<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999 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 No.)
2209 CENTURY DRIVE
RALEIGH, NORTH CAROLINA 27612
(Address of principal executive offices)
(Zip Code)
(919) 510-6010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of Common Stock, $.01 par value, outstanding on July 31,
1999 was 16,372,568.
<PAGE> 2
WINSTON HOTELS, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. WINSTON HOTELS, INC.
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998 3
Unaudited Consolidated Statements of Income for the three and six months
ended June 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
CAPSTAR WINSTON COMPANY, L.L.C. (1)
Note to Financial Statements 8
Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 9
Unaudited Statements of Income for the three and six months ended
June 30, 1999 and 1998 10
Unaudited Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBIT INDEX 23
</TABLE>
(1) The financial statements of CapStar Winston Company, L.L.C.
("CapStar Winston") are included in this report as they
contain material information with respect to the Company's
investment in hotel properties. For the six months ended June
30, 1999, CapStar Winston served as the lessee of 49 of
Winston Hotels, Inc.'s (the "Company's") 51 hotels. CapStar
Winston is not affiliated with the Company other than through
its lessee relationship.
2
<PAGE> 3
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
Investment in hotel properties:
Land $ 42,520 $ 42,449
Buildings and improvements 361,617 355,807
Furniture and equipment 36,652 32,296
--------- ---------
Operating properties 440,789 430,552
Less accumulated depreciation 47,998 37,920
--------- ---------
392,791 392,632
Properties under development 3,745 5,229
--------- ---------
Net investment in hotel properties 396,536 397,861
Corporate FF&E, net 324 294
Cash and cash equivalents 152 33
Lease revenue receivable 11,386 7,653
Deferred expenses, net 4,563 3,376
Prepaid expenses and other assets 4,048 2,939
--------- ---------
Total assets $ 417,009 $ 412,156
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 70,497 $ 71,000
Due to banks 109,800 102,085
Accounts payable and accrued expenses 5,715 3,969
Distributions payable 6,805 6,789
Minority interest in WINN Limited Partnership 14,420 14,888
--------- ---------
Total liabilities 207,237 198,731
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
3,000,000 shares issued and outstanding (liquidation preference
of $76,734) 30 30
Common stock, $.01 par value, 50,000,000 shares authorized,
16,372,568 and 16,313,980 shares issued and outstanding 164 163
Additional paid-in capital 225,340 224,757
Unearned compensation (705) (310)
Distributions in excess of earnings (15,057) (11,215)
--------- ---------
Total shareholders' equity 209,772 213,425
--------- ---------
Total liabilities and shareholders' equity $ 417,009 $ 412,156
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Percentage lease revenue $17,234 $14,999 $31,866 $25,071
Interest and other income 89 65 204 114
------- ------- ------- -------
Total revenue 17,323 15,064 32,070 25,185
------- ------- ------- -------
Expenses:
Real estate taxes and property and casualty
insurance 1,834 1,283 3,522 2,262
General and administrative 1,222 1,214 2,598 1,874
Interest 3,005 1,866 6,094 2,397
Depreciation 5,138 3,916 10,115 7,074
Amortization 226 127 392 247
------- ------- ------- -------
Total expenses 11,425 8,406 22,721 13,854
------- ------- ------- -------
Income before allocation to minority
interest 5,898 6,658 9,349 11,331
Income allocation to minority interest 400 469 565 767
------- ------- ------- -------
Net income 5,498 6,189 8,784 10,564
Preferred stock distribution 1,734 1,734 3,469 3,469
------- ------- ------- -------
Net income applicable to common
shareholders $ 3,764 $ 4,455 $ 5,315 $ 7,095
======= ======= ======= =======
Earnings per share:
Net income per common share $ 0.23 $ 0.27 $ 0.33 $ 0.44
======= ======= ======= =======
Net income per common share assuming dilution
$ 0.23 $ 0.27 $ 0.32 $ 0.44
======= ======= ======= =======
Weighted average number of common shares 16,352 16,302 16,342 16,263
======= ======= ======= =======
Weighted average number of common shares
assuming dilution 18,121 18,068 18,096 18,055
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,784 $ 10,564
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 565 767
Depreciation 10,115 7,074
Amortization 392 247
Unearned compensation amortization 129 112
Changes in assets and liabilities:
Lease revenue receivable (3,733) (4,775)
Prepaid expenses and other assets (1,109) 191
Accounts payable and accrued expenses 1,746 (482)
-------- ---------
Net cash provided by operating activities 16,889 13,698
-------- ---------
Cash flows from investing activities:
Deferred acquisition costs (116) --
Prepaid acquisition costs (62) (400)
Investment in hotel properties (10,812) (117,234)
Sale of land parcel 1,993 445
-------- ---------
Net cash used in investing activities (8,997) (117,189)
-------- ---------
Cash flows from financing activities:
Fees paid to increase and extend line of credit (1,344) (5)
Purchase of interest rate cap agreement (57) --
Net proceeds from issuance of stock -- 600
Payment of distributions to shareholders (12,611) (12,615)
Payment of distributions to minority interest (973) (940)
Net increase in line of credit borrowing 7,715 73,795
Decrease in long-term debt (503) --
Increase in demand notes -- 42,900
-------- ---------
Net cash provided by (used in) financing activities (7,773) 103,735
-------- ---------
Net increase in cash and cash equivalents 119 244
Cash and cash equivalents at beginning of period 33 164
-------- ---------
Cash and cash equivalents at end of period $ 152 $ 408
======== =========
Supplemental disclosure:
Cash paid for interest $ 5,855 $ 2,678
======== =========
Summary of non-cash investing and financing activities:
Distributions to shareholders declared but not paid $ 6,318 $ 6,122
Distributions to minority interest declared but not paid 487 487
Conversion of partnership units for common shares -- 152
Unearned compensation 524 400
Minority interest payable adjustment due to the exercise of stock
options and conversion of partnership units for common shares 60 208
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. ORGANIZATION
Winston Hotels, Inc. (the "Company") operates so as to qualify as a
real estate investment trust ("REIT") for federal income tax purposes.
The accompanying unaudited consolidated financial statements reflect,
in the opinion of management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments
are of a normal and recurring nature. Due to the seasonality of the
hotel business, the information for the three and six months ended June
30, 1999 and the information for the three and six months ended June
30, 1998 are not necessarily indicative of the results for a full year.
2. ACCOUNTING POLICIES
Certain reclassifications have been made to the 1998 financial
statements to conform with the 1999 presentation. These
reclassifications have no effect on net income or shareholders' equity
previously reported.
3. JOINT VENTURE AGREEMENT
In June 1999, the Company signed a joint venture agreement with Regent
Partners, Inc. ("Regent"), a leading real estate development,
investment and services firm. The joint venture will focus on the
construction of upscale hotels such as Hilton Garden Inn, Courtyard by
Marriott, Residence Inn and Homewood Suites. The Company anticipates
initiating additional new projects with Regent, a wholly owned
subsidiary of J.A. Jones, Inc., an affiliate of Philipp Holzmann AG.
The initial project under the joint venture will feature a $16,500,
full-service 158-room Hilton Garden Inn in Windsor, Connecticut. Upon
its completion, the hotel will be leased to and operated by Bristol
Hotels & Resorts, Inc. Development of this upscale hotel is expected to
take approximately one year to complete, with grand opening targeted
for the second half of 2000. Two additional sites are currently under
contract and the Company is currently conducting due diligence on them.
Under the terms of the joint venture, the Company will earn fees by
providing development management consulting, capital design and
purchasing capabilities, and ongoing asset management assistance to
Regent. The Company will have an ownership level of up to 49 percent in
each project. The Company has the ability to acquire Regent's and other
parties' ownership interest in each project subject to the provisions
of the agreement.
4. PRO FORMA FINANCIAL INFORMATION
These unaudited pro forma condensed statements of income of the Company
are presented as if the Company had acquired all 51 of the hotels owned
as of June 30, 1999 on the later of January 1, 1998, or the hotel
opening date for the five acquired and five developed hotels which
opened during 1998. The Company made no acquisitions during the first
six months of 1999, therefore, the pro forma condensed statement of
income for the Company for the six months ended June 30, 1999 is
identical to the actual condensed statement of income for the same
period. These unaudited pro forma condensed statements of income are
not necessarily indicative of what actual results of operations of the
Company would have been assuming such transactions had been completed
as of the dates described above, nor do they purport to represent the
results of operations for future periods.
6
<PAGE> 7
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA FOR THE
SIX MONTHS ENDED JUNE 30,
1999 1998
------- -------
<S> <C> <C>
Percentage lease and other revenue $32,070 $26,757
------- -------
Expenses:
Real estate taxes and property and casualty insurance 3,522 2,528
General and administrative 2,598 1,883
Interest 6,094 3,465
Depreciation 10,115 7,419
Amortization 392 251
------- -------
Total expenses 22,721 15,546
------- -------
Income before allocation to minority interest 9,349 11,211
------- -------
Income allocation to minority interest 565 753
Preferred stock distribution 3,469 3,469
------- -------
Net income applicable to common shareholders $ 5,315 $ 6,989
======= =======
Net income per common share $ 0.33 $ 0.43
======= =======
Net income per common share assuming dilution $ 0.32 $ 0.43
======= =======
Weighted average number of common shares 16,342 16,263
======= =======
Weighted average number of common shares assuming dilution 18,096 18,055
======= =======
</TABLE>
5. EARNINGS PER SHARE
The following is a reconciliation of the net income applicable to
common shareholders used in the net income per common share calculation
to the net income assuming dilution used in the net income per common
share - assuming dilution calculation.
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 5,498 $ 6,189 $ 8,784 $ 10,564
Less: preferred stock distribution 1,734 1,734 3,469 3,469
-------------- -------------- -------------- --------------
Net income applicable to common shareholders 3,764 4,455 5,315 7,095
Plus: income allocation to minority interest 400 469 565 767
-------------- -------------- -------------- --------------
Net income assuming dilution $ 4,164 $ 4,924 $ 5,880 $ 7,862
============== ============== ============== ==============
</TABLE>
The following is a reconciliation of the weighted average shares used
in the calculation of net income per common share to the weighted
average shares used in the calculation of net income per common share -
assuming dilution.
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Weighted average number of common shares 16,352 16,302 16,342 16,263
Units with redemption rights 1,739 1,739 1,739 1,754
Stock options 30 27 15 38
---------------- --------------- --------------- ----------------
Weighted average number of common shares
assuming dilution 18,121 18,068 18,096 18,055
================ =============== =============== ================
</TABLE>
7
<PAGE> 8
CAPSTAR WINSTON COMPANY, L.L.C.
NOTE TO FINANCIAL STATEMENTS
The financial statements of CapStar Winston Company, L.L.C. ("CapStar Winston")
are included in this report as they contain material information with respect to
the Company's investment in hotel properties. The accompanying unaudited
financial statements are prepared by and are the sole responsibility of CapStar
Winston. CapStar Winston leased 49 of the Company's 51 hotels as of June 30,
1999 and other than this lessee relationship, is not affiliated with the
Company. These financial statements reflect, in the opinion of CapStar Winston
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
8
<PAGE> 9
CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, 1999 December 31, 1998
----------------- --------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,126 $ 2,075
Accounts receivable, net of allowance for doubtful accounts of
$188 and $111 3,834 3,230
Due from affiliates 9,979 5,392
Deposits and other assets 490 355
----------------- --------------------
Total current assets 17,429 11,052
----------------- --------------------
Furniture, fixtures and equipment, net of accumulated depreciation
of $101 and $68 270 290
Intangible assets, net of accumulated amortization of $1,477 and $1,015 32,819 33,253
Deferred franchise costs, net of accumulated amortization of $104 and $72 504 536
Restricted cash 80 204
----------------- --------------------
Total assets $ 51,102 $ 45,335
================= ====================
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 1,516 $ 1,606
Accrued expenses 4,859 3,390
Percentage lease payable 11,310 7,601
Advance deposits 150 183
----------------- --------------------
Total current liabilities 17,835 12,780
----------------- --------------------
Members' capital 33,267 32,555
----------------- --------------------
Total liabilities and members' capital $ 51,102 $ 45,335
================= ====================
</TABLE>
See accompanying note to financial statements.
9
<PAGE> 10
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF INCOME
($ in thousands)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Rooms $34,590 $30,266 $65,276 $52,839
Food and beverage 2,142 1,804 4,254 2,705
Telephone and other operating departments 1,456 1,487 2,814 2,657
------- ------- ------- -------
Total revenue 38,188 33,557 72,344 58,201
------- ------- ------- -------
Operating costs and expenses:
Rooms 7,596 6,583 14,575 11,487
Food and beverage 1,523 1,375 2,944 2,058
Telephone and other operating departments 854 741 1,594 1,214
Undistributed expenses:
Lease 16,407 14,792 30,311 24,865
Administrative and general 3,377 2,904 6,853 5,386
Sales and marketing 1,422 1,197 3,146 2,023
Franchise fees 2,598 2,228 4,854 3,836
Repairs and maintenance 1,721 1,544 3,366 2,766
Energy 1,345 1,214 2,768 2,109
Other 390 568 694 1,014
Depreciation and amortization 262 262 527 519
------- ------- ------- -------
Total expenses 37,495 33,408 71,632 57,277
------- ------- ------- -------
Net income $ 693 $ 149 $ 712 $ 924
======= ======= ======= =======
</TABLE>
See accompanying note to financial statements.
10
<PAGE> 11
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 712 $ 924
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 527 519
Loss on sale of fixed assets -- 2
Increase in accounts receivable (604) (336)
Increase in due from CapStar Management Company, L.P. (4,587) (4,535)
Increase in deposits and other assets (135) (121)
Decrease in restricted cash 124 --
Increase in accounts payable and accrued expenses 1,379 2,330
Increase in percentage lease payable 3,709 4,855
Decrease/increase in advance deposits (33) 83
------- -------
Net cash provided by operating activities 1,092 3,721
------- -------
Cash flows from investing activities:
Additions of furniture, fixtures and equipment (13) (112)
Additions to intangible assets (28) (42)
Proceeds from sale of fixed assets -- 15
------- -------
Net cash used in investing activities (41) (139)
------- -------
Net increase in cash and cash equivalents 1,051 3,582
Cash and cash equivalents at beginning of period 2,075 3,393
------- -------
Cash and cash equivalents at end of period $ 3,126 $ 6,975
======= =======
</TABLE>
See accompanying note to financial statements.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands)
OVERVIEW
Winston Hotels, Inc. (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 51 hotels
(the "Current Hotels") as of June 30, 1999. The Company owned 31 hotels as of
December 31, 1996 and acquired seven hotels in 1997. The Company acquired eight
hotels and opened five internally developed hotels in 1998 (the "1998 Hotels").
It currently leases 49 of the total 51 Current Hotels to CapStar Winston
Company, L.L.C. ("CapStar Winston"), one of the Current Hotels to Bristol Hotels
& Resorts, Inc. ("Bristol") and one of the Current Hotels to Prime Hospitality
Corp. ("Prime") under leases that provide for rent payments based, in part, on
revenues from the Current Hotels ("Percentage Leases") through which the Company
receives its principal source of revenue.
RESULTS OF OPERATIONS
The table below outlines the Company's investment in hotel properties for the
six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------------------------ ----------------------------------
Additions Properties Additions Properties
during owned at during owned at
Type of Hotel the period June 30 the period June 30
------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Limited-service hotels -- 29 1 29
Extended-stay hotels -- 11 5 10
Full-service hotels -- 11 5 10
--------------- -------------- ----------------- ---------------
Total -- 51 11 49
=============== ============== ================= ===============
</TABLE>
In order to present a more meaningful comparison of operations, in addition to
the comparison of actual results of the Company and CapStar Winston for the
three and six months ended June 30, 1999 versus actual results for the three and
six months ended June 30, 1998, the Company has also provided an analysis of the
pro forma results of the Company for the three and six months ended June 30,
1999 versus pro forma results for the three and six months ended June 30, 1998.
These pro forma results are shown as if the Company had acquired all 51 of the
hotels owned as of June 30, 1999 on the later of January 1, 1998, or the hotel
opening date for the five acquired and five developed hotels which opened during
1998. The Company made no acquisitions during the first six months of 1999,
therefore, the pro forma results for the Company for the three and six months
ended June 30, 1999 is identical to the actual results for the same period.
THE COMPANY
ACTUAL - THREE MONTHS ENDED JUNE 30, 1999 VS ACTUAL - THREE MONTHS ENDED JUNE
30, 1998
The Company had revenues of $17,323 in 1999, consisting of $17,234 of Percentage
Lease revenues and $89 of interest and other income. Percentage Lease revenues
increased $2,235 to $17,234 in 1999 from $14,999 in 1998. This increase was
primarily attributable to lease revenues from the 1998 Hotels.
Real estate taxes and property insurance costs incurred in 1999 were $1,834, an
increase of $551 from $1,283 in 1998. This increase was primarily attributable
to the 1998 Hotels as well as an increase in assessed real estate values and
rates. General and administrative expenses were flat from 1998 to 1999; $1,222
in 1999 and $1,214 in 1998. Interest expense increased $1,139 to $3,005 in 1999
from $1,866 in 1998. The increase was primarily due to an increase in weighted
average outstanding borrowings of $63,768 to $181,854 in 1999 from $118,086 in
1998 and a decrease in capitalized interest in 1999 due to the opening of five
internally developed hotels in 1998. Interest rates remained constant between
the two quarters. Depreciation increased $1,222 to $5,138 in 1999 from $3,916 in
1998, primarily due to depreciation related to the 1998 Hotels and renovations
completed during 1998 and 1999.
12
<PAGE> 13
PRO FORMA - THREE MONTHS ENDED JUNE 30, 1999 VS PRO FORMA - THREE MONTHS ENDED
JUNE 30, 1998
The Company had revenues of $17,323 in 1999, consisting of $17,234 of Percentage
Lease revenues and $89 of interest and other income. Percentage Lease revenues
increased $1,978 to $17,234 in 1999 from $15,256 in 1998. This increase was
primarily attributable to the lease revenues from the ten 1998 Hotels which
opened in 1998.
Real estate taxes and property insurance costs incurred in 1999 were $1,834, an
increase of $455 from $1,379 in 1998. The increase was primarily attributable to
the ten 1998 Hotels which opened in 1998, as well as an increase in assessed
real estate values and rates. General and administrative expenses were flat from
1998 to 1999; $1,222 in 1999 and $1,217 in 1998. Interest expenses increased
$516 to $3,005 in 1999 from $2,489 in 1998. The increase was primarily due to an
increase in weighted average outstanding borrowings of $29,037 to $181,854 in
1999 from $152,817 in 1998 and a decrease in capitalized interest in 1999 due to
the opening of five internally developed hotels in 1998 and none in 1999.
Interest rates remained constant between the two periods. Depreciation increased
$1,127 to $5,138 in 1999 from $4,011 in 1998 primarily due to depreciation
related to the ten 1998 Hotels which opened in 1998 and renovations completed
during 1998 and 1999.
ACTUAL - SIX MONTHS ENDED JUNE 30, 1999 VS ACTUAL - SIX MONTHS ENDED JUNE 30,
1998
The Company had revenues of $32,070 in 1999, consisting of $31,866 of Percentage
Lease revenues and $204 of interest and other income. Percentage Lease revenues
increased $6,795 to $31,866 in 1999 from $25,071 in 1998. This increase was
primarily attributable to lease revenues from the 1998 Hotels.
Real estate taxes and property insurance costs incurred in 1999 were $3,522, an
increase of $1,260 from $2,262 in 1998. This increase was primarily attributable
to the 1998 Hotels, as well as an increase in assessed real estate values and
rates. General and administrative expenses increased $724 to $2,598 in 1999 from
$1,874 in 1998. The increase was attributable to the increase in size and
activities of the Company in 1999. Interest expense increased by $3,697 to
$6,094 in 1999 from $2,397 in 1998. This increase was primarily due to an
increase in weighted average outstanding borrowings of $90,388 to $179,558 in
1999 from $89,170 in 1998 and a decrease in capitalized interest in 1999 due to
the opening of five internally developed hotels in 1998. Interest rates remained
constant between the two periods. Depreciation increased $3,041 to $10,115 in
1999 from $7,074 in 1998, primarily due to depreciation related to the 1998
Hotels and renovations completed during 1998 and 1999.
PRO FORMA - SIX MONTHS ENDED JUNE 30, 1999 VS PRO FORMA - SIX MONTHS ENDED JUNE
30, 1998
The Company had revenues of $32,070 in 1999, consisting of $31,866 of Percentage
Lease revenues and $204 of interest and other income. Percentage Lease revenues
increased $5,223 to $31,866 in 1999 from $26,643 in 1998. This increase was
primarily attributable to the lease revenues from the ten 1998 Hotels which
opened in 1998.
Real estate taxes and property insurance costs incurred in 1999 were $3,522, an
increase of $994 from $2,528 in 1998. The increase was primarily attributable to
the ten 1998 Hotels which opened in 1998, as well as an increase in assessed
real estate values and rates. General and administrative expenses increased $715
to $2,598 in 1999 from $1,883 in 1998. The increase was attributable to the
increase in size and activities of the Company in 1999. Interest expenses
increased $2,629 to $6,094 in 1999 from $3,465 in 1998. The increase was
primarily due to an increase in weighted average outstanding borrowings of
$59,615 to $179,558 in 1999 from $119,943 in 1998 and a decrease in capitalized
interest in 1999 due to the opening of five internally developed hotels in 1998.
Interest rates remained constant between the two periods. Depreciation increased
$2,696 to $10,115 in 1999 from $7,419 in 1998 primarily due to depreciation
related to the ten 1998 Hotels which opened in 1998 and renovations completed
during 1998 and 1999.
13
<PAGE> 14
CAPSTAR WINSTON
ACTUAL - THREE MONTHS ENDED JUNE 30, 1999 VS ACTUAL - THREE MONTHS ENDED JUNE
30, 1998
The following table sets forth certain historical financial information for the
hotels leased by CapStar Winston for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Revenue:
Rooms $ 34,590 90.6% $ 30,266 90.2%
Food and beverage 2,142 5.6% 1,804 5.4%
Telephone and other operating departments 1,456 3.8% 1,487 4.4%
-------------- --------------- -------------- ---------------
Total revenue 38,188 100.0% 33,557 100.0%
-------------- --------------- -------------- ---------------
Operating costs and expenses:
Rooms 7,596 19.9% 6,583 19.6%
Food and beverage 1,523 4.0% 1,375 4.1%
Telephone and other operating departments 854 2.2% 741 2.2%
Undistributed expenses:
Lease 16,407 43.0% 14,792 44.1%
Administrative and general 3,377 8.9% 2,904 8.7%
Sales and marketing 1,422 3.7% 1,197 3.6%
Franchise fees 2,598 6.8% 2,228 6.6%
Repairs and maintenance 1,721 4.5% 1,544 4.6%
Energy 1,345 3.5% 1,214 3.6%
Other 390 1.0% 568 1.7%
Depreciation and amortization 262 0.7% 262 0.8%
-------------- --------------- -------------- ---------------
Total expenses 37,495 98.2% 33,408 99.6%
-------------- --------------- -------------- ---------------
Net income $ 693 1.8% $ 149 0.4%
============== =============== ============== ===============
</TABLE>
CapStar Winston had room revenues of $34,590 in 1999, an increase of $4,324 from
$30,266 in 1998. The increase in room revenues was primarily due to room
revenues from the 1998 Hotels.
CapStar Winston had total expenses in 1999 of $37,495, an increase of $4,087
from $33,408 in 1998. The increase was primarily attributable to the operation
of a greater number of hotels for the three months ended June 30, 1999 as
compared with the same period of 1998.
14
<PAGE> 15
ACTUAL - SIX MONTHS ENDED JUNE 30, 1999 VS ACTUAL - SIX MONTHS ENDED JUNE 30,
1998
The following table sets forth certain historical financial information for the
hotels leased by CapStar Winston for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Revenue:
Rooms $ 65,276 90.2% $ 52,839 90.8%
Food and beverage 4,254 5.9% 2,705 4.6%
Telephone and other operating departments 2,814 3.9% 2,657 4.6%
-------------- --------------- -------------- ---------------
Total revenue 72,344 100.0% 58,201 100.0%
-------------- --------------- -------------- ---------------
Operating costs and expenses:
Rooms 14,575 20.1% 11,487 19.7%
Food and beverage 2,944 4.1% 2,058 3.5%
Telephone and other operating departments 1,594 2.2% 1,214 2.1%
Undistributed expenses:
Lease 30,311 41.9% 24,865 42.7%
Administrative and general 6,853 9.5% 5,386 9.3%
Sales and marketing 3,146 4.3% 2,023 3.5%
Franchise fees 4,854 6.7% 3,836 6.6%
Repairs and maintenance 3,366 4.7% 2,766 4.8%
Energy 2,768 3.8% 2,109 3.6%
Other 694 1.0% 1,014 1.7%
Depreciation and amortization 527 0.7% 519 0.9%
-------------- --------------- -------------- ---------------
Total expenses 71,632 99.0% 57,277 98.4%
-------------- --------------- -------------- ---------------
Net income $ 712 1.0% $ 924 1.6%
============== =============== ============== ===============
</TABLE>
CapStar Winston had room revenues of $65,276 in 1999, an increase of $12,437
from $52,839 in 1998. The increase in room revenues was primarily due to room
revenues from the 1998 Hotels.
CapStar Winston had total expenses in 1999 of $71,632, an increase of $14,355
from $57,277 in 1998. The increase was primarily attributable to the operation
of a greater number of hotels for the six months ended June 30, 1999 as compared
with the same period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the six months ended June 30,
1999, cash flow provided by operating activities was $16,889 and funds from
operations, which is equal to net income before minority interest plus
depreciation, less preferred dividends, was $15,995. 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. For the
six months ended June 30, 1999, the Company declared distributions of $13,600 to
its common stock and preferred stock shareholders. Because the Company's cash
flow from operating activities is expected to exceed its taxable income due to
depreciation and amortization expenses, the Company expects to be able to meet
its distribution requirements out of cash flow from operating activities.
The Company's net cash used in investing activities for the six months ended
June 30, 1999 totaled $8,997, primarily related to hotel renovations and capital
expenditures. For capital expenditures at its Current Hotels, as required by its
Percentage Leases, the Company reserves 5% of room revenues for its hotels (7%
of room revenues and food and beverage revenues for one of its full-service
hotels). In the six months ended June 30, 1999, the Company spent $2,937 for
such
15
<PAGE> 16
capital expenditures. The Company anticipates spending an additional $3,837 for
capital expenditures during the year ended December 31, 1999. These capital
expenditures and renovation costs are in addition to amounts spent on normal
repairs and maintenance which have approximated 5.5% and 5.3% of room revenues
for the six months ended June 30, 1999 and 1998, respectively, and are paid by
the lessees.
On February 1, 1999, the Company entered into a new three-year, $140,000 line of
credit agreement with a group of four banks led by Wachovia Bank, N.A. (the "New
Line"). The Company has collateralized the New Line with 29 of its Current
Hotels. The New Line bears interest generally at rates from LIBOR plus 1.45% to
LIBOR plus 1.70%, based primarily upon the Company's level of total
indebtedness. The Company's current rate is LIBOR plus 1.45%. The Company's
outstanding balance under the New Line as of June 30, 1999 totaled $109,800.
Per the requirements of the New Line, which in effect require the Company to
have at least 50% of its total indebtedness subject to a fixed rate of debt, on
March 23, 1999 the Company entered into an interest rate cap agreement. The
interest rate cap agreement eliminates the exposure to increases in 30-day LIBOR
over 7.50% on $25,000 of the outstanding balances under the New Line for the
period March 25, 1999 through March 25, 2002.
The Company had $70,497 in long-term debt at June 30, 1999 that was subject to a
fixed interest rate and principal payments. This debt is comprised of the
Company's 25-year loan with GE Capital Corporation, which carries an interest
rate of 7.375% for the first 10 years. This debt facility is collateralized with
14 of the Company's Current Hotels.
The Company's net cash used in financing activities during the six months ended
June 30, 1999 totaled $7,773. This amount included the payment of distributions
of $13,584, payment of fees related to new financing facilities of $1,344,
long-term debt payments of $503 and the purchase of an interest rate cap for
$57. These payments were offset by $7,715 of proceeds from additional borrowings
under the New Line.
The amendment to the Company's Articles of Incorporation to increase the limit
of the Company's level of permitted indebtedness from 45 percent to 60 percent
of investments in hotel properties, at cost, proposed at the Company's 1999
Annual Meeting, has been approved by the Company's common and preferred
shareholders. Notwithstanding the approval of the increase in the debt
limitation, there can be no assurance that the Company will be able to borrow
money in excess of the former 45 percent debt limitation.
In June 1999, the Company signed a joint venture agreement with Regent Partners,
Inc. ("Regent"). The initial project will feature a $16,500 full service
158-room Hilton Garden Inn in Windsor, Connecticut. Per the joint venture
agreement, Regent will provide capital resources for the construction of the
hotel. The Company will provide service in developing, capital design, and
purchasing. The Company will also earn fees for services rendered. Two
additional sites are currently under contract and the Company is conducting due
diligence on them.
The Company has under contract eight hotel properties for sale, as well as one
parcel of land. All of these sales are subject to customary closing conditions
and the completion of due diligence of the respective buyers, a period which
extends through mid-August for the sale of the eight hotel properties.
The Company intends to acquire and develop additional hotel properties 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 New Line,
from joint venture agreements, from the sale of hotel properties 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, or that any
hotel development will be undertaken, or if commenced, that it will be completed
on schedule or on budget. Further, there can be no assurances that the Company
will be able to obtain any additional financing.
SEASONALITY
The hotels' operations historically have been seasonal in nature, reflecting
higher REVPAR during the second and third quarters. This seasonality and the
structure of the Percentage Leases, which provide for a higher percentage of
room revenues exceeding equal quarterly thresholds (adjusted for CPI changes) to
be paid as Percentage Rent, can be expected to cause significant fluctuations in
the Company's quarterly lease revenue under the Percentage Leases.
16
<PAGE> 17
FUNDS FROM OPERATIONS
The Company considers Funds From Operations ("FFO") a widely used and
appropriate measure of performance for an equity REIT. FFO, as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), is income
(loss) before minority interest (determined in accordance with generally
accepted accounting principles), excluding gains (losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. FFO is presented to assist investors in analyzing the performance of
the Company. The Company's method of calculating FFO may be different from
methods used by other REITs and, accordingly, may not be comparable to such
other REITs. FFO (i) does not represent cash flows from operating activities as
defined by generally accepted accounting principles, (ii) is not indicative of
cash available to fund all cash flow and liquidity needs, including the
Company's ability to make distributions, and (iii) should not be considered as
an alternative to net income (as determined in accordance with generally
accepted accounting principles) for purposes of evaluating the Company's
operating performance.
The following presents the Company's calculation of FFO and FFO per share (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- --------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income before allocation to minority
interest $ 5,898 $ 6,658 $ 9,349 $ 11,331
Plus: depreciation 5,138 3,916 10,115 7,074
Less: preferred stock dividends 1,734 1,734 3,469 3,469
------------------ ----------------- ----------------- ------------------
FFO $ 9,302 $ 8,840 $ 15,995 $ 14,936
================== ================= ================= ==================
Weighted average number of common shares
assuming dilution 18,121 18,068 18,096 18,055
------------------ ----------------- ----------------- ------------------
FFO per share $ 0.51 $ 0.49 $ 0.88 $ 0.83
================== ================= ================= ==================
</TABLE>
YEAR 2000 MANAGEMENT
The "Year 2000 Issue" is the result of computer programs that were written using
two digits rather than four to define the applicable year. If the computer
programs of the Company or one of its service providers, contractors, suppliers,
franchisors, or lessees are not Year 2000 compliant, they may recognize a date
using "00" as the Year 1900 rather than the Year 2000. If not corrected, this
could result in a system failure or miscalculations causing disruptions of
operations.
The Company has identified its Year 2000 risk in three categories: internal
software and embedded chip technology, external noncompliance by service
providers, contractors and suppliers, and external noncompliance by franchisors
and lessees.
Internal Software and Embedded Chip Technology
The Company has achieved full compliance with regard to internal software and
Embedded chip technology. Virtually all of the Company's internal software are
current versions of off-the-shelf, name-brand software. The Company's hardware
systems, which include computer hardware, a phone system, copiers and facsimile
machines, also contain embedded chip technology. These systems, except for the
phone system, are fully compliant. The current system will be replaced with a
new, fully compliant phone system in October 1999. The majority of the Company's
hardware has been installed in the last twelve months.
17
<PAGE> 18
External Noncompliance by Service Providers, Contractors and Suppliers
The Company has identified and contacted its significant service providers,
contractors and suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 issues.
The Company has received information concerning the Year 2000 compliance status
of several of its significant service providers, contractors and suppliers. At
this time, some of the service providers, contractors and suppliers have
indicated they are already Year 2000 compliant, however, most have responded
that they are in the process of becoming Year 2000 compliant. None have
indicated that they will not be Year 2000 compliant by December 31, 1999. The
Company will continue to monitor the progress of all significant service
providers, contractors and suppliers who have not yet indicated they are Year
2000 compliant. To the extent that responses to Year 2000 readiness are
unsatisfactory, the Company's contingency plan is to attempt to change
significant service providers, contractors or suppliers to those who have
demonstrated Year 2000 readiness, but cannot be assured that it will be
successful in finding such alternative service providers, contractors or
suppliers. In the event that any of the Company's significant service providers,
contractors or suppliers do not successfully and timely achieve Year 2000
compliance, and the Company is unable to replace them with alternate service
providers, contractors or suppliers, the Company's business or operations could
be materially and adversely affected.
External Noncompliance by Franchisors and Lessees
The Company has significant relationships with certain nationally recognized
hotel franchisors and lessees. These franchisors have national reservation
systems on which the Company relies to receive a significant portion of its
Percentage Lease revenue. The Company has received information concerning the
Year 2000 compliance status of all of its franchisors and lessees. At this time,
some of the franchisors and lessees have indicated they are already Year 2000
compliant, however, most have responded that they are in the process of becoming
Year 2000 compliant. None have indicated that they will not be Year 2000
compliant by December 31, 1999. The Company will continue to monitor the
progress of all franchisors and lessees who have not yet indicated they are Year
2000 compliant. In the event that any of these franchisors and lessees do not
successfully and timely achieve Year 2000 compliance, the Company's business or
operations could be materially and adversely affected.
Historical costs incurred to address the Year 2000 problem are approximately
$450. The Company has not yet developed a final cost estimate related to
resolving Year 2000 issues.
FORWARD LOOKING STATEMENTS
This report contains certain "forward looking" statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. You can identify
these statements by use of words like "may", "will", "expect", "anticipate",
"estimate", or "continue" or similar expressions. These statements represent the
Company's judgment and are subject to risks and uncertainties that could cause
actual operating results to differ materially from those expressed or implied in
the forward looking statements. Important factors that could cause actual
results to differ include, but are not limited to, the following (i) risk
associated with the Company's acquisition of hotels with little or no operating
history, including the risk that such hotels will not achieve the level of
revenue assumed by the Company in calculating the respective Percentage Rent
formula; (ii) development risk, including risk of construction delays, cost
overruns, occupancy rates, average daily rates, receipt of zoning, occupancy and
other required governmental permits and authorizations and the incurrence of
development costs in connection with projects that are not pursued through
completion; and (iii) factors identified in the Company's filings with the
Securities and Exchange Commission, including the risk factors listed in the
Company's Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on August 1, 1997.
18
<PAGE> 19
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
($ in thousands)
As of June 30, 1999, the Company's exposure to market risk for a change in
interest rates related solely to its debt outstanding under its New Line and the
related interest rate cap agreement. Total debt outstanding under the New Line
totaled $109,800 at June 30, 1999. The New Line bears interest at rates from
LIBOR plus 1.45% to LIBOR plus 1.70%, based on the Company's level of total
indebtedness. The current interest rate is LIBOR plus 1.45%. The weighted
average interest rate on the New Line for the period February 1, 1999 through
June 30, 1999 was 6.40%. The New Line is used to maintain liquidity and fund the
Company's business operations, hotel acquisitions, development and major
renovations. Pursuant to the Company's operating strategies, it maintains
minimal cash balances and is substantially dependent upon, among other things,
the availability of adequate working capital financing to support hotel
acquisitions, development and major renovations. The definitive extent of the
company's interest rate risk under the New Line is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements.
Per the requirements of the New Line, on March 23, 1999, the Company entered
into an interest rate cap agreement to limit the impact of increases in interest
rates on its floating rate debt. The interest rate cap agreement eliminates the
exposure to increases in 30-day LIBOR over 7.50% on $25,000 of the outstanding
balances under the New Line for the period March 25, 1999 through March 25,
2002.
The Company had $70,497 in long-term debt at June 30, 1999 that was subject to a
fixed interest rate and principal payments. This debt is comprised of the
Company's 25-year loan with GE Capital Corporation, which carries an interest
rate of 7.375% for the first 10 years.
The Company's long-term debt has an expiration date of December 2023. The
following table presents the aggregate maturities and historical cost amounts of
the fixed debt principal and interest rates by maturity dates at June 30, 1999:
Maturity Date Fixed Rate Debt Interest Rate
- -------------------- ------------------- ------------------
1999 $ 522 7.375%
2000 1,103 7.375%
2001 1,187 7.375%
2002 1,278 7.375%
2003 1,376 7.375%
Thereafter 65,031 7.375%
------------------- ------------------
$ 70,497 7.375%
=================== ==================
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 18, 1999, the Annual Meeting of Shareholders was held
and the following matters were submitted to the shareholders
for a vote. With respect to the second proposal below, the
Annual Meeting was adjourned and reconvened on July 12, 1999
to obtain additional votes. There were 14,864,489 shares of
Common Stock and 2,127,024 shares of Series A Preferred Stock
either present or evidenced by proxy. Holders of Series A
Preferred Stock were entitled to vote only on Proposal 2. All
proposals were approved. Set forth below is a brief
description of the matters voted on and the number of votes
cast for, against or withheld, as well as the number of
abstentions and broker non-votes.
Proposal 1: Election of Directors:
<TABLE>
<CAPTION>
NUMBER OF
VOTES AGAINST BROKER
NAME VOTES FOR OR WITHHELD NON-VOTES TOTALS
---- --------- ----------- --------- ------
<S> <C> <C> <C> <C>
Charles M. Winston 14,758,096 106,393 0 14,864,489
Robert W. Winston 14,759,621 104,868 0 14,864,489
James H. Winston 14,758,272 106,217 0 14,864,489
David C. Sullivan 14,736,376 128,113 0 14,864,489
Thomas F. Darden 14,761,876 102,613 0 14,864,489
Richard L. Daugherty 14,737,421 127,068 0 14,864,489
Edwin B. Borden 14,757,576 106,913 0 14,864,489
</TABLE>
Proposal 2: Amend Article 7 of the Company's Articles of Incorporation
to increase the Company's level of permitted indebtedness from
45% to 60% of investments in hotel properties, at cost:
COMMON STOCK VOTE:
-----------------
Votes for: 7,925,343
Votes against or withheld: 857,332
Votes abstained: 172,067
Broker non-votes: 5,909,747
----------
Total 14,864,489
PREFERRED STOCK VOTE:
--------------------
Votes for: 1,749,834
Votes against or withheld: 307,353
Votes abstained: 69,837
Broker non-votes: --
----------
Total 2,127,024
Proposal 3: Ratification of the accounting firm PricewaterhouseCoopers LLP
as external auditors:
Votes for: 14,763,192
Votes against or withheld: 41,589
Votes abstained: 59,708
Broker non-votes: --
----------
Total 14,864,489
20
<PAGE> 21
Item 5. Other Information
Shareholder Proposals. As disclosed in more detail in the
Company's proxy statement in connection with its 1999 Annual
Meeting of Shareholders, as filed with the Securities and
Exchange Commission on April 9, 1999, any proposals which
shareholders intend to present for a vote of the shareholders
at the Company's 2000 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
1, 1999. Proposals received after December 1, 1999 will not be
considered for inclusion in the Company's proxy materials for
its 2000 Annual Meeting of Shareholders.
In addition, if a shareholder intends to present a matter for
a vote at the 2000 Annual Meeting of Shareholders, other than
by submitting a proposal for inclusion in the Company's Proxy
Statement for that meeting, the shareholder must give timely
notice in accordance with SEC rules. To be timely, a
shareholder's notice must be received by the Company's
Corporate Secretary at its principal office, 2209 Century
Drive, Suite 300, Raleigh, North Carolina 27612, on or before
February 15, 2000.
During the quarter ended June 30, 1999, the Company announced
that Joseph V. Green had been named Chief Financial Officer
and Brent V. West had been named Vice President of Finance and
Controller. The Company also announced that James D.
Rosenberg, the Company's previous Chief Financial Officer,
will continue in his capacity as President and Chief Operating
Officer.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Restated Articles of Incorporation
27. Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended June 30, 1999.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WINSTON HOTELS, INC.
Date August 4, 1999 /s/ Joseph V. Green
----------------- --------------------------------------
Joseph V. Green
Chief Financial Officer
(Authorized officer and Principal Financial
Officer)
22
<PAGE> 23
WINSTON HOTELS, INC.
FORM 10-Q for the quarter ended June 30, 1999
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1 Restated Articles of Incorporation
27. Financial Data Schedule (For SEC use only).
23
<PAGE> 1
ARTICLES OF RESTATEMENT
OF
WINSTON HOTELS, INC.
Pursuant to Section 55-10-07 of the North Carolina General Statutes,
the undersigned corporation hereby submits these Articles of Restatement for the
purposes of amending a provision of, and integrating into one document, its
Articles of Incorporation:
1. The name of the corporation is Winston Hotels, Inc.
2. Attached hereto as Exhibit A are the Restated Articles of
Incorporation of the Corporation which contain an amendment to the Articles of
Incorporation requiring shareholder approval.
3. The amendment to the Articles of Incorporation contained within the
attached Restated Articles of Incorporation was approved and adopted by the
shareholders of Winston Hotels, Inc. on May 18, 1999, in the manner prescribed
by Chapter 55 of the North Carolina General Statutes and other applicable law.
4. The Restated Articles of Incorporation will become effective upon
filing.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of July, 1999.
WINSTON HOTELS, INC.
By: /s/ Robert W. Winston, III
--------------------------
Robert W. Winston, III
Chief Executive Officer
<PAGE> 2
EXHIBIT A
RESTATED ARTICLES OF INCORPORATION
OF
WINSTON HOTELS, INC.
1. Name. The name of the corporation (which is hereinafter called the
"Corporation") is Winston Hotels, Inc.
2. For Profit. The Corporation is for profit.
3. Principal and Registered Office. The address of the Corporation's
registered office and its principal office is 2209 Century Drive, Suite 300,
Raleigh, Wake County, North Carolina 27612.
4. Registered Agent. The name of the Corporation's registered agent at
that office is Robert W. Winston, III.
5. Authorized Capital Stock. The total number of shares of stock which
the Corporation has authority to issue is fifty million (50,000,000) shares of a
class denominated Common Stock, $.01 par value per share, and ten million
(10,000,000) shares of a class denominated Preferred Stock, $.01 par value per
share.
The Preferred Stock may be issued from time to time by the Board of
Directors of the Corporation, in such series and with such preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or other provisions as may be fixed by the Board of
Directors.
(a) Series A Preferred Stock
<PAGE> 3
(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.
(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
2
<PAGE> 4
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.
3
<PAGE> 5
(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
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<PAGE> 6
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 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
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<PAGE> 7
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, together with all accrued and
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<PAGE> 8
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
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<PAGE> 9
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.
(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
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<PAGE> 10
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 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.
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<PAGE> 11
(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
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<PAGE> 12
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 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.
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<PAGE> 13
(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 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
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<PAGE> 14
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,
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<PAGE> 15
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.
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
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<PAGE> 16
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 5(a)(ix)(I)(1) hereof.
"Board of Directors" shall mean the Board of Directors of the
Corporation.
"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
15
<PAGE> 17
"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 5(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
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<PAGE> 18
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.
"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 5(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 5(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 5(a)(ix)(C) hereof.
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<PAGE> 19
"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 5(a)(ix)(C) hereof and administered in accordance with the terms of
Section 5(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.
(1) Except as provided in Section 5(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.
(2) Except as provided in Section 5(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
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<PAGE> 20
(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 5(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 5(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
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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 5(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.
(2) If, notwithstanding the other provisions contained in this
Section 5(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
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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 5(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 5(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 5(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 5(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 5(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:
(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
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<PAGE> 23
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 5(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
5(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
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<PAGE> 24
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
5(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 5(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 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 5(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 5(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
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<PAGE> 25
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 5(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 5(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 the
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<PAGE> 26
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 5(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 5(a)(ix)(C) hereof. Upon the
designation by the Trustee of a Permitted Transferee in accordance with the
provisions of this Section 5(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 5(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 5(a)(ix)(I)(5) hereof or following the
acceptance of the offer to purchase such shares in accordance with Section
5(a)(ix)(I)(7) hereof) to receive from the Trustee following the sale or other
disposition of such Shares-in-Trust the
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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 5(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 5(a)(ix)(I)(6) shall be distributed to
the Beneficiary in accordance with the provisions of Section 5(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 5(a)(ix)(I), by such Trustee or the Corporation.
(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 5(a)(ix)(I)(E) hereof.
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(J) Remedies Not Limited. Nothing contained in this Section 5(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 5(a)(ix), including any definition contained in
Section 5(a)(ix)(A) hereof, the Board of Directors shall have the power to
determine the application of the provisions of this Section 5(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 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."
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(M) Severability. If any provision of this Section 5(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.
6. Directors. (a) The Corporation shall have a Board of Directors
consisting of not less than three (3) nor more than nine (9) members. The number
of directors may be fixed from time to time within this range by the
shareholders or by the affirmative vote of at least 80% of the members of the
Board of Directors. However, the number of directors shall never be less than
the minimum number required by the North Carolina Business Corporation Act. A
director need not be a shareholder.
(b) Independent Directors. Notwithstanding anything herein to the
contrary, at all times (except during a period not to exceed sixty (60) days
following the death, resignation, incapacity or removal from office of a
director prior to expiration of the director's term of office), a majority of
the Board of Directors shall be comprised of persons who are not officers or
employees of the Corporation or "Affiliates" of (i) any advisor to the
Corporation under an advisory agreement, (ii) any lessee of any property of the
Corporation, (iii) any subsidiary of the Corporation or (iv) any partnership
which is an Affiliate of the Corporation.
(c) Definition of Affiliate. For purposes of the foregoing subsection,
"Affiliate" of a person shall mean (i) any person that, directly or indirectly,
controls or is controlled by or is under common control with such person, (ii)
any other person that owns, beneficially, directly or indirectly, five percent
(5%) or more of the outstanding capital stock, shares or equity interests of
such person, or (iii) any officer, director, employee, partner or trustee of
such person or any person controlling, controlled by or under common control
with such person (excluding trustees and persons serving in similar capacities
who are not otherwise an Affiliate of such person). The term "person" means and
includes individuals, corporations, general and limited partnerships, stock
companies or associations, joint ventures, associations, companies, trusts,
banks, trust companies, land trusts, business trusts, or other entities and
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governments and agencies and political subdivisions thereof. For the purposes of
this definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
through the ownership of voting securities, partnership interests or other
equity interests.
(d) Amendment of this Section. Notwithstanding any other provisions of
this Charter or the Bylaws of the Corporation (and notwithstanding that some
lesser percentage may be specified by law, this Charter or the Bylaws of the
Corporation), the provisions of this Article 6 shall not be amended, altered,
changed or repealed without the affirmative vote of at least 80% of the members
of the Board of Directors or the affirmative vote of the holders of not less
than 75% of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors, voting separately as a class.
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 sixty percent (60%) 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
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through the Corporation or through its subsidiaries or any partnership in which
the Corporation serves as general partner.
8. Dividends. All shares of Common Stock will participate equally in
dividends payable to holders of shares of Common Stock when and as declared by
the Board of Directors and in net assets available for distribution to holders
of shares of Common Stock upon liquidation or dissolution.
9. Voting. Each holder of Common Stock shall be entitled to one vote
per share on all matters to be voted on by the shareholders of the Corporation.
10. Preemptive Rights. No holder of shares of capital stock of the
Corporation shall have any preemptive or preferential right to subscribe to or
purchase (i) any shares of any class of the Corporation, whether now or
hereafter authorized; (ii) any warrants, rights, or options to purchase any such
shares; or (iii) any securities or obligations convertible into any such shares
or into warrants, rights, or options to purchase any such shares.
11. Limitation on Liability to Shareholders. To the maximum extent that
North Carolina law in effect from time to time permits limitation of the
liability of directors and officers, no director or officer of the Corporation
shall be liable to the Corporation or its shareholders for money damages.
Neither the amendment nor repeal of this provision, nor the adoption or
amendment of any other provision of this Charter or Bylaws inconsistent with
this provision, shall apply to or affect in any respect the applicability of the
preceding sentence with respect to any act or failure to act which occurred
prior to such amendment, repeal or adoption.
12. Indemnification. Any word or words defined in Part 5 of Article 8
of Chapter 55 of the General Statutes of North Carolina, as amended from time to
time, or any successor provision thereof (the "Indemnification Section") used in
this Article 12, shall have the same meaning as provided in the Indemnification
Section.
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The Corporation shall indemnify and advance expenses to a director,
officer, employee or agent of the Corporation in connection with a proceeding to
the fullest extent permitted by and in accordance with the Indemnification
Section.
13. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation or who, while a director, officer, employee or agent of the
Corporation is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against liability asserted against or incurred by such person in
that capacity or arising from such person's status as a director, officer,
employee or agent, whether or not the Corporation would have power to indemnify
such person against the same liability under the Indemnification Section.
14. REIT Status. The Corporation shall seek to elect and maintain
status as a real estate investment trust ("REIT") under Sections 856-860 of the
Internal Revenue Code of 1986, as amended from time to time (the "Code"). It
shall be the duty of the Board of Directors to ensure that the Corporation
satisfies the requirements for qualification as a REIT under the Code,
including, but not limited to, the ownership of its outstanding stock, the
nature of its assets, the sources of its income, and the amount and timing of
its distributions to its shareholders. The Board of Directors shall take no
action to disqualify the Corporation as a REIT or to otherwise revoke the
Corporation's election to be taxed as a REIT without the affirmative vote of
two-thirds (2/3) of the number of shares of Common Stock entitled to vote on
such matter at a special meeting of the Shareholders.
15. Restrictions on Transfer.
(a) Affidavits of Transferees. Whenever it is deemed by the Board of
Directors to be prudent in protecting the tax status of the Corporation as a
REIT under the Code and regulations issued under the Code, the Board of
Directors may require to be filed with the Corporation a statement or affidavit
from each proposed transferee of shares of capital stock of the Corporation
setting forth the
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number of such shares already owned by the transferee and any related person(s)
specified in the form prescribed by the Board of Directors for that purpose. Any
contract for the sale or other transfer of shares of capital stock of the
Corporation shall be subject to this provision.
(b) Affidavits of Shareholders. Prior to any transfer or transaction
which would cause a shareholder to own, directly or indirectly, shares in excess
of the "Limit" as defined in paragraph (d) of this Article 15, and in any event
upon demand of the Board of Directors, such shareholder shall file with the
Corporation an affidavit setting forth the number of shares of capital stock of
the Corporation (a) owned directly and (b) owned indirectly by the person filing
the affidavit. For purposes of this paragraph (b), shares of capital stock not
owned directly shall be deemed to be owned indirectly by a person if that person
would be the beneficial owner of such shares for purposes of Rule 13d-3, or any
successor rule thereto, promulgated under the Securities Exchange Act of 1934
(the "Exchange Act") and/or would be considered to own such shares by reason of
the attribution rules in Section 544 (as modified by Section 856(h)) of the Code
or the regulations issued thereunder.
The affidavit to be filed with the Corporation shall set forth all
information required to be reported in returns filed by shareholders under
Treasury Regulation ss. 1.857-9 issued under the Code or similar provisions of
any successor regulation, and in reports to be filed under Section 13(d), or any
successor rule thereto, of the Exchange Act. The affidavit, or an amendment
thereto, shall be filed with the Corporation within ten (10) days after demand
therefor and at least fifteen (15) days prior to any transfer or transaction
which, if consummated, would cause the filing person to hold a number of shares
of capital stock of the Corporation in excess of the "Limit" as defined in
paragraph (d) of this Article 15.
(c) Void Transfers. Notwithstanding any other provision hereof to the
contrary except Section 15(e), any acquisition of shares of capital stock that
(i) would cause any person's ownership to exceed the Limit (as defined in
Section 15(d)), (ii) would result in the disqualification of the Corporation as
a REIT under the Code, or (iii) would cause the Corporation to be treated as
owning, directly or indirectly, 10% or more of the ownership interests in a
tenant of the Corporation's real property, within
32
<PAGE> 34
the meaning of Sections 856(d)(2)(B) and 856(d)(5) of the Code, shall be void ab
initio to the fullest extent permitted under applicable law and the intended
transferee of those shares shall be deemed never to have had an interest
therein. If the foregoing provision is determined to be void or invalid by
virtue of any legal decision, statute, rule or regulation, then the transferee
of those shares shall be deemed to be Excess Shares (as defined in Section
15(d)) and subject to Section 15(f) below.
(d) Excess Shares. Except as provided in Section 15(e), no person shall
at any time directly or indirectly own in the aggregate more than 9.9% of the
outstanding shares of capital stock of the Corporation (the "Limit"). Shares
which but for this Article 15 would be owned by a person and would, at any time,
be in excess of the Limit shall be deemed "Excess Shares" and shall become
subject to Section 15(f). For the purpose of determining whether shares are
Excess Shares, "ownership" of shares shall be deemed to include shares
constructively owned by a person under the provisions of Section 544 (as
modified by Section 856(h)) of the Code. All shares of capital stock of the
Corporation which any person has the right to acquire upon exercise of
outstanding rights, options and warrants, and upon conversion of any securities
convertible into those shares, if any, shall be considered outstanding for
purposes of determining the applicable Limit if such inclusion will cause such
person to own more than the Limit.
(e) Exemptions. The ownership limits set forth in paragraphs (c) and
(d) of this Article 15 shall not apply to the acquisition of shares of capital
stock of the Corporation by an underwriter in a public offering of those shares
or in any transaction involving the issuance of shares of capital stock by the
Corporation in which the Board of Directors determines that the underwriter or
other person or party initially acquiring those shares will timely distribute
those shares to or among others so that, following such distribution, the
ownership of those shares will not be in violation of Sections 15(c) or (d). The
Board of Directors in its discretion may exempt from the Limit and from the
filing requirements of paragraph (b) of this Article 15 ownership or transfers
of certain designated shares of capital stock of the Corporation while owned by
or transferred to a person who has provided the Board of Directors with
33
<PAGE> 35
evidence and assurances acceptable to the Board of Directors that the
qualification of the Corporation as a REIT under the Code and the regulations
issued under the Code would not be jeopardized thereby.
(f) Treatment of Excess Shares.
(i) If the Board of Directors of the Corporation shall at any
time determine that a transaction has taken place within the scope of Section
15(c) or that any person intends to acquire Excess Shares, the Board of
Directors shall take such action as it or they deem advisable to refuse to give
effect to or to prevent such transaction, including but not limited to refusing
to give effect to such transfer on the books of the Corporation.
(ii) If, notwithstanding Sections 15(c) and (f)(i), a
purported transferee (a "Record Transferee") acquires Excess Shares, the Record
Transferee shall be deemed to have received such Excess Shares as agent on
behalf of, and to hold such Excess Shares in trust for the exclusive benefit of,
the person(s) to whom the Excess Shares may be later transferred pursuant to
Section 15(f)(iii). The Record Transferee shall have no right to receive
dividends or other distributions on the Excess Shares and shall have no right to
vote the Excess Shares. The Record Transferee shall have no claim, cause of
action, or any other recourse whatsoever against the transferor of the Excess
Shares. The Record Transferee's sole right with respect to the trust shall be to
receive, at the Corporation's sole and absolute discretion, either (i) an amount
upon the resale of the Excess Shares as directed by the Corporation pursuant to
Section 15(f)(iii) or (ii) an amount upon the redemption of the Excess Shares by
the Corporation pursuant to Section 15(f)(iii).
(iii) The Board of Directors will, within six months after
receiving a notice of a transfer that causes a Record Transferee to own Excess
Shares, either, in its sole and absolute discretion, (a) direct the Record
Transferee to sell all of the Excess Shares held in trust pursuant to Section
15(f)(ii) for cash in such manner as the Board of Directors directs or (b)
redeem such Excess Shares for the price and on the terms set forth in Section
15(f)(iii)(b) on such date within such six month period as the Board of
Directors may determine.
34
<PAGE> 36
(a) If the Board of Directors directs the Record Transferee to
sell the Excess Shares in held in trust, the Record Transferee shall pay the
Corporation out of the proceeds of such sale all expenses incurred by the
Corporation in connection with such sale plus any remaining amount of such
proceeds that exceeds the amount paid by the Record Transferee for the Excess
Shares, and the Record Transferee shall be entitled to retain only any proceeds
in excess of such amount required to be paid to the Corporation.
(b) If the Board of Directors determines to redeem the Excess
Shares, written notice of redemption (the "Notice") shall be provided to the
Record Transferee of the Excess Shares not less than one week prior to the
redemption date (the "Redemption Date") determined by the Board of Directors and
included in the Notice. The redemption price per share to be paid for Excess
Shares will be equal to the lesser of (i) the principal price paid by the Record
Transferee from whom Excess Shares are being redeemed, (ii)(a) the closing price
per share of the shares on the principal national securities exchange on which
the shares are listed or admitted to trading on the date of Notice, or (b) if
the shares are not so listed or admitted to trading, the closing bid price on
the date of Notice as reported on the National Association of Securities
Dealers, Inc. System, if quoted thereon (the price per share determined under
clause (a) or (b) being herein defined as the "Market Price"), or (c) if a
Market Price is not determinable in accordance with either clause (a) or (b) of
this sentence, the net asset value per share on the date of Notice determined in
good faith by the Board of Directors, (iii) the Market Price on the date on
which the person would but for this Article 15 have been deemed to acquire
ownership of the Excess Shares, or (iv) the maximum price allowed under Part 5
of Chapter 35 of Title 48 of the North Carolina Code Annotated. The amount
payable to the Record Transferee for Excess Shares so redeemed may be paid, at
the option of the Corporation, in the form of the number of "Units" equal to the
number of shares redeemed divided by the "Conversion Factor," as those terms are
defined in the Amended and Restated Agreement of Limited Partnership of WINN
Limited Partnership. The redemption price for any shares of capital stock of the
Corporation so redeemed shall be paid on the Redemption Date. From and
35
<PAGE> 37
after the Redemption Date, the holder of any redeemed shares of capital stock of
the Corporation shall cease to be entitled to any distributions or other
benefits with respect to redeemed shares, except the right to receive payment of
the redemption price fixed as aforesaid.
(g) Application of Article. Nothing contained in this Article 15 or in
any other provision hereof shall limit the authority of the Board of Directors
to take any and all other action as it in its sole discretion deems necessary or
advisable to protect the Corporation and the interests of its shareholders by
maintaining the Corporation's eligibility to be, and preserving the
Corporation's status as, a REIT under the Code.
(h) Definition of "Person". For purposes of this Article only, the term
"person" shall include individuals, corporations, limited partnerships, general
partnerships, joint stock companies or associations, joint ventures,
associations, consortia, companies, trusts, banks, trust companies, land trusts,
common law trusts, business trusts, or other entities and governments and
agencies and political subdivisions thereof.
(i) Severability. If any provision of this Article 15 or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issue, 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
that court.
(j) Legend. Certificates representing shares of capital stock of the
Corporation shall bear a legend referencing the restrictions set forth in this
Article 15.
(k) Nothing in these Articles of Incorporation shall preclude
settlement of any transaction entered into through the facilities of the New
York Stock Exchange.
36
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION OF WINSTON HOTELS, INC.
EXTRACTED FROM THE UNAUDITED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND
THE UNAUDITED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 152
<SECURITIES> 0
<RECEIVABLES> 11,386
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,586
<PP&E> 444,858
<DEPRECIATION> 47,998
<TOTAL-ASSETS> 417,009
<CURRENT-LIABILITIES> 12,520
<BONDS> 0
0
30
<COMMON> 164
<OTHER-SE> 209,772
<TOTAL-LIABILITY-AND-EQUITY> 417,009
<SALES> 31,866
<TOTAL-REVENUES> 32,070
<CGS> 0
<TOTAL-COSTS> 16,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,094
<INCOME-PRETAX> 9,349
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,349
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,784
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.32
</TABLE>
