<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
WINSTON HOTELS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
Preliminary Copies
WINSTON HOTELS, INC.
2209 Century Drive, Suite 300
Raleigh, North Carolina 27612
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 5, 1998
You are cordially invited to attend the Annual Meeting of Shareholders
of Winston Hotels, Inc. (the "Company") which will be held on May 5, 1998, at
10:00 a.m., local time, at the Homewood Suites Hotel, 5400 Edwards Mill Road,
Raleigh, North Carolina for the following purposes:
(1) To elect eight members to the Board of Directors;
(2) To consider and act upon a proposal to delete Article 7 of the
Company's Articles of Incorporation, which limits the
Company's level of permitted indebtedness to 45% of
investments in hotel properties;
(3) To consider and act upon a proposal to amend Article 15 of the
Company's Articles of Incorporation to provide that nothing
contained therein will prohibit the settlement of any
transaction entered into through the facilities of the New
York Stock Exchange.
(4) To consider and act upon a proposal to amend the Company's
Stock Incentive Plan;
(5) To ratify the appointment of Coopers & Lybrand L.L.P. as
independent auditors for the Company for the year ending
December 31, 1998; and
(6) To transact such other business as may properly come before
the Annual Meeting or any adjournment thereof.
Shareholders of record at the close of business on March 18, 1998 are
entitled to notice of and to vote at the Annual Meeting and any and all
adjournments or postponements thereof.
IT IS DESIRABLE THAT YOUR SHARES OF STOCK BE REPRESENTED AT THE MEETING
REGARDLESS OF THE NUMBER OF SHARES YOU MAY HOLD. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING IN PERSON, PLEASE COMPLETE AND RETURN THE
ENCLOSED PROXY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING YOU
MAY REVOKE YOUR PROXY AND VOTE IN PERSON.
By Order of the Board of Directors
Robert W. Winston, III
Chief Executive Officer and
President
Raleigh, North Carolina
March 24, 1998
<PAGE> 3
WINSTON HOTELS, INC.
2209 Century Drive, Suite 300
Raleigh, North Carolina 27612
PROXY STATEMENT
GENERAL INFORMATION
Proxy Solicitation
This Proxy Statement and the accompanying proxy card are being mailed
to shareholders on or about March 24, 1998, by the Board of Directors of Winston
Hotels, Inc. (the "Company") in connection with the solicitation of proxies for
use at the Annual Meeting of Shareholders (the "Annual Meeting") to be held at
the Homewood Suites Hotel, 5400 Edwards Mill Road, Raleigh, North Carolina on
May 5, 1998, at 10:00 a.m., local time, and at all adjournments or postponements
thereof. The Company will pay all expenses incurred in connection with this
solicitation, including postage, printing, handling and the actual expenses
incurred by custodians, nominees and fiduciaries in forwarding proxy material to
beneficial owners. In addition to solicitation by mail, certain officers and
directors of the Company, who will receive no additional compensation for their
services, may solicit proxies by telephone, personal communication or other
means. In connection with the solicitation of proxies the Company has retained
Georgeson & Company, Inc. as proxy solicitors to provide certain services for
an estimated fee of $7,000, plus expenses.
Purposes of Annual Meeting
The principal purposes of the Annual Meeting are to: (1) elect eight
members to the Board of Directors; (2) consider and act upon a proposal to
delete Article 7 of the Company's Articles of Incorporation, which limits the
Company's level of permitted indebtedness to 45% of investments in hotel
properties; (3) consider and act upon a proposal to amend Article 15 of the
Company's Articles of Incorporation to provide that nothing contained therein
will prohibit the settlement of any transaction entered into through the
facilities of the New York Stock Exchange (the "NYSE"); (4) consider and act
upon a proposal to amend the Company's Stock Incentive Plan; (5) ratify the
appointment of Coopers & Lybrand L.L.P. as independent auditors for the Company
for the year ending December 31, 1998; and (6) transact such other business as
may properly come before the Annual Meeting or any adjournment thereof. The
Board of Directors knows of no other matters other than those stated above to be
brought before the Annual Meeting.
Voting Rights
If the accompanying proxy card is properly signed and returned to the
Company and not revoked, it will be voted in accordance with the instructions
contained therein. If the proxy card is signed and returned, but voting
directions are not made, the proxy will be voted in favor of the proposals set
forth in the accompanying "Notice of Annual Meeting of Shareholders" and in such
manner as the proxyholders named on the enclosed proxy card in their discretion
determine upon such other business as may properly come before the Annual
Meeting or any adjournment or postponement thereof. Any proxy given pursuant to
this solicitation may be revoked by the person giving it at any time before it
is voted by (1) filing written notice of revocation with the Secretary of the
Company which is actually received prior to the vote of shareholders, (2) filing
a duly executed proxy bearing a later date with the Secretary of the Company
before the vote of shareholders or (3) attending the Annual Meeting and voting
in person.
<PAGE> 4
The Board of Directors has fixed the close of business on March 18,
1998, as the record date for the determination of shareholders entitled to
receive notice of and to vote at the Annual Meeting and all adjournments or
postponements thereof. As of the close of business on March 18, 1998, the
Company had outstanding 16,194,480 shares of Common Stock and 3,000,000 shares
of Series A Preferred Stock. On all matters to come before the Annual Meeting,
each holder of Common Stock will be entitled to vote at the Annual Meeting and
will be entitled to one vote for each share owned. Holders of Series A Preferred
Stock will be entitled to vote as a separate voting group on Proposal 2 only and
will be entitled to one vote for each share owned. The representation in person
or by proxy of a majority of the issued and outstanding securities entitled to
vote of each voting group is necessary to provide a quorum for voting at the
Annual Meeting.
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information, as of March 18,
1998, regarding shares of Common Stock of the Company owned of record or known
to the Company to be owned beneficially by each director and nominee for
director, each executive officer named in the Summary Compensation Table in the
Proxy Statement, all directors and executive officers as a group, and each
person known to beneficially own more than five percent of the Company's
outstanding Common Stock. Except as set forth in the footnotes to the table
below, each of the shareholders identified in the table below has sole voting
and investment power over the shares beneficially owned by such person. None of
the directors or executive officers beneficially owns any shares of the
Company's Series A Preferred Stock.
<TABLE>
<CAPTION>
Shares
Name Beneficially Owned (1)(2) Percent of Class
---- ------------------------- ----------------
<S> <C> <C>
Directors and Executive Officers
Charles M. Winston (3) 1,089,764 6.4%
Robert W. Winston, III (4) 1,259,317 7.3%
Philip R. Alfano (5) 60,000 *
Kenneth Crockett (6) 50,000 *
James H. Winston (7)(8) 15,000 *
Paul Fulton (7) 7,500 *
Thomas F. Darden, II (7) 12,500 *
Richard L. Daugherty (7) 8,500 *
Edwin B. Borden (7) 17,500 *
David C. Sullivan (9) 5,687 *
All directors and executive officers
as a group (12 persons) (10) 1,899,395 10.7%
5% Shareholders
Franklin Resources, Inc. (11) 1,683,080 10.4%
777 Mariners Island Blvd.
San Mateo, California 94404
</TABLE>
- -------------------------------
*Less than one percent
2
<PAGE> 5
(1) Pursuant to the rules of the Securities and Exchange Commission,
certain shares of the Company's Common Stock which a person has the
right to acquire within 60 days of the date shown above pursuant to the
exercise of stock options are deemed to be outstanding for the purpose
of computing the percentage ownership of such person but are not deemed
outstanding for the purpose of computing the percentage ownership of
any other person.
(2) Assumes that all units of limited partnership interest (the "Units") in
WINN Limited Partnership (the "Partnership"), which are redeemable
within 60 days of the date shown above for shares of the Company's
Common Stock, are redeemed for shares of Common Stock. The total number
of shares outstanding used in calculating the percentage assumes that
none of the Units held by other persons are redeemed for shares of
Common Stock.
(3) Includes 105,643 shares issuable to Mr. Winston upon exercise of
redemption rights with respect to Units held directly by Mr. Winston.
Also includes 109,516 shares issuable upon redemption of Units held by
WJS - Perimeter, Inc., a corporation owned 33.33% by Mr. Winston;
606,413 shares issuable upon redemption of Units held by Cary Suites,
Inc., a corporation owned 23.33% by Mr. Winston, 23.33% by Mr.
Winston's spouse, 30% by Robert W. Winston, III, and 23.33% by Mr.
Winston's daughter-in-law; and 69,960 shares issuable upon redemption
of Units held by RWW, Inc., a corporation owned 33.33% by Mr. Winston,
33.33% by Mr. Winston's spouse and 33.33% by Robert W. Winston, III.
Mr. Winston serves on the board of directors of the above entities and
thereby shares voting and investment power over the Units held by these
corporations but disclaims beneficial ownership of any Company
securities held by such corporations except to the extent of his direct
ownership interest in such corporations.
(4) Includes 140,000 shares subject to presently exercisable stock options
Also includes 297,500 shares issuable upon redemption of Units held by
Hotel 1, Inc., a corporation owned 37% by Mr. Winston, and 63% by Mr.
Winston's spouse and trusts for the benefit of his minor children;
606,413 shares issuable upon redemption of Units held by Cary Suites,
Inc., a corporation owned 30% by Mr. Winston, 23.33% by Mr. Winston's
spouse, 23.33% by Charles M. Winston and 23.33% by Charles M. Winston's
spouse; 69,960 shares issuable upon redemption of Units held by RWW,
Inc., a corporation owned 33.33% by Mr. Winston, 33.33% by Charles M.
Winston and 33.33% by Charles M. Winston's spouse; and 45,651 shares
issuable upon redemption of Units held by Hotel 2, Inc., a corporation
owned 60% by Mr. Winston, 20% by trusts for the benefit of his minor
children and 20% by Mr. Winston's sister. Mr. Winston serves on the
board of directors of the above entities and thereby shares voting and
investment power over the Units held by these corporations but
disclaims beneficial ownership of any Company securities held by such
corporations except to the extent of his direct ownership interest in
such corporations.
(5) Includes 5,000 shares jointly owned with Mr. Alfano's wife and 55,000
shares subject to presently exercisable stock options.
(6) Includes 50,000 shares subject to presently exercisable stock options.
(7) Includes 7,500 shares issued to each director, other than Charles
Winston and Robert Winston, serving in June 1994 under the Winston
Hotels, Inc. Directors' Stock Incentive Plan (the "Directors' Plan").
Such shares began vesting in 1994 with each director at the rate of 20%
per year. Any shares not vested when such person ceases to be a
director will be forfeited. Each director is entitled to vote and
receive the dividends paid on such shares prior to vesting.
3
<PAGE> 6
(8) Includes 1,000 shares held by Mr. Winston's wife.
(9) Includes 5,687 shares issued to Mr. Sullivan in January 1998 under the
Directors' Plan. Such shares vest at the rate of 20% per year. Any
shares not vested when Mr. Sullivan ceases to be a director will be
forfeited. Each director is entitled to vote and receive the dividends
paid on such shares prior to vesting.
(10) Includes 275,000 shares subject to presently exercisable stock options
and 1,234,683 shares issuable upon redemption of all outstanding Units
redeemable within 60 days held by executive officers and directors.
(11) Based on information contained in a Schedule 13G filing dated February
11, 1998 provided by Franklin Resources, Inc., Franklin Advisers, Inc.,
Charles B. Johnson and Rupert H. Johnson, Jr. (principal shareholders
of Franklin Resources, Inc.). Franklin Resources, Inc. reported that,
through its subsidiaries, it has sole voting power and sole dispositive
power with respect to 1,683,080 shares.
PROPOSAL 1: ELECTION OF DIRECTORS
The Board of Directors has fixed the number of directors at eight. The
eight persons named below are nominated to serve on the Board of Directors until
the 1999 Annual Meeting of Shareholders (or until such time as their respective
successors are elected and qualified). Each nominee is currently a director of
the Company. The Board of Directors has no reason to believe that the persons
named below as nominees for directors will be unable or will decline to serve if
elected. In the event of death or disqualification of any nominee or the refusal
or inability of any nominee to serve as a director, the proxy may be voted with
discretionary authority for a substitute or substitutes as shall be designated
by the Board of Directors. Pursuant to North Carolina law, the eight candidates
who receive the highest number of votes as directors will be elected as
directors of the Company. Abstentions and shares held in street name that are
not voted in the election of directors will not be included in determining which
nominees received the highest number of votes.
Nominees For Election as Directors
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 its inception in
March 15, 1994 and Secretary until May 1995. 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
4
<PAGE> 7
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 H. Winston - James Winston, age 64, has been a director of the
Company since May 25, 1994. Mr. Winston is the President of Omega Insurance
Company, a property and casualty insurance company doing business mainly in the
State of Florida and throughout five southeastern states, and has served in that
capacity for more than the past five years. He is also President of LPMC, Inc.,
a real estate investment firm. Mr. Winston is a native of North Carolina and
graduated Phi Beta Kappa from the University of North Carolina at Chapel Hill.
Mr. Winston serves on the boards of directors of Stein Mart, Inc., FRP
Properties, Inc. and a number of community organizations in the Jacksonville,
Florida area. Mr. Winston is the brother of Charles Winston and the uncle of
Robert Winston.
Paul Fulton - Paul Fulton, age 63, has been a director of the Company
since May 25, 1994. Mr. Fulton has served as Chairman of the Board and Chief
Executive Officer of Bassett Furniture Industries, Inc. since July 1997. Until
September 1997 Mr. Fulton served as the Dean of the Kenan-Flagler Business
School of the University of North Carolina at Chapel Hill, a position he held
since January 1994. From 1988 through 1993 Mr. Fulton served with Sara Lee
Corporation, a global packaged food and consumer products company and one of
North Carolina's largest employers. Mr. Fulton's last position with Sara Lee was
President. Mr. Fulton is a graduate of the University of North Carolina at
Chapel Hill. Mr. Fulton serves as a director of Sonoco Products, NationsBank
Corporation, Cato Corporation, Bassett Furniture Industries, Inc., Hudson Bay
Company and Lowe's Companies, Inc.
Thomas F. Darden, II - Thomas Darden, age 43, has been a director of
the Company since May 25, 1994. Mr. Darden is the Chairman of Cherokee Sanford
Group, Inc. which manufactures brick products in North Carolina and Maryland,
where he has been employed for more than the past five years. Mr. Darden
graduated with highest honors from the University of North Carolina at Chapel
Hill with a B.A. degree in 1976 and graduated from Yale Law School with a J.D.
degree in 1981. In 1992, Mr. Darden received a Master's Degree in City and
Regional Planning from the University of North Carolina at Chapel Hill. In 1991,
Mr. Darden was appointed by the Governor of North Carolina to the board of the
North Carolina Department of Transportation, and was subsequently appointed to
the Triangle Transit Authority Board of Trustees. Mr. Darden serves or has
served on a variety of community, charitable and college boards, currently
including the Board of Visitors of the University of North Carolina at Chapel
Hill and the Board of Trustees of Shaw University. Mr. Darden serves as a
director of Waste Industries, Inc. and BTI Telecom Corp.
Richard L. Daugherty - Richard Daugherty, age 62, has been a director
of the Company since May 25, 1994. Mr. Daugherty serves as a consultant to North
Carolina State University. Until 1994 Mr. Daugherty was Vice President of
Worldwide Manufacturing for the IBM PC Company in Research Triangle Park, North
Carolina, where he had been employed for more than five years. At the time of
his retirement in 1994, Mr. Daugherty was the senior IBM executive for the State
of North Carolina. He serves on various community and business boards of
directors, including the boards of Wachovia Bank & Trust Company, N.A., and
Carolina Power & Light Company.
Edwin B. Borden - Edwin Borden, age 63, has been a director of the
Company since May 25, 1994. Mr. Borden is President and Chief Executive Officer
of The Borden Manufacturing Company, Inc. a textile manufacturer, where he has
been employed for more than the past five years. Mr. Borden is a native of North
Carolina and a graduate of the University of North Carolina at Chapel Hill. He
serves on
5
<PAGE> 8
the boards of directors of Carolina Power & Light Company, Jefferson-Pilot
Corporation, Triangle Bancorp and Ruddick Corp.
David C. Sullivan - David Sullivan, age 57, was appointed by the Board
of Directors to serve as a director, effective January 1, 1998. From 1990 until
1997 Mr. Sullivan served in various positions with Promus Hotel Corporation
("Promus"), a franchiser of over 900 Hampton Inns, Embassy Suites, Homewood
Suites and Hampton Inn and Suites hotels. Mr. Sullivan served as director,
Executive Vice President and Chief Operating Officer for Promus from April 1995
until December 1997. Between 1993 and 1995 Mr. Sullivan held the position of
Executive Vice President and Chief Operating Officer of the Hotel Division of
The Promus Companies Incorporated.
The Board of Directors recommends that shareholders vote FOR the election of the
nominees.
Board of Directors Meetings and Committees
The Board of Directors held eight meetings during 1997. All incumbent
directors attended more than 75% of the aggregate number of meetings of the
Board of Directors and its committees on which they served in 1997. The Board of
Directors has an Audit Committee, a Compensation Committee and holds special
committee meetings of the independent directors to consider various matters
where non-independent directors may have a financial interest as appropriate.
The Board of Directors does not have a nominating committee. The Audit Committee
makes recommendations concerning the engagement of independent accountants,
reviews the plans and results of the audit engagement with the independent
public accountants, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal accounting controls. Directors Borden, Darden
and Fulton are members of the Audit Committee. During 1997, the Audit Committee
met two times. The Compensation Committee administers the Winston Hotels, Inc.
Stock Incentive Plan and is responsible for determining compensation for the
Company's executive officers. Directors Daugherty, Darden and Borden make up the
Compensation Committee. During 1997, the Compensation Committee met three times.
A special committee of independent directors composed of directors Borden,
Darden, Daugherty and Fulton, met two times during 1997.
Director Compensation
The Company currently pays no cash compensation to its directors. At
the time of the initial public offering, the Company issued to each initial
director, other than Charles and Robert Winston, 7,500 shares of Common Stock,
subject to certain restrictions. Mr. Sullivan was issued 5,687 shares of
restricted Common Stock on January 1, 1998. The directors' shares of restricted
Common Stock vest at the rate of 20% per year beginning on the date of their
issuance. Each director is entitled to vote and receive the distributions paid
on such shares of Common Stock prior to vesting. Directors who cease to be
directors will forfeit any shares not previously vested. In addition, the
Company will reimburse all directors for their out-of-pocket expenses incurred
in connection with their service on the Board of Directors. Charles and Robert
Winston will receive no compensation as directors, other than reimbursement for
their out-of-pocket expenses incurred in connection with their service on the
Board of Directors.
6
<PAGE> 9
EXECUTIVE COMPENSATION
The following tables set forth a summary of annual and long-term
compensation paid or accrued by the Company for services rendered, for the
fiscal years indicated, by the Company's Chief Executive Officer and the next
two most highly compensated executive officers (the "named executive officers")
whose total salary and bonus exceeded $100,000 individually during the year
ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
---------------------------------------- -------------------
Name and No. of Securities All Other
Principal Position Year(1) Salary Bonus Underlying Options Compensation
------------------ ------- ------ ----- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Robert W. Winston, III 1997 $200,000 -- -- --
Chief Executive 1996 $190,000 $90,000 90,000 --
Officer and President
Philip R. Alfano (2) 1997 $113,425 $33,763 -- $19,725
Chief Financial 1996 $135,000 $40,000 60,000 --
Officer, Senior Vice
President and Secretary
Kenneth Crockett 1997 $150,000 $30,000 -- --
Executive Vice 1996 $110,000 $55,000 (3) --
President of
Development
</TABLE>
(1) Prior to 1996 the Company was advised by Winston Advisors, Inc., a
North Carolina corporation (the "Advisor") pursuant to the terms of an
advisory agreement (the "Advisory Agreement"). For 1995, under the
terms of the Advisory Agreement, the Advisor earned a cash fee of
$100,000 and an incentive fee of $409,234 payable in shares of Common
Stock, related to increases in funds from operations per share over the
prior year. The Company and the Advisor terminated the Advisory
Agreement effective December 31, 1995. For the period May 25, 1994
(inception) through December 31, 1995, the Advisory Agreement was in
effect and neither the Company nor the Partnership paid any of the
Company's executive officers any cash compensation. Effective January
1, 1996, the Company's executive officers became employees of the
Company.
(2) Mr. Alfano resigned as Chief Financial Officer, Senior Vice President
and Secretary to pursue personal interests effective October 3, 1997.
The annual compensation and long-term compensation amounts shown for
1997 reflect the compensation Mr. Alfano earned while serving as an
executive officer of the Company from January 1, 1997 through October
3, 1997. Mr. Alfano received $19,725 in consulting fees for services
provided to the Company during 1997 following his resignation.
(3) In 1995, the Company granted non-qualified stock options to Mr.
Crockett covering 50,000 shares of Common Stock which expire 10 years
from the date of grant. The grant of these options became effective
October 16, 1995 and vested fully on October 16, 1996.
7
<PAGE> 10
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table provides information about the stock options held
by the executive officers on December 31, 1997.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying Unexercised In-the-Money Options at
Options at Fiscal Year-End Fiscal Year-End (1)
-------------------------------------------------- ---------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert W. Winston, III 97,500 67,500 $223,750 $118,125
Philip R. Alfano 55,000 30,000(2) $152,500 $ 52,500
Kenneth Crockett 50,000 -- $90,625 --
</TABLE>
(1) The value of the options is based upon the difference between the
exercise price and the closing price per share of $13.125 on December
31, 1997.
(2) Mr. Alfano's unexercised options terminated on January 1, 1998.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors, a committee
composed entirely of non-officer and non-employee directors, is responsible for
determining the compensation of the Company's executive officers and
administering the Company's Stock Incentive Plan.
Executive Compensation
The Company is committed to implementing a scheme of executive
compensation which will contribute to the achievement of the Company's business
objectives. The Compensation Committee's policy is to implement a scheme of
executive compensation so that the compensation paid to executive officers shall
be commensurate with their positions and determined with reference to
compensation paid to similarly situated officers of companies which the Board of
Directors deem to be comparable to the Company.
The Compensation Committee establishes ranges for executive
compensation using regional and national surveys of comparable companies.
Companies included in these salary surveys are not necessarily the same as the
companies used for purposes of the performance graph included in this Proxy
Statement, but instead include a broader set of companies with which the Company
competes for qualified personnel.
Executive compensation consists of three components: base salary,
annual incentive and long-term incentive compensation. These components provide
elements of fixed income and variable compensation that is linked to the
achievement of individual and corporate goals and enhanced shareholder value.
Base salary represents the fixed component of the Company's executive
compensation system. Executives receive a salary that is within a range
established by the Compensation Committee for their respective positions based
on the comparative analysis described above. The determination of where an
executive's salary falls within the salary range is based on a determination of
the level of experience that the executive brings to the position and how
successful the executive has been in achieving set goals.
8
<PAGE> 11
Adjustments to salaries are based on a similar evaluation and a comparison of
adjustments made by competitors and any necessary inflationary adjustments.
Annual incentives exist in the form of bonuses which are provided for
each executive officer as a means of linking compensation to objective
performance criteria that are within the control of the executive officer. At
the beginning of each year the Compensation Committee establishes a target bonus
for each executive and identifies performance goals for each executive to meet
to receive the full bonus. The actual amount of incentive bonus received by each
of the Company's executive officers is determined by the Compensation Committee
after the end of the applicable year. Where an executive's performance is not
easily fixed to objective standards, the Compensation Committee will exercise
its subjective judgment in determining the extent to which goals are achieved.
The third component of executive compensation is targeted toward
providing rewards for long-term performance. The Compensation Committee believes
that long-term incentives are important to motivate and reward executives and
employees of the Company and related entities for maximizing stockholder value.
Long-term incentives are provided primarily pursuant to the Stock Incentive
Plan, which is administered by the Compensation Committee. The purpose of the
Stock Incentive Plan is to (i) attract and retain employees, and other service
providers with ability and initiative; (ii) provide incentives to those deemed
important to the success of the Company and related entities; and (iii)
associate the interests of these individuals with the interests of the Company
and its shareholders through opportunities for increased stock ownership. Awards
of stock options under the Stock Incentive Plan are based on comparison to
incentives offered to other comparable companies and serve as a means of
retaining valued employees. No new options were granted during 1997.
Chief Executive Officer Compensation
The Compensation Committee has adopted the policies described above
with respect to Mr. Winston's compensation. Mr. Winston's salary for 1997 was
$200,000. Mr. Winston did not receive a bonus or stock options in 1997. The
Company believes this value is competitive with compensation paid to chief
executive officers in the hotel industry.
This report is submitted by the following members of the Compensation
Committee of the Board of Directors:
Compensation Committee
Richard L. Daugherty (Chairman)
Edwin B. Borden
Thomas F. Darden, II
Employment Agreement
During 1997 the Company entered into a new employment agreement with
Mr. Crockett, the Company's Executive Vice President of Development. The
agreement has a three year term beginning July 31, 1997 and automatically renews
for subsequent one year terms unless either party provides the other 120 days
notice of an intent not to renew prior to the expiration of the preceding term.
The employment agreement provides that Mr. Crockett's base salary is $150,000
per year with the salary to be reviewed annually by the Company's Board of
Directors. Mr. Crockett is eligible to participate in any bonus programs the
Company has or may create for persons of Mr. Crockett's level and is eligible to
receive
9
<PAGE> 12
stock options under the Company's stock option plan. In addition Mr. Crockett
shall receive standard medical insurance and other employee benefits, including
term life insurance coverage and a company automobile. The employment agreement
is terminable by either party giving 90 days notice to the other party. If the
Company terminates upon such notice it shall pay Mr. Crockett a lump sum amount
equal to two years of his then current salary plus a bonus for each of the two
years based on the average of the bonus paid for the preceding two years. The
Company may also terminate the agreement immediately for death, disability or
for cause as defined in the agreement. If the Company terminates the agreement
for cause it shall pay Mr. Crockett the amount of salary due at that time. Mr.
Crockett may terminate the agreement upon notice in the event of a change in
control unless after the change in control Mr. Crockett retains his position and
the principal executive offices of the acquiring company remain within a 30 mile
radius of Raleigh, North Carolina. If Mr. Crockett elects to terminate upon a
change in control he shall be entitled to continue to receive medical and health
insurance for a period of two years and shall receive a bonus equal to two years
of his then current salary plus his most recent bonus if he agrees to stay with
the company for a period of six months following the change in control. The
agreement prohibits disclosure of confidential information acquired during the
period of employment with the Company.
10
<PAGE> 13
COMPARISON OF CUMULATIVE TOTAL RETURN
The following graph compares the cumulative total shareholder return on
the Company's Common Stock since May 25, 1994, the effective date of the
Company's initial public offering, through December 31, 1997, with the
cumulative total return for the same period on the Standard & Poor's 500 Stock
Index (the "S&P 500"), the National Association of Real Estate Investment Trust
Equity Index (the "NAREIT Equity Index"), and the SNL Securities Hotel REIT
Index (the "Hotel REIT Index"). The graph assumes that, at the beginning of the
period indicated, $100 was invested in the Company's Common Stock and the stock
of the companies comprising each index and that all dividends were reinvested.
The NAREIT Equity Index is currently comprised of 180 real estate
investment trusts ("REITs") which own a wide variety of real estate assets,
including regional shopping malls, shopping centers, apartments, self storage
facilities, industrial properties and manufactured housing communities. The
Hotel REIT Index is currently comprised of 14 publicly traded hotel REITs,
organized for purposes substantially similar to that of the Company.
<TABLE>
<CAPTION>
Period Ending
--------------------------------------------------
Index 5/25/94 12/31/94 12/31/95 12/31/96 12/31/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Winston Hotels, Inc. 100.00 104.83 136.11 169.01 176.30
S&P 500 100.00 102.36 140.62 173.02 230.76
NAREIT All Equity
REIT Index 100.00 96.16 110.72 150.27 180.71
SNL Hotel REITs 100.00 93.35 122.89 187.77 246.19
</TABLE>
11
<PAGE> 14
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and the Partnership have entered into a number of
transactions and agreements with entities affiliated with certain officers and
directors which were entered into or in effect in 1997. The Company is a REIT
that through the Partnership owns 38 limited service hotels, and one full
service hotel (the "Current Hotels"). The Company currently has a 90.15%
interest in the Partnership and is its sole general partner. In order for the
Company to qualify as a REIT, neither the Company nor the Partnership can
operate hotels. The Company and the Partnership historically have leased the
Current Hotels to Winston Hospitality, Inc. ("Winston Hospitality"), a
corporation owned by Robert W. Winston, III, an officer and director of the
Company, and John B. Harris, Jr. Charles M. Winston, the Chairman of the Board
of Directors of the Company, is a director of Winston Hospitality. As described
more fully below, in November 1997 substantially all of the assets of Winston
Hospitality were sold, contributed and transferred to CapStar Management
Company, L.P. ("CapStar"), an affiliate of CapStar Hotel Company, a
publicly-held company. Concurrent with the transaction, the leases were assigned
to CapStar Winston Company, L.L.C. (the "Lessee"), an affiliate of CapStar. The
details of related party transactions are described below.
Sale and Contribution of Assets by Winston Hospitality to CapStar
Effective November 17, 1997, Winston Hospitality transferred and
contributed certain of its assets, including 32 of the leases for the Current
Hotels between Winston Hospitality and the Company or the Partnership, as
applicable, to CapStar in exchange for partnership units in CapStar valued at
approximately $24 million. The partnership units in CapStar received by Winston
Hospitality are redeemable and exchangeable, on a one-for-one basis, for shares
of Common Stock of CapStar Hotel Company.
Effective November 24, 1997, Winston Hospitality transferred and
assigned substantially all of its remaining assets including six of the leases
between Winston Hospitality and the Partnership, to CapStar in exchange for
approximately $10 million in cash.
Effective November 17, 1997, 32 of the leases for the Current Hotels
and effective November 24, 1997, six of the leases for the Current Hotels were
amended by a lease amendment among the Company, the Partnership and the Lessee
to extend the term of each lease to a fifteen year term among other changes.
In connection with the November 17, 1997 and November 24, 1997
transactions, CapStar Hotel Company executed a limited guarantee, guaranteeing
the prompt and full payment, up to a maximum of $20 million, of rent and all
other accounts payable to the Company under leases for the Current Hotels and
possibly under future leases.
As an inducement to the Company to consent to the transactions Robert
W. Winston, III and John B. Harris, Jr. agreed to use their best efforts to
purchase a total of 400,000 shares of the Company's Common Stock by November 24,
1999. The transactions with CapStar were approved by a special committee of the
Company's Board of Directors composed entirely of independent directors.
The Percentage Leases
Until November 1997 and the CapStar transactions, the Partnership or
the Company, as applicable, and Winston Hospitality entered into leases, each
with a term of 10 years, relating to the
12
<PAGE> 15
Current Hotels owned until that time (the "Percentage Leases"). Pursuant to the
terms of the Percentage Leases, Winston Hospitality was required to pay the
greater of a base rent or percentage rent and certain other additional charges
and was entitled to all profits from the operation of the hotels after the
payment of operating and other expenses. Percentage rent is based on a
percentage of each hotel's room revenues. Payments of rent under the Percentage
Leases constitute substantially all of the Company's and the Partnership's
revenues.
At the time of the CapStar transactions Winston Hospitality operated 28
of the Current Hotels. Interstate Management and Investment Company ("IMIC")
operated 9 of the Current Hotels and Promus operated one of the Current Hotels
under management agreements with Winston Hospitality. Winston Hospitality was
entitled to all profits and cash flow from the hotels after payment of rent due
under the Percentage Leases and other operating expenses, including any
management fees payable to IMIC and Promus. The Company and the Partnership
relied on Winston Hospitality to generate sufficient cash flow from the
operation of the hotels to enable Winston Hospitality to meet the rent
obligations under the Percentage Leases. The obligations of Winston Hospitality
under the Percentage Leases were unsecured. Other than working capital
sufficient to operate the hotels, inventory and the franchise licenses for the
hotels, Winston Hospitality had only nominal assets in addition to its rights
and benefits under the Percentage Leases.
From January 1, 1997 through October 31, 1997, Winston Hospitality paid
the Company an aggregate of $33,198,000 in rent under the Percentage Leases and
had net income of $1,817,000 from the operation of the Current Hotels.
Relationships with Promus
From 1990 until 1997 David C. Sullivan a director of the Company served
in various positions with Promus and served as a director and Executive Vice
President and Chief Operating Officer of Promus from April 1995 until December
1997.
Promus is the franchiser of Hampton Inns, Embassy Suites, Homewood
Suites and Hampton Inn and Suites hotels. During 1997 a total of 19 of the
Current Hotels were operated under Promus franchise agreements with Winston
Hospitality until November 1997 and thereafter with CapStar. Promus also
operated one of the Current Hotels during 1997 under a management agreement with
Winston Hospitality until November 1997 and thereafter with the Lessee. Payments
by Winston Hospitality to Promus in connection with the Current Hotels through
October 31, 1997 totaled $3,262,000.
The Company and Promus have entered into various agreements relating to
the acquisition of Promus-developed hotels by the Company. The Company agreed in
1996 to use its best efforts, over an eight year period, to spend up to $100
million toward the acquisition or development of Promus-brand hotels. Promus
agreed to provide the Company with an option to purchase certain future
developed hotels. Promus also agreed to invest up to $15 million in Company
Common Stock at prevailing market prices at the rate of $15 per room as the
Company acquires hotels from Promus. Under the agreements the Company purchased
a Homewood Suites in Clear Lake, Texas for $6.9 million and agreed to purchase a
Homewood Suites in Richmond, Virginia for development costs estimated at $8.6
million. In connection with the Clear Lake acquisition Promus invested $1.5
million in Company Common Stock at a price of $11.00 per share. Promus also
agreed to invest $1.85 million in Company Common Stock at the prevailing market
price upon the completion of the Richmond, Virginia Homewood Suites transaction.
Promus is to operate any hotels acquired under the agreement through an
agreement with the Company's lessee.
13
<PAGE> 16
PROPOSAL 2: AMENDMENT OF ARTICLE 7 OF THE ARTICLES OF INCORPORATION
The Board of Directors has approved and recommends to the shareholders
approval of a proposed amendment to the Company's Articles of Incorporation to
delete Article 7 (the "Debt Limitation"). Article 7 of the Articles of
Incorporation currently provides as follows:
7. Limitation on Indebtedness. The Corporation may not incur or allow
to exist as of the end of any month Indebtedness (as defined below) in
an amount in excess of forty-five percent (45%) of the Corporation's
investment in hotel properties, at cost, after giving effect to the
Corporation's use of proceeds from any indebtedness. For purposes of
the foregoing restrictions, "cost" shall mean that the cost of
properties be accounted for using the purchase method of accounting,
including situations where properties are acquired from affiliates or
others and are accounted for at the historical cost basis of the
affiliates or others under generally accepted accounting principles.
For purposes of the foregoing restrictions, "Indebtedness" of the
Corporation shall mean all direct and indirect obligations of the
Corporation, its subsidiaries or any partnership in which the
Corporation serves as general partner, for borrowed money (including
all notes payable and drafts accepted representing extensions of
credit) and all obligations evidenced by bonds, debentures, notes or
other similar instruments on which interest charges are customarily
paid, including obligations under capital leases. For purposes of this
Article 7, the Corporation's investment in hotel properties shall
include all investments made directly or indirectly through the
Corporation or through its subsidiaries or any partnership in which the
Corporation serves as general partner.
The Debt Limitation was developed at the time of the Company's initial
public offering in May 1994 and increased by amendment in 1996 by the Company's
shareholders. The Company has acquired, through the Partnership, a total of 39
hotels. These acquisitions were financed principally with proceeds from the
Company's public offerings of Common Stock and Series A Preferred Stock. The
Company's ability to raise equity capital is dependent, in large part, upon
capital market conditions, including the general levels of interest rates. The
Board of Directors believes adoption of Proposal 2 will increase the Company's
ability to obtain capital on advantageous terms to take advantage of acquisition
and development opportunities. Also, since the initial public offering, a number
of other hotel REITs and entities have been formed for purposes similar to the
Company and the Company believes the market for hotel acquisitions has become
more competitive. Most of these entities have no corporate limitation on their
ability to incur indebtedness or have limitations which are higher than the
Company's Debt Limitation. Some of the Company's competitors initially had debt
limitations in their articles of incorporation but eliminated them by
shareholder vote. As competition for acquisitions has increased, the ability of
buyers to close on acquisitions, without a financing contingency, can be an
important advantage in acquiring hotel properties on favorable terms.
Management believes that it is important for the Company to have
flexibility in financing the acquisitions of hotel properties, and that as the
Company continues to grow, it will have access to a range of financing
alternatives, including public and private issuances of debt securities as well
as continued equity financings. Management believes that the selective use of
longer term debt can lower the Company's overall cost of capital and increase
shareholder value. Management also believes adoption of this proposal will
permit the Company to access debt financing sources more readily while
maintaining a policy limiting indebtedness to a level which is prudent.
14
<PAGE> 17
If Proposal 2 is approved by the shareholders, there will be no limitation in
the Company's Articles of Incorporation or bylaws on the Company's ability to
incur indebtedness and the Board of Directors, in its discretion and in the
exercise of its fiduciary duty, will be able to determine levels of indebtedness
without shareholder approval. The elimination of the Debt Limitation in the
Articles of Incorporation will increase the risk that the Company could become
highly leveraged, resulting in an increase in debt service that could adversely
affect the Company's cash flow and ability to make distributions to its
shareholders, and create an increased risk of default on its obligations and
increased risk of foreclosure on its property securing debt.
The approval of Proposal 2 will require the approval of the holders of
the Company's Common Stock and the Series A Preferred Stock voting as separate
voting groups. The proposed amendment to the Company's Articles of Incorporation
will be approved by the holders of the Company's Common Stock if the votes cast
in favor of the amendment exceed the votes cast against the amendment.
Abstentions and shares held in street name that are not voted on this matter
will not be included in determining the number of votes of Common Stock in favor
of or against this proposal.
The Company is seeking the approval of the holders of two-thirds of the
Series A Preferred Stock for Proposal 2. Article 5 of the Articles of
Incorporation provides that the holders of two-thirds of the shares of Series A
Preferred Stock voting as a separate voting group is required to approve an
amendment to the Articles of Incorporation if the proposed amendment would
materially and adversely affect any right, preference, privilege or voting power
of the Series A Preferred Stock or holders thereof. Although the Company
considers Proposal 2 as beneficial to all shareholders of the Company and does
not believe that the amendment to the Articles of Incorporation contemplated by
Proposal 2 would materially and adversely affect any right, preference,
privilege or voting power of the Series A Preferred Stock or holders thereof,
the Company believes that it would be good corporate governance and in the best
interests of the shareholders for the holders of the Series A Preferred Stock to
vote on Proposal 2. Accordingly, the affirmative vote of two-thirds of the
holders of the Series A Preferred Stock voting as a separate voting group will
be necessary to approve Proposal 2. Abstentions and shares held in street name
that are not voted on this matter will have the practical effect of a negative
vote on this proposal for Series A Preferred Stock voting purposes.
The Board of Directors recommends that the shareholders vote FOR the
amendment of the Company's Articles of Incorporation to delete Article 7.
15
<PAGE> 18
PROPOSAL 3: AMENDMENT OF ARTICLE 15 OF THE ARTICLES OF INCORPORATION
The Board of Directors has approved and recommends to the shareholders
approval of a proposed amendment to the Company's Articles of Incorporation to
amend Article 15 of the Company's Articles of Incorporation. Article 15
currently contains provisions (the "Share Transfer Restrictions") which restrict
the transfer of shares of the Company's capital stock, if, following such
transfer, any person would own more than 9.9% of the outstanding shares of
capital stock of the Company (including any shares deemed to be owned by such
persons under applicable provisions of the Internal Revenue Code). The Share
Transfer Restrictions, which are similar to provisions found in the charter
documents of many REITs, are designed to help the Company monitor compliance
with certain REIT tax law requirements which provide that not more than 50% of
the Company's outstanding capital stock can be owned, directly or indirectly, by
five or fewer persons. The Board of Directors has approved and recommends to the
shareholders that they approve and adopt an amendment to the Company's Articles
of Incorporation that would add a new paragraph (k) to Article 15, providing in
its entirety as follows:
(k) Nothing in this Articles of Incorporation shall preclude settlement
of any transaction entered into through the facilities of the New York
Stock Exchange.
The proposed amendment clarifies that nothing in the Company's Articles
of Incorporation would prohibit the settlement of any transaction entered into
through the facilities of the NYSE, while maintaining the authority of the Board
of Directors of the Company to take action necessary to maintain the Company's
status as a REIT for federal income tax purposes.
The Company's Common Stock and Series A Preferred Stock are currently
traded on the NYSE. The NYSE has advised the Company that such an amendment is
desirable to clarify that the Share Transfer Restrictions will not prohibit
settlement of any transactions entered into through the NYSE. The Board of
Directors believes it is important to assure the investment community and the
NYSE that the Share Transfer Restrictions in the Company's Articles of
Incorporation designed to protect the Company's status as a REIT do not prohibit
the settlement of any transactions through the facilities of such exchange or
system.
Pursuant to the applicable corporate laws of North Carolina, the
proposed amendment to the Company's Articles of Incorporation will be approved
if the votes cast in favor of the amendment exceed the votes cast against the
amendment. Abstentions and shares held in street name that are not voted on this
matter will not be included in determining the number of votes in favor of or
against this proposal.
The Board of Directors recommends that the shareholders vote FOR the
amendment of the Company's Articles of Incorporation to amend Article 15 by
adding new section (k) to clarify settlement on the NYSE.
16
<PAGE> 19
PROPOSAL 4: APPROVAL OF AMENDMENT TO THE
WINSTON HOTELS, INC. STOCK INCENTIVE PLAN
The Board of Directors proposes that the shareholders approve an
amendment to the Company's Stock Incentive Plan (the "Plan"). The Plan was
adopted by the Board of Directors and was approved by the shareholders on May
16, 1994 and was amended with shareholder approval on April 24, 1996. Currently
a maximum of 700,000 shares plus 5% of any increase in the number of authorized
and outstanding shares of the Company's Common Stock above 14,000,000 shares may
be issued under the Plan. The Board of Directors has approved, subject to
shareholder approval, an amendment to the Company's Plan to increase the maximum
number of shares of Common Stock that may be issued under the Plan from the
current maximum (which currently amounts to 808,724 shares authorized), to
1,600,000 shares (which includes the 808,724 shares currently authorized under
the Plan) plus an annual increase to be added as of January 1 of each year,
beginning January 1, 1999, equal to the lesser of (i) 500,000 shares, (ii) 8.5%
of any increase in the number of authorized and issued shares (on a fully
diluted basis) since the immediately preceding January 1; or (iii) a lesser
number determined by the Board of Directors.
The Plan is being amended in order to ensure the availability of an
adequate number of shares of Common Stock to allow the Plan to continue. Without
the proposed amendment, the maximum number of shares of Common Stock which may
be issued under the Plan is currently 808,724 shares. As of December 31, 1997,
456,000 shares under the Plan have been reserved for issuance or issued pursuant
to outstanding options granted under the Plan. An additional 420,000 shares
under the Plan have been granted pursuant to stock options and restricted stock
grants as of January 2, 1998.
The proposed amendment to the Plan will be approved if the votes cast
in favor of the amendment exceed the votes cast against the amendment.
Abstentions and shares held in street name that are not voted will be included
in determining the number of votes present or represented at the meeting but
will not be included in determining the number of votes in favor of or against
this proposal.
The following summarizes the proposed amendment to the Plan and
describes the material terms of the Plan. The summary is not intended to be
complete and is subject in all respects to the terms of the Plan. The Company
will provide promptly, upon request and without charge a copy of the full text
of the Plan to each person to whom a copy of this Proxy Statement is delivered.
Requests should be directed to James D. Rosenberg, Chief Financial Officer and
Chief Operating Officer, Winston Hotels, Inc., 2209 Century Drive, Suite 300,
Raleigh, North Carolina 27612.
Summary of the Plan
Purpose. The Plan is intended primarily to assist the Company in
recruiting and retaining executive officers, key employees and service providers
by enabling such persons to participate in the future success of the Company and
to associate their interests with those of the Company and its shareholders.
Administration. The Plan is administered by the Compensation Committee.
The Compensation Committee may delegate its authority to administer the Plan to
one or more officers of the Company. The Compensation Committee may not,
however, delegate its authority with respect to grants and awards to individuals
who are subject to Section 16 of the Securities Exchange Act of 1934. As used in
this Proxy Statement, the term "Administrator" means the Compensation Committee
and any delegate, as appropriate.
17
<PAGE> 20
The Administrator has the authority (i) to establish rules and policies
concerning the Plan; (ii) to determine the persons to whom stock options, stock
appreciation rights ("SARs") and awards of restricted stock and performance
shares may be granted; (iii) to fix the number of shares of Common Stock to be
covered by each award; and (iv) to set the terms and provisions of each award.
Eligibility. Each employee of the Company or certain related entities
(any parent or subsidiary corporation) of the Company and individuals who
provide services to the Company or certain related entities may participate in
the Plan. Currently, 11 individuals participate in the Plan. The Administrator
will select the individuals who will participate in the Plan ("Participants")
but no person may participate in the Plan while he is a member of the
Compensation Committee. All awards made under the Plan are evidenced by written
agreements between the Company and the Participant.
Stock Options. Options granted under the Plan may be incentive stock
options ("ISOs") or nonqualified stock options. A stock option entitles a
Participant to purchase shares of Common Stock from the Company at the option
price. The option price may be paid in cash, with shares of Common Stock, or
with a combination of cash and Common Stock. The option price will be fixed by
the Administrator at the time the option is granted, but the price cannot be
less than the shares' fair market value on the date of grant in the case of an
ISO. The exercise price of an ISO granted to any Participant who is a Ten
Percent Shareholder (as defined below) may not be less than 110% of the fair
market value of the shares of Common Stock on the date of grant. A Participant
is a Ten Percent Shareholder if he owns, or is deemed to own, more than ten
percent of the total combined voting power of all classes of stock of the
Company or a related entity. A Participant is deemed to own any voting stock
owned (directly or indirectly) by the Participant's spouse, brothers, sisters,
ancestors and lineal descendants. A Participant and such persons are also
considered to own proportionately any voting stock owned (directly or
indirectly) by or for a corporation, partnership, estate or trust of which the
Participant or any such person is a shareholder, partner or beneficiary. An ISO
must expire within ten years from the date of grant except that the term of an
ISO that is granted to a Ten Percent Shareholder may not be longer than five
years. Moreover, no Participant may be granted ISOs or related SARs (under all
incentive stock option plans of the Company) which are first exercisable in any
calendar year for stock having an aggregate fair market value (determined as of
the date that the ISO was granted) that exceeds $100,000.
SARS. SARs entitle the Participant to receive a payment based on a
formula determined by the Administrator and set forth in a written agreement
between the Company and the Participant. In the absence of such a determination,
the Participant will be entitled to receive, with respect to each share of
Common Stock encompassed by the exercise of such SAR, the excess of the fair
market value of a share of Common Stock on the date of exercise over the initial
value of the SAR. The initial value of the SAR is the fair market value of a
share of Common Stock on the date of grant. The amount payable upon the exercise
of an SAR may be paid in cash, Common Stock, or a combination of the two.
SARs may be granted in relation to option grants ("Corresponding SARs")
or independently of option grants. The difference between these two types of
SARs is that to exercise a Corresponding SAR, the Participant must surrender
unexercised that portion of the stock option to which the Corresponding SAR
relates.
Stock Awards. Participants also may be awarded shares of Common Stock
pursuant to a stock award. The Administrator, in its discretion, may prescribe
that a Participant's rights in a stock award shall be restricted or forfeitable
or both unless certain conditions are satisfied. These conditions may include,
for example, a requirement that the Participant continue employment with the
Company for a specified period or that the Company or the Participant achieve
stated objectives.
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<PAGE> 21
Performance Shares. The Plan also provides for the award of performance
shares. A performance share award entitles the Participant to receive a payment
equal to the fair market value of a specified number of shares of Common Stock
if certain performance standards are met. The Administrator will prescribe the
requirements that must be satisfied before a performance share award is earned.
The performance share requirements may include, for example, a requirement that
the Participant continue employment with the Company for a specified period or
that the Company or the Participant achieve stated objectives. To the extent
that performance shares are earned, the obligation may be settled in cash, in
Common Stock, or by a combination of the two.
Share Authorization. Currently, a maximum of 700,000 shares plus 5% of
any increase in the number of authorized and outstanding shares of the Company's
Common Stock above 14,000,000 shares may be issued under the Plan. The share
limitation and the terms of outstanding awards shall be adjusted, as the
Compensation Committee deems appropriate, in the event of a stock dividend,
stock split, combination, reclassification, recapitalization or other similar
event. The purpose of the amendment to the Plan is to increase the maximum
number of shares of Common Stock that may be issued under the Plan from the
current maximum to 1,600,000 shares (which includes the 808,724 shares currently
authorized under the Plan) plus an annual increase to be added as of January 1
of each year, beginning January 1, 1999, equal to the lesser of (i) 500,000
shares, (ii) 8.5% of any increase in the number of authorized and issued shares
(on a fully diluted basis) since the immediately preceding January 1; or (iii) a
lesser number determined by the Board of Directors. As of March 18, 1998, the
Company had outstanding 16,194,480 shares of Common Stock.
Termination and Amendment. No option, SAR or stock award may be granted
and no performance shares may be awarded under the Plan after June 1, 2004. The
Board may amend or terminate the Plan at any time, but an amendment will not
become effective without shareholder approval if the amendment changes the
eligibility requirements or increases the benefits that may be provided under
the Plan.
1998 Option Grants. Effective January 2, 1998, the Compensation
Committee granted additional stock options exercisable for 400,000 shares and
20,000 shares of restricted stock under the Plan. A total of 67,276 shares
underlying these grants are in excess of the shares available for issuance under
the Plan and accordingly are subject to shareholder approval of the amendment of
the Plan to increase the authorized number of shares available pursuant to the
Plan. Pursuant to these grants, Robert W. Winston, III received nonqualified
stock options covering 100,000 shares of Common Stock at an exercise price of
$13.1875 per share, James D. Rosenberg, the new Chief Financial Officer and
Chief Operating Officer received nonqualified stock options covering 150,000
shares of Common Stock at an exercise price of $13.1875 per share and 20,000
shares of restricted stock, and Joseph V. Green, the new Executive Vice
President - Acquisitions and Finance received nonqualified stock options
covering 150,000 shares of Common Stock at an exercise price of $13.1875 per
share. The options granted to Mr. Winston and Mr. Green vest 25% on the grant
date and in 25% increments on the first three anniversaries of the effective
date and expire 10 years from the effective date of the grants. The options
granted to Mr. Rosenberg vest in 25% increments on the first four anniversaries
of the effective date and expire 10 years from the effective date of the grant.
The restricted stock granted to Mr. Rosenberg vests in four equal annual
installments beginning on January 2, 1999.
As of March 18, 1998, the market price of the Company's Common Stock
was [$____] per share, based on the last reported transaction price on such date
for the Common Stock as listed for trading on the NYSE.
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<PAGE> 22
Federal Income Taxes. No income is recognized by a Participant at the
time an option is granted. If the option is an ISO, no income will be recognized
upon the Participant's exercise of the option although the exercise of an ISO
may subject the Participant to alternative minimum tax. Income is recognized by
a Participant when he disposes of shares acquired under an ISO. The exercise of
a nonqualified stock option generally is a taxable event that requires the
Participant to recognize, as ordinary income, the difference between the shares'
fair market value and the option price.
No income is recognized upon the grant of an SAR. The exercise of an
SAR generally is a taxable event. A Participant generally must recognize income
equal to any cash that is paid and the fair market value of Common Stock that is
received in settlement of an SAR.
A Participant will recognize income on account of a stock award on the
first day that the shares are either transferable or not subject to a
substantial risk of forfeiture. The amount of income recognized by the
Participant is equal to the fair market value of the Common Stock received on
that date.
A Participant will recognize income on account of the settlement of a
performance share award. A Participant will recognize income equal to any cash
that is paid and the fair market value of Common Stock (on the date that the
shares are first transferable or not subject to a substantial risk of
forfeiture) that is received in settlement of the award.
The employer will be entitled to claim a federal income tax deduction
on account of the exercise of a nonqualified option or SAR, the vesting of a
stock award and the settlement of a performance share award. The amount of the
deduction is equal to the ordinary income recognized by the Participant. The
employer will not be entitled to a federal income tax deduction on account of
the grant or the exercise of an ISO. The employer may claim a federal income tax
deduction on account of certain dispositions of Common Stock acquired upon the
exercise of an ISO.
The Board of Directors recommends that the shareholders vote FOR the amendment
of the Winston Hotels, Inc. Stock Incentive Plan.
PROPOSAL 5: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Coopers & Lybrand L.L.P. as
independent auditors for fiscal year 1998. Although shareholder approval is not
required, the Company desires to obtain from the shareholders an indication of
their approval or disapproval of the Board's action in appointing Coopers &
Lybrand L.L.P. as the independent auditors of the Company. If the shareholders
do not ratify this appointment, such appointment will be reconsidered by the
Audit Committee and the Board of Directors.
A representative of Coopers & Lybrand L.L.P. will be present at the
Annual Meeting and will be afforded an opportunity to make a statement and to
respond to questions.
The Board of Directors recommends that the shareholders vote FOR the
ratification of the appointment of Coopers & Lybrand L.L.P. for fiscal year
1998.
20
<PAGE> 23
MISCELLANEOUS
Shareholders may obtain a copy of the Company's 1997 Annual Report on
Form 10-K without charge upon written request to James D. Rosenberg, Chief
Financial Officer and Chief Operating Officer, Winston Hotels, Inc., 2209
Century Drive, Suite 300, Raleigh, North Carolina 27612.
SUBMISSION OF SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Any proposals which shareholders intend to present for a vote of
shareholders at the 1999 Annual Meeting of Shareholders and which such
shareholders desire to have included in the Company's Proxy Statement and form
of proxy relating to that meeting must be sent to the Company's principal
executive offices, marked to the attention of the Secretary of the Company, and
received by the Company at such offices on or before December 11, 1998. The
determination by the Company of whether it will oppose inclusion of any proposal
in its Proxy Statement and form of proxy will be made on a case by case basis in
accordance with its judgment and the rules and regulations promulgated by the
Securities and Exchange Commission. Proposals received after December 11, 1998,
will not be considered for inclusion in the Company's proxy materials for its
1999 Annual Meeting of Shareholders.
By Order of the Board of Directors
Robert W. Winston, III
Chief Executive Officer and
President
March 24, 1998
21
<PAGE> 24
APPENDIX A
PROXY
WINSTON HOTELS, INC.
Common Stock Proxy for
Annual Meeting of Shareholders
Solicited by the Board of Directors
The undersigned hereby appoints Robert W. Winston, III and James D.
Rosenberg and each of them as attorney and proxy of the undersigned, each with
the full power of substitution, to represent the undersigned and to vote all of
the shares of Common Stock in Winston Hotels, Inc. which the undersigned is
entitled to vote at the Annual Meeting of Shareholders to be held on May 5,
1998, at 10:00 a.m., local time, at the Homewood Suites Hotel, 5400 Edwards Mill
Road, Raleigh, North Carolina, and any adjournments thereof (1) as hereinafter
specified upon the proposals listed below and as more particularly described in
the Company's Proxy Statement, receipt of which is hereby acknowledged; and (2)
in their discretion upon such other matters as may properly come before the
meeting and any adjournments thereof.
The Board of Directors Recommends a Vote FOR the Proposals Listed
Below.
1. Election of Directors
[ ] FOR all nominees listed below (except as marked to
the contrary).
[ ] WITHHOLD AUTHORITY to vote for all nominees
listed below.
Charles M. Winston, Robert W. Winston, III, James H. Winston,
Paul Fulton, Thomas F. Darden, II, Richard L. Daugherty, Edwin
B. Borden and David C. Sullivan
INSTRUCTION: To withhold authority to vote for any individual
nominee, write that nominee's name on the space provided
below:
--------------------------------------------------------------
2. Proposal to delete Article 7 of the Company's Articles of
Incorporation which limits the Company's level of permitted
indebtedness to 45% of investments in hotel properties:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to amend Article 15 of the Company's Articles of
Incorporation to provide that nothing contained therein will
prohibit the settlement of any transaction entered into
through the facilities of the New York Stock Exchange:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued on other side)
<PAGE> 25
(Continued from other side)
4. Proposal to adopt the amendment to the Company's Stock
Incentive Plan to increase the aggregate number of shares that
may be issued under the plan from the current maximum to
1,600,000 shares (which includes the 808,724 shares currently
authorized under the Plan) plus an annual increase to be added
as of January 1 of each year, beginning January 1, 1999, equal
to the lesser of (i) 500,000 shares, (ii) 8.5% of any increase
in the number of authorized and issued shares (on a fully
diluted basis) since the immediately preceding January 1; or
(iii) a lesser number determined by the Board of Directors:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Ratify appointment of Coopers & Lybrand L.L.P. as independent
auditors for the Company for the fiscal year ending December
31, 1998:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Please sign exactly as your name appears below. When shares are held by
joint tenants, both should sign.
Date , 1998
-------------------------
(Be sure to date Proxy)
---------------------------------------
Signature and title, if applicable
---------------------------------------
Signature if held jointly
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign the full
corporate name by the president or
other authorized officer. If a
partnership, please sign in the
partnership name by an authorized
person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
PRE-PAID ENVELOPE.
<PAGE> 26
APPENDIX B
PROXY
WINSTON HOTELS, INC.
Series A Preferred Stock Proxy for
Annual Meeting of Shareholders
Solicited by the Board of Directors
The undersigned hereby appoints Robert W. Winston, III and James D.
Rosenberg and each of them as attorney and proxy of the undersigned, each with
the full power of substitution, to represent the undersigned and to vote all of
the shares of Series A Preferred Stock in Winston Hotels, Inc. which the
undersigned is entitled to vote at the Annual Meeting of Shareholders to be held
on May 5, 1998, at 10:00 a.m., local time, at the Homewood Suites Hotel, 5400
Edwards Mill Road, Raleigh, North Carolina, and any adjournments thereof as
hereinafter specified upon the proposals listed below and as more particularly
described in the Company's Proxy Statement, receipt of which is hereby
acknowledged.
The Board of Directors Recommends a Vote FOR the Proposal Listed Below.
1. Proposal to delete Article 7 of the Company's Articles of
Incorporation which limits the Company's level of permitted
indebtedness to 45% of investments in hotel properties:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Please sign exactly as your name appears below. When shares are held by
joint tenants, both should sign.
Date , 1998
-------------------------
(Be sure to date Proxy)
---------------------------------------
Signature and title, if applicable
---------------------------------------
Signature if held jointly
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign the full
corporate name by the president or
other authorized officer. If a
partnership, please sign in the
partnership name by an authorized
person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED PRE-PAID ENVELOPE.
