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As filed with the Securities and Exchange Commission on September 29, 1999
Registration No. 333-86457
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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WINSTON HOTELS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
NORTH CAROLINA 56-1872141
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
2209 CENTURY DRIVE, SUITE 300
RALEIGH, NORTH CAROLINA 27612
(919) 510-6010
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
ROBERT W. WINSTON, III
2209 CENTURY DRIVE, SUITE 300
RALEIGH, NORTH CAROLINA 27612
(919) 510-6010
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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WITH A COPY TO:
BYRON B. KIRKLAND, ESQ.
AMY J. MEYERS, ESQ.
SMITH, ANDERSON, BLOUNT,
DORSETT, MITCHELL & JERNIGAN, L.L.P.
2500 First Union Capitol Center
Raleigh, North Carolina 27601
(919) 821-1220
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.[ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Each Class Maximum Maximum
of Securities Amount to Offering Price Aggregate Amount of
to be Registered be Registered Per Share(1) Offering Price(1) Registration Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share. . . . 878,797 $8.66 $7,610,382 $2,115.69
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c), based upon the average of the high and low
prices of Winston Hotels, Inc. common stock reported on the New York
Stock Exchange on August 31, 1999.
(2) Of this amount, $1,068.84 was previously paid in connection with the
initial filing on September 2, 1999.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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Winston Hotels, Inc.
878,797 Shares of Common Stock
This prospectus relates to the offer and sale from time to time by the
selling shareholders listed on page 37, of up to 878,797 shares of our common
stock. We have issued or may issue these shares to the selling shareholders to
the extent they exchange common units of limited partnership interest in WINN
Limited Partnership for an equal number of shares of our common stock. We are
the sole general partner of WINN Limited Partnership, of which we currently own
90.4% of the outstanding common units, also referred to as units, and 100% of
the outstanding preferred units.
We are registering the shares of common stock pursuant to certain
agreements we have with the selling shareholders.
The selling shareholders may sell the shares covered by this prospectus
on the New York Stock Exchange, in other markets where our common stock may be
traded or in negotiated transactions. They may sell their shares at market
prices or at negotiated prices. The selling shareholders will pay any brokerage
fees or commissions relating to their sales of common stock pursuant to this
prospectus. The registration of these shares does not necessarily mean that the
selling shareholders will sell the shares. We will not receive any proceeds from
the sale of any shares covered by this prospectus. We are paying the costs of
preparing and filing the registration statement of which this prospectus is a
part.
Our common stock is traded on the New York Stock Exchange under the
symbol "WXH." On September 28, 1999, the closing price of our common stock was
$8 9/16 per share.
The terms of our common stock include limitations on ownership and
restrictions on transfer as may be appropriate to preserve our status as a real
estate investment trust for United States federal income tax purposes, as
described on page 17.
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You should consider carefully the risk factors beginning on page 3 of
this prospectus before making a decision to invest in our common stock.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is September __, 1999.
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WINSTON HOTELS
We are a self-advised and self-administered real estate investment
trust, or REIT, which was organized on June 2, 1994. Through WINN Limited
Partnership, we own, acquire and develop hotels with nationally recognized
franchise affiliations. We control the partnership as its sole general partner,
and hold approximately 90.4% of the outstanding units plus 100% of the
outstanding preferred units of the partnership. As the sole general partner of
the partnership, we have the full, complete and exclusive power under the
partnership agreement to manage and control the business of the partnership.
We specialize in the acquisition, development and rehabilitation of
premium limited-service, high-end extended-stay and full-service hotels. Through
the partnership and its subsidiary, we currently own 51 hotels having an
aggregate of 6,904 rooms as of August 31, 1999. We seek to enhance shareholder
value by:
- participating in any increased room revenue from the hotels we
currently own and any subsequently acquired or developed
hotels through percentage leases (as described below);
- acquiring additional hotels, or interests in hotels, that meet
our investment criteria; and
- selectively developing hotels as appropriate under market
conditions.
In order for us to qualify as a REIT, neither we nor our subsidiaries
can operate hotels. Therefore, we lease all of our hotels pursuant to leases
that provide for rent payments based, in part, on revenues from the hotels.
These "percentage leases" are designed to allow us to participate in any growth
in revenues at the hotels by providing that a portion of each hotel's room
revenues in excess of specified amounts will be paid to us as percentage rent.
We currently lease 49 of the total 51 hotels to CapStar Winston Company, L.L.C.,
one of the hotels to Bristol Hotels & Resorts, Inc. and one of the hotels to
Prime Hospitality Corp. CapStar Winston operates 39 of the 49 hotels it leases
from us. Interstate Management and Investment Corporation, or IMIC, operates
nine hotels and Promus Hotels, Inc., operates one hotel, each under management
agreements with CapStar Winston.
Our executive offices are located at 2209 Century Drive, Suite 300,
Raleigh, North Carolina 27602, and our telephone number is (919) 510-6010.
RECENT EVENTS
In June 1999, we signed a joint venture agreement with Regent Partners,
Inc. The initial project will feature a $16.5 million full service 158-room
Hilton Garden Inn in Windsor, Connecticut. Pursuant to the joint venture
agreement, Regent will provide capital resources for the construction of the
hotel. We will provide services in developing, capital design, and purchasing,
as well as capital resources for funding the hotel once it receives a
certificate of occupancy. We will also earn fees for services rendered. We will
own up to 49% of each project completed by the joint venture. Two additional
sites are currently under contract, and we are conducting due diligence on them.
In addition, we have under contract eight hotels 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 October 25, 1999 for the sale of the eight hotels.
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TAX STATUS OF WINSTON HOTELS
We elected to be taxed as a REIT beginning with our taxable year ended
December 31, 1994. As a REIT, we generally are not subject to federal income tax
on taxable income that we distribute to our shareholders. We are also subject to
a number of organizational and operational requirements as a result of our REIT
status, including a requirement that we currently distribute at least 95% of our
taxable income. Failure to qualify as a REIT would render us subject to federal
income tax, including any applicable minimum tax, on our taxable income at
regular corporate rates, and we would not be able to deduct distributions to our
shareholders in any such year. Even if we qualify for taxation as a REIT, we may
be subject to federal, state and local taxes on our income and property. In
connection with our election to be taxed as a REIT, our articles of
incorporation impose restrictions on the transfer of shares of our capital
stock. The calendar year is our taxable year.
RISK FACTORS YOU SHOULD CONSIDER
In addition to the other information contained in, or incorporated by
reference into, this prospectus, you should consider the following factors
carefully in evaluating us and our business before making an investment
decision. If any of the following risks occur, our business, financial condition
or results of operations could be materially adversely affected. In that event,
the trading price of our common stock could decline, in which case the value of
your investment may decline as well. See "Forward Looking Statements" on page
41.
WE MAY NOT HAVE ACCESS TO FINANCING FOR ACQUIRING OR DEVELOPING ADDITIONAL
HOTELS
Our ability to pursue our growth strategy depends, in part, on our
ability to finance additional hotel acquisitions and development. We are subject
to restrictions that may limit our ability to take advantage of expansion
opportunities that we believe are attractive. While our articles of
incorporation permit us to incur indebtedness up to 60% of our investments in
hotel properties, at cost, we cannot assure you that we will be able to borrow
funds to the extent of this limitation. We have approximately $23 million
available under our $140 million line of credit. Through a subsidiary of the
partnership, we also have a $71 million fixed-rate loan outstanding. Our line of
credit currently limits the amount of debt we can take on. In addition, our
ability to raise equity capital will depend on market conditions. We cannot
assure you that we will be able to raise funds through a public or private
offering at a time when we need access to funds. We may seek alternative methods
of funding expansion, such as joint venture development, however, we cannot
assure you that such opportunities will be available when we need them or on
acceptable terms.
OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR SHAREHOLDERS DEPENDS UPON THE ABILITY
OF OUR LESSEES TO MAKE RENT PAYMENTS UNDER OUR LEASES
Our income is dependent upon rental payments from lessees of our
hotels. Any failure or delay by the lessees in making rent payments would
adversely affect our ability to make distributions to our shareholders. Our
lessees' ability to make rental payments depends on their ability to generate
sufficient revenues from our hotels in excess of operating expenses. Our leases
require the lessees to pay us (1) the greater of a base rent or percentage rent
and (2) other additional charges. As a result, we participate in the economic
operations of our hotels through our share of room revenues which exceed
threshold amounts specific to each hotel. The lessees' ability to pay on time or
at all could be negatively affected by reductions in revenue from the hotels or
in the net operating income of the lessees or otherwise. Our lessees also will
be affected by factors beyond their control, such as changes in the level of
demand for
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rooms and related services of our hotels, their ability to maintain and increase
gross revenues at our hotels and other factors.
OUR RETURNS DEPEND ON MANAGEMENT OF OUR HOTELS BY THIRD PARTIES
In order to qualify as a REIT, we cannot operate any hotel or
participate in the decisions affecting the daily operations of any hotel. Either
our lessees, or an operator under a management agreement with a lessee, will
control the daily operations of our hotels. We do not have the authority to
require any hotel to be operated in a particular manner or to govern any
particular aspect of the daily operations of any hotel (e.g., setting room
rates). Thus, even if we believe our hotels are being operated inefficiently or
in a manner that does not result in anticipated rent payments under existing
leases, we cannot require a change to the method of operation. We can only seek
redress if the lessee violates terms of the lease, and then only to the extent
of the remedies provided for under the terms of the lease.
In addition, our growth strategy contemplates additional hotel
acquisitions that meet our investment criteria and selective development of
hotels as market conditions warrant. Our ability to grow depends, in part, upon
the ability of our lessees and any third-party managers retained by the lessees
to manage our current and future hotels effectively. If the lessees or their
third-party managers are not able to operate additional hotels, at current
staffing levels and office locations, they may need to hire additional
personnel, engage additional third-party managers and/or operate in new
geographic locations. If the lessees or their managers fail to operate the
hotels effectively, our ability to generate revenues from the hotel leases could
be diminished.
WE MUST BE ABLE TO REPAY, EXTEND OR REFINANCE OUR EXISTING DEBT
We and a special purpose finance subsidiary of the partnership, Winston
SPE LLC, each currently have significant amounts of debt outstanding. Thus, we
are subject to the risks normally associated with debt financing, including the
risks that:
- our cash flow from operations will be insufficient to make
required payments of principal and interest;
- existing debt, including secured debt, may not be refinanced;
or
- the terms of any refinancing will not be as favorable as the
terms of our current debt.
If we or the finance subsidiary do not have sufficient funds to repay our debt
at maturity, it may be necessary to refinance it through additional debt
financing, private or public offerings of debt securities or additional equity
offerings. If, at the time of any refinancing, prevailing interest rates or
other factors result in higher interest rates on refinancings, increases in
interest expense could adversely affect our cash flow, and, consequently, cash
available for distribution to shareholders. If we are unable to refinance our
debt on acceptable terms, we or the finance subsidiary may be forced to dispose
of hotels or other assets on disadvantageous terms, potentially resulting in
losses and adverse effects on cash flow from operating activities. If we are
unable to make required payments of principal and interest on debt secured by
our hotels, one or more of those properties could be foreclosed upon by the
lender with a consequent loss of income and asset value.
Likewise, requirements under our credit facilities could affect our
financial condition and our ability to make distributions. Our articles of
incorporation limit our ability to incur debt to 60% of the value of our
investment in hotel properties, at cost. This limit is currently approximately
$266 million.
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Our current credit facilities, consisting of our syndicated credit
agreement providing for a $140 million line of credit and a fixed-rate loan to
the finance subsidiary in the amount of $71 million, allow us to borrow up to a
total of $211 million. We have pledged 29 hotel properties as collateral
securing the line of credit and the finance subsidiary has pledged 14 hotel
properties securing the $71 million note with respect to its fixed-rate loan.
Both credit facilities prohibit additional debt secured by any hotel pledged as
collateral for obligations under that facility.
Under the terms of our $140 million line of credit, our borrowing
availability is limited to a percentage of value of the hotels provided as
collateral, with such value determined in part by the cash flow generated by
those hotels. Our current cash flow from the hotels securing the line of credit
limits our borrowing availability under the line of credit to less than $140
million. If we need to borrow funds under the line of credit above our borrowing
availability, we must provide additional collateral to increase our borrowing
availability to the total amount of debt we need, but not to exceed $140
million. If our cash flow decreases to such a level that our borrowing
availability is less than the amount outstanding under the line of credit, we
must either (1) repay the excess of the amounts outstanding over our borrowing
availability or (2) if the lenders give their unanimous consent, provide
additional collateral to increase our borrowing availability.
Our ability to borrow and to maintain loans under the line of credit is
subject to financial covenants, including leverage ratios, maximum unsecured and
secured debt ratios, interest and fixed charge coverage ratios and minimum
tangible net worth requirements. The terms of the line of credit also limit our
ability to effect mergers or asset sales, to make investments in other entities,
or to pay dividends in excess of 90% of our funds from operations over the most
recent four fiscal quarters. The line of credit provides that any default under,
or acceleration of, any of our other debt, any debt of the partnership or any
debt of our subsidiaries, including any default by the finance subsidiary under
the $71 million fixed-rate loan or otherwise, will constitute a default under
the line of credit and could lead to the acceleration of our obligations under
the line of credit. Although we and the finance subsidiary presently are in
compliance with our covenants and other material obligations under the line of
credit and the fixed-rate loan, respectively, we cannot assure you that we or
our finance subsidiary will continue to be in compliance, or that we or they
will be able to service our respective indebtedness or pay distributions to our
shareholders.
RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW
Our borrowings under the $140 million line of credit bear interest at a
variable rate. Our line of credit requires that we maintain at least 50% of our
total debt subject to a fixed rate of debt. We have entered into an interest
rate cap agreement which eliminates exposure to increases in 30-day LIBOR rates
exceeding 7.5% on $25 million of the outstanding balance under our line of
credit until March 25, 2002; however, outstanding debt of up to $115 million
under our line of credit remains subject to variable interest rates. We may
incur debt in the future that bears interest at a variable rate or we may be
required to retain our existing debt at higher interest rates. Accordingly,
increases in interest rates could increase our interest expense and adversely
affect our cash flow.
WE MAY NOT BE ABLE TO COMPLETE DEVELOPMENT OF NEW HOTELS ON TIME OR WITHIN
BUDGET
We are currently developing one hotel property through a joint venture,
and we intend to develop additional hotel properties as suitable opportunities
arise. New project development is subject to a number of risks that could cause
increased costs or delays in our ability to generate revenue from the
development hotel, resulting in a negative effect on our cash available for
distribution. These risks include:
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- construction delays or cost overruns that may increase project
costs;
- competition for suitable development sites;
- receipt of zoning, occupancy and other required governmental
permits and authorizations; and
- substantial development costs in connection with projects that
are not pursued to completion.
We cannot assure you that we will complete the development of any projects we
begin or that our development and construction activities will be completed in a
timely manner or within budget.
We also intend to rehabilitate hotels that we believe are
underperforming. These rehabilitation projects will be subject to the same risks
as development projects.
HOTELS WE DEVELOP HAVE NO OPERATING HISTORY
The hotel we are currently developing under our joint venture has no
operating history. We will negotiate the percentage rent formula for this hotel,
and other hotels we develop, based on projections of occupancy and average daily
room rates for the area in which the hotel is or will be located and the type of
hotel under development. We cannot assure you that these hotels will achieve
anticipated levels of occupancy or average daily room rate. Similarly, during
the start-up period, room revenues may be less than required to result in the
payment of rent at levels that provide us with an attractive return on our
investments.
PROPERTY OWNERSHIP THROUGH JOINT VENTURES AND PARTNERSHIPS COULD LIMIT OUR
CONTROL OF THOSE INVESTMENTS
Joint ventures or partnerships (other than the partnership) may involve
risks not otherwise present for investments we make on our own. It is possible
that our co-venturers or partners may have different interests or goals than we
do at any time and that they may take action contrary to our requests, policies
or objectives, including our policy with respect to maintaining our
qualification as a REIT. Other risks of joint venture investment include impasse
on decisions, because no single co-venturer or partner would have full control
over the joint venture or partnership. Our current joint venture partner has the
right, after one year, to sell the hotels developed by the joint venture to us,
or, if we refuse to purchase such hotels, to a third party.
WE WOULD HAVE TO FIND A NEW LESSEE UPON TERMINATION OF AN EXISTING LEASE
If our lessees fail to materially comply with the terms of a hotel
lease (including failure to pay rent when due), we have the right to terminate
the lease, repossess the applicable hotel and enforce payment obligations under
the lease. If CapStar Winston defaults under any lease, the default will
constitute a default under all of our leases with CapStar Winston and its
affiliates. Thus, we will have the right to terminate all of those leases. Upon
termination, we would have to find another lessee to lease the property because
we cannot operate the hotels directly due to federal income tax restrictions. In
addition, it is possible that we would not be able to enforce the payment
obligations under the leases following termination. We cannot assure you that we
would be able to find another lessee or that, if another lessee were found, we
would be able to enter into new leases favorable to us.
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OUR LEASE TERMS MAY AFFECT OUR ABILITY TO SELL HOTELS ON FAVORABLE TERMS
Currently, we have contracts to sell eight of our hotels. Even though
these hotels are under contract, we cannot assure you that the sales will be
completed. We may decide to sell additional hotels in the future. Under our
leases, upon the sale of a hotel, we must either pay a termination fee to our
lessee or offer to lease another suitable property to the lessee. The amount of
the termination fee would depend on the revenue from the hotel and the remaining
term of the lease. Alternatively, we may negotiate with our lessee to waive the
lease provision and arrange for the lessee to continue to lease the property
from the buyer. We cannot assure you that we will be able to successfully
negotiate with our lessee or be able to offer a suitable substitute lease.
Consequently, we may have to pay a termination fee, lease another suitable
property or abandon the sale transaction.
OUR PERFORMANCE AND THE VALUE OF OUR STOCK ARE SUBJECT TO RISKS ASSOCIATED WITH
THE HOTEL INDUSTRY
OUR HOTELS ARE SUBJECT TO OPERATING RISKS COMMON TO THE HOTEL INDUSTRY.
Our hotels are subject to all operating risks common to the hotel industry.
These factors could adversely affect the ability of our lessees to generate
revenues and to make payments to us and therefore affect our ability to make
distributions to our shareholders. These risks include:
- competition for guests from other hotels;
- faster growth in room supply in the segments in which we
operate than in other industry segments, which may exceed
demand growth in certain regions;
- increases in operating costs due to inflation and other
factors which may not be offset in the future by increased
room rates;
- seasonality, with higher hotel revenues occurring in the
second and third calendar quarters;
- increases in energy costs, airline fares and other expenses
related to travel, which may deter travelling; and
- adverse effects of general and local economic conditions.
WE MAY INCUR HIGHER COSTS AS A RESULT OF THE PROXIMITY OF OUR HOTELS TO
THE COAST. Several of our hotels are located near the Atlantic Ocean and are
exposed to more severe weather than hotels located inland. These hotels are also
exposed to salt water and humidity, which can increase or accelerate wear on the
hotels' weatherproofing and mechanical, electrical and other systems. As a
result, we may incur additional expenditures for capital improvements.
CONDITIONS OF FRANCHISE AGREEMENTS COULD ADVERSELY AFFECT US. All of
our hotels are operated pursuant to franchise agreements with nationally-
recognized hotel brands. In addition, hotels in which we subsequently invest
may be operated pursuant to franchise agreements. A hotel's failure to adhere
to the terms and conditions of the franchise agreement could result in the loss
or cancellation of its franchise license. The franchise agreements generally
contain specific standards for, and restrictions and limitations on, the
operation and maintenance of a hotel in order to maintain uniformity within the
franchisor's system. These standards are subject to change over time, in some
cases at the discretion of the franchisor, and may restrict a franchisee's
ability to make improvements or modifications to a hotel without the consent of
the franchisor. In addition, compliance with these standards could require a
franchisee to incur significant expenses or capital expenditures. Our cash
available for distribution could be adversely affected if we or our lessees
must incur substantial costs to maintain a franchise license.
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In connection with termination of a franchise license or changing the
franchise affiliation of a hotel, we may have to incur significant expenses or
capital expenditures. Moreover, the loss of a franchise license could have a
material adverse effect on the operations or the underlying value of the hotel
covered by the franchise because of the loss of association, name recognition,
marketing support and centralized reservation system provided by the franchisor.
Any of these events could have a negative effect on our distributions to
shareholders. The franchise agreements covering the hotels expire or terminate,
without special renewal rights, at various times and have different remaining
terms.
OPERATING COSTS AND CAPITAL EXPENDITURES COULD ADVERSELY AFFECT OUR
CASH FLOW. Hotels have an ongoing need for renovations and other capital
improvements, particularly in older structures, including periodic replacement
of furniture, fixtures and equipment. Under the terms of our leases, we are
obligated to pay the cost of certain capital expenditures at the hotels and to
pay for furniture, fixtures and equipment. Franchisors also may require periodic
capital improvements to the hotels as a condition of retaining the franchise
licenses. In addition, we intend to invest selectively in hotels that require
significant renovation. Renovation of hotels involves certain risks, including:
- the possibility of environmental problems;
- construction cost overruns and delays;
- uncertainties as to market demand or deterioration in market
demand after commencement of renovation; and
- the emergence of unanticipated competition from other hotels.
If any of these costs exceed our estimates, the additional cost could have an
adverse effect on our cash available for distribution.
WE MUST COMPETE WITH LARGER ENTITIES FOR ACQUISITION OPPORTUNITIES
We compete for acquisition opportunities with entities that have
substantially greater financial resources than we do. These entities generally
may be able to accept more risk than we can prudently manage, including risks
with respect to the creditworthiness of a hotel operator or the geographic
proximity of its investments. Competition may reduce the number of suitable
investment opportunities available to us and increase the bargaining power of
sellers. In addition, other potential buyers who do not need to use a lessee to
operate the hotel may be able to offer a higher price for a property than we are
able to pay.
WE MAY FACE CONFLICTS OF INTEREST RELATING TO SALE OF HOTELS ACQUIRED FROM
AFFILIATES
We have acquired 14 hotels in the past from related parties of our
affiliates, which include Robert Winston (our Chief Executive Officer) and
Charles Winston (our Chairman of the Board). The limited partners of the
partnership, including Robert Winston and Charles Winston, may have unrealized
gain associated with their interests in these hotels. Our sale of any of those
hotels may cause adverse tax consequences to the limited partners. Therefore,
our interests could conflict with the interests of the limited partners in
connection with the disposition of one or more of those 14 hotels. However,
decisions with respect to the disposition of any of our hotel properties must be
made by a majority of the board of directors. When the disposition involves a
hotel that was initially acquired from an affiliate, the majority required to
approve the sale must include a majority of our independent directors.
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WE DEPEND ON KEY PERSONNEL
We depend on the efforts and expertise of our president, chief
executive officer, chief financial officer, controller and vice president of
development to drive our day to day operations and strategic business direction.
The loss of their services could have an adverse effect on our operations.
OUR PERFORMANCE AND VALUE ARE SUBJECT TO THE CONDITION OF THE REAL ESTATE
INDUSTRY
SINCE REAL ESTATE INVESTMENTS ARE ILLIQUID, WE MAY NOT BE ABLE TO SELL
HOTELS WHEN APPROPRIATE. Real estate investments generally cannot be sold
quickly. We may not be able to vary our portfolio promptly in response to
changes in economic and other conditions. Because we are a REIT, federal income
tax laws limit our ability to sell properties in some situations when it may be
economically advantageous to do so. As a result, returns to our shareholders
could be adversely affected. In addition, we cannot assure you that the market
value of any of our hotels will not decrease in the future.
LIABILITY FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION. Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of investigation and removal or remediation
of hazardous or toxic substances on, under or in the property, including
fixtures, structures and other improvements located on the property. These laws
often impose liability whether or not the owner or operator knew of (or should
have known of), or caused, the presence of contaminants. Clean-up costs and the
owner's or operator's liability generally are not limited under these laws and
could exceed the value of the property and/or the aggregate assets of the owner
or operator. In addition, the presence of, or failure to properly remediate,
contaminants may adversely affect the owner's ability to sell or rent the
property or borrow using the real property as collateral. Persons who arrange
for the disposal or treatment of hazardous or toxic substances may also be
liable for the clean-up costs of the substances at the disposal or treatment
facility, whether or not the facility is or ever was owned or operated by that
person.
Environmental, health and safety laws and common law principles also
govern the presence, maintenance and removal of hazardous substances, including
asbestos-containing materials, or ACMs, into the air. Many such laws permit
third parties, including employees and independent contractors, to seek recovery
from owners or operators of real properties for personal injury or property
damage associated with exposure to released hazardous substances, including
ACMs. In connection with the ownership of the hotels, we may be considered an
owner or operator and therefore may be potentially liable for any such costs. We
obtained Phase I environmental site assessments prior to the acquisition of each
hotel. The purpose of these Phase I reports is to identify potential sources of
contamination for which a hotel may be responsible and to assess the status of
environmental regulatory compliance. However, Phase I reports do not address the
presence of asbestos, lead paint, radon or other indoor air pollution. The Phase
I reports have not revealed any environmental condition, liability or compliance
concern that we believe would have a material adverse effect on our business,
assets or results of operations, nor are we aware of any such condition,
liability or concern. However, these reports may not reveal all environmental
conditions, liabilities or compliance concerns. For example, asbestos has been
found at two of our hotels, but we do not believe that this finding has any
material adverse effect on our business, assets or the results of operations of
these hotels. Further, there may be material environmental conditions,
liabilities or compliance concerns that arose at a hotel after the related Phase
I report was completed of which we are otherwise unaware.
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LIABILITY FOR UNINSURED AND UNDERINSURED LOSSES COULD ADVERSELY AFFECT
OUR FINANCIAL CONDITION. In the event of a substantial loss, our insurance
coverage may not be sufficient to pay the full current market value or current
replacement cost of our lost investment. Each lease specifies comprehensive
insurance to be maintained on the subject hotel, which we believe is comparable
to that customarily obtained for or by an owner on real property assets. Leases
for subsequently acquired hotels will contain similar provisions. Our board of
directors will use its discretion in determining amounts, coverage limits and
deductibility provisions of insurance, with a view to maintaining appropriate
insurance coverage on our investments at a reasonable cost and on suitable
terms. Certain types of losses, generally of a catastrophic nature, such as
earthquakes, floods, hurricanes, and other acts of God, may be uninsurable or
not economically insurable. In addition, we may not be able to use insurance
proceeds to replace a damaged or destroyed property as a result of changes in
building codes and ordinances, environmental considerations or other factors. In
these circumstances, any insurance proceeds we receive might not be adequate to
restore our economic position with respect to the damaged or destroyed property.
THE COST OF COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND
OTHER CHANGES IN GOVERNMENTAL RULES AND REGULATIONS COULD ADVERSELY AFFECT OUR
CASH FLOW. Under the Americans with Disabilities Act of 1990, or the ADA, all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. While we believe that our hotels
substantially comply with these requirements, a determination that we are not in
compliance with the ADA could result in imposition of fines or an award of
damages to private litigants. In addition, other governmental rules and
regulations or enforcement policies affecting the use and operation of the
hotels could change, including changes to building codes and fire and life
safety codes. If we are required to spend money to comply with the ADA or other
changes in governmental rules and regulations, our ability to make distributions
to shareholders could be adversely affected.
FLUCTUATIONS IN PROPERTY TAXES COULD ADVERSELY AFFECT OUR CASH FLOW.
Real and personal property taxes on our current (and future) hotel properties
may increase or decrease as property tax rates change and as the properties are
assessed or reassessed by taxing authorities. An increase in property taxes
could have an adverse effect on our ability to make distributions to
shareholders.
THE PRICE OF OUR SECURITIES MAY BE AFFECTED BY CHANGES IN MARKET INTEREST RATES
One of the factors that may influence the price of our common stock in
public trading markets is the annual yield from distributions on our common
stock as compared to yields on other financial instruments. Thus, an increase in
market interest rates will result in higher yields on other financial
instruments, which could adversely affect the market price of our common stock.
OUR BOARD OF DIRECTORS HAS LIMITED ABILITY TO CHANGE CERTAIN POLICIES
Our major policies, including our acquisition, development, financing,
growth, operations, debt capitalization and distribution policies, are
determined by our board of directors. We cannot change our policy of limiting
consolidated debt to 60% of our investment in hotel properties, at cost, without
shareholder approval. In addition, the approval of two-thirds of the number of
shares of common stock entitled to vote is necessary to change our policy of
seeking to maintain qualification as a REIT.
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THE ABILITY OF OUR SHAREHOLDERS TO EFFECT A CHANGE IN CONTROL IS LIMITED
STOCK OWNERSHIP LIMITATIONS COULD INHIBIT CHANGES IN CONTROL. Our
articles of incorporation provide that no shareholder may own, directly or
indirectly, more than 9.9% of any class of our outstanding stock. This
limitation may have the effect of precluding acquisition of control by a third
party without the approval of our board of directors.
OUR ABILITY TO ISSUE PREFERRED STOCK COULD INHIBIT CHANGES IN CONTROL.
Our articles of incorporation authorize the board of directors to issue up to
10,000,000 shares of preferred stock and to establish the preferences and rights
of any shares of preferred stock issued. As of the date of this prospectus,
there are 3,000,000 shares of preferred stock outstanding. Issuing additional
preferred stock could have the effect of delaying or preventing a change in
control even if a change in control were in our shareholders' interest.
NORTH CAROLINA ANTI-TAKEOVER STATUTES COULD INHIBIT CHANGES IN CONTROL.
As a North Carolina corporation, we are subject to various statutes which impose
restrictions and require procedures with respect to certain takeover offers and
business combinations, which may include combinations with interested
shareholders and share repurchases from certain shareholders.
WE ARE SUBJECT TO TAX RISKS AS A RESULT OF OUR REIT STATUS
We have operated and intend to continue to operate so as to qualify as
a REIT for federal income tax purposes. Our continued qualification as a REIT
will depend on our continuing ability to meet various requirements concerning
the ownership of our outstanding stock, the nature of our assets, the sources of
our income, and the amount of distributions to our shareholders.
In order to qualify as a REIT, we generally are required each year to
distribute to our shareholders at least 95% of our taxable income, other than
any net capital gain. To the extent that we meet the 95% distribution
requirement, but distribute less than 100% of our taxable income, we will be
required to pay income tax on our undistributed income. The U.S. Congress
recently passed legislation that would reduce the 95% distribution requirement
to 90%. We cannot assure you that this legislation will be enacted into law. In
addition, we will be subject to a 4% nondeductible excise tax if the actual
amount we pay out to our shareholders in a calendar year is less than a minimum
amount specified under the federal tax laws. The requirement to distribute a
substantial portion of our net taxable income could cause us to distribute
amounts that otherwise would be spent on future acquisitions, unanticipated
capital expenditures or repayment of debt, which would require us to borrow
funds or to sell assets to fund the costs of such items.
We have made, and intend to continue to make, distributions to our
shareholders to comply with the 95% distribution requirement and to avoid
corporate income tax and the nondeductible excise tax. Our income consists of
our share of the income of the partnership, and our cash available for
distribution consists of our share of cash distributions from the partnership.
Differences in timing between the recognition of taxable income and the receipt
of cash available for distribution due to the seasonality of the hotel industry
could require us to borrow funds on a short-term basis to meet the 95%
distribution requirement and to avoid the nondeductible excise tax.
If we were to fail to qualify as a REIT for any taxable year, we would
not be allowed to deduct our distributions to our shareholders in computing our
taxable income. Furthermore, we would be subject to federal income tax,
including any applicable alternative minimum tax, on our taxable income
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at regular corporate rates. Unless we are entitled to relief under the federal
income tax laws, we also would be disqualified from treatment as a REIT for the
four taxable years following the year during which we lost our qualification. As
a result, our cash available for distribution would be reduced for each of the
years involved. Although we currently operate and intend to continue to operate
in a manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause our board of directors,
with the consent of shareholders holding at least two-thirds of the common stock
entitled to vote, to revoke the REIT election.
YEAR 2000 ISSUE COULD HAVE A NEGATIVE IMPACT ON OUR OPERATIONS AND FINANCIAL
RESULTS
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 our
computer programs or the computer programs of one of our 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. We have identified our 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. We anticipate that we
will achieve full compliance with regard to internal software and embedded chip
technology by October 1999. Virtually all of our internal software are current
versions of off-the-shelf, name-brand software. Our 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 phone system will be replaced with a new, fully
compliant phone system in October 1999. The majority of our hardware has been
installed in the last twelve months.
EXTERNAL NONCOMPLIANCE BY SERVICE PROVIDERS, CONTRACTORS AND SUPPLIERS.
We have identified and contacted our significant service providers, contractors
and suppliers to determine the extent to which we are vulnerable to their
failure to remedy their own Year 2000 issues. We have received information
concerning the Year 2000 compliance status of several of our significant service
providers, contractors and suppliers. At the date of this prospectus, 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. We 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, our contingency plan is to attempt to change
significant service providers, contractors or suppliers to those who have
demonstrated Year 2000 readiness, but we cannot assure you that we will be
successful in finding such alternative service providers, contractors or
suppliers. In the event that any of our significant service providers,
contractors or suppliers do not successfully and timely achieve Year 2000
compliance, and we are unable to replace them with alternate service providers,
contractors or suppliers, our business or operations could be materially and
adversely affected.
EXTERNAL NONCOMPLIANCE BY FRANCHISORS AND LESSEES. We have significant
relationships with certain nationally recognized hotel franchisors and lessees.
These franchisors have national reservation systems on which we rely to receive
a significant portion of revenue under our leases. We have received information
concerning the Year 2000 compliance status of all of our franchisors and
lessees. At the date of this prospectus, some of the franchisors and lessees
have indicated they are already Year 2000
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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. We 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, our business or operations
could be materially and adversely affected.
Historical costs incurred to address the Year 2000 problem are
approximately $450,000. We have not yet developed a final cost estimate related
to resolving Year 2000 issues.
DESCRIPTION OF CAPITAL STOCK
Under our articles of incorporation, the total number of shares of all
classes of stock that we are authorized to issue is 60,000,000, consisting of
50,000,000 shares of common stock, $.01 par value per share and 10,000,000
shares of preferred stock, $.01 par value per share. The description of our
capital stock set forth below describes certain general terms and provisions of
the capital stock. The following description does not purport to be complete and
is qualified in its entirety by reference to our articles of incorporation and
our bylaws.
COMMON STOCK
Under our articles of incorporation, we have the authority to issue up
to 50,000,000 shares of common stock. Under North Carolina law, shareholders
generally are not responsible for a corporation's debts or obligations. At
August 31, 1999, we had 16,373,843 shares of common stock outstanding.
The holders of our common stock are entitled to one vote per share on
all matters voted on by shareholders, including election of directors. Except as
otherwise required by law or our articles of incorporation or provided in any
resolution adopted by the board of directors with respect to any series of
preferred stock, the holders of such shares exclusively possess all voting
power. Our articles of incorporation do not provide for cumulative voting in the
election of directors. Subject to any preferential rights of any outstanding
series of preferred stock, the holders of common stock are entitled to such
distributions as may be declared from time to time by the board of directors
from funds available therefor, and upon liquidation are entitled to receive pro
rata all of our assets available for distribution to such holders.
Our common stock is subject to certain restrictions upon the ownership
and transfer thereof which were adopted for the purpose of enabling us to
preserve our status as a REIT. For a description of such restrictions, see
"Restrictions on Ownership of Common Stock."
Our common stock currently is traded on the New York Stock Exchange
under the symbol "WXH." The transfer agent and registrant for our common stock
is Boston Equiserve, L.P., Boston, Massachusetts. We will apply to the New York
Stock Exchange or any securities exchange on which our common stock is listed to
list any additional shares of common stock to be sold pursuant to this
prospectus.
PREFERRED STOCK
The board of directors is authorized to provide for the issuance of up
to 10,000,000 shares of preferred stock from time to time, in one or more
series, to establish the number of shares in each series and to fix the
designation, powers, preferences and rights of each such series and the
qualifications,
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limitations or restrictions thereof. We have designated 3,000,000 shares as
Series A preferred stock, all of which are outstanding as of the date of this
prospectus. The terms of the Series A preferred stock include:
- cumulative annual dividends of $2.3125 per share payable
before any distributions may be paid to our common
shareholders;
- a liquidation preference of $25.00;
- redemption rights at our option exercisable for $25 per share
in cash, plus accrued and unpaid dividends, beginning on
September 28, 2001; and
- redemption rights at our option upon a change of control (as
defined in our articles of incorporation) exercisable at a
redemption price ranging from $25.05 to $25.80 per share,
depending on the date of the change of control, until
September 28, 2001.
Holders of Series A preferred stock do not have a right to vote in elections of
directors or on any other matter, except as required by law or as specifically
required under our articles of incorporation. Our articles of incorporation
permit the Series A preferred stock to vote (1) to elect two additional
directors to our board in the event that we have not made distributions with
respect to the Series A preferred stock for a period of at least six quarters,
until all dividends accumulated through the current dividend period have been
paid and (2) on amendments to our articles of incorporation that materially and
adversely affect the rights, preferences, privileges or voting power of the
Series A preferred stock.
Because the board of directors has the power to establish the
preferences and rights of each class or series of preferred stock, the board of
directors may afford the holders of any series or class of preferred stock
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of common stock. The issuance of additional shares of preferred stock
could have the effect of delaying or preventing a change in control.
Our preferred stock is subject to certain restrictions upon the
ownership and transfer thereof for the purpose of enabling us to preserve our
status as a REIT, as more fully described in our articles of incorporation.
ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
Number of Directors; Removal; Filling Vacancies
Our articles of incorporation and bylaws provide that, subject to any
rights of holders of preferred stock to elect additional directors under
specified circumstances, the number of directors will consist of not less than
three nor more than nine persons, subject to increase or decrease by the
shareholders or by the affirmative vote of 80% of the members of the entire
board of directors. At all times a majority of the directors shall be directors
who do not serve as our officers or employees or as officers or employees of our
subsidiaries and are not affiliates of any of our advisors, any lessee of any of
our properties, or any of our affiliates ("independent directors"), except that
upon the death, removal or resignation of an independent director, this
requirement shall not be applicable for 60 days. The common stock shareholders
are entitled to vote on the election or removal of directors, with each share
entitled to one vote. Our bylaws provide that, subject to any rights of holders
of preferred stock, and unless the board of directors otherwise determines, any
vacancies will be filled by the affirmative vote of a majority of the remaining
directors, though less than a quorum, provided that independent directors shall
nominate and approve directors to fill vacancies created by independent
directors. Accordingly, the board of directors could temporarily prevent any
shareholder from enlarging the board of directors and filling the
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new directorships with that shareholder's own nominees. Any director so elected
shall hold office until the next annual meeting of shareholders.
A director, other than a director elected by our preferred share-
holders, may be removed with or without cause by the vote of the holders of 75%
of the outstanding shares of common stock entitled to vote for directors at a
special meeting of the shareholders called for the purpose of removing him.
Limitation of Liability; Indemnification
Our articles of incorporation provide that none of our directors or
officers shall be liable to us or our shareholders for money damages to the
maximum extent that North Carolina law in effect from time to time permits
limitation of liability of directors and officers.
Our articles of incorporation provide that we shall, to the fullest
extent permitted by North Carolina law, indemnify any director, officer,
employee or agent. In connection with their indemnification, we may advance
expenses to such persons. Any indemnification by us pursuant to the provisions
of our articles of incorporation shall be paid out of our assets and shall not
be recoverable from our shareholders. We have purchased director and officer
liability insurance for the purpose of providing a source of funds to pay any
indemnification described above. To the extent that the foregoing
indemnification provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, in the opinion of the Securities and
Exchange Commission such indemnification is contrary to public policy and,
therefore, unenforceable.
Amendment
Except as otherwise required by our articles of incorporation or by
law, our articles of incorporation may be amended by the affirmative vote of the
holders of a majority of the shares of common stock voting at a meeting at which
a quorum is present, with the shareholders voting as a voting group with one
vote per share. Our bylaws may be amended by the board of directors or by vote
of the holders of a majority of the shares of common stock voting at a meeting
at which a quorum is present, except that the bylaws governing the number of
directors, removal of directors, quorum for directors' meetings and sales
involving conflicts of interest can only be changed by a vote of 75% of
outstanding shares entitled to vote for directors.
NORTH CAROLINA ANTI-TAKEOVER STATUTES
North Carolina has adopted a series of statutes that may deter takeover
attempts or tender offers, including offers or attempts that might result in the
payment of a premium over the market price for the common stock or that a
shareholder might otherwise consider in our best interest. These statutes
provide takeover protections in addition to the provisions in our articles of
incorporation and bylaws described above.
We are subject to the North Carolina Control Share Acquisition Act (the
"Control Share Act"). The provisions of the Control Share Act are triggered upon
the acquisition by a person of shares of our voting stock that, when added to
all other shares beneficially owned by the person, would result in that person
holding one-fifth, one-third or a majority of the voting power in the election
of directors. Under the Control Share Act, the shares acquired in such a
transaction that meet or exceed any of these thresholds ("Control Shares") have
no voting rights until conferred by the affirmative vote of the holders of a
majority of all outstanding voting shares, excluding those shares held by any
person involved or proposing to be involved in the acquisition of Control
Shares, any of our officers and any of our
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employees who is also a director. If voting rights are conferred on the Control
Shares, all of our shareholders have the right to require that their shares be
redeemed at the highest price paid per share by the acquiror for any Control
Shares. The aggregate effect of these provisions may be to delay or prevent
attempts by other corporations or groups to acquire control without negotiation
with the board of directors.
The North Carolina Shareholder Protection Act (the "Shareholder
Protection Act") requires the affirmative vote of 95% of a corporation's voting
shares to approve a "business combination" with any person that beneficially
owns more than 20% of the voting shares of the corporation unless the fair price
provisions of the Shareholder Protection Act are satisfied. Under the
Shareholder Protection Act, a "business combination" is defined as any merger or
consolidation of a corporation with or into any other corporation, or the sale
or lease of all or any substantial part of the corporation's assets to, or any
payment, sale or lease to the corporation or any subsidiary thereof in exchange
for securities of the corporation or any assets (except assets having an
aggregate fair market value of less than $5 million) of any other entity.
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK
For us to qualify as a REIT under the federal tax laws, we must satisfy
restrictions on the ownership of shares of our capital stock. See "Federal
Income Tax Consequences of Our Status as a REIT -- Requirements for
Qualification." Because our board of directors believes it is essential for us
to continue to qualify as a REIT, our articles of incorporation restrict the
acquisition of shares of our capital stock (the "Ownership Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in our articles of incorporation, no shareholder may own, or be deemed
to own by virtue of the attribution provisions of the federal income tax laws,
more than 9.9% of the outstanding shares of common stock or more than 9.9% of
the outstanding Series A preferred stock. The board of directors may, but in no
event is required to, waive the Ownership Limitation if evidence satisfactory to
the board of directors is presented that ownership in excess of such amount will
not jeopardize our status as a REIT. As a condition of such waiver, the board of
directors may require opinions of counsel satisfactory to it or an undertaking
from the applicant with respect to preserving our REIT status. If shares in
excess of the Ownership Limitation, shares which would cause us to be
beneficially owned by fewer than 100 persons, shares which would cause us to be
"closely held," or shares which would cause us to own 10% or more of a tenant of
our property, are issued or transferred to any person, such issuance or transfer
will be null and void and the intended transferee will acquire no rights to the
shares.
The Ownership Limitation will not be automatically removed even if the
REIT provisions of the federal income tax laws are changed so as to no longer
contain any ownership concentration limitation or if the ownership concentration
limitation is increased. Any change in the Ownership Limitation would require an
amendment to our articles of incorporation. In addition to preserving our status
as a REIT, the Ownership Limitation may have the effect of precluding an
acquisition of control without the approval of our board of directors. All
certificates representing shares of capital stock bear a legend referring to the
restrictions described above.
All persons who own, directly or by virtue of the attribution
provisions of the federal income tax laws, 5% or more of our outstanding common
stock and any shareholder we request must file an affidavit with us containing
the information specified in our articles of incorporation with respect to their
ownership of shares within 30 days after January 1 of each year. In addition,
upon our demand, each
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shareholder is required to disclose to us in writing such information with
respect to the direct, indirect and constructive ownership of shares as the
board of directors deems necessary to comply with the provisions of the federal
income tax laws applicable to a REIT or to comply with the requirements of any
taxing authority or governmental agency.
FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT
This section summarizes the federal income tax issues that you, as a
shareholder, may consider relevant. Because this section is a summary, it does
not address all of the tax issues that may be important to you. In addition,
this section does not address the tax issues that may be important to
shareholders that are subject to special treatment under the federal income tax
laws, such as (1) insurance companies, (2) tax-exempt organizations, except to
the extent discussed in "--Taxation of Tax-Exempt Shareholders" below, (3)
financial institutions or broker-dealers, and (4) non-U.S. individuals and
foreign corporations, except to the extent discussed in "--Taxation of Non-U.S.
Shareholders" below.
The statements in this section are based on the current federal income
tax laws governing qualification as a REIT. We cannot assure you that new laws,
interpretations thereof, or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be inaccurate.
We urge you to consult your own tax advisor regarding the specific tax
consequences to you of owning the common stock and of our election to be taxed
as a REIT. Specifically, you should consult your own tax advisor regarding the
federal, state, local, foreign, and other tax consequences of such ownership and
election, and regarding potential changes in applicable tax laws.
TAXATION OF OUR COMPANY
We elected to be taxed as a REIT under the federal income tax laws
commencing with our taxable year ended December 31, 1994. We believe that we
have operated in a manner intended to qualify as a REIT since our election to be
a REIT and we intend to continue to so operate. This section discusses the laws
governing the federal income tax treatment of a REIT and its shareholders. These
laws are highly technical and complex.
Our qualification as a REIT depends on our ability to meet on a
continuing basis qualification tests set forth in the federal tax laws. Those
qualification tests involve the percentage of income that we earn from specified
sources, the percentage of our assets that fall within specified categories, the
diversity of our share ownership, and the percentage of our earnings that we
distribute. We describe the REIT qualification tests in more detail below. For a
discussion of the tax treatment of our company and our shareholders if we fail
to qualify as a REIT, see "--Failure to Qualify."
If we qualify as a REIT, we generally will not be subject to federal
income tax on the taxable income that we distribute to our shareholders. The
benefit of that tax treatment is that we avoid the "double taxation," or
taxation at both the corporate and shareholder levels, that generally results
from owning stock in a corporation. However, we will be subject to federal tax
in the following circumstances:
- - We will pay federal income tax on taxable income, including net capital
gain, that we do not distribute to our shareholders during, or within a
specified time period after, the calendar year in which the income is
earned.
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- - We may be subject to the "alternative minimum tax" on any items of tax
preference that we do not distribute or allocate to our shareholders.
- - We will pay income tax at the highest corporate rate on (1) net income
from the sale or other disposition of property acquired through
foreclosure ("foreclosure property") that we hold primarily for sale to
customers in the ordinary course of business and (2) other
non-qualifying income from foreclosure property.
- - We will pay a 100% tax on net income from sales or other dispositions
of property, other than foreclosure property, that we hold primarily
for sale to customers in the ordinary course of business.
- - If we fail to satisfy the 75% gross income test or the 95% gross income
test, as described below under "--Requirements for Qualification--
Income Tests," and nonetheless continue to qualify as a REIT because we
meet other requirements, we will pay a 100% tax on (1) the gross income
attributable to the greater of the amounts by which we fail the 75% and
95% gross income tests, multiplied by (2) a fraction intended to
reflect our profitability.
- - If we fail to distribute during a calendar year at least the sum of (1)
85% of our REIT ordinary income for such year, (2) 95% of our REIT
capital gain net income for such year, and (3) any undistributed
taxable income from prior periods, we will pay a 4% excise tax on the
excess of such required distribution over the amount we actually
distributed.
- - We may elect to retain and pay income tax on our net long-term capital
gain.
- - If we acquire any asset from a C corporation, or a corporation
generally subject to full corporate-level tax, in a merger or other
transaction in which we acquire a basis in the asset that is determined
by reference to the C corporation's basis in the asset, or another
asset, we will pay tax at the highest regular corporate rate applicable
if we recognize gain on the sale or disposition of such asset during
the 10-year period after we acquire such asset. The amount of gain on
which we will pay tax is the lesser of (1) the amount of gain that we
recognize at the time of the sale or disposition and (2) the amount of
gain that we would have recognized if we had sold the asset at the time
we acquired the asset. The rule described in this paragraph will apply
assuming that we make an election under IRS Notice 88-19 upon our
acquisition of an asset from a C corporation.
REQUIREMENTS FOR QUALIFICATION
A REIT is a corporation, trust, or association that meets the following
requirements:
1. it is managed by one or more trustees or directors;
2. its beneficial ownership is evidenced by transferable shares,
or by transferable certificates of beneficial interest;
3. it would be taxable as a domestic corporation, but for the
REIT provisions of the federal income tax laws;
4. it is neither a financial institution nor an insurance company
subject to special provisions of the federal income tax laws;
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5. at least 100 persons are beneficial owners of its shares or
ownership certificates;
6. not more than 50% in value of its outstanding shares or
ownership certificates is owned, directly or indirectly, by
five or fewer individuals, as defined in the federal income
tax laws to include specified entities, during the last half
of any taxable year;
7. it elects to be a REIT, or has made such election for a
previous taxable year, and satisfies all relevant filing and
other administrative requirements established by the Internal
Revenue Service that must be met to elect and maintain REIT
status;
8. it uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the federal
income tax laws; and
9. it meets other qualification tests, described below, regarding
the nature of its income and assets.
We must meet requirements 1 through 4 during our entire taxable year
and must meet requirement 5 during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
If we comply with all the requirements for ascertaining the ownership of our
outstanding shares in a taxable year and have no reason to know that we violated
requirement 6, we will be deemed to have satisfied requirement 6 for such
taxable year. For purposes of determining share ownership under requirement 6,
an "individual" generally includes a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust permanently set
aside or used exclusively for charitable purposes. An "individual," however,
generally does not include a trust that is a qualified employee pension or
profit sharing trust under the federal income tax laws, and beneficiaries of
such a trust will be treated as holding our shares in proportion to their
actuarial interests in the trust for purposes of requirement 6.
We believe that we have issued sufficient common stock with sufficient
diversity of ownership to satisfy requirements 5 and 6 set forth above. In
addition, our articles of incorporation restrict the ownership and transfer of
our common and preferred stock so that we should continue to satisfy
requirements 5 and 6. The provisions of the articles of incorporation
restricting the ownership and transfer of our common stock are described in
"Restrictions on Ownership of Common Stock."
We currently have one wholly-owned subsidiary, Winston Manager
Corporation, and we may have additional corporate subsidiaries in the future. A
corporation that is a "qualified REIT subsidiary" is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items of
income, deduction, and credit of a "qualified REIT subsidiary" are treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of which
is owned by the REIT. Thus, in applying the requirements described herein,
Winston Manager Corporation and any other "qualified REIT subsidiary" that we
acquire or form will be ignored, and all assets, liabilities, and items of
income, deduction, and credit of each such subsidiary will be treated as our
assets, liabilities, and items of income, deduction, and credit.
In the case of a REIT that is a partner in a partnership, the REIT is
treated as owning its proportionate share of the assets of the partnership and
as earning its allocable share of the gross income of the partnership for
purposes of the applicable REIT qualification tests. Thus, our proportionate
share of the assets, liabilities, and items of income of the partnership,
Winston SPE, LLC, a limited liability company 100% owned by the partnership that
owns 14 of the hotels, and of any other partnership in
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which we acquire an interest are treated as our assets and gross income for
purposes of applying the various REIT qualification requirements.
INCOME TESTS
We must satisfy two gross income tests annually to maintain our
qualification as a REIT. First, at least 75% of our gross income for each
taxable year must consist of defined types of income that we derive, directly or
indirectly, from investments relating to real property or mortgages on real
property or temporary investment income. Qualifying income for purposes of that
75% gross income test includes:
- - rents from real property;
- - interest on debt secured by mortgages on real property or on interests
in real property; and
- - dividends or other distributions on and gain from the sale of shares in
other REITs.
Second, in general, at least 95% of our gross income for each taxable
year must consist of income that is qualifying income for purposes of the 75%
gross income test, dividends, other types of interest, gain from the sale or
disposition of stock or securities, or any combination of the foregoing. Gross
income from our sale of property that we hold primarily for sale to customers in
the ordinary course of business is excluded from both income tests. The
following paragraphs discuss the specific application of these tests to us.
Rents. Pursuant to the percentage leases, the lessees lease from the
partnership the land, buildings, improvements, furnishings and equipment
comprising the hotels for a 10 to 15-year period. For purposes of this
discussion, the term "partnership" includes Winston SPE, LLC. The percentage
leases provide that the lessee is obligated to pay to the partnership (1) the
greater of a base rent or percentage rent and (2) other additional charges. The
percentage rent is calculated by multiplying fixed percentages by the gross room
revenues above and below established thresholds for each of the hotels, and for
some hotels, a percentage of other income. The base rent accrues and is required
to be paid monthly. Percentage rent is due monthly or quarterly. With respect to
eleven of the hotels with respect to which the percentage rent is due quarterly,
the lessee will not be in default for non-payment of percentage rent due in any
calendar year if the lessee pays, within 90 days of the end of the calendar
year, the excess of percentage rent due and unpaid over the base rent paid by
the lessee with respect to such year. With respect to the other hotels, the
lessee will be in default for the non-payment of percentage rent if it fails to
pay, within 30 days of the end of each calendar quarter or 20 days of the end of
each calendar month, the excess of percentage rent due and unpaid over the base
rent paid year to-date with respect to such month or quarter.
In order for the base rent, the percentage rent, and the additional
charges to constitute "rents from real property," the following conditions must
be met:
- First, the rent must not be based, in whole or in part, on the
income or profits of any person, but may be based on a fixed
percentage or percentages of receipts or sales.
- Second, neither our company nor a direct or indirect owner of
10% or more of our stock may own, actually or constructively,
10% or more of a tenant from whom we receive rent.
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- Third, all of the rent received under a lease of real property
will not qualify as "rents from real property" unless the rent
attributable to the personal property leased in connection
with such lease is no more than 15% of the total rent received
under the lease.
- Finally, we generally must not operate or manage our real
property or furnish or render services to our tenants, other
than through an "independent contractor" who is adequately
compensated and from whom we do not derive revenue. However,
we need not provide services through an "independent
contractor," but instead may provide services directly, if the
services are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not
considered to be provided for the tenants' convenience. In
addition, we may provide a minimal amount of "noncustomary"
services to the tenants of a property, other than through an
independent contractor, as long as our income from the
services does not exceed 1% of our income from the related
property. The U.S. Congress has passed legislation that would
allow us to own up to 100% of the stock of a "taxable REIT
subsidiary," which could provide customary and noncustomary
services to our tenants. See "--Asset Tests."
As stated above, the percentage rent must not be based in whole or in
part on the income or profits of any person. Percentage rent, however, will
qualify as "rents from real property" if it is based on percentages of receipts
or sales and the percentages:
- are fixed at the time the percentage leases are entered into;
- are not renegotiated during the term of the percentage leases
in a manner that has the effect of basing percentage rent on
income or profits; and
- conform with normal business practice.
More generally, the percentage rent will not qualify as "rents from real
property" if, considering the percentage leases and all the surrounding
circumstances, the arrangement does not conform with normal business practice,
but is in reality used as a means of basing the percentage rent on income or
profits. Because the percentage rent is based on fixed percentages of the gross
room revenues from the hotels that are established in the percentage leases, and
we have represented that the percentages (1) will not be renegotiated during the
term of the percentage leases in a manner that has the effect of basing the
percentage rent on income or profits and (2) conform with normal business
practice, the percentage rent should not be considered based in whole or in part
on the income or profits of any person. Furthermore, we have represented that,
with respect to other hotel properties that we acquire in the future, we will
not charge rent for any property that is based in whole or in part on the income
or profits of any person, except by reason of being based on a fixed percentage
of gross revenues, as described above.
Second, we must not own, actually or constructively, 10% or more of any
lessee (a "related party tenant"). The constructive ownership rules of the
federal income tax laws generally provide that, if 10% or more in value of our
stock is owned, directly or indirectly, by or for any person, we are considered
as owning the stock owned, directly or indirectly, by or for such person. We do
not actually own any stock of any lessee. Various of our affiliates, which
indirectly own interests in one of our lessees, may acquire our common stock by
exercising their redemption rights. The partnership agreement, however, provides
that if, upon a redemption of units, we would own, actually or constructively,
10% or more of any tenant, we must redeem the units for cash rather than our
common stock. Our articles of incorporation likewise prohibit any person from
owning, actually or constructively, 9.9% or more of our common stock. Thus, we
should never own, actually or constructively, 10% or more of any lessee.
Furthermore, we have represented that, with respect to other hotel properties
that we acquire in the future, we will not lease any
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property to a "related party tenant." However, because the constructive
ownership rules are broad and it is not possible to monitor continually direct
and indirect transfers of shares of our common stock, no absolute assurance can
be given that such transfers or other events of which we have no knowledge will
not cause us to own constructively 10% or more of a lessee at some future date.
Third, our rent attributable to personal property leased in connection
with a hotel must not exceed 15% of the rent received under the lease. The rent
attributable to the personal property in a hotel is the amount that bears the
same ratio to total rent for the taxable year as the average of the adjusted
bases of the personal property in the hotel at the beginning and at the end of
the taxable year bears to the average of the aggregate adjusted bases of both
the real and personal property comprising the hotel at the beginning and at the
end of such taxable year (the "adjusted basis ratio"). The adjusted basis ratio
for each hotel does not exceed 15%. In addition, we will not acquire additional
personal property for a hotel to the extent that such acquisition would cause
the adjusted basis ratio for that hotel to exceed 15%. There can be no
assurance, however, that the Internal Revenue Service will not assert that the
personal property we acquire has a value in excess of its appraised value, or
that a court will not uphold such assertion. The U.S. Congress has passed
legislation that, for taxable years beginning after December 31, 2000, would
calculate the amount of rent that a REIT receives with respect to personal
property based on the relative fair market values of the REIT's real and
personal property, instead of the relative adjusted bases of such property.
Amounts paid pursuant to a lease in effect on July 12, 1999 or pursuant to a
binding contract in effect on July 12, 1999 and at all times thereafter would be
grandfathered. There can be no assurance that the such legislation will be
enacted into law.
Finally, neither we nor the partnership can furnish or render
noncustomary services to the tenants of the hotels, or manage or operate the
hotels, other than through an independent contractor who is adequately
compensated and from whom we do not derive or receive any income. Provided that
the percentage leases are respected as true leases, we should satisfy that
requirement because neither we nor the partnership, performs, nor will we
perform, any services other than customary ones for the lessees. Furthermore, we
have represented that, with respect to each other hotel property that we acquire
in the future, we will not perform noncustomary services with respect to the
tenant of the property. As described above, however, if the percentage leases
are recharacterized as service contracts or partnership agreements, the rent
likely would be disqualified as "rents from real property" because the
partnership would be considered to furnish or render services to the occupants
of the hotels and to manage or operate the hotels other than through an
independent contractor. In addition, we may provide a minimal amount of
noncustomary services to the tenants of a property, other than through an
independent contractor, as long as our income from the services does not exceed
1% of our income from the related property. The U.S. Congress has passed
legislation that would allow us to own up to 100% of the stock of a "taxable
REIT subsidiary," which could provide customary and noncustomary services to our
tenants. See "--Asset Tests."
In order for the base rent, the percentage rent, and the additional
charges to constitute "rents from real property," the percentage leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the percentage leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following:
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- the intent of the parties;
- the form of the agreement;
- the degree of control over the property that is retained by
the property owner, such as whether the lessee has substantial
control over the operation of the property or whether the
lessee is required simply to use its best efforts to perform
its obligations under the agreement; and
- the extent to which the property owner retains the risk of
loss with respect to the property, such as whether the lessee
bears the risk of increases in operating expenses or the risk
of damage to the property.
In addition, federal income tax law provides that a contract that
purports to be a service contract or a partnership agreement is treated instead
as a lease of property if the contract is properly treated as such, taking into
account all relevant factors, including whether or not:
- the service recipient is in physical possession of the
property;
- the service recipient controls the property;
- the service recipient has a significant economic or possessory
interest in the property, such as whether the property's use
is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the
recipient shares the risk that the property will decline in
value, the recipient shares in any appreciation in the value
of the property, the recipient shares in savings in the
property's operating costs, or the recipient bears the risk of
damage to or loss of the property;
- the service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if
there is nonperformance under the contract;
- the service provider does not use the property concurrently to
provide significant services to entities unrelated to the
service recipient; and
- the total contract price does not substantially exceed the
rental value of the property for the contract period.
Since the determination of whether a service contract should be treated as a
lease is inherently factual, the presence or absence of any single factor may
not be dispositive in every case.
We believe that the percentage leases will be treated as true leases
for federal income tax purposes. Such belief is based, in part, on the following
facts:
- the partnership and the lessees intend for their relationship
to be that of a lessor and lessee and such relationship is
documented by lease agreements;
- the lessees have the right to the exclusive possession, use,
and quiet enjoyment of the hotels during the term of the
percentage leases;
- the lessees bear the cost of, and are responsible for,
day-to-day maintenance and repair of the hotels, other than
the cost of maintaining underground utilities and structural
elements, and dictate how the hotels are operated, maintained,
and improved;
- the lessees bear all of the costs and expenses of operating
the hotels, including the cost of any inventory used in their
operation, during the term of the percentage leases, other
than real and personal property taxes, property and casualty
insurance, and the cost of replacement or refurbishment of
furniture, fixtures and equipment, to the extent such costs do
not exceed the allowance that the partnership provides for
such costs under each percentage lease;
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- the lessees benefit from any savings in the costs of operating
the hotels during the term of the percentage leases;
- in the event of damage to or destruction of a hotel, the
applicable lessee is at economic risk because it is obligated
either (A) to restore the property to its prior condition, in
which event it will bear all costs of such restoration in
excess of any insurance proceeds, or (B) to offer to purchase
the hotel for an amount generally equal to the fair market
value of the property, less any insurance proceeds;
- each lessee has indemnified the partnership against all
liabilities imposed on the partnership during the term of the
percentage leases by reason of (A) injury to persons or damage
to property occurring at the hotels, (B) its use, management,
maintenance or repair of the hotels, (C) any environmental
liability caused by acts or grossly negligent failures to act
of the lessee, (D) taxes and assessments in respect of the
hotels, other than real estate or personal property taxes, or
(E) any breach of the percentage leases or of any sublease of
a hotel by the lessee;
- the lessees are obligated to pay substantial fixed rent for
the period of use of the hotels;
- the lessees stand to incur substantial losses or reap
substantial gains depending on how successfully they operate
the hotels;
- the partnership cannot use the hotels concurrently to provide
significant services to entities unrelated to the lessees; and
- the total contract price under the percentage leases does not
substantially exceed the rental value of the hotels for the
term of the percentage leases.
If the percentage leases are characterized as service contracts or
partnership agreements, rather than as true leases, part or all of the payments
that the partnership receives from the lessees may not be considered rent or may
not otherwise satisfy the various requirements for qualification as "rents from
real property." In that case, we likely would not be able to satisfy either the
75% or 95% gross income test and, as a result, would lose our REIT status.
Additional Charges. In addition to the rent, the lessees are required
to pay to the partnership additional charges. To the extent that the additional
charges represent either (1) reimbursements of amounts that the lessees are
obligated to pay to third parties or (2) penalties for nonpayment or late
payment of such amounts, the additional charges should qualify as "rents from
real property." To the extent, however, that the additional charges represent
interest accrued on the late payment of the rent or the additional charges, the
additional charges should not qualify as "rents from real property," but instead
should be treated as interest that qualifies for the 95% gross income test.
Interest. The term "interest" generally does not include any amount
received or accrued if the determination of such amount depends in whole or in
part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of receipts or sales.
Our investment, through the partnership and its subsidiary, in the
hotels in major part gives rise to income that is qualifying income for purposes
of both gross income tests. We believe that, other than the late charges
attributable to rent, which are treated as interest that qualifies for the 95%
gross income test, but not the 75% gross income test, those revenues qualify as
rents from real property for purposes of both gross income tests. Gains on sales
of the hotels or of our interest in the partnership generally will be qualifying
income for purposes of both gross income tests. We anticipate that income on our
other investments will not result in us failing either gross income test for any
year.
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Foreclosure Property. We will incur a 100% tax on the net income
derived from any sale or other disposition of property, other than foreclosure
property, that we hold primarily for sale to customers in the ordinary course of
a trade or business. We believe that none of our or the partnership's assets is
held for sale to customers and that a sale of any such asset would not be in the
ordinary course of business. Whether a REIT holds an asset "primarily for sale
to customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those related
to a particular asset. Nevertheless, we will attempt to comply with the terms of
safe-harbor provisions in the federal income tax laws prescribing when an asset
sale will not be characterized as a prohibited transaction. We cannot provide
assurance, however, that we can comply with such safe-harbor provisions or that
we or the partnership will avoid owning property that may be characterized as
property held "primarily for sale to customers in the ordinary course of a trade
or business."
Hedging Activities. In March 1999, we entered into an interest rate cap
agreement to reduce our exposure to increases in interest rates under our line
of credit. This agreement eliminates the exposure to increases in 30-day LIBOR
rates exceeding 7.5% on $25 million of the outstanding balances; however,
outstanding debt of up to $115 million under our line of credit remains subject
to variable interest rates. In the future, we and/or the partnership may enter
into other hedging transactions with respect to one or more of our assets or
liabilities. Our hedging activities may include entering into interest rate
swaps, caps, and floors, options to purchase such items, and futures and forward
contracts. To the extent that we or the partnership enters into an interest rate
swap or cap contract, such as the interest rate cap agreement we entered into in
March 1999, option, futures contract, forward rate agreement, or any similar
financial instrument to hedge indebtedness incurred to acquire or carry "real
estate assets," any periodic income or gain from the disposition of such
contract should be qualifying income for purposes of the 95% gross income test,
but not the 75% gross income test. To the extent that we or the partnership
hedges with other types of financial instruments, or in other situations, it is
not entirely clear how the income from those transactions will be treated for
purposes of the gross income tests. We intend to structure any hedging
transactions in a manner that does not jeopardize our status as a REIT.
Failure to Satisfy Income Tests. If we fail to satisfy one or both of
the gross income tests for any taxable year, we nevertheless may qualify as a
REIT for such year if we qualify for relief under the federal income tax laws.
Those relief provisions generally will be available if:
- - our failure to meet such tests is due to reasonable cause and not due
to willful neglect;
- - we attach a schedule of the sources of our income to our tax return;
and
- - any incorrect information on the schedule was not due to fraud with
intent to evade tax.
We cannot predict, however, whether in all circumstances we would
qualify for the relief provisions. In addition, as discussed above in
"--Taxation of Our Company," even if the relief provisions apply, we would incur
a 100% tax on the gross income attributable to the greater of the amounts by
which we fail the 75% and 95% gross income tests, multiplied by a fraction
intended to reflect our profitability.
ASSET TESTS
To maintain our qualification as a REIT, we also must satisfy two asset
tests at the close of each quarter of each taxable year. First, at least 75% of
the value of our total assets must consist of:
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- - cash or cash items, including receivables;
- - government securities;
- - interests in real property, including leaseholds and options to acquire
real property and leaseholds;
- - interests in mortgages on real property;
- - stock in other REITs; and
- - investments in stock or debt instruments during the one-year period
following our receipt of new capital that we raise through equity
offerings or offerings of debt with at least a five-year term.
The second asset test has two components:
- - First, of our investments not included in the 75% asset class, the
value of our interest in any one issuer's securities may not exceed 5%
of the value of our total assets; and
- - Second, we may not own more than 10% of any one issuer's outstanding
voting securities.
For purposes of both components of the second asset test, "securities"
does not include our stock in any qualified REIT subsidiary or in other REITs or
our interest in any partnership.
The U.S. Congress recently passed legislation (the "Tax Bill") that
would allow us to own up to 100% of the stock of taxable REIT subsidiaries,
("TRSs"), which could perform activities unrelated to our tenants, such as
third-party management, development, and other independent business activities,
as well as provide services to our tenants. An election would be required for a
subsidiary to be treated as a TRS. The Tax Bill would limit the deductibility of
interest paid or accrued by a TRS to us to assure that the TRS is subject to an
appropriate level of corporate taxation. Further, the Tax Bill would impose a
100% excise tax on transactions between a TRS and us or our tenants that are not
conducted on an arm's-length basis. The Tax Bill also would prevent us from
owning more than 10% of the voting power or value of the stock of a taxable
subsidiary for which a TRS election is not made. Current law only prevents us
from owning more than 10% of the voting stock of a taxable subsidiary. Overall,
no more than 25% of our assets may consist of securities of TRSs and other
taxable subsidiaries under the Tax Bill. If enacted, the TRS provisions of the
Tax Bill would apply for taxable years beginning after December 31, 2000. There
can be no assurance that the Tax Bill will be enacted into law.
If we should fail to satisfy the asset tests at the end of a calendar
quarter, we would not lose our REIT status if (1) we satisfied the asset tests
at the close of the preceding calendar quarter and (2) the discrepancy between
the value of our assets and the asset test requirements arose from changes in
the market values of our assets and was not wholly or partly caused by the
acquisition of one or more non-qualifying assets. If we did not satisfy the
condition described in clause (2) of the preceding sentence, we still could
avoid disqualification as a REIT by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which the discrepancy arose.
DISTRIBUTION REQUIREMENTS
Each taxable year, we must distribute dividends, other than capital
gain dividends and deemed distributions of retained capital gain, to our
shareholders in an aggregate amount at least equal to:
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- - the sum of (1) 95% of our "REIT taxable income," computed without
regard to the dividends paid deduction and our net capital gain or
loss, and (2) 95% of our after-tax net income, if any, from foreclosure
property; minus
- - the sum of specified items of non-cash income.
We must pay such distributions in the taxable year to which they
relate, or in the following taxable year if we declare the distribution before
we timely file our federal income tax return for such year and pay the
distribution on or before the first regular dividend payment date after such
declaration. Under the Tax Bill, the 95% distribution requirement discussed
above would be reduced to 90%. If enacted, that provision of the Tax Bill would
apply for taxable years beginning after December 31, 2000. There can be no
assurance that the Tax Bill will be enacted into law.
We will pay federal income tax on taxable income, including net capital
gain, that we do not distribute to shareholders. Furthermore, if we fail to
distribute during a calendar year, or by the end of January following such
calendar year in the case of distributions with declaration and record dates
falling in the last three months of the calendar year, at least the sum of:
- - 85% of our REIT ordinary income for such year;
- - 95% of our REIT capital gain income for such year; and
- - any undistributed taxable income from prior periods,
we will incur a 4% nondeductible excise tax on the excess of such required
distribution over the amounts we actually distributed. We may elect to retain
and pay income tax on the net long-term capital gain we receive in a taxable
year. See "--Taxation of Taxable U.S. Shareholders." If we so elect, we will be
treated as having distributed any such retained amount for purposes of the 4%
excise tax described above. We have made, and intend to continue to make, timely
distributions sufficient to satisfy the annual distribution requirements.
It is possible that, from time to time, we may experience timing
differences between (1) the actual receipt of income and actual payment of
deductible expenses and (2) the inclusion of that income and deduction of such
expenses in arriving at our REIT taxable income. For example, under some of the
percentage leases, the lessee may defer payment of the excess of the percentage
rent over the base rent paid by the lessee for a period of up to 90 days after
the end of the calendar year in which such payment was due. In that case, the
partnership still would be required to recognize as income the excess of the
percentage rent over the base rent paid by the lessee in the calendar year to
which such excess relates. In addition, we may not deduct recognized capital
losses from our "REIT taxable income." Further, it is possible that, from time
to time, we may be allocated a share of net capital gain attributable to the
sale of depreciated property that exceeds our allocable share of cash
attributable to that sale. As a result of the foregoing, we may have less cash
than is necessary to distribute all of our taxable income and thereby avoid
corporate income tax and the excise tax imposed on undistributed income. In such
a situation, we may need to borrow funds or issue preferred or common stock.
We may be able to correct a failure to meet the distribution
requirement for a year by paying "deficiency dividends" to our shareholders in a
later year. We may include such deficiency dividends in our deduction for
dividends paid for the earlier year. Although we may be able to avoid income tax
on amounts distributed as deficiency dividends, we will be required to pay
interest to the Internal Revenue Service based upon the amount of any deduction
we take for deficiency dividends.
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RECORDKEEPING REQUIREMENTS
We must maintain records in order to qualify as a REIT. In addition, to
avoid a monetary penalty, we must request on an annual basis information from
our shareholders designed to disclose the actual ownership of our outstanding
stock. We have complied, and intend to continue to comply, with such
requirements.
FAILURE TO QUALIFY
If we fail to qualify as a REIT in any taxable year, and no relief
provision applies, we would be subject to federal income tax and any applicable
alternative minimum tax on our taxable income at regular corporate rates. In
calculating our taxable income in a year in which we fail to qualify as a REIT,
we would not be able to deduct amounts paid out to shareholders. In fact, we
would not be required to distribute any amounts to shareholders in such year. In
such event, to the extent of our current and accumulated earnings and profits,
all distributions to shareholders would be taxable as ordinary income. Subject
to limitations, corporate shareholders might be eligible for the dividends
received deduction. Unless we qualified for relief under specific statutory
provisions, we also would be disqualified from taxation as a REIT for the four
taxable years following the year during which we ceased to qualify as a REIT. We
cannot predict whether in all circumstances we would qualify for such statutory
relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as we qualify as a REIT, a taxable "U.S. shareholder" must take
into account distributions made out of our current or accumulated earnings and
profits and that we do not designate as capital gain dividends or retained
long-term capital gain as ordinary income. A U.S. shareholder will not qualify
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of common stock that for
U.S. federal income tax purposes is:
- a citizen or resident of the United States;
- a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of a
political subdivision thereof;
- an estate whose income from sources outside of the United
States is includible in gross income for U.S. federal income
tax purposes regardless of its connection with the conduct of
a trade or business within the United States; or
- any trust with respect to which (1) a U.S. court is able to
exercise primary supervision over the administration of such
trust and (2) one or more U.S. persons have the authority to
control all substantial decisions of the trust.
A U.S. shareholder generally will recognize distributions that we
designate as capital gain dividends as long-term capital gain without regard to
the period for which the U.S. shareholder has held its common stock. We
generally will designate capital gain dividends as either 20% or 25% rate
distributions. Under the Tax Bill, the 25% rate described in the preceding
sentence would be reduced to 23%. If enacted, that provision of the Tax Bill
would apply for taxable years beginning after December 31, 1998. There can be no
assurance that the Tax Bill will be enacted into law. A corporate U.S.
shareholder, however, may be required to treat up to 20% of capital gain
dividends as ordinary income.
We may elect to retain and pay income tax on the net long-term capital
gain that we receive in a taxable year. In that case, a U.S. shareholder would
be taxed on its proportionate share of our
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<PAGE> 30
undistributed long-term capital gain. The U.S. shareholder would receive a
credit or refund for its proportionate share of the tax we paid. The U.S.
shareholder would increase the basis in its stock by the amount of its
proportionate share of our undistributed long-term capital gain, minus its share
of the tax we paid.
A U.S. shareholder will not incur tax on a distribution in excess of
our current and accumulated earnings and profits if such distribution does not
exceed the adjusted basis of the U.S. shareholder's common stock. Instead, such
distribution will reduce the adjusted basis of such common stock. A U.S.
shareholder will recognize a distribution in excess of both our current and
accumulated earnings and profits and the U.S. shareholder's adjusted basis in
its common stock as long-term capital gain, or short-term capital gain if the
common stock has been held for one year or less, assuming the common stock is a
capital asset in the hands of the U.S. shareholder. In addition, if we declare a
distribution in October, November, or December of any year that is payable to a
U.S. shareholder of record on a specified date in any such month, such
distribution shall be treated as both paid by us and received by the U.S.
shareholder on December 31 of such year, provided that we actually pay the
distribution during January of the following calendar year.
Shareholders may not include in their individual income tax returns any
of our net operating losses or capital losses. Instead, we would carry over such
losses for potential offset against our future income generally. Taxable
distributions from us and gain from the disposition of the common stock will not
be treated as passive activity income and, therefore, shareholders generally
will not be able to apply any "passive activity losses," such as losses from
some types of limited partnerships in which the shareholder is a limited
partner, against such income. In addition, taxable distributions from us and
gain from the disposition of common stock generally will be treated as
investment income for purposes of the investment interest limitations. We will
notify shareholders after the close of our taxable year as to the portions of
the distributions attributable to that year that constitute ordinary income,
return of capital, and capital gain.
TAXATION OF U.S. SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, a U.S. shareholder who is not a dealer in securities must
treat any gain or loss realized upon a taxable disposition of the common stock
as long-term capital gain or loss if the U.S. shareholder has held the common
stock for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. shareholder must treat any loss upon a sale or exchange of
common stock held by such shareholder for six months or less as a long-term
capital loss to the extent of capital gain dividends and other distributions
from us that such U.S. shareholder treats as long-term capital gain. All or a
portion of any loss that a U.S. shareholder realizes upon a taxable disposition
of the common stock may be disallowed if the U.S. shareholder purchases other
shares of common stock within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
A taxpayer generally must hold a capital asset for more than one year
for gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%.
The maximum tax rate on long-term capital gain applicable to non-corporate
taxpayers is 20% for sales and exchanges of assets held for more than one year.
The maximum tax rate on long-term capital gain from the sale or exchange of
"section 1250 property," or depreciable real property, is 25% to the extent that
such gain would have been treated as ordinary income if the property
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<PAGE> 31
were "section 1245 property." With respect to distributions that we designate as
capital gain dividends and any retained capital gain that we are deemed to
distribute, we generally may designate whether such a distribution is taxable to
our non-corporate shareholders at a 20% or 25% rate. Thus, the tax rate
differential between capital gain and ordinary income for non-corporate
taxpayers may be significant. In addition, the characterization of income as
capital gain or ordinary income may affect the deductibility of capital losses.
A non-corporate taxpayer may deduct capital losses not offset by capital gains
against its ordinary income only up to a maximum annual amount of $3,000. A
non-corporate taxpayer may carry forward unused capital losses indefinitely. A
corporate taxpayer must pay tax on its net capital gain at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years. Under the Tax Bill, the maximum tax rate on long-term capital gain
from the sale or exchange of section 1250 property would be reduced from 25% to
23%. If enacted, that provision of the Tax Bill would apply for taxable years
beginning after December 31, 1998. There can be no assurance that the Tax Bill
will be enacted into law.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
We will report to our shareholders and to the Internal Revenue Service
the amount of distributions we pay during each calendar year and the amount of
tax we withhold, if any. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% with respect to
distributions unless such holder (1) is a corporation or comes within another
exempt category and, when required, demonstrates this fact or (2) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide us with its correct
taxpayer identification number also may be subject to penalties imposed by the
Internal Revenue Service. Any amount paid as backup withholding will be
creditable against the shareholder's income tax liability. In addition, we may
be required to withhold a portion of capital gain distributions to any
shareholders who fail to certify their non-foreign status to us. The Treasury
Department has issued final regulations regarding the backup withholding rules
as applied to non-U.S. shareholders. Those regulations alter the procedural
aspects of backup withholding compliance and are effective for distributions
made after December 31, 2000.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts and annuities generally are
exempt from federal income taxation. However, they are subject to taxation on
their unrelated business taxable income. While many investments in real estate
generate unrelated business taxable income, the Internal Revenue Service has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute unrelated business taxable income,
provided that the exempt employee pension trust does not otherwise use the
shares of the REIT in an unrelated trade or business of the pension trust. Based
on that ruling, amounts that we distribute to tax-exempt shareholders generally
should not constitute unrelated business taxable income. However, if a
tax-exempt shareholder were to finance its acquisition of the common stock with
debt, a portion of the income that it receives from us would constitute
unrelated business taxable income pursuant to the "debt-financed property"
rules. Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under special provisions of the federal
income tax laws are subject to different unrelated business taxable income
rules, which generally will require them to characterize distributions that they
receive from us as unrelated business taxable income.
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Finally, a qualified employee pension or profit sharing trust that owns more
than 10% of our stock may be required to treat a percentage of the dividends
that it receives from us as unrelated business taxable income. Such percentage
is equal to the gross income we derive from an unrelated trade or business,
determined as if we were a pension trust, divided by our total gross income for
the year in which we pay the dividends. That rule applies to a pension trust
holding more than 10% of our stock only if:
- - the percentage of its dividends that the tax-exempt trust must treat as
unrelated business taxable income is at least 5%;
- - we qualify as a REIT by reason of the modification of the rule
requiring that no more than 50% of our shares be owned by five or fewer
individuals that allows the beneficiaries of the pension trust to be
treated as holding our stock in proportion to their actuarial interests
in the pension trust; and
- - either (1) one pension trust owns more than 25% of the value of our
stock or (2) a group of pension trusts individually holding more than
10% of the value of our stock collectively owns more than 50% of the
value of our stock.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "non-U.S. shareholders") are complex. This section
is only a summary of such rules. WE URGE NON-U.S. SHAREHOLDERS TO CONSULT THEIR
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX
LAWS ON OWNERSHIP OF THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
A non-U.S. shareholder that receives a distribution that is not
attributable to gain from our sale or exchange of U.S. real property interests,
as defined below, and that we do not designate as a capital gain dividend or
retained capital gain will recognize ordinary income to the extent that we pay
such distribution out of our current or accumulated earnings and profits. A
withholding tax equal to 30% of the gross amount of the distribution ordinarily
will apply to such distribution unless an applicable tax treaty reduces or
eliminates the tax. However, if a distribution is treated as effectively
connected with the non-U.S. shareholder's conduct of a U.S. trade or business,
the non-U.S. shareholder generally will be subject to federal income tax on the
distribution at graduated rates, in the same manner as U.S. shareholders are
taxed with respect to such distributions and also may be subject to the 30%
branch profits tax in the case of a non-U.S. shareholder that is a non-U.S.
corporation. We plan to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distribution paid to a non-U.S. shareholder unless either:
- - a lower treaty rate applies and the non-U.S. shareholder files the
required form evidencing eligibility for that reduced rate with us; or
- - the non-U.S. shareholder files an IRS Form 4224 with us claiming that
the distribution is effectively connected income.
The U.S. Treasury Department has issued final regulations that modify
the manner in which we will comply with the withholding requirements. Those
regulations are effective for distributions made after December 31, 2000.
A non-U.S. shareholder will not incur tax on a distribution in excess
of our current and accumulated earnings and profits if such distribution does
not exceed the adjusted basis of its common
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stock. Instead, such a distribution will reduce the adjusted basis of such
common stock. A non-U.S. shareholder will be subject to tax on a distribution
that exceeds both our current and accumulated earnings and profits and the
adjusted basis of its common stock, if the non-U.S. shareholder otherwise would
be subject to tax on gain from the sale or disposition of its common stock, as
described below. Because we generally cannot determine at the time we make a
distribution whether or not the distribution will exceed our current and
accumulated earnings and profits, we normally will withhold tax on the entire
amount of any distribution at the same rate as we would withhold on a dividend.
However, a non-U.S. shareholder may obtain a refund of amounts that we withhold
if it later determines that a distribution in fact exceeded our current and
accumulated earnings and profits.
We must withhold 10% of any distribution that exceeds our current and
accumulated earnings and profits. Consequently, although we intend to withhold
at a rate of 30% on the entire amount of any distribution, to the extent that we
do not do so, we will withhold at a rate of 10% on any portion of a distribution
not subject to withholding at a rate of 30%.
For any year in which we qualify as a REIT, a non-U.S. Shareholder will
incur tax on distributions that are attributable to gain from its sale or
exchange of "U.S. real property interests" under special provisions of the
federal income tax laws ("FIRPTA"). The term "U.S. real property interests"
includes interests in real property and stock in corporations at least 50% of
whose assets consists of interests in real property. Under those rules, a
non-U.S. shareholder is taxed on distributions attributable to gain from sales
of U.S. real property interests as if such gain were effectively connected with
a U.S. business of the non-U.S. shareholder. A non-U.S. shareholder thus would
be taxed on such a distribution at the normal capital gain rates applicable to
U.S. shareholders, subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of a nonresident alien individual. A
non-U.S. corporate shareholder not entitled to treaty relief or exemption also
may be subject to the 30% branch profits tax on such a distribution. We must
withhold 35% of any distribution that we could designate as a capital gain
dividend. A non-U.S. shareholder may receive a credit against its tax liability
for the amount we withhold.
A non-U.S. shareholder generally will not incur tax under FIRPTA as
long as at all times non-U.S. persons hold, directly or indirectly, less than
50% in value of our stock. We cannot assure you that that test will be met.
However, a non-U.S. shareholder that owned, actually or constructively, 5% or
less of the common stock at all times during a specified testing period will not
incur tax under FIRPTA if the common stock is "regularly traded" on an
established securities market. If the gain on the sale of the common stock were
taxed under FIRPTA, a non-U.S. shareholder would be taxed in the same manner as
U.S. shareholders with respect to such gain, subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations. Furthermore, a non-U.S. shareholder will incur
tax on gain not subject to FIRPTA if (1) the gain is effectively connected with
the non-U.S. shareholder's U.S. trade or business, in which case the non-U.S.
shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain, or (2) the non-U.S. shareholder is a nonresident alien
individual who was present in the U.S. for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the non-U.S.
shareholder will incur a 30% tax on his capital gains.
STATE AND LOCAL TAXES
We and/or you may be subject to state and local tax in various states
and localities, including those states and localities in which we or you
transact business, own property, or reside. The state and local tax treatment in
such jurisdictions may differ from the federal income tax treatment described
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above. Consequently, you should consult your own tax advisor regarding the
effect of state and local tax laws upon the ownership of the common stock.
TAX ASPECTS OF OUR INVESTMENT IN THE PARTNERSHIP
The following discussion summarizes the federal income tax
considerations applicable to our investment in the partnership. The discussion
does not cover state or local tax laws or any federal tax laws other than income
tax laws. For purposes of this discussion, where appropriate, the term
"partnership" includes Winston SPE, LLC, a limited liability company that is
100% owned by the partnership and that owns 14 of the hotels.
CLASSIFICATION AS A PARTNERSHIP
We are entitled to include in our income our distributive share of the
partnership's income and to deduct our distributive share of the partnership's
losses only if the partnership is classified for federal income tax purposes as
a partnership rather than as a corporation or an association taxable as a
corporation. An organization will be classified as a partnership, rather than as
a corporation, for federal income tax purposes if it:
- is treated as a partnership under Treasury regulations,
effective January 1, 1997, relating to entity classification
(the "check-the-box regulations"); and
- is not a "publicly traded" partnership.
Under the check-the-box regulations, an unincorporated entity with at
least two members may elect to be classified either as an association taxable as
a corporation or as a partnership. If such an entity fails to make an election,
it generally will be treated as a partnership for federal income tax purposes.
The federal income tax classification of an entity that was in existence prior
to January 1, 1997, such as the partnership, will be respected for all periods
prior to January 1, 1997 if:
- the entity had a reasonable basis for its claimed
classification;
- the entity and all members of the entity recognized the
federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997;
and
- neither the entity nor any member of the entity was notified
in writing by a taxing authority on or before May 8, 1996 that
the classification of the entity was under examination.
The partnership reasonably claimed partnership classification under the
Treasury Regulations relating to entity classification in effect prior to
January 1, 1997. In addition, the partnership intends to continue to be
classified as a partnership for federal income tax purposes and it will not
elect to be treated as an association taxable as a corporation under the
check-the-box regulations.
A publicly traded partnership is a partnership whose interests are
traded on an established securities market or are readily tradable on a
secondary market or the substantial equivalent thereof. A publicly traded
partnership will not, however, be treated as a corporation for any taxable year
if 90% or more of the partnership's gross income for such year consists of
passive-type income, including real property rents, gains from the sale or other
disposition of real property, interest, and dividends (the "90% passive income
exception").
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Treasury regulations (the "PTP regulations") provide limited safe
harbors from the definition of a publicly traded partnership. Pursuant to one of
those safe harbors (the "private placement exclusion"), interests in a
partnership will not be treated as readily tradable on a secondary market or the
substantial equivalent thereof if:
- all interests in the partnership were issued in a transaction
or transactions that were not required to be registered under
the Securities Act of 1933, as amended; and
- the partnership does not have more than 100 partners at any
time during the partnership's taxable year.
In determining the number of partners in a partnership, a person owning an
interest in a partnership, grantor trust, or S corporation that owns an interest
in the partnership is treated as a partner in the partnership only if:
- substantially all of the value of the owner's interest in the
entity is attributable to the entity's direct or indirect
interest in the partnership; and
- a principal purpose of the use of the entity is to permit the
partnership to satisfy the 100-partner limitation.
The partnership qualifies for the private placement exclusion.
If the partnership is considered a publicly traded partnership under
the PTP regulations because it is deemed to have more than 100 partners, it
should not be treated as a corporation because it should be eligible for the 90%
passive income exception. If, however, for any reason the partnership were
taxable as a corporation, rather than as a partnership, for federal income tax
purposes, we would not be able to qualify as a REIT. See "Federal Income Tax
Consequences of Our Status as a REIT -- Requirements for Qualification -- Income
Tests" and "-- Requirements for Qualification -- Asset Tests." In addition, any
change in the partnership's status for tax purposes might be treated as a
taxable event, in which case we might incur tax liability without any related
cash distribution. See "Federal Income Tax Consequences of Our Status as a REIT
- -- Requirements for Qualification -- Distribution Requirements." Further, items
of income and deduction of the partnership would not pass through to its
partners, and its partners would be treated as shareholders for tax purposes.
Consequently, the partnership would be required to pay income tax at corporate
tax rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing the partnership's taxable
income.
INCOME TAXATION OF THE PARTNERSHIP AND ITS PARTNERS
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, we are required to take
into account our allocable share of the partnership's income, gains, losses,
deductions, and credits for any taxable year of the partnership ending within or
with our taxable year, without regard to whether we have received or will
receive any distribution from the partnership.
Partnership Allocations. Although a partnership agreement generally
will determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes if they do not comply with the
provisions of the federal income tax laws governing partnership allocations. If
an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The partnership's allocations of taxable
income, gain, and loss are
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intended to comply with the requirements of the federal income tax laws
governing partnership allocations.
Tax Allocations With Respect to Contributed Properties. Income, gain,
loss, and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such unrealized
gain or unrealized loss is generally equal to the difference between the fair
market value of contributed property at the time of contribution, and the
adjusted tax basis of such property at the time of contribution. Such
allocations are solely for federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners.
The partnership was formed by way of contributions of appreciated
property and has received contributions of appreciated property since our
initial public offering. The partnership agreement governing the partnership
requires such allocations to be made in a manner consistent with the federal
income tax laws governing partnership allocations.
Under the partnership's partnership agreement, depreciation or
amortization deductions of the partnership generally are allocated among the
partners in accordance with their respective interests in the partnership,
except to the extent that the partnership is required under the federal income
tax laws governing partnership allocations to use a method for allocating tax
depreciation deductions attributable to contributed properties that results in
us receiving a disproportionate share of such deductions. In addition, gain on
the sale of a hotel that has been contributed, in whole or in part, to the
partnership will be specially allocated to the contributing partners to the
extent of any "built-in" gain with respect to such hotel for federal income tax
purposes.
Basis in Partnership Interest. Our adjusted tax basis in the
partnership generally is equal to the following:
- the amount of cash and the basis of any other property we have
contributed to the partnership;
- increased by (1) our allocable share of the partnership's
income and (2) our allocable share of indebtedness of the
partnership; and
- reduced, but not below zero, by (1) our allocable share of the
partnership's loss and (2) the amount of cash distributed to
us, including constructive distributions resulting from a
reduction in our share of indebtedness of the partnership.
If the allocation of our distributive share of the partnership's loss would
reduce the adjusted tax basis of our partnership interest in the partnership
below zero, the recognition of such loss will be deferred until such time as the
recognition of such loss would not reduce our adjusted tax basis below zero. To
the extent that the partnership's distributions, or any decrease in our share of
the indebtedness of the partnership, which is considered a constructive cash
distribution to the partners, would reduce our adjusted tax basis below zero,
such distributions would constitute taxable income to us. Such distributions and
constructive distributions normally will be characterized as capital gain, and,
if our partnership interest in the partnership has been held for longer than one
year, the distributions and constructive distributions will constitute long-term
capital gain.
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SALE OF THE PARTNERSHIP'S PROPERTY
Generally, any gain realized by the partnership on the sale of property
held for more than one year will be long-term capital gain, except for any
portion of such gain that is treated as depreciation or cost recovery recapture.
Any gain recognized on the disposition of contributed properties will be
allocated first to the partners of the partnership to the extent of their
"built-in gain" on those properties for federal income tax purposes. The
partners' "built-in gain" on the contributed properties sold will equal the
excess of the partners' proportionate share of the book value of those
properties over the partners' tax basis allocable to those properties at the
time of the sale. Any remaining gain recognized by the partnership on the
disposition of the contributed properties, and any gain recognized by the
partnership or the disposition of the other properties, will be allocated among
the partners in accordance with their respective percentage interests in the
partnership.
Our share of any gain realized by the partnership on the sale of any
property held by the partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the partnership's trade or
business will be treated as income from a prohibited transaction that is subject
to a 100% penalty tax. Such prohibited transaction income also may have an
adverse effect upon our ability to satisfy the income tests for REIT status. See
"Federal Income Tax Consequences of Our Status as a REIT -- Requirements for
Qualification -- Income Tests." We, however, do not presently intend to allow
the partnership to acquire or hold any property that represents inventory or
other property held primarily for sale to customers in the ordinary course of
our or the partnership's trade or business.
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USE OF PROCEEDS
The selling shareholders listed below will receive all of the proceeds
from the sale of the shares of common stock offered pursuant to this prospectus.
We will not receive any proceeds from the sale of such shares.
SELLING SHAREHOLDERS
The selling shareholders listed in the table below either have received
or may receive shares of our common stock in exchange for units of the
partnership. We have agreed to register the shares being offered pursuant to an
agreement with each of the selling shareholders. We are registering this common
stock to permit public secondary trading in the shares. The selling shareholders
may offer and sell the shares from time to time pursuant to this prospectus as
further described under "Plan of Distribution" below.
The following table sets forth important information about each selling
shareholder. This table assumes that each selling shareholder will sell all of
the shares offered; however, we are unable to determine the exact number of
shares that actually will be sold or when or if those sales will occur. Neither
selling shareholder has, within the past three years, had any position, office
or other material relationship with our company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT OWNED SHARES BENEFICIALLY
OWNED PRIOR TO PRIOR TO THE SHARES OWNED AFTER
NAME THE OFFERING OFFERING (1) BEING OFFERED THE OFFERING(2)
---- ------------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
Quantum Realty Partners, II, L.P. (3) 815,000 5% 815,000 0
Hubbard Realty of Winston-Salem, Inc. (4) 63,797 * 63,797 0
- ----------------
</TABLE>
* Less than one percent.
(1) Based on 16,373,843 shares outstanding as of August 31, 1999.
(2) Assumes sale of all shares of our common stock included in this
prospectus.
(3) Assumes exchange of 440,100 units for 440,100 shares of our common
stock. Based on information provided by the selling shareholder as of
September 17, 1999.
(4) Assumes exchange of 63,797 units for 63,797 shares of our common stock.
Based on information provided by the selling shareholder as of
September 24, 1999.
PLAN OF DISTRIBUTION
We are registering 878,797 shares of our common stock on behalf of the
selling shareholders listed above. When we refer to "selling shareholders" in
this section, we also refer to donees, pledgees, transferees or other
successors-in-interest selling shares received from a selling shareholder after
the date of this prospectus as a gift, pledge, partnership distribution or other
non-sale related transfer.
METHODS OF OFFERS AND SALES
The selling shareholders may sell the shares at various times in one or
more of the following transactions (which may include block transactions):
- on the New York Stock Exchange;
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- in negotiated transactions;
- through put or call transactions related to the shares;
- in connection with short sales of our common stock; or
- in a combination of any of the above transactions.
The selling shareholders may sell their shares at market prices
prevailing at the time of sale, at prices related to the prevailing market price
or at negotiated prices. These transactions may or may not involve brokers or
dealers.
If any selling shareholder uses broker-dealers, such broker-dealers may
receive commissions or discounts from the selling shareholders, or they may
receive commissions from the purchaser for whom they acted as agent or to whom
they sell as principal (or both). Such compensation may exceed customary
conditions. There is the possibility that the selling shareholders and the
broker-dealers (who effect sales) may be deemed to be "underwriters" under the
Securities Act, and their commissions or discounts regarded as underwriters'
compensation. Because of this possibility, the selling shareholders must comply
with the prospectus delivery requirements of the Securities Act.
Each selling shareholder has agreed to notify us upon entering into an
arrangement with a broker-dealer for the sale of shares through any one or more
of the following methods:
- a block trade,
- a special offering,
- an exchange distribution or secondary distribution, or
- a purchase by a broker or a dealer.
Once we receive such notification, if required, we will file a
prospectus supplement pursuant to Rule 424(b) of the Securities Act describing:
(1) the broker-dealer's name; (2) the number of shares involved; (3) the
commissions paid to the broker-dealer; (4) the discounts given or concessions
allowed to the broker dealer; (5) a statement that the broker-dealer did not
conduct any investigation to verify the information contained in or incorporated
by reference in this prospectus (if applicable); and (6) other material facts of
the transaction. To our knowledge, as of September 24, 1999, neither selling
shareholder has entered into any arrangement described above with a
broker-dealer, nor is there an underwriter or coordinating broker acting in
connection with the proposed sale by the selling shareholders. Upon notification
that a donee, pledgee, transferee or other successor-in-interest intends to sell
more than 500 shares, we will file a supplement to this prospectus.
The selling shareholders also may sell all or a portion of the shares
in open-market transactions in reliance on Rule 144 under the Securities Act,
provided that they can satisfy the requirements of that rule.
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DURATION OF RESALE PERIOD UNDER THIS PROSPECTUS
We anticipate that the registration statement shall remain effective as
to each selling shareholder group until the earlier of (1) the date when all of
his or her shares included in the registration statement have been distributed
to the public; or (2) the date the selling shareholder's shares become eligible
for resale under Rule 144(k) of the Securities Act.
COSTS AND INDEMNIFICATION
We will pay our own legal and accounting fees, all registration and
filing fees attributable to the registration of the shares, any legal fees and
filing fees relating to state securities or "blue sky" filings, the filing fee
payable to the New York Stock Exchange, and all printing fees incurred in
connection with the preparation of the registration statement. Each selling
shareholder will pay his, her or its own legal fees. The selling shareholders
will pay any selling discounts and commissions and stock transfer taxes
applicable to a sale of shares.
We have agreed to indemnify the selling shareholders in certain
circumstances against certain liabilities, including liabilities arising under
the Securities Act. The selling shareholders have agreed to indemnify us, and
our directors and officers and each person who controls us, on similar terms.
39
<PAGE> 41
WHERE YOU CAN FIND MORE INFORMATION ABOUT WINSTON HOTELS
We file reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any of these materials
at the SEC's public reference room in Washington, D.C. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. You can also find our SEC filings on the SEC's web site at
http://www.sec.gov. Our web site can be found at http://www.winstonhotels.com.
The SEC allows us to "incorporate by reference" in this prospectus the
information we file with them. This means that we can disclose important
information to you by referring you to those documents. Any information we
incorporate by reference is considered part of this prospectus, and any
information we later file with the SEC will automatically update and supersede
the information in this prospectus.
We incorporate by reference in this prospectus and refer you to the
documents listed below (File No. 0-23732):
1. Our Annual Report on Form 10-K for the fiscal year ended
December 31, 1998;
2. Our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1999;
3. Our Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1999;
4. The description of our common stock contained in our
registration statement on Form 8-A12B, filed with the SEC on
August 1, 1997 and amended on August 8, 1997; and
5. All other documents we file with the SEC pursuant to Section
13(a), 13(c) or 15(d) of the Exchange Act of 1934 after the
date of this prospectus and before the end of this offering.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following:
Winston Hotels, Inc.
2209 Century Drive, Suite 300
Raleigh, North Carolina 27612
Attention: Secretary
(919) 510-6010
You should also note that the SEC considers this prospectus to be part
of a registration statement filed with the SEC (Registration No. 333-86457).
Since this prospectus omits certain portions of the information provided in the
registration statement, we also refer you to that document.
===============================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU DIFFERENT
INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS, OR
ANY SUPPLEMENT, IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF
THOSE DOCUMENTS.
===============================================================================
40
<PAGE> 42
FORWARD LOOKING STATEMENTS
We make statements in this prospectus and in the documents incorporated
by reference that fall within the definition of "forward looking statements"
found in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including, but not limited to, those paragraphs
relating to development and acquisition of hotels contained in this prospectus.
You can identify these statements by our use of words like "may," "will,"
"expect," "anticipate," "estimate," or "continue" or comparable terms and
phrases.
These statements represent our judgment about the future and are not
guarantees of our future performance. Certain risks and uncertainties could
cause our 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 considerations described in connection with specific
forward looking statements;
- factors discussed in this prospectus under the caption "Risk
Factors You Should Consider;"
- risks associated with the level of our outstanding debt;
- risks associated with our acquisition of hotels with little or
no operating history and development of new hotels, including
the risk that such hotels will not achieve the level of
revenue assumed by us and our lessees, in calculating the
respective percentage rent formulas in the leases for such
hotels;
- development risks, including the risks of construction delay,
cost overruns, failure to receive zoning, occupancy and other
required governmental permits and authorizations and the
incurrence of development costs in connection with projects
that are not completed; and
- factors identified in our filings with the SEC, including the
factors listed in this prospectus, our Annual Report on Form
10-K for the year ended December 31, 1998, and our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1999 and
June 30, 1999, which are incorporated by reference in this
prospectus.
Therefore, we caution you not to place undue reliance on forward
looking statements. Such forward looking statements represent our estimates and
assumptions only as of the date of this prospectus.
LEGAL MATTERS
Our lawyers, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P., Raleigh, North Carolina, have issued a legal opinion concerning the
legality of the shares covered by this prospectus. The description of federal
tax consequences in the prospectus under the caption "Federal Income Tax
Considerations" is based upon the opinion of Hunton & Williams, Richmond,
Virginia.
EXPERTS
The consolidated balance sheets of Winston Hotels as of December 31,
1998 and 1997 and the consolidated statements of income, shareholders' equity
and cash flows for the years ended December 31,
41
<PAGE> 43
1998, 1997 and 1996 and the financial statement schedule as of December 31, 1998
and the balance sheet of Winston Hospitality, Inc. as of October 31, 1997 and
the statements of income, shareholders' equity and cash flows for the ten months
ended October 31, 1997 and for the year ended December 31, 1996 incorporated in
this prospectus by reference to our Annual Report on Form 10-K for the year
ended December 31, 1998, have been so incorporated in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing. The balance sheets of CapStar
Winston Company, L.L.C. as of December 31, 1998 and 1997 and the related
statements of operations, members' capital (deficit) and cash flows for the year
ended December 31, 1998 and the period from October 15, 1997 (date of inception)
through December 31, 1997 incorporated by reference in this prospectus, have
been incorporated herein in reliance on the report of KPMG LLP, independent
auditors, given on the authority of that firm as experts in accounting and
auditing.
42
<PAGE> 44
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees
and expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of its common stock.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee................................. $ 2,116
New York Stock Exchange Listing fees................................................. 3,500
Printing and mailing ................................................................ 1,500
Accountant's fees and expenses ...................................................... 4,500
Counsel fees and expenses ........................................................... 33,500
Miscellaneous ....................................................................... 1,884
----------
Total....................................................................... $ 47,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The articles of incorporation of the Company, generally, limit the
liability of the Company's directors and officers to the Company and the
shareholders for money damages to the fullest extent permitted from time to time
by the laws of the State of North Carolina. The articles of incorporation also
provide, generally, for the indemnification of directors and officers, among
others, to the fullest extent permitted from time to time by the State of North
Carolina. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors and officers of the Company pursuant to the foregoing provisions or
otherwise, the Company has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
The Company has purchased director and officer liability insurance for
the purpose of providing a source of funds to pay any indemnification described
above.
<PAGE> 45
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C>
4.1* Form of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-11 (Registration
No. 33-76602) as filed with the Securities and Exchange Commission
effective May 25, 1994)
4.2* Restated Articles of Incorporation as amended (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on August 4, 1999)
4.3* Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-11 (Registration No.
33-76602) as filed with the Securities and Exchange Commission
effective May 25, 1994)
4.4* Second Amended and Restated Agreement of Limited Partnership of WINN
Limited Partnership (incorporated by reference to Exhibit 4.1 to the
Company's report on Form 8-K filed with the Securities and Exchange
Commission on July 24, 1997)
4.5* Amendment No. 1 dated September 11, 1997 to Second Amended and Restated
Agreement of Limited Partnership of WINN Limited Partnership
(incorporated by reference to Exhibit 99.1 of the Company's report on
Form 8-K filed with the Securities and Exchange Commission on September
15, 1997)
4.6* Amendment No. 2 dated December 31, 1997 to Second Amended and Restated
Agreement of Limited Partnership of WINN Limited Partnership
(incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K, as filed with the Securities and Exchange
Commission on March 27, 1998 and as amended by Form 10-K/A filed with
the Securities and Exchange Commission on April 1, 1998)
4.7* Amendment No. 3 dated September 8, 1998 to Second Amended and Restated
Agreement of Limited Partnership of WINN Limited Partnership
4.8* Redemption and Registration Rights Agreement, dated as of July 14, 1997
by and among WINN Limited Partnership, Winston Hotels, Inc., certain
partnerships listed and certain partners or designees thereof listed
therein (incorporated by reference to Exhibit 10.46 to the Company's
Quarterly Report on Form 10-Q as filed with the Securities and Exchange
Commission on August 8, 1997)
4.9* Registration Rights and Lock-Up Agreement, dated as of September 9,
1997, by and among Winston Hotels, Inc. and Hubbard Realty of
Winston-Salem, Inc.
5.1 Opinion of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P.
8.1 Opinion of Hunton & Williams as to Tax Matters
</TABLE>
II-2
<PAGE> 46
<TABLE>
<S> <C>
23.1* Consent of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P. (included in Exhibit 5.1)
23.2* Consent of Hunton & Williams (included in Exhibit 8.1)
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of KPMG LLP
24.1* Power of Attorney
</TABLE>
- ----------
* Previously filed
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a) (3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this
Item do not apply if information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 47
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE> 48
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Raleigh, State of North
Carolina, on the 29th day of September, 1999.
WINSTON HOTELS, INC.
By: /s/ Robert W. Winston, III
-------------------------------
Robert W. Winston, III
Chief Executive Officer
II-5
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities indicated on the 29th day of September, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board
- -----------------------------------
Charles M. Winston
/s/ Robert W. Winston, III Chief Executive Officer
- ----------------------------------- and Director
Robert W. Winston, III (Principal Executive Officer)
/s/ Joseph V. Green Executive Vice President and
- ----------------------------------- Chief Financial Officer
Joseph V. Green (Principal Financial Officer)
/s/ Brent V. West Vice President of Finance and
- ----------------------------------- Controller
Brent V. West (Principal Accounting Officer)
* Director
- -----------------------------------
James H. Winston
* Director
- -----------------------------------
Thomas F. Darden, II
* Director
- -----------------------------------
Richard L. Daugherty
* Director
- -----------------------------------
David C. Sullivan
* Director
- -----------------------------------
Edwin B. Borden
* /s/ Robert W. Winston, III * /s/ Joseph V. Green
- ----------------------------------- -----------------------------
Robert W. Winston, III Joseph V. Green
as Attorney-in-fact as Attorney-in-fact
</TABLE>
II-6
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C>
4.1* Form of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-11 (Registration
No. 33-76602) as filed with the Securities and Exchange Commission
effective May 25, 1994)
4.2* Restated Articles of Incorporation as amended (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on August 4, 1999)
4.3* Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-11 (Registration No.
33-76602) as filed with the Securities and Exchange Commission
effective May 25, 1994)
4.4* Second Amended and Restated Agreement of Limited Partnership of WINN
Limited Partnership (incorporated by reference to Exhibit 4.1 to the
Company's report on Form 8-K filed with the Securities and Exchange
Commission on July 24, 1997)
4.5* Amendment No. 1 dated September 11, 1997 to Second Amended and Restated
Agreement of Limited Partnership of WINN Limited Partnership
(incorporated by reference to Exhibit 99.1 of the Company's report on
Form 8-K filed with the Securities and Exchange Commission on September
15, 1997)
4.6* Amendment No. 2 dated December 31, 1997 to Second Amended and Restated
Agreement of Limited Partnership of WINN Limited Partnership
(incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K, as filed with the Securities and Exchange
Commission on March 27, 1998 and as amended by Form 10-K/A filed with
the Securities and Exchange Commission on April 1, 1998)
4.7* Amendment No. 3 dated September 8, 1998 to Second Amended and Restated
Agreement of Limited Partnership of WINN Limited Partnership
4.8* Redemption and Registration Rights Agreement, dated as of July 14, 1997
by and among WINN Limited Partnership, Winston Hotels, Inc., certain
partnerships listed and certain partners or designees thereof listed
therein (incorporated by reference to Exhibit 10.46 to the Company's
Quarterly Report on Form 10-Q as filed with the Securities and Exchange
Commission on August 8, 1997)
4.9* Registration Rights and Lock-Up Agreement, dated as of September 9,
1997, by and among Winston Hotels, Inc. and Hubbard Realty of
Winston-Salem, Inc.
5.1 Opinion of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P.
</TABLE>
II-7
<PAGE> 51
<TABLE>
<S> <C>
8.1 Opinion of Hunton & Williams as to Tax Matters
23.1* Consent of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P. (included in Exhibit 5.1)
23.2* Consent of Hunton & Williams (included in Exhibit 8.1)
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of KPMG LLP
24.1* Power of Attorney
</TABLE>
- ------------
* Previously filed
II-8
<PAGE> 1
SMITH, ANDERSON, BLOUNT, DORSETT,
MITCHELL & JERNIGAN, L.L.P.
LAWYERS
<TABLE>
<S> <C> <C>
OFFICES MAILING ADDRESS
2500 FIRST UNION CAPITOL CENTER P.O. BOX 2611
RALEIGH, NORTH CAROLINA 27601 September 29, 1999 RALEIGH, NORTH CAROLINA
27602-2611
TELEPHONE: (919) 821-1220
FACSIMILE: (919) 821-6800
</TABLE>
Winston Hotels, Inc.
2209 Century Drive, Suite 300
Raleigh, North Carolina 27612
RE: AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM S-3
REGISTRATION NO. 333-86457
Ladies and Gentlemen:
We are counsel for Winston Hotels, Inc. (the "Company"), in connection
with the registration of 878,797 shares (the "Shares") of the Company's common
stock, par value $.01 per share ("Common Stock"). The Shares are described in
the Company's Registration Statement on Form S-3 filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), on September 2, 1999, as amended on September 29, 1999,
with which this opinion will be filed as an exhibit (the Registration Statement,
as amended, being hereinafter referred to as the "Registration Statement"). The
Shares have been or may be issued by the Company. The Shares may be offered from
time to time by certain selling shareholders as described in the Registration
Statement. This opinion is furnished pursuant to the requirement of Item
601(b)(5) of Regulation S-K under the Act and supersedes and replaces the
opinion of our firm dated September 2, 1999, which was filed as Exhibit 5.1 to
the Registration Statement filed with the Commission on September 2, 1999.
We have relied upon, among other things, our examination of corporate
documents, records, certificates of the Company's officers and public officials,
and matters of law as we have deemed necessary for purposes of this opinion. In
our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents as originals, the conforming to originals of all
documents submitted to us as certified copies or photocopies, and the
authenticity of originals of such latter documents.
Based upon the foregoing and the additional qualifications set forth
below, it is our opinion that the Shares that are outstanding are and the Shares
that may be issued, when issued upon the redemption of the Units in accordance
with the limited partnership agreement of WINN Limited Partnership, will be
validly issued, fully paid and nonassessable.
<PAGE> 2
Winston Hotels, Inc.
September 29, 1999
Page 2
The opinion expressed herein does not extend to compliance with federal
and state securities laws relating to the sale of the Shares.
We hereby consent to the reference to our firm in the Registration
Statement under the heading "Legal Matters" and to the filing of this opinion as
an exhibit to the Registration Statement. Such consent shall not be deemed to be
an admission that this firm is within the category of persons whose consent is
required under Section 7 of the Act or the regulations promulgated pursuant to
the Act.
This opinion is limited to the laws of the State of North Carolina, and
no opinion is expressed as to the laws of any other jurisdiction.
Our opinion is as of the date hereof, and we do not undertake to advise
you of matters that might come to our attention subsequent to the date hereof
which may affect our legal opinion expressed herein.
Sincerely yours,
/s/ SMITH, ANDERSON, BLOUNT, DORSETT,
MITCHELL & JERNIGAN, L.L.P.
<PAGE> 1
September 29, 1999
Winston Hotels, Inc.
2209 Century Drive, Suite 300
Raleigh, North Carolina 27612
Winston Hotels, Inc.
Qualification as
Real Estate Investment Trust
Ladies and Gentlemen:
We have acted as counsel to Winston Hotels, Inc., a North
Carolina corporation (the "Company"), in connection with the preparation of a
Form S-3 registration statement filed with the Securities and Exchange
Commission ("SEC") on September 2, 1999, as amended through the date hereof (the
"Registration Statement"), with respect to the offer and sale from time to time
by the selling shareholders named in the prospectus contained as a part of the
Registration Statement (the "Prospectus") of up to 878,797 shares (the
"Secondary Shares") of the common stock, par value $0.01 per share, of the
Company (the "Common Stock"). You have requested our opinion regarding certain
U.S. federal income tax matters.
The Company, through WINN Limited Partnership, a North
Carolina limited partnership (the "Partnership"), and Winston SPE, LLC, a
wholly-owned subsidiary of the Partnership ("Winston SPE"), currently owns 51
hotels and associated personal property (the "Hotels"). The Company leases 49 of
the Hotels to CapStar Winston Company, L.L.C., one of the Hotels to Bristol
Hotels & Resorts, Inc., and one of the Hotels to Prime Hospitality Corp.
(together, the "Lessees") pursuant to substantially similar operating leases
(collectively, the "Leases"). Bristol Hotels & Resorts, Inc. and Prime
Hospitality Corp. operate the Hotels that they lease. CapStar Winston Company,
L.L.C. operates 39 of the 49 Hotels that it leases. Interstate Management and
Investment Corporation operates nine of the Hotels, and Promus Hotels, Inc.
operates one of the
<PAGE> 2
Winston Hotels, Inc.
September 29, 1999
Page 2
Hotels, pursuant to management agreements (collectively, the "Management
Agreements") with CapStar Winston Company, L.L.C.
In giving the opinions set forth below, we have examined the
following:
1. the Company's Restated Articles of Incorporation, as filed with the Secretary
of State of the State of North Carolina on August 2, 1999;
2. the Company's Amended and Restated Bylaws;
3. the prospectus contained as a part of the Registration Statement (the
"Prospectus");
4. the Second Amended and Restated Agreement of Limited Partnership of the
Partnership, dated as of July 11, 1997 (the "Partnership Agreement"), among the
Company, as general partner, and several limited partners, as amended by
Amendment No. 1 to the Partnership Agreement dated September 11, 1997, Amendment
No. 2 to the Partnership Agreement dated December 31, 1997, and Amendment No. 3
to the Partnership Agreement dated September 14, 1998;
5. the Leases;
6. the Management Agreements; and
7. such other documents as we have deemed necessary or appropriate for purposes
of this opinion.
In connection with the opinions rendered below, we have
assumed generally that:
1. Each of the documents referred to above has been duly
authorized, executed, and delivered; is authentic, if an original, or is
accurate, if a copy; and has not been amended.
2. Each partner (a "Partner") of the Partnership, other than
the Company, that is a corporation or other entity has a valid legal existence.
<PAGE> 3
Winston Hotels, Inc.
September 29, 1999
Page 3
3. Each Partner has full power, authority, and legal right to
enter into and to perform the terms of the Partnership Agreement and the
transactions contemplated thereby.
4. The Partnership operates in accordance with the governing
law of the state of North Carolina and the Partnership Agreement.
5. The Partnership Agreement has remained in substantially the
same form as it was upon the most recent amendment and restatement thereof, and
has not been amended in any material respect (except upon the substitution of
partners in accordance with the terms of the Partnership Agreement).
6. During its taxable year ending December 31, 1999, and
subsequent taxable years, the Company has operated and will continue to operate
in such a manner that makes and will continue to make the representations
contained in a certificate, dated the date hereof and executed by a duly
appointed officer of the Company (the "Officer's Certificate"), true for such
years.
7. The Company will not make any amendments to its
organizational documents or the organizational documents of the Partnership
after the date of this opinion that would affect its qualification as a real
estate investment trust ("REIT") for any taxable year.
8. No action will be taken by the Company, Winston Manager
Corporation, a wholly-owned subsidiary of the Company, the Partnership, Winston
SPE, or the Partners after the date hereof that would have the effect of
altering the facts upon which the opinions set forth below are based.
In connection with the opinions rendered below, we also have
relied upon the correctness of the representations contained in the Officer's
Certificate. No facts have come to our attention, however, that would cause us
to question the accuracy and completeness of the facts contained in the
documents set forth above or the representations set forth in the Officer's
Certificate in a material way.
Based solely on the factual matters in the documents and
assumptions set forth above, the representations set forth in the Officer's
Certificate, the discussions in the Prospectus under the caption "Federal Income
Tax Consequences of Our Status as a
<PAGE> 4
Winston Hotels, Inc.
September 29, 1999
Page 4
REIT" (which are incorporated herein by reference), and without further
investigation, we are of the opinion that:
(a) the Company qualified to be taxed as a REIT pursuant to
sections 856 through 860 of the Internal Revenue Code of 1986,
as amended (the "Code"), for its taxable years ended December
31, 1994 through December 31, 1998, and the Company's
organization and current and proposed method of operation will
enable it to continue to qualify as a REIT for its taxable
year ended December 31, 1999, and in the future; and
(b) the descriptions of the law contained in the Prospectus
under the caption "Federal Income Tax Consequences of Our
Status as a REIT" are correct in all material respects, and
the discussions thereunder fairly summarize the federal income
tax considerations that are likely to be material to a holder
of the Secondary Shares.
We have performed no due diligence and have made no efforts to
verify the accuracy and genuineness of the documents and assumptions set forth
above, or the representations set forth in the Officer's Certificate. We will
not review on a continuing basis the Company's compliance with the documents or
assumptions set forth above, or the representations set forth in the Officer's
Certificate. Accordingly, no assurance can be given that the actual results of
the Company's operations for its 1999 and subsequent taxable years will satisfy
the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the
Code and the Treasury regulations thereunder (the "Regulations"), published
administrative interpretations thereof, and published court decisions. The
Internal Revenue Service has not issued Regulations or administrative
interpretations with respect to various provisions of the Code relating to REIT
qualification. No assurance can be given that the law will not change in a way
that will prevent the Company from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement. In giving this consent, we do not admit that we
are in the category of persons whose consent is required by Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder by the SEC.
<PAGE> 5
Winston Hotels, Inc.
September 29, 1999
Page 5
The foregoing opinions are limited to the U.S. federal income
tax matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion letter
is solely for the information and use of the addressee and the holders of
Secondary Shares, and it may not be distributed, relied upon for any purpose by
any other person, quoted in whole or in part or otherwise reproduced in any
document, or filed with any governmental agency without our express written
consent.
Very truly yours,
Hunton & Williams
<PAGE> 1
EXHIBIT 23.3
We hereby consent to the incorporation by reference in this Amendment No.1 to
the Registration Statement on Form S-3 (No. 333-86457) of our report dated
January 14, 1999, except for footnote 5 which is as of February 1, 1999,
relating to the financial statements and financial statement schedule of Winston
Hotels, Inc., which appears in Winston Hotels, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998. We also consent to the incorporation by
reference in this Amendment No. 1 to the Registration Statement on Form S-3 of
our report dated February 6, 1998 relating to the financial statements of
Winston Hospitality, Inc. which also appears in Winston Hotels, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1998. We also consent to the
references to us under the heading "Experts" in Amendment No. 1 to such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
September 29, 1999
<PAGE> 1
EXHIBIT 23.4
ACCOUNTANTS' CONSENT
The Members
CapStar Winston Company, L.L.C.:
We consent to incorporation by reference in Amendment No. 1 to the registration
statement of Winston Hotels, Inc. on Form S-3 of our report dated February 23,
1999, relating to the balance sheets of CapStar Winston Company, L.L.C. as of
December 31, 1998 and 1997 and the related statements of operations, members'
capital (deficit) and cash flows for the year ended December 31, 1998 and the
period from October 15, 1997 (date of inception) through December 31, 1997,
which report appears in the December 31, 1998 annual report on Form 10-K of
Winston Hotels, Inc.
We consent to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG LLP
Washington, D.C.
September 29, 1999
