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EXHIBIT 99.1
WINSTON HOTELS, INC.
RISK FACTORS
In addition to the other information contained in, or incorporated by
reference into, this Form 10-K, 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.
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 $24 million
available under our $140 million line of credit. Through a subsidiary of the
partnership, we also have a $71 million fixed-rate loan outstanding. Our line of
credit currently limits the amount of debt we can take on. In addition, our
ability to raise equity capital will depend on market conditions. We cannot
assure you that we will be able to raise funds through a public or private
offering at a time when we need access to funds. We may seek alternative methods
of funding expansion, such as joint venture development, however, we cannot
assure you that such opportunities will be available when we need them or on
acceptable terms.
Our Ability to Make Distributions to Our Shareholders Depends Upon the Ability
of Our Lessees to Make Rent Payments Under Our Leases
Our income is dependent upon rental payments from lessees of our
hotels. Any failure or delay by the lessees in making rent payments would
adversely affect our ability to make distributions to our shareholders. Our
lessees' ability to make rental payments depends on their ability to generate
sufficient revenues from our hotels in excess of operating expenses. Our leases
require the lessees to pay us (1) the greater of a base rent or percentage rent
and (2) other additional charges. As a result, we participate in the economic
operations of our hotels through our share of room revenues which exceed
threshold amounts specific to each hotel. The lessees' ability to pay on time or
at all could be negatively affected by reductions in revenue from the hotels or
in the net operating income of the lessees or otherwise. Our lessees also will
be affected by factors beyond their control, such as changes in the level of
demand for rooms and related services of our hotels, their ability to maintain
and increase gross revenues at our hotels and other factors.
Our Returns Depend on Management of Our Hotels by Third Parties
In order to qualify as a REIT, we cannot operate any hotel or
participate in the decisions affecting the daily operations of any hotel. Either
our lessees, or an operator under a management agreement with a lessee, will
control the daily operations of our hotels. We do not have the authority to
require any hotel to be operated in a particular manner or to govern any
particular aspect of the daily operations of any hotel (e.g., setting room
rates). Thus, even if we believe our hotels are being operated inefficiently or
in a manner that does not result in anticipated rent payments under existing
leases, we cannot require a change to the method of operation. We can only seek
redress if the lessee violates terms of the lease, and then only to the extent
of the remedies provided for under the terms of the lease.
In addition, our growth strategy contemplates additional hotel
acquisitions that meet our investment criteria and selective development of
hotels as market conditions warrant. Our ability to grow depends, in part, upon
the ability of our lessees and any third-party managers retained by the lessees
to manage our current and future hotels effectively. If the lessees or their
third-party managers are not able to operate additional hotels, at current
staffing levels and office locations, they may need to hire additional
personnel, engage additional third-party managers and/or operate in new
geographic locations. If the lessees or their managers fail to operate the
hotels effectively, our ability to generate revenues from the hotel leases could
be diminished.
We Must be Able to Repay, Extend or Refinance Our Existing Debt
We and a special purpose finance subsidiary of the partnership, Winston
SPE LLC, each currently have significant amounts of debt outstanding. Thus, we
are subject to the risks normally associated with debt financing, including the
risks that:
o our cash flow from operations will be insufficient to make required
payments of principal and interest;
o existing debt, including secured debt, may not be refinanced; or
o the terms of any refinancing will not be as favorable as the terms of our
current debt.
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If we or the finance subsidiary do not have sufficient funds to repay
our debt at maturity, it may be necessary to refinance it through additional
debt financing, private or public offerings of debt securities or additional
equity offerings. If, at the time of any refinancing, prevailing interest rates
or other factors result in higher interest rates on refinancings, increases in
interest expense could adversely affect our cash flow, and, consequently, cash
available for distribution to shareholders. If we are unable to refinance our
debt on acceptable terms, we or the finance subsidiary may be forced to dispose
of hotels or other assets on disadvantageous terms, potentially resulting in
losses and adverse effects on cash flow from operating activities. If we are
unable to make required payments of principal and interest on debt secured by
our hotels, one or more of those properties could be foreclosed upon by the
lender with a consequent loss of income and asset value.
Likewise, requirements under our credit facilities could affect our
financial condition and our ability to make distributions. Our articles of
incorporation limit our ability to incur debt to 60% of the value of our
investment in hotel properties, at cost. This limit is currently approximately
$267 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 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:
o construction delays or cost overruns that may increase project costs;
o competition for suitable development sites;
o receipt of zoning, occupancy and other required governmental permits and
authorizations; and
o 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.
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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 Company, L.L.C. ("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.
We May Not be Able to Sell Hotels on Favorable Terms
Although no hotels are currently under contract to sell, we may decide
to sell hotels in the future. We cannot assure you that we will be able to sell
such hotels on favorable terms, or that such hotels will not be sold at a loss.
Furthermore, 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
(a) 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:
o competition for guests from other hotels;
o 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;
o increases in operating costs due to inflation and other factors which may
not be offset in the future by increased room rates;
o seasonality, with higher hotel revenues occurring in the second and third
calendar quarters;
o increases in energy costs, airline fares and other expenses related to
travel, which may deter travelling; and
o adverse effects of general and local economic conditions.
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(b) 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.
(c) 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.
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.
(d) 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:
o the possibility of environmental problems;
o construction cost overruns and delays;
o uncertainties as to market demand or deterioration in market demand after
commencement of renovation; and
o 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 Executive 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
(a) 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.
(b) 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.
(c) 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.
(d) 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
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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.
(e) 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.
The Ability of Our Shareholders to Effect a Change in Control is Limited
(a) 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.
(b) 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.
(c) 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 reduces the 95% distribution requirement to 90%
for taxable years beginning after December 31, 2000. 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.
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We have made, and intend to continue to make, distributions to our
shareholders to comply with the current 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,
less capital expenditures and principal debt payments. 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 current 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 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
Even though the date is now past January 1, 2000, and we have not
experienced any immediate adverse impact from the transition to the Year 2000,
we cannot provide assurance that our service providers, contractors, suppliers,
franchisors and lessees have not been affected in a manner that is not yet
apparent. In addition, certain computer programs which were date sensitive to
the year 2000 may not have been programmed to process the Year 2000 as a leap
year, and any negative consequential effects remain unknown. As a result, we
will continue to monitor our Year 2000 compliance and the Year 2000 compliance
of our service providers, contractors, suppliers, franchisors and lessees.
Historical costs incurred to address the Year 2000 problem are
approximately $579. The Company's current estimate of additional costs to be
incurred to resolve Year 2000 issues is approximately $86. The issues associated
with these additional costs are expected to be resolved by April 30, 2000 and
are not affecting the day to day operations of our hotels.