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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-23732
WINSTON HOTELS, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1624289
(State of incorporation) (I.R.S. Employer
Identification Number)
2209 CENTURY DRIVE, SUITE 300
RALEIGH, NORTH CAROLINA 27612
(Address of principal executive offices) (Zip Code)
(919) 510-6010
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
Preferred Stock, $0.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X} No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of the registrant's Common Stock at March 18,
1998, held by those persons deemed by the registrant to be non-affiliates was
approximately $205,762,000.
As of March 18, 1998, there were 16,194,480 shares of the registrant's
Common Stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
- -------- ------------------
1. Proxy Statement for Annual Meeting of Part III
Shareholders to be held on May 5, 1998
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WINSTON HOTELS, INC.
Form 10-K Annual Report
INDEX
Page
----
PART I.
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 15
ITEM 6. SELECTED FINANCIAL DATA 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 25
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 25
ITEM 11. EXECUTIVE COMPENSATION 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 25
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 26
SIGNATURES
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PART I.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Winston Hotels, Inc. ("WHI") is an equity real estate investment trust
("REIT") organized on June 2, 1994, that through WINN Limited Partnership (the
"Partnership") owns 38 hotels (the "Current Hotels") having an aggregate of
5,124 rooms as of December 31, 1997. WHI currently owns a 90.15% partnership
interest in the Partnership and is its sole general partner. References to the
"Company" herein refer to WHI and the Partnership, unless otherwise indicated or
unless the context requires otherwise.
In 1994, the Company completed an initial public offering of Common Stock
(the "Common Stock") and used the majority of the offering proceeds to acquire
one hotel property and a 93.96% general partnership interest in the Partnership.
The Partnership used a substantial portion of the proceeds from the Company to
acquire nine hotel properties (together with the hotel acquired by the Company,
the "Initial Hotels"). During 1994, the Company acquired six additional hotels
(the "1994 Acquired Hotels") utilizing proceeds from the initial public offering
and borrowings under its line of credit. In 1995, the Company completed a second
public offering (the "Follow-on Offering") and used the proceeds to purchase
five additional hotels on May 18, 1995 ( the "1995 Acquired Hotels"). In 1996,
the Company completed an additional follow-on offering and used the proceeds to:
(i) fund a portion of the purchase price of five of the ten hotel properties
acquired in 1996 (collectively the ten hotels are the "1996 Acquired Hotels");
(ii) repay certain indebtedness of the Company; (iii) pay franchise fees,
financing costs and closing costs related to the 1996 Acquired Hotels; and (iv)
pay certain costs of capital improvements to the 1996 Acquired Hotels. In 1997,
the Company completed an offering of 3,000,000 shares of 9.25% Series A
Cumulative Preferred Stock ($25 liquidation preference per share) and used the
net proceeds of approximately $71,500,000 to pay down existing debt. During
1997, the Company also acquired seven additional hotel properties (the "1997
Acquired Hotels") utilizing borrowings under its line of credit.
Under the REIT qualification requirements of the Internal Revenue Code, REITs
generally must lease their hotels to third party operators. Therefore, the
Company and the Partnership lease the Current Hotels to CapStar Winston Company,
L.L.C. (the "Lessee") pursuant to leases that provide for rent payments based,
in part, on revenues from the Current Hotels (the "Percentage Leases"). Under
the terms of the Percentage Leases, the Lessee is obligated to pay the Company
the greater of base rent or percentage rent ("Percentage Rent"). The Percentage
Leases are designed to allow the Company to participate in the growth in
revenues at the Current Hotels by providing that a portion (ranging from 62% to
70%) of each Current Hotel's room revenues in excess of specified amounts will
be paid to the Partnership or the Company as Percentage Rent. The Lessee
operates 28 of the Current Hotels and Interstate Management and Investment
Corporation ("IMIC") and Promus Hotels, Inc. ("Promus"), operate nine hotels
and one hotel, respectively, under management agreements with the Lessee.
Prior to November 17, 1997, the Current Hotels were leased pursuant to the
Percentage Leases to Winston Hospitality, Inc. On November 17, 1997 and November
24, 1997, CapStar Management Company, L.P. purchased substantially all of the
assets and assumed certain liabilities of Winston Hospitality, Inc., including
the Current Hotels' leases. CapStar Management Company, L.P. is an affiliate of
CapStar Hotel Company ("CapStar"), a public company. Concurrent with the
transaction, the leases were assigned to the Lessee, also an affiliate of
CapStar.
FINANCIAL INFORMATION ABOUT THE INDUSTRY SEGMENT
The Company is in the business of acquiring equity interests in hotel
properties. See the Consolidated Financial Statements and notes thereto included
in Item 8 of this Annual Report on Form 10-K.
NARRATIVE DESCRIPTION OF BUSINESS
Growth Strategy
The Company's growth strategy is to enhance shareholder value by increasing
cash available for distribution per share of Common Stock through: (i)
participating in any increased room revenue from the Current Hotels and any
subsequently acquired or developed hotels through Percentage Leases; (ii)
acquiring additional hotels that meet the Company's investment criteria; and
(iii) selectively developing hotels and hotel additions as market conditions
warrant.
Internal Growth Strategy. The Company participates in any increased room
revenue from the Current Hotels through Percentage Leases. The Company believes
that internal growth, through increases in Percentage Rent has and, in the
future, may result from: (i)
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continued sales and marketing programs by the Lessee; (ii) completion of a
refurbishment plan for certain of the Current Hotels; (iii) maintaining hotel
franchises with demonstrated market acceptance and national reservation systems;
and (iv) continuation of the industry-wide trend of increasing average daily
room rate ("ADR") and revenue per available room ("REVPAR").
The Percentage Leases provide that a percentage of room revenues in specified
ranges is paid as Percentage Rent. The percentage of room revenues paid as
Percentage Rent increases as a higher specified level of room revenues is
achieved. Pursuant to each Percentage Lease, base rent and the ranges of room
revenues specified for purposes of calculating Percentage Rent are adjusted
quarterly for inflation beginning January 1, after the first full year of the
Percentage Lease, based on quarterly changes in the United States Consumer Price
Index ("CPI").
Acquisition Strategy. The Company intends to acquire additional hotel
properties with strong, national franchise affiliations in the mid-scale and
lower upscale market segments, or hotel properties with the potential to obtain
such franchise affiliations. In particular, the Company will consider acquiring
limited-service hotels such as Hampton Inn, Comfort Inn, and Fairfield Inn
hotels; full-service hotels such as Hilton Garden and Courtyard by Marriott
hotels; and limited-service extended-stay hotel properties such as Homewood
Suites, Hampton Inn and Suites and Residence Inn hotels (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Looking Statements").
The Company intends to consider investments in hotel properties that meet one
or more of the following criteria: (i) properties in locations with relatively
high demand for rooms, a relatively low supply of hotel properties and barriers
to easy entry into the hotel business, such as a scarcity of suitable sites or
zoning restrictions; (ii) poorly managed properties in a deteriorated physical
condition with the potential to increase performance after renovations and under
quality management; (iii) properties in attractive locations that the Company
believes could benefit significantly by changing franchises to a brand the
Company believes will strengthen the acquired hotel's competitive position,
including properties that would require complete renovation to qualify
for a new franchise; and (iv) successful hotels available at favorable prices.
The Company believes the relationship with CapStar will provide additional
potential investment opportunities, opportunities the Company may not otherwise
have had.
Additional investments in hotel properties may be made through the
Partnership or directly by the Company or other entities controlled by the
Company. The Company's ability to acquire additional hotel properties and
develop hotels depends primarily on its ability to obtain additional equity
financing, proceeds from subsequent issuances of Common Stock or other
securities, or co-investments from other investors in hotel development or
rehabilitation joint ventures. Such investments may be financed, in whole or in
part, from the exchange of Common Stock or Partnership Units for hotels, with
borrowings under lines of credit or other credit facilities, or with cash not
required to be distributed to maintain the Company's status as a REIT.
Development Strategy. The Company intends to pursue hotel development as
suitable opportunities arise. The Company may finance 100% of such development
or seek partners who would co-invest in development or rehabilitation joint
ventures. The Company intends to consider development of hotels with strong
national franchise affiliations in markets where the Company believes that
carefully timed and managed development will yield returns to the Company that
exceed returns from any available hotels in those markets that meet the
Company's acquisition criteria (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward Looking Statements").
In considering development opportunities, the Board of Directors will review
the availability and pricing of existing hotels for sale in the area that meet
its acquisition criteria, the availability of sites suitable for development,
the costs and risks of developing and the availability of financing, as well as
any other factors the Board of Directors deems relevant. Each Winston Affiliate
(Charles Winston, Robert W. Winston, III, his wife Tracy Winston and trusts for
the benefit of their minor children, Winston Hospitality, Inc., and any other
affiliate of Charles Winston or Robert W. Winston, III are collectively referred
to herein as the "Winston Affiliates") serving on the Company's or Winston
Hospitality, Inc.'s Board of Directors has agreed that so long as he is on the
board or is an officer of the Company or of Winston Hospitality, Inc., neither
he nor his affiliates will develop or own interests in hotel properties except
through the Company, or own more than five percent of any other publicly held
hotel company.
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As of December 31, 1997 the Company had five hotel properties under
development. The following table sets forth certain information for each project
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Forward Looking Statements").
<TABLE>
<CAPTION>
HOTEL AND LOCATION ROOMS DEVELOPMENT COSTS (APPX.) COMPLETION DATE
------------------ ----- ------------------------- ---------------
<S> <C> <C> <C>
Homewood Suites
Crabtree Valley
Raleigh, NC 137 $ 13,000 Early 1998
Homewood Suites
Alpharetta, GA 112 10,000 Early 1998
Homewood Suites
Lake Mary, FL 112 10,000 Mid 1998
Homewood Suites
Durham, NC 96 9,000 Late 1998
Courtyard by Marriott
Winston-Salem, NC 120 8,000 Late 1998
</TABLE>
Operations and Property Management. The Lessee currently operates 28 of the
Current Hotels, IMIC manages nine of the Current Hotels and Promus manages one
of the Current Hotels (collectively the "Property Managers") pursuant to
management agreements with the Lessee with respect to each of such hotels. The
Lessee and the Property Managers seek to increase revenues at the Current Hotels
by using established systems to manage the Current Hotels for marketing, rate
achievement, expense management, physical facility maintenance, human resources,
accounting and internal auditing. Managers are trained in all aspects of hotel
operations, with particular emphasis placed on customer service. Managers are
trained in negotiation of prices with corporate and other clients and to be
responsive to marketing requirements in their particular markets. The Lessee and
the Property Managers employ a mix of marketing techniques designed for each
specific Current Hotel, which include individual toll-free lines,
cross-marketing of the Current Hotels' billboards and direct marketing, as well
as taking advantage of national advertising by the franchisors of the Current
Hotels.
The Lessee leases the Current Hotels pursuant to the Percentage Leases. Under
the Percentage Leases, the Lessee generally is required to perform all
operational and management functions necessary to operate the Current Hotels.
Such functions include accounting, periodic reporting, ordering supplies,
advertising and marketing, maid service, laundry and maintenance. The Lessee is
entitled to all profits and cash flow from the Current Hotels after payment of
rent under the Percentage Leases and other operating expenses, including, in the
case of the ten Current Hotels managed by the Property Managers, the management
fee payable to the Property Managers. The Lessee, its affiliates and the
Property Managers may manage other hotel properties in addition to hotels owned
by the Company, however, the Lessee and its affiliates may not build or develop
a hotel or motel within five miles of a leased Company hotel.
Washington, D.C.-based CapStar owns and manages upscale, full-service hotels
and resorts throughout the U.S. and Canada under such internationally known
brands as Hilton, Sheraton, Marriott, Embassy Suites, Westin, Renaissance and
Doubletree. Including one hotel under contract, as of February 2, 1998,
CapStar's hotel portfolio comprised 54 owned hotels with 14,503 rooms, 40 leased
hotels with 5,687 rooms and 27 managed hotels with 4,631 rooms, for a total of
121 properties with 24,821 rooms. On March 16, 1998, CapStar and American
General Hospitality Corporation announced that they had signed an agreement to
merge as equals. Under the terms of the agreement, CapStar will spin off its
hotel operations and management business to its current shareholders as a new
C-corporation to be called MeriStar Hotels and Resorts, Inc. CapStar will
subsequently merge into American General Hospitality Corporation which will be
named MeriStar Hospitality Corporation. The transaction is subject to approval
by both CapStar's and American General Hospitality Corporation's shareholders.
IMIC, a hotel development and management company, operates nine of the
Current Hotels under separate management agreements with the Lessee. Each year,
the Lessee pays IMIC a base management fee for each Current Hotel managed by
IMIC based on a percentage of the budgeted gross operating profit for that year
with incentive amounts based on actual gross operating profits if they exceed
budgeted amounts. IMIC has agreed that each year it will spend a specified
percentage of the gross revenues of each Current Hotel managed by IMIC on
repairs and maintenance of the hotel. The Lessee has retained the right to
control the expenditure of funds budgeted for capital and non-routine items,
including, at its discretion, approving plans and selecting and overseeing
contractors and other vendors. IMIC currently operates 24 hotels in five states,
including 18 limited-service hotels and six full-service, convention or resort
hotels.
The Lessee pays or reimburses IMIC for all property operating expenses at the
hotels. Each IMIC management agreement may be terminated earlier upon the
occurrence of one or more events of default, as described in the management
agreements.
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Promus manages one of the Current Hotels under a management agreement with
the Lessee. Each year, the Lessee pays Promus a management fee based on a
percentage of the Lessee's gross operating profit for the hotel managed by
Promus with certain incentive amounts.
Investments by Shareholders of Former Lessee
As noted earlier, in November 1997, CapStar purchased substantially all of
the assets and assumed certain liabilities of Winston Hospitality, Inc.,
including the Current Hotels' leases. In connection with the transaction, Robert
W. Winston, III and John B. Harris, Jr., shareholders of Winston Hospitality,
Inc. owning 90% and 10% respectively, entered into an agreement to use their
best efforts to purchase an aggregate of 400,000 shares of the Company's Common
Stock, par value $0.01 per share, prior to November 24, 1999. If such investment
is not made prior to this date, the Company has the right to require Messrs.
Winston and Harris to purchase the number of shares equal to the difference of
400,000 less the aggregate number of shares purchased by them during such
two-year period.
Franchise Agreements
The Company anticipates that most of the additional hotel properties in which
it invests will be operated under franchise licenses. Franchisors provide a
variety of benefits for franchisees which include national advertising,
publicity and other marketing programs designed to increase brand awareness,
training of personnel, continuous review of quality standards and centralized
reservation systems. See schedule of properties by franchisor under Item 2.
The hotel franchise licenses generally specify certain management,
operational recordkeeping, accounting, reporting and marketing standards and
procedures with which the Lessee must comply. The franchise licenses obligate
the Lessee to comply with the franchisors' standards and requirements with
respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services
that may be provided, display of signs, and the type, quality and age of
furniture, fixtures and equipment included in guest rooms, lobbies and other
common areas.
Of the Current Hotels, three of the franchise licenses expire in 1999, two
expire in 2006, four expire in 2008, two expire in 2009, two expire in 2010,
three expire in 2011, two expire in 2012, one expires in 2013, two expire in
2016 and 17 expire in 2017. The franchise agreements provide for termination at
the franchisor's option upon the occurrence of certain events, including the
Lessee's failure to pay royalties and fees or perform its other covenants under
the license agreement, bankruptcy, abandonment of the franchise, commission of a
felony, assignment of the license without the consent of the franchisor, or
failure to comply with applicable law in the operation of the relevant Current
Hotel. The Lessee is entitled to terminate the franchise license only by giving
at least 12 months' notice and paying a specified amount of liquidated damages.
The license agreements will not renew automatically upon expiration. The Lessee
is responsible for making all payments under the franchise agreements to the
franchisors. Under the franchise agreements, the Lessee pays a franchise fee of
an aggregate of between 3% and 5% of room revenues, plus additional fees that
amount to between 3% and 4% of room revenues from the Current Hotels.
Prior to the sale of assets by Winston Hospitality, Inc., the Company served
as guarantor of certain obligations of Winston Hospitality, Inc. under three
franchise agreements between Winston Hospitality, Inc. and Holiday Inn. Although
the Lessee entered into new 18-month franchise agreements for the operation of
the three Holiday Inn hotels, Winston Hospitality, Inc. and the Company remain
obligated to Holiday Inn for certain liquidated damages in the event of a
termination of the Holiday Inn franchise agreements prior to the expiration of
the 18-month term. The Lessee and its affiliates shall indemnify the Company and
Winston Hospitality, Inc. for certain obligations arising from the Lessee's or
its affiliates' failure to satisfy certain conditions in its franchise
agreements with Holiday Inn.
Competition
The hotel industry is highly competitive. The Current Hotels compete with
other hotel properties in their geographic markets. Many of the Company's
competitors have greater marketing and financial resources than the Company, the
Lessee, and the Property Managers. Several of the Current Hotels are located in
areas in which they may compete with other Current Hotels for business. The
Company competes for acquisition opportunities with entities that have greater
financial resources than the Company. These entities may generally be able to
accept more risk than the Company can prudently manage, including risks with
respect to the creditworthiness of a hotel operator.
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Employees
The Company had 21 employees as of February 28, 1998.
Environmental Matters
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances on such property. Such laws often impose
such liability without regard to whether the owner knew of, or was responsible
for, the presence of hazardous or toxic substances. Furthermore, a person that
arranges for the disposal or transports for disposal or treatment of a hazardous
substance at another property may be liable for the costs of removal or
remediation of hazardous substances released into the environment at that
property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remediate such substances, may adversely affect the owner's ability to use or
sell such real estate or to borrow using such real estate as collateral. Certain
environmental laws and common law principles could be used to impose liability
for the release of and exposure to hazardous substances, including
asbestos-containing materials ("ACMs") into the air, and third parties may seek
recovery from owners or operators of real properties for personal injury or
property damage associated with exposure to released hazardous substances,
including ACMs. In connection with the ownership and operation of the Current
Hotels, the Company, the Lessee, IMIC or Promus, as the case may be, may be
potentially liable for such costs.
Phase I environmental site assessments ("ESAs") were obtained on all of the
Initial Hotels prior to the initial public offering and prior to the acquisition
of all hotels acquired since the initial public offering. The Phase I ESAs were
intended to identify potential sources of contamination for which the Current
Hotels may be responsible and to assess the status of environmental regulatory
compliance. The Phase I ESAs included historical reviews of the Current Hotels,
reviews of certain public records, preliminary investigations of the sites and
surrounding properties, screening for the presence of asbestos, PCBs and
underground storage tanks, and the preparation and issuance of a written report.
The Phase I ESAs did not include invasive procedures, such as soil sampling or
ground water analysis. The Phase I ESA reports have not revealed any
environmental condition, liability or compliance concern that the Company
believes would have a material adverse effect on the Company's business, assets
or results of operations, nor is the Company aware of any such condition,
liability or compliance concern. Nevertheless, it is possible that these reports
do not reveal all environmental conditions, liabilities or compliance concerns
or that there are material environmental conditions, liabilities or compliance
concerns that arose at a Current Hotel after the related Phase I ESA report was
completed of which the Company is unaware. Moreover, no assurances can be given
that (i) future laws, ordinances or regulations will not impose any material
environmental liability, or (ii) the current environmental condition of the
Current Hotels will not be affected by the condition of the properties in the
vicinity of the Current Hotels (such as the presence of leaking underground
storage tanks) or by third parties unrelated to the Company.
The Company believes that the Current Hotels are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances and other environmental
matters. The Company has not been notified by any governmental authority of any
material noncompliance, liability or claim relating to hazardous or toxic
substance or other environmental substances in connection with any of its
properties.
Tax Status
The Company elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended (the "Code"), effective for its short
taxable year ended December 31, 1994. The Company believes that it qualifies for
taxation as a REIT, and with certain exceptions, the Company will not be subject
to tax at the corporate level on its taxable income that is distributed to the
shareholders of the Company. A REIT is subject to a number of organizational and
operational requirements, including a requirement that it currently distribute
at least 95% of its annual taxable income. Failure to qualify as a REIT will
render the Company subject to federal income tax (including any applicable
minimum tax) on its taxable income at regular corporate rates and distributions
to the shareholders in any such year will not be deductible by the Company.
Although the Company does not intend to request a ruling from the Internal
Revenue Service (the "Service") as to its REIT status, the Company has obtained
the opinion of its legal counsel that the Company qualifies as a REIT, which
opinion is based on certain assumptions and representations and is not binding
on the Service or any court. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and properties.
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Seasonality
The Current Hotels' operations historically have been seasonal in nature,
reflecting higher revenues per available room ("REVPAR") during the second and
third quarters. This seasonality and the structure of the Percentage Leases,
which provide for a higher percentage of room revenues above stated equal
quarterly levels to be paid as Percentage Rent, can be expected to cause
fluctuations in the Company's quarterly lease revenue under the Percentage
Leases.
Executive Officers of the Registrant
The following table lists the executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles M. Winston 68 Chairman of the Board of Directors
Robert W. Winston, III 36 Chief Executive Officer, President and Secretary
James D. Rosenberg 44 Chief Financial Officer and Chief Operating Officer
Kenneth R. Crockett 41 Executive Vice President of Development
Joseph V. Green 47 Executive Vice President - Acquisitions and Finance
</TABLE>
CHARLES M. WINSTON. Charles Winston, age 68, has served as Chairman of the
Board of Directors since March 15, 1994. Mr. Winston is a native of North
Carolina and a graduate of the University of North Carolina at Chapel Hill with
an A.B. degree. He was Chairman of the Board of WJS Management, Inc., the former
operator of nine of the hotels acquired by the Company at the time of the
initial public offering (the "Initial Hotels"), and a principal executive
officer of several corporations, which developed eight of the Initial Hotels and
two additional hotels purchased by the Company in 1996, positions he had held
since 1987. Mr. Winston has more than 35 years of experience in developing and
operating full service restaurants. Mr. Winston also serves on the board of
directors of BB&T Corporation. Mr. Winston is Robert Winston's father and James
Winston's brother.
ROBERT W. WINSTON, III. Robert Winston, age 36, has served as Chief Executive
Officer, President and Director of the Company since March 15, 1994.
Mr. Winston has also served as Secretary for the periods from March 1994 through
May 1995 and from October 1997 until the present. Mr. Winston is a native of
North Carolina and a graduate of the University of North Carolina at Chapel Hill
with a B.A. degree in economics. From 1988 to 1991 he was employed by Hampton
Inns Corporation where he was involved in the management of several hotels. In
1991, Mr. Winston founded a hotel management company and purchased the Hampton
Inn in Wilmington, North Carolina. He managed that hotel from 1991 until the
closing of the initial public offering in June 1994. Mr. Winston developed,
directly or through affiliated entities, three hotels purchased by the Company
in 1996. Mr. Winston is Charles Winston's son and James Winston's nephew.
JAMES D. ROSENBERG. Mr. Rosenberg has served as Chief Operating Officer and
Chief Financial Officer since January 5, 1998. Mr. Rosenberg is a CPA and a
graduate of Presbyterian College and received an MBA from the University of
South Carolina. Prior to joining the Company, Mr. Rosenberg held the position of
Senior Vice President with Holiday Inn Worldwide since 1994 where he was
responsible for managing 85 hotels in seven countries. Prior to joining the
Holiday Inn organization, Mr. Rosenberg was a partner in Sage Hospitality
Resources and served as Executive Vice President and Chief Financial Officer of
the Denver-based hospitality firm. From 1989 to 1993, Mr. Rosenberg served as
Chief Operating Officer of Crossroads Hospitality, a division of
Pittsburgh-based Interstate Hotel Corporation. Mr. Rosenberg started his career
with Price Waterhouse, L.L.P.
KENNETH R. CROCKETT. Mr. Crockett was appointed Senior Vice President of
Development of the Company in September 1995 and Executive Vice President of
Development in January 1998. Mr. Crockett is a graduate of the University of
North Carolina at Chapel Hill with a B.S. degree in Business Administration.
Prior to joining the Company, Mr. Crockett was an Associate Partner for project
development in commercial real estate at Capital Associates, a real estate
development firm located in the Raleigh, North Carolina area. From 1984 to 1986,
Mr. Crockett worked for the Oberlin Company where he was responsible for the
development and operation of nine limited-service hotels. Prior to 1984, Mr.
Crockett worked for several different financial institutions.
JOSEPH V. GREEN. Mr. Green assumed the responsibilities of Executive Vice
President - Acquisitions and Finance effective January 1, 1998, after having
advised Winston Hospitality, Inc. on matters regarding hotel acquisitions and
finance since 1993, including the initial public offering of Winston Hotels,
Inc. Mr. Green is a graduate of East Carolina University, was awarded his J.D.
degree from Wake Forest University School of Law and received a Master of Laws
in Taxation from Georgetown University.
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ITEM 2. PROPERTIES
The following table sets forth certain unaudited pro forma information with
respect to the Current Hotels:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Room Lease Room Lease
# Revenues Occupancy Revenues Revenues Occupancy Revenues
Rooms ($000) ADR % ($000) ($000) ADR % ($000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hampton Inns
Boone, NC 95 $ 1,819 64.17 81.77% $ 751 $ 1,662 $58.70 81.4% $ 660
Brunswick, GA 128 2,092 56.96 79.14% 849 2,090 54.77 82.1% 862
Cary, NC 130 2,592 64.16 85.15% 1,230 2,453 60.22 85.6% 1,149
Charlotte, NC 125 2,695 70.53 83.75% 1,288 2,542 65.13 85.3% 1,201
Chester, VA 66 1,360 68.02 83.02% 607 1,369 64.78 87.5% 620
Duncanville, TX 119 1,425 47.76 68.68% 527 1,304 46.13 64.7% 443
Durham, NC 137 2,921 69.50 84.03% 1,358 2,868 63.09 90.7% 1,350
Gwinnett (Hampton Inn
& Suites), GA 135 2,696 72.99 74.60% 1,373 994 80.37 53.6% 436
Hilton Head, SC 125 2,062 65.16 69.90% 786 1,965 59.53 72.7% 743
Jacksonville, NC 120 1,955 53.62 83.24% 816 2,029 50.89 90.8% 881
Perimeter, GA 131 2,610 77.39 70.54% 1,343 2,173 76.75 70.4% 1,123
Raleigh, NC 141 2,936 66.60 85.65% 1,411 2,731 62.60 84.5% 1,292
Southern Pines, NC 126 1,887 53.72 76.39% 749 1,919 55.66 74.7% 783
Southlake, GA 124 2,107 63.77 72.99% 854 2,465 67.15 80.9% 1,105
W. Springfield, MA 126 2,291 70.74 70.42% 994 2,290 67.59 73.5% 994
White Plains, NY 156 4,000 91.18 77.04% 1,908 2,799 75.62 65.2% 1,092
Wilmington, NC 118 2,304 67.30 79.49% 1,001 2,376 63.67 86.4% 1,060
Comfort Inns
Augusta, GA 123 1,462 50.47 64.53% 517 1,447 48.06 66.9% 519
Charleston, SC 128 2,426 68.21 76.13% 1,138 2,084 60.48 73.5% 925
Chester, VA 123 2,131 67.09 70.76% 985 2,335 64.40 80.5% 1,136
Clearwater/St. Petersburg, FL 120 1,739 51.76 76.70% 644 1,439 48.64 67.4% 462
Durham, NC 138 2,887 70.64 81.14% 1,429 2,717 65.52 82.1% 1,337
Fayetteville, NC 176 2,487 52.24 74.10% 1,179 2,641 52.43 78.2% 1,300
Greenville, SC 190 1,540 49.90 44.43% 385 1,987 48.70 58.4% 644
London (Comfort Suites), KY 62 900 54.14 73.50% 374 983 53.65 80.7% 432
Orlando (Comfort Suites), FL 215 4,117 59.89 87.60% 1,908 3,617 53.13 86.5% 1,527
Raleigh, NC 149 1,646 49.85 60.72% 569 1,985 50.75 71.7% 792
Wilmington, NC 146 2,470 59.45 77.98% 1,081 2,561 58.15 82.4% 1,156
Holiday Inns
Abingdon (Holiday Inn
Express), VA 81 1,292 58.38 75.11% 607 1,246 52.92 80.4% 580
Clearwater (Holiday Inn
Express), FL 127 2,229 58.73 81.88% 966 2,116 55.01 82.7% 887
Dallas (Holiday Inn
Select), TX 244 4,695 73.48 71.75% 2,263 4,794 68.99 77.8% 2,350
Courtyard by Marriott
Ann Arbor, MI 160 3,951 81.47 82.83% 1,846 3,594 77.96 78.9% 1,603
Houston, TX 202 3,489 74.20 63.78% 1,596 3,224 65.80 66.3% 1,411
Wilmington, NC 128 2,377 72.32 70.34% 978 188 56.01 48.5% 60
Homewood Suites
Cary, NC 140 3,448 80.03 84.31% 2,221 3,342 76.78 85.0% 2,155
Clear Lake, TX 92 2,514 93.26 80.29% 1,163 2,250 90.46 73.9% 979
Quality Suites - Charleston, SC 168 3,860 78.09 80.62% 1,753 3,919 76.69 83.1% 1,817
Fairfield Inn - Ann Arbor, MI 110 1,811 61.97 72.58% 687 1,706 58.90 71.9% 616
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 5,124 $93,223 66.24 75.24% $42,134 $86,204 $62.07 77.1% $38,482
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
THE CURRENT HOTELS
1. Hampton Inn -- 208 Linville Road, Boone, North Carolina. This five-story,
interior corridor hotel is located on an approximately 2.1 acre site near the
Blue Ridge Parkway in the northwestern part of North Carolina's Appalachian
Mountains and is within 15 minutes from snow skiing slopes. Appalachian State
University, a part of the University of North Carolina system, is located in
Boone. In addition to other amenities, the hotel has an indoor pool and jacuzzi.
The hotel was acquired contemporaneously with the IPO.
2. Hampton Inn -- 112 Tourist Drive, Brunswick, Georgia. This three-story,
interior and exterior corridor hotel is located on an approximately 2.9 acre
site just off Interstate 95. Brunswick and the nearby Golden Isles feature
beaches on the Atlantic Ocean as well as historic areas. The property also is
near an outlet shopping center and several restaurants. In addition to other
amenities, the hotel has a fitness center and outdoor swimming pool. The hotel
was acquired contemporaneously with the IPO.
3. Hampton Inn -- 201 Asheville Avenue, Cary, North Carolina. This five-story,
interior corridor hotel is located on an approximately 2.2 acre site at the
interchange of US-1 and US-64, major area thoroughfares. In addition to other
amenities, the hotel has an outdoor pool and a fitness center. Cary is located
between Raleigh and Durham, adjacent to North Carolina's Research Triangle Park
and the Raleigh-Durham International Airport. Raleigh is one of three cities,
along with Durham and Chapel Hill, that comprise the Research Triangle. The
hotel was acquired contemporaneously with the IPO.
4. Hampton Inn -- U.S. Highway 29, Charlotte, North Carolina. This six-story,
interior corridor hotel is located on an approximately 2.1 acre site off
Interstate 85. The hotel is located in Charlotte, the largest metropolitan area
in the Carolinas. The hotel is close to the Charlotte Motor Speedway, the
University of North Carolina at Charlotte, and the University Hospital. The
hotel has an outdoor pool and two hospitality suites. The hotel was acquired
contemporaneously with the IPO.
5. Hampton Inn -- 12610 Chestnut Hill Road, Chester (Richmond), Virginia. This
two-story, interior corridor hotel was opened on April 15, 1994 and is located
on an approximately 5.1 acre site near Interstate 95 and Route 10 (approximately
15 miles south of Richmond). The hotel is located near major components of the
tobacco operations of Phillip Morris USA and major industrial and technical
centers for DuPont and Allied. Amenities include a daily complimentary
continental breakfast, on site guest laundry facilities and a jogging path. In
connection with the acquisition of this hotel, the Company also acquired a
free-standing restaurant, which is on an adjacent parcel of land and which is
subject to a pre-existing lease. The property was acquired in November, 1994.
6. Hampton Inn -- 4154 Preferred Place, Duncanville (Dallas), Texas. This
two-story, exterior corridor hotel is located on an approximately 2.5 acre site
near Interstate 20 and LBJ Freeway, the Texas Rangers Baseball Stadium and Six
Flags Over Texas. The property offers a complimentary continental breakfast,
outdoor pool and a meeting room. The property was acquired in May 1996.
7. Hampton Inn -- 1816 Hillandale Road, Durham, North Carolina. This five-story,
interior corridor hotel is located on an approximately 2.0 acre site near Duke
University, Duke University Medical Center and downtown Durham. The Research
Triangle Park, a regional research and development center just south of Durham,
is a major area employer. The property was substantially renovated and changed
from a Comfort Inn to a Hampton Inn in 1991. The hotel has an outdoor pool and a
conference room. The hotel was acquired contemporaneously with the IPO.
8. Hampton Inn & Suites -- 1725 Pineland Road, Duluth, Georgia. This four-story,
interior corridor hotel is located on an approximately 2.5 acre site near
Interstate 85 in suburban Atlanta. Located nearby are Gwinnett Mall, Lake
Lanier, Stone Mountain and Chateau Elan. The property offers a complimentary
full-service breakfast and social hour. Other amenities include a meeting room,
fully equipped business center and outdoor swimming pool. The property was
acquired in July 1996.
9. Hampton Inn -- One Airport Road, Hilton Head, South Carolina. This two-story,
interior corridor hotel is located on an approximately 5.0 acre site near
Highway 278, the airport and several golf and tennis facilities. The Hilton Head
area is home for several major sporting events, including the MCI Heritage Golf
Tournament and the Family Circle Tennis Tournament. Among other amenities, the
hotel has an outdoor pool and a health spa, and a complimentary continental
breakfast is served daily. The property was acquired in November 1994.
10. Hampton Inn -- 474 Western Boulevard, Jacksonville, North Carolina. This
two-story, exterior corridor hotel is located on an approximately 3.1 acre site
near Camp Lejeune Marine Corps Base. Camp Lejeune, a major U.S. Marine base
accounts for a substantial amount of its business. Among other amenities, the
property has an outdoor pool. The hotel was acquired contemporaneously with the
IPO.
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<PAGE> 11
11. Hampton Inn -- 769 Hammond Drive, Atlanta, Georgia. This four-story,
interior corridor hotel is located on an approximately 1.6 acre site near
Interstate 285 and Georgia 400 in the Perimeter Center Area. The property offers
a complimentary continental breakfast, a meeting room and an exercise room.
Other amenities include an outdoor swimming pool and 25-inch televisions in
every room. The property was acquired in July 1996.
12. Hampton Inn -- 6209 Glenwood Avenue, Raleigh, North Carolina. This
four-story, interior corridor hotel is located on an approximately 1.8 acre site
near the Beltline, Interstate 40, the Crabtree Valley Mall and the
Raleigh-Durham International Airport, to which the hotel offers free airport
transportation. Amenities at the hotel include three meeting rooms,
complimentary continental breakfast, manager's cocktail reception, and a health
spa that is equipped with an outdoor pool, sauna and workout room. The property
was acquired contemporaneously with the 1995 follow-on offering.
13. Hampton Inn -- 1675 U.S. Highway 1, Southern Pines, North Carolina. This
two-story, exterior corridor hotel is located on an approximately 4.2 acre site
near Pinehurst and other golfing attractions, including the World Golf Hall of
Fame. In addition to its agriculture and manufacturing industries, the Southern
Pines area attracts tourists because of the approximately 30 golf courses in the
area. Tourism, which is primarily golf related, is an important part of the
area's economy. The hotel seeks to capitalize on area golfing attractions by
organizing golf tours for large numbers of visitors. The hotel has two small
conference rooms. The hotel was acquired contemporaneously with the IPO.
14. Hampton Inn -- 1533 Southlake Parkway, Morrow, Georgia. This five-story,
interior corridor hotel is located on an approximately 2.5 acre site off of
Interstate 75 near South Lake Mall in suburban Atlanta. The hotel features
southern garden landscaping, a fountain lobby and an outdoor pool. The hotel was
acquired contemporaneously with the IPO.
15. Hampton Inn -- 1011 Riverdale Street, West Springfield, Massachusetts. This
four-story, interior corridor hotel is located on an approximately 2.5 acre site
near Interstate 91 at 1011 Riverdale Street, just a few miles from downtown West
Springfield, the Basketball Hall of Fame, and Riverside Amusement Park. Hotel
amenities include free continental breakfast, an outdoor pool, free in-room
movies, and facsimile service. The property was acquired in July 1997.
16. Hampton Inn -- 200 Tarrytown Road, Route 119, Elmsford, New York. This
seven-story, interior corridor hotel is located on an approximately 4.0 acre
site off I-287 at exit #1 (Route 119.) The hotel is 17 miles north of New York
City and is centrally located to Westchester County's major corporate
headquarters such as AT&T, Bayer, Ciba, Coca Cola, Fuju, Hitachi, IBM, KLM,
NYNEX, PepsiCo, and the area's many corporate parks. Amenities include a sunken
lobby/breakfast area, a fitness center, and an outdoor pool with lounging deck.
The property was acquired in October 1997.
17. Hampton Inn -- 567 Market Street, Wilmington, North Carolina. This
two-story, exterior corridor hotel is located on an approximately 2.9 acre site
approximately six miles from Wrightsville Beach, North Carolina. Wilmington is a
resort area with light manufacturing and distribution businesses. The hotel
offers a complimentary continental breakfast daily and provides an outdoor pool,
hospitality suite, and access to an offsite health club. The hotel was acquired
contemporaneously with the IPO.
18. Comfort Inn -- 629 Frontage Road, Augusta, Georgia. This five-story,
interior corridor hotel is located on an approximately 2.3 acre site near
Interstate 20, the Bobby Jones Expressway, Fort Gordon and The Augusta National
Golf Course, home of the Masters Tournament. The property offers complimentary
continental breakfast daily and other amenities including an outdoor pool and
whirlpool, a meeting room and a fully equipped fitness center. The property was
acquired in May 1995.
19. Comfort Inn -- 144 Bee Street, Charleston, South Carolina. This seven-story,
interior corridor hotel is located on an approximately 1.0 acre site, which
overlooks the Ashley River, and is near US 17 and Charleston's historic
district, several full-service marinas and a medical complex, which consists of
several area hospitals. Amenities include an outdoor swimming pool and a meeting
room. The property was acquired in May 1995.
20. Comfort Inn -- 2100 West Hundred Street, Chester (Richmond), Virginia. This
five-story, interior corridor hotel is located on an approximately 3.0 acre site
near Interstate 95 and Route 10 (approximately 15 miles south of Richmond),
several major industrial corporations and several historic attractions,
including the Confederate White House and Civil War battlefields. Amenities
include an outdoor pool, health spa, meeting room and a complimentary
continental breakfast. The property was acquired in November 1994.
21. Comfort Inn -- 3580 Ulmerton Road, Clearwater/St. Petersburg, Florida. This
three-story, interior corridor hotel is located on an approximately 2.8 acre
site near Interstate 75, Busch Gardens amusement park, golf courses,
restaurants, shopping, and many gulf
11
<PAGE> 12
coast beaches and is on Tampa Bay. Among other amenities, the hotel has an
outdoor pool and a whirlpool, which are in a central courtyard surrounded on all
sides by the hotel, and a complimentary continental breakfast is served each
day. The Company also owns a free-standing restaurant, which is on an adjacent
parcel of land and which is subject to a pre-existing lease. The property was
acquired in May 1995.
22. Comfort Inn -- 3508 Mount Moriah Road, Durham/Chapel Hill, North Carolina.
This four-story, interior corridor hotel is located on an approximately 4.5 acre
site near the intersection of Interstate 40 and US 15-501 between Durham and
Chapel Hill, which puts it in close proximity to Duke University, the University
of North Carolina at Chapel Hill and a number of restaurants and shopping
opportunities. The hotel received the Choice Hotels "Gold Award" in 1992, 1993
and 1994. Amenities include an outdoor pool and an exercise room with a sauna
and whirlpool. The property was acquired in November 1994.
23. Comfort Inn -- 1922 Skibbo Road, Fayetteville, North Carolina. This
four-story, interior-corridor hotel is located on an approximately 3.3 acre site
near Interstate 95 and in the heart of a large trade center in North Carolina.
Both Fort Bragg and Pope Air Force Base are nearby. Amenities include an outdoor
pool, health spa, 25-inch televisions and a complimentary continental breakfast.
The property was acquired in November 1994.
24. Comfort Inn -- 540 North Pleasantburg Drive, Greenville, South Carolina.
This two-story, exterior corridor hotel is located on an approximately 3.0 acre
site near Interstate 385, the BMW assembly plant, and Michelin's North American
headquarters in the Greenville-Spartanburg Metropolitan area. The property
offers a complimentary full-service breakfast and meeting room. Other amenities
include an outdoor swimming pool, game room and sports bar. The property was
acquired in May 1996.
25. Comfort Suites -- 1918 West 192 Bypass, London, Kentucky. This three-story
interior corridor hotel is located on an approximately 1.0 acre site near
Interstate 75, Daniel Boone National Forest and Rockcastle River with whitewater
sports attractions and bass fishing. The property offers a complimentary
continental breakfast, meeting room and indoor swimming pool. The property was
acquired in May 1996.
26. Comfort Suites -- 9350 Turkey Lake Road, Orlando, Florida. This three-story,
interior corridor hotel is located on an approximately 7.0 acre site
conveniently located close to Interstate 4 and Florida Turnpike at the
International Drive area off Sand Lake Road. Nearby attractions include
Universal Studios, Sea World, Walt Disney World, and Orange County Convention
Center. Hotel amenities include a tropically landscaped courtyard completed with
a heated pool, kiddie pool, jacuzzi, playground, Pool Side Bar & Grille serving
food and beverages daily, free shuttle to Universal Studios, Sea World, and Wet
& Wild, and complimentary continental breakfast which is served every day. The
property was acquired in May 1997.
27. Comfort Inn -- 2910 Capital Boulevard, Raleigh, North Carolina. This
four-story, interior corridor hotel is located on an approximately 2.7 acre site
and is located near the Raleigh Beltline Highway, the State Capitol, Governor's
mansion and North Carolina State University. Amenities include an outdoor pool
and exercise area. The property was acquired in August 1994.
28. Comfort Inn -- 151 South College Road, Wilmington, North Carolina. This
six-story, interior corridor hotel is located on an approximately 2.6 acre site
near the end of Interstate 40. The hotel is near the University of North
Carolina at Wilmington. The hotel features a complimentary continental
breakfast, outdoor pool, social hour and access to a nearby fitness center. The
hotel was acquired contemporaneously with the IPO.
29. Holiday Inn Express -- 940 East Main Street, Abingdon, Virginia. This
three-story, interior corridor hotel is located on an approximately 1.2 acre
site near Interstate 81 near Abingdon's Historic District and the Barter Theater
(State Theater of Virginia). The property offers a complimentary continental
breakfast and other amenities including an outdoor pool and meeting room. The
property was acquired in May 1996.
30. Holiday Inn Express -- 13625 Icot Boulevard, Clearwater, Florida. This
three-story, interior corridor hotel is located on an approximately 2.4 acre
site near Interstate 75, Busch Gardens amusement park, golf courses,
restaurants, shopping, and many gulf and coast beaches in the Tampa Bay area,
and is just minutes from St. Petersburg. Among other amenities, the hotel has an
outdoor pool and whirlpool, and complimentary continental breakfast is served
daily. The property was acquired in August 1997.
31. Holiday Inn Select -- 11350 LBJ Freeway, Garland, Texas. This property
consists of one five-story building and two three-story buildings, all with
interior corridors located on an approximately 6.5 acre site in suburban Dallas.
The property offers an approximate 9,800 square foot conference center, four
other meeting rooms and a 50-person auditorium. Other amenities include a
full-service restaurant, nightclub, outdoor swimming pool and executive fitness
club. The property was acquired in May 1996.
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<PAGE> 13
32. Courtyard by Marriott -- 3205 Boardwalk, Ann Arbor, Michigan. This
four-story, interior corridor hotel is located on an approximately 4.0 acre site
just off Interstate 94 and is adjacent to the Company's Fairfield Inn. Area
attractions include Briarwood Mall, Downtown Ann Arbor, University of Michigan,
and the Henry Ford Museum. Amenities include complimentary in-room coffee
service, valet service, non-smoking and handicap equipped rooms, and remote
controlled cable TV with free premium movie channel. The property was acquired
in September 1997.
33. Courtyard by Marriott -- 2504 N. Loop West, Houston, Texas. This
three-story, interior corridor hotel is located on an approximately 3.9 acre
site directly off Loop 610 and Highway 290. It is easily accessible to all major
thoroughfares around the city, and is only minutes from Downtown and the
Galleria area. Amenities include an outdoor pool and jacuzzi in a beautiful
courtyard setting, an exercise room, coffee makers, irons, and ironing boards.
The property was acquired in July 1997.
34. Courtyard by Marriott -- 151 Van Campen Boulevard, Wilmington, North
Carolina. This two-story, interior corridor hotel is located on an approximately
3.5 acre site near Wrightsville Beach and Revolutionary and Civil War historical
sites. The property offers two large meeting rooms, full service breakfast and a
lobby lounge. Other amenities include an outdoor swimming pool and a jacuzzi.
The property was acquired in December 1996.
35. Homewood Suites -- 100 MacAlyson Court, Cary, North Carolina. This
four-story, interior corridor hotel is located on an approximately 9.1 acre site
with a covered bridge entrance and a wooded setting near Research Triangle Park.
The property offers a complimentary full-service breakfast, a business center,
and a 1200 square foot meeting room. Other amenities include fully-equipped
kitchens, a fitness room, an outdoor swimming pool and a sport court. The
property was acquired in July 1996.
36. Homewood Suites -- 401 Bay Area Boulevard, Clearlake, Texas. This
three-story, interior corridor hotel is located on an approximately 2.6 acre
site near NASA's Johnson Space Center and Rockwell's Space Operations Center.
The property offers a complimentary full service breakfast, an executive
business center and a fitness facility. Other amenities include fully-equipped
in room kitchens, an outdoor swimming pool and a sport court. The property was
acquired in September 1996.
37. Quality Suites -- 5225 North Arco Lane, Charleston, South Carolina. This
five-story, interior corridor hotel is located on an approximately 3.8 acre site
just off Interstate 26 near Charleston's International Airport and only a few
miles away from Charleston's Historic District. The hotel has 168 two room
suites designed around a five-story atrium. The property offers a complimentary
cooked-to-order breakfast, manager's cocktail reception, meeting room and
outdoor pool and health spa. The property was acquired in May 1995.
38. Fairfield Inn -- 3285 Boardwalk, Ann Arbor, Michigan. This four-story,
interior corridor hotel is located on an approximately 2.5 acre site. Nearby
attractions include Bearwood Mall and the University of Michigan. Amenities
include a heated indoor pool and whirlpool, free continental breakfast, and free
HBO and ESPN. The property was acquired in September 1997.
THE PERCENTAGE LEASES
In order for the Company to qualify as a REIT, neither the Company nor the
Partnership can operate hotels. Therefore, the Company and the Partnership lease
the Current Hotels for terms of 15 years pursuant to Percentage Leases, which
provide for rent equal to the greater of Base Rent or Percentage Rent. The
Percentage Leases for the Current Hotels contain the provisions described below.
The Company intends that future leases with respect to its hotel property
investments will contain substantially similar provisions, although the
Company's Board of Directors may, in its discretion, alter any of these
provisions with respect to any particular lease, depending on the purchase price
paid, economic conditions and other factors deemed relevant at the time.
Percentage Lease Terms. Each Percentage Lease for the Current Hotels has a
non-cancelable term of 15 years beginning November 1997, subject to earlier
termination upon the occurrence of certain contingencies described in the
Percentage Lease.
Amounts Payable Under the Percentage Leases. During the term of each
Percentage Lease, the Lessee is or will be obligated to pay (i) the greater of
Base Rent or Percentage Rent (collectively, the "Rent") and (ii) certain other
additional charges. Base Rent accrues and is required to be paid monthly.
Percentage Rent is calculated by multiplying fixed percentages by gross room
revenues for each of the hotels. Percentage Rent is due quarterly. However, with
respect to eleven of the Current Hotels, the Lessee will not be in default for
non-payment of Percentage Rent due in any calendar year if the Lessee pays,
within 90 days of the end of the calendar
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<PAGE> 14
year, the excess of Percentage Rent due and unpaid over the Base Rent paid by
the Lessee with respect to such year. With respect to the other Current Hotels,
the Lessee will not be in default for the non-payment of Percentage Rent if it
pays, within 30 days of the end of each calendar quarter, the excess of
Percentage Rent due and unpaid over the Base Rent paid year-to-date with respect
to such quarter.
Beginning in the calendar year following the year in which most Percentage
Leases commence, and for each year thereafter, (i) the annual Base Rent and (ii)
the Percentage Rent formulas will be adjusted for inflation, based on quarterly
changes in the CPI. The adjustment in any quarter may not exceed 2%, which may
be less than the change in CPI for the quarter.
Other than real estate and personal property taxes, casualty insurance,
capital improvements and maintenance of underground utilities and structural
elements, which are obligations of the Company, the Percentage Leases require
the Lessee to pay rent, insurance, all costs and expenses and all utility and
other charges incurred in the operation of the Current Hotels. The Percentage
Leases also provide for rent reductions and abatements in the event of damage to
or destruction or a partial taking of any Current Hotel.
Maintenance and Modifications. Under the Percentage Leases, the Company is
required to maintain the underground utilities and the structural elements of
the improvements, including exterior walls (excluding plate glass) and the roof
of such Current Hotel. In addition, the Percentage Leases obligate the Company
to fund periodic capital improvements (in addition to maintenance of underground
utilities and structural elements) to the buildings and grounds comprising their
respective Current Hotels, and the periodic repair, replacement and
refurbishment of furniture, fixtures and equipment in their respective Current
Hotels, up to an amount equal to 5% of room revenues for limited-service hotels,
and 7% of room revenues and food and beverage revenue for the full-service
hotel. These obligations will be carried forward to the extent that the Lessee
has not expended such amounts, and any unexpended amounts will remain the
property of the Company upon termination of the Percentage Leases. Except for
capital improvements and maintenance of structural elements and underground
utilities, the Lessee will be required, at its expense, to maintain the Current
Hotels in good order and repair, except for ordinary wear and tear, and to make
non-structural, foreseen and unforeseen, and ordinary and extraordinary repairs
which may be necessary and appropriate to keep the Current Hotels in good order
and repair.
The Lessee is not obligated to bear the cost of capital improvements to the
Current Hotels. With the consent of the Company, however, the Lessee, at its
expense, may make non-capital and capital additions, modifications or
improvements to the Current Hotels, provided that such action does not
significantly alter the character or purposes of the Current Hotels or
significantly detract from the value or operating efficiencies of the Current
Hotels. All such alterations, replacements and improvements shall be subject to
all the terms and provisions of the Percentage Leases and will become the
property of the Company upon termination of the Percentage Leases. The Company
owns or will own substantially all personal property (other than inventory,
linens, and other nondepreciable personal property) not affixed to, or deemed a
part of, the real estate or improvements thereon comprising their respective
Current Hotels, except to the extent that ownership of such personal property
would cause the rents under the Percentage Leases not to qualify as "rents from
real property" for REIT income test purposes.
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<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not involved in any material litigation nor, to the
Company's knowledge, is any material litigation currently threatened against the
Company. The Lessee has advised the Company that they currently are not involved
in any material litigation, other than routine litigation arising in the
ordinary course of business, substantially all of which is expected to be
covered by liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On August 11, 1997, Common Stock shares in the Company began trading on the
New York Stock Exchange ("NYSE") under the symbol "WXH." Prior to this date, the
Common Stock was traded on the Nasdaq National Market under the symbol "WINN."
As of March 18, 1998, the Company had approximately 16,000 common shareholders
based on the number of shareholders of record and an estimate of the number of
participants represented by security position listings. The following table sets
forth, for the indicated periods, the high and low closing prices for the Common
Stock as traded on the Nasdaq National Market or the NYSE, as applicable, and
the cash distributions declared per share:
<TABLE>
<CAPTION>
PRICE RANGE
---------------- CASH DISTRIBUTIONS
HIGH LOW DECLARED PER SHARE
---- --- ------------------
<S> <C> <C> <C>
1997
First Quarter $14.00 $12.875 $0.27
Second Quarter 15.063 12.125 0.27
Third Quarter 14.625 13.063 0.27
Fourth Quarter 14.375 13.00 0.27
1996
First Quarter $13.375 $11.688 $0.24
Second Quarter 13.00 10.875 0.255
Third Quarter 13.125 11.00 0.255
Fourth Quarter 13.625 11.875 0.255
</TABLE>
Although the declaration of distributions is within the discretion of the
Board of Directors and depends on the Company's results of operations, cash
available for distribution, the financial condition of the Company, tax
considerations (including those related to REITs) and other factors considered
important by the Board of Directors, the Company's policy is to make regular
quarterly distributions to its shareholders. The Company's ability to make
distributions will depend on the receipt of the distributions from the
Partnership. The Company intends to cause the Partnership to distribute to its
partners substantially all of the Partnership's cash available for distribution.
RECENT SALES OF UNREGISTERED SECURITIES
In the year ended December 31, 1997, the Company issued the following
securities which were not registered pursuant to the Securities Act of 1933, as
amended:
On July 14, 1997, the Partnership issued 815,000 Partnership Units to BHI
Limited Partnership and West Springfield Limited Partnership in partial
consideration for the acquisition by the Company of the Courtyard by
Marriott-Brookhollow in Houston, Texas, and the Hampton Inn in West Springfield,
Massachusetts. On July 17, 1997, 374,900 of those Partnership Units were
converted into Company Common Stock.
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<PAGE> 16
On September 9, 1997, the Partnership issued 63,797 Partnership Units to
Hubbard Realty of Winston-Salem, Inc. in total consideration for the acquisition
by the Company of the land parcel for the Company's Courtyard by Marriott under
development in Winston-Salem, North Carolina.
Pursuant to the Partnership Agreement of the Partnership (the "Partnership
Agreement"), the Limited Partners have redemption rights (the "Redemption
Rights") which enable them to cause the Partnership to redeem their Partnership
Units in exchange for shares of Common Stock on a one-for-one basis or, at the
option of the Company or in certain other circumstances, cash.
No underwriter was engaged in connection with the foregoing issuances of
securities. Issuances of Common Stock and Partnership Units to the above parties
were made in reliance upon Section 4(2) of the Securities Act of 1933, as
amended, as transactions not involving any public offering.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the Company,
Winston Hospitality, Inc., the Lessee and the Initial Hotels for the years ended
December 31, 1997, 1996 1995 and for the period June 2, 1994 (date of inception)
through December 31, 1994 and selected historical balance sheet data as of
December 31, 1997, 1996, 1995 and 1994. This information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and notes thereto included
elsewhere in this report.
WINSTON HOTELS, INC.
Selected Historical Financial And Other Data
For The Years Ended December 31, 1997, 1996 And 1995
And The Period June 2, 1994 (Date Of Inception) Through December 31, 1994
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue:
Percentage lease revenue $ 35,868 $ 26,611 $ 17,148 $ 5,116
Interest and other income 234 97 442 92
--------- --------- --------- --------
Total revenue 36,102 26,708 17,590 5,208
--------- --------- --------- --------
Expenses:
Real estate and personal property taxes and casualty
insurance 2,702 1,647 1,054 362
General and administrative 2,021 1,985 1,208 339
Interest expense 3,066 2,665 2,555 218
Depreciation 10,064 6,476 3,854 1,176
Amortization 176 147 117 49
--------- --------- --------- --------
Total expenses 18,029 12,920 8,788 2,144
--------- --------- --------- --------
Income before allocation to minority interest 18,073 13,788 8,802 3,064
Income allocation to minority interest 1,329 786 417 187
--------- --------- --------- --------
Net income 16,744 13,002 8,385 2,877
Preferred stock distribution 2,100 -- --
--------- --------- --------- --------
Net income available to common shareholders $ 14,644 $ 13,002 $ 8,385 $ 2,877
========= ========= ========= ========
Earnings per share:
Net income per common share $ 0.92 $ 1.01 $ 0.96 $ 0.42
========= ========= ========= ========
Net income per common share assuming dilution $ 0.91 $ 1.00 $ 0.96 $ 0.42
========= ========= ========= ========
Weighted average number of common shares 15,990 12,922 8,715 6,775
Weighted average number of common shares assuming dilution
17,555 13,768 9,167 7,211
Distributions per common share $ 1.08 $ 1.005 $ 0.93 $ 0.48
BALANCE SHEET DATA:
Cash and cash equivalents $ 164 $ 234 $ 2,496 $ 1,114
Investment in hotel properties 279,485 196,682 121,886 85,917
Total assets 287,827 203,502 123,969 88,114
Total debt 44,081 42,800 34,000 28,600
Shareholders' equity 217,490 141,813 80,872 53,705
OTHER DATA:
Lessee room revenue $ 79,526 $ 58,956 $ 39,677 $ 12,474
Funds from operations 26,037 20,581 12,656 4,240
Cash available for distribution 21,809 17,557 11,185 3,866
Cash provided by (used in):
operating activities 27,811 18,729 12,628 3,417
investing activities (82,349) (74,614) (36,059) (85,973)
financing activities 54,468 53,623 24,813 83,670
</TABLE>
17
<PAGE> 18
WINSTON HOSPITALITY, INC.
Selected Historical Financial Data
For The Ten-months Ended October 31, 1997 And 1996
And The Years Ended December 31, 1996 And 1995
And The Period June 2, 1994 (Date Of Inception) Through December 31, 1994
(in thousands)
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEARS ENDED
OCTOBER 31, DECEMBER 31, PERIOD JUNE 2,
-------------------- -------------------- 1994 THROUGH
1997 1996 1996 1995 DECEMBER 31, 1994
---- ---- ---- ---- -----------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Room revenue $67,145 $49,633 $58,956 $39,677 $12,474
Other revenue 3,944 2,390 2,969 1,100 229
------- ------- ------- ------- -------
Total revenue 71,089 52,023 61,925 40,777 12,703
------- ------- ------- ------- -------
Property and operating expenses 38,292 27,965 34,549 22,097 7,297
Percentage lease payments 30,980 22,800 26,611 17,148 5,116
------- ------- ------- ------- -------
Total expenses 69,272 50,765 61,160 39,245 12,413
------- ------- ------- ------- -------
Net income $ 1,817 $ 1,258 $ 765 $ 1,532 $ 290
======= ======= ======= ======= =======
</TABLE>
CAPSTAR WINSTON COMPANY, L.L.C.
Selected Historical Financial Data
For The Period October 15, 1997 (Date Of Inception)
Through December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
Room revenue $ 8,197
Other revenue 846
-------
Total revenue 9,043
-------
Rooms expense 2,158
Percentage lease expense 3,242
Other expenses 3,704
-------
Total expenses 9,104
-------
Net loss $ (61)
=======
</TABLE>
18
<PAGE> 19
COMBINED INITIAL HOTELS
Selected Historical Financial Data
For The Five Months Ended June 2, 1994
And The Year Ended December 31, 1993
(in thousands)
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Revenue:
Room revenue $7,415 $17,125
Other, net 135 348
------ -------
Total revenue 7,550 17,473
------ -------
Expenses:
Property operating expenses 2,983 7,008
Franchise costs 646 1,507
Repairs and maintenance 465 844
Real estate and personal property taxes and
insurance 328 711
Management fees 381 882
Interest expense 1,215 2,892
Depreciation and amortization 973 2,249
------ -------
Total expenses 6,991 16,093
------ -------
Income before minority interest 559 1,380
Minority interest 357 833
------ -------
Net income $ 202 $ 547
====== =======
</TABLE>
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ($ in thousands)
The Company, which consummated an underwritten initial public offering
("IPO") in June 1994, follow-on Common Stock offerings in May 1995 and in June
1996, and a Preferred Stock offering in September 1997, operates as a REIT to
invest in hotel properties. The Company owned 16 hotels as of December 31, 1994
(the "1994 Hotels"), purchased five hotels in May 1995 (the "1995 Acquired
Hotels"), acquired 10 hotels in 1996 (the "1996 Acquired Hotels") and acquired
seven hotels in 1997 (the "1997 Acquired Hotels"). It currently leases all 38
Current Hotels to CapStar Winston Company, L.L.C. (the "Lessee") under
Percentage Leases through which it receives its principal source of revenue.
Prior to November 17, 1997, the Current Hotels were leased pursuant to the
Percentage Leases to Winston Hospitality, Inc. On November 17, 1997 and November
24, 1997, CapStar Management Company, L.P. purchased substantially all of the
assets and assumed certain liabilities of Winston Hospitality, Inc., including
the Current Hotels' leases. CapStar Management Company, L.P. is an affiliate of
CapStar Hotel Company ("CapStar"). Concurrent with the transaction, the leases
were assigned to the Lessee, and the terms of the leases were extended to 15
years from the date of the transaction.
Washington, D.C.-based CapStar owns and manages upscale, full-service hotels
and resorts throughout the U.S. and Canada under such internationally known
brands as Hilton, Sheraton, Marriott, Embassy Suites, Westin, Renaissance and
Doubletree. Including one hotel under contract, as of February 2, 1998,
CapStar's hotel portfolio comprised 54 owned hotels with 14,503 rooms, 40 leased
hotels with 5,687 rooms, and 27 managed hotels with 4,631 rooms, for a total of
121 properties with 24,821 rooms.
RESULTS OF OPERATIONS
For the periods ended December 31, 1997, 1996 and 1995, the differences in
operating results are primarily attributable to the Company owning more hotels
in 1997 than it did in 1996 and 1995. The table below outlines the Company's
hotel properties owned as of December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
-------------------------- ----------------------------- ----------------------------
Acquisitions Properties Acquisitions Properties Acquisitions Properties
during owned at during owned at during owned at
Type of Hotel the year year end the year year end the period year end
- ------------- ------------ ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Limited-service hotels 7 35 7 28 5 21
Extended-stay hotels - 2 2 2 - -
Full-service hotels - 1 1 1 - -
-- -- -- -- -- --
7 38 10 31 5 21
== == == == = ==
</TABLE>
In order to present a more meaningful comparison of operations, the following
comparisons are presented:
THE COMPANY:
- actual operating results for the year ended December 31, 1997 versus
actual operating results for the year ended December 31, 1996;
- actual operating results for the year ended December 31, 1996 versus
actual operating results for the year ended December 31, 1995;
- pro forma operating results for the year ended December 31, 1997 versus
pro forma operating results for the year ended December 31, 1996, as if
the follow-on Common Stock offerings, the Preferred Stock offering and the
1997 and 1996 acquisitions occurred on the later of January 1, 1996 or the
hotel opening date;
- pro forma operating results for the year ended December 31, 1996 versus
pro forma operating results for the year ended December 31, 1995, as if
the follow-on Common Stock offerings and the 1996 and 1995 acquisitions
occurred on the later of January 1, 1995 or the hotel opening date.
WINSTON HOSPITALITY, INC.:
- actual operating results for the ten months ended October 31, 1997 versus
actual operating results for the ten months ended October 31, 1996
- actual operating results for the year ended December 31, 1996 versus
actual operating results for the year ended December 31, 1995.
20
<PAGE> 21
CAPSTAR WINSTON COMPANY, L.L.C.:
- actual operating results for the period from October 15, 1997 (date of
inception) through December 31, 1997.
THE COMPANY
ACTUAL - YEAR ENDED DECEMBER 31, 1997 VERSUS
ACTUAL - YEAR ENDED DECEMBER 31, 1996
The Company had revenues of $36,102 in 1997, consisting of $35,868 of
Percentage Lease revenues and $234 of interest and other income. Percentage
Lease revenues increased by $9,257, or 35%, in 1997 from $26,611 in 1996. This
increase was attributable to (i) $3,639 related to the 1997 Acquired Hotels;
(ii) $4,889 related to the 1996 Acquired Hotels owned for the entire 12-month
period in 1997; and (iii) an increase of $729 in lease revenues generated from
hotels acquired prior to 1996.
Real estate taxes and property insurance costs incurred in 1997 were $2,702,
an increase of $1,055 from $1,647 in 1996. This increase was primarily
attributable to the 1997 Acquired Hotels and the 1996 Acquired Hotels that were
owned for the entire 12-month period in 1997. General and administrative
expenses increased $36 to $2,021 in 1997 from $1,985 in 1996. This increase was
attributable to additional overhead costs related to increased activities of the
Company in 1997 and approximately $265 in one-time costs incurred in 1997 with
both listing the Company's Common Stock on the NYSE and changes in the financial
management staff. These increases were partly offset by the increase in internal
time of the development and construction department devoted to development
projects and a non-recurring charge of $317 incurred in 1996 related to the
termination of a potential business combination. Interest expense increased by
$401 to $3,066 in 1997 from $2,665 in 1996. The increase was attributable to (i)
$28 related to the increase in weighted average interest rates from 1996 to
1997; (ii) $1,133 related to the increase in weighted average borrowings from
1996 to 1997; and (iii) $377 of increased amortization on line of credit fees
and unused line of credit fees in connection with the $125,000 line of credit
which was obtained in the fourth quarter of 1996. These increases were offset in
part by a $1,137 increase in capitalized interest costs from 1996 to 1997.
Depreciation increased $3,588 to $10,064 in 1997 from $6,476 in 1996, primarily
due to additional depreciation related to the 1997 Acquired Hotels, the 1996
Acquired Hotels and renovations completed during 1996 and 1997.
ACTUAL - YEAR ENDED DECEMBER 31, 1996 VERSUS
ACTUAL - YEAR ENDED DECEMBER 31, 1995
The Company had revenues of $26,708 in 1996, consisting of $26,611 of
Percentage Lease revenues and $97 of interest and other income. Percentage Lease
revenues increased by $9,463, or 55%, in 1996 from $17,148 in 1995. This
increase was attributable to (i) $5,460 related to the 1996 Acquired Hotels;
(ii) $2,286 related to the 1995 Acquired Hotels owned for the entire 12-month
period in 1996; and (iii) an increase of $1,717 in lease revenues generated from
the 1994 Hotels.
Real estate taxes and property insurance costs incurred in 1996 were $1,647,
an increase of $593 from $1,054 in 1995. This increase was primarily
attributable to the 1995 Acquired Hotels that were owned for the entire 12-month
period in 1996 and the 1996 Acquired Hotels. General and administrative expenses
increased $777 to $1,985 in 1996 from $1,208 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 in 1996 related to the
termination of potential business combinations. Interest expense increased by
$110 to $2,665 in 1996 from $2,555 in 1995, primarily due to an increase in
weighted average outstanding borrowings in 1996 from 1995. Depreciation
increased $2,622 to $6,476 in 1996 from $3,854 in 1995, primarily due to
depreciation related to the 1996 Acquired Hotels, the 1995 Acquired Hotels and
renovations completed during 1995 and 1996.
PRO FORMA - YEAR ENDED DECEMBER 31, 1997 VERSUS
PRO FORMA - YEAR ENDED DECEMBER 31, 1996
The Company had pro forma revenues of $42,462 for the year ended December 31,
1997, consisting of $42,134 of pro forma Percentage Lease revenues and $328 of
pro forma interest and other income. Pro forma Percentage Lease revenues
increased by $3,652, or 9%, to $42,134 in 1997 from $38,482 in 1996. Of this
increase, $1,578 was attributable to an increase in room rates in 1997 from 1996
and $2,074 was attributable to the opening of three hotel properties in 1996.
Pro forma real estate taxes and property insurance costs incurred in 1997
were $3,072, an increase of $544 from $2,528 in 1996. This increase was
primarily attributable to three hotel properties which opened during 1996 (the
"Newly Developed Hotels") and an increase in property tax values in 1997. Pro
forma general and administrative expenses decreased $27 to $2,056 in 1997 from
$2,083 in 1996. The decrease was attributable to a non-recurring charge of $317
in 1996 related to the termination of potential business
21
<PAGE> 22
combinations, offset in part by a non-recurring charge of $265 in 1997 related
to listing the Company's Common Stock on the NYSE and changes in the financial
management staff. Pro forma depreciation increased $1,411 to $10,920 in 1997
from $9,509 in 1996 primarily due to depreciation of the Newly Developed Hotels
and renovations completed during 1996 and 1997.
PRO FORMA YEAR ENDED DECEMBER 31, 1996 VERSUS
PRO FORMA YEAR ENDED DECEMBER 31, 1995
The Company had pro forma revenues of $30,501 for the year ended December 31,
1996, consisting of $30,404 of pro forma Percentage Lease revenues and $97 of
pro forma interest and other income. Pro forma Percentage Lease revenues
increased by $4,900, or 19%, to $30,404 in 1996 from $25,504 in 1995. Of this
increase, $2,446 was attributable an increase in room rates in 1996 from 1995
and $2,454 was attributable to the Newly Developed Hotels.
Pro forma real estate taxes and property insurance costs incurred in 1996
were $1,809, an increase of $206 from $1,603 in 1995. This increase was
attributable to an increase in property taxes in 1996 offset in part by a
decrease in insurance premiums in 1996. Pro forma general and administrative
expenses increased $450 to $1,704 in 1996 from $1,254 in 1995. The increase was
attributable to the Company becoming self-administered in 1996, inflationary
cost increases and a non-recurring charge of $317 in 1996 related to the
termination of potential business combinations, offset in part by savings from
costs not incurred under its previous advisory agreement. Pro forma depreciation
increased $2,039 to $7,800 in 1996 from $5,761 in 1995 primarily due to
additional depreciation on renovations completed during 1995 and 1996.
WINSTON HOSPITALITY, INC.
ACTUAL - TEN MONTHS ENDED OCTOBER 31, 1997 VERSUS
ACTUAL - TEN MONTHS ENDED OCTOBER 31, 1996
Total revenues increased $19,066, or 37% to $71,089 from $52,023. This
increase was primarily attributable to an increase in room revenues of $17,512,
or 35% to $67,145 from $49,633. The increase in room revenues included: (i) an
increase of $5,220 for the 1997 Acquired Hotels; (ii) an increase of $11,275 for
the 1996 Acquired Hotels; and (iii) an increase of $1,017 for the hotels
acquired prior to 1996. Food and beverage revenue totaled $2,419 in 1997
compared to $1,240 in 1996, an increase of $1,179. This increase was
attributable primarily to the fact that the one full-service hotel was operated
for less than six of 10 months in 1996 versus 10 months in 1997.
Winston Hospitality, Inc. had total expenses in 1997 of $69,272, up $18,507
from $50,765 in 1996. The increase was attributable primarily to the operation
of a greater number of hotels for the 10 months ended October 31, 1997 as
compared with the same period of 1996.
In addition, the net income of Winston Hospitality, Inc. was positively
impacted during the 10 months ended October 31, 1997, when compared with the 10
months ended October 31, 1996, by the following conditions: (i) an increase in
the average daily rate from 1996; (ii) a short-term management contract for the
full-service hotel in Garland, Texas in 1996; and (iii) the unseasonably cold
weather experienced during the first quarter of 1996.
ACTUAL - YEAR ENDED DECEMBER 31, 1996 VERSUS
ACTUAL - YEAR ENDED DECEMBER 31, 1995
Total revenues increased $21,148, or 52% to $61,925 in 1996 from $40,777 in
1995. This increase is primarily attributable to an increase in room revenues of
$19,279, or 49% to $58,956 in 1996, from $39,677 in 1995. The increase in room
revenues was due to: (i) an increase of $11,360 for the 1996 Acquired Hotels;
(ii) an increase of $5,089 for the 1995 Acquired Hotels; and (iii) an increase
of $2,830 for the 1994 Hotels. Food and beverage revenue increased $1,547 to
$1,685 in 1996 from $138 in 1995, primarily due to one of the 1996 Acquired
Hotels being a full-service hotel.
Winston Hospitality, Inc. had total expenses in 1996 of $61,160, up $21,915
from $39,245 in 1995. This increase was primarily attributable to the operation
of a greater number of hotels for the 12 months ended December 31, 1996 as
compared with the same period of 1995.
In addition, the net income of Winston Hospitality, Inc. was negatively
impacted during the 12 months ended December 31, 1996 by the following
conditions: (i) the unseasonably cold weather experienced during the first
quarter of 1996; (ii) renovations at several hotels; (iii) start-up general and
administrative costs incurred in connection with managing the 1996 Acquired
Hotels; and (iv) a short-term management contract for the full-service hotel in
Garland, Texas.
22
<PAGE> 23
CAPSTAR WINSTON COMPANY, L.L.C.
During November 1997, CapStar Management Company, L.P. purchased
substantially all of the assets and assumed certain liabilities of Winston
Hospitality, Inc., including the Current Hotels' leases. Concurrent with the
purchase, CapStar Management Company, L.P. contributed/assigned the assets
purchased and liabilities assumed in the transaction to the Lessee.
Since the Lessee was not operating prior to the purchase transaction, no
comparative data is available for CapStar Winston Company, L.L.C., and thus no
management discussion and analysis will be included herein.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the year ended December 31,
1997, cash flow provided by operating activities was $27,811 and funds from
operations, which is equal to net income before minority interest and
non-recurring costs, plus depreciation, less preferred share distributions, was
$26,037. Under Federal income tax law provisions applicable to REITs, the
Company is required to distribute at least 95% of its taxable income to maintain
its tax status as a REIT. In 1997, the Company declared distributions of $21,032
to its shareholders. Because the Company's cash flow from operating activities
is expected to exceed its taxable income due to depreciation and amortization
expenses, the Company expects to be able to meet its distribution requirements
out of cash flow from operating activities.
The Company's net cash used in investing activities for the year ended
December 31, 1997 totaled $82,349, primarily relating to the purchase of the
1997 Acquired Hotels and renovation of the 1996 Acquired Hotels. Further, the
Company anticipates spending an additional $4,100 in 1998 in connection with the
renovation of its Current Hotels. These expenditures are in addition to reserves
of 5% of room revenues for its limited-service hotels and 7% of room revenues
and food and beverage revenues from its full service hotel 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 its Current Hotels. In the year ended December 31, 1997, the
Company set aside $4,229 for such reserves. These reserves are expected to be
funded from operating cash flow, and possibly from borrowings under the
Company's line of credit, which sources are expected to be adequate to fund such
capital requirements. These reserves are in addition to amounts spent on normal
repairs and maintenance which have approximated 5.2% and 5.4% of room revenues
in 1997 and 1996, respectively, and are paid by the lessee.
The Company's net cash provided by financing activities in the year ended
December 31, 1996 totaled $54,468, including $71,506 of net proceeds from a
Preferred Stock offering in September 1997, offset in part by the payment of
distributions to shareholders of $16,789 and the payment of distributions to the
Partnership's minority interest of $1,645.
On October 29, 1996, the Company amended and restated its line of credit with
a group of four banks led by Wachovia Bank of North Carolina, N.A., which
increased its total line of credit to $125,000, and extended the term to
November 1, 1998 (the "Amended Line"). The Company has collateralized the
Amended Line with 28 of its Current Hotels. The Amended Line bears interest
generally at LIBOR plus 1.75%. The Company's Articles of Incorporation limit its
total amount of indebtedness to 45% of the investments in hotel properties at
cost, as defined in the Articles. In connection with the 1998 Annual Meeting of
Shareholders, the Board of Directors has recommended and the shareholders will
vote on a proposal to delete the debt limitation contained in the Articles of
Incorporation in favor of a Board policy.
The Company intends to acquire and develop additional hotel properties,
including those described below, that meet its investment criteria and is
continually evaluating acquisition opportunities. It is expected that future
hotel acquisitions will be financed, in whole or in part, from additional
follow-on offerings, from borrowings under the line of credit, from joint
venture agreements, and/or from the issuance of other debt or equity securities.
There can be no assurances that the Company will make an investment in any
additional hotel properties that meet its investment criteria.
Under an arrangement with Promus Hotels, Inc. ("Promus"), as amended, the
Company has a purchase agreement to acquire a Homewood Suites hotel being
developed by Promus in Richmond, Virginia, has an option to purchase a limited
number of additional Promus-developed Homewood Suites hotels (which are as yet
unidentified) that Promus is obligated to offer the Company in the future, and
will require its lessee to retain Promus to manage the hotels acquired from
Promus. In addition to offering the Company the right to acquire a limited
number of hotels, Promus has agreed to invest up to $15,000 in the Company's
Common Stock (at the then-current market price per share), at the rate of $12.5
per room, as the Company acquires hotels from Promus. The Company has agreed to
use its best efforts to spend up to $100,000 toward the acquisition or
development of Promus-brand hotels, including the Homewood Suites hotel in
Richmond, any hotels acquired in the future from Promus under the arrangement,
and the five development hotels described below. In
23
<PAGE> 24
September 1996, pursuant to the terms of this arrangement and in connection with
the Company's purchase of the Homewood Suites in Clear Lake, Texas, Promus
invested approximately $1,500 for approximately 136,000 newly issued shares of
Company Common Stock.
The Company expects to acquire the 123-suite Homewood Suites in Richmond,
Virginia upon its completion, which Promus estimates will occur during the
second quarter of 1998, for a purchase price approximating Promus' development
cost, estimated to be $8,600. 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.
Promus has committed to purchase $1,845 in newly issued Company Common Stock at
closing.
The Company had five hotel properties under development as of December 31,
1997. The following table sets forth certain information for each project (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Forward Looking Statements").
<TABLE>
<CAPTION>
EXPECTED
HOTEL AND LOCATION ROOMS DEVELOPMENT COSTS (APPX.) COMPLETION DATE
------------------ ----- ------------------------- ---------------
<S> <C> <C> <C>
Homewood Suites
Crabtree Valley
Raleigh, NC 137 $13,000 Early 1998
Homewood Suites
Alpharetta, GA 112 10,000 Early 1998
Homewood Suites
Lake Mary, FL 112 10,000 Mid 1998
Homewood Suites
Durham, NC 96 9,000 Late 1998
Courtyard by Marriott
Winston-Salem, NC 120 8,000 Late 1998
</TABLE>
SEASONALITY
The Company's operations historically have been seasonal in nature,
reflecting higher REVPAR during the second and third quarters. This seasonality
and the structure of the Percentage Leases, which provide for a higher
percentage of room revenues above the minimum equal quarterly levels to be paid
as Percentage Rent, can be expected to cause fluctuations in the Company's
quarterly lease revenue under the Percentage Leases.
FORWARD LOOKING STATEMENTS
This report contains certain "forward looking" statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, including,
but not limited to, those paragraphs cross-referenced to this section. These
statements represent the Company's judgment and are subject to risks and
uncertainties that could cause actual operating results to differ materially
from those expressed or implied in the forward looking statements. Important
factors that could cause actual results to differ include, but are not limited
to the following: (i) risks associated with the Company's acquisition of hotels
with little or no operating history, including the risk that such hotels will
not achieve the level of revenue assumed by the Company in calculating the
respective Percentage Rent formulas; (ii) development risks, including risk of
construction delay, cost overruns, receipt of zoning, occupancy and other
required governmental permits and authorizations and the incurrence of
development costs in connection with projects that are not pursued to
completion; and (iii) factors identified in the Company's filings with the
Securities and Exchange Commission including the factors listed in the Company's
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission on August 1, 1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are filed with this report
on Form 10-K immediately following the signature page and are listed in Item 14
of this report on Form 10-K.
24
<PAGE> 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the Company's directors is incorporated by reference from
pages 4 and 5, "Proposal 1 - Election of Directors", in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held May 5, 1998. Information on the Company's executive officers is included
under the caption "Executive Officers of the Registrant" on page 8 of this
report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from pages 7 through 10,
"Executive Compensation", in the Company's Proxy Statement to be filed with
respect to the Annual Meeting of Shareholders to be held May 5, 1998.
ITEM 12. SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
This information is incorporated by reference from pages 2 through 4, "Share
Ownership of Management and Certain Beneficial Owners", in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held May 5, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from pages 12 and 13,
"Certain Relationships and Related Transactions", in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held May 5, 1998.
25
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES. The financial statements and schedules
listed below are included in this report.
<TABLE>
<CAPTION>
Financial Statements and Schedules Form 10-K Page
- ---------------------------------- --------------
<S> <C>
WINSTON HOTELS, INC.:
Report of Independent Accountants 34
Consolidated Balance Sheets as of December 31, 1997 and 1996 35
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 36
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1997, 1996 and 1995 37
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 38
Notes to Consolidated Financial Statements 39
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1997 46
Notes to Schedule III 48
WINSTON HOSPITALITY, INC.:
Report of Independent Accountants 49
Balance Sheets as of October 31, 1997 and December 31, 1996 50
Statements of Income for the ten-month periods ended October 31, 1997 and 1996 (unaudited)
and the years ended December 31, 1996 and 1995 51
Statements of Shareholders' Equity for the period ended October 31, 1997 and
the years ended December 31, 1996 and 1995 52
Statements of Cash Flows for the ten-month periods ended October 31, 1997 and 1996 (unaudited)
and the years ended December 31, 1996 and 1995 53
Notes to Financial Statements 54
CAPSTAR WINSTON COMPANY, L.L.C.:
Report of Independent Accountants 56
Balance Sheet as of December 31, 1997 57
Statement of Operations for the period October 15, 1997 (date of inception) through
December 31, 1997 58
Statement of Member's Capital for the period October 15, 1997 (date of inception)
through December 31, 1997 59
Statement of Cash Flows for the period October 15, 1997 (date of inception) through
December 31, 1997 60
Notes to Financial Statements 61
</TABLE>
(b) REPORTS ON FORM 8-K. One report on Form 8-K was filed during the fourth
quarter of 1997: On December 10, 1997, the Company filed a report on Form
8-K that disclosed effective November 17, 1997 and November 24, 1997, the
Company entered into and consummated agreements with CapStar and certain
CapStar affiliates providing for, among other things, the amendment of the
Current Hotels' leases and the future leases of eight of the Company's
hotels which are currently in various stages of planning and development to
CapStar Winston Company, L.L.C., a subsidiary of CapStar. The report also
disclosed that CapStar agreed to guarantee the obligations of the new
lessee up to $20 million, that the shareholders of Winston Hospitality,
Inc., the former lessee, agreed to make certain investments in the Company,
and that the Company, the Partnership and Wachovia Bank, N.A., as
Administrative Agent, amended the Credit Agreement dated October 29, 1996.
26
<PAGE> 27
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are listed
below. Management contracts or compensatory plans are filed as Exhibits
10.8, 10.41 and 10.57.
Exhibit Description
- ------- -----------
3.1(1) Amended and Restated Articles of Incorporation
3.2(2) Articles of Amendment to the Amended and Restated Articles of
Incorporation effective June 14, 1995
3.3 Articles of Amendment to the Amended and Restated Articles of
Incorporation effective September 10, 1997
3.4(1) Amended and Restated Bylaws
4.1(1) Specimen certificate for Common Stock, $0.01 par value per share
4.2(10) Form of Stock Certificate for 9.25% Series A Cumulative Preferred
Stock
4.3 Amended and Restated Articles of Incorporation as amended (see
Exhibits 3.1, 3.2 and 3.3)
4.4 Amended and Restated Bylaws (see Exhibit 3.4)
10.1(1) First Amended and Restated Agreement of Limited Partnership of WINN
Limited Partnership
10.2(8) Second Amended and Restated Agreement of Limited Partnership of
WINN Limited Partnership
10.3(10) Amendment No. 1 dated September 11, 1997 to Second Amended and
Restated Agreement of Limited Partnership of WINN Limited
Partnership
10.4 Amendment No. 2 dated December 31, 1997 to Second Amended and
Restated Agreement of Limited Partnership of WINN Limited
Partnership
10.5(3) Form of Percentage Leases
10.6(11) First Amendment to Lease dated November 17, 1997 between WINN
Limited Partnership and CapStar Winston Company, L.L.C.
10.7(11) First Amendment to Lease dated November 24, 1997 between WINN
Limited Partnership and CapStar Winston Company, L.L.C.
10.8(1) Winston Hotels, Inc. Directors' Stock Incentive Plan
10.9(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Hampton Inn
Raleigh, North Carolina
10.10(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Hampton Inn Hilton
Head, South Carolina
10.11(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Hampton Inn
Chester (Richmond), Virginia
10.12(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort Inn
Fayetteville, North Carolina
10.13(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort
Inn-Durham/Chapel Hill, North Carolina
27
<PAGE> 28
10.14(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort
Inn-Charleston, South Carolina
10.15(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort Inn
Chester (Richmond), Virginia
10.16(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort Inn
Augusta, Georgia
10.17(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Quality Suites
Charleston, South Carolina
10.18(3) Limitation of Future Hotel Ownership and Development Agreement
10.19(4) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Hampton Inn-Raleigh,
North Carolina
10.20(4) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Comfort Inn-Charleston,
South Carolina
10.21(4) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Comfort
Inn-Clearwater/St. Petersburg, Florida
10.22(4) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Comfort Inn-Augusta,
Georgia
10.23(4) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Quality
Suites-Charleston, South Carolina
10.24(5) Memorandum of Understanding, dated March 15, 1996, among Winston
Hotels, Inc., Winston Hospitality, Inc. and Promus Hotels, Inc.
10.25(5) Stock Purchase Agreement, dated April 24, 1996, between Promus
Hotels, Inc. and Winston Hotels, Inc.
10.26(5) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and Promus Hotels, Inc. relating to three hotel
properties being developed by Promus Hotels, Inc.
10.27(5) Agreement of Purchase and Sale, dated April 24, 1996, relating to a
hotel property located in Clear Lake, Texas.
10.28(5) Option to Purchase Additional Hotels, dated April 24, 1996, between
WINN Limited Partnership and Promus Hotels, Inc.
10.29(5) Agreement of Purchase and Sale, dated February 1, 1996, among WINN
Limited Partnership, Dallas Lodging Associates, Inc., A.B. Lodging
Associates, Inc., London Lodging Associates and Duncanville Lodging
Associates I, Ltd.
10.30(5) Management Agreement, dated April 25, 1996, between Winston
Hospitality, Inc. and Impac Hotel Group, Inc.
10.31(5) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and Cary Suites, Inc.
28
<PAGE> 29
10.32(5) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and RWW, Inc.
10.33(5) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and WJS Associates.
10.34(5) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and Hotel II, Incorporated.
10.35(5) Sales Contract, dated March 31, 1996, among WINN Limited
Partnership, Louis Bowie and Title Company of North Carolina.
10.36(5) Sales Contract, dated February 9, 1996, among WINN Limited
Partnership, Russell Parman, Ruby Parman and Title Company of North
Carolina.
10.37(6) Amendment No. 1 to Stock Purchase Agreement, dated as of August 7,
1996, by and between Promus Hotels, Inc. and Winston Hotels, Inc.
amending the Stock Purchase Agreement, dated April 24, 1996, by and
between Promus Hotels, Inc. and Winston Hotels, Inc.
10.38(6) Amendment to Agreement of Purchase and Sale, dated as of August 7,
1996, by and between WINN Limited Partnership and Promus Hotels,
Inc., amending the Agreement of Purchase and Sale, dated April 24,
1996, by and between WINN Limited Partnership and Promus Hotels,
Inc. relating to three hotel properties being developed by Promus
Hotels, Inc.
10.39(6) Amendments to Agreement of Purchase and Sale, dated May 21, 1996
and August 7, 1996, by and between WINN Limited Partnership and
Promus Hotels, Inc. amending the Agreement of Purchase and Sale,
dated April 24, 1996, by and between WINN Limited Partnership and
Promus Hotels, Inc., relating to a hotel property being developed
in Clear Lake, Texas.
10.40(6) First Amendment to Option to Purchase Additional Hotels, dated as
of August 7, 1996, by and between Promus Hotels, Inc. and WINN
Limited Partnership, amending the Option to Purchase Additional
Hotels, dated April 24, 1996, by and between WINN Limited
Partnership and Promus Hotels, Inc.
10.41(6) Winston Hotels, Inc. Stock Incentive Plan, as amended and restated
on May 28, 1996.
10.42(7) Credit Agreement, dated as of October 29, 1996, among Winston
Hotels, Inc., WINN Limited Partnership, the banks listed therein,
Wachovia Bank of North Carolina, N.A., as Collateral Agent and
Wachovia Bank of Georgia, N.A., as Administrative Agent (the
"Credit Agreement").
10.43(7) Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Branch Banking and Trust Company
for the principal sum of $35,000,000 pursuant to the Credit
Agreement.
10.44(7) Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Nationsbank, N.A. for the principal
sum of $20,000,000 pursuant to the Credit Agreement.
10.45(7) Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Southtrust Bank of Alabama, N.A.
for the principal sum of $20,000,000 pursuant to the Credit
Agreement.
29
<PAGE> 30
10.46(7) Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Wachovia Bank of North Carolina,
N.A. for the principal sum of $50,000,000 pursuant to the Credit
Agreement.
10.47(7) Form of Deed of Trust, Assignment of Rents, Security Agreement and
Financing Statement used to secure certain obligations under the
Credit Agreement (not including certain variations existing in the
different states where the properties are located).
10.48(9) Redemption and Registration Rights Agreement, dated as of July 14,
1997 by and among WINN Limited Partnership, Winston Hotels, Inc.,
certain partnerships listed and certain partners or designees
thereof listed therein.
10.49(9) Contribution and Exchange Agreement dated as of June 1997 between
BHI Limited Partnership and W. Spring Limited Partnership, as
Contributor, and WINN Limited Partnership and Winston Hotels, Inc.
10.50(9) Reinstatement of Agreement of Purchase and Sale and Amendment,
dated as of July 22, 1997 between WINN Limited Partnership and Park
Hotel, Limited.
10.51(9) Agreement of Purchase and Sale dated as of March 25, 1997 between
WINN Limited Partnership and Park Hotel, Limited.
10.52(9) Agreement of Purchase and Sale dated as of March 17, 1997 between
WINN Limited Partnership and WHB Hotel Corp., Ltd.
10.53(11) Letter Agreement dated November 17, 1997 between WINN Limited
Partnership and CapStar Winston Company, L.L.C.
10.54(11) Guaranty dated November 17, 1997 between CapStar Hotel Company,
WINN Limited Partnership and Winston Hotels, Inc.
10.55(11) Investment Agreement dated November 17, 1997 between Winston
Hotels, Inc., Robert W. Winston, III and John B. Harris, Jr.
10.56(11) First Amendment to Credit Agreement dated November 17, 1997 between
Winston Hotels, Inc., WINN Limited Partnership, Wachovia Bank,
N.A., Branch Banking and Trust Company, NationsBank, N.A., and
SouthTrust Bank, N.A.
10.57 Employment Agreement, dated July 31, 1997, by and between Kenneth
R. Crockett and Winston Hotels, Inc.
23 Consent of Independent Accountants.
24 Powers of Attorney.
27.1 Financial Data Schedule to the Company's Form 10-K for the year
ended December 31, 1997.
27.2 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on November 14,
1997 due to the change in the earnings per share calculation as a
result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.3 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on August 8,
1997, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share,"
30
<PAGE> 31
on December 31, 1997.
27.4 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on May 13,
1997, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.5 Restated Financial Data Schedule to the Company's Form 10-K as
filed with the Securities and Exchange Commission on March 27,
1997, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.6 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on November 12,
1996, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.7 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on August 14,
1996, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.8 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on May 14,
1996, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
(1) Exhibits to the Company's Registration Statement on Form S-11 as filed
with the Securities and Exchange Commission (Registration No. 33-76602)
effective May 25, 1994 and incorporated herein by reference.
(2) Exhibit to the Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on August 11, 1995 and incorporated
herein by reference.
(3) Exhibits to the Company's Registration Statement on Form S-11 as filed
with the Securities and Exchange Commission (Registration No. 33-91230)
effective May 11, 1995 and incorporated herein by reference.
(4) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 15, 1996 and incorporated
herein by reference.
(5) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with
the Securities and Exchange Commission on May 14, 1996 and incorporated
herein by reference.
(6) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with
the Securities and Exchange Commission on August 14, 1996 and incorporated
herein by reference.
(7) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 27, 1997 and incorporated
herein by reference.
(8) Exhibit to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on July 24, 1997 and incorporated herein by
reference.
(9) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with
the Securities and Exchange Commission on August 8, 1997 and incorporated
herein by reference.
31
<PAGE> 32
(10) Exhibits to the Company's report on Form 8-K as filed with the
Securities and Exchange Commission on September 15, 1997 and incorporated
herein by reference.
(11) Exhibits to the Company's report on Form 8-K as filed with the
Securities and Exchange Commission on December 10, 1997 and incorporated
herein by reference.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WINSTON HOTELS, INC.
By: /s/ Robert W. Winston, III
-------------------------------------
Robert W. Winston, III
Chief Executive Officer and President
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Charles M. Winston Chairman of the Board of Directors March 27, 1998
- ---------------------------
Charles M. Winston
/s/ Robert W. Winston, III Chief Executive Officer, March 27, 1998
- --------------------------- President, Director and Secretary
Robert W. Winston, III (Principal Executive Officer)
/s/ James D. Rosenberg Chief Operating Officer and Chief March 27, 1998
- --------------------------- Financial Officer
James D. Rosenberg
/s/ Brent V. West Vice President and Controller March 27, 1998
- ---------------------------
Brent V. West
* Edwin B. Borden Director March 27, 1998
- ---------------------------
Edwin B. Borden
* Thomas F. Darden, II Director March 27, 1998
- ---------------------------
Thomas F. Darden, II
* Richard L. Daugherty Director March 27, 1998
- ---------------------------
Richard L. Daugherty
* Paul Fulton Director March 27, 1998
- ---------------------------
Paul Fulton
* James H. Winston Director March 27, 1998
- ---------------------------
James H. Winston
* David C. Sullivan Director March 27, 1998
- ---------------------------
David C. Sullivan
*By /s/ Robert W. Winston, III
----------------------------------------
Robert W. Winston, III, Attorney-in-Fact
*By /s/ James D. Rosenberg
----------------------------------------
James D. Rosenberg, Attorney-in-Fact
</TABLE>
33
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Winston Hotels, Inc.
We have audited the accompanying consolidated balance sheets of Winston
Hotels, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule of Winston Hotels, Inc. as listed on the index and
included in this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Winston Hotels,
Inc. as of December 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
January 11, 1998
34
<PAGE> 35
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
As Of December 31, 1997 And 1996
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS
1997 1996
---- ----
<S> <C> <C>
Investment in hotel properties:
Land $ 27,504 $ 20,639
Buildings and improvements 224,535 166,664
Furniture and equipment 22,528 15,749
--------- ---------
Operating properties 274,567 203,052
Less accumulated depreciation 21,572 11,508
--------- ---------
252,995 191,544
Properties under development 26,490 5,138
--------- ---------
Net investment in hotel properties 279,485 196,682
Corporate FF&E, net 23 --
Cash and cash equivalents 164 234
Lease revenue receivable 5,682 4,611
Deferred expenses, net 1,403 1,362
Prepaid expenses and other assets 1,070 613
--------- ---------
Total assets $ 287,827 $ 203,502
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks $ 44,081 $ 42,800
Accounts payable and accrued expenses 3,527 3,190
Distributions payable 6,950 4,352
Minority interest in Partnership 15,779 11,347
--------- ---------
Total liabilities 70,337 61,689
--------- ---------
Commitments (Note 10)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
3,000,000 and 0 shares issued and outstanding (liquidation
preference of $77,100) 30 --
Common stock, $.01 par value, 50,000,000 shares authorized,
16,194,480 and 15,799,580 shares issued and outstanding 162 158
Additional paid-in capital 223,427 145,216
Unearned directors' compensation (106) (181)
Distributions in excess of earnings (6,023) (3,380)
--------- ---------
Total shareholders' equity 217,490 141,813
--------- ---------
Total liabilities and shareholders' equity $ 287,827 $ 203,502
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE> 36
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 1997, 1996 And 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue:
Percentage lease revenue $35,868 $26,611 $17,148
Interest and other income 234 97 442
------- ------- -------
Total revenue 36,102 26,708 17,590
------- ------- -------
Expenses:
Real estate taxes and property and casualty
insurance 2,702 1,647 1,054
General and administrative 2,021 1,985 1,208
Interest 3,066 2,665 2,555
Depreciation 10,064 6,476 3,854
Amortization 176 147 117
------- ------- -------
Total expenses 18,029 12,920 8,788
------- ------- -------
Income before allocation to minority
interest 18,073 13,788 8,802
Income allocation to minority interest 1,329 786 417
------- ------- -------
Net income 16,744 13,002 8,385
Preferred stock distribution 2,100 -- --
------- ------- -------
Net income applicable to common
shareholders $14,644 $13,002 $ 8,385
======= ======= =======
Earnings per share:
Net income per common share $ 0.92 $ 1.01 $ 0.96
======= ======= =======
Net income per common share assuming
dilution $ 0.91 $ 1.00 $ 0.96
======= ======= =======
Weighted average number of common shares 15,990 12,922 8,715
======= ======= =======
Weighted average number of common shares
assuming dilution 17,555 13,768 9,167
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
36
<PAGE> 37
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For The Years Ended December 31, 1997, 1996 And 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
UNEARNED DISTRIBU-
COMMON STOCK PREFERRED STOCK ADDITIONAL DIRECTORS' TIONS IN TOTAL
--------------- --------------- PAID-IN COMPEN- EXCESS OF SHAREHOLDERS'
SHARES DOLLARS SHARES DOLLARS CAPITAL SATION EARNINGS EQUITY
------ ------- ------ ------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 6,775 $ 68 -- $-- $ 55,805 $(331) $ (1,837) $ 53,705
Issuance of shares 3,105 31 -- -- 27,183 -- -- 27,214
Distributions ($0.93 per share) -- -- -- -- -- -- (8,507) (8,507)
Unearned compensation amortization -- -- -- -- -- 75 -- 75
Net income -- -- -- -- -- -- 8,385 8,385
------ ---- ----- --- -------- ----- -------- ---------
Balances at December 31, 1995 9,880 99 -- -- 82,988 (256) (1,959) 80,872
Issuance of shares 5,919 59 -- -- 60,532 -- -- 60,591
Adjustment to minority interest -- -- -- -- 1,696 -- -- 1,696
Distributions ($1.005 per share) -- -- -- -- -- -- (14,423) (14,423)
Unearned compensation amortization -- -- -- -- -- 75 -- 75
Net income -- -- -- -- -- -- 13,002 13,002
------ ---- ----- --- -------- ----- -------- ---------
Balances at December 31, 1996 15,799 158 -- -- 145,216 (181) (3,380) 141,813
Issuance of shares 395 4 3,000 30 76,451 -- -- 76,485
Adjustment to minority interest -- -- -- -- 1,760 -- -- 1,760
Distributions ($1.08 per common share) -- -- -- -- -- -- (17,287) (17,287)
Distributions ($0.70 per preferred -- -- -- -- -- -- (2,100) (2,100)
share)
Unearned compensation amortization -- -- -- -- -- 75 -- 75
Net income -- -- -- -- -- -- 16,744 16,744
------ ---- ----- --- -------- ----- -------- ---------
Balances at December 31, 1997 16,194 $162 3,000 $30 $223,427 $(106) $ (6,023) $ 217,490
====== ==== ===== === ======== ===== ======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
37
<PAGE> 38
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1997, 1996 And 1995
($ in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,744 $ 13,002 $ 8,385
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 1,329 786 417
Depreciation 10,064 6,476 3,854
Amortization 516 321 196
Unearned compensation amortization 75 75 75
Changes in assets and liabilities:
Lease revenue receivable (1,071) (2,064) (1,159)
Prepaid expenses and other assets (457) (168) (88)
Accounts payable and accrued expenses 611 301 948
-------- -------- --------
Net cash provided by operating activities 27,811 18,729 12,628
-------- -------- --------
Cash flows from investing activities:
Franchise fees paid (408) (565) (216)
Deferred acquisition costs (64) (18) (77)
Investment in hotel properties (81,877) (74,031) (35,766)
-------- -------- --------
Net cash used in investing activities (82,349) (74,614) (36,059)
-------- -------- --------
Cash flows from financing activities:
Purchase of interest rate cap agreements (69) -- (261)
Fees paid to increase and extend the line of credit (16) (563) (130)
Net proceeds from issuance of common stock 200 59,091 27,443
Net proceeds from issuance of preferred stock 71,506 -- --
Payment of distributions to common shareholders (16,789) (13,062) (7,261)
Payment of distributions to minority interest (1,645) (643) (378)
Net increase in line of credit borrowing 1,281 8,800 5,400
-------- -------- --------
Net cash provided by financing activities 54,468 53,623 24,813
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (70) (2,262) 1,382
Cash and cash equivalents at beginning of period 234 2,496 1,114
-------- -------- --------
Cash and cash equivalents at end of period $ 164 $ 234 $ 2,496
======== ======== ========
Supplemental disclosure:
Cash paid for interest $ 4,044 $ 2,158 $ 2,517
======== ======== ========
Summary of non-cash investing and financing activities:
Investment in hotel properties payable $ 1,134 $ 1,315 $ 1,187
Distributions declared but not paid 6,950 4,352 2,785
Issuance of shares in exchange for hotel properties/minority
interest units 4,799 1,500 --
Issuance of units in exchange for hotel properties 11,287 9,555 --
Adjustment to minority interest due to follow-on offerings and
issuance of partnership units in connection with the
acquisition of hotel properties 1,760 1,696 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
38
<PAGE> 39
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
1. ORGANIZATION:
Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering ("IPO") of $0.01 par value common stock
("Common Stock"), utilizing the majority of the proceeds to acquire one hotel
and a general partnership interest (as the sole general partner) in WINN Limited
Partnership (the "Partnership"). The Partnership used a substantial portion of
the proceeds to acquire nine hotel properties (collectively the ten hotels are
the "Initial Hotels"). The Initial Hotels were acquired from affiliates of WHI
(the "Winston Affiliates"). WHI and the Partnership (collectively the "Company")
began operations as a REIT on June 2, 1994.
During 1995 and 1996, WHI completed follow-on Common Stock offerings, as well
as a Preferred Stock offering in September 1997, and invested the net proceeds
from these offerings in the Partnership. The Partnership utilized the proceeds
to acquire 28 additional hotel properties (see Note 3). As of December 31, 1997,
WHI's ownership in the Partnership was 90.15% (see Note 6). As of December 31,
1997, the Company owned 38 hotel properties (the "Current Hotels"), primarily in
the Southeast region of the United States. The Current Hotels are leased,
pursuant to separate percentage operating lease agreements (the "Percentage
Leases"), to CapStar Winston Company, L.L.C. (the "Lessee"), an affiliate of
CapStar Hotel Company ("CapStar").
Prior to November 17, 1997, the Current Hotels were leased pursuant to the
Percentage Leases to Winston Hospitality, Inc. On November 17, 1997 and November
24, 1997, CapStar Management Company, L.P. purchased substantially all of the
assets and assumed certain liabilities of Winston Hospitality, Inc., including
the Current Hotels' leases. CapStar Management Company, L.P. is an affiliate of
CapStar. Concurrent with the transaction, the leases were assigned to the Lessee
and the terms of the leases were extended to 15 years from the date of the
transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation. The consolidated financial statements include
the accounts of WHI and the Partnership. All significant inter-company balances
and transactions have been eliminated.
Investment in Hotel Properties. Hotel properties are recorded at cost and are
depreciated using the straight-line method over estimated useful lives of the
assets of 5 and 30 years for furniture and equipment, and buildings and
improvements, respectively. Upon disposition, both the assets and accumulated
depreciation accounts are relieved and the related gain or loss is credited or
charged to the income statement. Repairs and maintenance of hotel properties are
paid by the Lessee.
The Company evaluates long-lived assets for potential impairment by analyzing
the operating results, trends and prospects for the Company and considering any
other events and circumstances which might indicate potential impairment.
Cash and Cash Equivalents. All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Deferred Expenses. Included in deferred expenses are franchise fees, loan
costs, and amounts paid for interest rate caps, all of which are recorded at
cost. Amortization of franchise fees is computed using the straight-line method
over ten years. Amortization of loan costs and interest rate caps, computed
using the straight-line method over the period of the related revolving credit
and interest rate cap agreements, are included in interest expense.
Minority Interest in Partnership. Certain hotel properties have been
acquired, in part, by the Partnership, through the issuance of limited
partnership units of the Partnership. The equity interest in the Partnership
created by these transactions represents the Company's minority interest
liability. The Company's minority interest is: (i) increased or decreased by its
pro-rata share of the net income or net loss, respectively, of the Partnership;
(ii) decreased by distributions; and (iii) adjusted to equal the net equity of
the Partnership multiplied by the limited partners' ownership percentage
immediately after each issuance of units of the Partnership through an
adjustment to additional paid-in capital.
Earnings Per Share. The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128") on December 31, 1997
(see Note 7). SFAS No. 128 requires the Company to change its method of
computing, presenting and disclosing earnings per share information. The Company
is now required to show both net income per common share and net
39
<PAGE> 40
income per common share assuming dilution. Net income per common share is
computed by dividing net income applicable to common shareholders by the
weighted-average number of common shares outstanding during the period. Net
income per common share assuming dilution is computed by dividing income before
allocation to minority interest by the weighted average number of common shares
assuming dilution during the period. Weighted average number of common shares
assuming dilution includes common shares and dilutive common share equivalents,
primarily redeemable limited partnership units (see Note 6) and stock options.
Distributions. The ability to pay regular quarterly distributions is
dependent upon receipt of distributions from the Partnership, which in turn are
dependent upon the results of operations of the Partnership's properties.
Income Taxes. The Company qualifies as a REIT under Section 856 to 860 of the
Internal Revenue Code and therefore no provision for federal income taxes has
been reflected in the financial statements.
Earnings and profits, which determine the taxability of distributions to
shareholders, differ from net income reported for financial reporting purposes
due to the differences for federal tax purposes in the estimated useful lives
used to compute depreciation and the carrying value (basis) of the investment in
hotel properties. Additionally, certain costs associated with the IPO are
treated differently for federal tax purposes than for financial reporting
purposes. At December 31, 1997, the net tax basis of the Company's assets and
liabilities was approximately $14,200 less than the amounts reported in the
accompanying consolidated financial statements.
For federal income tax purposes, 1997 distributions amounted to $1.08 per
common share, four percent of which is considered a return of capital.
Fair Value of Financial Instruments. The value of interest rate cap
agreements fluctuates with interest rates. As of December 31, 1997 and 1996,
interest rates related to the contract period were below the contract rates, and
therefore these contracts were estimated to have nominal current fair value as
of that date. Due to banks consists of a line of credit which reprices
periodically to allow for the fair value to equal the carrying value. The
Company's remaining assets and liabilities are not considered financial
instruments.
Concentration of Credit Risk. The Company places cash deposits at federally
insured depository institutions. At December 31, 1997, bank account balances
exceeded federal depository insurance limits by approximately $52.
Reclassifications. Certain reclassifications have been made to the 1995 and
1996 financial statements to conform with the 1997 presentation. These
reclassifications have no effect on net income or shareholders' equity
previously reported.
Estimates. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the balance sheet
dates and the reported amounts of revenues and expenses during the periods
reported. Actual results could differ from those estimates.
Adoption of New Accounting Pronouncements. The Company will adopt Statement
of Financial Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130")
for its 1998 fiscal year. SFAS No. 130 requires the Company to display an amount
representing the total comprehensive income for the period in a financial
statement which is displayed with the same prominence as other financial
statements. Upon adoption, all prior period data presented will be restated to
conform to the provisions of SFAS No. 130. This statement is not expected to
have a material impact on the Company's financial statements.
The Company will adopt Statement of Financial Standards No. 131 "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS No. 131") for
its 1998 fiscal year. SFAS No. 131 requires the Company to report selected
information about operating segments in its financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement is
not expected to have a material impact on the Company's financial statements.
3. HOTEL PROPERTIES:
The Company owned 38 hotels, consisting of 5,124 rooms, as of December 31,
1997. The Company's acquisition of hotel properties for the years 1997, 1996 and
1995 are summarized as follows:
40
<PAGE> 41
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
YEAR PURCHASE COST HOTEL PROPERTIES ROOMS/SUITES
---- ------------- ---------------- ------------
<S> <C> <C> <C>
1995 $ 33,107 5 680
1996* 73,200 10 1,322
1997 62,625 7 1,096
-------- -- -----
Total $168,932 22 3,098
======== == =====
</TABLE>
* Includes $38,313 paid to Winston Affiliates for the acquisition of four
hotels with 534 rooms/suites.
The Partnership issued 722,024 limited partnership units in connection with
the acquisition of three hotels acquired in 1996 from Winston Affiliates. These
affiliates agreed to reduce the purchase prices for the hotels by returning up
to $9,555 of units, in the event the Company's aggregate yield, as defined, from
these hotels in the first 12 months of ownership was less than 13%. At December
31, 1997, the Company's aggregate yield, as defined, from these hotels in the
first 12 months of ownership was 13.8%, thus none of the units were returned.
All acquisitions were accounted for by the purchase method of accounting and
results of operations for these hotels are included in the Consolidated
Statements of Income for the period in which they were owned by the Company. The
following unaudited pro forma financial information assumes the acquisitions
were acquired as of the later of January 1, 1996 or their date of opening, and
the 1996 follow-on Common Stock and the 1997 Preferred Stock offerings took
place on January 1, 1996:
<TABLE>
<CAPTION>
Pro forma for the
year ended December 31,
----------------------------
1997 1996
----- ----
<S> <C> <C>
Percentage lease and other revenue $ 42,462 $ 38,754
----------- -----------
Expenses:
Real estate taxes and property and
casualty insurance 3,072 2,528
General and administrative 2,056 2,083
Depreciation 10,920 9,509
Amortization 195 195
Interest expense 727 385
----------- -----------
Total expense 16,970 14,700
----------- -----------
Income before allocation to minority interest 25,492 24,054
Income allocation to minority interest 2,005 2,044
Preferred stock distribution 6,938 6,938
----------- -----------
Net income applicable to common shareholders $ 16,549 $ 15,072
=========== ===========
Net income per common share $ 1.03 $ 0.95
=========== ===========
Net income per common share assuming dilution $ 1.03 $ 0.95
=========== ===========
Weighted average number of common shares 15,990,096 15,789,332
=========== ===========
Weighted average number of common shares assuming dilution 18,034,235 15,821,949
=========== ===========
</TABLE>
The 1996 weighted average number of common shares assuming dilution does not
include the conversion of partnership units, as they were anti-dilutive.
41
<PAGE> 42
4. DEFERRED EXPENSES:
At December 31, 1997 and 1996 deferred expenses consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Franchise fees $1,254 $ 848
Line of credit fees 658 779
Interest rate caps 69 149
Acquisition costs 86 21
------ ------
2,067 1,797
Less accumulated amortization 664 435
------ ------
Deferred expenses, net $1,403 $1,362
====== ======
</TABLE>
During 1995, the Company entered into interest rate cap agreements to
eliminate the exposures to increases in 90-day LIBOR over 7.25%, and therefore
from exposures in interest rate increases under the collateralized line of
credit over 8.50%, on $30,000, for the period May 30, 1995 through May 30, 1997.
During 1997, the Company entered into interest rate cap agreements to eliminate
the exposure to increases in 90-day LIBOR over 6.25%, and therefore from its
exposure to interest rate increases over 8.00% under its line of credit, on a
principal balance of $40 million for the period June 4, 1997, through June 4,
1998.
5. DUE TO BANKS:
In October 1996, the Company amended and restated its line of credit with a
group of four banks led by Wachovia Bank of North Carolina, N.A., and extended
the term to November 1, 1998 (the "Amended Line"). The Company has
collateralized the Amended Line with 28 of its Current Hotels, which provide
borrowing availability up to a maximum of $125,000. Interest on borrowings is
generally at LIBOR plus 1.75% and is payable quarterly in arrears. As of
December 31, 1997 and 1996 the weighted average interest rate on the outstanding
balance under the line of credit was 7.55% and 7.20%, respectively. A commitment
fee of 0.0625% is also paid quarterly on the unused portion of the line of
credit. During the years ended December 31, 1997, 1996 and 1995, the Company
capitalized interest of $1,284, $148 and $0, respectively, related to hotels
under development.
The Amended Line requires approval of the use of proceeds to certain
geographic areas with respect to future hotel acquisitions. It also requires
maintenance of certain financial ratios including liquidity and net worth.
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.
6. CAPITAL STOCK:
On September 11, 1997, the Company issued 3,000,000 shares of 9.25% Series A
Cumulative Preferred Stock ($25 liquidation preference per share plus unpaid
cumulative distributions). Except in the event of certain occurrences, the
preferred shares are not redeemable prior to September 28, 2001. The Company
used the net proceeds from the offering of approximately $71,500 to pay down
most of the then outstanding debt under its line of credit, and thereby created
additional borrowing capacity to finance the acquisition and development of
additional hotel properties.
Pursuant to the Partnership Agreement, the holders of limited partnership
units have certain redemption rights (the "Redemption Rights") which enable them
to cause the Partnership to redeem their units in the Partnership in exchange
for shares of Common Stock on a one-for-one basis or, in certain circumstances,
for cash. The number of shares issuable upon exercise of the Redemption Rights
will be adjusted upon the occurrence of stock splits, mergers, consolidations or
similar pro-rata share transactions, which otherwise would have the effect of
diluting the ownership interests of the limited partners or the shareholders of
WHI. As of December 31, 1997, the Partnership had 17,963,873 units outstanding,
of which 16,194,480 units were held by WHI.
WHI has issued 7,500 shares to each of its five initial independent directors
which shares vest at a rate of 1,500 shares per year beginning on June 2, 1994.
The unvested shares are subject to forfeiture if the director does not remain a
director of WHI. Each director is entitled to vote and receive distributions
paid on such shares prior to vesting.
42
<PAGE> 43
7. EARNINGS PER SHARE:
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," on December 31, 1997. SFAS No. 128 requires the
Company to change its method of computing, presenting and disclosing earnings
per share information. All prior period data presented has been restated to
conform to the provisions of SFAS No. 128.
The following is a reconciliation of the net income applicable to common
shareholders used in the net income per common share calculation to the income
before allocation to minority interest used in the net income per common share -
assuming dilution:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income $ 16,744 $ 13,002 $ 8,385
Less: preferred shares distribution 2,100 -- --
---------- ---------- ----------
Net income applicable to common shareholders 14,644 13,002 8,385
Plus: income allocation to minority interest 1,329 786 417
---------- ---------- ----------
Net income assuming dilution $ 15,973 $ 13,788 $ 8,802
========= ========= ==========
</TABLE>
The following is a reconciliation of the weighted average shares used in net
income per common share to the weighted average shares used in the net income
per common share - assuming dilution:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Weighted average number of common shares 15,990,096 12,921,552 8,714,676
Units with redemption rights 1,493,306 813,831 433,956
Stock options 71,376 32,617 18,860
---------- ---------- ---------
Weighted average number of common shares
assuming dilution 17,554,778 13,768,000 9,167,492
========== ========== =========
</TABLE>
8. STOCK OPTION PLAN:
The Company has adopted the Winston Hotels, Inc. Stock Incentive Plan (the
"Plan") under which the Company may grant options to its employees for 700,000
shares plus 5% of the amount of authorized and issued shares of Common Stock
exceeding 14,000,000, excluding shares issued pursuant to the Plan. Incentive
stock options under the Plan may not exceed 350,000 without shareholder
approval. The Plan permits the grant of incentive or nonqualified stock options,
stock appreciation rights, stock awards or performance shares to participants.
Under the Plan, the exercise price of each option equals the market price of the
Company's Common Stock on the date of grant and an option's maximum term is ten
years. Options are granted upon approval of the Board of Directors and generally
contain vesting requirements over a period of years.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). As
permitted by SFAS 123, no compensation cost has been recognized for options
granted under the Plan. Had the fair value method been used to determine
compensation cost, the impact on the Company's net income and net income per
share would not have been material. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in 1997, 1996 and 1995: dividend yield
of 8%; expected volatility of 20%; risk-free interest rate of 6%; and an
expected life of five years for all options.
43
<PAGE> 44
A summary of the status of the Plan as of December 31, 1997, 1996 and 1995,
and changes during the years ended on those dates, is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 401,000 $ 10.93 376,000 $ 10.80 176,000 $ 10.16
Granted 55,000 13.88 25,000 12.88 200,000 11.36
Exercised (20,000) 10.00 -- -- -- --
------- --------- ------- --------- ------- ---------
Outstanding at end of year 436,000 $ 11.34 401,000 $ 10.93 376,000 $ 10.80
======= ========= ======= ========= ======= =========
Options exercisable at year-end 264,750 226,000 176,000
======= ======= =======
</TABLE>
The following table summarizes information about the Stock Plan at December
31, 1997:
<TABLE>
<CAPTION>
OPTIONS OPTIONS
EXERCISE OUTSTANDING EXERCISABLE AVERAGE REMAINING
PRICES AT 12/31/97 AT 12/31/97 CONTRACTUAL LIFE (YEARS)
------ ----------- ----------- ------------------------
<C> <C> <C> <C>
$9.13 25,000 25,000 0.5
$10.00 28,000 28,000 6.4
$10.00 53,000 53,000 0.4
$11.00 50,000 50,000 6.4
$11.31 50,000 50,000 7.8
$11.38 90,000 22,500 8.0
$11.38 60,000 30,000 0.5
$12.88 25,000 6,250 8.8
$13.88 55,000 -- 9.8
</TABLE>
9. SUBSEQUENT EVENTS:
On January 30, 1998, the Company announced its intention to purchase three
Hilton Garden Inn hotels in a transaction totaling approximately $38,000 in
cash. The full-service hotels, which are still under construction but scheduled
for completion in the first quarter of 1998, are located in Albany, New York,
Alpharetta, Georgia, and Raleigh-Durham, North Carolina. On March 3, 1998, the
Company purchased a 168-suite Residence Inn by Marriott in Phoenix, Arizona for
$15,900 in cash. On March 10, 1998, the Company announced the opening of a
137-suite Homewood Suites in Raleigh, North Carolina. The hotel was internally
developed at a cost of approximately $13,000.
10. COMMITMENTS:
The Company has future lease commitments from the Lessee through 2012.
Minimum future rental payments under these non-cancelable operating leases are
as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Year ended December 31:
1998 $ 18,179
1999 18,179
2000 18,179
2001 18,179
2002 18,179
2003 and thereafter 180,278
--------
Total $271,173
========
</TABLE>
Under the terms of the Percentage Leases, the Lessee is obligated to pay the
Company the greater of base rents or percentage rents. The Company earned
minimum rents of $15,519, $11,154, and $7,853 for the years ended December 31,
1997, 1996, and 1995,
44
<PAGE> 45
respectively, and percentage rents of $20,349, $15,457, and $9,295 for the years
ended December 31, 1997, 1996, and 1995, respectively. The percentage rents are
based on percentages of gross room revenue and certain food and beverage
revenues. CapStar has guaranteed amounts due and payable to the Company under
the leases up to $20,000. The Lessee operates the hotel properties pursuant to
franchise agreements, which require the payment of fees based on a percentage of
hotel revenue. These fees are paid by the Lessee.
Pursuant to the Percentage Leases, the Company reserves 5% of room revenues
from the limited-service hotels, and 7% of gross room, food and beverage
revenues from the full-service hotel to fund periodic improvements to the
buildings and grounds, and the periodic replacement and refurbishment of
furniture, fixtures and equipment.
The Company has a contract to acquire a Homewood Suites hotel upon the
completion of its development, which is expected to occur during the second
quarter of 1998, for a purchase price approximating the development cost, which
is estimated to be $8,600. Conditions to the Company's purchase obligation
include its approval of the building specifications and completion of
construction within certain cost limitations and by a specified delivery date.
The developer has committed to acquire approximately $1,845 in newly issued
Company Common Stock in connection with the acquisition.
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly results of operations for the years ended
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
- ----- FIRST SECOND THIRD FOURTH
------ ------ ------- ------
<S> <C> <C> <C> <C>
Total revenue $7,178 $9,646 $10,406 $8,872
Total expenses 4,012 4,468 5,027 4,522
------ ------ ------- ------
Income before minority interest 3,166 5,178 5,379 4,350
Income allocation to minority interest 230 381 490 228
------ ------ ------- ------
Income after minority interest 2,936 4,797 4,889 4,122
Preferred share distribution -- -- 366 1,734
------ ------ ------- ------
Net income applicable to common
shareholders $2,936 $4,797 $ 4,523 $2,388
====== ====== ======= ======
Earnings per share:
Net income per common share $ 0.19 $ 0.30 $ 0.28 $ 0.15
====== ====== ======= ======
Net income per common share
assuming dilution $ 0.18 $ 0.30 $ 0.28 $ 0.15
====== ====== ======= ======
1996
- ----- FIRST SECOND THIRD FOURTH
------ ------ ------- ------
Total revenue $4,556 $6,813 $ 8,435 $6,904
Total expenses 2,616 3,226 3,348 3,730
------ ------ ------- ------
Income before minority interest 1,940 3,587 5,087 3,174
Income allocation to minority interest 80 150 337 219
------ ------ ------- ------
Income after minority interest 1,860 3,437 4,750 2,955
Preferred share distribution -- -- -- --
------ ------ ------- ------
Net income applicable to common
shareholders $1,860 $3,437 $ 4,750 $2,955
====== ====== ======= ======
Earnings per share:
Net income per common share $ 0.19 $ 0.34 $ 0.30 $ 0.18
====== ====== ======= ======
Net income per common share
assuming dilution $ 0.18 $ 0.34 $ 0.30 $ 0.18
====== ====== ======= ======
</TABLE>
45
<PAGE> 46
WINSTON HOTELS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
As Of December 31, 1997
($ in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Cost Capitalized Gross Amounts
Subsequent to Carried
Initial Cost Acquisition at Close of Period
- ---------------------------------------------------------------------------------------------------------------------
Buildings Buildings Buildings
and and and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hampton Inn
Boone, NC * $ 264 $ 2,750 $ -- $ 22 $ 264 $ 2,772 $ 3,036
Hampton Inn
Brunswick, GA * 716 3,887 -- 58 716 3,945 4,661
Hampton Inn
Cary, NC * 613 4,596 -- 22 613 4,618 5,231
Hampton Inn
Charlotte, NC * 833 3,609 -- 1 833 3,610 4,443
Hampton Inn
Chester, VA * 461 2,238 -- 9 461 2,247 2,708
Hampton Inn
Duncanville, TX * 480 2,689 25 296 505 2,985 3,490
Hampton Inn
Durham, NC * 634 4,582 -- 111 634 4,693 5,327
Hampton Inn & Suites
Gwinnett, GA * 557 6,959 -- (16) 557 6,943 7,500
Hampton inn
Hilton Head, SC * 310 3,969 -- 277 310 4,246 4,556
Hampton Inn
Jacksonville, NC * 473 4,140 -- 13 473 4,153 4,626
Hampton Inn
Perimeter , GA * 914 6,293 -- 47 914 6,340 7,254
Hampton Inn
Raleigh, NC * 697 5,955 -- 622 697 6,577 7,274
Hampton Inn
Southern Pines, NC * 614 4,280 -- 17 614 4,297 4,911
Hampton Inn
Southlake, GA * 680 4,065 -- 33 680 4,098 4,778
Hampton Inn
W. Springfield, MA 916 5,253 -- -- 916 5,253 6,169
Hampton Inn
White Plains, NY 1,382 10,763 -- -- 1,382 10,763 12,145
Hampton Inn
Wilmington, NC * 460 3,208 2 37 462 3,245 3,707
Comfort Inn
Augusta, GA * 404 3,541 -- 31 404 3,572 3,976
Comfort Inn
Charleston, SC * 438 5,853 -- 502 438 6,355 6,793
Comfort Inn
Chester, VA * 661 6,447 -- 11 661 6,458 7,119
Comfort Inn
Clearwater, FL 532 3,436 -- 409 532 3,845 4,377
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
Life Upon
Which
Accumulated Net Book Depreciation
Depreciation Value Land, in Latest
Buildings Buildings Income
and and Date of Statement is
Description Improvements Improvements Acquisition Computed
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hampton Inn
Boone, NC $ 329 $ 2,707 6/2/94 30
Hampton Inn
Brunswick, GA 469 4,192 6/2/94 30
Hampton Inn
Cary, NC 549 4,682 6/2/94 30
Hampton Inn
Charlotte, NC 431 4,012 6/2/94 30
Hampton Inn
Chester, VA 230 2,478 11/29/94 30
Hampton Inn
Duncanville, TX 161 3,329 5/7/96 30
Hampton Inn
Durham, NC 552 4,775 6/2/94 30
Hampton Inn & Suites
Gwinnett, GA 329 7,171 7/18/96 30
Hampton inn
Hilton Head, SC 428 4,128 11/29/94 30
Hampton Inn
Jacksonville, NC 495 4,131 6/2/94 30
Hampton Inn
Perimeter , GA 298 6,956 7/19/96 30
Hampton Inn
Raleigh, NC 554 6,720 5/18/95 30
Hampton Inn
Southern Pines, NC 513 4,398 6/2/94 30
Hampton Inn
Southlake, GA 488 4,290 6/2/94 30
Hampton Inn
W. Springfield, MA 87 6,082 7/14/97 30
Hampton Inn
White Plains, NY 60 12,085 10/29/97 30
Hampton Inn
Wilmington, NC 387 3,320 6/2/94 30
Comfort Inn
Augusta, GA 305 3,671 5/18/95 30
Comfort Inn
Charleston, SC 526 6,267 5/18/95 30
Comfort Inn
Chester, VA 663 6,456 11/29/94 30
Comfort Inn
Clearwater, FL 315 4,062 5/18/95 30
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Cost Capitalized Gross Amounts
Subsequent to Carried
Initial Cost Acquisition at Close of Period
- ---------------------------------------------------------------------------------------------------------------------
Buildings Buildings Buildings
and and and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Comfort Inn
Durham, NC * 947 6,208 -- 30 947 6,238 7,185
Comfort Inn
Fayetteville, NC * 1,223 8,047 -- 363 1,223 8,410 9,633
Comfort Inn
Greenville, SC 871 3,551 -- 942 871 4,493 5,364
Comfort Suites
London, KY 345 2,170 -- 213 345 2,383 2,728
Comfort Inn
Raleigh, NC * 459 4,075 8 267 467 4,342 4,809
Comfort Inn
Wilmington, NC * 532 5,889 -- 232 532 6,121 6,653
Comfort Suites
Orlando, FL 1,357 10,180 -- -- 1,357 10,180 11,537
Holiday Inn Express
Abingdon, VA * 918 2,263 -- 254 918 2,517 3,435
Holiday Inn Express
Clearwater, FL 510 5,854 -- -- 510 5,854 6,364
Holiday Inn Select
Dallas, TX * 1,060 13,615 -- 1,094 1,060 14,709 15,769
Homewood Suites
Cary, NC * 1,010 12,367 9 (9) 1,019 12,358 13,377
Homewood Suites
Clear Lake, TX * 879 5,978 -- 11 879 5,989 6,868
Fairfield Inn
Ann Arbor, MI 543 3,744 -- -- 543 3,744 4,287
Quality Suites
Charleston, SC * 912 11,224 -- 43 912 11,267 12,179
Courtyard by Marriott
Ann Arbor, MI 902 9,850 -- -- 902 9,850 10,752
Courtyard by Marriott
Houston, TX 1,211 9,154 -- -- 1,211 9,154 10,365
Courtyard by Marriott
Wilmington, NC * 742 5,907 -- 4 742 5,911 6,653
-------- ----------- ---- ----------- ------ ----------- --------
$ 27,460 $ 218,589 $ 44 $ 5,946 $27,504 $ 224,535 $252,039
======== =========== ==== =========== ======= =========== ========
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
Life Upon
Which
Accumulated Net Book Depreciation
Depreciation Value Land, in Latest
Buildings Buildings Income
and and Date of Statement is
Description Improvements Improvements Acquisition Computed
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Comfort Inn
Durham, NC 639 6,546 11/29/94 30
Comfort Inn
Fayetteville, NC 857 8,776 11/29/94 30
Comfort Inn
Greenville, SC 219 5,145 5/6/96 30
Comfort Suites
London, KY 124 2,604 5/7/96 30
Comfort Inn
Raleigh, NC 467 4,342 8/16/94 30
Comfort Inn
Wilmington, NC 726 5,927 6/2/94 30
Comfort Suites
Orlando, FL 225 11,312 5/1/97 30
Holiday Inn Express
Abingdon, VA 102 3,333 5/7/96 30
Holiday Inn Express
Clearwater, FL 81 6,283 8/6/97 30
Holiday Inn Select
Dallas, TX 779 14,990 5/7/96 30
Homewood Suites
Cary, NC 618 12,759 7/9/96 30
Homewood Suites
Clear Lake, TX 266 6,602 9/13/96 30
Fairfield Inn
Ann Arbor, MI 31 4,256 9/30/97 30
Quality Suites
Charleston, SC 967 11,212 5/18/95 30
Courtyard by Marriott
Ann Arbor, MI 82 10,670 9/30/97 30
Courtyard by Marriott
Houston, TX 152 10,213 7/14/97 30
Courtyard by Marriott
Wilmington, NC 196 6,457 12/19/96 30
------------ ------------
$ 14,700 $ 237,339
============ ============
</TABLE>
* These properties serve as collateral for the $125,000 line of credit
which, as of December 31, 1997, had an outstanding balance of $44,081.
47
<PAGE> 48
WINSTON HOTELS, INC.
NOTES TO SCHEDULE III
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
(a) Reconciliation of Real Estate:
Balance at beginning of period $187,303 $116,133
Acquisitions during period 61,619 69,568
Additions during period 3,117 1,602
-------- --------
Balance at end of period $252,039 $187,303
======== ========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of period 8,387 $ 3,937
Depreciation for period 6,313 4,450
-------- --------
Balance at end of period $ 14,700 $ 8,387
======== ========
</TABLE>
(c) The aggregate cost of land, buildings and furniture and equipment for
federal income tax purposes is approximately $270,000.
(d) Refer to Notes 1 and 3 to the financial statements of Winston Hotels, Inc.
for transactions with affiliates.
48
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
Winston Hospitality, Inc.
We have audited the accompanying balance sheets of Winston Hospitality, Inc.
as of October 31, 1997 and December 31, 1996 and the related statements of
income, shareholders' equity and cash flows for the 10 months ended October 31,
1997 and the years ended December 31, 1996 and 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Winston Hospitality, Inc. as of
October 31, 1997 and December 31, 1996 and the results of its operations and its
cash flows for the 10 months ended October 31, 1997 and the years ended December
31, 1996 and 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
February 6, 1998
49
<PAGE> 50
WINSTON HOSPITALITY, INC.
BALANCE SHEETS
As Of October 31, 1997 And December 31, 1996
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,926 $5,463
Accounts receivable:
Trade 2,303 1,166
Lessor 768 1,391
Affiliates 125 95
Shareholders -- 71
Prepaid expenses and other assets 182 220
------- ------
Total current assets 10,304 8,406
------- ------
Furniture, fixtures and equipment:
Furniture and equipment 399 323
Leasehold improvements 113 113
------- ------
512 436
Less accumulated depreciation and amortization 245 178
------- ------
Net furniture, fixtures and equipment 267 258
------- ------
$10,571 $8,664
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 1,918 $1,259
Percentage lease payable to Lessor 3,882 4,611
Accounts payable - affiliates -- 146
Accrued salaries and wages 1,204 874
Accrued sales and occupancy taxes 814 462
Other current liabilities 842 618
------- ------
Total current liabilities 8,660 7,970
------- ------
Commitments (Note 3)
Shareholders' equity:
Common stock, $.01 par value, 100 shares authorized,
issued and outstanding 1 1
Additional paid-in capital 49 49
Retained earnings 1,861 644
------- ------
Total shareholders' equity 1,911 694
------- ------
$10,571 $8,664
======= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE> 51
WINSTON HOSPITALITY, INC.
STATEMENTS OF INCOME
For The Ten Months Ended October 31, 1997 And 1996 And
The Years Ended December 31, 1996 And 1995
($ in thousands)
<TABLE>
<CAPTION>
TEN MONTHS YEARS ENDED
ENDED OCTOBER 31, DECEMBER 31,
-------------------- --------------------
1997 1996 1996 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Room $67,145 $49,633 $58,956 $39,677
Food and beverage 2,419 1,240 1,685 138
Other operating, net 1,373 1,068 1,191 877
Interest income 152 82 93 85
------- ------- ------- -------
Total revenue 71,089 52,023 61,925 40,777
------- ------- ------- -------
Expenses:
Property and operating 24,112 17,388 21,550 14,124
Property repairs and maintenance 3,193 2,614 3,181 1,909
Food and beverage 1,715 924 1,281 189
General and administrative 2,090 1,603 2,050 1,526
Franchise costs 6,167 4,327 5,361 3,565
Management fees 1,015 1,109 1,126 784
Percentage lease payments 30,980 22,800 26,611 17,148
------- ------- ------- -------
Total expenses 69,272 50,765 61,160 39,245
------- ------- ------- -------
Net income $ 1,817 $ 1,258 $ 765 $ 1,532
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
51
<PAGE> 52
WINSTON HOSPITALITY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For The Ten Months Ended October 31, 1997,
And The Years Ended December 31, 1996 And 1995
($ in thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS EQUITY
------ ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 100 $1 $49 $ 15 $ 65
Net income - - - 1,532 1,532
Distributions - - - (1,112) (1,112)
--- -- --- ------- -------
Balances at December 31, 1995 100 1 49 435 485
Net income - - - 765 765
Distributions - - - (556) (556)
--- -- --- ------- -------
Balances at December 31, 1996 100 1 49 644 694
Net income - - - 1,817 1,817
Distributions - - - (600) (600)
--- -- --- ------- -------
Balances at October 31, 1997 100 1 49 1,861 1,911
=== == === ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE> 53
WINSTON HOSPITALITY, INC.
STATEMENT OF CASH FLOWS
For The Ten Months Ended October 31, 1997 And 1996
And The Years Ended December 31, 1996 And 1995
($ in thousands)
<TABLE>
<CAPTION>
TEN MONTHS YEARS ENDED
ENDED OCTOBER 31, DECEMBER 31,
--------------------- ----------------------
1997 1996 1996 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,817 $ 1,258 $ 765 $ 1,532
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 67 65 83 63
Changes in assets and liabilities:
Accounts receivable - trade (1,137) (1,525) (330) (310)
Prepaid expenses and other assets 38 (137) (103) (65)
Accounts payable - trade 659 547 666 132
Percentage lease payable to Lessor (729) 532 2,064 1,159
Accrued expenses and other liabilities 906 1,045 914 30
------- ------- ------- -------
Net cash provided by operating activities
1,621 1,785 4,059 2,541
------- ------- ------- -------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (76) (107) (144) (67)
Repayments from (advances to) Lessor, affiliates and
shareholders, net 518 (265) (145) (1,233)
------- ------- ------- -------
Net cash provided by (used in) investing
activities 442 (372) (289) (1,300)
------- ------- ------- -------
Cash flows from financing activities:
Distributions to shareholders (600) (485) (556) (1,112)
------- ------- ------- -------
Net cash used in financing activities (600) (485) (556) (1,112)
------- ------- ------- -------
Net increase in cash and cash equivalents 1,463 928 3,214 129
Cash and cash equivalents at beginning of the period 5,463 2,249 2,249 2,120
------- ------- ------- -------
Cash and cash equivalents at end of the period $ 6,926 $ 3,177 $ 5,463 $ 2,249
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
53
<PAGE> 54
WINSTON HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
1. ORGANIZATION:
Winston Hospitality, Inc. ("Hospitality") was formed to lease and operate
hotels owned by WINN Limited Partnership (the "Partnership") and Winston Hotels,
Inc. ("WHI") (collectively, the "Company"). Approximately 90.15% of the
Partnership is owned by WHI. The two shareholders of Hospitality (Robert W.
Winston, III and John B. Harris, Jr.) are also shareholders of WHI and/or
partners in the Partnership. The Company owned 21 hotels as of December 31,
1995, 31 hotels as of December 31, 1996 and 38 hotels as of October 31, 1997
(collectively, all 38 hotels are the "Current Hotels").
Each hotel was separately leased by the Company to Hospitality under a
Percentage Lease Agreement. These leases required minimum base rental payments
to be made to the Company on a monthly basis and additional quarterly payments
to be made based on a percentage of gross room revenue and certain food and
beverage revenues.
Thirty-seven of the 38 hotels are limited-service hotels and one is a
full-service hotel. All 38 hotels are operated under franchise agreements with
Promus Hotels, Inc., Choice Hotels International, Inc., Holiday Inns
Franchising, Inc. and Marriott International, Inc. The cost of obtaining the
franchise licenses was paid by the Company and the on-going franchise fees were
paid by Hospitality.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition. Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
Cash Equivalents. All highly liquid investments with a maturity date of three
months or less when purchased are considered to be cash equivalents. Hospitality
places cash deposits with federally insured depository institutions. At October
31, 1997, bank account balances exceeded federal depository insurance limits by
approximately $6,252.
Fair Value of Financial Instruments. Hospitality's financial instruments
consist of cash and cash equivalents whose carrying value approximates fair
value because of their short maturity. Hospitality's remaining assets and
liabilities are not considered financial instruments.
Furniture, Fixtures and Equipment. Furniture and equipment are recorded at
cost and are depreciated using the straight-line method over estimated useful
lives of the assets of five and seven years. Leasehold improvements are being
amortized using the straight-line method over the terms of the related leases.
Upon disposition, both the asset and accumulated depreciation accounts are
relieved and the related gain or loss is credited or charged to the income
statement. Repairs and maintenance of hotel properties owned by the Company are
paid by Hospitality and are charged to expense as incurred.
Income Taxes. Hospitality has made an election under Subchapter S of the
Internal Revenue Code of 1986, as amended. Any taxable income or loss is
recognized by the shareholders and, therefore, no provision for income taxes has
been provided in the accompanying financial statements.
Reclassifications. Certain reclassifications have been made to the 1996 and
1995 financial statements to conform with the 1997 presentation. These
reclassifications have no effect on net income or shareholders' equity as
previously reported.
Unaudited October 31, 1996 operating results. Operating results for the 10
months ended October 31, 1996, presented for comparison purposes, are unaudited.
The unaudited financial statements for the period ended October 31, 1996
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the financial statements. All such adjustments are normal and
recurring in nature.
3. COMMITMENTS:
Under the terms of the Percentage Lease Agreements, Hospitality had future
lease commitments to the Company through 2006. As disclosed in Note 6 below, all
Percentage Leases were sold as of November 24, 1997.
54
<PAGE> 55
Hospitality incurred minimum rents of $13,535, $11,154 and $7,853 as well as
percentage rents of $17,445, $15,457 and $9,295 for the ten months ended October
31, 1997 and the years ended December 31, 1996 and 1995, respectively.
Hospitality had entered into separate contracts with unrelated parties for
the management of 10 of the hotels. The terms of these agreements provided for
management fees to be paid based on predetermined formulas for a period of ten
years through 2006. The contracts were cancelable under certain circumstances as
outlined in the agreements. As disclosed in Note 6 below, all such contracts
were sold as of November 24, 1997.
Various legal proceedings against Hospitality have arisen from time to time
in the normal course of business. Management believes liabilities arising from
these proceedings, if any, will have no material adverse effect on the financial
positions or results of operations of Hospitality.
4. DISTRIBUTIONS:
Beginning with the year ended December 31, 1996, the shareholders agreed to
limit distributions by Hospitality to amounts necessary to pay their income
taxes on the net income derived from Hospitality until such time as the tangible
net worth of Hospitality reached $4,000. Thereafter, they agreed to invest at
least 75% of their after-tax distributions of net income from Hospitality in
Common Stock of the Company. These agreements terminated effective November 24,
1997, due to the sale of the leases to CapStar.
5. PROFIT SHARING PLAN:
On January 1, 1996, Hospitality adopted the Winston 401(k) Plan (the
"Plan") for substantially all employees, except any highly compensated employee,
as defined in the Plan, who had attained the age of 21 and completed one year of
service. Under the Plan, employees were able to contribute from 1% to 15% of
compensation, subject to an annual maximum as determined under the Internal
Revenue Code. Hospitality made matching contributions of a specified percentage
of the employee's contribution. Hospitality contributed $54, $50 (unaudited) and
$61 during the 10-month periods ended October 31, 1997 and 1996, and the year
ended December 31, 1996, respectively.
6. SUBSEQUENT EVENT:
On November 24, 1997, Hospitality completed the sale of substantially all of
its assets and all 38 existing Percentage Leases to CapStar Management Company,
L.P. ("CMC") for total consideration of $34,000. The $34,000 sale price
consisted of $10,000 in cash and 674,236 CMC Partnership Units.
55
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
The Members
CapStar Winston Company, L.L.C.:
We have audited the accompanying balance sheet of CapStar Winston Company,
L.L.C. (the "Company") as of December 31, 1997 and the related statements of
operations, members' capital, and cash flows for the period from October 15,
1997 (date of inception) through December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CapStar Winston Company, L.L.C.
as of December 31, 1997, and the results of its operations and its cash flows
for the period from October 15, 1997 (date of inception) through December 31,
1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
February 20, 1998
56
<PAGE> 57
CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEET
As Of December 31, 1997
($ in thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 3,393
Accounts receivable 1,614
Due from Winston Hospitality, Inc. 1,636
Due from CapStar Management Company, L.P. 385
Deposits and other assets 197
-------
Total current assets 7,225
-------
Furniture, fixtures and equipment, net of accumulated depreciation of $5 241
Intangible assets, net of accumulated amortization of $93 34,088
Deferred franchise costs, net of accumulated amortization of $7 601
-------
$42,155
=======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 1,459
Accrued expenses 2,920
Percentage lease payable to Winston Hotels, Inc. 5,682
Advance deposits 135
-------
Total current liabilities 10,196
-------
Commitments (Note 6)
Members' capital 31,959
-------
$42,155
=======
</TABLE>
See accompanying notes to financial statements.
57
<PAGE> 58
CAPSTAR WINSTON COMPANY, L.L.C.
STATEMENT OF OPERATIONS
For The Period October 15, 1997 (Date Of Inception) Through December 31, 1997
($ in thousands)
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Rooms $ 8,197
Food and beverage 462
Telephone and other operating departments 384
-------
Total revenue 9,043
-------
Operating costs and expenses:
Rooms 2,158
Food and beverage 308
Telephone and other operating departments 211
Undistributed expenses:
Lease expense 3,242
Administrative and general 1,069
Sales and marketing 415
Franchise fees 595
Repairs and maintenance 515
Energy 431
Other 55
Depreciation and amortization 105
-------
Total expenses 9,104
-------
Net loss $ (61)
=======
</TABLE>
See accompanying notes to financial statements.
58
<PAGE> 59
CAPSTAR WINSTON COMPANY, L.L.C.
STATEMENT OF MEMBERS' CAPITAL
For The Period October 15, 1997 (Date Of Inception) Through December 31, 1997
($ in thousands)
<TABLE>
<CAPTION>
CapStar Management EquiStar Acquisition
Company, L.P. Corporation Total
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Member contributions made since
October 15, 1997 (date of inception) $ 32,020 $ -- $ 32,020
Net loss (60) (1) (61)
------------------------ ------------------------ -----------------------
Balance, December 31, 1997 $ 31,960 $ (1) $ 31,959
======================== ======================== ========================
</TABLE>
See accompanying notes to financial statements.
59
<PAGE> 60
CAPSTAR WINSTON COMPANY, L.L.C.
STATEMENT OF CASH FLOWS
For The Period October 15, 1997 (Date Of Inception) Through December 31, 1997
($ in thousands)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss $ (61)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 105
Decrease in accounts receivable 235
Increase in due from Winston Hospitality, Inc. (1,636)
Increase in due from CapStar Management Company, L.P. (635)
Increase in deposits and other assets (135)
Increase in accounts payable and accrued expenses 4,063
Increase in percentage lease payable to Winston Hotels, Inc. 1,463
Increase in advance deposits 26
--------
Net cash provided by operating activities 3,425
--------
Cash flows from investing activities:
Additions of furniture, fixtures and equipment (3)
Additions to intangible assets (100)
--------
Net cash used in investing activities (103)
--------
Cash flows from financing activities - contributions by members 71
--------
Net increase in cash and cash equivalents 3,393
Cash and cash equivalents at beginning of period --
--------
Cash and cash equivalents at end of period $ 3,393
========
Supplemental Disclosure of Cash Flow information:
Assets contributed (liabilities assigned) to the Company by CapStar
Management Company, L.P.:
Accounts receivable $ 1,849
Deposits and other assets 62
Furniture, fixtures and equipment 243
Intangible assets 34,081
Deferred franchise costs 608
Accounts payable and accrued expenses (316)
Percentage lease payable to Winston Hotels, Inc. (4,219)
Advance deposits (109)
Due to CapStar Management Company, L.P. (250)
--------
Non-cash financing activity - contribution by member 31,949
========
</TABLE>
See accompanying notes to financial statements.
60
<PAGE> 61
CAPSTAR WINSTON COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
($ in thousands)
1. ORGANIZATION:
CapStar Winston Company, L.L.C. (the "Company") was formed on October 15,
1997, pursuant to a limited liability company agreement ("Agreement"), subject
to the Limited Liability Act of the State of Delaware, between CapStar
Management Company, L.P. (CMC) and EquiStar Acquisition Corporation, both
wholly-owned subsidiaries of CapStar Hotel Company, to lease and operate certain
hotels owned by WINN Limited Partnership and Winton Hotels, Inc. (collectively,
"Winston").
During November 1997, CMC purchased substantially all of the assets and
assumed certain liabilities of Winston Hospitality, Inc. ("WHI"), including 38
hotel leases, certain operating assets and liabilities, and goodwill and other
intangible assets. Concurrent with the purchase, CMC contributed/assigned the
assets purchased and liabilities assumed in the transaction to the Company.
Thirty-five of the hotels are limited-service hotels, two are extended-stay
and one is a full-service hotel. The hotels, which contain 5,124 rooms, are
operated under various franchise agreements, and are located in Florida,
Georgia, Kentucky, Massachusetts, Michigan, New York, North Carolina, South
Carolina, Texas and Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Members' Capital and Allocation of Profits and Losses. As defined in the
Agreement, CMC has a 99% interest and EquiStar has a 1% interest in the Company.
In general, the allocation of income and losses and contributions and
distributions are made to the members in proportion to their respective
ownership interest.
Cash Equivalents. The Company considers all highly liquid instruments with
original maturities of three months or less to be cash equivalents.
Furniture, Fixtures and Equipment. Furniture, fixtures and equipment are
recorded at cost or fair market value in the case of assets contributed and are
depreciated using the straight-line method over estimated useful lives of five
to seven years.
Deferred Franchise Costs. Franchise costs are deferred and are amortized on
a straight-line basis over the terms of the franchise agreements, which range
from 18 months to 20 years.
Intangible Assets. Lease contracts represent the estimated present value of
net cash flows expected to be received from the leases acquired by CMC and
contributed to the Company. Lease contracts are amortized on a straight-line
basis over 30 years.
Goodwill represents the excess of the cost over the net tangible and
identifiable intangible assets acquired by CMC and contributed to the Company.
Goodwill is amortized on a straight-line basis over 40 years.
The Company reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Recoverability is measured by comparing the carrying amount of the
intangible assets to the projected future cash flows of the Company. If such
assets are considered to be impaired, the impairment to be recognized is the
amount by which the carrying amount of the intangible assets exceed the
Company's net discounted cash flows.
Revenue. Revenue is earned through the operation of the hotels and is
recognized when earned.
Income Taxes. No provision has been made for income taxes since any such
liability is the liability of the individual members.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
61
<PAGE> 62
3. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1997:
Lease contracts $ 6,576
Goodwill 27,605
--------
34,181
Less: accumulated amortization (93)
--------
Balance, December 31, 1997 $ 34,088
========
4. MANAGEMENT AGREEMENTS:
The Company manages 28 of the 38 hotels leased and has entered into separate
contracts with third parties to manage 10 of the hotels. The terms of these
third-party management agreements provide for management fees to be paid on a
monthly basis based on budgeted gross operating profit, as defined in the
agreements, with year end adjustments for actual operating results. The terms of
nine of the management agreements extend to 2006 and one extends to 2012. The
agreements are cancelable before expiration under certain circumstances.
Management fees incurred during 1997 were $17 and are recorded as other
expenses.
5. TRANSACTIONS WITH RELATED PARTIES:
The Company advances amounts to CMC and receives amounts from CMC in the
normal course of business. At December 31, 1997 the CMC owed the Company a net
amount of $385.
6. COMMITMENTS:
Each of the hotels is leased under a separate lease agreement. These leases
were collectively amended on November 24, 1997 and extend through November 30,
2012. The leases require monthly minimum base rental payments to Winston and
additional quarterly payments of percentage rent, as described below. The leases
are non-cancelable except upon the sale of a hotel by Winston, and Winston is
required to make a termination payment to the Company, as defined in the lease
agreements, upon cancellation of a lease. CapStar Hotel Company has guaranteed
amounts due and payable by the Company under the leases up to $20,000.
Minimum future base rental payments under these non-cancelable operating leases
are as follows:
Year ended December 31:
1998 $ 18,179
1999 18,179
2000 18,179
2001 18,179
2002 18,179
2003 and thereafter 180,278
--------
Total $271,173
========
Percentage rent for each hotel consists of minimum percentage rent and excess
percentage rent, if any. Minimum percentage rent is calculated based primarily
on the amount of room revenue up to a predetermined threshold per the lease. The
percentage, which differs by hotel, is multiplied by this amount to calculate
minimum percentage rent. These percentages range from 25% to 50%. Excess
percentage rent is calculated based primarily on the amount of any room revenue
in excess of the predetermined threshold mentioned above. The percentage, which
differs by hotel, is multiplied by this amount to calculate excess percentage
rent. These percentages range from 62% to 70%. The Company incurred base rents
and minimum percentage rents of $2,731, and excess percentage rents of $511
during 1997.
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7. DUE FROM WHI:
Due from WHI represents amounts received by WHI on behalf of the Company and
amounts paid by the Company on behalf of WHI. Management believes the amounts
due from WHI will be repaid in March 1998.
8. BUSINESS CONCENTRATION:
As mentioned in Note 1, all of the Company's leased hotels are owned by
Winston. Therefore, the Company's financial position and results of operations
would be adversely and materially impacted if Winston sells the hotels and
terminates the leases. Management believes that Winston has no intention of or
cause for terminating the hotel leases.
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<PAGE> 64
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
3.1(1) Amended and Restated Articles of Incorporation
3.2(2) Articles of Amendment to the Amended and Restated Articles of
Incorporation effective June 14, 1995
3.3 Articles of Amendment to the Amended and Restated Articles of
Incorporation effective September 10, 1997
3.4(1) Amended and Restated Bylaws
4.1(1) Specimen certificate for Common Stock, $0.01 par value per share
4.2(10) Form of Stock Certificate for 9.25% Series A Cumulative Preferred
Stock
4.3 Amended and Restated Articles of Incorporation as amended (see
Exhibits 3.1, 3.2 and 3.3)
4.4 Amended and Restated Bylaws (see Exhibit 3.4)
10.1(1) First Amended and Restated Agreement of Limited Partnership of WINN
Limited Partnership
10.2(8) Second Amended and Restated Agreement of Limited Partnership of
WINN Limited Partnership
10.3(10) Amendment No. 1 dated September 11, 1997 to Second Amended and
Restated Agreement of Limited Partnership of WINN Limited
Partnership
10.4 Amendment No. 2 dated December 31, 1997 to Second Amended and
Restated Agreement of Limited Partnership of WINN Limited
Partnership
10.5(3) Form of Percentage Leases
10.6(11) First Amendment to Lease dated November 17, 1997 between WINN
Limited Partnership and CapStar Winston Company, L.L.C.
10.7(11) First Amendment to Lease dated November 24, 1997 between WINN
Limited Partnership and CapStar Winston Company, L.L.C.
10.8(1) Winston Hotels, Inc. Directors' Stock Incentive Plan
10.9(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Hampton Inn
Raleigh, North Carolina
10.10(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Hampton Inn Hilton
Head, South Carolina
10.11(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Hampton Inn
Chester (Richmond), Virginia
10.12(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort Inn
Fayetteville, North Carolina
10.13(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort
Inn-Durham/Chapel Hill, North Carolina
10.14(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management &
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<PAGE> 65
Investment Corp. for the Comfort Inn-Charleston, South Carolina
10.15(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort Inn
Chester (Richmond), Virginia
10.16(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort Inn
Augusta, Georgia
10.17(3) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Quality Suites
Charleston, South Carolina
10.18(3) Limitation of Future Hotel Ownership and Development Agreement
10.19(4) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Hampton Inn-Raleigh,
North Carolina
10.20(4) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Comfort Inn-Charleston,
South Carolina
10.21(4) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Comfort
Inn-Clearwater/St. Petersburg, Florida
10.22(4) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Comfort Inn-Augusta,
Georgia
10.23(4) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Quality
Suites-Charleston, South Carolina
10.24(5) Memorandum of Understanding, dated March 15, 1996, among Winston
Hotels, Inc., Winston Hospitality, Inc. and Promus Hotels, Inc.
10.25(5) Stock Purchase Agreement, dated April 24, 1996, between Promus
Hotels, Inc. and Winston Hotels, Inc.
10.26(5) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and Promus Hotels, Inc. relating to three hotel
properties being developed by Promus Hotels, Inc.
10.27(5) Agreement of Purchase and Sale, dated April 24, 1996, relating to a
hotel property located in Clear Lake, Texas.
10.28(5) Option to Purchase Additional Hotels, dated April 24, 1996, between
WINN Limited Partnership and Promus Hotels, Inc.
10.29(5) Agreement of Purchase and Sale, dated February 1, 1996, among WINN
Limited Partnership, Dallas Lodging Associates, Inc., A.B. Lodging
Associates, Inc., London Lodging Associates and Duncanville Lodging
Associates I, Ltd.
10.30(5) Management Agreement, dated April 25, 1996, between Winston
Hospitality, Inc. and Impac Hotel Group, Inc.
10.31(5) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and Cary Suites, Inc.
10.32(5) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and RWW, Inc.
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<PAGE> 66
10.33(5) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and WJS Associates.
10.34(5) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and Hotel II, Incorporated.
10.35(5) Sales Contract, dated March 31, 1996, among WINN Limited
Partnership, Louis Bowie and Title Company of North Carolina.
10.36(5) Sales Contract, dated February 9, 1996, among WINN Limited
Partnership, Russell Parman, Ruby Parman and Title Company of North
Carolina.
10.37(6) Amendment No. 1 to Stock Purchase Agreement, dated as of August 7,
1996, by and between Promus Hotels, Inc. and Winston Hotels, Inc.
amending the Stock Purchase Agreement, dated April 24, 1996, by and
between Promus Hotels, Inc. and Winston Hotels, Inc.
10.38(6) Amendment to Agreement of Purchase and Sale, dated as of August 7,
1996, by and between WINN Limited Partnership and Promus Hotels,
Inc., amending the Agreement of Purchase and Sale, dated April 24,
1996, by and between WINN Limited Partnership and Promus Hotels,
Inc. relating to three hotel properties being developed by Promus
Hotels, Inc.
10.39(6) Amendments to Agreement of Purchase and Sale, dated May 21, 1996
and August 7, 1996, by and between WINN Limited Partnership and
Promus Hotels, Inc. amending the Agreement of Purchase and Sale,
dated April 24, 1996, by and between WINN Limited Partnership and
Promus Hotels, Inc., relating to a hotel property being developed
in Clear Lake, Texas.
10.40(6) First Amendment to Option to Purchase Additional Hotels, dated as
of August 7, 1996, by and between Promus Hotels, Inc. and WINN
Limited Partnership, amending the Option to Purchase Additional
Hotels, dated April 24, 1996, by and between WINN Limited
Partnership and Promus Hotels, Inc.
10.41(6) Winston Hotels, Inc. Stock Incentive Plan, as amended and restated
on May 28, 1996.
10.42(7) Credit Agreement, dated as of October 29, 1996, among Winston
Hotels, Inc., WINN Limited Partnership, the banks listed therein,
Wachovia Bank of North Carolina, N.A., as Collateral Agent and
Wachovia Bank of Georgia, N.A., as Administrative Agent (the
"Credit Agreement").
10.43(7) Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Branch Banking and Trust Company
for the principal sum of $35,000,000 pursuant to the Credit
Agreement.
10.44(7) Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Nationsbank, N.A. for the principal
sum of $20,000,000 pursuant to the Credit Agreement.
10.45(7) Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Southtrust Bank of Alabama, N.A.
for the principal sum of $20,000,000 pursuant to the Credit
Agreement.
10.46(7) Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Wachovia Bank of North Carolina,
N.A. for the principal sum of $50,000,000 pursuant to the Credit
Agreement.
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<PAGE> 67
10.47(7) Form of Deed of Trust, Assignment of Rents, Security Agreement and
Financing Statement used to secure certain obligations under the
Credit Agreement (not including certain variations existing in the
different states where the properties are located).
10.48(9) Redemption and Registration Rights Agreement, dated as of July 14,
1997 by and among WINN Limited Partnership, Winston Hotels, Inc.,
certain partnerships listed and certain partners or designees
thereof listed therein.
10.49(9) Contribution and Exchange Agreement dated as of June 1997 between
BHI Limited Partnership and W. Spring Limited Partnership, as
Contributor, and WINN Limited Partnership and Winston Hotels, Inc.
10.50(9) Reinstatement of Agreement of Purchase and Sale and Amendment,
dated as of July 22, 1997 between WINN Limited Partnership and Park
Hotel, Limited.
10.51(9) Agreement of Purchase and Sale dated as of March 25, 1997 between
WINN Limited Partnership and Park Hotel, Limited.
10.52(9) Agreement of Purchase and Sale dated as of March 17, 1997 between
WINN Limited Partnership and WHB Hotel Corp., Ltd.
10.53(11) Letter Agreement dated November 17, 1997 between WINN Limited
Partnership and CapStar Winston Company, L.L.C.
10.54(11) Guaranty dated November 17, 1997 between CapStar Hotel Company,
WINN Limited Partnership and Winston Hotels, Inc.
10.55(11) Investment Agreement dated November 17, 1997 between Winston
Hotels, Inc., Robert W. Winston, III and John B. Harris, Jr.
10.56(11) First Amendment to Credit Agreement dated November 17, 1997 between
Winston Hotels, Inc., WINN Limited Partnership, Wachovia Bank,
N.A., Branch Banking and Trust Company, NationsBank, N.A., and
SouthTrust Bank, N.A.
10.57 Employment Agreement, dated July 31, 1997, by and between Kenneth
R. Crockett and Winston Hotels, Inc.
23 Consent of Independent Accountants.
24 Powers of Attorney.
27.1 Financial Data Schedule to the Company's Form 10-K for the year
ended December 31, 1997.
27.2 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on November 14,
1997 due to the change in the earnings per share calculation as a
result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.3 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on August 8,
1997, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.4 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on May 13,
1997, due to the change in the earnings per share calculation as
a
67
<PAGE> 68
result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.5 Restated Financial Data Schedule to the Company's Form 10-K as
filed with the Securities and Exchange Commission on March 27,
1997, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.6 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on November 12,
1996, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.7 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on August 14,
1996, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
27.8 Restated Financial Data Schedule to the Company's Form 10-Q as
filed with the Securities and Exchange Commission on May 14,
1996, due to the change in the earnings per share calculation as
a result of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," on December 31, 1997.
(1) Exhibits to the Company's Registration Statement on Form S-11 as filed
with the Securities and Exchange Commission (Registration No. 33-76602)
effective May 25, 1994 and incorporated herein by reference.
(2) Exhibit to the Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on August 11, 1995 and incorporated
herein by reference.
(3) Exhibits to the Company's Registration Statement on Form S-11 as filed
with the Securities and Exchange Commission (Registration No. 33-91230)
effective May 11, 1995 and incorporated herein by reference.
(4) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 15, 1996 and incorporated
herein by reference.
(5) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with
the Securities and Exchange Commission on May 14, 1996 and incorporated
herein by reference.
(6) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with
the Securities and Exchange Commission on August 14, 1996 and incorporated
herein by reference.
(7) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 27, 1997 and incorporated
herein by reference.
(8) Exhibit to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on July 24, 1997 and incorporated herein by
reference.
(9) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with
the Securities and Exchange Commission on August 8, 1997 and incorporated
herein by reference.
(10) Exhibits to the Company's report on Form 8-K as filed with the
Securities and Exchange Commission on September 15, 1997 and incorporated
herein by reference.
(11) Exhibits to the Company's report on Form 8-K as filed with the
Securities and Exchange Commission on December 10, 1997 and incorporated
herein by reference.
68
<PAGE> 1
EXHIBIT 3.3
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
WINSTON HOTELS, INC.
The undersigned corporation hereby submits these Articles of Amendment for
the purpose of amending its Amended and Restated Articles of Incorporation:
1. The name of the corporation is Winston Hotels, Inc. (the "Corporation").
2. The Corporation's Amended and Restated Articles of Incorporation are
hereby amended by adding the following subsection (a) of Article 5:
(a) Series A Preferred Stock
(i) TITLE. The series of Preferred Stock is hereby designated as the "9.25%
Series A Cumulative Preferred Stock" (the "Series A Preferred Stock").
(ii) NUMBER. The maximum number of authorized shares of the Series A
Preferred Stock shall be 3,000,000.
(iii) RELATIVE SENIORITY. In respect of rights to receive dividends and to
participate in distributions of payments in the event of any liquidation,
dissolution or winding up of the Corporation, the Series A Preferred Stock shall
rank (i) senior to all classes or series of Common Stock of the Corporation, 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 Corporation; (ii) on a parity with all equity securities issued by the
Corporation, 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 Corporation;
and (iii) junior to all existing and future indebtedness of the Corporation. The
term "equity securities" does not include convertible debt securities, which
will rank senior to the Series A Preferred Stock prior to conversion.
<PAGE> 2
(iv) DIVIDENDS.
(A) The holders of the then outstanding Series A Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors out of any
funds legally available therefor, preferential cumulative cash dividends at the
rate of 9.25% per annum of the Liquidation Preference (as defined herein) per
share (equivalent to a fixed annual amount of $2.3125 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 (as defined below), 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 Corporation 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 Corporation 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").
"Business Day" shall mean any day, other than a Saturday or Sunday, that is
neither a legal holiday nor a day on which banking institutions in New York City
are authorized or required by law, regulation or executive order to close.
(B) The amount of any dividends accrued on any Series A Preferred Stock at
any Dividend Payment Date shall be the amount of any unpaid dividends
accumulated thereon, to and including such Dividend Payment Date, whether or not
earned or declared, and the amount of dividends accrued on any shares of Series
A Preferred Stock at any date other than a Dividend Payment Date shall be equal
to the sum of the amount of any unpaid dividends accumulated thereon, to and
including the last preceding Dividend Payment Date, whether or not earned or
declared, plus an amount calculated on the basis of the annual dividend rate of
$2.3125 per share for the period after such last preceding Dividend Payment Date
to and including the date as of which the calculation is made based on a 360-day
year of twelve 30-day months.
(C) Except as provided in this subsection (a) of Article 5, the Series A
Preferred Stock will not be entitled to any dividends in excess of full
cumulative dividends as described above and shall not be entitled to participate
in the earnings or assets of the Corporation, and no interest, or sum of money
in lieu of interest, shall be payable in respect of any dividend payment or
payments on the Series A Preferred Stock which may be in arrears.
(D) Any dividend payment made on the Series A Preferred Shares shall be
first credited against the earliest accrued but unpaid dividend due with respect
to such shares which remains payable.
2
<PAGE> 3
(E) 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 Corporation at
such time as the terms and provisions of any agreement of the Corporation,
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 Corporation 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.
(F) 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 Corporation 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
Corporation'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.
(G) 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 Corporation 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 Corporation 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 monies be paid to or made available for a
sinking fund for
3
<PAGE> 4
the redemption of any such shares) by the Corporation (except by conversion into
or exchange for other capital stock of the Corporation ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation or redemptions for
the purpose of preserving the Corporation's qualification as a real estate
investment trust ("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.
(v) LIQUIDATION RIGHTS.
(A) Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Corporation, the holders of shares of Series A
Preferred Stock are entitled to be paid out of the assets of the Corporation
legally available for distribution to its shareholders a liquidation preference
of $25.00 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 Corporation 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.
(B) After the payment to the holders of the Series A Preferred Stock of the
full preferential amounts provided for in this subsection (a) of Article 5, the
holders of the Series A Preferred Stock, as such, shall have no right or claim
to any of the remaining assets of the Corporation.
(C) If, upon any voluntary or involuntary dissolution, liquidation, or
winding up of the Corporation, the amounts payable with respect to the
Liquidation Preference, plus an amount equal to any accrued and unpaid dividends
to the date of payment, of the Series A Preferred Stock and any other shares of
the Corporation ranking as to any such distribution on a parity with the Series
A Preferred Stock are not paid in full, the holders of the Series A Preferred
Stock and of such other shares will share ratably in any such distribution of
assets of the Corporation in proportion to the full respective preference
amounts to which they are entitled.
(D) The consolidation, share exchange or merger of the Corporation with or
into any other corporation, trust or entity or of any other corporation with or
into the Corporation, or the sale, lease or conveyance of all or substantially
all of the property or business of the Corporation, shall not be deemed to
constitute a liquidation, dissolution or winding up of the Corporation for the
purposes of this subsection (a) of Article 5.
(vi) REDEMPTION.
(A) OPTIONAL REDEMPTION. On and after September 28, 2001, the Corporation
may, at its option, redeem at any time from time to time, in whole or in part,
the Series A Preferred Stock at a price per share (the " Redemption Price"),
payable in cash, of $25.00,
4
<PAGE> 5
together with all accrued and unpaid dividends to and including the date fixed
for redemption (the "Redemption Date"), without interest, to the full extent the
Corporation has funds legally available therefor. The shares of Series A
Preferred Stock have no stated maturity, except as provided for in subparagraph
(ix) below, and will not be subject to any sinking fund or mandatory redemption
provisions.
(B) REDEMPTION UPON A CHANGE OF CONTROL.
(1) At any time prior to September 28, 2001, the Corporation 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 at the
applicable redemption price reflected below, plus accrued and unpaid
dividends (if any) to the date of redemption. The redemption price shall be
as follows:
<TABLE>
<CAPTION>
Date of Redemption
----------------------------- Purchase
From Through Price
---- ------- -----
<S> <C> <C>
September 11, 1997 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 redemption date must be within 60 days of the
date of notice and a sum sufficient to redeem the shares must be deposited
in trust to effect the redemption.
(2) Definitions.
(a) A "Change of Control Event" shall mean the execution by the
Corporation 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.
5
<PAGE> 6
(b) 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 Securities Exchange Act of 1934, as amended
(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 Corporation on a fully
diluted basis; (ii) the date the Corporation sells, transfers or
otherwise disposes of all or substantially all of the assets of the
Corporation; and (iii) the date of the consummation of a merger or
share exchange of the Corporation with another corporation where the
shareholders of the Corporation 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 or share exchange would be entitled in the election of
directors, or where members of the Board of Directors of the
Corporation immediately prior to the merger or share exchange would
not immediately after the merger or share exchange constitute a
majority of the board of directors of the corporation issuing cash or
securities in the merger or share exchange.
(c) "Voting Stock" shall mean capital stock of any class or kind
having the power to vote generally for the election of directors of
the Corporation.
(C) PROCEDURES OF REDEMPTION.
(1) 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 Corporation, 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 Corporation.
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 the
Corporation has failed to give notice or except as to the holder to whom
notice was defective. In addition to any information required by law or by
the applicable rules of any exchange upon which the Series A Preferred
Stock may be listed or admitted to trading, each such notice shall state:
(a) the Redemption Date; (b) the Redemption Price; (c) the number of shares
of Series A Preferred Stock to be redeemed; (d) the place or places where
certificates for such shares are to be surrendered for payment of the
Redemption Price; and (e) that dividends on the shares to be redeemed will
cease to accumulate on the Redemption Date. If less than all of the shares
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of Series A Preferred Stock held by any holder are to be redeemed, the
notice mailed to such holder shall also specify the number of shares of
Series A Preferred Stock to be redeemed from such holder.
(2) If notice has been mailed in accordance with subparagraph
(vi)(C)(1) above and provided that on or before the Redemption Date
specified in such notice all funds necessary for such redemption shall have
been irrevocably set aside by the Corporation, separate and apart from its
other funds in trust for the pro rata benefit of the holders of the Series
A Preferred Stock so called for redemption, so as to be, and to continue to
be available therefor, then, from and after the Redemption Date, dividends
on the Series A Preferred Stock so called for redemption shall cease to
accumulate, and said shares shall no longer be deemed to be outstanding and
shall not have the status of Series A Preferred Stock and all rights of the
holders thereof as shareholders of the Corporation shall cease, except the
right to receive the Redemption Price. Upon surrender, in accordance with
such notice, of the certificates for any Series A Preferred Stock so
redeemed (properly endorsed or assigned for transfer, if the Corporation
shall so require and the notice shall so state), such Series A Preferred
Stock shall be redeemed by the Corporation at the Redemption Price. In case
fewer than all the shares of Series A Preferred Stock represented by any
such certificate are redeemed, a new certificate or certificates shall be
issued representing the unredeemed shares of Series A Preferred Stock
without cost to the holder thereof.
(3) Any funds deposited with a bank or trust corporation for the
purpose of redeeming Series A Preferred Stock shall be irrevocable except
that:
(a) the Corporation shall be entitled to receive from such bank
or trust corporation the interest or other earnings, if any, earned on
any money so deposited in trust, and the holders of any shares
redeemed shall have no claim to such interest or other earnings; and
(b) any balance of monies so deposited by the Corporation and
unclaimed by the holders of the Series A Preferred Stock entitled
thereto at the expiration of two years from the applicable Redemption
Date shall be repaid, together with any interest or other earnings
earned thereon, to the Corporation, and after any such repayment, the
holders of the shares entitled to the funds so repaid to the
Corporation shall look only to the Corporation for payment without
interest or other earnings.
(4) 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 Corporation shall not purchase or otherwise acquire directly or
indirectly any shares of Series A Preferred Stock (except by exchange for
capital stock of the
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Corporation 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 Corporation of shares of Series A Preferred
Stock in order to ensure that the Corporation 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 Corporation
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.
(5) Immediately prior to any redemption of Series A Preferred Stock,
the Corporation shall pay, in cash, any accumulated and unpaid dividends
through the Redemption Date, unless a Redemption Date falls after a
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.
(6) 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 Corporation.
(vii) VOTING RIGHTS. Except as required by law, and as set forth below, the
holders of the Series A Preferred Stock shall not be entitled to vote at any
meeting of the shareholders for election of directors or for any other purpose
or otherwise to participate in any action taken by the Corporation or the
shareholders thereof, or to receive notice of any meeting of shareholders.
(A) Whenever dividends on any shares of Series A Preferred Stock shall be
in arrears for six or more quarters, whether consecutive or not (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 Corporation (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
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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.
(B) So long as any shares of Series A Preferred Stock remain outstanding,
the Corporation will not, without the affirmative vote or consent of the holders
of at least two-thirds of the shares of Series A Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (such
series voting separately as a voting group), amend, alter or repeal the
provisions of the Amended and Restated Articles of Incorporation or this
subsection (a) of Article 5 thereof, whether by merger, share exchange 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 Corporation might 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.
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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 and sufficient funds shall have been deposited
in trust to effect such redemption.
(C) On each matter submitted to a vote of the holders of Series A Preferred
Stock in accordance with this paragraph (vii), or as otherwise required by law,
each share of Series A Preferred Stock shall be entitled to one vote. With
respect to each share of Series A Preferred Stock, the holder thereof may
designate a proxy, with each such proxy having the right to vote on behalf of
the holder.
(viii) CONVERSION. The shares of Series A Preferred Stock are not
convertible into or exchangeable for any other property or securities of the
Corporation.
(ix) RESTRICTIONS ON OWNERSHIP AND TRANSFER.
(A) Definitions. The following terms shall have the following meanings:
"Affiliate" shall mean, with respect to any person, (i) any person
directly or indirectly owning, controlling, or holding, with power to vote ten
percent or more of the outstanding voting securities of such other person, (ii)
any person ten percent or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held, with power to vote, by such
other person, (iii) any person directly or indirectly controlling, controlled
by, or under common control with such other person, (iv) any executive officer,
director, trustee or general partner of such other person, and (v) any legal
entity for which such person acts as an executive officer, director, trustee or
general partner. The term "person" means and includes any natural person,
corporation, partnership, association, limited liability company or any other
legal entity. An indirect relationship shall include circumstances in which a
person's spouse, children, parents, siblings or mothers-, fathers, sisters- or
brothers-in-law is or has been associated with a person.
"Beneficial Ownership" shall mean ownership of shares of Equity Stock
by a Person who would be treated as an owner of such shares of Equity Stock
either directly or indirectly through the application of Section 544 of the
Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial
Owner," "Beneficially Owns," and "Beneficially Owned" shall have correlative
meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the
Corporation as the beneficiary or beneficiaries of such Trust, in accordance
with the provisions of Section 2(a)(ix)(I)(1) hereof.
"Board of Directors" shall mean the Board of Directors
of the Corporation.
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"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Common Stock" shall mean the shares of common stock, par value $0.01
per share, of the Corporation.
"Constructive Ownership" shall mean ownership of shares of Equity
Stock by a Person who would be treated as an owner of such shares of Equity
Stock either directly or indirectly through the application of Section 318 of
the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive
Owner," "Constructively Owns," and "Constructively Owned" shall have correlative
meanings.
"Equity Stock" shall mean the Common Stock and the Series A Preferred
Stock of the Corporation. The term "Equity Stock" shall include all shares of
Common Stock and Series A Preferred Stock of the Corporation that are held as
Shares-in-Trust in accordance with the provisions of Section 2(a)(ix)(I) hereof.
"Offering" means the offering and sale of shares of Series A
Preferred Stock pursuant to the Corporation's first effective registration
statement for such shares of Series A Preferred Stock filed under the Securities
Act of 1933, as amended.
"Market Price" on any date shall mean the average of the Closing
Price for the five consecutive Trading Days ending on such date. The "Closing
Price" on any date shall mean the last sale price, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange ("NYSE"), or, if the Equity Stock is not
listed or admitted to trading on the NYSE, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Equity Stock is listed
or admitted to trading, or, if the Equity Stock is not listed or admitted to
trading on any national securities exchange, the last quoted price, or if not so
quoted, as reported by the National Association of Securities Dealers, Inc.
Automated Quotation System, or, if such system is no longer in use, the
principal other automated quotations system that may then be in use or, if the
shares of Equity Stock are not quoted by any such organization, the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in the shares of Equity Stock selected by the Board of
Directors.
"Non-Transfer Event" shall mean an event other than a purported
Transfer that would cause any Person to Beneficially Own or Constructively Own
shares of Equity Stock in excess of the Ownership Limitation, including, but not
limited to, the granting of any option or entering into any agreement for the
sale, transfer or other disposition of shares of Equity Stock or the sale,
transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for shares of Equity Stock.
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"Ownership Limitation" shall mean the restriction on ownership by any
stockholder of (a) more than 9.9% of the number of outstanding shares of Series
A Preferred Stock and (b) if the stockholder owns both Series A Preferred Stock
and Common Stock, more than 9.9% of the number of outstanding shares of Common
Stock.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 2(a)(ix)(I)(5) hereof.
"Person" shall mean an individual, corporation, partnership, estate,
trust, a portion of a trust permanently set aside for or to be used exclusively
for the purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock company
or other entity and also includes a "group" as that term is used for purposes of
Section 12(d)(3) of the Securities Exchange Act of 1934, as amended.
"Prohibited Owner" shall mean, with respect to any purported Transfer
or Non-Transfer Event, any Person who, but for the provisions of Section
2(a)(ix)(C) hereof, would own record title to shares of Equity Stock.
"Restriction Termination Date" shall mean the first day after the date
of the Offering on which (i) the Board of Directors determines that it is no
longer in the best interests of the Corporation to attempt to, or continue to,
qualify as a REIT and (ii) there is an affirmative vote of two-thirds of the
number of shares of Common Stock entitled to vote on such matter at a regular or
special meeting of the shareholders of the Corporation.
"Shares-in-Trust" shall mean any shares of Equity Stock designated
Shares-in-Trust pursuant to Section 2(a)(ix)(C) hereof.
"Trading Day" shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of shares of Equity Stock, whether
voluntary or involuntary, whether of record, constructively or beneficially and
whether by operation of law or otherwise. "Transfer" (as a verb) shall have the
correlative meaning.
"Trust" shall mean any separate trust created pursuant to Section
2(a)(ix)(C) hereof and administered in accordance with the terms of Section
2(a)(ix)(I) hereof, for the exclusive benefit of any Beneficiary.
"Trustee" shall mean any Person or entity that is not an Affiliate of
either the Corporation or any Prohibited Owner, such Trustee to be designated by
the Corporation to act as trustee of any Trust, or any successor trustee
thereof.
(B) Restriction on Transfers.
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(1) Except as provided in Section 2(a)(ix)(G) hereof, from the date
of the Offering and prior to the Restriction Termination Date, (i) no Person
shall Beneficially Own or Constructively Own outstanding shares of Equity Stock
in excess of the Ownership Limitation and (ii) any Transfer that, if effective,
would result in any Person Beneficially Owning or Constructively Owning shares
of Equity Stock in excess of the Ownership Limitation shall be void ab initio as
to the Transfer of that number of shares of Equity Stock which would be
otherwise Beneficially Owned or Constructively Owned by such Person in excess of
the Ownership Limitation, and the intended transferee shall acquire no rights in
such shares of Equity Stock.
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(2) Except as provided in Section 2(a)(ix)(G) hereof, from the date
of the Offering and prior to the Restriction Termination Date, any Transfer of
shares of Series A Preferred Stock that, if effective, would result in shares of
Equity Stock being Beneficially Owned by fewer than 100 Persons (determined
without reference to any rules of attribution) shall be void ab initio as to the
Transfer of that number of shares which otherwise would be Beneficially Owned
(determined without reference to any rules of attribution) by the transferee,
and the intended transferee shall acquire no rights in such shares of Series A
Preferred Stock.
(3) From the date of the Offering and prior to the Restriction
Termination Date, any Transfer of shares of Series A Preferred Stock that, if
effective, would result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer
of that number of shares of Equity Stock which would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the Code, and the
intended transferee shall acquire no rights in such shares of Series A Preferred
Stock.
(4) From the date of the Offering and prior to the Restriction
Termination Date, any Transfer of shares of Series A Preferred Stock that, if
effective, would cause the Corporation to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's or a subsidiary's real
property, within the meaning of Section 856(d)(2)(B) of the Code, shall be void
ab initio as to the Transfer of that number of shares of Equity Stock which
would cause the Corporation to Constructively Own 10% or more of the ownership
interests in a tenant of the Corporation's or a subsidiary's real property,
within the meaning of Section 856(d)(2)(B) of the Code, and the intended
transferee shall acquire no rights in such shares of Series A Preferred Stock.
(C) Transfer to Trust.
(1) If, notwithstanding the other provisions contained in this Section
2(a)(ix), at any time after the Offering and prior to the Restriction
Termination Date, there is a purported Transfer or Non-Transfer Event such that
any Person would either Beneficially Own or Constructively Own shares of Equity
Stock in excess of the Ownership Limitation, then, (i) except as otherwise
provided in Section 2(a)(ix)(G) hereof, the purported transferee shall acquire
no right or interest (or, in the case of a Non-Transfer Event, the Person
holding record title to the shares of Equity Stock Beneficially Owned or
Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease
to own any right or interest) in such number of shares of Equity Stock which
would cause such Beneficial Owner or Constructive Owner to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership Limitation,
(ii) such number of shares of Equity Stock in excess of the Ownership Limitation
(rounded up to the nearest whole share) shall be designated Shares-in-Trust and
transferred automatically and by operation of law to a Trust to be held in
accordance with that Section 2(a)(ix)(I), and (iii) the Prohibited Owner shall
submit such number of shares of Equity Stock to the Corporation for registration
in the name of the Trustee. Such transfer to a Trust and the designation of
shares as Shares-in-Trust shall be effective as of the close of business on the
business day prior to the date of the Transfer or Non-Transfer Event, as the
case may be. There shall be a separate Trust with respect to each designation
and transfer of Shares-in-Trust.
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(2) If, notwithstanding the other provisions contained in this Section
2(a)(ix), at any time after the Offering and prior to the Restriction
Termination Date, there is a purported Transfer or Non-Transfer Event that, if
effective, would (i) result in shares of Equity Stock being Beneficially Owned
by fewer than 100 Persons (determined without reference to any rules of
attribution), (ii) result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code, or (iii) cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant of the
Corporation's or a subsidiary's real property, within the meaning of Section
856(d)(2)(B) of the Code, then (x) the purported transferee shall not acquire
any right or interest (or, in the case of a Non-Transfer Event, the Person
holding record title of the shares of Series A Preferred Stock with respect to
which such Non-Transfer Event occurred, shall cease to own any right or
interest) in such number of shares of Series A Preferred Stock, the ownership of
which by such purported transferee or record holder would (A) result in shares
of Equity Stock being Beneficially Owned by fewer than 100 Persons, (B) result
in the Corporation being "closely held" within the meaning of Section 856(h) of
the Code, or (C) cause the Corporation to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's or a subsidiary's real
property, within the meaning of Section 856(d)(2)(B) of the Code, (y) such
number of shares of Series A Preferred Stock (rounded up to the nearest whole
share) shall be designated Shares-in-Trust and transferred automatically and by
operation of law to a Trust to be held in accordance with that Section
2(a)(ix)(I), and (z) the Prohibited Owner shall submit such number of shares of
Series A Preferred Stock to the Corporation for registration in the name of the
Trustee. Such transfer to a Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer Event, as the case may be.
There shall be a separate Trust with respect to each designation and transfer of
Shares-in-Trust.
(D) Remedies For Breach. If the Corporation, or its designees, shall at
any time determine in good faith that a Transfer has taken place in violation of
Section 2(a)(ix)(B) hereof or that a Person intends to acquire or has attempted
to acquire Beneficial Ownership or Constructive Ownership of any shares of
Equity Stock in violation of Section 2(a)(ix)(B) hereof, the Corporation shall
take such action as it deems advisable to refuse to give effect to or to prevent
such Transfer or acquisition, including, but not limited to, refusing to give
effect to such Transfer on the books of the Corporation or instituting
proceedings to enjoin such Transfer or acquisition.
(E) Notice of Restricted Transfer. Any Person who acquires or attempts to
acquire shares of Equity Stock in violation of Section 2(a)(ix)(B) hereof, or
any Person who owned shares of Equity Stock that were transferred to a Trust
pursuant to the provisions of Section 2(a)(ix)(C) hereof, shall immediately give
written notice to the Corporation of such event and shall provide to the
Corporation such other information as the Corporation may request in order to
determine the effect, if any, of such Transfer or Non-Transfer Event, as the
case may be, on the Corporation's status as a REIT.
(F) Owners Required To Provide Information. From the date of the Offering
and prior to the Restriction Termination Date:
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(1) Every Beneficial Owner or Constructive Owner of more than 5%, or
such lower percentages as required pursuant to regulations under the Code,
of the outstanding shares of all classes of capital stock of the
Corporation shall, within 30 days after January 1 of each year, provide to
the Corporation a written statement or affidavit stating the name and
address of such Beneficial Owner or Constructive Owner, the number of
shares of Equity Stock Beneficially Owned or Constructively Owned, and a
description of how such shares are held. Each such Beneficial Owner or
Constructive Owner shall provide to the Corporation such additional
information as the Corporation may request in order to determine the
effect, if any, of such Beneficial Ownership or Constructive Ownership on
the Corporation's status as a REIT and to ensure compliance with the
Ownership Limitation.
(2) Each Person who is a Beneficial Owner or Constructive Owner of
shares of Equity Stock and each Person (including the stockholder of
record) who is holding shares of Equity Stock for a Beneficial Owner or
Constructive Owner shall provide to the Corporation a written statement or
affidavit stating such information as the Corporation may request in order
to determine the Corporation's status as a REIT and to ensure compliance
with the Ownership Limitation.
(G) Exception. The Ownership Limitation shall not apply to the acquisition
of shares of Equity Stock by an underwriter that participates in a public
offering of such shares for a period of 90 days following the purchase by such
underwriter of such shares provided that the restrictions contained in Section
2(a)(ix)(B) hereof will not be violated following the distribution by such
underwriter of such shares. In addition, the Board of Directors, upon receipt of
a ruling from the Internal Revenue Service or an opinion of counsel in each case
to the effect that the restrictions contained in Section 2(a)(ix)(B) hereof will
not be violated, may exempt a Person from the Ownership Limitation provided that
(i) the Board of Directors obtains such representations and undertakings from
such Person as are reasonably necessary to ascertain that no individual's
Beneficial Ownership or Constructive Ownership of shares of Equity Stock will
violate the Ownership Limitation and (ii) such Person agrees in writing that any
violation or attempted violation of such representations or undertakings will
result in such transfer to a Trust of shares of Equity Stock pursuant to Section
2(a)(ix)(C) hereof.
(H) Removal of Ownership Limitation. The Ownership Limitation will not be
removed until (i) the Board of Directors determines that it is no longer in the
best interest of the Corporation to attempt to qualify, or to continue to
qualify, as a REIT and (ii) there is an affirmative vote of two-thirds of the
number of shares of Common Stock entitled to vote on such matter at a regular or
special meeting of the stockholders of the Corporation.
(I) Shares-in-Trust.
(1) Trust. Any shares of Equity Stock transferred to a Trust and
designated Shares-in-Trust pursuant to Section 2(a)(ix)(C) hereof shall be held
for the exclusive benefit of the Beneficiary. The Corporation shall name a
Beneficiary for each Trust within five days after
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discovery of the existence thereof. No Beneficiary shall be a Beneficiary of
more than one Trust at any time. Any transfer to a Trust, and subsequent
designation of shares of Equity Stock as Shares-in-Trust, pursuant to Section
2(a)(ix)(C) hereof shall be effective as of the close of business on the
business day prior to the date of the Transfer or Non-Transfer Event that
results in the transfer to the Trust. Shares-in-Trust shall remain issued and
outstanding shares of Equity Stock of the Corporation and shall be entitled to
the same rights and privileges on identical terms and conditions as are all
other issued and outstanding shares of Equity Stock of the same class and
series. When transferred to a Permitted Transferee in accordance with the
provisions of Section 2(a)(ix)(I)(5) hereof, such Shares-in-Trust shall cease to
be designated as Shares-in-Trust.
(2) Dividend Rights. The Trust, as record holder of Shares-in-Trust,
shall be entitled to receive all dividends and distributions as may be declared
by the Board of Directors on such shares of Equity Stock and shall hold such
dividends or distributions in trust for the benefit of the Beneficiary. The
Prohibited Owner with respect to Shares-in-Trust shall repay to the Trust the
amount of any dividends or distributions received by it that (i) are
attributable to any shares of Equity Stock designated Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or distribution
paid to a Prohibited Owner, including, if necessary, withholding any portion of
future dividends or distributions payable on shares of Equity Stock Beneficially
Owned or Constructively Owned by the Person who, but for the provisions of
Section 2(a)(ix)(C) hereof, would Constructively Own or Beneficially Own the
Shares-in-Trust; and, as soon as reasonably practicable following the
Corporation's receipt or withholding thereof, shall pay over to the Trust for
the benefit of the Beneficiary the dividends so received or withheld, as the
case may be.
(3) Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled
to receive, ratably with each other holder of shares of Equity Stock of the same
class or series, that portion of the assets of the Corporation which is
available for distribution to the holders of such class and series of shares of
Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts
received upon such liquidation, dissolution, or winding up, or distribution;
provided, however, that the Prohibited Owner shall not be entitled to receive
amounts pursuant to this Section 2(a)(ix)(I)(3) in excess of, in the case of a
purported Transfer in which the Prohibited Owner gave value for shares of Equity
Stock and which Transfer resulted in the transfer of the shares to the Trust,
the price per share, if any, such Prohibited Owner paid for the shares of Equity
Stock and, in the case of a Non-Transfer Event or Transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the shares were
received through a gift or devise) and which Non-Transfer Event or Transfer, as
the case may be, resulted in the transfer of shares to the Trust, the price per
share equal to the Market Price on the date of such Non-Transfer Event or
Transfer. Any remaining amount in such Trust shall be distributed to the
Beneficiary.
(4) Voting Rights. The Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity
Stock prior to the discovery by
17
<PAGE> 18
the Corporation that the shares of Equity Stock are Shares-in-Trust shall,
subject to applicable law, be rescinded and shall be void ab initio with respect
to such Shares-in-Trust and the Prohibited Owner shall be deemed to have given,
as of the close of business on the business day prior to the date of the
purported Transfer or Non-Transfer Event that results in the transfer to the
Trust of shares of Equity Stock under Section 2(a)(ix)(C) hereof, an irrevocable
proxy to the Trustee to vote the Shares-in-Trust in the manner in which the
Trustee, in its sole and absolute discretion, desires.
(5) Designation of Permitted Transferee. The Trustee shall have the
exclusive and absolute right to designate a Permitted Transferee of any and all
Shares-in-Trust. In an orderly fashion so as not to materially adversely affect
the Market Price of the Shares-in-Trust, the Trustee shall designate any Person
as Permitted Transferee, provided, however, that (i) the Permitted Transferee so
designated purchases for valuable consideration (whether in a public or private
sale) the Shares-in-Trust and (ii) the Permitted Transferee so designated may
acquire such Shares-in-Trust without such acquisition resulting in a transfer to
a Trust and the redesignation of such shares of Equity Stock so acquired as
Shares-in-Trust under Section 2(a)(ix)(C) hereof. Upon the designation by the
Trustee of a Permitted Transferee in accordance with the provisions of this
Section 2(a)(ix)(I)(5), the Trustee shall (i) cause to be transferred to the
Permitted Transferee that number of Shares-in-Trust acquired by the Permitted
Transferee, (ii) cause to be recorded on the books of the Corporation that the
Permitted Transferee is the holder of record of such number of shares of Equity
Stock, (iii) cause the Shares-in-Trust to be canceled, and (iv) distribute to
the Beneficiary any and all amounts held with respect to the Shares-in-Trust
after making that payment to the Prohibited Owner pursuant to Section
2(a)(ix)(I)(6) hereof.
(6) Compensation to Record Holder of Shares of Equity Stock that
Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 2(a)(ix)(I)(5) hereof or following the
acceptance of the offer to purchase such shares in accordance with Section
2(a)(ix)(I)(7) hereof) to receive from the Trustee following the sale or other
disposition of such Shares-in-Trust the lesser of (i) in the case of (a) a
purported Transfer in which the Prohibited Owner gave value for shares of Equity
Stock and which Transfer resulted in the transfer of the shares to the Trust,
the price per share, if any, such Prohibited Owner paid for the shares of Equity
Stock, or (b) a Non-Transfer Event or Transfer in which the Prohibited Owner did
not give value for such shares (e.g., if the shares were received through a gift
or devise) and which Non-Transfer Event or Transfer, as the case may be,
resulted in the transfer of shares to the Trust, the price per share equal to
the Market Price on the date of such Non-Transfer Event or Transfer, and (ii)
the price per share received by the Trustee from the sale or other disposition
of such Shares-in-Trust in accordance with Section 2(a)(ix)(I) hereof. Any
amounts received by the Trustee in respect of such Shares-in-Trust and in excess
of such amounts to be paid the Prohibited Owner pursuant to this Section
2(a)(ix)(I)(6) shall be distributed to the Beneficiary in accordance with the
provisions of Section 2(a)(ix)(I) hereof. Each Beneficiary and Prohibited Owner
waive any and all claims that they may have against the Trustee and the Trust
arising out of the disposition of Shares-in-Trust, except for claims arising out
of the gross negligence or willful misconduct of, or any failure to make
payments in accordance with this Section 2(a)(ix)(I), by such Trustee or the
Corporation.
18
<PAGE> 19
(7) Purchase Right in Shares-in-Trust. Shares-in-Trust shall be
deemed to have been offered for sale to the Corporation, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or
Non-Transfer Event) and (ii) the Market Price on the date the Corporation, or
its designee, accepts such offer. The Corporation shall have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
Non-Transfer Event or purported Transfer which resulted in such Shares-in-Trust
and (ii) the date the Corporation determines in good faith that a Transfer or
Non-Transfer Event resulting in Shares-in-Trust has occurred, if the Corporation
does not receive a notice of such Transfer or Non-Transfer Event pursuant to
Section 2(a)(ix)(I)(E) hereof.
(J) Remedies Not Limited. Nothing contained in this Section 2(a)(ix) shall
limit the authority of the Corporation to take such other action as it deems
necessary or advisable to protect the Corporation and the interests of its
shareholders by preservation of the Corporation's status as a REIT and to ensure
compliance with the Ownership Limitation.
(K) Ambiguity. In the case of an ambiguity in the application of any of
the provisions of this Section 2(a)(ix), including any definition contained in
Section 2(a)(ix)(A) hereof, the Board of Directors shall have the power to
determine the application of the provisions of this Section 2(a)(ix) with
respect to any situation based on the facts known to it.
(L) Legend. Each certificate for shares of Equity Stock shall bear the
following legend:
"The shares of Series A Preferred Stock represented by this certificate are
subject to restrictions on transfer for the purpose of the Corporation's
maintenance of its status as a real estate investment trust under the
Internal Revenue Code of 1986, as amended (the "Code"). No Person may (i)
Beneficially Own or Constructively Own (a) more than 9.9% of the number of
outstanding shares of Series A Preferred Stock and (b) if the stockholder
owns both Series A Preferred Stock and Common Stock, more than 9.9% of the
number of outstanding shares of Common Stock, (ii) Beneficially Own shares
of Equity Stock that would result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without reference
to any rules of attribution), (iv) Beneficially Own shares of Equity Stock
that would result in the Corporation being "closely held" under Section
856(h) of the Code, or (v) Constructively Own shares of Equity Stock that
would cause the Corporation to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's or a subsidiary's real
property, within the meaning of Section 856(d)(2)(B) of the Code. Any
Person who attempts to Beneficially Own or Constructively Own shares of
Equity Stock in excess of the above limitations must immediately notify the
Corporation in writing. If the restrictions above are violated, the shares
of Equity Stock
19
<PAGE> 20
represented hereby will be transferred automatically and by operation of
law to a Trust and shall be designated Shares-in-Trust. All capitalized
terms in this legend have the meanings defined in the Corporation's Amended
and Restated Articles of Incorporation, as the same may be further amended
from time to time, a copy of which, including the restrictions on transfer,
will be sent without charge to each shareholder who so requests."
(M) Severability. If any provision of this Section 2(a)(ix) or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
3. The foregoing amendment was duly adopted by the Board of Directors on
September 2, 1997 without shareholder approval in accordance with Section
55-6-02 of the North Carolina General Statutes.
4. These articles will become effective upon filing.
20
<PAGE> 21
IN WITNESS WHEREOF, Winston Hotels, Inc. has caused these Articles of
Amendment to be executed by its duly authorized officer this ____ day of
September, 1997.
WINSTON HOTELS, INC.
By: /s/ Robert W. Winston, III
-------------------------------------------
Robert W. Winston, III
President and Chief Executive Officer
21
<PAGE> 1
EXHIBIT 10.4
AMENDMENT NO. 2 TO THE SECOND AMENDED
AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
WINN LIMITED PARTNERSHIP
This Amendment No. 2 (the "Amendment") to the Second Amended and Restated
Agreement of Limited Partnership of WINN Limited Partnership dated July 11, 1997
(the "Partnership Agreement") is entered into as of December 31, 1997, by and
among Winston Hotels, Inc. (the "General Partner") and the Limited Partners of
WINN Limited Partnership (the "Partnership"). All capitalized terms used herein
and not otherwise defined shall have the meanings assigned to them in the
Partnership Agreement.
WHEREAS, the General Partner wishes to contribute to the Partnership the
Hampton Inn hotel, 201 Asheville Avenue, Cary, North Carolina (the "Cary Hampton
Inn") in exchange for 670,616 Partnership Units;
WHEREAS, the Partnership wishes to acquire the Cary Hampton Inn in
exchange for the issuance of such Partnership Units;
WHEREAS, Section 4.02(c) of the Partnership Agreement provides that, upon
the General Partner's contribution of the Cary Hampton Inn to the Partnership,
the General Partner will be entitled to receive 585,400 Partnership Units;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree to amend the Partnership
Agreement as follows:
Section 1. Amendment to Section 4.02(c).
-------------------------
Section 4.02(c) is hereby amended by deleting the numerals "585,400"
appearing in such section and substituting in lieu thereof the numerals
"670,616".
Section 2. Contribution.
------------
The General Partner hereby contributes to the Partnership
the Cary Hampton Inn.
Section 3. Issuance of Additional Partnership Units.
----------------------------------------
In consideration of the contribution to the Partnership made by the General
Partner pursuant to Section 2 hereof, the Partnership hereby issues to the
General Partner 670,616 Partnership Units.
<PAGE> 2
Section 4. Amendment to Exhibit A.
----------------------
Exhibit A to the Partnership Agreement is hereby amended by substituting
for the current version of such exhibit, a version in the form attached to this
Amendment reflecting the issuance of the additional Partnership Units as
provided in Section 3 hereof.
IN WITNESS WHEREOF, the foregoing Amendment No. 2 to the Second Amendment
and Restated Agreement of Limited Partnership Agreement of WINN Limited
Partnership has been signed and delivered as of this 31st day of December, 1997,
by the undersigned as General Partner of the Partnership.
WINSTON HOTELS, INC.,
as General Partner
By: /s/ Brent V. West
------------------------------
Title: Vice President, Controller
---------------------------
<PAGE> 3
EXHIBIT A
---------
December 31, 1997
(reflecting issuance of additional Partnership Units to
Winston Hotels, Inc. in exchange for contribution of
Hampton Inn hotel in Cary, North Carolina)
<TABLE>
<CAPTION>
Agreed Value of
Partner and Cash Capital Partnership Percentage
Address Contribution Contribution Units Interest
------- ------------ ------------ ----- --------
<S> <C> <C> <C> <C>
GENERAL PARTNER:
Winston Hotels, Inc. $103,524,120 $7,595,734 16,194,480 90.15%
2209 Century Drive
Raleigh, NC 27612
Limited Partners:
Hotel I, Inc. ____ $2,975,000 297,500 1.65%
2209 Century Drive
Raleigh, NC 27612
Charles M. Winston ____ $1,056,430 105,643 0.59%
Winston Hotels, Inc.
2209 Century Drive
Raleigh, NC 27612
John B. Harris, Jr. ____ $ 308,130 30,813 0.17%
Winston Hotels, Inc.
2209 Century Drive
Raleigh, NC 27612
Cary Suites, Inc. ____ $6,947,215 606,413 3.38%
2209 Century Drive
Raleigh, NC 27612
RWW, Inc. ____ $ 788,365 69,960 0.39%
2209 Century Drive
Raleigh, NC 27612
WJS Associates- ____ $1,230,000 109,516 0.61%
Perimeter II, Inc.
2209 Century Drive
Raleigh, NC 27612
Hotel II, Inc. ____ $ 590,042 45,651 0.25%
2209 Century Drive
Raleigh, NC
27612
Quantum Realty ____ $5,633,280 440,100 2.45%
Partners II, L.P.
100 Crescent Court
Suite 1000
Dallas, Texas 75241
Hubbard Realty ____ $ 855,871 63,797 0.36%
of Winston-Salem, Inc.
85 South Stratford Rd.
Winston-Salem, NC 27103
---------- -------
17,963,873 100.0%
</TABLE>
<PAGE> 1
EXHIBIT 10.59
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement") is made and entered into by
WINSTON HOTELS, INC., a North Carolina corporation (hereinafter the
"Corporation") and KENNETH R. CROCKETT, (hereinafter the "Employee").
The Corporation desires to employ Employee and Employee desires to
accept such employment on the terms set forth below.
In consideration of the mutual promises set forth below and other good
and valuable consideration, the receipt and sufficiency of which the parties
acknowledge, the Corporation and Employee agree as follows:
1. EMPLOYMENT. The Corporation employs Employee and Employee accepts
employment on the terms and conditions set forth in this Agreement.
2. NATURE OF EMPLOYMENT.
Employee shall serve as the Chief Development Officer of the
Corporation and shall have such responsibilities over development and renovation
and authority consistent with such position as may be reasonably assigned to him
by the Corporation. Employee shall devote his full time and attention and best
efforts to perform successfully his duties and advance the Corporation's
interests. Employee shall abide by Corporation's policies, procedures, and
practices as they may exist from time to time.
During this employment, Employee shall have no other employment of any
nature whatsoever without the prior consent of the Corporation; provided,
however, this Agreement shall not prohibit Employee from personally owning and
dealing in stocks, bonds, securities, real estate, commodities or other
investment properties for his own benefit.
3. COMPENSATION AND BENEFITS.
(a) SALARY. Compensation for Employee's services under this Agreement
initially shall be One Hundred Fifty Thousand Dollars ($150,000.00) per year,
payable in accordance with the Corporation's reasonable policies, procedures,
and practices as they may exist from time to time. The Employee's salary shall
be reviewed annually by the Corporation's Board of Directors as of December 31
and by February 15 of each year and may be increased in the Board's discretion.
(b) BONUS. Employee shall be entitled to participate in any bonus
programs the Corporation may have or create for employees of his level.
<PAGE> 2
(c) BENEFITS. Employee may participate in any medical insurance or
other employee benefit plans and programs which may be made available from time
to time to other Corporation employees at Employee's level; provided, however,
that Employee's participation in such benefit plans and programs is subject to
the applicable terms, conditions, and eligibility requirements of those plans
and programs, some of which are within the plan administrator's discretion, as
they may exist from time to time.
(d) AUTOMOBILE. The Corporation shall provide Employee with the use of
an automobile.
(e) EXPENSES. Employee shall be reimbursed by the Corporation for any
reasonable expenses incurred by Employee on behalf of the Corporation or in
connection with Employee's performance of his duties hereunder. Such
reimbursement shall be in accordance with the Corporation's practices or
policies as they may exist from time to time.
(f) LIFE INSURANCE. The Corporation shall pay the premium for a term
life insurance policy for Employee for up to one million dollars in coverage.
(g) STOCK OPTIONS. Employee shall be entitled to participate in any
qualified or non-qualified stock option plans offered by the Corporation to
Employees at Employee's level. The terms of any stock options under such plans
shall be set forth in separate stock option agreements between the Corporation
and Employee.
(h) VACATION. Employee shall be entitled to four (4) weeks of vacation
each year. Such vacation shall be taken in accordance with the Corporation's
policies and practices as they may exist from time to time.
4. TERM OF EMPLOYMENT. Unless terminated earlier as provided herein,
the original term of employment under this Agreement shall be for three (3)
years, commencing on the date hereof. Upon the expiration of the original term
of employment or any subsequent term, Employee's employment shall be
automatically renewed for an additional one (1) year period unless either party
gives the other one hundred twenty (120) days notice of intent not to renew.
5. TERMINATION OF EMPLOYMENT.
(a) WITH NOTICE. Either the Corporation or Employee may terminate this
Agreement during the original or any extension term of employment by giving
ninety (90) days notice to the other party. If the Corporation terminates this
Agreement with such notice, then Employee shall be entitled to an amount equal
to two years of his then current salary and any bonuses to which he may be
entitled (based on the average of the preceding two (2) years bonuses), with
said amount to be paid in a lump sum upon the date of termination of this
Agreement.
2
<PAGE> 3
(b) CAUSE, DISABILITY, OR DEATH. The Corporation may terminate
Employee's employment immediately for "Disability," "Cause," or in the event of
Employee's death. For purposes of this Agreement, Disability shall mean a mental
or physical condition, or both, that substantially interferes with Employee's
ability to perform satisfactorily his usual duties for the Corporation for a
period of more than six (6) consecutive months upon the certificate of a
qualified physician approved by the Corporation. For purposes of this Agreement,
Cause shall mean: (i) any act of Employee's in connection with his employment
and relating to the Corporation's business including, but not limited to,
negligence, which is materially detrimental to the Corporation's interests; (ii)
any act of misconduct, unlawfulness or dishonesty by Employee in connection with
his employment which is detrimental to the Corporation; (iii) Employee's
unsatisfactory job performance or failure to comply with the Corporation's Board
of Directors' reasonable directions; or (iv) Employee's material breach of this
Agreement. Employee shall be given written notice and a thirty (30) day
opportunity to cure any deficiencies arising under Sections 5(iii) and (iv)
above.
In the event of termination for Cause, the Corporation's obligation to
compensate Employee ceases on the date of termination except as to the amounts
of salary due at that time. In the event of termination for Disability, the
Corporation shall pay Employee's then current salary (reduced by any payments
Employee receives from disability insurance) and any bonuses to which he may be
entitled (based on the average of the preceding two (2) years bonuses) for a
period of one year from the date of termination. In the event of termination for
death, the Corporation shall pay Employee's estate any salary and pro-rated
bonuses to which he may be entitled as of the date of termination.
6. CHANGE IN CONTROL. For purposes of this Agreement, "Change in
Control" shall mean:
(a) The acquisition by any entity or person, which theretofore
beneficially owned less than 50% of the Corporation's common stock in a
transaction or series of transactions which results in such entity or person
beneficially owning 50% or more of the Corporation's common stock or voting
power, where beneficial ownership and the percentages of shares outstanding are
determined pursuant to Sections 13(d) and (g) of the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder; or
(b) The merger, share exchange, or consolidation of the Corporation
with one or more corporations in a transaction or series of transactions where
the common stock of the Corporation is exchanged for less than 50% of the voting
stock of the resulting or surviving corporation, including, without limitation,
an exchange of the common stock of the Corporation for cash; or
(c) The sale, assignment, transfer, pledge, hypothecation or other
disposition of assets (except a pledge, hypothecation or other similar
disposition made at the time the Corporation enters into a bona fide financing
transaction with a party which at the time of such transaction is not an
affiliate of the Corporation) of the Corporation having a value in excess of 50%
of the consolidated total assets of the Corporation.
3
<PAGE> 4
(d) The individuals who, as of the date of this Agreement, are members
of the Board of Directors (the "Incumbent Board"), cease for any reason to
constitute at least two-thirds of the members of the Board; provided, however,
that if the election, or nomination for election by the Corporation's common
stockholders of any new director was approved by a vote of at least two-thirds
of the Incumbent Board, such new director shall, for purposes of this Agreement,
be considered as a member of the Incumbent Board.
A Change in Control shall not include a transaction, or series of
transactions, whereby the Corporation becomes a subsidiary of a holding company
if the shareholders of the holding company are substantially the same as the
shareholders of the Corporation prior to such transaction or series of series of
transactions.
After the occurrence of a Change in Control:
(1) If Employee becomes the Chief Development Officer responsible for
all development and renovation activities of the acquiring corporation (or
surviving corporation in the event of a merger, share exchange, or
consolidation)(the "Acquiring Corporation") and the principal executive offices
of the Acquiring Corporation are located within a thirty (30) mile radius of
Raleigh, North Carolina, then the terms and provisions of this Agreement shall
remain in full force and effect;
(2) If Employee is not the Chief Development Officer of the Acquiring
Corporation, Employee is required to relocate outside a thirty (30) mile radius
of Raleigh, North Carolina, the principal executive offices of the Acquiring
Corporation are located outside a thirty (30) mile radius of Raleigh, North
Carolina, or Employee suffers a reduction in base salary, then within thirty
(30) days following the later of the happening of one of the items listed in
this sub-paragraph (2) or the Change in Control, the Employee must notify the
Acquiring Corporation of his election to:
(i) remain subject to the terms and provisions of this Agreement; or
(ii) terminate this Agreement. However, in the event Employee elects to
terminate this Agreement, he shall be entitled to a continuation of Employee's
medical insurance and any other health benefit plans and programs of the
Corporation for a period of two (2) years following his termination and to
receive a Stay Bonus in exchange for his agreement to remain in the employment
of the Acquiring Corporation for a six (6) month period from the Change in
Control. The amount of the Stay Bonus shall be equal to two (2) years of his
then current annual compensation, including the amount of his most recent annual
bonus. During said six (6) month period, Employee shall receive compensation and
benefits in accordance with the terms of this Agreement, and, should his
employment terminate because of Disability, Employee shall receive payments in
accordance with Section 5(b) of this Agreement. The Stay Bonus shall be paid in
a lump sum at the end of said six (6) month period. If, after Employee agrees to
remain in the employment of the Acquiring Corporation for said six (6) month
period, the Corporation should terminate his employment without cause, Employee
nevertheless shall be deemed to have
4
<PAGE> 5
earned and be entitled to the entire Stay Bonus and a continuation of the
medical insurance and other health benefits referenced in this paragraph.
7. PROPRIETARY INFORMATION AND PROPERTY.
Employee shall not, at any time during or following employment with the
Corporation, disclose or use, except in the course of his employment with the
Corporation or as may be required by law, any confidential or proprietary
information of the Corporation received by Employee while employed hereunder,
whether such information is in Employee's memory or embodied in writing or other
physical form.
Confidential or proprietary information is information which is not
generally available to the general public, or Corporation's competitors, or
ascertainable through common sense or general business knowledge; including, but
not limited to data, compilations, methods, financial data, financial plans,
business plans, product plans, lists of actual or potential customers, and
marketing information regarding executives and employees.
All records, files or other objects maintained by or under the control,
custody or possession of the Corporation or its agents in their capacity as
agents shall be and remain the Corporation's property. Upon termination of his
employment, Employee shall return to the Corporation all property (including,
but not limited to, equipment, records, files, documents, credit cards, and
keys) which he received in connection with his employment. At the Corporation's
request, Employee shall bring current all such records, files or documents
before returning them.
Upon notice of cessation of his employment with the Corporation,
Employee shall fully cooperate with the Corporation in winding up his pending
work and transferring his work to those individuals designated by the
Corporation.
The terms and conditions of this Section 7 shall survive expiration or
termination of this Agreement or Employee's employment and shall not be affected
by any change or modification of this Agreement unless specific reference is
made to this Section 7.
8. REMEDIES. Employee agrees that his breach or violation of Section 7,
will result in immediate and irreparable harm to the Corporation for which legal
remedies would be inadequate. Therefore, in addition to any legal or other
relief to which the Corporation may be entitled, the Corporation may seek legal
and equitable relief, including but not limited to, preliminary and permanent
injunctive relief.
9. EMPLOYEE REPRESENTATION. Employee represents and warrants that his
employment and obligations under this Agreement will not breach any duty or
obligation he owes to another person or entity.
10. WAIVER OF BREACH. The Corporation's or Employee's waiver of any
breach of a provision of this Agreement shall not waive any subsequent breach by
the other party.
5
<PAGE> 6
11. ENTIRE AGREEMENT. This Agreement including any exhibit or
attachment hereto: (i) supersedes all other understandings and agreements, oral
or written, between the parties with respect to the subject matter of this
Agreement including any exhibit or attachment hereto; and (ii) constitutes the
sole agreement between the parties with respect to this subject matter. Each
party acknowledges that: (i) no representations, inducements, promises or
agreements, oral or written, have been made by any party or by anyone acting on
behalf of any party, which are not embodied in this Agreement including any
exhibit or attachment hereto; and (ii) no agreement, statement or promise not
contained in this Agreement shall be valid. No change or modification of this
Agreement shall be valid or binding upon the parties unless such change or
modification is in writing and is signed by the parties.
12. SEVERABILITY. If a court of competent jurisdiction holds that any
provision or sub-part thereof contained in this Agreement is invalid, illegal or
unenforceable, that invalidity, illegality or unenforceability shall not affect
any other provision in this Agreement.
13. PARTIES BOUND. The terms, provisions, covenants and agreements
contained in this Agreement shall apply to, be binding upon and inure to the
benefit of the Corporation's successors and assigns. Employee may not assign
this Agreement without the Corporation's prior written consent.
14. GOVERNING LAW. This Agreement and the employment relationship
created by it shall be governed by North Carolina law.
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
day and year written below.
EMPLOYEE
/s/ Kenneth R. Crockett 7/31/97
---------------------------------------
Kenneth R. Crockett Date
WINSTON HOTELS, INC.
By: /s/ Robert W. Winston, III 7/18/97
------------------------------------
Date
6
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Winston Hotels, Inc. on Form S-3 (File Nos. 33-93516 and 333-32713) and Form S-8
(File No. 333-19197) of our report dated January 11, 1998, on our audits of the
consolidated financial statements and the financial statement schedule of
Winston Hotels, Inc. as of December 31, 1997 and 1996, and for each of the three
years in the period ended December 31, 1997, and of our report dated February 6,
1998, on our audits of the financial statements of Winston Hospitality, Inc. as
of October 31, 1997 and December 31, 1996, and for the ten months ended October
31, 1997 and the years ended December 31, 1996 and 1995, which reports are
included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Raleigh, North Carolina
March 25, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
I, Edwin B. Borden, a resident of Wayne County, North Carolina, of
legal age and legally competent for all purposes, do hereby grant this Power of
Attorney to Robert W. Winston, III, Chief Executive Officer and President of
Winston Hotels, Inc. (the "Company") and James D. Rosenberg, Chief Financial
Officer and Chief Operating Officer of the Company, who are of legal age and who
are legally competent for all purposes, and with full power of substitution so
that they, or either of them, may perform any and all acts and things which said
attorneys-in-fact, or any of them, deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934. I expressly
authorize the said attorneys-in-fact, or any of them, to execute and deliver to
the Securities and Exchange Commission or other appropriate entities on my
behalf an Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997,
including specifically, but not limited to, the power and authority to sign for
me in my name in the capacity indicated on the Annual Report and any and all
amendments thereto.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 2nd day of February, 1998.
/s/ Edwin B. Borden [SEAL]
-----------------------------------
Edwin B. Borden
<PAGE> 2
POWER OF ATTORNEY
I, Richard L. Daugherty, a resident of Wake County, North Carolina, of
legal age and legally competent for all purposes, do hereby grant this Power of
Attorney to Robert W. Winston, III, Chief Executive Officer and President of
Winston Hotels, Inc. (the "Company") and James D. Rosenberg, Chief Financial
Officer and Chief Operating Officer of the Company, who are of legal age and who
are legally competent for all purposes, and with full power of substitution so
that they, or either of them, may perform any and all acts and things which said
attorneys-in-fact, or any of them, deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934. I expressly
authorize the said attorneys-in-fact, or any of them, to execute and deliver to
the Securities and Exchange Commission or other appropriate entities on my
behalf an Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997,
including specifically, but not limited to, the power and authority to sign for
me in my name in the capacity indicated on the Annual Report and any and all
amendments thereto.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 3rd day of February, 1998.
/s/ Richard L. Daugherty [SEAL]
-----------------------------------
Richard L. Daugherty
<PAGE> 3
POWER OF ATTORNEY
I, Thomas F. Darden, II, a resident of Wake County, North Carolina, of
legal age and legally competent for all purposes, do hereby grant this Power of
Attorney to Robert W. Winston, III, Chief Executive Officer and President of
Winston Hotels, Inc. (the "Company") and James D. Rosenberg, Chief Financial
Officer and Chief Operating Officer of the Company, who are of legal age and who
are legally competent for all purposes, and with full power of substitution so
that they, or either of them, may perform any and all acts and things which said
attorneys-in-fact, or any of them, deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934. I expressly
authorize the said attorneys-in-fact, or any of them, to execute and deliver to
the Securities and Exchange Commission or other appropriate entities on my
behalf an Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997,
including specifically, but not limited to, the power and authority to sign for
me in my name in the capacity indicated on the Annual Report and any and all
amendments thereto.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 2nd day of February, 1998.
/s/ Thomas F. Darden, II [SEAL]
-----------------------------------
Thomas F. Darden, II
<PAGE> 4
POWER OF ATTORNEY
I, Paul Fulton, a resident of Forsyth County, North Carolina, of legal
age and legally competent for all purposes, do hereby grant this Power of
Attorney to Robert W. Winston, III, Chief Executive Officer and President of
Winston Hotels, Inc. (the "Company") and James D. Rosenberg, Chief Financial
Officer and Chief Operating Officer of the Company, who are of legal age and who
are legally competent for all purposes, and with full power of substitution so
that they, or either of them, may perform any and all acts and things which said
attorneys-in-fact, or any of them, deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934. I expressly
authorize the said attorneys-in-fact, or any of them, to execute and deliver to
the Securities and Exchange Commission or other appropriate entities on my
behalf an Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997,
including specifically, but not limited to, the power and authority to sign for
me in my name in the capacity indicated on the Annual Report and any and all
amendments thereto.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 6th day of February, 1998.
/s/ Paul Fulton [SEAL]
-----------------------------------
Paul Fulton
<PAGE> 5
POWER OF ATTORNEY
I, David C. Sullivan, a resident of Shelby County, Tennessee, of legal
age and legally competent for all purposes, do hereby grant this Power of
Attorney to Robert W. Winston, III, Chief Executive Officer and President of
Winston Hotels, Inc. (the "Company") and James D. Rosenberg, Chief Financial
Officer and Chief Operating Officer of the Company, who are of legal age and who
are legally competent for all purposes, and with full power of substitution so
that they, or either of them, may perform any and all acts and things which said
attorneys-in-fact, or any of them, deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934. I expressly
authorize the said attorneys-in-fact, or any of them, to execute and deliver to
the Securities and Exchange Commission or other appropriate entities on my
behalf an Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997,
including specifically, but not limited to, the power and authority to sign for
me in my name in the capacity indicated on the Annual Report and any and all
amendments thereto.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 3rd day of February, 1998.
/s/ David C. Sullivan [SEAL]
-----------------------------------
David C. Sullivan
<PAGE> 6
POWER OF ATTORNEY
I, Charles M. Winston, a resident of Wake County, North Carolina, of
legal age and legally competent for all purposes, do hereby grant this Power of
Attorney to Robert W. Winston, III, Chief Executive Officer and President of
Winston Hotels, Inc. (the "Company") and James D. Rosenberg, Chief Financial
Officer and Chief Operating Officer of the Company, who are of legal age and who
are legally competent for all purposes, and with full power of substitution so
that they, or either of them, may perform any and all acts and things which said
attorneys-in-fact, or any of them, deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934. I expressly
authorize the said attorneys-in-fact, or any of them, to execute and deliver to
the Securities and Exchange Commission or other appropriate entities on my
behalf an Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997,
including specifically, but not limited to, the power and authority to sign for
me in my name in the capacity indicated on the Annual Report and any and all
amendments thereto.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 3rd day of February, 1998.
/s/ Charles M. Winston [SEAL]
-----------------------------------
Charles M. Winston
<PAGE> 7
POWER OF ATTORNEY
I, James H. Winston, a resident of Duval County, Florida, of legal age
and legally competent for all purposes, do hereby grant this Power of Attorney
to Robert W. Winston, III, Chief Executive Officer and President of Winston
Hotels, Inc. (the "Company") and James D. Rosenberg, Chief Financial Officer and
Chief Operating Officer of the Company, who are of legal age and who are legally
competent for all purposes, and with full power of substitution so that they, or
either of them, may perform any and all acts and things which said
attorneys-in-fact, or any of them, deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934. I expressly
authorize the said attorneys-in-fact, or any of them, to execute and deliver to
the Securities and Exchange Commission or other appropriate entities on my
behalf an Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997,
including specifically, but not limited to, the power and authority to sign for
me in my name in the capacity indicated on the Annual Report and any and all
amendments thereto.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 3rd day of February, 1998.
/s/ James H. Winston [SEAL]
-----------------------------------
James H. Winston
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WINSTON HOTELS, INC. FOR THE PERIOD ENDED
SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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