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As filed with the Securities and Exchange Commission on September 2, 1999
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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)
NORTH CAROLINA 56-1872141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share. . . . 503,897 $7.63 $3,844,734.11 $1,068.84
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f), based upon the book value as of July 31,
1999 of the common units of limited partnership interest in WINN
Limited Partnership to be redeemed for shares of Winston Hotels, Inc.
common stock.
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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.
503,897 Shares of Common Stock
This prospectus relates to our possible issuance of up to 503,897
shares of common stock to holders of up to 503,897 common units of limited
partnership interest in WINN Limited Partnership, if and to the extent that the
holders redeem their units and we issue them shares of common stock in exchange
for their units. 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.
WINN Limited Partnership issued 503,897 units in connection with the
acquisition of hotel properties and a parcel of land. The units are redeemable
on a one-for-one basis for shares of our common stock. We are registering the
shares of common stock as required under the terms of certain agreements we have
with the unit holders.
We will not receive any cash proceeds from the issuance or sale of any
shares of common stock pursuant to this offering but will acquire partnership
units tendered for redemption for which we elect to issue such shares. 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 1, 1999, the closing price of our common stock was
$8.75 per share.
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You should consider carefully the risk factors beginning on page 4 of
this prospectus before making a decision to invest in our common stock.
================================================================================
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 specialize in the acquisition, development and
rehabilitation of premium limited-service, high-end extended-stay and
full-service hotels. Through WINN Limited 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.
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 six 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 September 15, 1999 for the sale of the six hotels.
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THE PARTNERSHIP
We control WINN Limited 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. Currently, the limited partners of the
partnership are those persons who received units of limited partnership interest
in consideration of the transfer of certain hotels and land to the partnership.
Pursuant to the partnership agreement, each unit currently held by the limited
partners may be redeemed, at the election of the holder. In addition, in
accordance with the partnership agreement, the limited partners have the right
to require the partnership to redeem all or a portion of the number of units
held by each. At our sole option, each unit may be redeemed by us for either one
share of common stock or cash equal to the fair market value of one share of our
common stock at the time of the redemption. We presently anticipate that we will
elect to issue shares of our common stock in connection with each redemption
rather than cash. With each redemption of outstanding units, our percentage
ownership interest in the partnership, which is based on the number of units
owned by us in relation to all outstanding units, will increase. In general,
whenever we issue shares of our common stock, we will contribute any net
proceeds to the partnership, and the partnership will issue an equivalent number
of units to us.
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. The partnership will continue until
December 31, 2050, or until sooner dissolved upon:
-- the bankruptcy, dissolution or withdrawal of the general
partner (unless the limited partners elect to continue the
partnership);
-- the sale or other disposition of all or substantially all of
the assets of the partnership;
-- the redemption of all limited partnership interests in the
partnership (other than those held by the general partner, if
any); or
-- our election, as the general partner, to dissolve the
partnership.
We are entitled to share in cash distributions from, and in the profits
and losses of, the partnership (including payments under the percentage leases)
and are entitled to vote on all matters requiring a vote of the partners.
Our executive offices are located at 2209 Century Drive, Suite 300,
Raleigh, North Carolina 27602, and our telephone number is (919) 510-6010.
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
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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
54.
YOU MAY RECOGNIZE TAXABLE GAIN IN EXCESS OF THE VALUE OF THE SHARES YOU RECEIVE
UPON REDEMPTION
Exercise of your unit redemption right will be treated for tax purposes
as a sale of the units you redeem. Such a sale will be fully taxable to you, and
you will be treated as realizing for tax purposes an amount equal to the cash or
the value of the common shares you receive in the redemption plus the amount of
the partnership's nonrecourse liabilities considered allocable to the redeemed
units at the time of the redemption. It is possible that the amount of gain you
will be required to recognize, or even the total tax liability resulting from
such gain, could exceed the amount of cash or the value of the common shares you
receive upon redemption. In addition, because the price of our common shares
fluctuates, the price you receive when you sell your common shares may not equal
the value of your units at the time of redemption.
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
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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 rooms and related services of our hotels, their ability to maintain and
increase gross revenues at our hotels and other factors.
OUR RETURN DEPENDS 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.
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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. 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
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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:
-- 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 six of our hotels. Even though
these hotels are under contract, we cannot assure you that the sale 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.
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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. Upon issuance
and delivery following redemption of units, all shares of common stock offered
hereby will be fully paid and nonassessable and the holders thereof will not
have preemptive rights.
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, 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;
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-- 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 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
shareholders, 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.
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Limitation of Liability; Indemnification
Our articles of incorporation provide that to the maximum extent that
North Carolina law in effect from time to time permits limitation of liability
of directors and officers, none of our directors or officers shall be liable to
us or our shareholders for money damages.
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 outstanding shares of common stock, 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
outstanding shares of common stock, 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 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
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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 will 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 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.
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REDEMPTION OF UNITS
GENERAL
In accordance with the partnership agreement, each limited partner may,
subject to limitations, require that the partnership redeem all or a portion of
his units by delivering a notice of exercise of redemption right to the
partnership. Upon redemption, each redeeming limited partner will receive, at
the option of the partnership, either (1) a number of shares of our common stock
equal to the number of units redeemed (subject to certain anti-dilution
adjustments) or (2) cash in an amount equal to the market value of the number of
shares of common stock he would have received pursuant to (1) above. The market
value of the common stock for this purpose will be equal to the average of the
closing trading prices of our common stock or substitute information (if no such
closing price is available) for the ten consecutive trading days before the day
on which the redemption notice was received by the partnership.
In lieu of the partnership redeeming units, we, in our sole discretion,
have the right to assume directly and satisfy the redemption right of a limited
partner described in the preceding paragraph. We anticipate that we generally
will elect to assume directly and satisfy any redemption right exercised by a
limited partner through the issuance of shares pursuant to this or a future
prospectus, whereupon we will acquire the units being redeemed. Such an
acquisition will be treated as a sale of the units to us for federal income tax
purposes. See "-- Tax Consequences of Redemption." Upon redemption, a limited
partner's right to receive distributions with respect to the units redeemed will
cease.
A limited partner must notify us, as the general partner, of its desire
to require the partnership to redeem units by sending a notice of exercise of
redemption right. A limited partner must request the redemption of at least 100
units (or all of the units held by such holder, if less than 100 are so held).
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes certain federal income tax
considerations that may be relevant to a limited partner who exercises his right
to require the redemption of his units.
Tax Treatment of Redemption of Units. If we assume and perform the
redemption obligation, the partnership agreement provides that the redemption
will be treated by us, the partnership and the redeeming limited partner as a
sale of units by the limited partner to us at the time of the redemption. In
that event, the sale will be fully taxable to the redeeming limited partner, and
the redeeming limited partner will be treated as realizing for tax purposes an
amount equal to the sum of the cash or the value of the common stock received in
connection with the redemption plus the amount of any partnership liabilities
allocable to the redeemed units at the time of redemption. The determination of
the amount of gain or loss is discussed more fully below. If we do not elect to
assume the obligation to redeem a limited partner's units and the partnership
redeems the units for cash or shares of common stock that we contribute to the
partnership to effect the redemption, the redemption likely would be treated for
tax purposes as a sale of the units to us in a fully taxable transaction,
although the matter is not free from doubt. In that event, the redeeming partner
would be treated as realizing an amount equal to the sum of the cash or the
value of the shares of common stock received in connection with the redemption
plus the amount of any partnership liabilities allocable to the redeemed units
at the time of the redemption. The determination of the amount of gain or loss
in the event of sale treatment is discussed more fully below.
If the partnership chooses to redeem a limited partner's units for cash
that is not contributed by us to effect the redemption, the tax consequences
would be the same as described in the previous
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paragraph, except that if the partnership redeems less than all of a limited
partner's units, the limited partner would not be permitted to recognize any
loss occurring on the transaction and would recognize taxable gain only to the
extent that the cash, plus the amount of any partnership liabilities allocable
to the redeemed units, exceeded the limited partner's adjusted basis in all of
that limited partner's units immediately before the redemption.
Tax Treatment of Disposition of Units by Limited Partner Generally. If
a unit is redeemed in a manner that is treated as a sale of the unit, or a
limited partner otherwise disposes of a unit, the determination of gain or loss
from sale or other disposition will be based on the difference between the
amount considered realized for tax purposes and the tax basis in such unit. See
"--Basis of Units." Upon the sale of a unit, the "amount realized" will be
measured by the sum of the cash and fair market value of the common stock
received plus the amount of any partnership liabilities allocable to the unit
sold. To the extent that the amount of cash or property received plus the
allocable share of any partnership liabilities exceeds the limited partner's
basis for the unit disposed of, such limited partner will recognize gain. It is
possible that the amount of gain recognized or even the tax liability resulting
from such gain could exceed the amount of cash and the value of the common stock
received upon such disposition.
Except as described below, any gain recognized upon a sale or other
disposition of units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount realized
upon the sale of a unit attributable to a limited partner's share of "unrealized
receivables" of the partnership, as defined in the federal income tax laws,
exceeds the basis attributable to those assets, such excess will be treated as
ordinary income. Unrealized receivables include, to the extent not previously
included in partnership income, any rights to payment for services rendered or
to be rendered. Unrealized receivables also include amounts that would be
subject to recapture as ordinary income if the partnership had sold its assets
at their fair market value at the time of the transfer of a unit.
Basis of Units. In general, a limited partner who was deemed at the
time of the issuance of his units to have received his units upon liquidation of
a partnership had an initial tax basis in his units equal to his basis in his
partnership interest at the time of the liquidation. Similarly, in general, a
limited partner who at the time of the issuance of his units contributed a
partnership interest in exchange for his units had an initial tax basis in the
units equal to his basis in the contributed partnership interest. A limited
partner's initial tax basis in his units generally is increased by (1) such
limited partner's share of partnership taxable income and (2) increases in his
share of liabilities of the partnership, including any increase in his share of
liabilities occurring in connection with the issuance of the units. Generally,
the limited partner's basis in his units is decreased, but not below zero, by
(A) his share of partnership distributions, (B) decreases in his share of
liabilities of the partnership, including any decrease in his share of
liabilities of the partnership occurring in connection with the transactions
resulting in the issuance of the units, (C) his share of losses of the
partnership, and (D) his share of nondeductible expenditures of the partnership
that are not chargeable to capital.
Potential Application of Disguised Sale Rules to a Redemption of Units.
There is a risk that a redemption of units may cause the original transfer of
property to the partnership in exchange for units to be treated as a "disguised
sale" of property. The federal income tax laws generally provide that, unless
one of the prescribed exceptions is applicable, a partner's contribution of
property to a partnership and a simultaneous or subsequent transfer of money or
other consideration, including the assumption of or taking subject to a
liability, from the partnership to the partner will be presumed to be a sale, in
whole or in part, of such property by the partner to the partnership. Further,
in the absence of an applicable exception, if money or other consideration is
transferred by a partnership to a partner within two years of the partner's
contribution of property, the transactions are, when viewed together, presumed
to be a sale of the contributed property unless the facts and circumstances
clearly establish that the transfers do not
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constitute a sale. If, however, two years have passed between the transfer of
money or other consideration and the contribution of property, the transactions
will be presumed not to be a sale unless the facts and circumstances clearly
establish that the transfers constitute a sale.
Accordingly, if a unit is redeemed, the Internal Revenue Service could
contend that the disguised sale rules apply because the limited partner will
receive cash or shares of common stock subsequent to his previous contribution
of property to the partnership. In that event, the Internal Revenue Service
could contend that the transactions in connection with the issuance of the units
themselves were taxable as a disguised sale. Any gain recognized thereby may be
eligible for installment reporting under the federal income tax laws, subject to
limitations.
COMPARISON OF OWNERSHIP OF UNITS AND SHARES OF COMMON STOCK
If you exercise your redemption right, we will determine whether you
receive cash or common shares in exchange for your units. If you receive shares
of common stock, you will become a shareholder in Winston Hotels rather than a
holder of units in the partnership. Generally, the nature of an investment in
shares of our common stock is substantially equivalent economically to an
investment in units in the partnership. Since the partnership makes
distributions to its partners on a per unit basis and we own one unit for each
outstanding share of common stock, a holder of a share of common stock generally
receives the same distribution that a holder of a unit receives, and
shareholders and unit holders generally share in the risks and rewards of
ownership in the enterprise being conducted by us (both through us and the
partnership). However, there are some differences between ownership of units and
ownership of shares of common stock, some of which may be material to investors.
The information below highlights a number of significant differences
between us and the partnership relating to, among other things, form of
organization, permitted investments, policies and restrictions, management
structure, compensation and fees, investor rights and federal income taxation,
and compares certain legal rights associated with the ownership of units and
common stock, respectively. These comparisons are intended to assist limited
partners of the partnership in understanding how their investment will be
changed if their units are redeemed for common stock. This discussion is summary
in nature and does not constitute a complete discussion of these matters.
Holders of units should carefully review the balance of this prospectus, the
registration statement of which this prospectus is a part and the documents
incorporated by reference in this prospectus for additional important
information about us.
Form of Organization and Assets Owned. The partnership is organized as
a North Carolina limited partnership. We are organized as a North Carolina
corporation. We elected to be taxed as a REIT under the federal income tax laws
beginning with our taxable year ended December 31, 1994 and intend to maintain
our qualification as a REIT. We own an interest in 51 hotels through our
ownership interest in the partnership.
Length of Investment. The partnership has a slated termination date of
December 31, 2050, although it may be terminated earlier under certain
circumstances. See "Description of the Partnership and Units - Term." We have a
perpetual term and intend to continue our operations for an indefinite time
period.
Purpose and Permitted Investments. The purpose of the partnership
includes the conduct of any business that may be lawfully conducted by a limited
partnership formed under North Carolina law, except that the partnership
agreement requires the business of the partnership to be conducted in a manner
that will permit us to be classified as a REIT under the federal income tax
laws, unless we cease to qualify as a REIT for reasons other than the conduct of
the business of the partnership. The
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partnership may, subject to the foregoing limitation, invest in or enter into
partnerships, joint ventures or similar arrangements and may own interests in
any other entity.
Additional Equity. The partnership is authorized to issue units and
other partnership interests to the partners or to other persons for such
consideration and on such terms and conditions as we, as the general partner, in
our sole discretion, may deem appropriate. In addition, we may cause the
partnership to issue additional units to us, as the general partner, or other
partnership interests in one or more different series or classes which may be
senior to the units, in conjunction with the offering of our securities having
substantially similar rights, in which the proceeds thereof are contributed to
the partnership. Consideration for additional partnership interests may be cash
or other property or other assets permitted by North Carolina law.
Under our articles of incorporation, the total number of shares of all
classes of stock that we have the authority to issue is 60,000,000, consisting
of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock.
As of the date of this prospectus, 16,373,843 shares of common stock and
3,000,000 shares of Series A preferred stock are outstanding. Our board of
directors may issue, in its discretion, additional equity securities consisting
of common stock or preferred stock, provided that the total number of shares
issued does not exceed the authorized number of shares of capital stock set
forth in our articles of incorporation. As long as the partnership is in
existence, the proceeds of all equity capital raised by us will be contributed
to the partnership in exchange for units or other interests in the partnership.
Borrowing Policies. Our articles of incorporation limit consolidated
debt to 60% of our investment in hotel properties, at cost, after giving effect
to our use of proceeds from any indebtedness. For purposes of calculating our
consolidated debt, any debt incurred by the partnership is included.
Management and Control. All management and control over the business of
the partnership are vested in us, as the general partner of the partnership, and
no limited partner of the partnership has any right to participate in or
exercise management or control over the business of the partnership. Other than
restrictions precluding investments by the partnership that would adversely
affect our qualification as a REIT, there are no restrictions upon the
partnership's authority to enter into certain transactions, including among
others, making investments, lending partnership funds, or reinvesting the
partnership's cash flow and net sale or refinancing proceeds. Upon the
occurrence of an event of bankruptcy or our dissolution, we shall be deemed to
be removed as general partner automatically; otherwise, we may not be removed as
general partner by the limited partners with or without cause.
Our board of directors has exclusive control over our business and
affairs subject to the restrictions in our articles of incorporation and bylaws.
The policies adopted by the board of directors may be altered or eliminated
without a vote of the shareholders. Accordingly, except for their vote in the
elections of directors, shareholders have no control over our ordinary business
policies. Neither our articles of incorporation nor our bylaws impose any
restrictions upon the types of investments made by us except that under our
articles of incorporation the board of directors is prohibited from taking any
action that would terminate our REIT status without the approval of the holders
of two-thirds of the outstanding shares of our common stock.
Fiduciary Duties. Under North Carolina law, as general partner of the
partnership, we are accountable to the partnership as a fiduciary and,
consequently, are required to exercise good faith in all of our dealings with
respect to partnership affairs. However, under the partnership agreement, we are
under no obligation to take into account the tax consequences to any limited
partner of any action taken by us as general partner, and we will have no
liability to a limited partner as a result of any liabilities or
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damages incurred or suffered by or benefits not derived by a limited partner as
a result of our action or inaction so long as we acted in good faith.
Under North Carolina law, our directors must perform their duties in
good faith, in a manner that they believe to be in our best interest and with
the care an ordinarily prudent person would exercise under similar
circumstances. Our directors who act in such a manner generally will not be
liable to us for monetary damages arising from their activities.
Limitation of Liability and Indemnification of Management. The
partnership agreement generally provides that, as general partner, we will incur
no liability for monetary damages to the partnership or any limited partner for
losses sustained or liabilities incurred as a result of errors in judgment or of
any act or omission if we acted in good faith. In addition, we are not
responsible for any misconduct or negligence on the part of our agents provided
we appointed such agents in good faith. As general partner, we may consult with
legal counsel, accountants, consultants, real estate brokers and other persons,
and any action we take or omit to take in reliance upon the opinion of such
persons, as to matters which we reasonably believe to be within their
professional or expert competence, shall be conclusively presumed to have been
done or omitted in good faith and in accordance with such opinion. The
partnership agreement also provides for indemnification of us, as general
partner, our directors and officers, and such other persons as we may from time
to time designate, against any and all losses, claims, damages, liabilities
(joint or several), expenses (including reasonable legal fees and expenses),
judgments, fines, settlements, and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, that relate to the operations of the
partnership in which such person may be involved, or is threatened to be
involved, provided that the partnership will not indemnify any such person (1)
for an act or omission of such person that was material to the matter giving
rise to the proceeding and either was committed in bad faith or was the result
of active and deliberate dishonesty, (2) who actually received an improper
benefit in money, property or services or (3) who, in the case of any criminal
proceeding, had reasonable cause to believe that the act or omission was
unlawful.
For a discussion of limitations on liability of our officers and
directors, see "Description of Capital Stock--Limitation of Liability;
Indemnification."
Anti-Takeover Provisions. Except in limited circumstances, as general
partner of the partnership, we have exclusive management power over the business
and affairs of the partnership. We may not be removed as general partner by the
limited partners with or without cause. Under the partnership agreement, we have
the sole discretion to prevent a limited partner from transferring his interest
or any rights of approval to deter, delay or hamper attempts by persons to
acquire a controlling interest in the partnership. See "Description of the
Partnership and Units--Transferability of Interests."
Voting Rights. Under the partnership agreement, the limited partners
have voting rights only under certain circumstances, including certain
amendments of the partnership agreement, as described more fully below.
Otherwise, all decisions relating to the operation and management of the
partnership are made by us as the general partner. See "--Management and
Control." As of August 31, 1999, we held approximately 90.4% of the outstanding
units and 100% of the outstanding preferred units. As units held by limited
partners are redeemed, our percentage ownership of the units will increase. If
additional units are issued to third parties, our percentage ownership of the
units will decrease.
Our shareholders have the right to vote on, among other things, a
merger or sale of substantially all of our assets, certain amendments to our
articles of incorporation and our dissolution. All shares of common stock have
one vote. Shares of Series A preferred stock have limited voting rights as set
forth in
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our articles of incorporation and summarized in this prospectus. Our articles
of incorporation permits our board of directors to classify and issue preferred
stock in one or more series having voting power which may differ from that of
the common stock. See "Description of Capital Stock--Preferred Stock."
Amendment of the Partnership Agreement or the Articles of
Incorporation. The partnership agreement may be amended by us, as general
partner, without the consent of the limited partners (except us or our
wholly-owned subsidiaries) in any respect, except that certain amendments
affecting the fundamental rights of a limited partner must be approved by
consent of limited partners holding more than 50% of the units held by the
limited partners (other than units held by us or our wholly-owned subsidiaries).
Such consent is required for any amendment that would (1) adversely affect the
redemption rights, (2) adversely affect the rights of limited partners to
receive distributions payable to them under the partnership agreement, (3)
materially alter the partnership's profit and loss allocations, or (4) impose
any obligation upon the limited partners to make additional capital
contributions to the partnership.
For a description of the vote of shareholders required to amend our
articles of incorporation, see "Description of Capital Stock - Articles of
Incorporation and Bylaw Provisions - Amendment."
Vote Required to Dissolve Winston Hotels or the Partnership. At any
time prior to December 31, 2050 (upon which date the partnership shall
terminate), as general partner, we may elect to dissolve the partnership in our
sole discretion. Dissolution shall also occur upon (1) our bankruptcy,
dissolution or withdrawal (unless the limited partners elect to continue the
partnership), (2) the passage of 90 days after the sale or other disposition of
all or substantially all the assets of the partnership or (3) the redemption of
all limited partnership interests in the partnership (other than those held by
us, if any).
Under North Carolina law, our board of directors must obtain approval
of a majority of votes entitled to be cast upon such proposal in order to
dissolve us.
Vote Required to Sell Assets or Merge. Under the partnership agreement,
the sale, exchange, transfer or other disposition of all or substantially all of
the partnership's assets or merger or consolidation of the partnership requires
only our consent, as general partner. Under North Carolina law, any merger or
share exchange involving us requires the separate approval of our board of
directors and each group entitled to vote on the matter by a majority of all
votes entitled to be cast by such group. Under North Carolina law, unless the
articles of incorporation provide otherwise, the sale of all or substantially
all of our assets otherwise than in the normal course of business requires the
approval of our board of directors and a majority of all the votes entitled to
be cast on the transaction. Shareholder approval is not required for the sale of
our assets in the usual and regular course of business.
Compensation, Fees and Distributions. We do not receive any
compensation for our services as general partner of the partnership. As a
partner in the partnership, however, we have the same right to allocations and
distributions as other partners of the partnership, subject to our rights as the
sole holder of outstanding preferred units. In addition, the partnership will
reimburse us for all expenses we incur relating to the ongoing operation of the
partnership and any offering of partnership units or other partnership
interests.
Liability of Investors. Under the partnership agreement and applicable
state law, the liability of the limited partners for the partnership's debts and
obligations is generally limited to the amount of their investment in the
partnership, and limited partners are generally not liable for any debts,
liabilities, contracts or obligations of the partnership.
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Under North Carolina law, our shareholders are not personally liable
for our debts or obligations.
Nature of Investments. The units constitute equity interests entitling
each limited partner to his pro rata share of cash distributions made to the
limited partners in the partnership. The partnership generally intends to retain
and reinvest proceeds of the sale of property or excess refinancing proceeds in
its business.
The shares of our common stock constitute equity interests in Winston
Hotels. We are entitled to receive our pro rata share of distributions made by
the partnership with respect to the units, and each shareholder will be entitled
to his pro rata share of any dividends or distributions paid with respect to our
common stock. The dividends payable to the common shareholders are not fixed in
amount and are only paid if and when declared by our board of directors and are
subject to the preferential right of the Series A preferred stock to receive
distributions. In order to qualify as a REIT, we must distribute at least 95% of
our taxable income (excluding capital gains), and any taxable income (including
capital gains) not distributed will be subject to corporate income tax.
Potential Dilution of Rights. As general partner of the partnership, we
are authorized, in our sole discretion and without the consent of the limited
partners, to cause the partnership to issue additional limited partnership
interests and other equity securities for any partnership purpose at any time to
the limited partners or to other persons on terms and conditions established by
us.
Our board of directors may issue, in its discretion, additional shares
of our common stock and preferred stock with such powers, preferences and rights
as the board of directors may designate at the time. The issuance of additional
shares of either common stock or preferred stock may result in the dilution of
interests of the shareholders.
Liquidity. Subject to certain exceptions, a limited partner may not
transfer all or any portion of his units without (1) obtaining our prior written
consent, as general partner of the partnership, which consent may be withheld in
our sole and absolute discretion, and (2) meeting certain other requirements set
forth in the partnership agreement. Notwithstanding the foregoing, subject to
certain other restrictions, a limited partner may transfer his units to (1) the
partnership or us in connection with the redemption of those units, (2) a
corporation that is an affiliate, subsidiary or successor to a corporate limited
partner making the transfer or (3) a member of a limited partner's immediate
family or a trust for the benefit of a member of a partner's immediate family in
a donative transfer that does not involve the receipt of any consideration.
Limited partners should expect to hold their units until they redeem them for
cash or shares of our common stock, or until the partnership terminates. The
right of a transferee to become a substituted limited partner also is subject to
certain requirements. If a transferee is admitted, the transferee will succeed
to all economic rights and benefits attributable to such units (including the
right to vote on or consent to actions of the partnership). We may require, as a
condition of any transfer, that the transferring limited partner assume all
costs incurred by the partnership in connection with such transfer.
The shares of common stock issued pursuant to this prospectus upon
redemption of units will be freely transferable as registered securities under
the Securities Act. Our common stock is listed on the New York Stock Exchange
under the symbol "WXH." Our Series A preferred stock is listed on the New York
Stock Exchange under the symbol "WXH_pa."
Federal Income Taxation. The partnership is not subject to federal
income taxes. Instead, each holder of units includes its allocable share of the
partnership's taxable income or loss in determining its individual federal
income tax liability. As of August 1, 1999, the maximum federal income tax rate
for
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individuals was 39.6%. Income and loss from the partnership generally is subject
to the "passive activity" limitations. Under the "passive activity" rules,
income and loss from the partnership that is considered "passive" income or loss
generally can be offset against income and loss from other investments than
constitute "passive activities" unless the partnership is considered a "publicly
traded partnership," in which case income and loss from the partnership can only
be offset against other income and loss from the partnership. Income of the
partnership, however, that is attributable to dividends or interest does not
qualify as passive income and cannot be offset with losses and deductions from a
"passive activity." Cash distributions from the partnership are not taxable to a
holder of units except to the extent they exceed such holder's basis in its
interest in the partnership. Each year, holders of units will receive a Schedule
K-1 tax form containing detailed tax information for inclusion in preparing
their federal income tax returns. Holders of units are required in some cases,
to file state income tax returns and/or pay state income taxes in the states in
which the partnership owns property. In some states, the partnership is required
to remit a withholding tax with respect to nonresident partners.
We elected to be taxed as a REIT effective for our taxable year ended
December 31, 1994. So long as we qualify as a REIT, we will be permitted to
deduct distributions paid to our shareholders, which effectively will reduce or
eliminate the "double taxation" that typically results when a corporation earns
income and distributes that income to its shareholders in the form of dividends.
A REIT, however, is subject to federal income tax on income that is not
distributed and also may be subject to federal income and excise taxes in
certain circumstances. The maximum federal income tax rate for corporations
currently is 35% and for individuals is 39.6%. Dividends paid by us will be
treated as "portfolio" income and cannot be offset with losses from "passive
activities." Distributions made by us to our taxable domestic shareholders out
of current or accumulated earnings and profits will be taken into account by
them as ordinary income. Distributions that are designated as capital gain
dividends generally will be taxed as long-term capital gain, subject to
limitations. Distributions in excess of our current or accumulated earnings and
profits will be treated as a non-taxable return of basis to the extent of a
shareholder's adjusted basis in its common stock, with the excess taxed as
capital gain. Each year, our shareholders, other than certain types of
institutional investors, will receive IRS Form 1099, which is used by
corporations to report dividends paid to their shareholders. Shareholders who
are individuals generally should not be required to file state income tax
returns and/or pay state income taxes outside of their state of residence with
respect to our operations and distributions. We may be required to pay state
income taxes in certain states.
DESCRIPTION OF THE PARTNERSHIP AND UNITS
GENERAL
The partnership, including its wholly-owned subsidiary, owns 51 hotels.
We are the sole general partner of the partnership. We hold approximately 90.4%
of the units issued and 100% of the preferred units issued. The remaining
approximately 9.6% of the issued units are held by limited partners who owned
interests in selling corporations which conveyed several hotels to the
partnership. The material terms of the units, including a summary of certain
provisions of the partnership agreement, are set forth below. The following
description of the terms and provisions of the units and certain other matters
does not purport to be complete and is subject to and qualified in its entirety
by reference to applicable provisions of North Carolina law and the partnership
agreement. For a comparison of the voting and other rights of holders of the
units and holders of our common stock, see "Redemption of Units -- Comparison of
Ownership of Units and Shares of Common Stock."
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Through the ownership of the units, the limited partners hold interests
in the partnership and all holders of the units (including us in our capacity as
general partner) are entitled to share in cash distributions from, and in the
profits and losses of, the partnership. Distributions by the partnership are
made equally for each unit outstanding, subject to the prior payment of
distributions on outstanding preferred units. Each unit generally receives
distributions in the same amount as the cash dividends paid by us on each share
of common stock. The distribution rights of the preferred units are preferential
to the rights of the units.
The units are not registered pursuant to the federal securities laws or
any state securities law. The units cannot be sold, assigned, hypothecated,
pledged, transferred or otherwise disposed of by a holder unless they are so
registered or an exemption from such registration is available. In addition, the
partnership agreement imposes restrictions on the transfer of the units, as
described below.
SERIES A PREFERRED UNITS
In connection with our sale to the public of 3,000,000 shares of our
Series A preferred stock, we contributed the net proceeds to the partnership in
exchange for 3,000,000 Series A preferred units. The terms of the Series A
preferred units substantially track the terms of our Series A preferred stock.
The preferred units have a liquidation preference of $25.00 per preferred unit,
plus accrued but unpaid distributions. Annual distributions of $2.3125 are
payable on each preferred unit and are preferential to distributions on the
units. Beginning on September 28, 2001, the partnership may redeem the preferred
units, in whole or in part, at any time or from time to time, for $25.00 in cash
per preferred unit, plus accrued and unpaid distributions. Prior to September
28, 2001, the partnership may redeem the preferred units upon a change of
control (as defined in the partnership agreement) at certain specified
redemption prices ranging from $25.05 to $25.80 based on the date of the change
of control. The preferred units also have certain preferences with respect to
allocations. See "--Tax Matters; Profit and Loss Allocation."
ABILITY TO ENGAGE IN OTHER BUSINESSES; CONFLICTS OF INTEREST
Subject to the terms of our articles of incorporation and any
agreements between us, as the general partner, or our affiliates and the
partnership, we and other persons (including our officers, directors, employees,
agents and other affiliates) are not prohibited under the partnership agreement
from engaging in other business activities, including business activities
substantially similar or identical to those of the partnership, and we will not
be required to present any business opportunities to the partnership or to any
limited partner.
BORROWING BY THE PARTNERSHIP
As general partner, we are authorized under the partnership agreement
to cause the partnership to borrow money and to issue and guarantee debt as we
deem necessary for the conduct of the activities of the partnership. Such debt
may be secured by deeds to secure debt, mortgages, deeds of trust, pledges or
other liens on the assets of the partnership. We may also cause the partnership
to borrow money to enable the partnership to make distributions in an amount
sufficient to permit us, so long as we qualify as a REIT, to avoid payment of
federal income tax.
REIMBURSEMENT OF GENERAL PARTNER; TRANSACTIONS WITH THE GENERAL PARTNER AND ITS
AFFILIATES
We receive no compensation for our services as the general partner of
the partnership. However, as a partner in the partnership, we have the same
right, subject to our rights as holders of the Series A
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preferred units, to allocations, payments and distributions as other partners of
the partnership. In addition, the partnership will reimburse us for all expenses
we incur relating to the ownership and operation of or for the benefit of the
partnership and any offering of units or other partnership interests.
Except as expressly permitted by the partnership agreement, neither us
nor any of our affiliates will sell, transfer or convey any property to, or
purchase any property from, the partnership, directly or indirectly, except
pursuant to transactions that are determined by us in good faith, in our sole
and absolute discretion, to be fair and reasonable.
LIABILITY OF GENERAL PARTNER AND LIMITED PARTNERS
As the general partner of the partnership, we are liable for all
general obligations of the partnership to the extent not paid by the
partnership. We are not liable for the non-recourse obligations of the
partnership.
The limited partners are not required to make further capital
contributions to the partnership after their respective initial contributions
are fully paid. Assuming that a limited partner acts in conformity with the
provisions of the partnership agreement, the liability of the limited partner
for obligations of the partnership under the partnership agreement and the
Revised Uniform Limited Partnership Act will be limited, subject to certain
possible exceptions, to the loss of the limited partner's investment in the
partnership.
The partnership is qualified to conduct business in each state in which
it owns property and may qualify to conduct business in other jurisdictions.
Maintenance of limited liability may require compliance with certain legal
requirements of these jurisdictions and certain other jurisdictions. Limitations
on the liability of a limited partner for the obligations of a limited
partnership have not clearly been established in many states. Accordingly, if it
were determined that the right, or exercise of the right by the limited
partners, to make certain amendments to the partnership agreement or to take
other action pursuant to the partnership agreement constituted "control" of the
partnership's business for the purposes of the statutes of any relevant state,
the limited partners might be held personally liable for the partnership's
obligations. The partnership will operate in a manner we deem reasonable,
necessary and appropriate to preserve the limited liability of the limited
partners.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The partnership agreement generally provides that, as general partner,
we will incur no liability for monetary damages to the partnership or any
limited partner for losses sustained or liabilities incurred as a result of
errors to judgment or of any act or omission if we acted in good faith. In
addition, we are not responsible for any misconduct or negligence on the part of
our agents, provided we appointed such agents in good faith. We may consult with
legal counsel, accountants, consultants, real estate brokers and other
consultants and advisors, and any action we take or omit to take in reliance
upon the opinion of such persons as to matters which we reasonably believe to be
within their professional or expert competence, shall be conclusively presumed
to have been done or omitted in good faith and in accordance with such opinion.
The partnership agreement also provides for indemnification for us,
our directors and officers, and such other persons as we may from time to time
designate, against any and all losses, claims, damages, liabilities (joint or
several), expenses (including reasonable legal fees and expenses), judgments,
fines, settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, whether civil, criminal, administrative or
investigative, that relate to the operations of the
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partnership to which such person may be involved, or is threatened to be
involved, provided that the partnership shall not indemnify any such persons if
it is established that (1) the act or omission of such person was material to
the matter giving rise to the proceeding and either was committed in bad faith
or was the result of active and deliberate dishonesty, (2) such person actually
received an improper personal benefit in money, property or services, or (3) in
the case of any criminal proceeding, such person had reasonable cause to believe
that the act or omission was unlawful.
SALE OF ASSETS
Under the partnership agreement, we generally have the exclusive
authority to determine whether, when and on what terms the assets of the
partnership (including the hotels) will be sold.
REMOVAL OF THE GENERAL PARTNER; TRANSFER OF GENERAL PARTNER'S INTEREST
The partnership agreement provides that we may not be removed as
general partner by the limited partners. We may not transfer any of our
interests as a partner except in connection with a merger or sale of all or
substantially all of our assets. We may not sell all or substantially all of our
assets, or enter into a merger, unless (1) we obtain the consent of the limited
partners (other than us or our subsidiaries) holding more than 50% of the units
(other than units held by us or our subsidiaries); (2) the sale or merger
includes the sale of all or substantially all of the assets of, or the merger
of, the partnership, with the partners of the partnership receiving
substantially the same consideration in such transaction as holders of shares of
our common stock or (3) we merge with or into another entity and substantially
all of the assets of that entity are contributed to the partnership in exchange
for partnership units.
TRANSFERABILITY OF INTERESTS
We may not withdraw from the partnership voluntarily or transfer or
assign our interest in the partnership unless the transaction in which the
transfer occurs results in the limited partners' receipt of property in an
amount equal to the amount they would have received had they redeemed their
units immediately prior to such transaction, or unless our successor contributes
substantially all of its assets to the partnership in return for an interest in
the partnership. Subject to the exceptions described in "Comparison of Ownership
of Units and Shares of Common Stock - Liquidity," the limited partners may not
transfer their interests in the partnership without our consent, which consent
may be withheld in our sole discretion. We may not consent to any transfer that
would cause the partnership to be treated as a separate corporation for federal
income tax purposes.
REDEMPTION RIGHTS FOR UNITS
Pursuant to the partnership agreement, the limited partners have the
right to cause the redemption of their interest in the partnership in exchange
for shares of our common stock, or at our option, cash. Further, the redemption
price will be paid in cash in the event that the issuance of common stock to the
redeeming limited partner (1) would cause the ownership limitation described
above to be exceeded by such partner, or any other person (unless this condition
is expressly waived by us for a particular redemption transaction), or (2)
otherwise would jeopardize our REIT status. The aggregate number of shares
issuable upon exercise of the redemption rights is 1,738,580. The number of
shares issuable upon exercise of the redemption rights will be adjusted upon the
occurrence of stock splits, mergers, consolidations or similar pro rata share
transactions, which otherwise would have the effect of diluting the ownership
interests of the limited partners or our shareholders.
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NO WITHDRAWAL BY LIMITED PARTNERS
No limited partner has the right to withdraw from or reduce or receive
the return of his capital contribution to the partnership, except as a result of
the redemption or transfer of his units pursuant to the terms of the partnership
agreement.
ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS
For a description of our ability to issue additional partnership
interests, see "Redemption of Units--Comparison of Ownership of Units and Shares
of Common Stock--Additional Equity."
MEETINGS
The partnership agreement does not provide for annual meetings of the
limited partners, and we do not anticipate calling such meetings.
AMENDMENT OF PARTNERSHIP AGREEMENT
For a description of the amendment provisions of the partnership
agreement, see "Redemption of Units--Comparison of Ownership of Units and Shares
of Common Stock--Amendment of the Partnership Agreement or the Articles of
Incorporation."
BOOKS AND REPORTS
As general partner, we are required to keep the partnership's books and
records at the specified principal office of the partnership. The limited
partners have the right, subject to certain limitations, to inspect or to
receive copies of the partnership's federal, state and local tax returns, a list
of the partners and their last known business addresses, the partnership
agreement, the partnership certificate and all amendments thereto, information
about the capital contributions of each of the partners and any other documents
and information required under North Carolina. Any partner or his duly
authorized representative, upon paying duplicating, collection and mailing
costs, is entitled to inspect or copy such records during ordinary business
hours.
We will furnish to each limited partner, within 90 days after the close
of each fiscal year, an annual report containing financial statements of the
partnership (or us, if consolidated financial statements including the
partnership are prepared) for each fiscal year. The financial statements will be
audited by a nationally recognized firm of independent public accountants that
we select. In addition, within 45 days after the close of each fiscal quarter
(other than the fourth quarter), we will furnish to each limited partner a
report containing quarterly unaudited financial statements of the partnership
(or us) and such other information as may be required by applicable law or
regulation or as we deem appropriate.
As general partner, we will use reasonable efforts to furnish to each
limited partner, within 75 days after the close of each fiscal year of the
partnership, the tax information reasonably required by the limited partners for
federal and state income tax reporting purposes.
CAPITAL CONTRIBUTION
We contributed to the partnership a portion of the net proceeds of our
initial public offering and all of the net proceeds of our follow on offerings
as capital contributions in exchange for units and
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Series A preferred units. In connection with our contribution of the net
proceeds of our follow on offerings (as required by the partnership agreement),
the properties of the partnership were revalued to their fair market value
(based on the offering price per share of our stock issued in our follow on
offerings) and the capital accounts of the partners were adjusted to reflect the
manner in which the unrealized gain or loss associated with such property would
have been allocated among the partners under the terms of the partnership
agreement if there had been a taxable disposition of such property for such fair
market value of the date of the revaluation. The partnership agreement provides
that if the partnership requires additional funds at any time or from time to
time in excess of funds available to the partnership from borrowing or capital
contributions, we may borrow such funds from a financial institution or other
lender and lend such funds to the partnership on the same terms and conditions
as are applicable to our borrowing of such funds. As an alternative to borrowing
funds required by the partnership, we may contribute the amount of such required
funds as an additional capital contribution to the partnership. If we so
contribute additional capital to the partnership, we will receive additional
units and our percentage interest in the partnership will be increased on a
proportionate basis based upon the amount of such additional capital
contributions and the value of the partnership at the time of such
contributions. Conversely, the percentage interests of the limited partners will
be decreased on a proportionate basis in the event that we contribute additional
capital to the partnership. In addition, when we contribute additional capital
to the partnership, we will revalue the property of the partnership to its fair
market value as determined by us, and the capital accounts of the partners will
be adjusted to reflect the manner in which the unrealized gain or loss
associated with such property that has not been reflected in the capital
accounts previously would be allocated among the partners under the terms of the
partnership agreement if there were a taxable disposition of such property for
such fair market value on the date of the revaluation.
REGISTRATION RIGHTS
Pursuant to the partnership agreement and registration rights
agreements we have entered with two of the unit holders, we have agreed to pay
all expenses of effecting the registration of the shares to be issued upon
redemption of units, or the redemption shares, (other than any underwriter or
broker discounts or commissions or any fees and expenses incurred by holders of
redemption shares in connection with such registration which, according to the
written instructions of any regulatory authority, we may not pay) pursuant to
the registration statement. We have also agreed to indemnify each holder of
redemption shares and its officers and directors and any person who controls any
holder against certain losses, claims, damages, liabilities and expenses arising
under the securities laws. In addition, each holder of redemption shares has
severally agreed to indemnify us and the other holders of redemption shares, and
each of their respective directors and officers (including each of our directors
and officers who signed the registration statement), and any person who controls
us or any holder against other losses, claims, damages, liabilities, and
expenses arising under the securities laws insofar as such loss, claim, damage
or expense relates to written information furnished to us by such holder
expressly for use in the registration statement or prospectus on any amendment
or supplement thereto.
We have no obligation to retain any underwriter to effect the sale of
the shares of our common stock covered hereby.
TAX MATTERS; PROFIT AND LOSS ALLOCATIONS
Pursuant to the partnership agreement, we are the tax matters partner
of the partnership and, as such, have the authority to handle tax audits and to
make tax elections under the federal income tax laws on behalf of the
partnership.
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Profit of the partnership generally will be allocated first to us to
the extent of the distribution preference on the Series A preferred units and
then will be allocated among the partners in accordance with their respective
percentage interests in the partnership based on the number of units held by the
partners. Loss of the partnership generally will be allocated among the partners
in acordance with their percentage interests.
DISTRIBUTIONS
The partnership agreement provides that the partnership will distribute
cash from operations (including net sale or refinancing proceeds, but excluding
net proceeds from the sale of the partnership's property in connection with the
liquidation of the partnership) quarterly, in amounts determined by us in our
sole discretion, first to us to the extent of the distribution preference on the
Series A preferred units and then to the partners in accordance with their
respective percentage interests in the partnership. Upon liquidation of the
partnership, after payment of, or adequate provision for, debts and obligations
of the partnership, including any loans made by partners, any remaining assets
of the partnership will be distributed first to us to the extent of the
liquidation preference on the Series A preferred units and then to all partners
with positive capital accounts in accordance with their respective positive
capital account balances. If we have a negative balance in our capital account
following a liquidation of the partnership, we will be obligated to contribute
cash to the partnership equal to the negative balance in our capital account.
TERM
The partnership will continue until December 31, 2050, or until sooner
dissolved upon (1) the bankruptcy, dissolution or withdrawal of us, as general
partner (unless the limited partners elect to continue the partnership), (2) the
sale or other disposition of all the assets of the partnership (except for such
assets as we believe are required to wind up the affairs of the partnership),
(3) the redemption of all limited partnership interests in the partnership
(other than those held by us, if any), or (4) the election by us, as general
partner.
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.
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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.
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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.
- -- 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
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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;
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
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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 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
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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.
-- 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:
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-- 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 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.
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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:
-- 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;
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-- 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;
-- 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
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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.
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. The 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
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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:
- -- 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
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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:
- -- 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,
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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.
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.
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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 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
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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 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
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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. 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.
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TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "non-U.S. shareholders") are complex. 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 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
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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
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
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<PAGE> 50
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").
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
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-- 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 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
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<PAGE> 52
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.
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
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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.
PLAN OF DISTRIBUTION
This prospectus relates to our possible issuance of up to 503,897
shares of common stock to holders of up to 503,897 units of limited partnership
interest in the partnership, if and to the extent that such holders redeem their
units and we issue them common shares upon surrender of the units to us. We are
registering these shares as required under the terms of the partnership
agreement and certain registration rights agreements we have entered with the
unit holders. We will not receive any cash proceeds from the issuance or sale of
any shares of common stock pursuant to this prospectus but will acquire
partnership units tendered for redemption for which we elect to issue such
shares. We will acquire one exchanging partner's unit in exchange for each
redemption share that we issue in connection with these redemptions.
Consequently, with each such redemption, our interest in the partnership will
increase. We are paying the costs of preparing and filing the registration
statement of which this prospectus is a part.
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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
June 30, 1999;
3. Our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 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-___________). 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.
================================================================================
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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 redemption shares. 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,
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1998, 1997 and 1996 and the financial statement schedule as of December 31, 1998
and the balance sheet of Winston Hospitality 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.
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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.
Securities and Exchange Commission, registration fee............... $ 1,069
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 ..................................................... 1,931
--------
Total..................................................... $ 46,000
========
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.
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ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
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
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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 (included on signature page)
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.
(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.
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(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.
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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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Raleigh, State of North Carolina, on the 2nd day of
September, 1999.
WINSTON HOTELS, INC.
By: /s/ Robert W. Winston
-------------------------------
Robert W. Winston, III
Chief Executive Officer
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 2nd day of September, 1999. Each of the directors
and/or officers of Winston Hotels, Inc. whose signature appears below hereby
appoints Robert W. Winston, III and Joseph V. Green, and each of them generally
as his attorney-in-fact to sign in his name and behalf, in any and all
capacities stated below, and to file with the Commission any and all amendments,
including post-effective amendments, to this registration statement, making such
changes in the registration statement as appropriate, and generally to do all
such things in their behalf in their capacities as officers and directors to
enable Winston Hotels, Inc. to comply with the provisions of the Securities Act
of 1933, as amended, and all requirements of the Securities and Exchange
Commission.
SIGNATURE TITLE
--------- -----
/s/ Charles M. Winston Chairman of the Board
-------------------------------------
Charles M. Winston
/s/ Robert W. Winston 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)
/s/ James H. Winston Director
-------------------------------------
James H. Winston
/s/ Thomas F. Darden Director
-------------------------------------
Thomas F. Darden, II
/s/ Richard L. Daugherty Director
-------------------------------------
Richard L. Daugherty
/s/ David C. Sullivan Director
-------------------------------------
David C. Sullivan
/s/ Edwin B. Borden Director
-------------------------------------
Edwin B. Borden
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
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.
II-7
<PAGE> 64
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 (included on signature page)
II-8
<PAGE> 1
AMENDMENT NO. 3 TO THE SECOND AMENDED
AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
WINN LIMITED PARTNERSHIP
This Amendment No. 3 (the "Amendment") to the Second Amended and
Restated Agreement of Limited Partnership of WINN Limited Partnership dated July
11, 1997 (the "Partnership Agreement") is entered into as of September 8, 1998,
by and among Winston Hotels, Inc. (the "General Partner") and the Limited
Partners of WINN Limited Partnership (the "Partnership"). All capitalized terms
used herein and not otherwise defined shall have the meanings assigned to them
in the Partnership Agreement.
WHEREAS, the Partnership Units held by John B. Harris, Jr. Were
redeemed on March 30, 1998 in exchange for REIT Shares in accordance with the
terms of the Partnership Agreement;
WHEREAS, additional Partnership Units were issued to the General
Partner upon the contribution by the General Partner of the proceeds of the
issuance of REIT Shares to employees and directors of the General partner;
WHEREAS, it is desirable to amend Exhibit A to the Partnership
Agreement to reflect such redemption and such issuance;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree to amend
the Partnership Agreement as follows:
Exhibit A to the Partnership Agreement is hereby amended by
substituting for the current version of such exhibit, a version in the form
attached to this Amendment reflecting the redemption of the Partnership Units
held by John B. Harris, Jr. and the issuance of additional Partnership Units to
the General Partner upon the General partner's contribution of the proceeds of
the issuance of additional REIT Shares to employees and directors of the General
Partner.
IN WITNESS WHEREOF, the foregoing Amendment No. 3 to the Second
Amendment and Restated Agreement of Limited Partnership Agreement of WINN
Limited Partnership has been signed and delivered as of this 14th day of
September, 1998, by the undersigned as General Partner of the Partnership.
WINSTON HOTELS, INC.,
as General Partner
By: /s/ Brent V. West
-----------------------------
Brent V. West
Title: Vice President, Controller
<PAGE> 2
EXHIBIT A
September 14, 1998
(reflecting redemption of Partnership Units held by John B. Harris, Jr. and the
issuance of additional units to the General Partner in connection with the
General Partner's issuance of stock to employees and directors)
<TABLE>
<CAPTION>
PARTNER AND PARTNERSHIP PERCENTAGE
ADDRESS UNITS INTEREST
----------- ----------- ----------
<S> <C> <C>
GENERAL PARTNER:
Winston Hotels, Inc. 16,313,980 90.37%
2209 Century Drive
Raleigh, NC 27612
LIMITED PARTNERS:
Hotel I, Inc. 297,500 1.65%
2209 Century Drive
Raleigh, NC 27612
Charles M. Winston 105,643 .58%
Winston Hotels, Inc.
2209 Century Drive
Raleigh, NC 27612
Cary Suites, Inc. 606,413 3.36%
2209 Century Drive
Raleigh, NC 27612
RWW, Inc. 69,960 .39%
2209 Century Drive
Raleigh, NC 27612
WJS Associates- 109,516 .61%
Perimeter II, Inc.
2209 Century Drive
Raleigh, NC 27612
Hotel II, Inc. 45,651 .25%
2209 Century Drive
Raleigh, NC 27612
Quantum Realty 440,100 2.44%
Partners II, L.P.
100 Crescent Court
Suite 1000
Dallas, Texas 75241
Hubbard Realty of 63,797 .35%
Winston-Salem, Inc.
85 South Stratford Rd.
Winston-Salem, NC 27103
---------- -------
18,052,560 100.00%
</TABLE>
<PAGE> 1
Exhibit 4.9
REGISTRATION RIGHTS AND LOCK-UP AGREEMENT
Dated as of September 9, 1997
By and Between
HUBBARD REALTY OF WINSTON-SALEM, INC.,
a North Carolina Corporation
and
WINSTON HOTELS, INC., a North Carolina Corporation
<PAGE> 2
REGISTRATION RIGHTS AND LOCK-UP AGREEMENT
THIS REGISTRATION RIGHTS AND LOCK-UP AGREEMENT (this "Agreement") is
made and entered into as of September 9, 1997, by and among WINSTON HOTELS,
INC., a North Carolina corporation (the "Company"), and HUBBARD REALTY OF
WINSTON-SALEM, INC., a North Carolina corporation (herein referred to as the
"Owner").
WHEREAS, on the date hereof, the Owner will become the owner of Units
(as defined below) in WINN Limited Partnership, a North Carolina limited
partnership (the "Operating Partnership") in connection with the transactions
described in that certain Contribution and Exchange Agreement by and among the
Operating Partnership, the Company and the Owner dated as of February 5, 1997
(the "Exchange Agreement");
WHEREAS, in order to induce the Company to enter into the Exchange
Agreement, the Owner has agreed to the Lock-up (as defined below) set forth in
Section 2 hereof; and
WHEREAS, in order to induce the Owner to agree to the Lock-up end the
Exchange Agreement, the Company has agreed to provide the Owner and each of its
permissible successors, assigns and transferees as provided in Section 2(b)
hereof (herein referred to individually as a "Holder" and collectively as the
"Holders") with the registration rights set forth in Section 3 hereof.
NOW, THEREFORE, the parties hereto, in consideration of the foregoing,
the mutual covenants and agreements hereinafter set forth and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"Affiliate" shall mean a Person that directly or indirectly, through
one or more intermediaries, controls, or is controlled by, or is under common
control with the Company.
"Common Stock" shall mean the Common Stock, par value $.01 per share,
of the Company.
"Company" shall have the meaning set forth in the preamble and also
shall include the Company's successors.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Exchange Agreement" shall have the meaning set forth in the preamble.
<PAGE> 3
"Holder and "Holders" shall have the meanings set forth in the
preamble.
"Lock-up" shall have the meaning set forth in Section 2(a) hereof
"Lock-up Period" shall have the meaning set forth in Section 2(a)
hereof.
"Operating Partnership" shall have the meaning set forth in the
preamble and also shall including the Operating Partnership's successors.
"Partnership Agreement" shall mean the Agreement of Limited Partnership
of the Operating Partnership, as amended.
"Person" shall mean an individual, partnership, corporation, trust,
unincorporated. organization or other legal entity or a government agency or
agency or political subdivision thereof.
"Private Placement" shall mean the issuance and sale of the Units to
the Owner pursuant to the transactions described in the Exchange Agreement.
"Prospectus" shall mean the prospectus included in the Shelf
Registration Statement, including any preliminary prospectus, and all amendments
and supplements thereto, including any supplement relating to the terms as of
the offering of any portion of the registrable Securities covered by the Shelf
Registration Statement, and in each case including all materials incorporated by
reference therein.
"Redemption Right" shall mean the right of a Partner under the
Partnership Agreement to cause his or her Units to be redeemed for cash or
Shares as more specifically described therein.
"Registrable Securities" shall mean the Shares, excluding (i) Shares
held by Owners who are not Affiliates which were issued in a public offering
pursuant to an effective registration statement and (ii) shares that have been
previously disposed of by a Holder, and (iii) Shares that counsel to the Company
has opined in writing to the Holders may be freely distributed to the public
free of the registration and prospectus delivery requirements of the Securities
Act and applicable State securities laws in transactions that upon consummation
will result in the delivery of Shares that are freely tradeable, by
nonaffiliates.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance with this Agreement, or any registration or
qualification of any of the Shares, including, without limitation: (i) all SEC,
stock exchange or National Association of Securities Dealers, Inc. ("NASD")
registration and filing fees, (ii) all fees and expenses incurred in connection
with compliance with state securities or blue sky laws (including reasonable
fees and disbursements of counsel in connection with qualification of any of the
Registrable Securities under any state securities or blue sky laws and the
preparation of a blue sky memorandum) and compliance with the rules of the NASD,
(iii) all expenses of any Persons in preparing, assisting in preparing, word
processing, printing and distributing the Shelf Registration Statement, any
-2-
<PAGE> 4
other registration statement, and any Prospectus, certificates and other
documents relating to the performance of and compliance with this Agreement,
(iv) all fees and expenses incurred in connection with the listing, if any, of
any of the Registrable Securities on any securities exchange or exchanges
pursuant to Section 4(a) hereof, and (v) the fees and disbursements of the
Company's counsel and of the independent public accountants of the Company,
including the expenses of any special audits or "cold comfort" letters required
by or incident to such performance and compliance. Registration Expenses shall
specifically exclude underwriting discounts and commissions, the fees and
disbursements of counsel and other agents representing Holders and transfer
taxes, if any, relating to the sale or disposition of Registrable Securities by
a selling Holder, all of which shall be borne by such Holder in all cases.
"Registration Notice" shall have the meaning set forth in Section 3(a)
hereof.
"Registration Statement" or the "Shelf Registration Statement" shall
mean a registration statement of the Company (and any other entity required to
be a registrant with respect to such registration statement pursuant to the
requirements of the Securities Act) that covers all or any portion of the
Registrable Securities to be offered on a delayed or continuous basis pursuant
to Rule 415 tinder the Securities Act, or any similar rule that may be adopted
by the SEC, and all amendments (including post-effective amendments) to such
registration statement, all exhibits thereto and all materials incorporated by
referenced therein.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended from
time to time.
"Shares" shall mean any Common Stock issued or issuable to a Holder
upon redemption of such Holder's Units.
"Shelf Registration" shall mean a registration required to be effected
pursuant to Section 3 hereof.
"Suspension Event" shall have the meaning set forth in Section 5(a)
hereof
"Units" shall mean the units of limited partnership interest of the
Operating Partnership issued to the Owner in the Private Placement on the date
hereof, which interest may be transferred by Owner and any other Holder pursuant
to the terms of this Agreement, and which interests are redeemable for cash, or
at the option of the Company, in its capacity as the general partner of the
Operating Partnership, Common Stock.
2. LOCK-UP AGREEMENT.
(a) Lock-up Period. The Owner hereby agrees that, except as set forth
in this Section below, for the one-year period commencing on the date hereof
(the "Lock-up Period"), without the prior written consent of the Company, it
will not, directly or indirectly, sell, offer or contract to sell, grant any
option for the sale of, seek redemption of or otherwise dispose of or transfer,
-3-
<PAGE> 5
(collectively, "Dispose of"), any Units (the "Lock-up"). Thereafter, the Units
maybe submitted for redemption or otherwise Disposed of in accordance with the
provisions of the Partnership Agreement; provided, however, (a) that in the
event the Company, in its capacity as the general partner of the Operating
Partnership, elects to deliver shares in payment of the redemption price for
such Units, such Shares and any remaining unredeemed Units may be Disposed of
only in accordance with the terms of this Agreement, and (b) notwithstanding any
references to a shorter period in the Partnership Agreement, including but not
limited to Section 8.05, no Units held by the Owner on the date hereof may be
redeemed before the expiration of the Lock-up Period.
(b) Exceptions. The following transfers of Units or Shares shall not be
subject to the Lock-up set forth in Section 2(a):
(i) the Owner may dispose of Units or Shares to any of its current
shareholders provided they are accredited investors, as defined below, and
otherwise in accordance with the Exchange Agreement;
(ii) a Holder who is a natural person may Dispose of Units or
Shares to his or her spouse, siblings, parents or any natural or adopted
children or to any personal trust in which such family members or such Owner
retain the entire beneficial interest,
(iii) a Holder that is a corporation, partnership or other business
entity may Dispose of Units or Shares of one or more other entities that are
wholly owned and controlled, legally and beneficially, by such Owner or by a
Person or Persons that directly or indirectly wholly owns and controls such
Owner;
(iv) A Holder may Dispose of Units or Shares on his or her death to
such Owner's estate, executor, administrator or personal representative or to
such Holder's beneficiaries pursuant to a devise or bequest or by the laws of
descent and distribution; and
(v) a Holder may dispose of Units or Shares as a bona fide gift;
provided, however, that in the case of any transfer of Units or Shares pursuant
to clauses (i), (ii), (v) and (vi), the transferee or transferor shall each be
an "accredited investor" within the meaning of Rule 501(a) of Regulation D under
the Securities Act. In the event any Holder Disposes of Units or Shares
described in this Section 2(b), such Units or Shares shall remain subject to
this Agreement and, as a condition of the validity of such disposition, the
transferee (and any transferee who acquires Units or Shares from a pledgee upon
foreclosure) shall be required to execute and deliver a counterpart of this
Agreement. Thereafter, such transferee shall be deemed to be a Holder for
purposes of this Agreement.
3. SHELF REGISTRATION UNDER THE SECURITIES ACT.
(a) Filing the Shelf Registration Statement. If the Company satisfies
the Redemption Right of a Holder under the Agreement of Limited Partnership (the
"Partnership Agreement) of the Operating Partnership through the issuance of
Shares, the Company shall have used its best
-4-
<PAGE> 6
efforts to cause such Shares to be freely tradeable by any Holder upon their
receipt. Unless the SEC staff lifts its current restriction on how soon the
Company may register the Shares for issuance, the Company shall have satisfied
its obligations under this paragraph 3(a) if it (i) files a registration
statement covering the issuance of the Shares within 54 weeks of the issuance of
the Units and (ii) uses its "best efforts" to cause such registration statement
to be declared effective promptly. If (at the advice of counsel to the Company)
securities law considerations dictate that it is in the best interest of the
Company to satisfy a Holder's Redemption Right through the issuance of
Registrable Securities, the Company will have satisfied its obligations under
this paragraph 3(a) if it promptly files after the issuance of the Registrable
Securities and the receipt by the Company of notice (the "Registration Notice")
that a Holder desires to sell its Registrable Securities (and in no event later
than 30 days thereafter) a Shelf Registration Statement providing for the sale
of the Registrable Securities by such Holder in accordance with the terms hereof
and uses its best efforts to cause such Shelf Registration Statement to be
declared effective by the SEC promptly, the Company agrees to use its best
efforts to keep the Shelf Registration Statement continuously effective for at
least the shorter of 60 days or the sale of all of the outstanding Registrable
Securities covered by the applicable Registration Notice. After the expiration
of such period, the Company will use its best efforts to cause the Registration
Statement to become effective again with 10 business days of receipt by the
Company of a subsequent Registration Notice as contemplated by the last
paragraph of Section 4 hereof.
(b) Expenses. The Company shall pay all Registration Expenses in
connection with the registration pursuant to Section 3(a). Each Holder shall pay
all underwriting discounts and commissions, the fees and disbursements of
counsel representing such Holder and transfer taxes, if any, relating to the
sale or disposition of such Holder's Registrable Securities pursuant to the
Shelf Registration Statement or Rule 144 under the Securities Act.
(c) Inclusion in Shelf Registration Statement. Each Holder agrees to
provide as promptly as practicable the information reasonably requested by the
Company in connection with the Registration Statement. Any Holder who does not
provide (i) a Registration Notice and (ii) the information reasonably requested
by the Company in connection with the then applicable Shelf Registration
Statement shall not be entitled to have its Registrable Securities included in
the Shelf Registration Statement, but may thereafter give a Registration Notice,
in which event the Company shall comply with the provisions of this Section 3.
(d) Unavailability of Rule 415. Notwithstanding anything herein to the
contrary, in the event the Company is ineligible under Rule 415 of the
Securities Act to register the Registrable Securities upon expiration of the
Lock-up Period pursuant to a continuous Shelf Registration Statement, the
Company shall use its best efforts to effectively register for public resale
each Holder's Registrable Securities at such time as such Holder elects to sell
any Registrable Securities.
4. REGISTRATION PROCEDURES.
In connection with the obligations of the Company with respect to the
Shelf Registration Statement contemplated by Section 3 hereof, the Company
shall:
-5-
<PAGE> 7
(a) prepare and file with the SEC, within the time period set
forth in Section 3 hereof, the Shelf Registration Statement, which Shelf
Registration Statement (i) shall permit selling Holders to sell the Registrable
Securities in accordance with the intended method or methods of distribution by
the selling Holders thereof, and (ii) shall comply as to form and substance with
the requirements of the applicable form and include all financing statements
required by the SEC to be filed therewith;
(b) (i) prepare and file with the SEC such amendments to such
Registration Statement as may be necessary to keep such Registration Statement
effective until the Holders have sold all of the Registrable Securities; (ii)
cause the Prospectus to be amended or supplemented as required and to be filed
as required by Rule 424 or any similar Rule that may be adopted under the
Securities Act; (iii) respond as promptly as practicable to any comments
received from the SEC with respect to the Shelf Registration Statement or any
amendment thereto; and (iv) comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such Registration
Statement during the applicable period in accordance with the intended method or
methods of distribution by the selling Holders thereof, provided, however, that
the Company shall have 10 business days to prepare and file any such amendment
or supplement after receipt of a Registration Notice. Once a Holder has
delivered a Registration Notice to the Company, such Holder shall promptly
provide to the Company such information as the Company reasonably requests in
order to identify such Holder and the method of distribution in a post-effective
amendment to the Registration Statement or a supplement to the Prospectus. Such
Holder also shall notify the Company in writing up completion of such offer or
sale or at such time as such Holder no longer intends to make offer; or sales
under the Registration Statement;
(c) furnish to each Holder of Registrable Securities or its
designee that has delivered a Registration Notice to the Company, without
charge, as man copies of the Prospectus and my amendment or supplement thereto
and such other documents as such Holder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Securities;
(d) use its best efforts to, as applicable, either (i)
register or qualify the Registrable Securities by the time the Shelf
Registration Statement is declared effective by the SEC,
or (ii) make the notices required under all applicable state securities or blue
sky laws of such jurisdictions in the United States and its territories and
possessions as any Holder of Registrable Securities covered by the Shelf
Registration Statement shall reasonably request in writing, keep any such
registration or qualification effective during the period such Registration
Statement is required to be kept effective or during the period offers or sales
are being made by a Holder that has delivered a Registration Notice to the
Company, whichever is shorter, and do any and all other acts that may reasonably
be necessary to enable such Holder to dispose of such Registrable Securities
owned by such Holder in each such jurisdiction; provided, however, that in
connection therewith, the Company shall not be required to (i) qualify as a
foreign corporation to do business
-6-
<PAGE> 8
or to register as a broker or dealer in any such jurisdiction where it otherwise
would not be required to qualify or register but for this Section 4(d), (ii)
subject itself to taxation in any such jurisdiction, or (iii) file a general
consent to service of process in any such jurisdiction, wherein it is not
otherwise required to do so;
(e) notify each Holder of Registrable Securities that has
delivered a Registration Notice to the Company promptly and, if requested by
such Holder, confirm in writing (i) when the Registration Statement and any
post-effective amendment thereto have become effective, (ii) when any amendment
or supplement as to the Prospectus has been filed with the SEC, (iii) of the
issuance by the SEC or any state securities authority of any stop order
suspending the effectiveness of the Registration Statement or any part thereof
or the initiation of any proceedings for that purpose, (iv) if the Company
receives any notification with respect to the suspension of the qualification of
the Registrable Securities for offer or sale in any jurisdiction or the
initiation of any proceeding for such purpose, and (v) of the happening of any
event during the period the Registration Statement is effective as a result of
which (A) such Registration Statement contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or (B) the
Prospectus, as then amended or supplemented, contains any untrue statement of a
material fact or omits to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(f) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of the Shelf Registration Statement, or any part
thereof, as promptly as possible;
(g) furnish to each Holder of Registrable Securities that has
delivered a Registration Notice to the Company, without charge, at least one
conformed copy of the Shelf Registration Statement and any post effective
amendment thereto (without documents incorporated therein by reference or
exhibits, thereof, unless requested);
(h) cooperate with the selling Holders of Registrable
Securities to facilitate the timely preparation and delivery of certifications
representing Registrable Securities to be sold and not bearing any Securities
Act legend; and enable certificates for such Registrable Securities to be issued
for such numbers of shares and registered in such names as the selling Holders
may reasonable request at least two business days prior to any sale of
Registrable Securities;
(i) at any time when a Prospectus relating to the Registration
Statement is required to be delivered under the Securities Act, the Company
shall immediately notify each Holder of the happening of any event as a result
of which the Prospectus included in the Registration Statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. In such event, the Company shall as promptly as possible prepare and
furnish to each Holder a reasonable number of copies of a supplement to or an
amendment of such Prospectus as may be necessary so that, as thereafter
delivered to the purchasers of the Registrable Securities, such Prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated
-7-
<PAGE> 9
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company will, if
necessary, amend the Registration Statement of which such Prospectus is a part
as promptly as possible to reflect such amendment or supplement;
(j) upon at least five (5) business days advance written
notice and during normal business hours, make available, for inspection by the
Holders of the Registrable Securities that have provided a Registration Notice
to the Company and any counsel, accountants or other representatives retained by
such Holders all financial and other records, pertinent corporate documents and
properties of the Company, and case the officers, directors and employees of the
Company to supply all such records, documents or information reasonable
requested by such Holders, counsel, accountants or representatives in connection
with the Shelf Registration Statement, provided, however, that such records,
documents or information which the Company determines in good faith to be
confidential and notifies such Holders, counsel, accountants or representatives
in writing that such records, documents or information are confidential shall
not be disclosed by such Holders, counsel, accountants or representatives unless
(i) such disclosure is necessary to avoid or correct a material misstatement or
omission, in a Registration Statement, (ii) such disclosure is ordered pursuant
to a subpoena or other order from a court of competent jurisdiction, or (iii)
such records, documents or information become generally available to the public
other than through a breach of this Agreement;
(k) use its best efforts to cause all Registrable Securities
to be listed on any securities exchange on which similar securities issued by
the Company are then listed or, if no such securities are then listed, on an
exchange selected by the Company, if such listing is then permitted under the
rules of such exchange; or if such listing is not practicable, to secure
designation of such security as a NASDAQ "National Market System Security"
within the meaning of Rule 11A under the Exchange Act; or, failing that, to
secure NASDAQ authorization for such securities; and, without limiting the
foregoing, to arrange for at least two market makers to register as such with
respect to such securities NASD; and to provide a transfer agent and registrar
for such Registrable Securities not later than the effective date of such
registration statement,
(1) provide a CUSIP number for all Registrable Securities not
later than the effective date of a Registration Statement; and
(m) Make available to its security holders, as soon as
reasonably practicable, an earnings statement covering at least 12 months, which
statement shall satisfy the provisions of Section 11(a) of the Securities Act
and Rule 158 thereunder.
The Company may from time to time require each Holder of Registrable
Securities to furnish to the Company in writing such information regarding the
number of shares owned and the proposed method or methods of distribution by
such Holder of the Registrable Securities to be included in a Registration, as
the Company may from time to time reasonably request in writing.
-8-
<PAGE> 10
In connection with and as a condition to the Company's obligations with
respect to the Shelf Registration Statement pursuant to Section 3 hereof and
this Section 4, each Holder covenants and agrees that (i) it will not offer or
sell any Registrable Securities pursuant to the Shelf Registration Statement
until it has provided a Registration Notice pursuant to Section 3(a) and has
received copies of the Prospectus as then amended or supplemented as
contemplated by Section 4(c) and notice from the Company that the Registration
Statement and any post-effective amendments thereto have become effective as
contemplated by Section 4(e) and 4(i), (ii) upon receipt of any notice from the
Company contemplated by Section 5(a) or Section 4(e) (in respect of the
occurrence of an event contemplated by clause (v) of Section 4(e)), such Holder
shall not offer or sell any Registrable Securities pursuant to the Shelf
Registration Statement until such Holder receives copies of the supplemented or
amended Prospectus contemplated by Section 4(i) hereof and receives notice that
any post-effective amendment has become effective, and, if so directed by the
Company, such Holder will deliver to the Company (at the expense of the Company)
all copies in its possession, other than permanent file copies then in such
Holder's possession, of the Prospectus as amended or supplemented at the time of
receipt of the notice contemplated by Section 5(a) or clause (v) of Section
4(e); (iii) all offers and sales by such Holder under the Registration Statement
shall be completed within 60 days after the first date on which offers or sales
can be made pursuant to clause (i) above, and upon expiration of such 60-day
period, the Holder will not offer or sell any Registrable Securities under the
Registration Statement until it has again complied with the provisions of clause
(i) above; (iv) such Holder and any of its officers, directors or affiliates, if
any, will comply with the provisions of Rule 10b-6 and 10b-7 under the Exchange
Act as applicable to them in connection with sales of Registrable Securities
pursuant to the Shelf Registration Statement; and (v) such Holder and any of its
officers, director, or affiliates, if any, will enter into such written
agreements as the Company shall reasonably request to ensure compliance with
clause (iv) above.
5. SUSPENSION OF REGISTRATION RIGHTS: BLACK-OUT PERIOD.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, the Company's obligation under this Agreement to use its best efforts
to cause the Registration Statement and any filings with any state securities
commission to become effective or to amend or supplement the Registration
Statement shall be suspended in the event and during such period that unforeseen
circumstances (including without limitation (i) an underwritten primary offering
by the Company if the Company is advised by the underwriters that sale of
Registrable Securities under the Registration Statement would have a material
adverse effect, on the primary offering or (ii) pending negotiations relating
to, or consummation of, a transaction or the occurrence of an event that would,
require additional disclosure of material information by the Company in the
Registration Statement or such filing, as to which the Company has a bona fide
business purpose for preserving confidentiality or which renders the Company
unable, to comply with SEC requirements) (such unforeseen circumstances being
hereinafter referred to as a "Suspension Event") would make it impractical or
unadvisable to cause the Registration Statement or such filings to become
effective or to amend or supplement the Registration Statement. but such
suspension shall continue only for so long as such event or its effect is
continuing but in no event will that suspension exceed 90 days. The Company
shall notify the Holder of the existence and,
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<PAGE> 11
in the case of circumstances referred to in clause (i) of this Section 5(a),
nature of any Suspension Event. The Company may deliver only two such notices
within any 2-month period.
(b) Following the effectiveness of the Registration Statement
and the filings with any state securities commission the Holders agree that they
will not effect any sales of the Registrable Securities pursuant to the
Registration Statement or any such filings at any time after they have received
notice from the Company to suspend sales as a result of the occurrence or
existence of any Suspension Event. The Holder may recommence effecting sales of
the Shares pursuant to the Registration Statement or such filings after the
earlier of 30 days or receipt of further notice to such effect from the Company,
which notice shall be given by the Company not later than five days after the
conclusion of any such Suspension Event. The Company may deliver only one such
notice within any 6-month period. The Company will use its best efforts to
conclude a Suspension Event and to correct or update the Registration Statement,
any such filings, and the Prospectus as promptly as possible.
6. INDEMNIFICATION: CONTRIBUTION.
(a) Indemnification by the Company. The Company agrees to
defend, indemnify and hold harmless each Holder and its officers and directors,
any underwriter (as defined in the Securities Act) for each selling Holder of
Registrable Securities, and each Person, if any, who controls any such Holder or
underwriter within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, to which such Holder, officer, director or controlling
Person may become subject under the Securities Act or otherwise (A) that arises
out of or is based upon any untrue statement or alleged untrue statement of a
material fact contained in the Shelf Registration Statement [(including all
documents incorporated therein by reference)] or any amendment thereto, or the
omission or alleged omission therein of a material fact required to be stated
therein or necessary to make the statements therein not misleading; (B) that
arises out of or is based upon any untrue statement or alleged untrue statement
of a material fact contained in any Prospectus (including all documents
incorporated therein by reference) or any amendment or supplement thereto, or
the omission or alleged omission therein of a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; or (C) that arises out of or is based upon any
violation or alleged violation by the Company of the Securities Act, the
Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"), or
any State's securities law, or any rule or regulation promulgated under the
Securities Act, the Securities Exchange Act, or any State securities law.
(ii) subject to the limitations set forth in Section 6(c),
against any and all expense whatsoever, as incurred (including reasonable fees
and disbursements of counsel), reasonably incurred in investigating, preparing
or defending against any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, in each case whether or
not a party, or any claim whatsoever based upon any such untrue statement
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<PAGE> 12
or alleged untrue statement or omission or alleged omission, to the extent that
any such expense is not paid under Subparagraph (i) above;
provided, however, that the indemnity provided pursuant to this Section 6(a)
shall not apply to any Holder with respect to any loss, liability, claim, damage
or expense that arises out of or is based upon any untrue statement or omission
made in reliance upon and in conformity with written information furnished to
the Company by such Holder expressly for use in the Shelf Registration Statement
or any amendment thereto or the Prospectus or any amendment or supplement
thereto.
(b) Indemnification by Holders. Each Holder agrees to
indemnify and hold harmless the Company, the other selling Holders, each of
their respective directors and officers (including each director and officer of
the Company who signed the Registration Statement), any underwriter (as defined
in the Securities Act) for each of the Company or such other Holders and each
Person, if any, who controls the Company, any other selling Holder or
underwriter within the meaning of Section 15 of the Securities Act, to the same
extent as the indemnity contained in Section 6(a) hereof, but only insofar as
such loss, liability, claim, damage or expanse arises out of or is based upon
any untrue statement or omission made in the Shelf Registration Statement or any
amendment thereto or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company by such selling Holder expressly for use therein.
(c) Conduct of Indemnification Proceedings. Each indemnified
party shall give reasonably prompt notice to each indemnifying party of any
action or proceeding commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party (i) shall not
relieve it from any liability that it may have under the indemnity agreement
provided in Section 6(a) or (b);above, unless and to the extent it did not
otherwise learn of such action and the lack of notice by the indemnified party
materially prejudices the indemnifying party or results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) shall not, in any
event, relieving the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided under Section 6(a) or
(b) above. After receipt of such notice, the indemnifying party shall be
entitled to participate in and, to the extent it wishes, jointly with any other
indemnifying party so notified, assume the defense of such action or proceeding
at such indemnifying party's own expense with counsel chosen by such
indemnifying party and approved by the indemnified party, which approval shall
not be unreasonably withheld; provided however, that if he defendants in any
such action or proceeding include both the indemnified party and the
indemnifying party and the indemnifying party and indemnified party reasonably
determine, upon advice of counsel, that a conflict of interest exists or that
there may be legal defenses available to it or other indemnified parties that
are different from or in addition to those available to the indemnifying party,
then the indemnifying party shall not be entitled to assume the defense of such
action or proceeding and the indemnified party shall be entitled to one separate
counsel, the reasonable fees and expenses of which shall be paid by the
indemnifying party. If the indemnifying party does not assume the defense of any
such action or proceeding, after having received the notice referred to in the
first sentence of this Paragraph, the indemnifying party will pay the reasonable
fees and expenses of
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<PAGE> 13
counsel (which shall be limited to a single law firm) for the indemnified party.
If the indemnifying party assumes the defense of any such action or proceeding
in accordance with this Paragraph, such indemnifying party shall not be liable
for any fees and expenses of counsel for the indemnified party incurred
thereafter in connection with such action or proceeding, except as set forth in
the proviso in the second sentence of this Section 6(c).
(d) Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
this Section 6 is for any reason held to be unenforceable, the Company and the
selling Holders shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by such indemnity agreement
incurred by the Company and the selling Holders, in such proportion as is
appropriate to reflect the relative fault of the Company on the one hand and the
selling Holders on the other (in such proportions that the selling Holders are
severally, not jointly, responsible for the balance), in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses. The relative fault of the indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether the action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
the indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action and any other
equitable considerations appropriate under the circumstances. The parties hereto
agree that it would not be just or equitable if contribution pursuant to this
Section 6(d) were determined by pro rata allocation or by any other method of
allocation that does not take account of the equitable considerations referred
to in this paragraph. Notwithstanding the provisions of this Section 6(d), no
selling Holder shall be required to contribute any amount in excess of the
proceeds (less selling commissions) received by such selling Holder upon the
sale of Registrable Securities less the amount of any damages which such selling
Holder has otherwise been required to pay.
Notwithstanding the foregoing, no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 6(d), each Person, if
any, who controls a Holder within the meaning of Section 15 of the Securities
Act and directors and officers of a Holder shall have the same rights to
contribution as such Holder, and each director of the Company, each officer of
the Company who signed the Registration Statement and each Person, if any, who
controls he Company within the meaning of Section 15 of the Securities Act shall
have the same rights to contribution as the Company.
7. RULE 144 SALES. In connection with any sale, transfer or other
disposition by any Holder of any Registrable Securities pursuant to Rule 144
under the Securities Act, the Company shall reasonably cooperate with such
Holder to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold and not bearing any Securities
Act legend, and enable certificates for such Registrable Securities to be for
such number of shares and registered in such names as the selling Holders may
reasonably request at least two business days prior to any sale of Registrable
Securities.
-12-
<PAGE> 14
8. MISCELLANEOUS.
(a) Notwithstanding anything herein, in the Exchange Agreement
or any other document or instrument executed pursuant to the Exchange Agreement
under which the Holder(s) of the Units held by Owner on the date hereof evidence
its or their intent to be bound by the provisions of this Agreement or the
Partnership Agreement, Section 8.06 of the Partnership Agreement shall have no
applicability to such Holders or the Shares issued or issuable upon a redemption
of the Units held by them.
(b) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified,
supplemented or waived, nor may consent to departures therefrom be given,
without the written consent of the Company and the Holders of a majority of the
outstanding Registrable Securities hereunder (the Holders of Units being treated
as the Holders of Registrable Securities issuable upon redemption of such
Units); provided, however, that no amendment, modification, supplement or waiver
of, or consent to the departure from, the provisions of this Agreement hereof
shall be effective as against any Holder of Registrable Securities unless
consented to in writing by such Holder of Registrable Securities. Notice of any
such amendment, modification, supplement, waiver or consent adopted in
accordance with this Section 8(a) shall be provided by the Company to each
Holder of Registrable Securities at least 30 days prior to the effective date of
such amendment, modification, supplement, waiver or consent.
(c) Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier or any courier guaranteeing overnight
delivery, (i) if to a Holder, at the most current address given by such Holder
to the Company by means of a notice given in accordance with the provisions of
this Section 8(b), which address initially is, 285 South Stratford Road,
Winston-Salem, North Carolina, 27103, Attention: Lewis Hubbard; or (ii) if to
the Company, at 2209 Century Drive, Suite 300, Raleigh, North Carolina, 27622,
Attention: Robert W. Winston, III.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; when answered
back if telexed; when receipt is acknowledged if telecopied; or at the time
delivered if delivered by an air courier guaranteeing overnight delivery.
(d) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successor, assigns and transferees of each of
the parties, including, without limitation and without the need for an express
assignment, subsequent Holders. If any successor, assignee or transferee of any
Holder shall acquire Registrable Securities, in any manner, whether by operation
of law or otherwise such Registrable Securities shall be held subject to all of
the terms of this Agreement, and by taking and holding such Registrable
Securities, such Person shall (a) be entitled to receive the benefits hereof and
shall conclusively be deemed to have agreed to be bound by all of the terms and
provisions hereof; and (b) upon the request of the Company execute a counterpart
signature page to this Agreement sufficient to evidence such Persons intent to
be bound hereby.
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<PAGE> 15
(e) Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina without
giving affect to the conflicts of law provisions thereof.
(h) Entire Agreement. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
HUBBARD REALTY OF WINSTON-SALEM,
INC., A NORTH CAROLINA CORPORATION
Attest: By: /s/ Lewis E. Hubbard
------------------------------
/s/ Emma B. Hubbard
----------------------------
Secretary
WINSTON HOTELS, INC., a North Carolina
Corporation
Attest: By: /s/ Kenneth Crockett
-------------------------------
Sr. Vice President
/s/ Brenda G. Burns
-----------------------------
Asst. Secretary
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<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 2, 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: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We are counsel for Winston Hotels, Inc. (the "Company"), in connection
with the preparation of a Registration Statement on Form S-3 (the "Registration
Statement") to be filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), relating to
the registration of 503,897 shares (the "Shares") of the Company's common stock,
par value $.01 per share ("Common Stock"), which the Company intends to issue to
holders of up to 503,897 common units of limited partnership interest in WINN
Limited Partnership (the "Units"), if and to the extent that such holders redeem
their Units. This opinion is furnished pursuant to the requirement of Item
601(b)(5) of Regulation S-K under the Act.
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, when issued upon the redemption of the
Units as described in the Registration Statement, will be validly issued, fully
paid and nonassessable.
<PAGE> 2
Winston Hotels, Inc.
September 2, 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 2, 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 (the "Registration Statement") with
respect to the possible issuance by the Company of up to 503,897 shares (the
"Redemption Shares") of the common stock, par value $0.01 per share, of the
Company (the "Common Stock") if, and to the extent that, the current holders of
503,897 common units of limited partnership interest ("Units") in WINN Limited
Partnership, a North Carolina limited partnership (the "Partnership"), tender
such Units for redemption and the Company elects to redeem the Units for shares
of Common Stock. You have requested our opinion regarding certain U.S. federal
income tax matters.
The Company, through 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 Hotels, pursuant to
<PAGE> 2
Winston Hotels, Inc.
September 2, 1999
Page 2
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 2, 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 2, 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 Redemption 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 2, 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
Redemption 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 Registration
Statement on Form S-3 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 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 such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
August 30, 1999
<PAGE> 1
EXHIBIT 23.4
ACCOUNTANTS' CONSENT
The Members
CapStar Winston Company, L.L.C.:
We consent to incorporation by reference in 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 2, 1999
