<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 2, 1997
REGISTRATION NO. 333-32713
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
WINSTON HOTELS, INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C>
NORTH CAROLINA 56-1872141
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
2209 CENTURY DRIVE, SUITE 300
RALEIGH, NORTH CAROLINA 27612
(919) 510-6010
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT W. WINSTON, III
2209 CENTURY DRIVE, SUITE 300
RALEIGH, NORTH CAROLINA 27612
(919) 510-6010
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
WITH A COPY TO:
ALAN J. PRINCE, ESQ.
KING & SPALDING
191 PEACHTREE STREET
ATLANTA, GEORGIA 30303-1763
(404) 572-4600
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement in light of
market conditions and other factors.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
AMOUNT OF
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) FEE(3)(4)(5)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value per share(3)...............
Preferred Stock, $.01 par value per share(3)............ $200,000,000 $60,607
===============================================================================================================
</TABLE>
(1) In no event will the aggregate maximum offering price of all securities
registered under this Registration Statement exceed $200,000,000. Any
securities registered hereunder may be sold separately or as units with
other securities registered hereunder.
(2) The proposed maximum offering price per unit (a) has been omitted pursuant
to General Instruction II.D. of Form S-3 and (b) will be determined, from
time to time, by the Registrant in connection with the issuance by the
Registrant of the securities registered hereunder.
(3) Subject to footnote (1), there is being registered hereunder an
indeterminate number of shares of Common Stock and Preferred Stock as may be
sold, from time to time, by Winston Hotels, Inc.
(4) Fee calculated pursuant to Rule 457(o).
(5) Previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement relates to securities which may be offered from
time to time by Winston Hotels, Inc. (the "Company"). This Registration
Statement contains a form of basic prospectus (the "Basic Prospectus") relating
to the Company which will be used in connection with one or more offerings of
securities by the Company. This Registration Statement also contains a form of
Prospectus Supplement relating to certain shares of Preferred Stock to be
offered by the Company. The specific terms of additional securities to be
offered will be set forth in a subsequent Prospectus Supplement relating to such
securities.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE PROSPECTUS TO
WHICH IT RELATES SHALL CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES IN ANY
STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 2, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER , 1997)
2,000,000 SHARES
WINSTON HOTELS, INC.
% SERIES A CUMULATIVE PREFERRED STOCK
LIQUIDATION PREFERENCE $25 PER SHARE
LOGO
---------------------
Dividends on the % Series A Cumulative Preferred Stock, $.01 par value
per share (the "Series A Preferred Stock"), of Winston Hotels, Inc. (the
"Company") are cumulative from the date of original issue and are payable
quarterly in arrears on the sixteenth day of January, April, July and October of
each year at the rate of % per annum of the $25 liquidation preference (the
"Liquidation Preference") per share (equivalent to a fixed annual amount of
$ per share) to shareholders of record as they appear in the stock
records of the Company at the close of business on the applicable record date
for the respective dividend payment. The first record date for determination of
shareholders entitled to receive dividends on the Series A Preferred Stock is
expected to be December 30, 1997. See "Description of Series A Preferred
Stock -- Dividends."
Except (i) in certain circumstances relating to preservation of the
Company's qualification as a real estate investment trust (a "REIT") and (ii) in
connection with a change of control of the Company, the Series A Preferred Stock
is not redeemable prior to September 28, 2001. On and after such date, the
Series A Preferred Stock may be redeemed for cash at the option of the Company,
in whole or in part, at a redemption price of $25 per share, plus accrued and
unpaid dividends thereon, if any, up to the redemption date. The Series A
Preferred Stock has no stated maturity, will not be subject to any sinking fund
or mandatory redemption and will not be convertible into any other securities of
the Company. See "Description of Series A Preferred Stock -- Maturity,"
"-- Redemption of Series A Preferred Stock Upon a Change of Control" and
"-- Redemption."
In order to ensure that the Company continues to meet the requirements for
qualification as a REIT for federal income tax purposes, shares of Series A
Preferred Stock shall be deemed "Excess Shares" pursuant to the Company's
articles of incorporation (the "Articles of Incorporation") if a holder owns
more than 9.9% of the Company's outstanding common stock or preferred stock, and
the Company will have the right to purchase Excess Shares from the holder. See
"Description of Series A Preferred Stock -- Restrictions on Ownership."
The Company has applied to list the Series A Preferred Stock on the New York
Stock Exchange ("NYSE") under the symbol "WXH PrA." If approved, trading of the
Series A Preferred Stock on the NYSE is expected to commence within a 30-day
period after the initial delivery of the Series A Preferred Stock. See
"Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE S-9 OF THIS PROSPECTUS SUPPLEMENT AND
PAGE 6 OF THE ACCOMPANYING PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SERIES A PREFERRED
STOCK OFFERED HEREBY.
---------------------
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 SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total.................................. $ $ $
==================================================================================================================
</TABLE>
(1) The Company and WINN Limited Partnership (the "Partnership") have agreed to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $562,500.
---------------------
The shares of Series A Preferred Stock are offered by the several
Underwriters named herein, subject to prior sale, when, as and if issued to and
accepted by them, and subject to certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of Series A
Preferred Stock will be made through the facilities of The Depository Trust
Company, New York, New York, on or about September , 1997.
MORGAN KEEGAN & COMPANY, INC.
J.C. BRADFORD & CO.
RAYMOND JAMES & ASSOCIATES, INC.
September , 1997
<PAGE> 4
WINSTON HOTELS, INC.
[MAP OF THE UNITED STATES SHOWING LOCATIONS OF WINSTON HOTELS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A PREFERRED
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
SERIES A PREFERRED STOCK OFFERING AND MAY BID FOR AND PURCHASE SHARES OF SERIES
A PREFERRED STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE> 5
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein and therein by reference. Unless
the context otherwise requires, as used herein the term "Company" shall mean and
refer to the business and assets of Winston Hotels, Inc. and its subsidiaries on
a consolidated basis.
This Prospectus Supplement and the accompanying Prospectus, including
documents incorporated by reference, contain "forward-looking" statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including, but not limited to, those paragraphs
relating to development and acquisition of hotels contained herein and in the
accompanying Prospectus. These statements represent the Company's judgment and
are subject to risks and uncertainties that could cause actual operating results
to differ materially from those expressed or implied in the forward-looking
statements. Important factors that could cause actual results to differ include,
but are not limited to, the following: (i) risks associated with the Company's
acquisition of hotels with little or no operating history, including the risk
that such hotels will not achieve the level of revenue assumed by the Company
and Winston Hospitality, Inc., the lessee of the Company's hotels (the
"Lessee"), in calculating the respective Percentage Rent (as defined herein)
formulas in the leases for such hotels; (ii) development risks, including the
risks of construction delay, cost overruns, failure to receive zoning, occupancy
and other required governmental permits and authorizations and the incurrence of
development costs in connection with projects that are not completed; and (iii)
factors identified in the Company's filings with the Securities and Exchange
Commission, including the factors listed in the Registration Statement on Form
S-3 in which this Prospectus Supplement and the accompanying Prospectus are
included, the Company's Annual Report on Form 10-K for the year ended December
31, 1996, and the Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997, which are incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus.
THE COMPANY
The Company is a self-advised and self-administered REIT that owns,
acquires and develops hotels with nationally recognized franchise affiliations.
The Company specializes in the acquisition and development of limited-service
and extended-stay hotels. Currently, the Company owns, either directly or
through WINN Limited Partnership (the "Partnership"), 35 hotels (the "Current
Hotels") in eight states containing an aggregate of 4,697 rooms. The Company
seeks to enhance shareholder value by: (i) participating in any increased room
revenue from the Current Hotels and any subsequently acquired or developed
hotels through Percentage Leases (as defined below); (ii) acquiring additional
hotels that meet the Company's investment criteria; and (iii) selectively
developing hotels and hotel additions as market conditions warrant.
In order for the Company to qualify as a REIT, neither the Company nor its
subsidiaries can operate hotels. Therefore, the Company leases all of the
Current Hotels to the Lessee pursuant to leases that provide for rent payments
based, in part, on revenues from the Current Hotels (the "Percentage Leases").
The Percentage Leases are designed to allow the Company to participate in any
growth in revenues at the Current Hotels by providing that a portion (ranging
from 62% to 70%) of each hotel's room revenues in excess of specified amounts
will be paid to the Company as percentage rent ("Percentage Rent"). The Lessee
operates 25 of the Current Hotels, Interstate Management and Investment
Corporation ("IMIC") operates nine of the Current Hotels, and Promus Hotels,
Inc. ("Promus") operates one of the Current Hotels. The Current Hotels operated
by IMIC and Promus are managed pursuant to management agreements with the
Lessee. Two of the Acquisition Hotels (as defined herein) and all of the
Development Hotels (as defined herein) are expected to be managed by the Lessee,
and one of the Acquisition Hotels (as defined herein) will be managed by Promus.
S-1
<PAGE> 6
RECENT DEVELOPMENTS
ACQUISITIONS
Since January 1, 1997, the Company has acquired four hotel properties (the
"Newly Acquired Hotels"). On May 1, 1997, the Company acquired the 215-room
Comfort Suites(R) in Orlando, Florida for $11.6 million in cash. On July 14,
1997, the Company acquired the 202-room Courtyard by Marriott-Brookhollow in
Houston, Texas and the 126-room Hampton Inn in West Springfield, Massachusetts.
The aggregate purchase price for these two hotels was $16.7 million, consisting
of $6.3 million in cash and 815,000 units of interest in the Partnership
("Units") valued at $10.4 million. On July 17, 1997, 374,900 of these Units were
redeemed in exchange for the same number of newly issued shares of Common Stock.
On August 6, 1997, the Company acquired the 127-room Holiday Inn Express(R)
located in Clearwater, Florida for $6.4 million in cash. The Company utilized
borrowings under its $125 million line of credit (the "Line of Credit") to fund
the cash portion of the purchase price of the Newly Acquired Hotels.
The Company has signed letters of intent or definitive agreements to
acquire three additional hotels, which contain an aggregate of 393 rooms (the
"Acquisition Hotels") for total purchase prices aggregating $23.7 million. The
Acquisition Hotels consist of: (i) a 160-room Courtyard by Marriott located in
Ann Arbor, Michigan to be acquired for $10.8 million in cash; (ii) a 110-room
Fairfield Inn(R) located in Ann Arbor, Michigan to be acquired for $4.3 million
in cash; and (iii) a 123-room Homewood Suites located in Richmond, Virginia to
be acquired for $8.6 million, including approximately $1.8 million of newly
issued Common Stock. The Company anticipates that the Acquisition Hotels will be
acquired during the third and fourth quarters of 1997. There can be no
assurance, however, that the purchases of the Acquisition Hotels will be
consummated at all or consummated on schedule or on budget. See "Risk
Factors -- Risk that Pending Acquisitions Will Not Close." The Company intends
to pay for the Acquisition Hotels with borrowings under the Line of Credit.
DEVELOPMENT HOTELS
The Company currently is developing five hotels, which include Homewood
Suites hotels in Raleigh, North Carolina, Alpharetta, Georgia, Lake Mary,
Florida and Durham, North Carolina, and a Courtyard by Marriott in
Winston-Salem, North Carolina (collectively, the "Development Hotels"). The
Company expects that the Development Hotels will contain an aggregate of 577
rooms. The Company anticipates that two of the Homewood Suites hotels will be
completed by the end of 1997, one Homewood Suites hotel will be completed by the
spring of 1998 and the remaining Development Hotels will be completed by the
summer of 1998. The Company estimates that the aggregate development costs for
the Development Hotels will be approximately $50.3 million and will be funded
through borrowings under the Line of Credit.
OTHER POTENTIAL TRANSACTIONS
The Company is in various stages of evaluation and negotiation with respect
to a number of other available hotel transactions. Due to the preliminary status
of such negotiations and evaluations, no assurance can be given that the Company
will elect to pursue, or succeed in the completion of, any of such transactions.
The Company evaluates its hotel portfolio with respect to the potential
sale of certain of its hotel properties if it believes it can reinvest the
proceeds of a sale at a more attractive rate of return. The Company is
considering selling or otherwise disposing of the Comfort Inn in Augusta,
Georgia and the Comfort Suites in London, Kentucky. The Company has no
commitment, letter of intent or other agreement with any potential buyer of
either hotel, and there can be no assurance that any such sale will occur.
MANAGEMENT MATTERS
On August 19, 1997, the Company announced that Philip R. Alfano, the
Company's Senior Vice President, Chief Financial Officer and Secretary, will
resign to pursue personal interests. Mr. Alfano will continue to handle
day-to-day operations as chief financial officer in the near term and the
Company has engaged an executive search firm to assist in the process of
selecting Mr. Alfano's replacement. See "Management".
S-2
<PAGE> 7
THE HOTELS
The following table sets forth certain unaudited information with respect
to the Hotels (dollar amounts are in thousands):
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31, 1996
NUMBER -------------------------------------------------------
OF AVERAGE
ROOMS/ YEAR ROOM LEASE DAILY
HOTELS SUITES OPENED(1) DATE ACQUIRED REVENUE PAYMENTS(2) OCCUPANCY RATE REVPAR
- ------ ------ --------- -------------- ------- ----------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Hampton Inn:
Durham, NC.............. 137 1987 May 1994 $2,868 $1,350 90.7% $63.09 $57.22
Raleigh, NC............. 141 1986(3) May 1995 2,731 1,292 84.5 62.60 52.90
Charlotte, NC........... 125 1991 May 1994 2,542 1,201 85.3 65.13 55.56
Southlake (Atlanta),
GA.................... 124 1990 May 1994 2,465 1,105 80.9 67.15 54.32
Cary, NC................ 130 1989 May 1994 2,453 1,149 85.6 60.22 51.55
Wilmington, NC.......... 118 1986(3) May 1994 2,376 1,060 86.4 63.67 55.01
Brunswick, GA........... 127 1991 May 1994 2,090 862 82.1 54.77 44.97
Southern Pines, NC...... 126 1988 May 1994 1,919 783 74.7 55.66 41.58
Jacksonville, NC........ 120 1989 May 1994 2,029 881 90.8 50.89 46.21
Hilton Head, SC......... 124 1988(3) November 1994 1,965 743 72.7 59.53 43.28
Boone, NC............... 95 1987 May 1994 1,662 660 81.4 58.70 47.78
Chester (Richmond), VA.. 66 1994 November 1994 1,369 620 87.5 64.78 56.68
Perimeter (Atlanta),
GA.................... 131 1996 July 1996 2,173(4) 1,123(4) 70.4(4) 76.75(4) 54.03(4)
Duncanville (Dallas),
TX.................... 119 1986(3) May 1996 1,305 443 64.7 46.13 29.85
W. Springfield, MA...... 126 1989(3) July 1997 N/A(5) N/A(5) N/A(5) N/A(5) N/A(5)
Comfort Inn:
Durham/Chapel Hill, NC.. 138 1991 November 1994 2,717 1,337 82.1 65.52 53.79
Fayetteville, NC........ 176 1987(3) November 1994 2,641 1,300 78.2 52.43 41.00
Wilmington, NC.......... 146 1986(3) May 1994 2,561 1,156 82.4 58.15 47.92
Chester (Richmond), VA.. 123 1988 November 1994 2,335 1,136 80.5 64.40 51.84
Charleston, SC.......... 128 1989(3) May 1995 2,084 925 73.5 60.48 44.45
Raleigh, NC............. 149 1984(3) August 1994 1,985 792 71.7 50.75 36.39
Augusta, GA............. 123 1989 May 1995 1,447 519 66.9 48.06 32.15
Clearwater/St.
Petersburg, FL........ 120 1985(3) May 1995 1,439 462 67.4 48.64 32.78
Greenville, SC.......... 190 1975(3) May 1996 1,987 644 58.4 48.70 28.44
Quality Suites:
Charleston, SC.......... 168 1989 May 1995 3,918 1,817 83.1 76.69 63.73
Homewood Suites:
Cary, NC................ 140 1994 July 1996 3,347 2,159 85.0 76.89 65.36
Clear Lake (Houston),
TX.................... 92 1995 September 1996 2,250 979 73.9 90.47 66.86
Hampton Inn & Suites:
Duluth (Atlanta), GA.... 136 1996 July 1996 1,039(4) 468(4) 50.7(4) 80.83(4) 40.98(4)
Comfort Suites:
Orlando, FL............. 215 1990(3) May 1997 N/A(5) N/A(5) N/A(5) N/A(5) N/A(5)
London, KY.............. 62 1992(3) May 1996 983 432 80.7 53.65 43.30
Holiday Inn Select:
Garland (Dallas), TX.... 244 1974(3)(6) May 1996 4,794 2,350 77.8 68.99 53.67
Holiday Inn Express:
Abingdon, VA............ 81 1991(3) May 1996 1,246 577 80.4 52.92 42.55
Clearwater, FL.......... 127 1987(3) August 1997 N/A(5) N/A(5) N/A(5) N/A(5) N/A(5)
Courtyard by Marriott:
Wilmington, NC.......... 128 1996 December 1996 188(4) 79(4) 48.5(4) 56.01(4) 27.16(4)
Houston, TX............. 202 1973(3) July 1997 N/A(5) N/A(5) N/A(5) N/A(5) N/A(5)
ACQUISITION HOTELS(7):
Courtyard by Marriott:
September
Ann Arbor, MI........... 160 1997(8) N/A N/A N/A N/A N/A
Fairfield Inn:
September
Ann Arbor, MI........... 110 1997(8) N/A N/A N/A N/A N/A
Homewood Suites:
Richmond, VA............ 123 Fourth Quarter N/A N/A N/A N/A N/A
1997(8)
</TABLE>
- ---------------
(1) The average age, as of June 30, 1997, of the Current Hotels is approximately
9.0 years.
(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 to the historical room revenue for the year ended December
31, 1996.
(3) The following Current Hotels have undergone substantial renovation in the
following years: Hampton Inn -- Hilton Head, South Carolina in 1995; Hampton
Inn -- Raleigh, North Carolina in 1995; Hampton Inn -- Wilmington, North
Carolina in 1994; Hampton Inn -- Duncanville (Dallas), Texas in 1997;
Comfort Inn -- Clearwater/St. Petersburg, Florida in 1996; Comfort Inn --
Fayetteville, North Carolina in 1995; Comfort Inn -- Wilmington, North
Carolina in 1996; Comfort Inn -- Charleston, South Carolina in 1996; Comfort
Inn -- Greenville, South Carolina in 1997; Comfort Inn -- Chester
(Richmond), Virginia in 1995; Comfort Suites -- London, Kentucky in 1997;
Holiday Inn Express -- Abingdon, Virginia in 1997; and Holiday Inn Select --
Garland (Dallas), Texas in 1997. The Company intends to substantially
renovate the following Hotels over the next 12 months: Hampton Inn -- W.
Springfield, Massachusetts; Comfort Suites -- Orlando, Florida; Holiday Inn
Express -- Clearwater, Florida; and Courtyard by Marriott -- Ann Arbor,
Michigan. For purposes of this footnote, renovation refers to a substantial
upgrade of guest rooms and/or public areas.
(4) Data reflected is since the date this Hotel was acquired by the Company and
reflects operations only after the date of acquisition.
(5) The Hampton Inn -- W. Springfield, Massachusetts; Comfort Suites -- Orlando,
Florida; Holiday Inn Express -- Clearwater, Florida; and Courtyard by
Marriott -- Houston, Texas, were acquired subsequent to December 31, 1996.
(6) 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.
S-3
<PAGE> 8
(7) The Acquisition Hotels are expected to be acquired by the Company during the
third and fourth quarters of 1997. See "-- Recent
Developments -- Acquisitions."
(8) Represents approximate expected closing date.
THE HOTEL INDUSTRY
In 1992, the United States lodging industry began to recover from an
extended period of unprofitable performance in the late 1980s and early 1990s.
The industry downturn in the late 1980s resulted from a dramatic increase in the
supply of hotel rooms that significantly outpaced demand. This imbalance was
reversed in the early 1990s due mainly to a reduction of new construction and an
improved economy.
Smith Travel Research ("Smith Travel") categorizes over 75% of the Current
Hotels as Midscale (Without Food & Beverage). According to Smith Travel, the
rate of increase in room demand within the Midscale (Without Food & Beverage)
category compared to the rate of increase in room supply within the category has
been decreasing since mid-1995. In 1996, room supply within the category
increased more than room demand for the first time since 1991. Supply within the
category has been spurred by improving industry performance and resulting
increases in the availability of capital for hotel construction. Despite the
increase in supply within the category, average daily room rates ("ADR") have
increased every year since 1991. In 1996, ADR within the category increased
6.7%. This increase reflects the continued strength of the U.S. economy, in
general, and the continued strong demand for hotel rooms, in particular.
Smith Travel categorizes four of the Current Hotels and all of the
Development Hotels as Upscale. According to Smith Travel, the rate of increase
in room demand within the Upscale category has increased more than the rate of
increase in room supply in every year since 1991. The increase in room supply
within the Upscale category has been lower than the increase in room supply
within the Midscale (Without Food & Beverage) category due, in part, to the
higher cost of developing an Upscale hotel. ADR within the Upscale segment has
increased every year since 1991.
The following table reflects percentage changes in occupancy, ADR and
REVPAR in 1994, 1995 and 1996, compared to the respective preceding years, for
(i) the 27 Current Hotels that were open for each of the periods presented, (ii)
all Midscale Chains (Without Food and Beverage), (iii) all Upscale Chains and
(iv) all U.S. Hotels.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE OVER PRIOR PERIOD
--------------------------------------------------------------------
OCCUPANCY ADR REVPAR(1)
------------------ ------------------ ------------------
1994 1995 1996 1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Hotels............................. 1.4% (0.1)% (2.7)% 6.6% 9.7% 9.7% 8.0% 9.6% 6.7%
Midscale Chains (Without Food &
Beverage)(2)............................. 2.6 (0.4) (2.3) 4.1 6.6 6.7 6.8 6.1 4.2
Upscale Chains(2).......................... 3.0 0 0.3 4.4 5.3 7.4 7.5 5.3 7.7
U.S. Hotels(2)............................. 2.0 0.5 0 3.9 4.7 6.5 5.9 5.2 6.6
</TABLE>
- ---------------
(1) Determined by dividing annual room revenues by annual available rooms.
(2) Source -- Smith Travel. The "Upscale Chains" category includes, among
others, Courtyard by Marriott and Homewood Suites hotels. The "Midscale
(Without Food and Beverage)" category includes, among others, Comfort Inn,
Hampton Inn, Hampton Inn & Suites and Holiday Inn Express. Smith Travel has
not provided advice regarding any aspect of the offering of the Series A
Preferred Stock (the "Offering") and is not associated with the Offering in
any way.
S-4
<PAGE> 9
THE OFFERING
Securities Offered......... 2,000,000 shares of % Series A Cumulative
Preferred Stock. The Company has applied to list
the Preferred Stock on the NYSE under the symbol
"WXH PrA." See "Underwriting."
Maturity................... The Series A Preferred Stock has no stated maturity
and will not be subject to any sinking fund or
mandatory redemption. See "Description of Series A
Preferred Stock -- Maturity."
Use of Proceeds............ The Company will contribute all of the net proceeds
from the Offering to the Partnership. The
Partnership intends to use all of the net proceeds
to repay indebtedness outstanding under the Line of
Credit. Amounts repaid under the Line of Credit may
be reborrowed. See "Use of Proceeds."
Ranking.................... With respect to the payment of dividends and
amounts upon liquidation, the Series A Preferred
Stock will rank senior to the Common Stock, which
is the only capital stock of the Company currently
outstanding. See "Description of Series A Preferred
Stock -- Rank," "-- Dividends" and "-- Liquidation
Preference."
Dividends.................. Dividends on the Series A Preferred Stock are
cumulative from the date of original issue and are
payable quarterly in arrears on or about the
sixteenth day of January, April, July and October
to shareholders of record on the last business day
of March, June, September and December,
respectively, commencing on January 16, 1998, at
the fixed rate of % per annum of the
Liquidation Preference (equivalent to a fixed
annual rate of $ per share). See "Description
of Series A Preferred Stock -- Dividends."
Liquidation Preference..... Equal to $25 per share of Series A Preferred Stock,
plus accrued and unpaid dividends (whether or not
declared). See "Description of Series A Preferred
Stock -- Liquidation Preference."
Change of Control.......... Upon the occurrence of a Change of Control Event
(as defined herein), at any time prior to September
28, 2001, the Company may redeem all of the
outstanding Series A Preferred Stock at a purchase
price ranging from $25.05 to $25.80 per share
(depending on the date of the redemption), plus
accrued and unpaid dividends (if any) to the date
of repurchase. See "Description of Series A
Preferred Stock -- Redemption of Series A Preferred
Stock Upon a Change of Control."
Redemption................. Except in certain circumstances relating to
preservation of the Company's status as a REIT and
in connection with a change of control of the
Company, the Series A Preferred Stock is not
redeemable prior to September 28, 2001. On and
after such date, the Series A Preferred Stock will
be redeemable for cash at the option of the
Company, in whole or in part, at a redemption price
of $25 per share, plus dividends accrued and unpaid
to the redemption date (whether or not declared)
without interest. See "Description of Series A
Preferred Stock -- Redemption" and "-- Restrictions
on Ownership."
Voting Rights.............. Holders of Series A Preferred Stock generally will
have no voting rights except as required by law.
However, whenever dividends on any shares of Series
A Preferred Stock shall be in arrears for six or
more quarters, the holders of such shares (voting
separately as a voting group with all other
S-5
<PAGE> 10
series of parity preferred stock upon which like
voting rights have been conferred and are
exercisable) will be entitled to vote for the
election of two additional directors of the Company
until all dividends accumulated on such shares of
Series A Preferred Stock have been fully paid or
declared and a sum sufficient for the payment
thereof set aside for payment. In addition, certain
changes to the terms of the Series A Preferred
Stock that would be materially adverse to the
rights of holders of the Series A Preferred Stock
cannot be made without the affirmative vote of
holders of at least two-thirds of the outstanding
Series A Preferred Stock. Holders of Series A
Preferred Stock will have certain other voting
rights under North Carolina law. See "Description
of Series A Preferred Stock -- Voting Rights."
Conversion................. The Series A Preferred Stock is not convertible
into or exchangeable for any other property or
securities of the Company.
SUMMARY FINANCIAL DATA
The following table sets forth summary financial information on an
historical basis for the Company. The following information should be read in
conjunction with all of the financial statements and notes thereto included in
the Quarterly Report on Form 10-Q for the quarter and six-month period ended
June 30, 1997 and the Annual Report on Form 10-K for the year ended December 31,
1996, which are incorporated by reference into the accompanying Prospectus. Also
set forth below are summary unaudited pro forma financial data for the Company
at and for the six months ended June 30, 1997 and the year ended December 31,
1996. The unaudited pro forma balance sheet data at June 30, 1997 have been
prepared as if the consummation of the Offering, and the application of the net
proceeds thereof, had each occurred on June 30, 1997. The unaudited pro forma
financial and other data for the six months ended June 30, 1997 and the year
ended December 31, 1996 have been prepared as if the consummation of the
Offering, the application of the net proceeds thereof and the acquisition of
four hotels from affiliates of the Impac Hotel Group, Inc. ("Impac") had
occurred at the beginning of the period presented. These four hotels, which were
acquired from affiliates of Impac for a cash purchase price of approximately
$23.0 million on May 5, 1996, are the Holiday Inn Select -- Garland, Texas; the
Holiday Inn Express -- Abingdon, Virginia; the Comfort Suites -- London,
Kentucky; and the Hampton Inn -- Duncanville (Dallas), Texas (the "Impac
Acquisition Hotels"). The pro forma financial data are not necessarily
indicative of what the actual financial position or results of operations of the
Company would have been as of the date or for the periods indicated, nor do they
purport to represent the results of operations or financial position for future
periods. This data should be read in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus Supplement. In the opinion of management,
the financial data for the periods presented include all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
information set forth therein.
S-6
<PAGE> 11
WINSTON HOTELS, INC.
SUMMARY HISTORICAL, PRO FORMA FINANCIAL AND OTHER DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------ HISTORICAL PRO FORMA
PERIOD FROM SIX MONTHS SIX
JUNE 2, 1994 PRO FORMA ENDED MONTHS
THROUGH YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------- JUNE 30,
1994 1995 1996 1996(1) 1996 1997 1997(1)
------------ ------------ ------------ ------------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue:
Percentage Lease revenue........ $5,116 $17,148 $26,611 $27,855 $11,332 $16,770 $16,770
Interest and other income....... 92 442 97 97 37 54 54
------ ------- ------- ------- ------- ------- -------
Total revenue............. 5,208 17,590 26,708 27,952 11,369 16,824 16,824
------ ------- ------- ------- ------- ------- -------
Expenses:
Real estate and personal
property taxes and casualty
insurance..................... 362 1,054 1,647 1,755 695 1,156 1,156
General and administrative...... 339 1,208 1,985 1,995 897 862 862
Interest expense(2)............. 218 2,555 2,665 582 1,574 1,811 503
Depreciation.................... 1,176 3,854 6,476 6,828 2,609 4,570 4,570
Amortization.................... 49 117 147 155 67 81 81
------ ------- ------- ------- ------- ------- -------
Total expenses............ 2,144 8,788 12,920 11,315 5,842 8,480 7,172
------ ------- ------- ------- ------- ------- -------
Income before allocation to
minority interest............. 3,064 8,802 13,788 16,637 5,527 8,344 9,652
Income allocation to minority
interest...................... 187 417 786 448 230 611 715
------ ------- ------- ------- ------- ------- -------
Net income.................... 2,877 8,385 13,002 16,189 5,297 7,733 8,937
Preferred dividends(3).......... -- -- -- 4,625 -- -- 2,313
------ ------- ------- ------- ------- ------- -------
Net income applicable to
common shareholders......... $2,877 $ 8,385 $13,002 $11,564 $ 5,297 $ 7,733 $ 6,624
====== ======= ======= ======= ======= ======= =======
Weighted average number of common
shares and common share
equivalents..................... 7,073 9,211 13,747 16,099 10,526 17,083 17,083
Net income per common share....... $ 0.43 $ 0.96 $ 1.00 $ 0.75 $ 0.53 $ 0.49 $ 0.43
Distribution declared per common
share........................... $ 0.48 $ 0.93 $ 1.005 $ 0.495 $ 0.54
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL JUNE 30, 1997
--------------------------------------------------------- ----------------------
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996 HISTORICAL PRO FORMA
----------------- ----------------- ----------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 1,114 $ 2,496 $ 234 $ 340 $ 340
Investment in hotel properties............... 85,917 122,977 208,190 229,893 229,893
Total assets................................. 88,114 123,969 203,502 224,103 224,103
Total debt................................... 28,600 34,000 42,800 63,081 15,581
Shareholders' equity......................... 53,705 80,872 141,813 141,241 188,741
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------ HISTORICAL PRO FORMA
PERIOD FROM SIX MONTHS SIX
JUNE 2, 1994 PRO FORMA ENDED MONTHS
THROUGH YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------- JUNE 30,
1994 1995 1996 1996 1996 1997 1997
------------ ------------ ------------ ------------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Lessee room revenue................... $ 12,474 $ 39,677 $ 58,956 $ -- $25,427 $36,813 $ --
Funds From Operations(4).............. 4,240 12,656 20,581 18,840 8,136 12,914 11,909
Ratio of earnings to fixed charges and
preferred stock dividends(5)........ 15.09x 4.44x 5.85x 3.31x 4.51x 4.58x 3.61x
Ratio of earnings to fixed charges and
preferred stock dividends, as
adjusted for the Newly Acquired
Hotels(6)........................... 3.09x
Ratio of Funds From Operations to
fixed charges and preferred stock
dividends(7)........................ 20.50x 5.95x 8.15x 4.62x 6.17x 6.65x 5.23x
Ratio of Funds From Operations to
fixed charges and preferred stock
dividends, as adjusted for the Newly
Acquired Hotels(8).................. 4.53x
Ratio of total debt to total
capitalization(9)................... 28.4% 21.7% 15.5% -- -- 19.7% 4.9%
Ratio of total debt to total
capitalization, as adjusted for the
Newly Acquired Hotels(10)........... 9.7%
Number of hotels at end of period..... 16 21 31 -- -- 32 --
Number of rooms at end of period...... 2,024 2,704 4,026 -- -- 4,241 --
</TABLE>
S-7
<PAGE> 12
- ---------------
(1) The pro forma statement of income for the year ended December 31, 1996
includes the Impac Acquisition Hotels as if they were acquired on January
1, 1996. Consistent with the rules and regulations of the Securities and
Exchange Commission, all other acquisitions during 1996 and 1997 do not
meet certain measures of significance individually or in the aggregate and,
accordingly, have been excluded from these pro forma consolidated
statements of income. See the Pro Forma Consolidated Statements of Income
included elsewhere in this Prospectus Supplement.
(2) Pro forma interest expense was calculated based on the application of the
net proceeds from the Offering to the weighted average debt outstanding
during the period based on the Company's historical weighted average
interest rate during the period. In addition, pro forma interest expense
includes unused line of credit fees of 0.25%, and $270 and $226 for
amortization of loan costs and fees and interest rate cap fees for the year
ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
(3) Assumes an annual dividend rate of 9.25% on the liquidation preference of
the Series A Preferred Stock.
(4) Funds From Operations consists of net income, computed in accordance with
generally accepted accounting principles, excluding extraordinary items,
minority interest in Partnership income, gains or losses from debt
restructurings and sales of property and certain non-cash items, primarily
depreciation of real property (including furniture and equipment) and after
adjustments for unconsolidated partnerships and joint ventures less
preferred stock dividends. 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.
(5) For purposes of these computations, earnings consist of income before
allocation to minority interests, plus fixed charges (excluding capitalized
interest). Fixed charges principally consist of interest expense,
capitalized interest and amortization of deferred financing costs. The
historical earnings do not include preferred stock dividends as no shares
of preferred stock were outstanding for the periods presented.
(6) For purposes of this computation, earnings as defined in (5) above include
the impact of the Newly Acquired Hotels as if they were acquired on January
1, 1997. Such information for earlier periods is not considered meaningful
since certain of the Current Hotels were not open for the entire year of
1996.
(7) For purposes of these computations, funds from operations consists of Funds
From Operations as defined in (4) above plus fixed charges (excluding
capitalized interest) and preferred stock dividend requirements. The
historical Funds From Operations do not include preferred stock dividends,
as no shares of preferred stock were outstanding for the periods presented.
(8) For purposes of this computation, Funds From Operations as defined in (7)
above include the impact of the Newly Acquired Hotels as if they were
acquired on January 1, 1997. Such information for earlier periods is not
considered meaningful since certain of the Current Hotels were not open for
the entire year of 1996.
(9) Total capitalization as of the dates presented is total debt plus the
aggregate market value of the Company's Common Stock, Series A Preferred
Stock (on a pro forma basis) and Units held by persons other than the
Company, which are redeemable for shares of Common Stock on a one-for-one
basis.
(10) For purposes of this computation, total debt and total capitalization as
defined in (9) above include the impact of the Newly Acquired Hotels as if
they were acquired on June 30, 1997.
S-8
<PAGE> 13
RISK FACTORS
An investment in the Series A Preferred Stock involves various risks,
including those described below and in the accompanying Prospectus under "Risk
Factors" beginning on page 6. Investors should carefully consider such risk
factors, together with all of the information contained in or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus, in
determining whether to purchase shares of the Series A Preferred Stock offered
hereby.
RISKS RELATED TO ISSUANCE OF ADDITIONAL PREFERRED STOCK
The Company's Articles of Incorporation do not limit the issuance of
additional series of preferred stock ranking in parity with or superior to the
Series A Preferred Stock. The issuance of additional preferred stock in parity
with or superior to the Series A Preferred Stock could have the effect of
diluting the interests of holders of the Series A Preferred Stock. None of the
provisions relating to the Series A Preferred Stock contain any provisions
affording the holders of the Series A Preferred Stock protection in the event of
a highly leveraged or other transaction that might adversely affect the holders
of the Series A Preferred Stock.
RISK THAT PENDING ACQUISITIONS WILL NOT CLOSE
The Company has entered into letters of intent or definitive agreements to
acquire the three Acquisition Hotels. While the Company has substantially
completed its due diligence with respect to such Acquisition Hotels, the
closings of such hotels are not scheduled to occur until after the Offering. The
purchase contracts and letters of intent relating to the Acquisition Hotels to
be acquired are subject to customary closing conditions. There can be no
assurance that the scheduled acquisitions of the Acquisition Hotels will be
completed. See "Risk Factors -- Risks Associated with Homewood Development
Hotel" in the accompanying Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series A Preferred
Stock offered hereby are estimated to be approximately $47.5 million. The
Company will contribute all of the net proceeds from the Offering to the
Partnership, in which it presently has a 90.1% interest, in exchange for
2,000,000 units of % Series A Cumulative Preferred limited partnership
interests (the "Series A Preferred Units") having distribution, liquidation,
redemption and other features identical to the terms of the Series A Preferred
Stock. The Partnership intends to use all of the net proceeds to repay
indebtedness outstanding under the Line of Credit. The outstanding balance under
the Line of Credit bears interest at LIBOR plus 1.75%, at rates ranging from
7.37% to 7.53% as of August 25, 1997, with a weighted average of 7.46%, and was
incurred to pay a portion of the purchase prices for certain of the Current
Hotels as well as for certain development costs and other general corporate
purposes. Amounts outstanding under the Line of Credit as of August 25, 1997 are
payable in full on various dates ranging from September 2, 1997 to October 2,
1997 and may not be prepaid. Until such amounts under the Line of Credit mature,
the Company may invest certain net proceeds of the Offering 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.
Following completion of the Offering and the application of the net proceeds
therefrom, the Company will have approximately $30.7 million of indebtedness
outstanding under the Line of Credit. Amounts paid to reduce the outstanding
indebtedness under the Line of Credit may be re-borrowed (subject to the terms
and limits of the Line of Credit) for the purchase of the Acquisition Hotels,
the completion of the Development Hotels and other corporate purposes.
S-9
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997, and on a pro forma basis as adjusted to give effect to (a) issuance of
2,000,000 shares of Series A Preferred Stock and application of the estimated
net proceeds thereof, (b) the redemption of 374,900 Units in exchange for the
same number of newly-issued shares of Common Stock, (c) the acquisition of the
1997 Newly Acquired Hotels (as defined in "Management's Discussion and Analysis
of Financial Condition and Result of Operations" herein) and (d) the anticipated
cost of planned renovations to the Newly Acquired Hotels. See "Pro Forma
Financial Statements -- Pro Forma Consolidated Balance Sheet as of June 30,
1997".
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Debt........................................................ $ 63,081 $ 34,059
Minority interest in Partnership............................ 11,274 16,907
Shareholders' Equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding, 2,000,000
shares % Series A Cumulative Preferred Stock, issued and
outstanding, as adjusted.................................. - 20
Common Stock, $0.01 par value per share, 50,000,000 shares
authorized, 15,819,580 shares issued and outstanding;
16,194,480 shares issued and outstanding, pro forma as
adjusted.................................................. 158 162
Additional paid-in-capital.................................. 145,416 197,691
Unearned directors' compensation............................ (144) (144)
Accumulated deficit......................................... (4,189) (4,189)
--------------- ---------------
Total shareholders' equity........................ 141,241 193,540
--------------- ---------------
Total Capitalization........................................ $ 215,596 $ 244,506
=============== ===============
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company, which consummated an underwritten initial public offering
("IPO") in June 1994 and follow-on offerings in May 1995 and in June 1996,
operates as a REIT to invest in hotel properties and owned 32 properties (the
"Specified Hotels") as of June 30, 1997. The Company owned 16 hotels as of
December 31, 1994 (the "1994 Hotels"), acquired five hotels in May 1995 (the
"1995 Acquired Hotels"), five hotels in May 1996, three hotels in July 1996, one
hotel in September 1996, one hotel in December 1996 (collectively, all ten are
the "1996 Acquired Hotels"), and one hotel in May 1997 (the "1997 Acquired
Hotel"). It currently leases all Specified Hotels to the Lessee under Percentage
Leases through which it receives its principal source of revenue.
S-10
<PAGE> 15
RESULTS OF OPERATIONS
For the periods ended December 31, 1996, 1995 and 1994, the differences in
operating results are primarily attributable to the Company owning more hotels
in 1996 than it did in 1995 and 1994 and commencing operations on June 2, 1994.
The table below outlines the Company's investment in hotel properties for the
periods ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- ------------------------- -------------------------
ACQUISITIONS PROPERTIES ACQUISITIONS PROPERTIES ACQUISITIONS PROPERTIES
DURING OWNED AT DURING OWNED AT DURING OWNED AT
TYPE OF HOTEL THE YEAR YEAR END THE YEAR YEAR END THE YEAR YEAR END
------------- ------------ ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Limited-service hotels.... 7 28 5 21 6 16
Extended-stay hotels...... 2 2 - - - -
- -- - --
Full-service hotels....... 1 1 - - - -
-- -- - -- - --
Total........... 10 31 5 21 6 16
= =
== == == ==
</TABLE>
For the six month periods ended June 30, 1997 and 1996, the differences in
operating results are primarily attributable to the fact that the Company owned
more hotels in 1997 then it did in 1996. The table below outlines the Company's
investment in hotel properties for the periods ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
PROPERTIES OWNED
------------------------------
TYPE OF HOTEL JUNE 30, 1997 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C>
Limited-service hotels......................... 29 25
Extended-stay hotels........................... 2 0
Full-service hotels............................ 1 1
-- --
Total................................ 32 26
== ==
</TABLE>
Comparison of six months ended June 30, 1997 to the six months ended June 30,
1996
The Company had revenues of $16,824,000 in 1997, consisting of $16,770,000
of Percentage Lease revenues and $54,000 of interest and other income.
Percentage Lease revenues increased by $5,438,000 or 48%, in 1997 from
$11,332,000 in 1996. This increase was comprised of: (i) $297,000 due to the
rent formulas of the Percentage Leases increasing rent payments by the Lessee by
an average of 35% of the $492,000 in increased room revenues attributable to
inflation and by an average of 66% of the $188,000 in increased room revenues
attributable primarily to higher rates; (ii) $4,796,000 for the 1996 Acquired
Hotels; and (iii) $345,000 for the 1997 Acquired Hotel.
Real estate taxes and property insurance costs incurred in 1997 were
$1,156,000 an increase of $461,000 from $695,000 in 1996. This increase was
primarily attributable to the greater number of hotels owned during the 1997
period than in the 1996 period. General and administrative expenses decreased
$35,000 to $862,000 in 1997 from $897,000 in 1996. The decrease was attributable
to the capitalization of $107,000 of payroll costs related to the development
projects during the first six months of 1997 offset in part by an increase in
costs attributable to the increase in size and activities of the Company in
1997. Interest expense increased by $237,000 to $1,811,000 in 1997 from
$1,574,000 in 1996. The increase was attributable to: (i) $496,000 related to
the increase in the weighted average level of borrowings from the second quarter
of 1996 to the second quarter of 1997; and (ii) $172,000 of amortization of line
of credit fees and unused line of credit fees in connection with the Line of
Credit that was obtained in the fourth quarter of 1996. These increases were
partially offset by $404,000 of capitalized interest costs during the six months
ended June 30, 1997 in connection with the development projects. Depreciation
increased $1,961,000 to $4,570,000 in 1997 from $2,609,000 in 1996, primarily
due to depreciation related to the 1996 Acquired Hotels and the 1997 Acquired
Hotel and renovations completed during 1996 and 1997.
Comparison of year ended December 31, 1996 to December 31, 1995
The Company had revenues of $26,708,000 in 1996, consisting of $26,611,000
of Percentage Lease revenues and $97,000 of interest and other income.
Percentage Lease revenues increased by $9,463,000 or
S-11
<PAGE> 16
55%, in 1996 from $17,148,000 in 1995. This increase was comprised of: (i)
$1,717,000 for the 1994 Hotels, which was due to the rent formulas of the
Percentage Leases increasing rent payments by the Lessee by an average of 35% of
the $571,000 in increased room revenues attributable to inflation and by an
average of 67% of the $2,259,000 in increased room revenues attributable
primarily to higher rates; (ii) $2,286,000 for the 1995 Acquired Hotels; and
(iii) $5,460,000 for the 1996 Acquired Hotels.
Real estate taxes and property insurance costs incurred in 1996 were
$1,647,000 an increase of $593,000 from $1,054,000 in 1995. This increase was
primarily attributable to the 1995 Acquired Hotels that were owned for the
entire twelve month period in 1996 and the 1996 Acquired Hotels. General and
administrative expenses increased $777,000 to $1,985,000 in 1996 from $1,208,000
in 1995. The increase was attributable to: (i) costs related to the increase in
size and activities of the Company in 1996 over 1995; (ii) the Company becoming
self-administered in 1996 and incurring costs associated therewith, offset in
part by savings from costs not incurred under its previous advisory agreement;
(iii) inflationary cost increases; and (iv) a non-recurring charge of $317,000
in 1996 related to the termination of potential business combinations. Interest
expense increased by $110,000 to $2,665,000 in 1996 from $2,555,000 in 1995,
primarily due to an increase in weighted average outstanding borrowings in 1996
from 1995. Depreciation increased $2,622,000 to $6,476,000 in 1996 from
$3,854,000 in 1995, primarily due to depreciation related to the 1995 Acquired
Hotels, the 1996 Acquired Hotels and renovations completed during 1995 and 1996.
Comparison of year ended December 31, 1995 to the period June 2, 1994 to
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. In addition,
the Company only owned the 1995 Acquired Hotels for the last seven months of
1995. The Company had revenues of $17,590,000 in 1995, consisting of $17,148,000
of Percentage Lease revenues and $442,000 of interest and other income. Other
income includes approximately $314,000 in non-recurring commission income.
Percentage Lease revenues increased by $12,032,000 to $17,148,000 in 1995 from
$5,116,000 in 1994. Approximately $9,303,000 of the increase was attributable to
the 1994 Hotels, and approximately $2,729,000 of the increase was attributable
to the 1995 Acquired Hotels.
The increase in operating expenses was attributable primarily to the fact
that the Company existed for only seven months with fewer hotels in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the six months ended June 30,
1997, cash flow provided by operating activities was $10,189,000 and Funds From
Operation, which is equal to net income before minority interest plus
depreciation, was $12,914,000. Under federal income tax law provisions
applicable to REITs, the Company is required to distribute at least 95% of its
taxable income to maintain its tax status as a REIT. During the first six months
of 1997, the Company declared distributions of $8,543,000 to its shareholders.
Because the Company's cash flow from operating activities is expected to exceed
its taxable income due to depreciation and amortization expenses, the Company
expects to be able to meet its distribution requirements out of cash flow from
operating activities.
The Company's net cash used in investing activities for the six months
ended June 30, 1997 totaled $21,518,000 including $11,628,000 related to the
acquisition of the 1997 Acquired Hotel, $4,353,000 for hotel renovations
primarily of the 1996 Acquired Hotels and $5,445,000 primarily for the
development of four new extended stay hotels. The Company is developing four new
extended-stay hotels which are expected to cost approximately $42,000,000 of
which approximately $10,400,000 has been expended as of June 30, 1997. The
development of two of these hotels is expected to be completed late in 1997, and
the remaining two during the first and second quarters of 1998. In addition, the
Company has announced plans to commence the development of a limited-service
hotel, which is expected to cost approximately $8 million and be completed
during the second quarter of 1998. See "Recent Developments -- Development
Hotels." The Company acquired two additional limited-service hotels on July 14,
1997 for approximately $16.7 million, and acquired another limited-service hotel
on August 6, 1997 for approximately $6.4 million (collectively, the "1997 Newly
Acquired Hotels"). The Company plans to spend approximately $4 million to
renovate these three hotels.
S-12
<PAGE> 17
The Company also anticipates spending approximately $2.5 million during
1997 in connection with the refurbishment of the Specified Hotels. These
expenditures are in addition to the reserve of 5% of room revenues for its
limited-service hotels and 7% of room revenues and food and beverage revenues
from its full-service hotels which the Company is required to set aside under
its Percentage Leases for periodic capital improvements and the refurbishment
and replacement of furniture, fixtures and equipment at the Current Hotels. In
the six months ended June 30, 1997, the Company set aside $1,954,000 for such
reserves. These reserves are in addition to amounts spent on normal repairs and
maintenance which approximated 5.0% and 5.2% of room revenues for the six months
ended June 30, 1997 and 1996, respectively, and are paid by the Lessee.
The Company's net cash provided by financing activities in the quarter
ended June 30, 1997 totaled $11,435,000 primarily attributable to an increase of
$20,281,000 in the Line of Credit borrowings, offset by the payment of
distributions to shareholders of $8,300,000 and to minority interest, of
$665,000. The Company financed the acquisition of the 1997 Newly Acquired Hotels
with approximately $12.7 million in borrowings under the Line of Credit and with
the issuance of 815,000 Units of the Partnership. On July 17, 1997, 374,900 of
such Units were redeemed in exchange for the same number of newly issued shares
of Common Stock.
The Company has collateralized a portion of the Line of Credit with 28 of
the Current Hotels. As of June 30, 1997 there is $95,070,000 available for
borrowing ("Line Availability"), of which $63,081,000 is outstanding. The Line
Availability is calculated quarterly, and increases if cash flow attributable to
the collateral hotels increases and/or the Company adds additional hotels as
collateral. The Company's Articles of Incorporation limit its total amount of
indebtedness to 45% of the purchase prices paid by the Company for its
investments in hotel properties, as defined. As of June 30, 1997, the Company
had additional borrowing capacity under the debt limitation contained in the
Articles of Incorporation of approximately $80,000,000 assuming it invests all
borrowings in additional hotels.
In June 1997, the Company entered into an interest rate cap agreement to
eliminate its exposure to increases in 90-day LIBOR over 6.25%, and therefore
from its exposure to interest rate increases over 8.00% under the Line of
Credit, on a principal balance of $40 million for the period June 4, 1997
through June 4, 1998. The fee paid for this cap was $69,000 which will be
amortized as additional interest expense over the term of the agreement.
Under an arrangement with Promus, the Company has an agreement to acquire a
123-suites Homewood Suites hotel being developed by Promus in Richmond,
Virginia. The Company expects to acquire this hotel upon its completion, which
Promus estimates will occur during the fourth quarter of 1997, for a purchase
price approximating Promus' development cost, estimated to be $8,600,000.
Conditions to the Company's obligation to purchase include its approval of the
building specifications and Promus' completion of construction within certain
cost limitations and by a specified delivery date. Pursuant to the arrangement,
Promus has agreed to invest $1,845,000 in the Company's Common Stock (at the
then-current market price per share), in connection with the Company's purchase
of this hotel.
The Company intends to acquire and develop additional hotel properties,
including those described herein, that meet its investment criteria and its
continually evaluating acquisition opportunities. It is expected that future
hotel acquisitions and development will be financed, in whole or in part, from
additional follow-on offerings, from borrowings under the Line of Credit, from
joint venture agreements, and from the issuance of other debt or equity
securities. There can be no assurances that the Company will acquire any
additional hotels, or that any hotel development will be undertaken, or if
commenced that it will be completed on schedule or on budget. Further, there can
be no assurances that the Company will be able to obtain satisfactory sources of
additional financing.
SEASONALITY
The Company's hotels' operations historically have been seasonal in nature,
reflecting higher REVPAR during the second and third quarters. This seasonality
and the structure of the Percentage Leases, which provide for a higher
percentage of room revenues above the minimum equal quarterly levels to be paid
as Percentage Rent, can be expected to cause fluctuations in the Company's
quarterly lease revenue under the Percentage Leases.
S-13
<PAGE> 18
PROPERTIES
The following table sets forth certain information regarding the Current
Hotels as of August 11, 1997.
<TABLE>
<CAPTION>
NUMBER
OF GUEST NUMBER CORRIDOR LOT YEAR YEAR
HOTEL LOCATION ROOMS OF FLOORS DESIGN ACREAGE BUILT RENOVATED(1)
- ------------------- ------------------- ---------- --------- -------- ------- ----- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
1. Hampton Inn Atlanta, GA (near 124 5 Interior 2.5 1990
Interstate-75)
2. Hampton Inn Perimeter 131 4 Interior 1.6 1996
(Atlanta), GA (near
Interstate 285 and
Georgia 400
(suburban Atlanta)
3. Hampton Inn Brunswick, GA (near 127 3 Interior/ 2.9 1991
Interstate-95) Exterior
4. Hampton Inn W. Springfield, MA 126 4 Interior 2.5 1989 (2)
5. Hampton Inn Boone, NC 95 5 Interior 2.1 1987
<CAPTION>
LOCAL POINTS OF INTEREST/
BUSINESSES AMENITIES
- --- ------------------------------- --------------------
<C> <C> <C>
1. Atlanta Hartsfield Garden landscaping,
International Airport, Fort lobby fountain,
Gilliam, Fort McPherson outdoor pool,
complimentary
continental
breakfast, two
meeting rooms,
access to health
spa, airport shuttle
van
2. Perimeter Mall and Class A Meeting room,
office space complimentary
continental
breakfast, outdoor
swimming pool,
25-inch televisions,
exercise room
3. Tourist travel, nearby Golden Complimentary
Isles resort beaches, including continental
Jekyll Island and St. Simon's breakfast, two
Island meeting rooms,
exercise room,
outdoor pool,
adjacent full-
service restaurant
4. Riverdale Shopping Plaza, Complimentary
Basketball Hall of Fame and Big continental
E. Downtown breakfast, free
local phone calls,
free in-room movie
channel, outdoor
pool, and free
incoming fax service
5. Appalachian State University, Complimentary
North Carolina's Appalachian continental
Mountains breakfast indoor
pool; jacuzzi,
access to health
spa, hospitality
suite, adjacent
full-service
restaurant
</TABLE>
S-14
<PAGE> 19
<TABLE>
<CAPTION>
NUMBER
OF GUEST NUMBER CORRIDOR LOT YEAR YEAR
HOTEL LOCATION ROOMS OF FLOORS DESIGN ACREAGE BUILT RENOVATED(1)
- ------------------- ------------------- ---------- --------- -------- ------- ----- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
6. Hampton Inn Cary, NC (near US-1 130 5 Interior 2.2 1989
and Interstate-64)
7. Hampton Inn Charlotte, NC (near 125 6 Interior 2.1 1991
Interstate-85)
8. Hampton Inn Durham, NC 137 5 Interior 2.0 1987
9. Hampton Inn Jacksonville, NC 120 2 Exterior 3.1 1989
10. Hampton Inn Raleigh, NC (near 141 4 Interior 1.8 1986 1995
Beltline and
Interstate-40)
<CAPTION>
LOCAL POINTS OF INTEREST/
BUSINESSES AMENITIES
- --- ------------------------------- --------------------
<C> <C> <C>
6. Raleigh/Durham International Meeting room,
Airport, Research Triangle Park outdoor pool,
complimentary
health-club
privileges, adjacent
full-service
restaurant,
complimentary
continental
breakfast
7. Charlotte Motor Speedway, Complimentary
University of North Carolina at continental
Charlotte, University Hospital breakfast, access to
health spa, lobby
bar, two hospitality
suites, outdoor pool
8. Duke University, Duke Medical Conference room,
Center, Research Triangle Park complimentary
continental
breakfast, exercise
room with sauna,
executive suites,
outdoor pool,
hospital van service
9. Camp LeJeune Marine Corps Base Complimentary
continental
breakfast, outdoor
pool, access to
health spa, on-site
guest laundry,
adjacent
full-service
restaurant
10. Raleigh/Durham International Three meeting rooms,
Airport, Crabtree Mall, complimentary
Research Triangle Park continental
breakfast, manager's
cocktail reception,
sauna and workout
room, health spa
with outdoor pool,
adjacent
full-service
restaurant, airport
shuttle van
</TABLE>
S-15
<PAGE> 20
<TABLE>
<CAPTION>
NUMBER
OF GUEST NUMBER CORRIDOR LOT YEAR YEAR
HOTEL LOCATION ROOMS OF FLOORS DESIGN ACREAGE BUILT RENOVATED(1)
- ------------------- ------------------- ---------- --------- -------- ------- ----- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
11. Hampton Inn Southern Pines, NC 126 2 Exterior 4.2 1988
12. Hampton Inn Wilmington, NC 118 2 Exterior 2.9 1986 1994
13. Hampton Inn Hilton Head, SC 124 2 Interior 5.0 1988 1995
(near Highway 278)
14. Hampton Inn Duncanville, TX 119 2 Exterior 2.5 1986 1997
(near Interstate-20
and LBJ Freeway)
(suburban Dallas)
15. Hampton Inn Chester, VA (near 66 2 Interior 5.1 1994
Interstate-95 and
Route 10)
16. Comfort Inn Clearwater/St. 120 3 Interior 2.8 1985 1996
Petersburg, FL
(near
Interstate-75)
<CAPTION>
LOCAL POINTS OF INTEREST/
BUSINESSES AMENITIES
- --- ------------------------------- --------------------
<C> <C> <C>
11. Pinehurst golfing facilities, Two conference
professional golf tour events rooms, complimentary
continental
breakfast, access to
health spa, golf
packages
12. Wrightsville Beach, Hospitality suite,
Revolutionary and Civil War outdoor pool,
historical sites complimentary
continental
breakfast, access to
health spa, adjacent
full-service
restaurant
13. Hilton Head resort area, golf Complimentary
and tennis attractions continental
breakfast, suites
with whirlpools,
outdoor pool, health
spa, shuttle
service, bicycle
rentals
14. The Ballpark at Arlington Meeting room,
(Texas Rangers Baseball complimentary
Stadium), Six Flags over Texas continental
breakfast, outdoor
pool, landscaped
exterior
15. Industrial and technical Jogging path,
centers for Philip Morris USA, on-site guest
DuPont and Allied, Confederate laundry,
White House, Richmond and complimentary
Petersburg National continental
Battlefields, James River breakfast, local van
Plantations tour shuttle
16. Busch Gardens amusement park, Meeting room,
golf courses, Tampa Bay and hospitality suite,
Gulf Coast beaches complimentary
continental
breakfast,
tropically
landscaped outdoor
pool and whirlpool
in central
courtyard, free-
standing restaurant
with room service,
exercise room,
airport shuttle van
</TABLE>
S-16
<PAGE> 21
<TABLE>
<CAPTION>
NUMBER
OF GUEST NUMBER CORRIDOR LOT YEAR YEAR
HOTEL LOCATION ROOMS OF FLOORS DESIGN ACREAGE BUILT RENOVATED(1)
- ------------------- ------------------- ---------- --------- -------- ------- ----- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
17. Comfort Inn(3) Augusta, GA (near 123 5 Interior 2.3 1989
Interstate-20 and
Bobby Jones
Expressway)
18. Comfort Inn Durham/Chapel Hill, 138 4 Interior 4.5 1991
NC (near
Interstate-40 and
U.S. 15-501)
19. Comfort Inn Fayetteville, NC 176 4 Interior 3.3 1987 1995
(near
Interstate-95)
20. Comfort Inn Raleigh, NC (near 149 4 Interior 2.7 1984 (2)
Raleigh Beltline
Highway)
21. Comfort Inn Wilmington, NC 146 6 Interior 2.6 1986 1996
(near
Interstate-40)
<CAPTION>
LOCAL POINTS OF INTEREST/
BUSINESSES AMENITIES
- --- ------------------------------- --------------------
<C> <C> <C>
17. Augusta National Golf Club Deluxe complimentary
continental
breakfast, executive
suites, outdoor pool
and whirlpool,
meeting room, fully
equipped fitness
center
18. University of North Carolina at Hospitality suite,
Chapel Hill, Duke Hospital, meeting room,
Duke University complimentary
continental
breakfast, fitness
center with sauna,
outdoor pool with
whirlpool spa,
executive suites,
adjacent
full-service
restaurants
19. Fort Bragg, Home of 82nd U.S. Complimentary
Airborne Division, Pope Air continental
Force Base breakfast executive
suites with wet bar,
outdoor pool, access
to health spa,
25-inch televisions,
55 restaurants
within three-mile
radius
20. State Capitol, North Carolina Two meetings rooms,
State University, Research deluxe weekday
Triangle Park breakfast buffet,
complimentary
continental weekend
breakfast buffet,
outdoor pool,
exercise area,
access to health spa
21. University of North Carolina at Complimentary
Wilmington, Wrightsville Beach, continental
Revolutionary and Civil War breakfast, outdoor
historical sites pool, social hour,
fitness center
access and three
meeting rooms,
adjacent
full-service
restaurant
</TABLE>
S-17
<PAGE> 22
<TABLE>
<CAPTION>
NUMBER
OF GUEST NUMBER CORRIDOR LOT YEAR YEAR
HOTEL LOCATION ROOMS OF FLOORS DESIGN ACREAGE BUILT RENOVATED(1)
- ------------------- ------------------- ---------- --------- -------- ------- ----- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
22. Comfort Inn Charleston, SC 128 7 Interior 1.0 1989 1996
23. Comfort Inn Greenville, SC 190 2 Exterior 3.0 1975 1997
(near Interstate-
385)
24. Comfort Inn Chester, VA (near 123 5 Interior 3.0 1988 1995
Interstate-95 and
Route 10)
25. Homewood Cary, NC (Raleigh) 140 Suites 4 Interior 9.1 1994
Suites
<CAPTION>
LOCAL POINTS OF INTEREST/
BUSINESSES AMENITIES
- --- ------------------------------- --------------------
<C> <C> <C>
22. Charleston historic district, Meeting room,
nearby marinas, nearby medical complimentary deluxe
complex continental
breakfast, whirlpool
suites, exercise
center, outdoor
pool, historic
district tours,
rooms with view of
Ashley River
23. Greenville-Spartanburg Meeting room,
Metropolitan area, BMW assembly outdoor swimming
plant, Michelin's North pool, game room,
American headquarters sports bar
24. Nearby industrial and technical Meeting room,
centers for Philip Morris, complimentary
Allied, DuPont, Confederate continental
White House, Richmond & breakfast buffet,
Petersburg National boardroom, guest
Battlefields, James River laundry facilities,
Plantations tour local van shuttle,
outdoor pool, health
spa, jogging path
25. Siemens Medical Systems(4), Complimentary full
Research Triangle Park service breakfast,
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
</TABLE>
S-18
<PAGE> 23
<TABLE>
<CAPTION>
NUMBER
OF GUEST NUMBER CORRIDOR LOT YEAR YEAR
HOTEL LOCATION ROOMS OF FLOORS DESIGN ACREAGE BUILT RENOVATED(1)
- ------------------- ------------------- ---------- --------- -------- ------- ------- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
26. Homewood Clear Lake 92 Suites 3 Interior 2.6 1995
Suites (Houston), TX (near
Interstate-45)
(suburban Houston)
27. Comfort Suites Orlando, FL 215 3 Exterior 4.4 1990 (2)
28. Comfort London, KY (near 62 Suites 3 Interior 1.0 1992 1997
Suites(3) Interstate-75)
29. Hampton Inn & Duluth (Atlanta), 104 and 32 4 Interior 2.5 1996
Suites GA (near suites
Interstate-85)
(suburban Atlanta)
30. Holiday Inn Clearwater, FL 127 3 Interior 2.4 1987 (2)
Express
31. Holiday Inn Abingdon, VA (near 81 3 Interior 1.2 1991 1997
Express Interstate 81)
<CAPTION>
LOCAL POINTS OF INTEREST/
BUSINESSES AMENITIES
- --- ------------------------------- -----------------
<C> <C> <C>
26. NASA's Johnson Space Center, Executive
Rockwell's Space Operations business center,
Center, Space Center Clear complimentary
Lake, Martin-Marietta, full service
McDonnell-Douglas, Lockheed breakfast,
fitness facility,
sport court,
fully-equipped
in-room kitchens,
outdoor swimming
pool, exercise
room, jacuzzi
27. Walt Disney World, Universal Complimentary
Studios, Sea World, Convention continental
Center breakfast, large
heated pool,
microwave ovens
and refrigerators
in every suite
and a poolside
bar and grille
28. Daniel Boone National Forest, Meeting room,
Rockcastle River, whitewater complimentary
sports attractions, bass continental
fishing, adjacent multiscreen breakfast, indoor
movie theater swimming pool
29. Gwinnett Mall, Lake Lanier, Meeting room,
Stone Mountain, Chateau Elan fully equipped
business center,
social hour,
complimentary
full-service
breakfast,
outdoor pool
30. Busch Gardens, Gulf Coast Complimentary
beaches and Tampa Bay continental
breakfast, heated
outdoor swimming
pool and jacuzzi
and exercise room
31. 20 block historic district, Meeting room,
Barter Theater (State Theater complimentary
of Virginia), arts and crafts continental
centers, Virginia Highlands breakfast,
Festival outdoor pool
</TABLE>
S-19
<PAGE> 24
<TABLE>
<CAPTION>
NUMBER
OF GUEST NUMBER CORRIDOR LOT YEAR YEAR
HOTEL LOCATION ROOMS OF FLOORS DESIGN ACREAGE BUILT RENOVATED(1)
- ------------------- -------------------- ---------- --------- -------- ------- ----- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
32. Holiday Inn Garland (Dallas), TX 244 5 Interior 6.5 1974 1997
Select (near
Interstate-635)
(suburban Dallas)
33. Quality Suites Charleston, SC 168 Suites 5 Interior 3.8 1989 (2)
(near Interstate-26)
34. Courtyard by Wilmington, NC 128 2 Interior 3.5 1996
Marriott
35. Courtyard by Houston, TX 202 3 Interior 4.0 1973 (2)
Marriott
<CAPTION>
LOCAL POINTS OF INTEREST/
BUSINESSES AMENITIES
- --- --------------------------------- -------------------------
<C> <C> <C>
32. Suburban Dallas, electronics- Approximately 9,800
related industries including square- foot conference
E-Systems and Software Spectrum center, four other
meeting rooms, 50- person
auditorium theater,
full-service restaurant,
night club, outdoor pool,
executive fitness center
33. Charleston International Airport, Five-story atrium,
Charleston's Historic District complimentary full
service cooked-to-order
breakfast, manager's
cocktail reception,
meeting rooms, outdoor
jacuzzi, pool health spa,
exercise room, airport
shuttle van
34. Wrightsville Beach, Revolutionary Two large meeting rooms,
and Civil War historical sites full service breakfast,
lobby lounge, outdoor
swimming pool, jacuzzi
35. Convenient to Interstate 610, Outdoor swimming pool
Interstate 10 and the Northwest and jacuzzi, fitness
Freeway center, complimentary
continental breakfast,
daily newspaper and a
coin-operated laundry
facility
</TABLE>
- ---------------
(1) For purposes of this table, renovation refers to substantial upgrade of
guest rooms and/or public areas.
(2) The Company expects renovation to occur within the next 12 months.
(3) The Company is considering the sale or other disposition of this property
once renovations are completed.
(4) The Homewood Suites -- Cary, North Carolina, is subject to a lease (the
"Siemens Lease") with Siemens Medical System, 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 Consumer Price Index. The lease terminates on
March 31, 2003.
S-20
<PAGE> 25
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and a brief description of the business
experience of each person who is a director or executive officer of the Company.
<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 67) has been Chairman of the
Board of Directors of the Company since its inception in March 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 ten 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
also serves on the board of directors of Branch Banking and Trust Company. Mr.
Winston is Robert Winston's father and James Winston's brother.
Robert W. Winston, III -- Robert Winston (age 35) has served as Chief
Executive Officer, President and director of the Company since its inception in
March 1994 and Secretary until May 1995. Mr. Winston is the son of Charles
Winston and the nephew of James 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 Company's initial public offering in June 1994. Mr. Winston
developed three of the Current Hotels, which were purchased by the Company in
1996.
Philip R. Alfano -- Mr. Alfano (age 47) was appointed Chief Financial
Officer and Senior Vice President of the Company in October 1994 and Secretary
in May 1995. 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 which is not affiliated with
the Company, 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. Mr. Alfano has informed the Company of his intention
to resign from his position as Chief Financial Officer in order to pursue other
interests. Mr. Alfano will continue to handle day-to-day operations as CFO
during the near term and will remain available in an advisory role to assist the
Company in the transition to a new CFO. The Company has retained an executive
search firm to assist in the search process for Mr. Alfano's successor.
Kenneth Crockett -- Mr. Crockett (age 40) 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
S-21
<PAGE> 26
he was responsible for the development and operation of nine limited service
hotels. Prior to 1984, Mr. Crockett worked for several different financial
institutions.
James H. Winston -- James Winston (age 63) has served as a director of the
Company since May 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 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 Stein Mart, Inc., 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 62) has served as a director of the Company
since May 25, 1994. Mr. Fulton is currently the Dean of Kenan-Flagler Business
School of the University of North Carolina at Chapel Hill, a position he has
held since January 1, 1994, but expects to leave such position on September 12,
1997. Mr. Fulton is also currently the Chief Executive Officer of Bassett
Furniture Industries, Inc. Mr. Fulton served from 1988 through 1993 with Sara
Lee Corporation, a global packaged food and consumer products company. 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, Cato Corporation and Bassett
Furniture Industries, Inc.
Thomas F. Darden II -- Thomas Darden (age 42) has served as a director of
the Company since May 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 61) has served as a director
of the Company since May 1994. Mr. Daugherty serves as a consultant to North
Carolina State University. Until 1994, Mr. Daugherty 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. At the time of
his retirement in 1994, Mr. Daugherty was the senior IBM executive for the State
of North Carolina. Mr. Daugherty received a Bachelor of Science degree from
Lehigh University in 1957. He serves on various community and business boards of
directors, including the boards of Wachovia Bank & Trust Company, N.A. and
Carolina Power & Light Company.
Edwin B. Borden -- Edwin Borden (age 63) has served as a director of the
Company since May 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 boards of directors of Carolina Power & Light Company, Jefferson
Pilot Corporation, Triangle Bancorp and Ruddick Corp.
S-22
<PAGE> 27
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as
of August 12, 1997 by (i) each director, (ii) each executive officer, and (iii)
all directors and executive officers as a group:
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED(1)(2) CLASS
------------------------ ------------ -------
<S> <C> <C>
Charles M. Winston(3)....................................... 340,380 2.0%
Robert W. Winston, III(4)................................... 494,793 2.9%
Philip R. Alfano(5)......................................... 45,000 *
Kenneth Crockett(6)......................................... 50,000 *
James H. Winston(7)(8)...................................... 15,000 *
Paul Fulton(7).............................................. 7,500 *
Thomas F. Darden, II(7)..................................... 12,500 *
Richard L. Daugherty(7)..................................... 8,500 *
Edwin B. Borden(7).......................................... 17,500 *
All directors and executive officers as a group (9
persons)(9)............................................... 991,173 5.7%
</TABLE>
- ---------------
* Represents less than one percent of the Company's outstanding Common Stock.
(1) Pursuant to the rules of the Securities and Exchange Commission, certain
shares of the Company's Common Stock which a person has the right to
acquire within 60 days of the date shown above pursuant to the exercise of
stock options are deemed to be outstanding for the purpose of computing the
percentage ownership of such person but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Assumes that all Units in the Partnership held by such persons, if any,
which are redeemable within 60 days of the date shown above for shares of
the Company's Common Stock, are redeemed for shares of Common Stock on a
one-for-one basis. The total number of shares outstanding used in
calculating the percentage assumes that none of the Units held by other
persons are redeemed for shares of Common Stock.
(3) Includes 105,643 shares issuable to Mr. Winston upon the exercise of
redemption rights with respect to Units issued to Mr. Winston in connection
with the Company's acquisition of hotels in connection with the Company's
initial public offering. Also includes 36,505 shares issuable upon exercise
of redemption rights with respect to outstanding Units issued to a
corporation that is owned 33.33% by Mr. Winston in connection with the
Company's acquisition of the Hampton Inn-Perimeter (Atlanta).
(4) Includes 297,500 shares issuable upon exercise of redemption rights with
respect to Units issued to a corporation that is owned by Mr. Winston, his
wife and trusts for the benefit of his minor children in connection with
the Company's acquisition of the Hampton Inn-Wilmington, North Carolina.
Also includes 97,500 shares subject to presently exercisable stock options.
(5) Includes 5,000 shares jointly owned with Mr. Alfano's wife and 40,000 shares
subject to presently exercisable stock options.
(6) Represents 50,000 shares subject to presently exercisable stock options.
(7) Includes 7,500 shares issued to each director, other than Charles Winston
and Robert Winston, in June 1994 under the Winston Hotels, Inc. Directors'
Stock Incentive Plan (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.
(8) Includes 1,000 shares held by Mr. Winston's wife.
(9) Includes 7,500 shares issued to each director, other than Charles Winston
and Robert W. Winston, under the Directors' Plan. Also includes 187,500
shares subject to presently exercisable stock options and 439,648 shares
issuable upon exercise of redemption rights with respect to outstanding
Units held by executive officers and directors.
S-23
<PAGE> 28
DESCRIPTION OF SERIES A PREFERRED STOCK
The description of the particular terms of the Series A Preferred Stock
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the Preferred Stock set forth in the
accompanying Prospectus, to which description reference is hereby made.
GENERAL
The Company is authorized to issue up to 10,000,000 shares of preferred
stock ("Preferred Stock") from time to time, in one or more series, with such
designations, powers, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption, in each case, if any, as are permitted by
North Carolina law and as the Board of Directors may determine prior to issuance
thereof by adoption of an amendment of the Company's Articles of Incorporation
without any further vote or action by the Company's shareholders. As of the date
of this Prospectus Supplement, no shares of Preferred Stock were outstanding.
The Company intends to contribute or otherwise transfer the net proceeds of
the sale of the Series A Preferred Stock to the Partnership in exchange for
% Series A Preferred Units in the Partnership, the economic terms of
which will be substantially identical to the Series A Preferred Stock. The
Partnership will be required to make all required distributions on the Series A
Preferred Units (which will mirror the payments of distributions, including
accrued and unpaid distributions upon redemption, and of the liquidation
preference amount of the Series A Preferred Stock) prior to any distribution of
cash or assets to the holders of the Units or to the holders of any other
interests in the Partnership, except for any other series of preference units
ranking on a parity with the Series A Preferred Units as to distributions and/or
liquidation rights and except for distributions required to enable the Company
to maintain its qualification as a REIT.
None of the terms of the Series A Preferred Stock, the Partnership
Agreement of the Partnership or, subject to limited exceptions, any of the debt
agreements of the Company contain any provisions affording holders of the Series
A Preferred Stock protection in the event of a highly leveraged or other
transaction that might adversely affect holders of the Series A Preferred Stock.
The following summary of the terms and provisions of the Series A Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the pertinent sections of the Articles of Incorporation and the
amendment to the Articles of Incorporation creating the Series A Preferred Stock
(the "Designating Amendment"), each of which is available from the Company.
MATURITY
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
RANK
The Series A Preferred Stock will, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company, rank (i)
senior to all classes or series of Common Stock of the Company, and to all
equity securities ranking junior to the Series A Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company; (ii) on a parity with all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank on a parity
with the Series A Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; and (iii) junior to all
existing and future indebtedness of the Company. The term "equity securities"
does not include convertible debt securities, which will rank senior to the
Series A Preferred Stock prior to conversion.
DIVIDENDS
Holders of shares of the Series A Preferred Stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, preferential cumulative cash
S-24
<PAGE> 29
dividends at the rate of % per annum of the Liquidation Preference per
share (equivalent to a fixed annual amount of $ per share).
Dividends on the Series A Preferred Stock shall be cumulative from the date
of original issue and shall be payable quarterly in arrears on or before the
sixteenth day of January, April, July and October of each year, or, if not a
business day, the next succeeding business day (each, a "Dividend Payment
Date"). The first dividend will be paid on or before January 16, 1998. Dividends
payable on the Series A Preferred Stock for any partial dividend period will be
computed on the basis of a 360-day year consisting of twelve 30-day months.
Dividends will be payable to holders of record as they appear in the stock
records of the Company at the close of business on the applicable record date,
which shall be the last business day of March, June, September and December,
respectively, or on such other date designated by the Board of Directors of the
Company for the payment of dividends that is not more than 30 nor less than 10
days prior to the applicable Dividend Payment Date (each, a "Dividend Record
Date"). The first Dividend Record Date for determination of shareholders
entitled to receive dividends on the Series A Preferred Stock is expected to be
December 30, 1997.
No dividends on shares of Series A Preferred Stock shall be declared by the
Board of Directors or paid or set apart for payment by the Company at such time
as the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such declaration, payment or
setting apart for payment or provides that such declaration, payment or setting
apart for payment would constitute a breach thereof or a default thereunder, or
if such declaration or payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series A Preferred Stock
will accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series A
Preferred Stock will not bear interest and holders of the Series A Preferred
Stock will not be entitled to any distributions in excess of full cumulative
distributions described above.
If, for any taxable year, the Company elects to designate as "capital gain
dividends" (as defined in Section 857 of the Internal Revenue Code of 1986, as
amended (the "Code")) any portion (the "Capital Gains Amount") of the dividends
(as determined for federal income tax purposes) paid or made available for the
year to holders of all classes of stock (the "Total Dividends"), then the
portion of the Capital Gains Amount that shall be allocable to the holders of
Series A Preferred Stock shall be the amount that the total dividends (as
determined for federal income tax purposes) paid or made available to the
holders of the Series A Preferred Stock for the year bears to the Total
Dividends. Beginning with its 1998 taxable year, the Company will be able to
elect to retain and pay income tax on its net long-term capital gains. In such a
case, the holders of Series A Preferred Stock would include in income their
proportionate share of the Company's undistributed long-term capital gains, as
designated by the Company.
Except as set forth in the next sentence, no dividends will be declared or
paid or set apart for payment on any capital stock of the Company or any other
series of Preferred Stock ranking, as to dividends, on a parity with or junior
to the Series A Preferred Stock (other than a dividend in shares of the
Company's Common Stock or in shares of any other class of stock ranking junior
to the Series A Preferred Stock as to dividends and upon liquidation) for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof is
set apart for such payment on the Series A Preferred Stock for all past dividend
periods and the then current dividend period. When dividends are not paid in
full (or a sum sufficient for such full payment is not so set apart) upon the
Series A Preferred Stock and the shares of any other series of Preferred Stock
ranking on a parity as to dividends with the Series A Preferred Stock, all
dividends declared upon the Series A Preferred Stock and any other series of
Preferred Stock ranking on a parity as to dividends with the Series A Preferred
Stock shall be declared pro rata so that the amount of dividends declared per
share of Series A Preferred Stock and such other series of Preferred Stock shall
in all cases bear to each other the same ratio that accrued dividends per share
on the Series A Preferred Stock and such other series of Preferred Stock (which
shall not include any accrual in respect of unpaid dividends for prior dividend
periods if such Preferred Stock does not have a cumulative dividend) bear to
each other.
S-25
<PAGE> 30
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series A Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in shares of Common Stock
or other shares of capital stock ranking junior to the Series A Preferred Stock
as to dividends and upon liquidation) shall be declared or paid or set aside for
payment nor shall any other distribution be declared or made upon the Common
Stock or any other capital stock of the Company ranking junior to or on a parity
with the Series A Preferred Stock as to dividends or upon liquidation, nor shall
any shares of Common Stock, or any other shares of capital stock of the Company
ranking junior to or on a parity with the Series A Preferred Stock as to
dividends or upon liquidation, be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any such shares) by the Company (except by conversion into
or exchange for other capital stock of the Company ranking junior to the Series
A Preferred Stock as to dividends and upon liquidation or redemptions for the
purpose of preserving the Company's qualification as a REIT). Holders of shares
of the Series A Preferred Stock shall not be entitled to any dividend, whether
payable in cash, property or stock, in excess of full cumulative dividends on
the Series A Preferred Stock as provided above. Any dividend payment made on
shares of the Series A Preferred Stock shall first be credited against the
earliest accrued but unpaid dividend due with respect to such shares which
remains payable.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, the holders of shares of Series A Preferred Stock
are entitled to be paid out of the assets of the Company legally available for
distribution to its shareholders a liquidation preference of $25 per share (the
"Liquidation Preference"), plus an amount equal to any accrued and unpaid
dividends to the date of payment, but without interest, before any distribution
of assets is made to holders of Common Stock or any other class or series of
capital stock of the Company that ranks junior to the Series A Preferred Stock
as to liquidation rights. Holders of Series A Preferred Stock will be entitled
to written notice of any event triggering the right to receive such Liquidation
Preference. After payment of the full amount of the Liquidation Preference, plus
any accrued and unpaid dividends to which they are entitled, the holders of
Series A Preferred Stock will have no right or claim to any of the remaining
assets of the Company. The consolidation or merger of the Company with or into
any other corporation, trust or entity or of any other corporation with or into
the Company, or the sale, lease or conveyance of all or substantially all of the
property or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
REDEMPTION OF SERIES A PREFERRED STOCK UPON A CHANGE OF CONTROL
At any time prior to September 28, 2001, the Company may, at its option,
upon the occurrence of a Change of Control Event (as defined below) redeem all
of the outstanding Series A Preferred Stock
S-26
<PAGE> 31
at the applicable redemption price reflected below, plus accrued and unpaid
dividends (if any) to the date of repurchase. The repurchase price shall be as
follows:
<TABLE>
<CAPTION>
DATE OF REDEMPTION
- ------------------------------------ PURCHASE
FROM THROUGH PRICE
- ------------------- ------------- --------
<S> <C> <C> <C>
Closing of Offering December 31, 1997......................................... $25.80
January 1, 1998 March 31, 1998............................................ 25.75
April 1, 1998 June 30, 1998............................................. 25.70
July 1, 1998 September 30, 1998........................................ 25.65
October 1, 1998 December 31, 1998......................................... 25.60
January 1, 1999 March 31, 1999............................................ 25.55
April 1, 1999 June 30, 1999............................................. 25.50
July 1, 1999 September 30, 1999........................................ 25.45
October 1, 1999 December 31, 1999......................................... 25.40
January 1, 2000 March 31,2000............................................. 25.35
April 1, 2000 June 30, 2000............................................. 25.30
July 1, 2000 September 30, 2000........................................ 25.25
October 1, 2000 December 31, 2000......................................... 25.20
January 1, 2001 March 31, 2001............................................ 25.15
April 1, 2001 June 30, 2001............................................. 25.10
July 1, 2001 September 27, 2001........................................ 25.05
</TABLE>
Such redemption may be consummated at any time prior to, contemporaneously
with or after the Change of Control (as defined below), provided that notice of
any such redemption pursuant to this paragraph is given no later than 90 days
following the date upon which the Change of Control Event occurred, the
repurchase date must be within 60 days of the date of notice and a sum
sufficient to redeem the shares has been deposited in trust to effect the
redemption.
As used herein, a "Change of Control Event" shall mean the execution by the
Company or any of its subsidiaries or affiliates of any agreement with respect
to any proposed transaction or event or series of transactions or events which,
individually or in the aggregate, may reasonably be expected to result in a
Change of Control.
A "Change of Control" shall be deemed to have occurred at such time as (i)
a "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the
Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, except that a person or group shall be deemed
to have beneficial ownership of all shares of Voting Stock that such person or
group has the right to acquire regardless of when such right is first
exercisable), directly or indirectly, of Voting Stock representing more than 35%
of the total voting power of the total Voting Stock of the Company on a fully
diluted basis; (ii) the date the Company sells, transfers or otherwise disposes
of all or substantially all of the assets of the Company; or (iii) the date of
the consummation of a merger or share exchange of the Company with another
corporation where the shareholders of the Company immediately prior to the
merger or share exchange would not beneficially own immediately after the merger
or share exchange, shares entitling such shareholders to 50% or more of all
votes (without consideration of the rights of any class of stock to elect
directors by a separate group vote) to which all shareholders of the corporation
issuing cash or securities in the merger consolidation or share exchange would
be entitled in the election of directors, or where members of the Board of
Directors of the Company immediately prior to the merger, or share exchange
would not immediately after the merger consolidation or share exchange
constitute a majority of the board of directors of the corporation issuing cash
or securities in the merger, or share exchange. "Voting Stock" shall mean
capital stock of any class or kind having the power to vote generally for the
election of directors of the Company.
REDEMPTION
Other than upon the occurrence of a Change of Control Event as described
under "-- Redemption of Series A Preferred Stock Upon a Change of Control" or in
the event a shareholder acquires Excess Shares in
S-27
<PAGE> 32
excess of the Ownership Limitation as described under "-- Restrictions on
Ownership", the Series A Preferred Stock is not redeemable prior to September
28, 2001. However, in order to ensure that the Company will continue to meet the
stock ownership requirements for qualification as a REIT, the Series A Preferred
Stock will be subject to provisions in the Articles of Incorporation pursuant to
which any class of capital stock of the Company owned by a shareholder in excess
of the Ownership Limitation (as defined herein) will be transferred to a trust
and the shareholder will have the right to receive certain compensation for such
shares of stock. See "-- Restrictions on Ownership." On and after September 28,
2001, the Company, at its option upon not less than 30 nor more than 60 days'
written notice, may redeem shares of the Series A Preferred Stock, in whole or
in part, at any time or from time to time, for cash at a redemption price of $25
per share, plus all accrued and unpaid dividends thereon to the date fixed for
redemption (except with respect to Excess Shares in excess of the Ownership
Limitation as described under "-- Restrictions on Ownership"), without interest.
Holders of Series A Preferred Stock to be redeemed shall surrender such Series A
Preferred Stock at the place designated in such notice and shall be entitled to
the redemption price and any accrued and unpaid dividends payable upon such
redemption following such surrender. If notice of redemption of any shares of
Series A Preferred Stock has been given and if the funds necessary for such
redemption have been set aside by the Company in trust for the benefit of the
holders of any shares of Series A Preferred Stock so called for redemption, then
from and after the redemption date dividends will cease to accrue on such shares
of Series A Preferred Stock, such shares of Series A Preferred Stock shall no
longer be deemed outstanding and all rights of the holders of such shares will
terminate, except the right to receive the redemption price. If less than all of
the outstanding Series A Preferred Stock is to be redeemed, the Series A
Preferred Stock to be redeemed shall be selected pro rata (as nearly as may be
practicable without creating fractional shares) or by any other equitable method
determined by the Company. The Company's ability to redeem Series A Preferred
Stock is subject to the limitations on distributions of the North Carolina
Business Corporation Act.
Unless full cumulative dividends on all shares of Series A Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no shares of Series A Preferred
Stock shall be redeemed unless all outstanding shares of Series A Preferred
Stock are simultaneously redeemed and the Company shall not purchase or
otherwise acquire directly or indirectly any shares of Series A Preferred Stock
(except by exchange for capital stock of the Company ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation); provided,
however, that the foregoing shall not prevent the redemption by the Company of
shares of stock in order to ensure that the Company continues to meet the
requirements for qualification as a REIT, or the purchase or acquisition of
shares of Series A Preferred Stock pursuant to a purchase or exchange offer made
on the same terms to holders of all outstanding shares of Series A Preferred
Stock. So long as no dividends are in arrears, the Company shall be entitled at
any time and from time to time to repurchase shares of Series A Preferred Stock
in open-market transactions duly authorized by the Board of Directors and
effected in compliance with applicable laws.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two successive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice will be mailed by the Company, postage
prepaid, not less than 30 nor more than 60 days prior to the redemption date,
addressed to the respective holders of record of the Series A Preferred Stock to
be redeemed at their respective addresses as they appear on the stock transfer
records of the Company. No failure to give such notice or any defect therein or
in the mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of Series A Preferred Stock except as to the holder to
whom notice was defective or not given. Each notice shall state: (i) the
redemption date; (ii) the redemption price; (iii) the number of shares of Series
A Preferred Stock to be redeemed; (iv) the place or places where the Series A
Preferred Stock is to be surrendered for payment of the redemption price; and
(v) that dividends on the shares to be redeemed will cease to accrue on such
redemption date. If less than all of the Series A Preferred Stock held by any
holder is to be redeemed, the notice mailed to such holder shall also specify
the number of shares of Series A Preferred Stock held by such holder to be
redeemed.
Immediately prior to any redemption of Series A Preferred Stock, the
Company shall pay, in cash, any accumulated and unpaid dividends through the
redemption date, unless a redemption date falls after a
S-28
<PAGE> 33
Dividend Record Date and prior to the corresponding Dividend Payment Date, in
which case each holder of Series A Preferred Stock at the close of business on
such Dividend Record Date shall be entitled to the dividend payable on such
shares on the corresponding Dividend Payment Date notwithstanding the redemption
of such shares before such Dividend Payment Date.
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption. However, in order to ensure that
the Company continues to meet the requirements for qualification as a REIT,
Series A Preferred Stock acquired by a shareholder in excess of the Ownership
Limitation will automatically be transferred to a trust and the shareholder will
have the right to receive certain compensation for such stock from the Company.
VOTING RIGHTS
Holders of the Series A Preferred Stock will not have any voting rights,
except as set forth below or as otherwise from time to time required by law.
Whenever dividends on any shares of Series A Preferred Stock shall be in
arrears for six or more quarters (a "Preferred Dividend Default"), the holders
of such shares of Series A Preferred Stock (voting separately as a voting group
with all other series of Preferred Stock ranking on a parity with the Series A
Preferred Stock as to dividends or upon liquidation ("Parity Preferred") upon
which like voting rights have been conferred and are exercisable) will be
entitled to vote separately as a voting group for the election of a total of two
additional directors to serve on the Board of Directors of the Company (the
"Preferred Stock Directors") at a special meeting called by the holders of
record of at least 20% of the Series A Preferred Stock and the holders of record
of at least 20% of any series of Parity Preferred so in arrears (unless such
request is received less than 90 days before the date fixed for the next annual
or special meeting of shareholders) or at the next annual meeting of
shareholders, and at each subsequent annual meeting until all dividends
accumulated on such shares of Series A Preferred Stock for the past dividend
periods and the dividend for the then current dividend period shall have been
fully paid or declared and a sum sufficient for the payment thereof set aside
for payment. A quorum for any such meeting shall exist if at least a majority of
the outstanding shares of Series A Preferred Stock and shares of Parity
Preferred upon which like voting rights have been conferred and are exercisable
are represented in person or by proxy at such meeting. Such Preferred Stock
Directors shall be elected upon the affirmative vote of a plurality of the
shares of Series A Preferred Stock and such Parity Preferred present and voting
in person or by proxy at a duly called and held meeting at which a quorum is
present. If and when all accumulated dividends and the dividend for the then
current dividend period on the Series A Preferred Stock shall have been paid in
full or set aside for payment in full, the holders thereof shall be divested of
the foregoing voting rights (subject to revesting in the event of each and every
Preferred Dividend Default) and, if all accumulated dividends and the dividend
for the then current dividend period have been paid in full or declared and set
aside for payment in full on all series of Parity Preferred upon which like
voting rights have been conferred and are exercisable, the term of office of
each Preferred Stock Director so elected shall terminate. Any Preferred Stock
Director may be removed at any time with or without cause by, and shall not be
removed otherwise than by the vote of, the holders of record of a majority of
the outstanding shares of the Series A Preferred Stock and such Parity Preferred
when they have the voting rights described above (voting separately as a voting
group with all series of Parity Preferred upon which like voting rights have
been conferred and are exercisable). So long as a Preferred Dividend Default
shall continue, any vacancy in the office of a Preferred Stock Director may be
filled by written consent of the Preferred Stock Director remaining in office,
or if none remains in office, by a vote of the holders of record of a majority
of the outstanding shares of Series A Preferred Stock and such Parity Preferred
when they have the voting rights described above (voting separately as a voting
group with all series of Parity Preferred upon which like voting rights have
been conferred and are exercisable). The Preferred Stock Directors shall each be
entitled to one vote per director on any matter.
So long as any shares of Series A Preferred Stock remain outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least two-thirds of the shares of the Series A Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (voting
separately as a voting group), amend, alter or repeal the provisions of the
Articles of Incorporation or the Designating
S-29
<PAGE> 34
Amendment, whether by merger, consolidation or otherwise (an "Event"), so as to
materially and adversely affect any right, preference, privilege or voting power
of the Series A Preferred Stock or the holders thereof; provided, however, that
with respect to the occurrence of any Event set forth above, so long as the
Series A Preferred Stock remains outstanding with the terms thereof materially
unchanged, taking into account that upon the occurrence of an Event, the Company
may not be the surviving entity, the occurrence of any such Event shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting power of holders of the Series A Preferred Stock, and provided further
that (i) any increase in the amount of the authorized Preferred Stock or the
creation or issuance of any other series of Preferred Stock, or (ii) any
increase in the amount of authorized shares of such series, in each case ranking
on a parity with or junior to the Series A Preferred Stock with respect to
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up, shall not be deemed to affect materially and adversely such
rights, preferences, privileges or voting powers.
In addition to the above, under North Carolina law, the Series A Preferred
Stock will be entitled to vote as a separate voting group if the Series A
Preferred Stock is affected by certain amendments to the Articles of
Incorporation, whether made by filing articles of amendment or by a merger or
share exchange. In particular, if an amendment to the Articles of Incorporation
is one that requires shareholder action, a separate class or series of shares
will be entitled to vote as a separate voting group on any amendment that would:
(i) change the aggregate number of authorized shares of that class; (ii) effect
an exchange or reclassification of any shares of that class into shares of
another class; (iii) effect an exchange (or create a right of exchange) or
reclassification of any shares of another class into shares of that class; (iv)
change the designation, rights, preferences, or limitations of any shares of
that class; (v) change any shares of that class into a different number of
shares of the same class; (vi) increase the rights, preferences, or number of
authorized shares of any class that, after giving effect to the amendment, would
have rights or preferences with respect to distributions or to dissolution that
are prior, superior, or substantially equal to the shares of that class; (vii)
limit or deny an existing preemptive right of any shares of that class; (viii)
cancel or otherwise affect rights to distributions or dividends that have
accumulated but not yet been declared on any shares of that class; or (ix)
change the corporation into a non-profit corporation or a cooperative
organization. If a proposed amendment would affect a series of a class of shares
in one or more of the ways described in this paragraph, the shares of that
series are entitled to vote as a separate voting group on the proposed
amendment. The above mandatory voting rights apply regardless of whether the
change is favorable or unfavorable to the affected series or class. A mandatory
voting right also is given to a class or series of shares for approval of a
share dividend payable in the shares of that class or series on the shares of
another class or series.
Unless the Articles of Incorporation, the bylaws, or the Board of Directors
requires a higher vote, the vote required within each voting group will be a
majority of shares actually cast at a meeting at which a quorum is present,
except that if the proposed amendment creates dissenters' rights for any voting
group, the vote required within that voting group will be a majority of the
total votes in that voting group entitled to be cast on the amendment.
Under North Carolina law, the Series A Preferred Stock will be entitled to
vote separately on a plan of merger if the plan of merger contains a provision
that, if contained in a proposed amendment to the Articles of Incorporation,
would require action on the proposed amendment. The right to vote separately as
a group on a plan of merger does not apply to a voting group if the
consideration to be received in exchange for the shares of that voting group
consists solely of cash. In the event of a statutory share exchange under which
all shares to be acquired will be automatically exchanged for the designated
consideration, the Series A Preferred Stock will be entitled to vote separately
as a voting group. Unless the Articles of Incorporation or the Board of
Directors require a greater vote, the plan of merger or share exchange must be
approved by each voting group entitled to vote separately on the plan by a
majority of all the votes entitled to be cast on the plan by that voting group.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series A Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
S-30
<PAGE> 35
CONVERSION
The Series A Preferred Stock is not convertible into or exchangeable for
any other property or securities of the Company.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, certain restrictions
apply to the ownership of shares of capital stock. See the accompanying
Prospectus under "Federal Income Tax Considerations -- Requirements for
Qualification." Because the Board of Directors believes it is essential for the
Company to continue to qualify as a REIT, the Articles of Incorporation and the
Designating Amendment restrict the ownership, acquisition and transfer of the
Company's capital stock, including shares of Series A Preferred Stock (the
"Ownership Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in the Articles of Incorporation and the Designating Amendment, no
shareholder may own, or be deemed to own by virtue of the attribution provisions
of the Code, more than 9.9% of (i) the number of outstanding shares of Common
Stock or (ii) the number of outstanding shares of Series A Preferred Stock. The
Board of Directors may, but in no event is required to, waive the Ownership
Limitation with respect to a shareholder that is not an individual if evidence
satisfactory to the Board of Directors is presented that such shareholder's
ownership in excess of the Ownership Limitation will not jeopardize the
Company's status as a REIT. As a condition of such waiver, the Board of
Directors may require opinions of counsel satisfactory to it or an undertaking
from the applicant with respect to preserving the REIT status of the Company.
If shares in excess of the Ownership Limitation, shares which would cause
the Company to be beneficially owned by fewer than 100 persons, shares which
would cause the Company to be "closely held," or shares which would cause the
Company to own 10% or more of the ownership interests in a tenant of its
property are issued or transferred to any person, such issuance or transfer
shall be void ab initio as to that number of shares the transfer of which would
cause a violation of the applicable limit, and the shareholder will be deemed
not to have transferred such excess shares. In addition, if any person holds
shares in excess of the applicable limit, such person will be deemed to hold the
shares that cause the limit to be exceeded in trust for the Company, and will
not receive dividends or distributions with respect to such shares and will not
be entitled to exercise any voting rights with respect to such shares. The
person will be required to sell such shares to the Company for the lesser of the
amount paid for the shares or average of the last reported sales prices for the
ten trading days immediately preceding the redemption or to sell such shares at
the direction of the Company, in which case the Company will be reimbursed for
its expenses in connection with the sale plus any remaining amount of such
proceeds that exceeds the amount such person paid for the shares and such person
will be entitled to receive only the balance of the proceeds. If the Company
repurchases such shares, it may elect to pay for the shares with Units.
The Ownership Limitation will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Any change in the Ownership Limitation would require an amendment to
the Articles of Incorporation. In addition to preserving the Company's status as
a REIT, the Ownership Limitation may have the effect of precluding an
acquisition of control of the Company without the approval of the Board of
Directors. All certificates representing shares of Series A Preferred Stock will
bear a legend referring to the restrictions described above.
The Designating Amendment provides that each shareholder shall upon demand
be required to disclose to the Company in writing such information as the
Company may request in good faith in order to determine the Company's status as
a REIT.
TRANSFER AND DIVIDEND PAYING AGENT
Wachovia Bank, N.A., will act as the transfer and dividend payment agent in
respect of the Series A Preferred Stock.
S-31
<PAGE> 36
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This discussion supplements the discussion set forth in the accompanying
Prospectus under the heading "Federal Income Tax Considerations."
This discussion does not address the taxation of the Company or the impact
on the Company of its election to be taxed as a REIT. Such matters are discussed
in the accompanying Prospectus under "Federal Income Tax Considerations."
Prospective investors should consult, and must depend on, their own tax advisors
regarding the state, local, foreign and other tax consequences of holding and
disposing of Series A Preferred Stock.
TAXATION OF THE COMPANY
In the opinion of Hunton & Williams, the Company qualified to be taxed as a
REIT pursuant to sections 856 through 860 of the Code for its taxable years
ended December 31, 1994 through December 31, 1996, and the Company's
organization and proposed method of operation will enable it to qualify to be
taxed as a REIT for its taxable year ending December 31, 1997, and future
taxable years. 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 and the future
conduct of its business. Such factual assumptions and representations are set
out in the federal income tax opinion that will 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. 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 operations for any particular 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" in the
accompanying Prospectus.
REDEMPTION OF SERIES A PREFERRED STOCK
A redemption of Series A Preferred Stock will be treated under Section 302
of the Code as a distribution that is taxable at ordinary income tax rates as a
dividend (to the extent of the Company's current or accumulated earnings and
profits), unless the redemption satisfies certain tests set forth in Section
302(b) of the Code enabling the redemption to be treated as sale of the Series A
Preferred Stock. The redemption will satisfy such tests if it (i) is
"substantially disproportionate" with respect to the holder (which will not be
the case if only Series A Preferred Stock is redeemed, since it generally does
not have voting rights), (ii) results in a "complete termination" of the
holder's stock interest in the Company, or (iii) is "not essentially equivalent
to a dividend" with respect to the holder, all within the meaning of Section
302(b) of the Code. In determining whether any of these tests have been met,
shares considered to be owned by the holder by reason of certain constructive
ownership rules set forth in the Code, as well as shares actually owned, must
generally be taken into account. Because the determination as to whether any of
the alternative tests of Section 302(b) of the Code will be satisfied with
respect to any particular holder of Series A Preferred Stock depends upon the
facts and circumstances at the time that the determination must be made,
prospective investors are advised to consult their own tax advisors to determine
such tax treatment.
If a redemption of Series A Preferred Stock is treated as a distribution
that is taxable as a dividend, the amount of the distribution will be measured
by the amount of the cash and the fair market value of any property received by
the shareholders. A shareholder's adjusted tax basis in the redeemed Series A
Preferred Stock will be transferred to any of such shareholder's remaining stock
holdings in the Company. If the shareholder does not retain any stock ownership
in the Company, such basis could be transferred to a related person or it may be
lost.
S-32
<PAGE> 37
UNDERWRITING
Morgan Keegan & Company, Inc., J.C. Bradford & Co. and Raymond James &
Associates, Inc. (the "Underwriters") have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement among the Company,
the Partnership and the Underwriters (the "Underwriting Agreement"), to purchase
from the Company the number of shares of Series A Preferred Stock set forth
opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Morgan Keegan & Company, Inc................................
J.C. Bradford & Co..........................................
Raymond James & Associates, Inc.............................
---------
Total............................................. 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Series A Preferred Stock offered hereby, if any
such shares are purchased. The Company has been advised by the Underwriters that
the Underwriters propose to offer the shares of Series A Preferred Stock to the
public at the offering price set forth on the cover page of this Prospectus
Supplement and to certain dealers at such price less a concession not in excess
of $ per share of Series A Preferred Stock. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of $ per share
to other dealers. The public offering price and the concessions and discount to
dealers may be changed by the Underwriters after the initial offering.
The Company has agreed, subject to certain exceptions, that it will not,
without the prior written consent of the Underwriters, directly or indirectly
sell, offer to sell, grant any option for the sale of, or otherwise transfer or
dispose of any shares of Preferred Stock for a period of 90 days from the date
hereof.
The Company and the Partnership have agreed to indemnify the several
Underwriters or to contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Company has applied to list the Series A Preferred Stock on the NYSE
under the symbol "WXH PrA." If approved, trading of the Series A Preferred Stock
on the NYSE is expected to commence within a 30-day period after the initial
delivery of the Series A Preferred Stock. Prior to the Offering, there has been
no public market for the shares of Series A Preferred Stock. The Underwriters
have advised the Company that each intends to make a market in the Series A
Preferred Stock prior to the commencement of trading on the NYSE, but is not
obligated to do so and may discontinue market making at any time without notice.
LEGAL MATTERS
The legality of the shares of Series A Preferred Stock offered hereby will
be passed upon for the Company by King & Spalding, Atlanta, Georgia. The
legality of the shares of Series A Preferred Stock offered hereby will be passed
upon for the Underwriters by Hunton & Williams. King & Spalding will rely on the
opinion of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. with
respect to all matters involving North Carolina law. The description of federal
tax consequences in the Prospectus Supplement under the caption "Certain Federal
Income Tax Considerations" and contained in the accompanying Prospectus under
the caption "Federal Income Tax Considerations" is based upon the opinion of
Hunton & Williams, Richmond, Virginia.
S-33
<PAGE> 38
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
1995 and the consolidated statements of income, shareholders' equity and cash
flows for the years ended December 31, 1996 and 1995 and the period June 2, 1994
through December 31, 1994 and the financial statement schedule as of December
31, 1996; the balance sheets of the Lessee as of December 31, 1996 and 1995 and
the statements of income, shareholders' equity and cash flows for the years
ended December 31, 1996 and 1995 and for the period June 2, 1994 through
December 31, 1994; the combined statements of income, equity and cash flows for
the year ended December 31, 1995 of the Impac Acquisition Hotels (described in
Note 1 to those financial statements); 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 five months ended June 2, 1994; all
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus, have been 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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company may be
examined without charge at, or copies obtained upon payment of prescribed fees
from, the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and are also available for inspection
and copying at the regional offices of the Commission located at Seven World
Trade Center, New York, New York 10048 and at 500 West Madison Street, Chicago,
Illinois 60661-2511. The Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding the Company. In addition, the Company's Common Stock is traded on the
NYSE and such reports, proxy and information statements and other information
concerning the Company can be inspected and copied at The New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act, and the rules and regulations promulgated
thereunder, with respect to the Series A Preferred Stock offered hereby. This
Prospectus Supplement, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and financial schedules thereto. For further information concerning the
Company and the Series A Preferred Stock, reference is made to the Registration
Statement and the exhibits and schedules filed therewith, which may be examined
without charge at, or copies obtained upon payment of prescribed fees from, the
Commission and its regional offices at the locations listed above. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
S-34
<PAGE> 39
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company (File No. 0-23732)
with the Commission are incorporated herein by reference:
(a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(b) the Company's Quarterly Report on Form 10-Q for the fiscal
quarters ended March 31, 1997 and June 30, 1997;
(c) the Company's Current Report on Form 8-K dated May 7, 1996, as
amended by the Company's Current Report on Form 8-K/A filed with the
Commission on July 18, 1996; and the Company's Current Report on Form 8-K
dated July 11, 1997; and
(d) the combined statements of income, equity and cash flows of the
Impac Acquisition Hotels (described in Note 1 to those financial
statements) for the year ended December 31, 1995, included in the Company's
Registration Statement on Form S-3 (File No. 333-03986).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus Supplement
(and the accompanying Prospectus) and prior to the termination of the offering
of the Series A Preferred Stock shall be deemed to be incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus and made a part
hereof from the date of the filing of such documents. Any statement contained in
a document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus
Supplement (and the accompanying Prospectus) to the extent that a statement
contained herein or in any other document subsequently filed with the Commission
which also is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus Supplement or the accompanying Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus Supplement and the accompanying
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents incorporated by reference herein (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in 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.
S-35
<PAGE> 40
INDEX TO PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Winston Hotels, Inc.
Pro forma Consolidated Statements of Income for the Year
Ended December 31, 1996 and the Six Months Ended June 30,
1997...................................................... SF-2
Pro forma Consolidated Balance Sheet as of June 30, 1997.... SF-4
</TABLE>
SF-1
<PAGE> 41
WINSTON HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
These unaudited pro forma Consolidated Statements of Income are presented
as if (i) the acquisition of the Impac Acquisition Hotels which occurred on May
5, 1996, (ii) the Common Stock Offering in June 1996, (iii) the consummation of
the Offering, (iv) the application of the proceeds therefrom and (v) the
effective date for the Percentage Leases for the Impac Acquisition Hotels had
occurred as of the beginning of each of the periods presented. Consistent with
the rules and regulations of the Securities and Exchange Commission, all other
acquisitions during 1996 and 1997 do not meet certain measures of significance
individually or in the aggregate and, accordingly, have been excluded from these
pro forma consolidated statements of income. Such pro forma information is based
in part upon the Consolidated Statements of Income of Winston Hotels, Inc. and
the Impac Acquisition Hotels incorporated herein by reference. 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.
<TABLE>
<CAPTION>
PRO FORMA FOR THE YEAR ENDED DECEMBER 31, 1996
HISTORICAL ------------------------------------------------
YEAR ENDED IMPAC ACQUISITION
DECEMBER 31, HOTELS JANUARY 1 - PRO FORMA
1996 MAY 4, 1996 ADJUSTMENTS PRO FORMA
------------ ------------------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Percentage lease revenue......................... $26,611 $1,244(A) $27,855
Interest and other income........................ 97 -- 97
------- ------- -------
Total revenue................................ 26,708 1,244 27,952
------- ------- -------
Real estate taxes and property and casualty
insurance...................................... 1,647 108(B) 1,755
General and administrative....................... 1,985 10(C) 1,995
Interest expense................................. 2,665 -- $(2,083)(D) 582
Depreciation..................................... 6,476 352(E) 6,828
Amortization..................................... 147 8(F) 155
------- ------- ------- -------
Total expenses............................... 12,920 478 (2,083) 11,315
------- ------- ------- -------
Income before allocation to minority interest.... 13,788 $ 766 $ 2,083 16,637
======= =======
Income allocation to minority interest........... 786 448
------- -------
Net income....................................... 13,002 16,189
Preferred dividends(G)........................... -- 4,625
------- -------
Net income applicable to common shareholders..... $13,002 $11,564
======= =======
Net income per common share(H)................... $ 1.00 $ 0.75
Weighted average number of common shares and
common share equivalents....................... 13,747 16,099
</TABLE>
SF-2
<PAGE> 42
WINSTON HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA FOR THE SIX
MONTHS ENDED
HISTORICAL JUNE 30, 1997
SIX MONTHS -----------------------
ENDED PRO FORMA
JUNE 30, 1997 ADJUSTMENTS PRO FORMA
------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA:
Percentage lease revenue.................................... $16,770 $16,770
Interest and other income................................... 54 54
------- -------
Total revenue........................................... 16,824 16,824
------- -------
Real estate taxes and property and casualty insurance....... 1,156 1,156
General and administrative.................................. 862 862
Interest expense............................................ 1,811 $(1,308)(D) 503
Depreciation................................................ 4,570 4,570
Amortization................................................ 81 81
------- ------- -------
Total expenses.......................................... 8,480 (1,308) 7,172
------- ------- -------
Income before allocation to minority interest............... 8,344 $ 1,308 9,652
=======
Income allocation to minority interest...................... 611 715
------- -------
Net income applicable to common shareholders................ 7,733 8,937
------- -------
Preferred dividends(G)...................................... -- 2,313
------- -------
Net income applicable to common shareholders................ $ 7,733 $ 6,624
======= =======
Net income per common share(H).............................. $ 0.49 $ 0.43
Weighted average number of common shares and common share
equivalents............................................... 17,083 17,083
</TABLE>
(A) Represents lease payments calculated using the rent provisions in the
applicable Percentage Leases applied to the historical revenue of the Impac
Acquisition Hotels for the period from January 1, 1996 through May 4, 1996,
the date of acquisition by the Partnership.
(B) Represents real estate taxes and property and casualty insurance for the
period January 1, 1996 through May 4, 1996.
(C) Represents an estimate for incremental franchise taxes, legal, accounting,
printing and other expenses.
(D) Represents a reduction in interest expense resulting from the application
of the proceeds from the Offering to the weighted average debt outstanding
during the period based on the Company's historical weighted average
interest rate during the period. Pro forma interest expense includes unused
line of credit fees of 0.25% and $270 and $226 for amortization of loan
costs and fees and interest rate cap fees for the year ended December 31,
1996 and the six months ended June 30, 1997, respectively.
(E) Represents depreciation of the Impac Acquisition Hotels, 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.
(F) Represents amortization of capitalized franchise fees, which is computed
over a 10 year period.
(G) Assumes an annual dividend rate of 9.25% on the Liquidation Preference of
the Series A Preferred Stock.
(H) Net income per common share is computed by dividing income before
allocation to minority interest less preferred dividends by the weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding for the period.
SF-3
<PAGE> 43
WINSTON HOTELS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED, IN THOUSANDS)
This unaudited pro forma Consolidated Balance Sheet is presented as if the
Offering and the application of the net proceeds to retire debt had occurred on
June 30, 1997. Such pro forma information is based upon the Consolidated Balance
Sheet of the Company. It should be read in conjunction with all of the financial
statements and notes thereto included in the Quarterly Report on Form 10-Q for
the quarter and six months ended June 30, 1997, which is incorporated by
reference into the accompanying 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 June 30, 1997, 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........................ $229,893 $229,893
Less accumulated depreciation......................... (16,078) (16,078)
-------- --------
Net investment in hotel properties.................... 213,815 213,815
Cash and cash equivalents............................. 340 340
Lease revenue receivable.............................. 7,154 7,154
Deferred expenses, net................................ 1,272 1,272
Prepaid expenses and other assets..................... 1,522 1,522
-------- --------
$224,103 $224,103
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks.......................................... $ 63,081 $(47,500)(A) $ 15,581
Accounts payable and accrued expenses................. 2,227 2,227
Distributions payable................................. 4,613 4,613
Amounts due to Lessee................................. 1,667 1,667
Minority interest in Partnership...................... 11,274 11,274
Shareholders' equity:
Preferred stock..................................... -- 20(B) 20
Common stock........................................ 158 158
Additional paid-in capital.......................... 145,416 47,480(C) 192,896
Unearned directors' compensation.................... (144) (144)
Accumulated deficit................................. (4,189) (4,189)
-------- -------- --------
Total shareholders' equity.................. 141,241 47,500 188,741
-------- -------- --------
$224,103 $ -- $224,103
======== ======== ========
</TABLE>
(A) Decrease represents assumed net proceeds used to repay amounts due to
banks.
(B) Increase reflects the par value of the preferred stock expected to be sold
in the Offering.
(C) Increase reflects the gross proceeds from the Offering ($50,000) less the
par value of the preferred stock issued ($20) and the estimated expenses of
the Offering ($2,500).
SF-4
<PAGE> 44
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 2, 1997
$200,000,000
WINSTON HOTELS, INC.
[LOGO] COMMON STOCK AND PREFERRED STOCK
---------------------
Winston Hotels, Inc. (the "Company") may from time to time offer (i) shares
of its common stock, $.01 par value per share (the "Common Stock"), and (ii) in
one or more series or classes, shares of its preferred stock, $.01 par value per
share ("Preferred Stock"), with an aggregate public offering price of up to
$200,000,000 (or its equivalent in another currency based on the exchange rate
at the time of sale) in amounts, at prices and on terms to be determined at the
time of offering. The Common Stock and Preferred Stock (collectively, the
"Securities") may be offered, separately or together, in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable (i) in the case of Common Stock, any initial
public offering price and (ii) in the case of Preferred Stock, the specific
designation and stated value per share, any dividend, liquidation, redemption,
conversion, voting and other rights, and all other specific terms of the
Preferred Stock. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the Securities,
in each case as may be appropriate to preserve the status of the Company as a
real estate investment trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement also will contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on an interdealer quotation system or a securities
exchange of, the Securities covered by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
series of Securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN FACTORS RELATING TO AN
INVESTMENT IN THE OFFERED SECURITIES.
---------------------
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.
---------------------
The date of this Prospectus is September , 1997.
<PAGE> 45
AVAILABLE INFORMATION
The Company is subject to the informational 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"). Such reports, proxy
statements and other information filed by the Company may be examined without
charge at, or copies obtained upon payment of prescribed fees from, the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and are also available for inspection and copying at the
regional offices of the Commission located at Seven World Trade Center, New
York, New York 10048 and at 500 West Madison Street, Chicago, Illinois
60661-2511. The Commission maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding the Company. In addition, the Company's Common Stock currently is
traded on the New York Stock Exchange ("NYSE") and such reports, proxy and
information statements and other information concerning the Company can be
inspected and copied at the offices of the NYSE located at 20 Broad Street, New
York, New York 10005.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations promulgated thereunder, with respect to the
Securities. This Prospectus, which is part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits and financial schedules thereto. For further information concerning
the Company and the Securities, reference is made to the Registration Statement
and the exhibits and schedules filed therewith, which may be examined without
charge at, or copies obtained upon payment of prescribed fees from, the
Commission and its regional offices at the locations listed above. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company (File No. 0-23732)
with the Commission are incorporated herein by reference and made a part hereof:
(a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(b) the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997;
(c) the Company's Current Report on Form 8-K dated May 7, 1996, as
amended by the Company's Current Report on Form 8-K/A filed with the
Commission on July 18, 1996; and the Company's Current Report on Form 8-K
dated July 11, 1997;
(d) the combined statements of income, equity and cash flows of the
Impac Acquisition Hotels (described in Note 1 to those financial
statements) for the year ended December 31, 1995, included in the Company's
Registration Statement on Form S-3 (File No. 333-03986); and
(e) the description of the Common Stock of the Company included in the
Company's Registration Statement on Form 8-A, dated August 1, 1997,
including any amendment or report filed for the purpose of updating such
description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and made a part hereof from the
date of the filing of such documents. Any statement contained in a document
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 applicable Prospectus Supplement) or in
any other document subsequently filed with the Commission which also is deemed
to be incorporated by reference herein modifies
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<PAGE> 46
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus or any accompanying Prospectus Supplement.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any or all of the documents incorporated by
reference herein (not including the exhibits to such documents, unless such
exhibits are specifically incorporated by reference in 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.
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<PAGE> 47
THE COMPANY
The Company is a self-advised and self-administered equity REIT that,
either directly or through WINN Limited Partnership (the "Partnership"), owns 35
hotels as of September 2, 1997 (the "Hotels"), and is developing four Homewood
Suites(R) hotels, and one Courtyard by Marriott(R) hotel. In addition, the
Company has signed contracts or letters of intent to acquire three additional
hotels, which contain an aggregate of 393 rooms, for a total purchase price of
$23.7 million. The Company is the sole general partner of the Partnership and,
at September 2, 1997, owned an approximately 90.1% interest in the Partnership.
The following table sets forth, as of September 2, 1997, certain information
regarding the Company's hotels:
<TABLE>
<CAPTION>
FRANCHISE AFFILIATION NUMBER OF HOTELS NUMBER OF ROOMS
- --------------------- ---------------- ---------------
<S> <C> <C>
Hampton Inn(R)........................................ 15 1,809
Comfort Inn(R)........................................ 9 1,293
Homewood Suites(R).................................... 2 232
Comfort Suites(R)..................................... 2 277
Courtyard by Marriott(R).............................. 2 330
Holiday Inn Express(R)................................ 2 208
Hampton Inn & Suites(R)............................... 1 136
Holiday Inn Select(R)................................. 1 244
Quality Suites(R)..................................... 1 168
-- -----
Total....................................... 35 4,697
== =====
</TABLE>
The Company and Promus Hotels, Inc. ("Promus") have entered into various
agreements relating to the acquisition of hotels by the Company from Promus.
Specifically, the Company has agreed to purchase one additional Homewood Suites
hotel (the "Homewood Development Hotel") being developed by Promus. In addition,
Promus has granted the Company an option to purchase additional Homewood Suites
hotels (the "Homewood Option Hotels") during the three year period ending April
2000. The Company also has agreed to use its best efforts over an eight year
period to spend at least $100 million to acquire hotels from Promus or develop
hotels franchised by Promus, including the Homewood Development Hotel and the
Homewood Option Hotels. Promus has agreed to invest up to an additional $13.5
million in the Company's Common Stock from time to time, based on purchases by
the Company of the Homewood Development Hotel and Homewood Option Hotels. To
date, Promus has invested approximately $1.5 million in the Common Stock.
To enable the Company to qualify as a REIT, the Company or the Partnership,
as applicable, leases the Hotels to Winston Hospitality, Inc. (the "Lessee")
pursuant to leases (the "Percentage Leases") providing for rent payments based,
in part, on revenues from the Hotels ("Percentage Rent"). 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 25 of the Hotels, Interstate Management and
Investment Corporation ("IMIC") operates nine of the Hotels and Promus operates
one of the Hotels. Promus also will manage additional Homewood Suites hotels
developed by it and acquired by the Company.
The Company's growth strategy is to enhance shareholder value by increasing
Cash Available for Distribution (as defined herein) 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. The Company's internal growth strategy is to establish and maintain a
high occupancy rate at each hotel followed by increases in average daily rate
("ADR"), which in turn increase Percentage Lease revenues to the Company. The
Company's acquisition strategy is to purchase hotels with strong, national
franchise affiliations 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'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. In considering development opportunities, the Company will
review the availability and
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<PAGE> 48
pricing of existing hotels for sale in the area that meet the Company's
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 Company deems relevant. The Company's rehabilitation strategy
focuses on identifying 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 intends to finance
acquisitions and development through the offering of the Securities or other
follow-on offerings, from borrowings under its available $125 million line of
credit (the "Line of Credit"), from joint venture agreements and from the
issuance of other debt or equity securities.
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its short taxable year ended December 31, 1994. A REIT is subject to a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 95% of its taxable income. In connection
with the Company's election to be taxed as a REIT, the Company's Articles of
Incorporation (the "Articles of Incorporation") impose certain restrictions on
the transfer and ownership of shares of Common Stock. See "Restrictions on
Ownership of Common Stock." The Company has adopted the calendar year as its
taxable year. The Articles of Incorporation limit consolidated indebtedness to
45% of the Company's investment in hotel properties, at its cost.
The Company will contribute all of the net proceeds from the sale of the
Securities offered hereby to the Partnership in exchange for units of
partnership interest in the Partnership ("Units"). Unless the context otherwise
requires, all references herein to the business and assets of the Company refer
to Winston Hotels, Inc., the Partnership and their respective subsidiaries, on a
consolidated basis.
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.
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<PAGE> 49
RISK FACTORS
In addition to the other information contained in, or incorporated by
reference into, this Prospectus and any Prospectus Supplement, prospective
investors should carefully consider the following factors in evaluating an
investment in the Securities offered hereby.
DEVELOPMENT RISKS
The Company is currently developing five hotel properties and intends to
develop additional hotel properties as suitable opportunities arise. 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 competition for suitable development sites, receipt
of zoning, occupancy and other required governmental permits and authorizations
and the incurrence of substantial development costs in connection with projects
that are not pursued to completion. The Company anticipates that its development
projects will be financed with the Line of Credit or other secured or unsecured
financing. There can be no assurances, however, that the Company will complete
the development of any projects it begins 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 Company's May 1994 initial public offering (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, 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 depends 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 its 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 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 and Promus, 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 to the Company and the Partnership as required
under the Percentage Leases. The obligations of the Lessee under the Percentage
Leases are unsecured. Other than inventory and working capital, the Lessee has
only nominal assets in addition to its rights and benefits under the Percentage
Leases. See "-- Hotel Industry Risks -- Competition."
ACQUISITION OF HOTELS WITH NO OPERATING HISTORY
The Homewood Development Hotel, the Homewood Option Hotels and the hotels
currently under development by the Company have no operating history. The
Company and the Lessee have negotiated, or will negotiate, the Percentage Rent
formulas for these hotels based on projections of occupancy and ADR for the area
in which each of these hotels is or will be 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.
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<PAGE> 50
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 and Promus
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 anticipated rent
payments to the Company or 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 terms of the
Percentage Leases, and then only to the extent of the remedies set forth
therein.
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 (defined as net
income (loss), excluding gains (or losses) from debt restructuring or sales of
properties, plus depreciation and amortization and minority interest, minus
capital expenditures and principal payments of indebtedness) 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 Midscale (Without Food & Beverage) segment of the hotel industry, which
includes Holiday Inn Express, Hampton Inn, Hampton Inn & Suites and Comfort Inn
hotels, and the Upscale segment of the hotel industry, which includes Courtyard
by Marriott and Homewood Suites, are experiencing a greater percentage increase
in room supply than other segments of the industry. Room supply for the Midscale
(Without Food & Beverage) segment grew 12.1% in 1995 and 14.7% in 1996, and room
supply for the Upscale segment grew 4.4% in 1995 and 5.7% for 1996, each as
compared to 1.2% in 1995 and 2.1% in 1996 for all U.S. hotels. Although growth
in demand for Upscale hotels (4.5% in 1995 and 6.0% in 1996) exceeded growth in
supply in each of these periods, respectively, growth in demand for Midscale
(Without Food & Beverage) hotels (11.7% in 1995 and 12.0% in 1996) was less than
growth in supply in each of these periods. Continued increases in supply could
result in decreased ADR, occupancy and revenue per available room ("REVPAR") at
the Company's hotels competing in the Midscale (Without Food & Beverage) and
Upscale segments.
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 other REITs and entities organized for purposes
substantially similar to the Company's objectives, including
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<PAGE> 51
entities which do not need to utilize a lessee to operate the hotel and who
therefore may be able to offer a higher price to sellers than can the Company.
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.
Concentration of Investments; Proximity to Coast
Fourteen of the 35 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. 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 currently is
developing two hotels. The concentration of the Company's investments in North
Carolina could result in adverse events or conditions which affect those areas
particularly, such as increases in room supply, 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 geographically diversified.
In addition to the Company's concentration of investment in North Carolina,
three of the Hotels are located in the metropolitan Atlanta area. The Company
also currently is developing a Homewood Suites hotel in Alpharetta, Georgia, a
suburb of Atlanta. 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
Fifteen of the 35 Hotels are operated as Hampton Inn hotels; one is
operated as a Hampton Inn & Suites hotel; nine are operated as Comfort Inn
hotels; and two are operated as Comfort Suites hotels. The Company is subject to
risks inherent in concentrating investments in these 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.
Franchisors may also require periodic capital improvements to the Hotels as a
condition of retaining the franchise licenses. 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.
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.
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<PAGE> 52
CONFLICTS OF INTEREST
Because of the ownership in and positions with the Company and the Lessee
of affiliates of Charles M. Winston and Robert W. Winston, III, there are
inherent conflicts of interest in the ongoing lease and operation of the Hotels.
No Arm's 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 acquired ten hotels in connection with the IPO (the "Initial
Hotels") and four other hotels (the "Affiliate Acquisition Hotels") in the past
from affiliates of Charles M. Winston and Robert W. Winston, III were not
negotiated on an arm's length basis. The Company believes, however, that the
terms of such agreements are fair to the Company. The Independent Directors
(directors who do not serve as officers or employees of the Company or its
subsidiaries and are not affiliates of any advisor to or lessee of any property
of the Company) and the Company obtained separate, independent appraisals of
each Affiliate Acquisition Hotel, each of which indicated a fair market value
that was greater than the purchase price of the related Affiliate Acquisition
Hotel. The Independent Directors determined that the acquisition of the Initial
Hotels and the Affiliate Acquisition Hotels was in the best interests of the
Company and its shareholders and approved the acquisition of such Hotels and the
terms of the Percentage Leases. The Company does not own any interest in the
Lessee. The Lessee is owned by Robert W. Winston, III, President and director of
the Company, and John B. Harris, Jr., President and director of the Lessee.
Because Mr. Winston is a director and 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.
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 Winston and Charles Winston (President and
Chairman of the Board of the Company, respectively), may have unrealized gain in
their interests in the 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.
DEPENDENCE ON MANAGEMENT
The Company is dependent upon the efforts and expertise of its executive
officers for its day-to-day operations and strategic business direction. The
loss of their services could have an adverse effect on the operations of the
Company.
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 or Promus, to operate the Hotels in a manner
sufficient to maintain or increase revenues, to generate sufficient income in
excess of operating expenses and 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
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<PAGE> 53
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, 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") were obtained on all
of the 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. However, these
reports may not reveal all environmental conditions, liabilities or compliance
concerns. Further, there may be 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 its 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
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<PAGE> 54
circumstances, the insurance proceeds received by the Company might not be
adequate to restore its economic position with respect to such property.
Compliance with Americans with Disabilities Act and Other Changes in
Governmental Rules and Regulations
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. In addition, changes in other
governmental rules and regulations or enforcement policies affecting the use and
operation of the Hotels, including changes to building codes and fire and life
safety codes, may occur. If the Company were required to make expenditures to
comply with the ADA or other changes in governmental rules and regulations, 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.
RISKS OF LEVERAGE
All indebtedness incurred by the Company under the Line of Credit matures
on November 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 Line of Credit 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
Line of Credit. The Line of Credit is secured by 28 Hotels, which will increase
as the Company elects to fully utilize the $125 million maximum amount available
under the Line of Credit. If the Company is unable to obtain favorable
refinancing of its outstanding indebtedness at the Maturity Date or an extension
of the Line of Credit, 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 Line of Credit decreases such that the Company's borrowing
availability under the Line of Credit (the "Line Availability") is less than the
amount outstanding under the Line of Credit, the Company must either (i) provide
additional collateral to increase the Line Availability or (ii) repay the excess
of the amounts outstanding under the Line of Credit over the Line Availability.
The Line of Credit generally bears 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. 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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RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
All of the Hotels are subject to franchise agreements. The Lessee holds the
franchise licenses for the Hotels. The Company guarantees the Lessee's
obligations to make franchise license payments under the franchise licenses for
the 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.
RISKS ASSOCIATED WITH HOMEWOOD DEVELOPMENT HOTEL
The Company has agreed to acquire the Homewood Development Hotel from
Promus shortly after such hotel is completed. Under the terms of the Company's
agreement with Promus, the Homewood Development Hotel will be built to
specifications set forth in that agreement. The Company's obligation to purchase
the Homewood Development Hotel is contingent upon the hotel meeting the
applicable construction specifications. Because the Homewood Development Hotel
is currently under development, there can be no assurances that such will be
completed to the specifications to which the Company has agreed, and, therefore,
there can be no assurances that the Company will acquire such hotel. In
addition, the Company's agreement to purchase the 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 the Homewood Development
Hotel will be completed by such specified date, and, therefore, there can be no
assurances that the Company will acquire the Homewood Development Hotel.
EFFECT OF MARKET INTEREST RATES ON PRICE OF THE SECURITIES
One of the factors that may influence the price of the Securities in public
trading markets will be the annual yield from distributions by the Company on
the Common Stock and the annual yield on the Preferred 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 Securities.
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, without the approval of the holders of a majority of the
outstanding shares of Common Stock voting on such matter. The approval of
two-thirds of the number of shares of Common Stock entitled to vote thereon is
necessary to change the Company's policy of seeking to maintain its
qualification as a REIT.
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LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
Ownership Limitation
The Ownership Limitation (as hereinafter defined), 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 shares of Preferred Stock issued. The issuance of Preferred Stock
could have the effect of delaying or preventing a change in control of the
Company even if a change in control were in the shareholders' interest.
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. See "Description of Capital Stock -- North Carolina Anti-Takeover
Statutes."
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 Internal Revenue Service (the
"Service") that it qualifies as a REIT, it previously has received, and will
receive at the closing of an offering of the Securities, 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 alternative minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), 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 the Common Stock
entitled to vote thereon, 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 taxable income (excluding
any net capital gain). In addition, the Company will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it
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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 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 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 previously has received, and will receive at the closing of an
offering of Securities, 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, the Company likely would cease to qualify as a
REIT for a variety of reasons. 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) during the last half of any taxable year. Furthermore, if any
shareholder 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, which likely would result in loss of REIT status for the Company. For
the purpose of preserving the Company's REIT qualification, the 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 and its affiliates
(including the affiliates of Charles M. Winston and Robert W. Winston, III),
without Board approval, subject to adjustment as described below. See
"Restrictions on Ownership of Common Stock." Generally, the capital stock owned
by related or affiliated shareholders will be aggregated for purposes of the
Ownership Limitation (as hereinafter defined). 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."
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POSSIBLE ADVERSE EFFECTS OF SHARES AVAILABLE FOR FUTURE SALE UPON PRICES OF
COMMON STOCK
The Company may elect to issue up to 1,705,596 shares of Common Stock to
holders of Units ("Unitholders") on a one-for-one basis upon the Unitholders'
exercise of redemption rights they have with respect to the Units. 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 may
also issue additional shares of Common Stock upon acquisition by the Company of
Homewood Suites hotels pursuant to an agreement with Promus. 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.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's (or its predecessor's)
consolidated ratios of earnings to fixed charges for the six months ended June
30, 1997, and for each of the last five fiscal years. There was no Preferred
Stock outstanding for any of the periods shown below. Accordingly, the ratio of
earnings to fixed charges and Preferred Stock dividends is identical to the
ratio of earnings to fixed charges.
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES THE COMPANY
------------------------------ ----------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, JANUARY 1, 1994 JUNE 2, 1994 DECEMBER 31, SIX MONTHS
------------ TO JUNE 2, TO DECEMBER 31, ------------ ENDED
1992 1993 1994 1994 1995 1996 JUNE 30, 1997
---- ---- --------------- --------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges:(1)................ 1.05 1.48 1.46 15.09 4.44 5.85 4.58
</TABLE>
- ---------------
(1) The consolidated ratio of earnings to fixed charges was computed by dividing
earnings by fixed charges. Fixed charges consist of interest costs, whether
expensed or capitalized, amortization of Line of Credit fees, amortization
of interest rate caps and loan commitment fees.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company will contribute the net proceeds from the sale of the Securities to the
Partnership in exchange for Units having characteristics similar to those of the
Securities, and the Partnership expects to use such net proceeds for various
purposes, which may include the acquisition of additional hotel assets, the
repayment of outstanding indebtedness, the improvement and/or expansion of one
or more of its hotel properties or for working capital purposes. Prior to
utilization, the net proceeds 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.
DISTRIBUTION POLICY
In order to maintain its qualification as a REIT, the Company must
distribute to its shareholders at least 95% of its annual taxable income (which
does not include net capital gains). While future distributions paid by the
Company will be at the discretion of the Board of Directors of the Company and
will depend on the actual cash flow of the Company, its financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Code, and such other factors as the Board of Directors of the
Company deems relevant, it is the present intention of the Company to pay
regular quarterly distributions.
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DESCRIPTION OF CAPITAL STOCK
Under the Articles of Incorporation, the total number of shares of all
classes of stock that the Company has authority to issue is 60,000,000,
consisting of 50,000,000 shares of Common Stock and 10,000,000 shares of
Preferred Stock. The description of the Company's capital stock set forth below
describes certain general terms and provisions of the capital stock to which any
Prospectus Supplement may relate. The following description does not purport to
be complete and is qualified in its entirety by reference to the Company's
Articles of Incorporation and Bylaws.
COMMON STOCK
Under the Articles of Incorporation, the Company has authority to issue up
to 50,000,000 shares of Common Stock. Under North Carolina law, shareholders
generally are not responsible for the Corporation's debts or obligations. At
August 29, 1997, the Company had outstanding 16,194,480 shares of Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters voted on by shareholders, including election of directors. Except as
otherwise required by law or provided in any resolution adopted by the Board of
Directors with respect to any series of Preferred Stock, the holders of such
shares exclusively possess all voting power. The Articles of Incorporation do
not provide for cumulative voting in the election of directors. Subject to any
preferential rights of any outstanding series of Preferred Stock, the holders of
Common Stock are entitled to such distributions as may be declared from time to
time by the Board of Directors from funds available therefor, and upon
liquidation are entitled to receive pro rata all assets of the Company available
for distribution to such holders. Upon issuance and delivery against payment
therefor, all shares of Common Stock offered hereby will be fully paid and
nonassessable and the holders thereof will not have preemptive rights.
The Common Stock is subject to certain restrictions upon the ownership and
transfer thereof which were adopted for the purpose of enabling the Company to
preserve its status as a REIT. For a description of such restrictions, see
"Restrictions on Ownership of Common Stock."
The Common Stock currently is traded on the NYSE under the symbol "WXH".
The transfer agent and registrant for the Company's Common Stock is Wachovia
Bank, N.A., Winston-Salem, North Carolina. The Company will apply to the NYSE or
any securities exchange on which the Common Stock is listed to list any
additional shares of Common Stock to be sold pursuant to any Prospectus
Supplement.
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of up to
10,000,000 shares of Preferred Stock from time to time, 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. Because the Board of Directors has the
power to establish the preferences and rights of each class or series of
Preferred Stock, the Board of Directors may afford the holders of any series or
class of Preferred Stock preferences, powers and rights, voting or otherwise,
senior to the rights of holders of Common Stock. The issuance of Preferred Stock
could have the effect of delaying or preventing a change in control of the
Company.
The applicable Prospectus Supplement will describe each of the following
terms that may be applicable in respect of any Preferred Stock offered and
issued pursuant to this Prospectus: (1) the specific designation, number of
shares, seniority and purchase price; (2) any liquidation preference per share;
(3) any maturity date; (4) any mandatory or optional redemption or repayment
dates and terms or sinking fund provisions; (5) any dividend rate or rates and
the dates on which any dividends will be payable (or the method by which such
rates or dates will be determined); (6) any voting rights; (7) any rights to
convert the Preferred Stock into other securities or rights, including a
description of the securities or rights into which such Preferred Stock is
convertible (which may include other Preferred Stock) and the terms and
conditions upon which such conversions will be effected, including, without
limitation, conversion rates or formulas, conversion periods and other related
provisions; (8) the place or places where dividends and other payments with
respect
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to the Preferred Stock will be payable; and (9) any additional voting, dividend,
liquidation, redemption and other rights, preferences, privileges, limitations
and restrictions, including restrictions imposed for the purpose of maintaining
the Company's qualification as a REIT under the Code. Upon issuance and delivery
against payment therefor, all shares of the Preferred Stock offered hereby will
be duly authorized, fully paid and non-assessable.
The Preferred Stock will be subject to certain restrictions upon the
ownership and transfer thereof for the purpose of enabling the Company to
preserve its status as a REIT. See "Restrictions on Ownership of Common Stock."
ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
Number of Directors; Removal; Filling Vacancies
The Articles of Incorporation and Bylaws provide that, subject to any
rights of holders of Preferred Stock to elect additional directors under
specified circumstances, the number of directors will consist of not less than
three nor more than nine persons, subject to increase or decrease by the
affirmative vote of 80% of the members of the entire Board of Directors. At all
times a majority of the Directors shall be Independent Directors, except that
upon the death, removal or resignation of an Independent Director, such
requirement shall not be applicable for 60 days. The shareholders shall be
entitled to vote on the election or removal of directors, with each share
entitled to one vote. The Bylaws provide that, subject to any rights of holders
of Preferred Stock, and unless the Board of Directors otherwise determines, any
vacancies will be filled by the affirmative vote of a majority of the remaining
directors, though less than a quorum, provided that Independent Directors shall
nominate and approve directors to fill vacancies created by Independent
Directors. Accordingly, the Board of Directors could temporarily prevent any
shareholder from enlarging the Board of Directors and filling the new
directorships with such shareholder's own nominees. Any director so elected
shall hold office until the next annual meeting of shareholders.
A director may be removed with or without cause by the vote of the holders
of 75% of the outstanding shares at a special meeting of the shareholders called
for the purpose of removing him.
Limitation of Liability; Indemnification
The Articles of Incorporation provide that to the maximum extent that North
Carolina law in effect from time to time permits limitation of liability of
directors and officers, no director or officer of the Company shall be liable to
the Company or its shareholders for money damages.
The Articles of Incorporation provide that the Company shall, to the
fullest extent permitted by North Carolina law, indemnify any director, officer,
employee or agent against any expense incurred by such person if the
disinterested directors, the shareholders or independent legal counsel determine
that such person conducted himself in good faith and (a) reasonably believed, in
the case of conduct in his official capacity with the Company, that his conduct
was in its best interest and in all other cases, that his conduct was at least
not opposed to the Company's best interest and (b) in the case of any criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful.
Any indemnification by the Company pursuant to the provisions of the
Articles of Incorporation described above shall be paid out of the assets of the
Company and shall not be recoverable from the shareholders. The Company has
purchased director and officer liability insurance for the purpose of providing
a source of funds to pay any indemnification described above. To the extent that
the foregoing indemnification provisions purport to include indemnification for
liabilities arising under the Securities Act, in the opinion of the Commission
such indemnification is contrary to public policy and, therefore, unenforceable.
Amendment
Except as otherwise required by the Articles of Incorporation or by law,
the Articles of Incorporation may be amended by the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock, with the
shareholders voting as a voting group with one vote per share. The Company's
Bylaws may be amended by the Board of Directors or by vote of the holders of a
majority of the outstanding shares of Common Stock.
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NORTH CAROLINA ANTI-TAKEOVER STATUTES
In addition to certain of the Articles of Incorporation provisions
discussed above, North Carolina has adopted a series of statutes that may deter
takeover attempts or tender offers, including offers or attempts that might
result in the payment of a premium over the market price for the Common Stock or
that a shareholder might otherwise consider in its best interest.
The Company is subject to the North Carolina Control Share Acquisition Act.
The provisions of this Act are triggered upon the acquisition by a person of
shares of voting stock of the Company that, when added to all other shares
beneficially owned by the person, would result in that person holding one-fifth,
one-third or a majority of the voting power in the election of directors. Under
the Control Share Acquisition Act, the shares acquired in such a transaction
that meet or exceed any of these thresholds ("Control Shares") have no voting
rights until conferred by the affirmative vote of the holders of a majority of
all outstanding voting shares, excluding those shares held by any person
involved or proposing to be involved in the acquisition of Control Shares, any
officer of the Company and any employee of the Company who is also a director of
the Company. If voting rights are conferred on the Control Shares, all
shareholders of the Company have the right to require that their shares be
redeemed at the highest price paid per share by the acquiror for any Control
Shares. The aggregate effect of these provisions may be to delay or prevent
attempts by other corporations or groups to acquire control of the Company
without negotiation with the Board of Directors.
The North Carolina Shareholder Protection Act requires the affirmative vote
of 95% of a corporation's voting shares to approve a "business combination" with
any person that beneficially owns more than 20% of the voting shares of the
corporation unless the fair price provisions of the Act are satisfied.
"Business combination" is defined by the statute as any merger or
consolidation of a corporation with or into any other corporation, or the sale
or lease of all or any substantial part of the corporation's assets to, or any
payment, sale or lease to the corporation or any subsidiary thereof in exchange
for securities of the corporation of any assets (except assets having an
aggregate fair market value of less than five million dollars) of any other
entity.
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK
For the Company to qualify as a REIT under the Code, certain restrictions
apply to the ownership of shares of capital stock. See "Federal Income Tax
Considerations -- Requirements for Qualification." Because the Board of
Directors believes it is essential for the Company to continue to qualify as a
REIT, the Articles of Incorporation restrict the acquisition of shares of Common
Stock (the "Ownership Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in the Articles of Incorporation, no shareholder may own, or be deemed
to own by virtue of the attribution provisions of the Code, more than 9.9% of
the outstanding shares of Common Stock. The Board of Directors may, but in no
event is required to, waive the Ownership Limitation if evidence satisfactory to
the Board of Directors is presented that ownership in excess of such amount will
not jeopardize the Company's status as a REIT. As a condition of such waiver,
the Board of Directors may require opinions of counsel satisfactory to it or an
undertaking from the applicant with respect to preserving the REIT status of the
Company. If shares in excess of the Ownership Limitation, shares which would
cause the Company to be beneficially owned by fewer than 100 persons, shares
which would cause the Company to be "closely held," or shares which would cause
the Company to own 10% or more of a tenant of its property, are issued or
transferred to any person, such issuance or transfer shall be null and void and
the intended transferee will acquire no rights to the shares.
The Ownership Limitation will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Any change in the Ownership Limitation would require an amendment to
the Articles of Incorporation. In addition to preserving the Company's status as
a REIT, the Ownership Limitation may have the effect of precluding an
acquisition of control of the Company without the approval of the Board of
Directors. All certificates representing shares of capital stock will bear a
legend referred to the restrictions described above.
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All persons who own, directly or by virtue of the attribution provisions of
the Code, 5% or more of the outstanding Common Stock and any shareholder
requested by the Company must file an affidavit with the Company containing the
information specified in the Articles of Incorporation with respect to their
ownership of shares within 30 days after January 1 of each year. In addition,
each shareholder shall, upon demand, be required to disclose to the Company in
writing such information with respect to the direct, indirect and constructive
ownership of shares as the Board of Directors deems necessary to comply with the
provisions of the Code applicable to a REIT or to comply with the requirements
of any taxing authority or governmental agency.
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. 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.
EACH PROSPECTIVE PURCHASER SHOULD 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 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. 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.
Hunton & Williams has acted as special tax counsel to the Company. Prior to
issuing Common Stock or Preferred Stock, the Company expects to receive an
opinion of Hunton & Williams as to its REIT qualification. Continued
qualification and taxation as a REIT will 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. No assurance can be given that the
actual results of the Company's operation for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "-- Failure to Qualify."
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 shareholders. 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.
The Company believes that it qualified to be taxed as a REIT for its
taxable years ended December 31, 1994, December 31, 1995 and December 31, 1996,
and that its 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, 1997 and in the future. 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. No assurance can be given that the
actual results of the Company's operation for any taxable year will satisfy such
requirements. For a discussion of the tax consequences of failure to qualify as
a REIT, see "-- Failure to Qualify."
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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 shareholder levels)
that generally results from an 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 undistributed 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 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. See "-- Recently Enacted
Legislation."
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 requirements described in clauses (v) and (vi) above.
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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 corporate subsidiaries, although it
may have corporate 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 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. See "-- Recently Enacted Legislation."
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.
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).
See "-- Recently Enacted Legislation." 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 from
whom the Company derives no revenue. The "independent contractor"
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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 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 Hotels. The Base Rent accrues and is
required to be paid monthly. Although Percentage Rent is due quarterly, with
respect to eleven of the 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 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.
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.
The Company believes that the Percentage Leases will be treated as true
leases for federal income tax purposes. Such belief 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 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
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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.
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 she 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 Hotel has
not exceeded 15%. 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 Adjusted Basis Ratio could exceed 15%
as to one or more of the Hotels, which in turn potentially could cause the
Company 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
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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, upon a redemption of Units, the Company would own, actually or
constructively, 10% or more of any tenant, the Company must redeem the Units for
cash rather than Common Stock. The Articles of Incorporation likewise prohibit
any person 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 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
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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.
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). See "-- Recently
Enacted Legislation." 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 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
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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. 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 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. See "-- Recently Enacted
Legislation."
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 "-- 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 greater of the amounts by which the Company failed
the 75% or 95% gross income tests. No such relief is available for violations of
the 30% income test. See "-- Recently Enacted Legislation."
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 principal balance of
the mortgage 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, (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 owned, and will not
own, any securities that do not qualify for the 75% asset test (except for the
stock of subsidiaries with respect to which it has held 100% of the stock at all
times during the subsidiary's
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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 test.
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 test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of one or more
nonqualifying 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. See "-- Recently Enacted
Legislation."
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Partnership Anti-Abuse Rule
The U.S. Department of the Treasury has 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 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 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. 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. For
purposes of determining whether distributions are made out of the Company's
current or accumulated earnings and profits, the Company's earnings and profits
will be allocated first to the Preferred Stock and then to the Common Stock.
There can be no assurances that the Company will have sufficient earnings and
profits to cover distributions to holders of both the Preferred Stock and the
Common Stock. As used herein, the term "U.S. shareholder" means a
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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, (iii) an estate whose income from sources
without the United States is includible in gross income for U.S. federal income
tax purposes regardless of its connection with the conduct of a trade or
business within the United States, or (iv) any trust with respect to which (A) a
U.S. court is able to exercise primary supervision over the administration of
such trust and (B) one or more U.S. fiduciaries have the authority to control
all substantial decisions of the trust. 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. See "-- Recently Enacted
Legislation." 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 highest marginal individual income tax rate is 39.6%.
Effective for sales or exchanges occurring after May 6, 1997, the maximum tax
rate on net capital gains applicable to individuals is 28% for sales and
exchanges of assets held for more than one year but not more than 18 months, and
20% for sales and exchanges of assets held for more than 18 months. Thus, the
tax rate differential between capital gain and ordinary income for individuals
may be significant. In addition, the
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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 amount 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.
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. In
April 1996, the Service issued proposed regulations regarding the backup
withholding rules as applied to Non-U.S. Shareholders. The proposed regulations
would alter the technical requirements relating to backup withholding compliance
and are proposed to be effective for distributions made after December 31, 1997.
See "-- 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. However, the Ownership Limitation
should prevent any Exempt Organization from owning more than 10% of the value of
the Company's stock.
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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
ordinary income to the extent that they are made out of current 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. The Service issued proposed regulations in April 1996 that
would modify the manner in which the Company complies with the withholding
requirement.
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.
In August 1996, the U.S. Congress passed the Small Business Job Protection
Act of 1996, which requires the Company to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
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
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.
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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 is or will continue to be a
"domestically controlled REIT". In addition, a Non-U.S. Shareholder that owned
(actually or constructively) 5% or less of the Company's outstanding Common
Stock at all times during a specified testing period will not be subject to tax
under FIRPTA if 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 currently traded). 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 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).
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 entity will be classified as a partnership rather than as a
corporation or an association taxable as a corporation for federal income tax
purposes if the entity (i) is treated as a partnership under Treasury
Regulations, effective January 1, 1997, relating to entity classification (the
"Check-the-Box Regulations") and (ii) is not a "publicly traded" partnership.
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make an
election, it generally will be treated as a partnership for federal income tax
purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnership, will be respected
for all periods prior to January 1, 1997 if (i) the entity had a reasonable
basis for its claimed classification, (ii) the entity and all members of the
entity recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (iii) neither
the entity nor any member of the entity was notified in writing by a taxing
authority on or before May 8, 1996 that the classification of the entity was
under examination. The Partnership intends to continue to be treated as a
partnership under the Check-the-Box Regulations. In addition, the Company has
represented that (a) the Partnership will not elect to be treated as an
association taxable as a corporation for federal income tax
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purposes under the Check-the-Box Regulations and (b) neither the Partnership nor
any partner thereof was notified in writing by a taxing authority on or before
May 8, 1996 that the classification of the Partnership was under examination.
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). A publicly traded partnership
will be treated as a corporation for federal income tax purposes unless at least
90% of such partnership's gross income for a taxable year consists of
"qualifying income" under section 7704(d) of the Code, which generally includes
any income that is qualifying income for purposes of the 95% gross income test
applicable to REITs (the "90% Passive-Type Income Exception"). See
"-- Requirements for Qualifications -- Income Tests." The U.S. Treasury
Department has issued regulations effective for taxable years beginning after
December 31, 1995 (the "PTP Regulations") that provide limited safe harbors from
the definition of a publicly traded partnership. 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 interests in the partnership were issued in a
transaction (or transactions) that was not required to be registered under the
Securities Act and (ii) the partnership does not have more than 100 partners at
any time during the partnership's taxable year. In determining the number of
partners in a partnership, a person owning an interest in a flow-through entity
(i.e., a partnership, grantor trust, or S corporation) that owns an interest in
the partnership is treated as a partner in such partnership only if (a)
substantially all of the value of the owner's interest in the flow-through
entity's interest (direct or indirect) in the Partnership and (b) a principal
purpose of the use of the flow-through entity is attributable to the flow-
through entity is to permit the partnership to satisfy the 100-partner
limitation. The Company believes that the Partnership qualifies for the Private
Placement Exclusion and that if the Partnership were considered a publicly
traded partnership under the PTP Regulations because it is deemed to have more
than 100 partners, the Partnership should not be treated as a corporation
because it should be eligible for the 90% Passive-Type Income Exception.
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, prior to issuing Securities, the Company expects to
obtain an opinion of Hunton & Williams that the Partnership will be treated for
federal income tax purposes as a partnership and not as a corporation or an
association taxable as a corporation. 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.
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 qualify as a REIT. See "-- 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 shareholders 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.
33
<PAGE> 77
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 has 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 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. To the extent that
the Partnership has 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 generally depreciates such depreciable hotel
property for federal income tax purposes under the modified accelerated cost
recovery system of depreciation ("MACRS"). Under MACRS, the Partnership
generally depreciates 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
34
<PAGE> 78
depreciation convention must be used for the furnishings and equipment placed in
service during that year. Under MACRS, the Partnership generally depreciates
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
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
generally 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 are 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 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 "-- 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.
RECENTLY ENACTED LEGISLATION
In August 1997, the U.S. Congress enacted, and the President signed into
law, the Taxpayer Relief Act of 1997 (the "Act"), which modifies certain Code
provisions relating to REIT qualification effective for taxable years beginning
after the date of enactment of the Act. The provisions of the Act are summarized
below and will apply to the Company effective January 1, 1998.
1. 30% Gross Income Test. REITs no longer will be subject to the 30%
gross income test.
2. Hedging Instruments. Income and gain from the sale of all
instruments entered into by a REIT to hedge interest rate risk with respect
to debt incurred to acquire or carry real estate assets, including interest
rate swap or cap agreements, options, futures and forward rate contracts,
and other similar financial instruments, will be qualifying income for
purposes of the 95% income test.
3. Ownership. A REIT that fails to comply with the requirements for
ascertaining the ownership of its shares in any taxable year will incur a
penalty of $25,000 ($50,000 for intentional violations) instead of being
disqualified as a REIT. A REIT that complies with all the requirements for
ascertaining the
35
<PAGE> 79
ownership of its outstanding shares in a taxable year and does not have
reason to know that it violated the 5/50 Rule will be deemed to have
satisfied the 5/50 Rule for such taxable year.
4. De Minimis Services Income. A REIT will be permitted to render a
de minimis amount of impermissible services to its tenants, or manage or
operate property, and treat the amounts received with respect to such
property as "rents from real property," as long as the amount received with
respect to the impermissible services or management does not exceed one
percent of the REIT's gross income from the property.
5. Credit for Tax Paid on Retained Capital Gains. A REIT will be able
to elect to retain and pay income tax on its net long-term capital gain. In
such a case, the REIT's shareholders would include in income their
proportionate share of the undistributed long-term capital gain and would
be deemed to have paid their proportionate share of the tax paid by the
REIT. In addition, the shareholders' basis in their shares would be
increased by the amount of the undistributed long-term capital gain
included in their income, less the amount of tax paid by the REIT.
6. Excess Noncash Income. Amounts includible in a REIT's income by
reason of cancellation of indebtedness, and OID and coupon interest
received by REITs in excess of related cash amounts, will not be subject to
the 95% distribution requirement.
7. Attribution of Ownership. For purposes of determining whether a
tenant is a related party tenant or a person is an "independent contractor"
within the meaning of Code section 856(c)(3), a partner's ownership only
will be attributed to a partnership if the partner owns a 25% or greater
interest in the capital or profits of the partnership.
8. Earnings and Profits. Distributions by REITs of accumulated
earnings and profits will be treated as made from the earliest accumulated
earnings and profits, rather than the most recently accumulated earnings
and profits. In addition, such distributions will not be treated as
distributions for purposes of calculating the dividends paid deduction.
9. Foreclosure Property. The Act lengthens the grace period for
foreclosure property to the last day of the third full taxable year
following the foreclosure property election, with the possibility that the
Service could extend the grace period for an additional three years. A REIT
will be able to revoke a foreclosure property election for any taxable year
by filing a revocation on or before the due date for filing its REIT tax
return. If a REIT revokes such an election, it may not make a foreclosure
property election with respect to the property for any subsequent taxable
year.
10. Prohibited Transactions Safe Harbor. Property that is
involuntarily converted will not count as a disposition of property under
the prohibited transactions safe harbor.
11. Shared Appreciation Mortgages. For purposes of the prohibited
transactions safe harbor, if a REIT receives interest on a shared
appreciation mortgage, the REIT will be treated as having held the property
subject to the mortgage for at least four years if the property is sold
within four years of the REIT's acquisition of the mortgage pursuant to a
bankruptcy plan of the mortgagor, unless the REIT acquired the property
with the intent to evict or foreclose or knew or had reason to know that
the property would be sold in a bankruptcy proceeding.
12. Qualified REIT Subsidiary. Any corporation wholly-owned by a REIT
will be treated as a qualified REIT subsidiary, regardless of whether the
corporation always has been owned by the REIT.
PLAN OF DISTRIBUTION
The Company may sell the Securities in or outside the United States to or
through underwriters and also may sell Securities directly to other purchasers
or through agents. The Prospectus Supplement with respect to the Securities will
set forth the terms of the offering of the Securities, including the name or
names of any underwriters, dealers or agents, the initial public offering price,
any underwriting discounts and other items
36
<PAGE> 80
constituting underwriters compensation, any discounts or concessions allowed or
reallowed or paid to dealers, and any interdealer quotation system or securities
exchanges on which the Securities may be listed.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of Securities, underwriters may receive
compensation from the Company or from purchasers of Securities, for whom they
may act as agents, in the form of discounts, concessions, or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions, or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers, and agents that participate in the distribution
of Securities may be deemed to be underwriters, and any discounts or commissions
they receive from the Company and any profit on the resale of Securities they
realize may be deemed to be underwriting discounts and commissions under the
Securities Act. Any such underwriter or agent will be identified, and any such
compensation received from the Company will be described, in the Prospectus
Supplement relating thereto. Unless otherwise set forth in the Prospectus
Supplement relating thereto, the obligations of the underwriters or agents to
purchase the Securities will be subject to conditions precedent and the
underwriters will be obligated to purchase all the Securities described in any
applicable Prospectus Supplement if any are purchased. The initial public
offering price and any discounts or concessions allowed or reallowed or paid to
dealers may be changed from time to time.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock which is currently traded on the NYSE. Any shares of
Common Stock sold pursuant to a Prospectus Supplement will be listed on the NYSE
or any other exchange on which the Common Stock is then traded, subject to
official notice of issuance. The Company may elect to list any series of
Preferred Stock on the NYSE or an exchange, but is not obligated to do so. It is
possible that one or more underwriters may make a market in a series of
Securities, but will not be obligated to do so and may discontinue any market
making at any time without notice. Therefore, no assurance can be given as to
the liquidity of the trading market for the Securities.
Under agreements the Company may enter into, underwriters, dealers, and
agents who participate in the distribution of Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, or be customers of, the Company in the ordinary course of
business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
at the public offering price set forth in such Prospectus Supplement pursuant to
delayed delivery contracts ("Contracts") providing for payment and delivery on
the date or dates stated in such Prospectus Supplement. Each Contract will be
for an amount not less than, and the aggregate principal amount of Securities
sold pursuant to Contracts shall be not less nor more than, the respective
amounts stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Securities covered by its
Contracts shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject, and (ii)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts.
37
<PAGE> 81
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
1995 and the consolidated statements of income, shareholders' equity and cash
flows for the years ended December 31, 1996 and 1995 and the period June 2, 1994
through December 31, 1994 and the financial statement schedule as of December
31, 1996; the balance sheets of the Lessee as of December 31, 1996 and 1995 and
the statements of income, shareholders' equity and cash flows for the years
ended December 31, 1996 and 1995 and the period June 2, 1994 through December
31, 1994; the combined statements of income, equity and cash flows for the year
ended December 31, 1995 of the Impac Acquisition Hotels (described in Note 1 to
those financial statements); 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 five months ended June 2, 1994; all incorporated
by reference in this Prospectus, have been 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 legality of the Securities will be passed upon for the Company by King
& Spalding, Atlanta, Georgia. In addition, the description of federal tax
consequences contained in the Prospectus under the caption "Federal Income Tax
Considerations" is based upon the opinion of Hunton & Williams, Richmond,
Virginia. King & Spalding will rely on an opinion of Smith, Anderson, Blount,
Dorsett, Mitchell & Jernigan, L.L.P. with respect to all matters involving North
Carolina law.
38
<PAGE> 82
======================================================
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus Supplement or the accompanying
Prospectus in connection with the offer made by this Prospectus Supplement and
the accompanying Prospectus, and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or the Underwriters. This Prospectus Supplement and the accompanying Prospectus
do not constitute an offer to sell or a solicitation of an offer to buy the
shares of Common Stock offered hereby by anyone in any jurisdiction in which
such offer or solicitation is not authorized, or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus Supplement and the accompanying Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the facts set forth in this Prospectus Supplement and the
accompanying Prospectus or in the affairs of the Company since the date hereof.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............. S-1
Risk Factors.............................. S-9
Use of Proceeds........................... S-9
Capitalization............................ S-10
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. S-10
Properties................................ S-14
Management................................ S-21
Security Ownership of Management.......... S-23
Description of Series A Preferred Stock... S-24
Certain Federal Income Tax
Considerations.......................... S-32
Underwriting.............................. S-33
Legal Matters............................. S-33
Experts................................... S-34
Available Information..................... S-34
Incorporation of Certain Documents by
Reference............................... S-35
Index to Pro Forma Financial Statements... SF-1
PROSPECTUS
Available Information..................... 2
Incorporation of Certain Documents by
Reference............................... 2
The Company............................... 4
Risk Factors.............................. 6
Ratio of Earnings to Fixed Charges........ 15
Use of Proceeds........................... 15
Distribution Policy....................... 15
Description of Capital Stock.............. 16
Restrictions on Ownership of Common
Stock................................... 18
Federal Income Tax Considerations......... 19
Plan of Distribution...................... 36
Experts................................... 38
Legal Matters............................. 38
</TABLE>
======================================================
======================================================
2,000,000 SHARES
WINSTON HOTELS, INC.
% SERIES A CUMULATIVE
PREFERRED STOCK
------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------
MORGAN KEEGAN & COMPANY, INC.
J.C. BRADFORD & CO.
RAYMOND JAMES & ASSOCIATES, INC.
SEPTEMBER , 1997
======================================================
<PAGE> 83
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the Securities.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee........ $ 60,607
New York Stock Exchange Listing fees........................ 133,600
Printing and mailing........................................ 140,000
Accountant's fees and expenses.............................. 200,000
Blue Sky fees and expenses.................................. 5,000
Counsel fees and expenses................................... 250,000
Miscellaneous............................................... 163,293
----------
Total............................................. $1,052,500
==========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of the Company, generally, limit the
liability of the Company's directors and officers to the Company and the
shareholders for money damages to the fullest extent permitted from time to time
by the laws of the State of North Carolina. The Articles of Incorporation also
provide, generally, for the indemnification of directors and officers, among
others, against judgments, settlements, penalties, fines and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities except in
connection with a proceeding by or in the right of the Company in which the
director was adjudged liable to the Company or in connection with any other
proceeding, whether or not involving action in his official capacity, in which
he was adjudged liable on the basis that personal benefit was improperly
received by him. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors and officers of the Company pursuant to the foregoing provisions or
otherwise, the Company has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
The Company has purchased director and officer liability insurance for the
purpose of providing a source of funds to pay any indemnification described
above.
ITEM 16. EXHIBITS
<TABLE>
<C> <C> <S>
4.1 -- Form of Share Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-11 (Registration No. 33-76602))
5.1 -- Opinion of King & Spalding
8.1 -- Form of Opinion of Hunton & Williams as to Tax Matters
*12.1 -- Statement Regarding Computation of Ratios
23.1 -- Consent of King & Spalding (included in Exhibit 5.1)
23.2 -- Consent of Hunton & Williams (included in Exhibit 8.1)
23.3 -- Consent of Coopers & Lybrand L.L.P.
*24.1 -- Power of Attorney (included on signature page)
</TABLE>
- ---------------
* Previously filed.
II-1
<PAGE> 84
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such posteffective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (the "Securities
Act"), each filing of the registrant's annual report pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 85
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Raleigh, State of North Carolina, on the 2nd day
of September, 1997.
WINSTON HOTELS, INC.
By: /s/ ROBERT W. WINSTON, III
------------------------------------
Robert W. Winston, III
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on the 2nd day of September, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CHARLES M. WINSTON Chairman of the Board September 2, 1997
- ----------------------------------------------------- (Principal Executive
Charles M. Winston Officer)
/s/ ROBERT W. WINSTON, III Chief Executive Officer, September 2, 1997
- ----------------------------------------------------- President and Director
Robert W. Winston, III
/s/ PHILIP R. ALFANO Senior Vice President, September 2, 1997
- ----------------------------------------------------- Chief Financial Officer
Philip R. Alfano and Secretary (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ JAMES H. WINSTON Director September 2, 1997
- -----------------------------------------------------
James H. Winston
/s/ THOMAS F. DARDEN, II Director September 2, 1997
- -----------------------------------------------------
Thomas F. Darden, II
/s/ RICHARD L. DAUGHERTY Director September 2, 1997
- -----------------------------------------------------
Richard L. Daugherty
* Director September 2, 1997
- -----------------------------------------------------
Paul Fulton
/s/ EDWIN B. BORDEN Director September 2, 1997
- -----------------------------------------------------
Edwin B. Borden
*By: /s/ PHILIP R. ALFANO
------------------------------------------------
Philip R. Alfano
Attorney-in-fact
</TABLE>
II-4
<PAGE> 87
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
4.1 -- Form of Share Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-11 (Registration No. 33-76602))
5.1 -- Opinion of King & Spalding
8.1 -- Form of Opinion of Hunton & Williams as to Tax Matters
*12.1 -- Statement Regarding Computation of Ratios
23.1 -- Consent of King & Spalding (included in Exhibit 5.1)
23.2 -- Consent of Hunton & Williams (included in Exhibit 8.1)
23.3 -- Consent of Coopers & Lybrand L.L.P.
*24.1 -- Power of Attorney (included on signature page)
</TABLE>
- ---------------
* Previously filed.
II-5
<PAGE> 1
EXHIBIT 5.1
September 2, 1997
Winston Hotels, Inc.
2209 Century Drive
Suite 300
Raleigh, North Carolina 27612
Re: Winston Hotels, Inc. --
Shelf Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Winston Hotels, Inc., a North Carolina
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-3 (the "Registration Statement") filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended. The Registration Statement relates to the offering from time to time,
as set forth in the prospectus contained in the Registration Statement (the
"Prospectus") and as to be set forth in one or more supplements to the
Prospectus (each such supplement, a "Prospectus Supplement"), of the Company's
common stock, par value $0.01 per share (the "Common Stock"), and preferred
stock, par value $0.01 per share (the "Preferred Stock"), in an aggregate
amount not to exceed $200,000,000.
In connection with this opinion, we have examined and relied upon such
records, documents, certificates and other instruments as in our judgment are
necessary or appropriate to form the basis for the opinions hereinafter set
forth. In all such examinations, we have assumed the genuineness of signature
on original documents and the conformity to such original documents of all
copies submitted to us as certified, conformed or photographic copies, and as
to certificates of public officials, we have assumed the same to have been
properly given and to be accurate. As to matters of fact material to this
opinion, we have relied upon statements and representations of representatives
of the Company and of public officials.
The opinions expressed herein are limited in all respects to the federal
laws of the United States of America and the laws of the State of North
Carolina, and no opinion is expressed with respect to the laws of any other
jurisdiction or any effect which such laws may have on the opinions
<PAGE> 2
Winston Hotels, Inc.
September 2, 1997
Page 2
expressed herein. With respect to all matters in this opinion that are
governed by the laws of the State of North Carolina, we have, with your
approval, relied solely on the opinion of Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P., a copy of which has been delivered to you today,
and the opinions expressed herein with respect to the laws of the State of
North Carolina are subject to the same qualifications, assumptions and
limitations as are set forth therein. The opinions expressed herein are
limited to the matters stated herein, and no opinion is implied or may be
inferred beyond the matters expressly stated herein.
Based upon the foregoing and subject to the other limitations and
qualifications set forth herein, we are of the opinion that:
1. The Company has authority pursuant to its Articles of
Incorporation to issue the shares of Common Stock to be registered under the
Registration Statement and (a) upon the adoption by the Board of Directors of a
resolution in form and content required by applicable laws, (b) upon compliance
with the applicable provisions of the Act and such state securities laws as may
be applicable and (c) upon issuance and deliver of and payment for such shares
in the manner contemplated by the Registration Statement, the Prospectus and
the applicable Prospectus Supplement, such shares of Common Stock will be
validly issued, fully paid and nonassessable.
2. The Company has authority pursuant to its Articles of
Incorporation to issue the shares of Preferred Stock to be registered under the
Registration Statement and (a) upon the adoption by the Board of Directors of a
resolution in form and content required by applicable law, (b) upon compliance
with the applicable provisions of the Act and such state securities laws as may
be applicable, (c) upon the adoption by the Company's Board of Directors and
shareholders, if applicable, and the due execution and filing by the Company
with the North Carolina Secretary of State Articles of Amendment to the
Company's Articles of Incorporation that conform to North Carolina law
establishing the preferences, limitations, and relative voting and other rights
of each series of Preferred Stock prior to issuance thereof and (d) upon
issuance and delivery of and payment for such shares in the manner contemplated
by the Registration Statement, the Prospectus and the applicable Prospectus
Supplement, such shares of Preferred Stock will be valdily issued, fully paid
and nonassessable.
The opinions set forth above are subject, as to enforcement, to (i)
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting the rights and remedies of creditors generally and
(ii) general equitable principles (regardless of whether enforcement is
considered in a proceeding in equity or law).
This opinion is given as of the date hereof, and we assume no
obligation to advise you after the date hereof of facts or circumstances that
come to our attention or changes in law that occur which could affect the
opinion contained herein. This opinion is being rendered solely for the
<PAGE> 3
Winston Hotels, Inc.
September 2, 1997
Page 3
benefit of the Company in connection with the matters addressed herein. This
opinion may not be furnished to or relied upon by any person or entity for any
purpose without our prior written consent.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus that is included in the Registration Statement.
Very truly yours,
/s/ King & Spalding
KING & SPALDING
<PAGE> 1
EXHIBIT 8.1
September 2, 1997
Winston Hotels, Inc.
2209 Century Drive, Suite 300
Raleigh, North Carolina 27612
RE: Registration Statement on Form S-3 No. 333-32713
Ladies and Gentlemen:
We have acted as special tax counsel to Winston Hotels, Inc. (the
"Company") in connection with the preparation of a Form S-3 Registration
Statement filed with the Securities and Exchange Commission ("SEC") on August 1,
1997 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Act"), with respect to the offering and sale from time to time of up to
$200 million aggregate offering price of (i) shares of the common stock, par
value $0.01 per share, of the Company and (ii) in one or more series or classes,
shares of the preferred stock, par value $0.01 per share, of the Company
(collectively, the "Securities").
We have reviewed the originals or copies of (i) the Amended and Restated
Articles of Incorporation, Amended and Restated Bylaws, and other organizational
documents of the Company and its affiliates; (ii) the Registration Statement and
the prospectus included therein (the "Prospectus"); and (iii) such other
documents as we have deemed necessary or appropriate as a basis for the opinion
set forth below.
Based on the foregoing, we are of the opinion that the descriptions of
the law contained in the Registration Statement under the caption "Federal
Income Tax Consequences" are correct in all material respects, and the
discussion thereunder does not omit any material provision with respect to the
matters covered. You should be aware that this opinion represents our
conclusions as to existing law. There can be no assurance
<PAGE> 2
Winston Hotels, Inc.
September 2, 1997
Page 2
that contrary positions will not be taken by the Internal Revenue Service or
that the law will not change.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the caption "Federal Income Tax Consequences" in the Prospectus. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Act or the rules and regulations
promulgated thereunder by the SEC.
The foregoing opinion is limited to the U.S. federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
federal tax or other matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinion expressed herein after the date of this letter. This opinion letter
is solely for the information and use of the addressee and the purchasers of
Securities pursuant to the Prospectus, and it may not be distributed, relied
upon for any purpose by any other person, quoted in whole or in part or
otherwise reproduced in any document, or filed with any governmental agency
without our express written consent.
Very truly yours,
/s/ Hunton & Williams
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
Winston Hotels, Inc. on Form S-3 of our report dated January 10, 1997, on our
audits of the consolidated financial statements of Winston Hotels, Inc. as of
December 31, 1996 and 1995, and for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994, of our report dated
January 10, 1997, on our audit of the financial statement schedule of Winston
Hotels, Inc. as of December 31, 1996, of our report dated March 5, 1997, on our
audits of the financial statements of Winston Hospitality, Inc. as of December
31, 1996 and 1995, and for the years ended December 31, 1996 and 1995 and the
period June 2, 1994 through December 31, 1994, and of our report dated September
21, 1994, on our audits of the combined statements of income, capital deficiency
and cash flows of the Initial Hotels (described in Note 1 to those financial
statements) for the five months ended June 2, 1994, appearing in the 1996 Annual
Report on Form 10-K of Winston Hotels, Inc. filed with the Securities and
Exchange Commission pursuant to the Securities Act of 1934. We also consent to
the incorporation by reference in this registration statement of Winston Hotels,
Inc. on Form S-3 of our report dated February 21, 1996, on our audit of the
combined statements of income, equity and cash flows of the Impac Acquisition
Hotels (described in Note 1 to those financial statements) for the year ended
December 31, 1995, appearing in Amendment No. 1 to the registration statement on
Form S-3 (File No. 333-03986) of Winston Hotels, Inc. filed with the Securities
and Exchange Commission pursuant to the Securities Act of 1933. We also consent
to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
August 29, 1997
