<PAGE>
Filed Pursuant to Rule No. 424(b)(3)
Registration No. 333-57737
PROSPECTUS
EXTENDED STAY AMERICA, INC.
----------------
OFFER TO EXCHANGE
ALL OF ITS OUTSTANDING
9.15% SENIOR SUBORDINATED NOTES DUE 2008
FOR
NEW 9.15% SENIOR SUBORDINATED NOTES DUE 2008
----------------
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON JULY 31, 1998 UNLESS EXTENDED
----------------
Extended Stay America, Inc., a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange (the "Exchange Offer") its outstanding 9.15% Senior
Subordinated Notes due 2008 (the "Old Notes"), of which an aggregate of
$200,000,000 in principal amount is outstanding as of the date hereof, for an
equal principal amount of newly issued 9.15% Senior Subordinated Notes due
2008 (the "New Notes"). The form and terms of the New Notes will be the same
in all material respects as the form and terms of the Old Notes except that
the New Notes will be registered under the Securities Act of 1933, as amended
(the "Securities Act"), and will not bear legends restricting the transfer
thereof. The New Notes will evidence the same indebtedness as the Old Notes
(which they replace) and will be entitled to the benefits of the Indenture,
dated as of March 10, 1998, between the Company and Manufacturers and Traders
Trust Company, as Trustee (the "Trustee"). The New Notes and the Old Notes are
sometimes referred to herein collectively as the "Notes".
The New Notes will bear interest at the same rate and on the same terms as
the Old Notes. Consequently, the New Notes will bear interest at the rate of
9.15% per annum and the interest thereon will be payable semi-annually on
March 15 and September 15 of each year, commencing September 15, 1998. The New
Notes will bear interest from the date of the last interest payment on the Old
Notes or if no interest has been paid, from the date of original issuance of
the Old Notes. Holders whose Old Notes are accepted for exchange will be
deemed to have waived the right to receive any interest accrued on the Old
Notes.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time after March 15, 2003, initially at 104.575% of their
principal amount, plus accrued interest, declining ratably to 100% of their
principal amount, plus accrued interest, on or after March 15, 2006. In
addition, at any time on or prior to March 15, 2001, up to 35% of the
aggregate principal amount of the Notes may be redeemed, at the option of the
Company, with the proceeds of one or more public equity offerings by the
Company of its Capital Stock (other than Disqualified Stock) at 109.15% of the
principal amount thereof, plus accrued interest.
The New Notes will be unsecured, senior subordinated indebtedness of the
Company, will be subordinated to all Senior Indebtedness (as defined herein)
of the Company, will be pari passu with all senior subordinated indebtedness
of the Company, will be senior to all subordinated indebtedness of the
Company, and will be effectively subordinated to all existing and future
liabilities of the Company's subsidiaries. At December 31, 1997, on a pro
forma basis after giving effect to the offering of the Old Notes (the
"Offering") and the use of the proceeds therefrom, the Company would have had
no Indebtedness other than the Old Notes. However, the Amended Credit Facility
(as defined herein) provides the Company with $700 million of committed Senior
Indebtedness. In addition, the Company's subsidiaries had liabilities of
approximately $101.2 million at December 31, 1997, all of which would be
effectively senior to the Notes.
(Continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT
IN THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JULY 1, 1998.
<PAGE>
The Company will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City
time, on July 31, 1998 (if and as extended, the "Expiration Date"). Tenders of
Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time,
on the Expiration Date. Old Notes may only be tendered in integral multiples
of $1,000. The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered for exchange, but is subject to
certain customary conditions. See "The Exchange Offer--Conditions."
The Old Notes were originally issued and sold in a transaction that was
exempt from registration under the Securities Act (the "Offering") and resold
to certain qualified institutional buyers and to persons other than U.S.
persons in reliance on, and subject to the restrictions imposed pursuant to,
Rule 144A under the Securities Act ("Rule 144A") and Regulation S under the
Securities Act, and other applicable exemptions from the registration
requirements of such Act. Based on a previous interpretation by the staff of
the Securities and Exchange Commission (the "Commission") set forth in no-
action letters to third parties, the Company believes that the New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold, and
otherwise transferred by a holder thereof (other than (i) a broker-dealer who
receives such New Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company (within the meaning of Rule 405
under the Securities Act)) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
or any other such person is acquiring the New Notes in its ordinary course of
business and is not participating, and has no arrangement or understanding
with any person to participate, in the distribution of the New Notes. Holders
of Old Notes wishing to accept the Exchange Offer must represent to the
Company that such conditions have been met. Holders of Old Notes who tender
their Old Notes in the Exchange Offer with the intention to participate in a
distribution of New Notes may not rely upon such no-action letters.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a Prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of 120 days after the Expiration
Date, it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
The Company believes that none of the registered holders of the Old Notes is
an affiliate (as such term is defined in Rule 405 under the Securities Act) of
the Company. The Company has not entered into any arrangement or understanding
with any person to distribute the New Notes to be received in the Exchange
Offer. See "Risk Factors--Absence of Public Market." The Company will not
receive any proceeds from the Exchange Offer. The Company has agreed to bear
the expenses of the Exchange Offer. No underwriter or dealer-manager is being
used in connection with the Exchange Offer.
The New Notes will be available initially only in book-entry form. The
Company expects that the New Notes issued pursuant to the Exchange Offer will
be issued in the form of one or more fully registered global notes that will
be deposited with, or on behalf of, The Depository Trust Company (the
"Depositary" or the "Book-Entry Transfer Facility") and registered in its name
or in the name of its nominee. Beneficial interests in the global Note
representing the New Notes will be shown on, and transfers thereof will be
effected only through, records maintained by the Depositary and its
participants. After the initial issuance of such global Note, New Notes in
certificated form will be issued in exchange for the global Note only in
accordance with the terms and conditions set forth in the Indenture. See
"Description of Notes--Book Entry; Delivery and Form."
2
<PAGE>
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding. To the extent that any Old Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. Following consummation of the Exchange Offer, the holders
of Old Notes will continue to be subject to the existing restrictions upon
transfer thereof and, except as provided herein, the Company will have no
further obligation to such holders to provide for the registration under the
Securities Act of the Old Notes held by them. See "Risk Factors--Consequences
of the Exchange Offer on Non-Tendering Holders of the Old Notes and Broker-
Dealers Receiving New Notes."
The New Notes are a new issue of securities for which there is currently no
trading market. If the New Notes are traded after their initial issuance, they
may trade at a discount from their principal amount, depending upon prevailing
interest rates, the market for similar securities, and other factors,
including general economic conditions and the financial condition and
performance of, and prospects for, the Company. Morgan Stanley & Co.
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc., and Salomon Brothers Inc (the "Placement Agents") have
advised the Company that they currently intend to make a market in the Old
Notes and the New Notes. However, they are not obligated to do so, and any
market making activity with respect to the Old Notes and the New Notes may be
discontinued at any time without notice. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Old Notes
or the New Notes. In connection with the issuance of the Old Notes, the
Company arranged for the Old Notes to be designated for trading in the Nasdaq
Stock Market's Portal MarketSM. The Company does not intend to apply for
listing of the New Notes on any securities exchange or for quotation through
the National Association of Securities Dealers Automated Quotation System.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER
OF TRANSMITTAL OR BOTH TOGETHER CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL OR BOTH
TOGETHER, NOR ANY SALE MADE HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES IMPLY
THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <C> <C>
Available Information....... 4 Description of the Notes................ 31
Information Incorporated by
Reference.................. 4 Description of Certain Indebtedness..... 57
Summary..................... 5 Certain Federal Income Tax Consequences. 59
Risk Factors................ 15 Plan of Distribution.................... 59
The Exchange Offer.......... 22 Legal Matters........................... 60
Use of Proceeds............. 30 Experts................................. 60
Capitalization.............. 30
</TABLE>
3
<PAGE>
The sources of industry information set forth herein were Smith Travel
Research and D.K. Shifflet & Associates, Ltd., neither of which provided any
form of consultation, advice, or counsel regarding any aspect of the Exchange
Offer or this Prospectus, or are in any way associated with the Exchange
Offer.
----------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements, and other information with the
Commission. Reports, registration statements, proxy statements, and other
information which the Company files with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices, 500 West Madison Street, Chicago, Illinois
60661, and 7 World Trade Center, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements, and other information regarding registrants,
such as the Company, that file electronically with the Commission. Such
materials also can be inspected at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.
The Company has filed a Registration Statement on Form S-4 with the
Commission under the Securities Act with respect to the New Notes offered
hereby (including all amendments and supplements thereto, the "Registration
Statement"). This Prospectus omits certain information contained in the
Registration Statement as permitted by the rules and regulations of the
Commission. Consequently, statements herein concerning the provisions of any
document are not necessarily complete and in each instance reference is made
to the copy of such document filed with the Commission as an exhibit to the
Registration Statement, or otherwise. Each such statement is qualified by, and
subject to, such reference in all respects. The Registration Statement and the
exhibits thereto can be inspected and copied at the Commission's public
reference facilities referred to above.
INFORMATION INCORPORATED BY REFERENCE
The following documents have been filed by the Company with the Commission
and are hereby incorporated by reference and made a part of this Prospectus:
. The Company's Annual Report on Form 10-K for the year ended December 31,
1997 (Commission File No. 0-27360).
. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.
. The Company's Current Reports on Form 8-K dated February 20, 1998 and
March 10, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14, or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of this offering (except to the extent specified therein or in
rules or regulations of the Commission) shall be deemed to be incorporated by
reference in this Prospectus and to be part hereof from the date of filing of
such documents. Any statement, including financial statements, contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is, or is deemed to be, incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, at the written or oral request of such
person, a copy of any or all of the documents referred to above which have
been or may be incorporated in this Prospectus by reference, other than
exhibits to such documents. Requests for such copies should be directed to
Extended Stay America, Inc., 450 E. Las Olas Boulevard, Suite 1100, Fort
Lauderdale, Florida, 33301, Attention: Secretary (telephone: 954-713-1600).
4
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus
or incorporated by reference herein. On April 11, 1997, Extended Stay America,
Inc. ("ESA") and ESA Merger Sub, Inc., a wholly-owned subsidiary of ESA
("Merger Sub"), completed a merger (the "Merger") with Studio Plus Hotels, Inc.
("SPH"). The Merger was accounted for as a pooling of interests and ESA's
business development and historical financial statements have been restated to
include the operations and accounts of SPH, which is now a wholly-owned
subsidiary of ESA. Unless the context suggests otherwise, references in this
Prospectus to the "Company" mean ESA and its subsidiaries (including SPH).
THE COMPANY
The Company develops, owns, and operates extended stay lodging facilities
which provide an affordable and attractive lodging alternative at a variety of
price points for value-conscious guests. The Company's facilities are designed
to offer a superior product at lower rates than most other lodging providers
within their respective price segments. They feature fully furnished rooms
which are generally rented on a weekly basis to guests such as business
travelers, professionals on temporary work assignment, persons between domestic
situations, and persons relocating or purchasing a home, with most guests
staying for multiple weeks.
The Company believes that extended stay properties generally have higher
operating margins, lower occupancy break-even thresholds, and higher returns on
capital than traditional hotels, primarily as a result of the typically longer
length of stay, lower guest turnover, and lower operating expenses. In
addition, the Company believes the extended stay market is one of the most
rapidly growing and underserved segments of the U.S. lodging industry, with
demand for extended stay lodging significantly exceeding the current and
anticipated near-term supply of dedicated extended stay rooms. For 1997,
industry statistics indicate that there were approximately 117 million room
nights for paid accommodations of six nights or longer related to non-
convention business travel, of which approximately 90 million room nights were
accommodated at traditional hotels. This indicates potential demand for
approximately 300,000 extended stay lodging rooms on an annual basis. For 1997,
there were 3.6 million rooms available in the lodging industry, of which
approximately 86,000 rooms were at extended stay hotel chains. Of the 86,000
total extended stay rooms, approximately 43,000 rooms operated in the upscale
segment of the extended stay market (with weekly room rates generally exceeding
$500) and approximately 19,000 rooms were operated by the Company (with weekly
room rates below $500). As a result, management believes that there exists
strong growth opportunities in the mid-price, economy, and budget segments of
the extended stay market.
The Company's goal is to be a national provider of extended stay lodging and
believes that the first companies to do so will benefit from establishing a
brand name and customer awareness. The Company intends to achieve its goal by
rapidly developing properties in selected markets, providing high value
accommodations for its guests, actively managing its properties to increase
revenues and reduce operating costs, and increasing customer awareness of the
Company's extended stay products. Through March 31, 1998, the Company had
developed 207 extended stay lodging facilities, acquired 11 others, and had 75
facilities under construction. The Company plans to begin construction of
approximately 96 additional facilities during 1998 and to continue an active
development program thereafter. Since 1995, the Company has raised
approximately $800 million of equity to finance its growth strategy and, as a
result of its rapid development plan, has become the largest extended stay
hotel chain in the mid-priced and economy sectors.
The Company owns and operates three brands in the extended stay lodging
category--StudioPLUS(TM) hotels ("StudioPLUS"), EXTENDED STAYAMERICA Efficiency
Studios ("EXTENDED STAY"), and Crossland Economy StudiosSM ("Crossland"), each
designed to appeal to different price points below $500 per week. All
5
<PAGE>
three brands offer the same core components: a living/sleeping area; a fully-
equipped kitchen or kitchenette; and a bathroom. EXTENDED STAY rooms are
designed to compete in the economy category. Crossland rooms are typically
smaller than EXTENDED STAY rooms and are targeted for the budget category, and
StudioPLUS facilities serve the mid-price category and generally feature larger
guest rooms, an exercise room, and a swimming pool.
The Company's strategy is to maximize value to customers by providing a
superior, newly-constructed product at each price point while maintaining high
operating margins. The Company attempts to achieve this goal at each of its
StudioPLUS, EXTENDED STAY, and Crossland facilities through the following:
Create Brand Awareness. The Company believes that guests value a
recognizable brand when selecting lodging accommodations. By positioning
its brands as the first nationwide extended stay providers in their
targeted price segments, the Company believes its brands will have a
distinct advantage over their local and regional competitors. The Company
believes that its evolving national presence and high customer satisfaction
ratings, coupled with selective advertising and promotion, will establish
StudioPLUS, EXTENDED STAY, and Crossland as desirable and well recognized
brands.
Provide a Superior Product at a Lower Price. The Company's facilities are
designed to offer a superior product at lower rates than most other lodging
providers within their respective price segments. Each of the Company's
brands is targeted to a different price point: StudioPLUS--$299 to $399 per
week (daily equivalent--$43 to $57); EXTENDED STAY--$199 to $299 per week
(daily equivalent--$29 to $43); and Crossland--$159 to $199 per week (daily
equivalent--$23 to $29). Room rates at the Company's facilities vary
significantly depending upon market factors affecting such locations. These
rates contrast with average daily rates in 1997 of $68, $52, and $43 for
the mid-price, economy, and budget segments, respectively, of the
traditional lodging industry.
Achieve Operating Efficiencies. The Company believes that the design and
price level of its facilities attract guest stays of several weeks, which
provide for a more stable revenue stream and which, coupled with low labor-
cost amenities, should lead to reduced administrative and operational costs
and higher operating margins. In addition, the Company uses sophisticated
control and information systems which enable it to manage, on a Company-
wide basis, individual facility-specific factors such as pricing, payroll,
and occupancy levels.
Optimize Low Cost Amenities. The Company seeks to provide the level of
amenities needed to offer quality accommodations while maintaining high
operating margins. The Company's facilities contain a variety of non-labor
intensive features that are attractive to the extended stay guest such as a
fully-equipped kitchen or kitchenette, weekly housekeeping, color
television with cable or satellite hook-up, coin-operated laundromat, and
telephone service with voice mail messaging, and, at many StudioPLUS
facilities, an exercise room and swimming pool. To help maintain
affordability of room rates, labor-intensive services such as daily
cleaning, room service, and restaurants are not provided.
Employ a Standardized Concept. The Company has developed standardized
plans and specifications for its facilities which provide for lower
construction and purchasing costs and establish uniform quality and
operational standards. The Company also benefits from the experience of
various members of the Company's management team in rapidly developing and
operating numerous commercial properties to a uniform set of design
standards on a cost-effective basis.
The Company was formed in 1995 as a Delaware corporation and its executive
offices are located at 450 E. Las Olas Boulevard, Fort Lauderdale, Florida
33301 and its telephone number is (954) 713-1600.
6
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $200,000,000 aggregate
principal amount of New Notes for up to an equal aggregate principal amount of
Old Notes. The Old Notes are, and the New Notes will be, obligations of the
Company entitled to the benefits of the Indenture. The form and terms of the
New Notes are the same in all material respects as the form and terms of the
Old Notes, except that the New Notes have been registered under the Securities
Act and will not contain terms restricting the transfer thereof. The Old Notes
and the New Notes are herein collectively referred to as the "Notes." See
"Description of the Notes."
The Exchange Offer ......... The Company is offering to exchange $1,000
principal amount of New Notes for each $1,000
principal amount of Old Notes that are properly
tendered and accepted in the Exchange Offer. The
Company will issue the New Notes on or promptly
after the Expiration Date. As of the date hereof,
there is $200,000,000 aggregate principal amount
of Old Notes outstanding. See "The Exchange
Offer."
Resale of New Notes......... Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that the
New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold, and otherwise
transferred by any holder thereof (other than (i)
a broker-dealer who receives such New Notes
directly from the Company to resell pursuant to
Rule 144A or any other available exemption under
the Securities Act or (ii) any such holder which
is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act)
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and
that such holder has no arrangement or
understanding with any person to participate in
the distribution of such New Notes. Holders of
Old Notes who tender them in the Exchange Offer
with the intention to participate in a
distribution of the New Notes may not rely upon
such no-action letters. Under no circumstance may
this Prospectus be used for an offer to resell or
other retransfer of New Notes. In the event that
the Company's belief is inaccurate, holders of
New Notes who transfer shares of New Notes in
violation of the prospectus delivery provisions
of the Securities Act and without an exemption
from registration thereunder may incur liability
thereunder. The Company does not assume or
indemnify holders against such liability. Each
broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a
result of market-making activities or other
trading activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. The Company has not
entered into any arrangement or understanding
with any person to distribute the New Notes to be
received in the Exchange Offer. See "Plan of
Distribution."
7
<PAGE>
Registration Rights The Old Notes were sold by the Company on March
Agreement.................. 10, 1998 to the Placement Agents pursuant to a
Placement Agreement, dated March 5, 1998, between
the Company and the Placement Agents (the
"Placement Agreement"). Pursuant to the Placement
Agreement, the Company and the Placement Agents
entered into a Registration Rights Agreement,
dated as of March 10, 1998 (the "Registration
Rights Agreement"), which grants the holders of
the Old Notes certain exchange and registration
rights. The Exchange Offer is intended to satisfy
such rights, which will terminate upon the
consummation of the Exchange Offer. See "The
Exchange Offer--Termination of Certain Rights."
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on July 31, 1998 unless extended,
in which case the term "Expiration Date" shall
mean the latest date and time to which the
Exchange Offer is extended. The Company will
accept for exchange any and all Old Notes which
are properly tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant to
the Exchange Offer will be delivered on or
promptly after the Expiration Date.
Accrued Interest on the New
Notes and the Old Notes....
The New Notes will bear interest from the date of
the last interest payment on the Old Notes or if
no interest has been paid, from the date of
original issuance of the Old Notes. Holders whose
Old Notes are accepted for exchange will be
deemed to have waived the right to receive any
interest accrued, but not paid, on the Old Notes.
See "The Exchange Offer--Interest on the New
Notes."
Conditions to the Exchange The Exchange Offer is not conditioned upon any
Offer...................... minimum aggregate principal amount of Old Notes
being tendered for exchange. However, the
Exchange Offer is subject to certain customary
conditions, all of which may be waived by the
Company. The Exchange Offer is not being made to,
nor will the Company accept surrenders for
exchange from, holders of Old Notes (i) in any
jurisdiction in which the Exchange Offer or the
acceptance thereof would not be in compliance
with the securities or blue sky laws of such
jurisdiction or (ii) if any holder is engaged or
intends to engage in a distribution of the New
Notes. The Company may terminate the Exchange
Offer if it determines that its ability to
proceed with the Exchange Offer could be
materially impaired due to any legal or
governmental action, any new law, statute, rule,
or regulation, any interpretation by the staff of
the Commission of any existing law, statute,
rule, or regulation, or the failure to obtain any
necessary approvals of governmental agencies or
holders of Old Notes. The Company does not expect
any of the foregoing conditions to occur,
although there can be no assurance that such
conditions will not occur. See "The Exchange
Offer--Conditions."
8
<PAGE>
Procedures for Tendering Each holder of Old Notes wishing to accept the
Old Notes.................. Exchange Offer must complete, sign, and date the
accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the
Old Notes to be exchanged and any other required
documentation to Manufacturers and Traders Trust
Company, as Exchange Agent, at the address set
forth herein and therein, or effect a tender of
Old Notes pursuant to the procedures for book-
entry transfer as provided for herein. See "The
Exchange Offer--Procedures for Tendering." By
executing the Letter of Transmittal, each holder
will represent to the Company that, among other
things, the holder or the person receiving such
New Notes, whether or not such person is the
holder, is acquiring the New Notes in the
ordinary course of business and that neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such New Notes
and that neither the holder nor any such other
person is an "affiliate" of the Company, within
the meaning of Rule 405 under the Securities Act,
or a broker-dealer that receives such New Notes
directly from the Company to resell pursuant to
Rule 144A or any other available exemption under
the Securities Act.
Special Procedures for
Beneficial Holders.........
Any beneficial holder whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company, or other nominee
and who wishes to tender in the Exchange Offer
should contact such registered holder promptly
and instruct such registered holder to tender on
his behalf. If such beneficial holder wishes to
tender on his own behalf, such beneficial holder
must, prior to completing and executing the
Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to
register ownership of the Old Notes in such
holder's name or obtain a properly completed bond
power from the registered holder. The transfer of
record ownership may take considerable time and
may not be able to be completed prior to the
Expiration Date. See "The Exchange Offer--
Procedures for Tendering."
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures ................ Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes
(or who cannot complete the procedure for book-
entry transfer on a timely basis) and a properly
completed Letter of Transmittal, or any other
documents required by the Letter of Transmittal,
to the Exchange Agent prior to the Expiration
Date may tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
9
<PAGE>
Acceptance of the Old Notes
and Delivery of the New
Notes......................
Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Old Notes
that are property tendered in the Exchange Offer
prior to the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be
delivered on the earliest practicable date
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Withdrawal Rights........... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "Exchange Offer--Withdrawal
of Tenders."
Effect on Holders of Old As a result of the making of this Exchange Offer,
Notes...................... the Company will have fulfilled one of its
obligations under the Registration Rights
Agreement and, except as otherwise provided
herein, holders of Old Notes who do not tender
their Old Notes will not have any further
registration rights under the Registration Rights
Agreement or otherwise. Such holders will
continue to hold the untendered Old Notes and
will be entitled to all the rights and subject to
all the limitations applicable thereto under the
Indenture, except to the extent such rights or
limitations, by their terms, terminate or cease
to have further effectiveness as a result of the
Exchange Offer. All untendered Old Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, if any Old Notes are
tendered and accepted in the Exchange Offer, the
trading market, if any, for the untendered Old
Notes could be adversely affected. See "Risk
Factors--Consequences of the Exchange Offer on
Non-Tendering Holders of the Old Notes."
Certain Federal Income Tax
Consequences...............
The exchange pursuant to the Exchange Offer will
generally not be a taxable event for federal
income tax purposes. See "Certain Federal Income
Tax Consequences."
Exchange Agent.............. Manufacturers and Traders Trust Company, the
Trustee under the Indenture, is serving as
exchange agent (the "Exchange Agent") in
connection with the Exchange Offer. See "The
Exchange Offer--Exchange Agent."
10
<PAGE>
THE NEW NOTES
Notes Offered............... $200,000,000 aggregate principal amount of 9.15%
Senior Subordinated Notes due 2008.
Maturity.................... March 15, 2008.
Interest.................... Interest on the New Notes is payable semiannually
in cash on March 15 and September 15 of each
year, commencing September 15, 1998.
Optional Redemption......... The Notes are redeemable, at the option of the
Company, in whole or in part, at any time on or
after March 15, 2003, initially at 104.575% of
their principal amount, plus accrued interest,
declining ratably to 100% of their principal
amount, plus accrued interest, on or after March
15, 2006.
In addition, at any time prior to March 15, 2001,
the Company may redeem up to 35% of the principal
amount of the Notes with the proceeds of one or
more sales by the Company of its Capital Stock
(other than Disqualified Stock), at any time or
from time to time in part, at a redemption price
(expressed as a percentage of principal amount)
of 109.15%, plus accrued interest; provided that
at least $130 million aggregate principal amount
of Notes remains outstanding after each such
redemption. See "Description of the Notes--
Optional Redemption."
Change of Control........... Upon a Change of Control (as defined in
"Description of the Notes--Certain Definitions"),
each holder of Notes will have the right to
require the Company to purchase such holder's
Notes at a price of 101% of the principal amount
thereof plus accrued interest, if any, to the
date of purchase. There can be no assurance that
the Company will have the financial resources
necessary to purchase the Notes upon a Change of
Control. See "Description of the Notes--
Repurchase of Notes upon a Change of Control."
Ranking..................... The Indebtedness evidenced by the New Notes will
be unsecured, will be subordinated to all Senior
Indebtedness of the Company, will rank pari passu
in right of payment with all senior subordinated
indebtedness of the Company, and will be senior
in right of payment to all subordinated
indebtedness of the Company. After giving pro
forma effect to the Offering and the application
of the proceeds therefrom, as of December 31,
1997, the Company and its subsidiaries would have
had no Indebtedness outstanding other than the
Old Notes. However, the Amended Credit Facility
provides the Company with $700 million of
committed Senior Indebtedness (all of which is
secured). See "Risk Factors--Substantial
Indebtedness; Ability to Service Debt" and
"Capitalization." In addition, all existing and
future liabilities (including trade payables) of
the Company's subsidiaries will be effectively
senior to the Notes. At
11
<PAGE>
December 31, 1997, the Company's subsidiaries had
approximately $101.2 million of liabilities
outstanding. See "Risk Factors--Subordination of
Notes" and "Capitalization."
Certain Covenants...........
The Indenture contains certain covenants for the
benefit of the holders of the Notes which, among
other things, restrict the ability of the Company
and its Restricted Subsidiaries (as defined in
"Description of the Notes--Certain Definitions")
to: incur additional indebtedness; pay dividends
and make investments and other restricted
payments; create restrictions on the ability of
Restricted Subsidiaries to make certain payments;
issue or sell stock of Restricted Subsidiaries;
enter into transactions with 5% stockholders or
affiliates; create liens; sell assets; and, with
respect to the Company, consolidate, merge, or
sell all or substantially all of its assets. See
"Description of the Notes--Covenants."
RISK FACTORS
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 15.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Summary and under the caption "Risk Factors" and
elsewhere in this Prospectus (including documents incorporated herein by
reference) constitute "forward-looking statements." Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements of the Company
to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the Company's limited operating history
and uncertainty as to the Company's future profitability; the ability to meet
construction and development schedules and budgets; the ability to develop and
implement operational and financial systems to manage rapidly growing
operations; the uncertainty as to the consumer demand for extended stay
lodging; increasing competition in the extended stay lodging market; the
ability to integrate and successfully operate acquired properties and the risks
associated with such properties; the ability to obtain financing on acceptable
terms to finance the Company's growth strategy; the ability of the Company to
operate within the limitations imposed by financing arrangements; and other
factors referenced in this Prospectus. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise. See "Risk Factors."
12
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below has been derived from the
consolidated financial statements of the Company. The consolidated financial
statements of the Company for the years ended December 31, 1993, 1994, 1995,
1996, and 1997 have been audited by Coopers & Lybrand L.L.P., independent
accountants, whose report for the years ended December 31, 1995, 1996, and 1997
is incorporated by reference herein. The summary financial information for the
three months ended March 31, 1997 and 1998 is derived from unaudited financial
statements of the Company incorporated herein by reference and includes all
adjustments, consisting only of normal recurring adjustments, which the Company
considers necessary for the fair presentation of its financial position and the
results of its operations for those periods. The summary financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto, all of which is incorporated by reference into this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- --------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue................ $10,309 $12,152 $ 16,768 $ 38,809 $ 130,800 $ 19,763 $ 54,231
Property operating
expenses.............. 4,458 5,256 6,706 16,560 60,391 10,180 26,282
Corporate operating and
property management
expenses.............. 792 881 4,669 16,867 29,951 5,755 9,393
Merger, financing and
other charges......... -- -- -- -- 19,895 -- --
Depreciation and
amortization.......... 1,313 1,472 2,059 6,139 21,331 3,712 9,430
Income (loss) from
operations............ 3,746 4,543 3,334 (757) (768) 116 9,126
Interest income
(expense), net(1)..... (2,498) (2,532) (507) 13,744 9,242 3,987 (1,122)
Provision for income
taxes(2).............. -- -- 1,217 5,231 5,838 1,633 3,202
Net income from
continuing operations. $ 1,050 $ 1,653 $ 1,468 $ 7,756 $ 2,636 $ 2,470 $ 4,802
======= ======= ======== ========= ========== ========= ==========
Net income from
continuing operations
per share(3):
Basic................. $ 0.05 $ 0.11 $ 0.03 $ 0.03 $ 0.05
======== ========= ========== ========= ==========
Diluted............... $ 0.05 $ 0.10 $ 0.03 $ 0.03 $ 0.05
======== ========= ========== ========= ==========
Weighted average
shares(3):
Basic................. 30,381 71,933 94,233 90,641 95,698
======== ========= ========== ========= ==========
Diluted............... 31,434 73,935 95,744 92,900 97,088
======== ========= ========== ========= ==========
OPERATING DATA:
Average occupancy
rates(4).............. 83% 85% 83% 73% 73% 65% 68%
Average weekly room
rate.................. $ 202 $ 222 $ 250 $ 261 $ 263 $ 256 $ 278
Operating facilities
(at period end)....... 17 18 24 75 185 93 218
Weighted average rooms
available(5).......... 1,142 1,201 1,479 3,783 12,558 8,977 21,623
Rooms (at period end).. 1,192 1,263 1,794 7,611 19,299 9,570 22,770
Facilities under
construction (at
period end)........... 1 2 16 61 84 78 75
Rooms under
construction (at
period end)........... 71 144 1,780 6,864 8,953 8,433 8,122
OTHER FINANCIAL DATA:
Cash flows provided by
(used in):
Operating activities.. $ 2,498 $ 3,160 $ 4,186 $ 20,828 $ 50,263 $ 6,934 $ 16,960
Investing activities.. (2,692) (5,891) (35,330) (279,259) (609,064) (105,485) (139,469)
Financing activities.. 380 2,327 156,601 356,841 337,689 198,582 157,317
EBITDA(6).............. 5,059 6,015 5,393 5,382 20,563 3,828 18,556
Adjusted EBITDA(7)..... 5,059 6,015 5,393 5,382 40,458 3,828 18,556
Capital expenditures... 2,729 5,794 33,722 277,531 607,649 103,432 139,464
Ratio of earnings to
fixed charges(8)...... 1.4x 1.6x 2.4x 39.1x 4.9x -- 1.8x
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents........... $ 861 $ 457 $125,915 $ 224,325 $ 3,213 $ 324,356 $ 38,021
Total assets........... 30,313 36,222 213,445 668,435 1,070,891 863,985 1,245,734
Long-term debt......... 28,831 32,306 4,000 -- 135,000 -- 300,000
Stockholders' equity
(deficit)............. (1,611) (1,247) 199,322 628,714 834,659 831,435 841,991
</TABLE>
(footnotes on following page)
13
<PAGE>
- --------
(1) Excludes interest of $153,000, $256,000, $329,000, and $1,731,000 for 1994,
1995, 1996, and 1997, respectively, and $3,804,000 for the three months
ended March 31, 1998, capitalized during the construction of the Company's
facilities under Statement of Financial Accounting Standards ("SFAS")
Statement No. 34 "Capitalization of Interest Cost."
(2) Historical financial information prior to SPH's initial public offering of
common stock in June 1995 (the "SPH IPO") does not include a provision for
income taxes because SPH's predecessor entities (the "SPH Predecessor
Entities") were S corporations or partnerships not subject to income taxes.
See the Company's consolidated financial statements incorporated by
reference herein.
(3) Net income per share for the year ended December 31, 1995 is presented on a
pro forma basis as if all of the Company's income for the period was
subject to income taxes. See note 10 to the Company's consolidated
financial statements incorporated by reference herein.
(4) Average occupancy rates are determined by dividing the rooms occupied on a
daily basis by the total number of rooms. Due to the Company's rapid
expansion, its overall average occupancy rate has been negatively impacted
by the lower occupancy typically experienced during the pre-stabilization
period for newly-opened facilities. This negative impact on occupancy is
expected to diminish as the ratio of new property openings during a period
to total properties in operation at the end of that period decreases.
(5) Weighted average rooms available is calculated by dividing total room
nights available during the year or quarter by 365 or 90, respectively.
(6) EBITDA represents earnings before interest, income taxes, depreciation, and
amortization. EBITDA is provided because it is a measure commonly used in
the lodging industry. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered
an alternative to net income as a measure of performance or to cash flow as
a measure of liquidity. EBITDA is not necessarily comparable with similarly
titled measures for other companies.
(7) Adjusted EBITDA means EBITDA before $19.9 million of one-time pre-tax
charges consisting of (i) $9.7 million of merger expenses and costs
associated with the integration of SPH's operations following the Merger,
(ii) the write-off of $9.7 million of debt issuance costs associated with
terminating two mortgage loan facilities upon execution of the Company's
$500 million senior secured revolving credit facility (the "Credit
Facility"), and (iii) a $500,000 charge in connection with listing the
Company's common stock, par value $0.01 per share ("Common Stock"), on the
New York Stock Exchange, Inc. ("NYSE"). Management believes all these
charges are non-recurring in nature and will not affect the Company's
future results of operations.
(8) For purposes of calculating this ratio, earnings include income from
continuing operations before income taxes plus fixed charges other than
capitalized expenses. Fixed charges consist of interest, whether expensed
or capitalized. Assuming the Offering occurred as of January 1, 1997, for
the three months ended March 31, 1997 and the year ended December 31, 1997
the Company's earnings from operations before income taxes and interest
expense would have been insufficient to cover the Company's interest
(whether expensed or capitalized) by $472,000 and $9.8 million,
respectively.
14
<PAGE>
RISK FACTORS
In evaluating an investment in the Notes, prospective investors should
carefully consider the following factors in addition to the other information
contained in this Prospectus.
LIMITED OPERATING HISTORY AND COSTS ASSOCIATED WITH EXPANSION
ESA first began operating economy extended stay lodging facilities in August
1995 and has a limited operating history upon which investors may evaluate its
performance. Since 1995 the Company has been rapidly expanding its operations.
Through March 31, 1998, the Company had developed 207 facilities, acquired 11
others, and had 75 facilities under construction. In addition, the Company
plans to begin construction of approximately 96 additional facilities during
1998 and to continue an active development program thereafter. Because many of
the Company's facilities have only recently opened or been acquired by the
Company and because of the significant development and financing expenses
associated with the Company's expansion, the Company's historical financial
information may not be indicative of future performance. The Company's
inability to expand in accordance with its plans or to manage efficiently its
growth could have a material adverse effect on its results of operations and
financial condition.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT
At December 31, 1997, on a pro forma basis after giving effect to the
issuance of the Old Notes, the Company would have had no Indebtedness (as
defined) outstanding other than the Old Notes. However, the Company would have
had $500 million of availability under the Credit Facility. On March 10, 1998,
the Company amended the Credit Facility to provide the Company with a $350
million revolving loan facility and $350 million of term loan facilities (the
"Amended Credit Facility"). The Amended Credit Facility also permits, but does
not make available, an additional $100 million of term loans to be made in the
future. See "Description of Certain Indebtedness."
Assuming the Offering of the Old Notes occurred as of January 1, 1997, for
the year ended December 31, 1997, the Company's earnings from operations
before income taxes and interest expense would have been insufficient to cover
the Company's interest (whether expensed or capitalized) by $9.8 million and
its EBITDA minus interest and capital expenditures for the year ended December
31, 1997 would have resulted in a deficiency of $606.8 million. The Company
expects to continue to incur significant negative cash flow (after capital
expenditures) as it rapidly expands its operations. The Company intends to
fund such expansion with the net proceeds from the issuance of the Old Notes,
cash flow from operations, cash on hand, and borrowings under the Amended
Credit Facility. Although there can be no assurance, the Company expects that
it will generate sufficient cash flow from operations to meet its current and
future debt service requirements. If the Company's properties do not perform
as expected, the Company may not be able to make required payments under the
Amended Credit Facility or on the Notes and may have to refinance such
indebtedness in order to repay these obligations.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, or general corporate purposes may
be impaired; (ii) a substantial portion of the Company's cash flow from
operations may be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for its
operations; (iii) all of the indebtedness incurred under the Amended Credit
Facility is scheduled to become due prior to the time any principal payments
are required on the Notes; and (iv) certain of the Company's borrowings will
be at variable rates of interest, which will cause the Company to be
vulnerable to increases in interest rates.
ABILITY TO INCUR ADDITIONAL INDEBTEDNESS; REFINANCING RISk
The Company expects to require significant additional financing in the
future. See "--Need for Additional Capital." The Indenture permits the Company
to incur up to $800 million of indebtedness, which may be
15
<PAGE>
incurred under the Amended Credit Facility or otherwise, and additional
indebtedness if certain financial ratios are satisfied. The Indenture also
permits other specified indebtedness to be incurred by the Company. See
"Description of the Notes." The Amended Credit Facility provides the Company
with a $350 million revolving credit facility and up to $350 million of term
loans (and permits, but does not make available, an additional $100 million of
term loans), with the availability of the revolving credit facility and the
term loans subject to satisfaction of certain financial ratios and other
conditions.
The Company may have to refinance the indebtedness drawn under the Amended
Credit Facility at its maturity. In addition, the Notes permit the Company to
incur additional indebtedness, which may mature and need to be refinanced
prior to the maturity date of the Notes. The Company's ability to refinance
the indebtedness under the Amended Credit Facility and any future indebtedness
will depend on, among other things, its financial condition at the time, the
restrictions in the instruments governing its then outstanding indebtedness,
and other factors, including market conditions, which are beyond the control
of the Company. In the absence of such refinancing, the Company could be
forced to dispose of assets in order to make up for any shortfall in the
payments due on its indebtedness under circumstances that might not be
favorable to realizing the highest price for such assets.
SUBORDINATION OF NOTES
The Notes are expressly subordinated to all Senior Indebtedness of the
Company and are pari passu in right of payment with all senior subordinated
indebtedness of the Company. In the event of the Company's bankruptcy,
insolvency, liquidation, reorganization, dissolution, or other winding up, or
upon the acceleration of any Senior Indebtedness, the lenders under the
Amended Credit Facility and any other holder of Senior Indebtedness must be
paid in full before the holders of the Notes may be paid. In addition, under
certain circumstances no payment may be made with respect to the principal of
or interest on the Notes if a payment default or certain other defaults exist
with respect to certain Senior Indebtedness. Moveover, all existing and future
liabilities (including trade payables) of the Company's subsidiaries will be
effectively senior to the Notes. As of December 31, 1997, the Company's
subsidiaries had $101.2 million of liabilities (excluding inter-company
payables).
RESTRICTIVE COVENANTS
The terms of the Amended Credit Facility and the Indenture contain certain
restrictive covenants, including, among others, covenants significantly
limiting or prohibiting the ability of the Company and certain of its
subsidiaries to incur indebtedness, make investments, engage in transactions
with shareholders and affiliates, incur liens, create restrictions on the
ability of certain subsidiaries to pay dividends or make certain payments to
the Company, merge or consolidate with any other person, or sell, assign,
transfer, lease, convey, or otherwise dispose of all or substantially all of
the assets of the Company. In addition, the Company is required under the
Amended Credit Facility to maintain certain specified financial ratios. There
can be no assurance that the Company will be able to maintain such ratios or
that such covenants will not adversely affect the Company's ability to finance
its future operations or capital needs or to engage in other business
activities that may be in the interest of the Company. The breach of any of
these covenants or the inability of the Company to comply with the required
financial ratios could result in a default under the Amended Credit Facility
or the Indenture. In the event of any such default, depending on the actions
taken by the lenders under the Amended Credit Facility, the Company could be
prohibited from making any payments of principal or interest on the Notes. In
addition, such lenders could elect to declare all amounts borrowed under the
Amended Credit Facility, together with accrued interest, to be due and
payable. If the Company were unable to repay such borrowings, the lenders
under the Amended Credit Facility could proceed against their collateral. If
the indebtedness under the Amended Credit Facility were to be accelerated,
there can be no assurance that the assets of the Company would be sufficient
to repay such indebtedness and the Notes in full. See "--Subordination of
Notes," "Description of Certain Indebtedness," and "Description of the Notes."
16
<PAGE>
DEVELOPMENT RISKS
The Company intends to grow primarily by developing additional Company-owned
extended stay lodging facilities. Development involves substantial risks,
including the risk that development costs will exceed budgeted or contracted
amounts, the risk of delays in completion of construction, the risk of failing
to obtain all necessary zoning and construction permits, the risk that
financing might not be available on favorable terms, the risk that developed
properties will not achieve desired revenue or cash flow levels once opened,
the risk of competition for suitable development sites from competitors (some
of which have greater financial resources than the Company), the risks of
incurring substantial unrecoverable costs in the event a development project is
abandoned prior to completion, changes in governmental rules, regulations, and
interpretations (including interpretations of the requirements of the Americans
with Disabilities Act), and general economic and business conditions. Although
the Company intends to manage its development to reduce such risks, there can
be no assurance that present or future developments will perform in accordance
with the Company's expectations. Through March 31, 1998, the Company had
developed 207 extended stay lodging facilities, acquired 11 others, and had 75
facilities under construction. The Company plans to begin construction of
approximately 96 additional facilities during 1998 and to continue an active
development program thereafter. There can be no assurance, however, that the
Company will complete the development and construction of the facilities or
that any such developments will be completed in a timely manner or within
budget. The Company's inability to expand in accordance with its plans or to
manage its growth could have a material adverse effect on its results of
operations and financial condition.
RISKS ASSOCIATED WITH RAPID GROWTH
The Company's rapid development plans will require the implementation of
enhanced operational and financial systems and will require additional
management, operational, and financial resources. For example, the Company will
be required to recruit and train property managers and other personnel for each
new lodging facility as well as additional accounting personnel. There can be
no assurance that the Company will be able to manage its expanding operations
effectively. The failure to implement such systems and add such resources on a
cost-effective basis could have a material adverse effect on the Company's
results of operations and financial condition.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The extended stay segment of the lodging industry may be adversely affected
by changes in national or local economic conditions, neighborhood
characteristics and other local market conditions, such as an oversupply of
hotel space or a reduction in demand for hotel space in a geographic area,
changes in travel patterns, extreme weather conditions, changes in governmental
regulations which influence or determine wages, prices, or construction costs,
changes in interest rates, the availability of financing for operating or
capital needs, and changes in real estate tax rates and other operating
expenses. The Company's principal assets consist of real property, and real
estate values are sensitive to changes in local market and economic conditions
and to fluctuations in the economy as a whole. In addition, due in part to the
strong correlation between the lodging industry's performance and economic
conditions, the lodging industry is subject to cyclical changes in revenues
and profits. These risks may be exacerbated by the relatively illiquid nature
of real estate holdings. The ability of the Company to vary its portfolio in
response to changes in economic and other conditions will be limited. There can
be no assurance that downturns or prolonged adverse conditions in real estate
or capital markets or in national, state, or local economies, and the inability
of the Company to dispose of an investment when it finds disposition to be
advantageous or necessary, will not have a material adverse impact on the
Company.
COMPETITION IN THE LODGING INDUSTRY
The lodging industry is highly competitive. Competitive factors within the
lodging industry include room rates, quality of accommodations, service levels,
convenience of location, reputation, reservation systems, and
17
<PAGE>
name recognition. The Company competes with traditional lodging facilities
(including limited service hotels), other extended stay facilities, including
those owned and operated by competing chains and individually-owned extended
stay facilities, and alternative lodging, including short-term lease
apartments. There is no single competitor or small number of competitors that
is or are dominant in the mid-price, economy, or budget extended stay
categories. However, some of the Company's indirect competitors have
substantially larger networks of locations and greater financial resources
than the Company. A number of major lodging companies have announced their
intent to aggressively develop extended stay lodging properties which may
compete directly with the Company's properties and the Company expects
competition in the extended stay lodging segment to increase. Competition in
the U.S. lodging industry is based generally on convenience of location,
price, range of services and guest amenities offered, and quality of customer
service. The Company considers the location of its lodging facilities, the
reasonableness of its room rates, and the services and guest amenities
provided by it to be among the most important factors in its business.
Demographic or other changes in one or more of the Company's markets could
impact the convenience or desirability of the sites of certain lodging
facilities, which would adversely affect their operations. Further, there can
be no assurance that new or existing competitors will not significantly lower
rates or offer greater convenience, services, or amenities or significantly
expand or improve facilities in a market in which the Company's facilities
compete, thereby adversely affecting the Company's operations.
RISKS ASSOCIATED WITH ACQUISITIONS
Although the Company expects that the construction and development of new
extended stay lodging facilities will be its primary means of expansion, the
Company has also made, and may continue making, acquisitions of existing
extended stay lodging facilities or other properties that are suitable for
conversion to the extended stay concept and acquisitions of companies that
operate in the extended stay lodging market. There can be no assurance that
the Company will be able to acquire other extended stay lodging facilities or
companies on terms favorable to the Company. When the Company does make such
acquisitions, it encounters various associated risks, including possible
environmental and other regulatory costs, goodwill amortization, diversion of
management's attention, potential inability to integrate the acquired business
with the Company's existing operations, and unanticipated problems or
liabilities, some or all of which could have a material adverse effect on the
Company's operations and financial performance.
NEED FOR ADDITIONAL CAPITAL
The Company expects to continue to rapidly expand its operations. The
Company expects to make capital expenditures of at least $600 million in 1998.
The Company believes that the net proceeds from the issuance of the Old Notes,
together with cash on hand, cash flow from operations, and borrowings expected
to be available under the Amended Credit Facility, will provide sufficient
funds for the Company to expand its business as presently planned and to fund
its operating expenses through early 1999. Thereafter the Company expects it
will require additional funding to continue its expansion as currently
planned. However, the timing and the amount of financing needed will depend on
a number of factors, including the number of properties the Company constructs
or acquires, the timing of such development, and the cash flow generated by
its properties. In the event that the capital markets provide favorable
opportunities, the Company's plans or assumptions change or prove to be
inaccurate, or the foregoing sources of funds prove to be insufficient to fund
the Company's growth and operations, the Company may seek additional capital
sooner than currently anticipated. Sources of financing may include public or
private debt or equity financing. There can be no assurance that such
additional financing will be available to the Company or, if available, that
it can be obtained on acceptable terms or within the limitations contained in
the Company's financing arrangements. See "--Restrictive Covenants." Failure
to obtain such financing could result in the delay or abandonment of some or
all of the Company's development and expansion plans and could have a material
adverse effect on the Company.
18
<PAGE>
IMPACT OF ENVIRONMENTAL REGULATIONS
The Company may be adversely affected by the obligation to pay for the cost
of complying with existing environmental laws, ordinances, and regulations. In
addition, in the event any future legislation is adopted, the Company may,
from time to time, be required to make significant capital and operating
expenditures in response to such legislation. 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
removal or remediation of hazardous or toxic substances on, under, or in such
property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. In addition, the presence of contamination from hazardous or
toxic substances, or the failure to properly remediate such contaminated
property, may adversely affect the owner's ability to borrow using such real
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances also may be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether
or not such facility is or ever was owned or operated by such person. Certain
environmental laws and common-law principles could be used to impose liability
for releases of hazardous materials, including asbestos-containing materials
("ACMs"), into the environment, and third parties may seek recovery from
owners or operators of real properties for personal injury associated with
exposure to released ACMs or other hazardous materials. Environmental laws
also may impose restrictions on the manner in which property may be used or
transferred or in which businesses may be operated, and these restrictions may
require expenditures. In connection with the ownership of its properties, the
Company may be potentially liable for any such costs. The cost of defending
against claims of liability or remediating contaminated property and the cost
of complying with environmental laws could materially adversely affect the
Company's results of operations and financial condition. The Company attempts
to minimize its exposure to potential environmental liability through its
site-selection procedures. The Company typically secures an option to purchase
land subject to certain contingencies. Prior to exercising such option and
purchasing the property, the Company conducts a Phase I environmental
assessment (which generally involves a physical inspection and database
search, but not soil or groundwater analyses) and may conduct Phase II
assessments if it is deemed necessary.
LOSSES IN EXCESS OF INSURANCE COVERAGE
The Company maintains comprehensive insurance on each of its properties,
including liability, fire, and extended coverage, in the types and amounts the
Company believes are customarily obtained by an owner and operator in the
Company's industry. Nevertheless, there are certain types of losses, generally
of a catastrophic nature, such as hurricanes, earthquakes, and floods, that
may be uninsurable or not economically insurable. The Company uses its
discretion in determining amounts, coverage limits, and deductibility
provisions of insurance, with a view to obtaining appropriate insurance on the
Company's properties at a reasonable cost and on suitable terms. This may
result in insurance coverage that in the event of a loss would not be
sufficient to pay the full current market value or current replacement value
of the Company's lost investment and the insurance proceeds received by the
Company might not be adequate to restore its economic position with respect to
such property.
RELIANCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the efforts and
abilities of its senior management and key employees, particularly Mr. H.
Wayne Huizenga, Chairman of the Board of Directors of the Company, Mr. George
D. Johnson, Jr., President and Chief Executive Officer of the Company, and
Mr. Robert A. Brannon, Senior Vice President and Chief Financial Officer of
the Company. The loss of the services of any of these individuals could have a
material adverse effect upon the Company. The Company does not have employment
or consulting agreements with any of its officers nor does it carry key-man
life insurance on any of its officers.
CONTROL OF THE COMPANY BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS; CONFLICTS OF
INTEREST
As of December 31, 1997, H. Wayne Huizenga, the Chairman of the Board of
Directors of the Company, George D. Johnson, Jr., the President and Chief
Executive Officer of the Company, and Stewart H. Johnson, a director of the
Company, beneficially owned approximately 15.7% of the outstanding shares of
Common Stock,
19
<PAGE>
and these individuals together with other executive officers and directors of
the Company as a group owned approximately 20.7% of the outstanding shares of
Common Stock. Certain decisions concerning the operations or financial
structure of the Company may present conflicts of interest between the owners
of the Company's capital stock and the holders of the Notes. For example, if
the Company encounters financial difficulties, or is unable to pay its debts
as they mature, the interests of the Company's equity investors might conflict
with those of the holders of the Notes. In addition, the equity investors may
have an interest in pursuing acquisitions, divestitures, financings, or other
transactions that, in their judgment, could enhance their equity investment,
even though such transactions might involve risk to the holders of the Notes.
ABSENCE OF PUBLIC MARKET
The New Notes are new securities for which there is currently no trading
market. Although the Placement Agents have informed the Company that they
currently intend to make a market in the New Notes and the Old Notes, they are
not obligated to do so and any such market making may be discontinued at any
time without notice. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes, the ability of holders
to sell the Notes, or the price at which holders would be able to sell the
Notes. Future trading prices of the Notes will depend on many factors,
including, among other things, prevailing interest rates, the Company's
operating results, the market for similar securities and, in the case of the
Old Notes, the restrictions on transfer with respect thereto. Historically,
the market for securities similar to the New Notes, including non-investment
grade debt, has been subject to disruptions that have caused substantial
volatility in the prices of such securities. There can be no assurance that
any market for the New Notes, if such market develops, will not be subject to
similar disruptions. In connection with the issuance of the Old Notes, the
Company arranged for the Old Notes to be designated for trading in the Nasdaq
Stock Market's Portal MarketSM. The Company does not intend to apply for
listing of either the Old Notes or the New Notes on any securities exchange or
for quotation through the National Association of Securities Dealers, Inc.'s
Automated Quotation System.
Notwithstanding the registration of the New Notes in the Exchange Offer,
each holder that may be deemed an "affiliate" (as defined under Rule 405 under
the Securities Act) of the Company will represent to the Company that such
holder understands and acknowledges that the New Notes may not be offered for
resale, resold, or otherwise transferred by that holder without registration
under the Securities Act or exemption therefrom.
Each broker-dealer or other dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer or other dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
EXCHANGE OFFER PROCEDURES
Issuance of the New Notes in exchange for Old Notes pursuant to the Exchange
Offer will be made only after a timely receipt by the Exchange Agent of such
Old Notes, a properly completed and duly executed Letter of Transmittal, and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for New Notes should allow sufficient time
to ensure timely delivery. The Company is under no duty to give notification
of defects or irregularities with respect to the tenders of Old Notes for
exchange. See "The Exchange Offer." Old Notes that are not tendered or are
tendered but not accepted will, following the consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof and, upon consummation of the Exchange Offer, the registration rights
under the Registration Rights Agreement will terminate. In addition, any
holder of Old Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in
20
<PAGE>
connection with any resale of such New Notes. See "Plan of Distribution." To
the extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market, if any, for untendered and tendered but unaccepted Old Notes
could be adversely affected. See "The Exchange Offer."
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF THE OLD NOTES
AND BROKER-DEALERS RECEIVING NEW NOTES
The Company intends for the Exchange Offer to satisfy its registration
obligations under the Registration Rights Agreement. If the Exchange Offer is
consummated, the Company does not intend to file further registration
statements for the sale or other disposition of Old Notes. Consequently,
following completion of the Exchange Offer, holders of Old Notes seeking
liquidity in their investment would have to rely on an exemption to the
registration requirements under applicable securities laws, including the
Securities Act, with respect to any sale or other disposition of the Old
Notes. In addition, broker-dealers that receive New Notes in exchange for Old
Notes acquired in market-making activities or other trading activities must
deliver a prospectus in connection with any resale of such New Notes. The
Company has agreed to use its best efforts to maintain this registration
statement effective for 120 days from the consummation of the Exchange Offer
and amend or supplement this Prospectus for such purpose. Thereafter, the
Company has no obligation to furnish broker-dealers holding New Notes with a
prospectus to deliver in connection with any such resale. See "The Exchange
Offer" and "Plan of Distribution."
21
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company to the Placement Agents on March 10,
1998 pursuant to the terms of the Placement Agreement. The Placement Agents
subsequently sold the Old Notes to "qualified institutional buyers" in
reliance on Rule 144A under the Securities Act and outside the United States
to non-U.S. persons in reliance on Regulation S under the Securities Act. In
connection with the sale of the Old Notes, the Company and the Placement
Agents entered into the Registration Rights Agreement which requires the
Company, among other things, to file with the Commission a registration
statement under the Securities Act covering the offer by the Company to
exchange all of the Old Notes for the New Notes and to use its best efforts to
cause such registration statement to become effective under the Securities
Act. The Company is further obligated, upon the effectiveness of that
registration statement, to offer the holders of the Old Notes the opportunity
to exchange their Old Notes for an equal principal amount of New Notes, which
will be issued without a restrictive legend and which, subject to the
exceptions described in this Prospectus, may be reoffered and resold by the
holder without restrictions or limitations under the Securities Act. A copy of
the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The Exchange Offer
is being made pursuant to the Registration Rights Agreement to satisfy the
Company's obligations thereunder. The term "Holder" with respect to the
Exchange Offer means any person in whose name Old Notes are registered on the
Company's books or any other person who has obtained a properly completed
assignment from the registered holder.
In order to participate in the Exchange Offer, a Holder must represent to
the Company, among other things, that (i) the New Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of
the person receiving such New Notes, whether or not such person is the Holder,
(ii) neither the Holder nor any such other person is engaging in or intends to
engage in a distribution of such New Notes, (iii) neither the Holder nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes, and (iv) neither the Holder
nor any such other person is an "affiliate," as defined under Rule 405
promulgated under the Securities Act, of the Company, or a broker-dealer who
receives such New Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act.
RESALE OF NEW NOTES
Based on a previous interpretation by the staff of the Commission set forth
in certain no-action letters issued to third parties, the Company believes
that the New Notes issued pursuant to the Exchange Offer may be offered for
resale, resold, and otherwise transferred by any Holder of such New Notes
(other than any such Holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act or a broker-dealer who receives
such New Notes directly from the Company to resell pursuant to Rule 144A or
any other available exemption under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
Holder's business and such Holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes. Any Holder who
tenders in the Exchange Offer with the intention of participating in a
distribution of the New Notes cannot rely on such interpretation by the staff
of the Commission as set forth in such no-action letters and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Under no circumstances may
this Prospectus be used for an offer to resell, a resale, or other retransfer
of the New Notes. In the event that the Company's belief is inaccurate,
Holders of the New Notes who transfer New Notes in violation of the prospectus
delivery provisions of the Securities Act and without an exemption from
registration thereunder may incur liability thereunder. The Company does not
assume or indemnify Holders against such liability. The Exchange Offer is not
being made to, nor will the Company accept surrenders for exchange from,
Holders of Old Notes in any jurisdiction in which the Exchange Offer or the
acceptance thereof would not be in compliance with the securities or blue sky
laws of such jurisdiction. Each broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other
22
<PAGE>
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Company has not entered into
any arrangement or understanding with any person to distribute the New Notes
to be received in the Exchange Offer. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of New Notes in exchange for each $1,000 principal amount of outstanding Old
Notes surrendered pursuant to the Exchange Offer. Old Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except that the New Notes will be registered under the
Securities Act and hence will not bear legends restricting the transfer
thereof. The New Notes will evidence the same indebtedness as the Old Notes.
The New Notes will be issued under and entitled to the benefits of the
Indenture, which also authorized the issuance of the Old Notes, such that both
series will be treated as a single class of debt securities under the
Indenture.
As of the date of this Prospectus, $200,000,000 aggregate principal amount
of Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered Holders of the Old Notes.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Old Notes that are not tendered for exchange under the
Exchange Offer will remain outstanding and will be entitled to the rights and
benefits such Holders have under the Indenture.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company shall have given oral or written notice thereof
to the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purposes of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein, or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
certain applicable taxes described below, in connection with the Exchange
Offer. See "--Fees and Expenses" below.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on July
31, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered Holders an announcement thereof, prior to 9:00 a.m., New York City
time, on the next business day after the Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptances, extension,
termination or amendment will be followed as promptly as practicable by oral
23
<PAGE>
or written notice thereof to the registered Holders. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered Holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure
to the registered Holders, if the Exchange Offer would otherwise expire during
such five to ten business day period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, amendment, or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
Upon satisfaction or waiver of all the conditions to the Exchange Offer, the
Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Conditions" below. For purposes of the Exchange Offer,
the Company shall be deemed to have accepted properly tendered Old Notes for
exchange when, as, and if the Company shall have given oral or written notice
thereof to the Exchange Agent.
In all cases, issuance of the New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a properly completed and duly executed Letter of
Transmittal or a timely Book-Entry Confirmation (as defined herein) by an
Agent's Message (as defined herein) in lieu of a Letter of Transmittal, and
all other required documents; provided, however, that the Company reserves the
absolute right to waive any defects or irregularities in the tender or
conditions of the Exchange Offer. If any tendered Old Notes are not accepted
for any reason set forth in the terms and conditions of the Exchange Offer or
if Old Notes are submitted for a greater principal amount than the Holder
desires to exchange, then such unaccepted or non-exchanged Old Notes
evidencing the unaccepted portion, as appropriate, will be returned without
expense to the tendering Holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from the date of the last interest payment
on the Old Notes or, if no interest has been paid, from the date of original
issuance of the Old Notes (March 10, 1998) to the date of Exchange thereof for
New Notes. Holders whose Old Notes are exchanged will be deemed to have waived
the right to receive any interest accrued, but not paid, on the Old Notes.
CONDITIONS
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange (provided, however, that the
New Notes are issuable only in denominations of $1,000 in principal amount and
integral multiples of $1,000 in excess thereof). However, notwithstanding any
other term of the Exchange Offer, the Company will not be required to exchange
any New Notes for any Old Notes and may terminate the Exchange Offer before
the acceptance of any Old Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the Company's reasonable judgment, might materially impair the
ability of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule, or regulation is proposed, adopted, or
enacted, or any existing law, statute, rule, or regulation is interpreted
by the staff of the Commission, which, in the Company's reasonable
judgment, might materially impair the ability of the Company to proceed
with the Exchange Offer; or
(c) any governmental approval or approval by Holders of the Old Notes has
not been obtained, which approval the Company shall, in its reasonable
judgment, deem necessary for the consummation of the Exchange Offer as
contemplated hereby.
24
<PAGE>
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering Holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of Holders who tendered
such Old Notes to withdraw their tendered Old Notes, or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Old Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
Holders, if the Exchange Offer would otherwise expire during such five to ten
business day period.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign, and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such
Old Notes must be received by the Exchange Agent along with the Letter of
Transmittal prior to the Expiration Date, or (ii) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Existing Notes into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF LETTERS OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS.
IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL,
IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE
EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD
NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR NOMINEES TO EFFECT THE
ABOVE TRANSACTIONS FOR SUCH HOLDERS. To be tendered effectively, the Letter of
Transmittal and other required documents must be received by the Exchange
Agent at the address set forth below under "--Exchange Agent" prior to the
Expiration Date.
The tender by a Holder of Old Notes that is not withdrawn prior to the
Expiration Date will constitute an agreement between such Holder and the
Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal. Any beneficial owner whose Old Notes
are registered in the name of a broker, dealer, commercial bank, trust
company, or other nominee and who wishes to tender its Old Notes should
contact the registered Holder promptly and instruct such registered Holder to
tender such Old Notes on such beneficial owner's behalf. If such beneficial
owner wishes to tender its Old Notes on such owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's name or obtain a properly
completed assignment from the registered Holder. The transfer of registered
ownership of Old Notes may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Payment
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantor must be a member firm of
a registered national securities exchange or of the National Association
25
<PAGE>
of Securities Dealers, Inc., a commercial bank or trust company having an
office or correspondent in the United States, or an "eligible guarantor
institution" within the meaning of Rule l7Ad-15 under the Exchange Act
(an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond or stock power, as the case may be,
signed by such registered Holder as such registered Holder's name appears on
such Old Notes.
If the Letter of Transmittal or any Old Notes or bond or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
the Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes, and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the Company's opinion, be
unlawful. The Company also reserves the right to waive any defects,
irregularities, or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Old Notes, none of the
Company, the Exchange Agent, or any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering Holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date or, as set forth above under "--Conditions" above, to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each Holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder, (ii) neither the Holder nor
any such other person is engaging in or intends to engage in a distribution of
such New Notes, (iii) neither the Holder nor any such other person has an
arrangement or understanding with any person to participate in the
distribution of such New Notes, and (iv) neither the Holder nor any such other
person is an "affiliate," as defined in Rule 405 of the Securities Act, of the
Company, or a broker-dealer who received New Notes directly from the Company
to resell pursuant to Rule 144A or any other available exemption under the
Securities Act.
In all cases, issuance of New Notes pursuant to the Exchange Offer will be
made only after timely receipt by the Exchange Agent of certificates for such
Old Notes (or a timely Book-Entry Confirmation), a properly completed and duly
executed Letter of Transmittal (unless such Old Notes are tendered via a Book-
Entry Confirmation), and all other required documents. If any tendered Old
Notes are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer or if Old Notes are submitted for a greater number of
shares than the Holder desires to exchange, such unaccepted or non-exchanged
Old Notes will be returned without expense to the tendering Holder thereof
(or, in the case of Old Notes tendered by Book-Entry Confirmation pursuant to
the book-entry transfer procedures described below, such non-exchanged Old
Notes will be credited to an account maintained with the Book-Entry Transfer
Facility) as promptly as practicable after the expiration or termination of
the Exchange Offer.
26
<PAGE>
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for the purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, with
any required signature guarantees and any other required documents, must, in
any case, be transmitted to and received by the Exchange Agent at the address
set forth below under "--Exchange Agent" on or prior to the Expiration Date or
the guaranteed delivery procedures described below must be complied with.
EXCHANGING BOOK-ENTRY NOTES
The Exchange Agent and The Depository Trust Company ("DTC") have confirmed
that any financial institution that is a participant in DTC may utilize the
Book-Entry Transfer Facility Automated Tender Offer Program ("ATOP")
procedures to tender Old Notes.
Any DTC participant may make book-entry delivery of Old Notes by causing DTC
to transfer such Old Notes into the Exchange Agent's account in accordance
with DTC's ATOP procedures for transfer. However, the exchange for the Old
Notes so tendered will only be made after a Book-Entry Confirmation of such
book-entry transfer of Old Notes into the Exchange Agent's account, and timely
receipt by the Exchange Agent of an Agent's Message (as such term is defined
in the next sentence) and any other documents required by the Letter of
Transmittal. The term "Agent's Message" means a message, transmitted by DTC
and received by the Exchange Agent and forming part of a Book-Entry
Confirmation, which states that DTC has received an express acknowledgment
from a participant tendering Old Notes that are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal, or any other required documents to the Exchange Agent prior to
the Expiration Date, or (iii) who cannot comply with the book-entry transfer
procedures on a timely basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old Notes (if such Holder holds physical certificates representing
such Old Notes) and the number of shares of Old Notes tendered, and stating
that the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after the Expiration Date, either (i)
the Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Old Notes and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent or (ii) a timely Book-Entry Confirmation of such
Old Notes by an Agent's Message in lieu of a Letter of Transmittal, if such
procedure is available, into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the procedure for book-entry transfer
described herein, and any required documents, will be received by the
Exchange Agent; and
(c) Either (i) such properly completed and executed Letter of Transmittal
(or facsimile thereof), as well as the certificate(s) representing all
tendered Old Notes in proper form for transfer and other documents required
by the Letter of Transmittal are received by the Exchange Agent within
three New York Stock
27
<PAGE>
Exchange trading days after the Expiration Date, or (ii) such timely Book-
Entry Confirmation of such Old Notes by an Agent's Message in lieu of a
Letter of Transmittal, if such procedure is available, into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the
procedure for book-entry transfer described herein, and any required
documents, are received by the Exchange Agent within three New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Old Notes eligible to participate in the Exchange
Offer will terminate upon consummation of the Exchange Offer except with
respect to the Company's continuing obligations (i) to indemnify such holders
(including any broker-dealers) and certain parties related to such holders
against certain liabilities (including liabilities under the Securities Act),
(ii) to provide, upon the request of any holder of a transfer-restricted Old
Note held by a Qualified Institutional Buyer (as defined in Rule 144A), the
information required by Rule 144A(d)(4) under the Securities Act in order to
permit resales of such Old Notes pursuant to Rule 144A, (iii) to use its best
efforts to keep the Registration Statement effective to the extent necessary
to ensure that it is available for resales of transfer-restricted Old Notes by
broker-dealers for a period of up to 120 days from the Expiration Date, and
(iv) to provide copies of the latest version of the Prospectus to broker-
dealers upon their request for a period of up to 120 days after the Expiration
Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number), (iii) be signed by the Holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Exchange Agent register the
transfer of such Old Notes in the name of the person withdrawing the tender,
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form,
and eligibility (including time of receipt) of such notices will be determined
by the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Old Notes so withdrawn are validly retendered. Any
Old Notes that have been tendered but that are not accepted for payment will
be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender, or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described above under "--Procedures for Tendering" at
any time prior to the Expiration Date.
28
<PAGE>
EXCHANGE AGENT
Manufacturers and Traders Trust Company has been appointed Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or the Letter of Transmittal and requests
for a Notice of Guaranteed Delivery with respect to the Old Notes should be
addressed to the Exchange Agent as follows:
By Registered Mail, Certified Mail, Overnight Courier, or Hand Delivery:
Manufacturers and Traders Trust Company
50 Broadway, 7th Floor
New York, NY 10004
Attention: Russell T. Whitley
By Telephone: (716) 842-5602; By Facsimile: (716) 842-4474
FEES AND EXPENSES
The expenses of soliciting tenders in connection with the Exchange Offer
will be paid by the Company. The principal solicitation is being made by mail;
however, additional solicitation may be made by telecopier, telephone, or in
person by officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for their services and will
reimburse them for their reasonable out-of-pocket expenses in connection
therewith.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses include registration fees, fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees, and
printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Old Notes for shares not tendered or accepted for exchange are to
be delivered to, or are to be issued in the name of, any person other than the
registered Holder of Old Notes tendered, or, if tendered, the Old Notes are
registered in the name of any person other than the person signing the Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of the Old Notes pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered Holder or any other
persons) will be payable by the tendering Holder. If satisfactory evidence of
payment of such transfer taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
29
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as
contemplated in this Prospectus, the Company will receive in exchange Old
Notes in like principal amount, the terms of which are the same in all
material respects as the form and terms of to the New Notes, except that the
New Notes have been registered under the Securities Act and will not contain
terms restricting the transfer thereof. The Old Notes surrendered in exchange
for the New Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the New Notes will not result in any increase in the
indebtedness of the Company.
The net proceeds received by the Company from the issuance of the Old Notes
were approximately $193.7 million. The Company used a portion of the net
proceeds from the Offering to repay outstanding revolving loans under the
Credit Facility, which may be reborrowed (subject to satisfaction of certain
conditions). See "Description of Certain Indebtedness." A total of
$128,500,000 of revolving loans were repaid with such proceeds, which bore
interest at an annual rate of approximately 7.8%, and which were initially
borrowed to finance the development of extended stay lodging facilities. The
Company used the remaining proceeds of the Offering to expand its business by
developing additional extended stay lodging facilities and for other general
corporate purposes.
CAPITALIZATION
The following table sets forth the consolidated cash and capitalization of
the Company as of December 31, 1997 and as adjusted to give effect to the
Offering. This table should be read in conjunction with "Use of Proceeds,"
"Selected Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the financial statements
and notes thereto included elsewhere herein or incorporated by reference into
this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
AS
ACTUAL ADJUSTED(A)
-------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash and Cash Equivalents........................... $ 3,213 $ 61,913
======== ==========
Long-Term Debt:
Credit Facility................................... $135,000 $ --
-------- ----------
Notes offered hereby.............................. -- 200,000
-------- ----------
Stockholders' Equity:
Common Stock, $.01 par value, 500,000,000 shares
authorized and 95,604,208 shares issued and
outstanding...................................... 956 956
Additional paid-in capital........................ 823,060 823,060
Retained earnings................................. 10,643 10,643
-------- ----------
Total stockholders' equity...................... 834,659 834,659
-------- ----------
Total capitalization............................ $969,659 $1,034,659
======== ==========
</TABLE>
- --------
(a) As adjusted reflects the repayment of indebtedness outstanding on December
31, 1997 under the Credit Facility with the proceeds from the Offering but
does not reflect (i) approximately $93.5 million of additional borrowings
made by the Company under the Credit Facility between December 31, 1997
and March 10, 1998, (ii) conversion on March 10, 1998 of $100 million
borrowed under the Credit Facility to term loans, or (iii) any of the
additional financing available to the Company under the Amended Credit
Facility. See "Description of Certain Indebtedness."
30
<PAGE>
DESCRIPTION OF THE NOTES
The Old Notes are, and the New Notes will be, issued under the Indenture.
The following summary of certain provisions of the Indenture does not purport
to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indenture, including the definitions
of certain terms therein and those terms made a part thereof by the Trust
Indenture Act of 1939, as amended. The Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. Whenever
particular defined terms of the Indenture not otherwise defined herein are
referred to, the definitions ascribed to such terms in the Indenture are
incorporated herein by reference. For definitions of certain capitalized terms
used in the following summary, see "--Certain Definitions."
GENERAL
The Old Notes are, and the New Notes will be, unsecured senior subordinated
obligations of the Company, initially limited to $200.0 million aggregate
principal amount, and will mature on March 15, 2008. Each Note will initially
bear interest at 9.15% per annum from March 10, 1998 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semiannually (to Holders of record at the close of business on the March 1 or
September 1 immediately preceding the Interest Payment Date) on March 15 and
September 15 of each year, commencing September 15, 1998.
Principal of, premium, if any, and interest on the Notes are and will be
payable, and the Notes may be exchanged or transferred, at the office or
agency of the Company in the Borough of Manhattan, the City of New York (which
initially will be the corporate trust office of the Trustee at 50 Broadway,
New York, New York 10004); provided that, at the option of the Company,
payment of interest may be made by check mailed to the Holders at their
addresses as they appear in the Security Register.
The Notes are and will be issued only in fully registered form, without
coupons, in denominations of $1,000 of principal amount and any integral
multiple thereof. See "--Book-Entry; Delivery and Form." No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Notes
offered hereby and any additional Notes subsequently issued would be treated
as a single class for all purposes under the Indenture.
OPTIONAL REDEMPTION
The Old Notes are, and the New Notes will be, redeemable at the Company's
option, in whole or in part, at any time or from time to time, on or after
March 15, 2003 and prior to maturity, upon not less than 30 nor more than 60
days' prior notice mailed by first class mail to each Holder's last address as
it appears in the Security Register, at the following Redemption Prices
(expressed in percentages of principal amount), plus accrued and unpaid
interest, if any, to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date that is on or prior to the
Redemption Date to receive interest due on an Interest Payment Date), if
redeemed during the 12-month period commencing March 15 of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003.......................... 104.575%
2004.......................... 103.050
2005.......................... 101.525
2006 and thereafter........... 100.000
</TABLE>
31
<PAGE>
In addition, at any time prior to March 15, 2001, the Company may redeem up
to 35% of the principal amount of the Notes with the proceeds of one or more
sales by the Company of its Capital Stock (other than Disqualified Stock), at
any time or from time to time in part, at a Redemption Price (expressed as a
percentage of principal amount) of 109.15%, plus accrued and unpaid interest
to the Redemption Date (subject to the rights of Holders of record on the
relevant Regular Record Date that is prior to the Redemption Date to receive
interest due on an Interest Payment Date); provided that at least $130 million
aggregate principal amount of Notes remains outstanding after each such
redemption and that notice of such redemption is mailed within 60 days after
the consummation of such sale or sales.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not listed on a national securities exchange, by lot or
by such other method as the Trustee in its sole discretion shall deem to be
fair and appropriate; provided that no Note of $1,000 in principal amount or
less shall be redeemed in part. If any Note is to be redeemed in part only,
the notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
SINKING FUND
There will be no sinking fund payments for the Notes.
RANKING
The Old Notes are, and the New Notes will be, senior subordinated
Indebtedness of the Company. The payment of the Senior Subordinated
Obligations will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full, in cash or cash equivalents, of
all existing and future Senior Indebtedness. After giving pro forma effect to
the Offering of the Old Notes, as of December 31, 1997, the Company would have
had no Indebtedness outstanding other than the Old Notes and $500 million of
availability under the Credit Agreement (subject to borrowing base
restrictions). On March 10, 1998, the Company amended the Credit Agreement to
provide the Company with committed senior credit facilities totalling $700
million, subject to borrowing base restrictions. The Credit Agreement is
secured by a first priority lien on all stock owned by the Company and its
subsidiaries and all other current and future assets of the Company and its
subsidiaries (other than real property and certain other exceptions). In
addition, all existing and future liabilities (including trade payables) of
the subsidiaries of the Company will be effectively senior to the Notes, and
as of December 31, 1997, such subsidiaries would have had $101.2 million of
liabilities (excluding inter-company payables). Notwithstanding the foregoing,
payment from the money or the proceeds of U.S. Government Obligations held in
any defeasance trust described under "--Defeasance" below, will not be
contractually subordinated in right of payment to any Senior Indebtedness or
subject to the restrictions described herein.
Except with respect to the money, securities or proceeds held under any
defeasance trust established in accordance with the Indenture, upon any
payment or distribution of assets or securities of the Company of any kind or
character, whether in cash, property or securities, upon any dissolution or
winding up or total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary, or in bankruptcy, insolvency, receivership
or other proceedings, all amounts due or to become due upon all Senior
Indebtedness (including any interest accruing subsequent to an event of
bankruptcy at the rate provided in such Senior Indebtedness, whether or not
such interest is an allowed claim enforceable against the debtor under the
United States Bankruptcy Code or other applicable law) shall first be paid in
full, in cash or cash equivalents, before the Holders of the Notes or the
Trustee on behalf of the Holders of the Notes shall be entitled to receive any
payment by (or on behalf of) the Company on account of Senior Subordinated
Obligations or any payment to acquire any of the Notes for cash, property or
securities, or any distribution with respect to the Notes of any cash,
property or securities. Before any payment may be made by, or on behalf of,
the Company on any Senior Subordinated
32
<PAGE>
Obligations (other than with the money, securities or proceeds held under any
defeasance trust established in accordance with the Indenture), upon any such
dissolution, winding up, liquidation or reorganization, any payment or
distribution of assets or securities of the Company of any kind or character,
whether in cash, property or securities, to which the Holders of the Notes or
the Trustee on behalf of the Holders of the Notes would be entitled, but for
the subordination provisions of the Indenture, shall be made by the Company or
by any receiver, trustee in bankruptcy, liquidating trustee, agent or other
similar Person making such payment or distribution or by the Holders of the
Notes or the Trustee if received by them or it, directly to the holders of the
Senior Indebtedness (pro rata to such holders on the basis of the respective
amounts of Senior Indebtedness held by such holders) or their representatives
or to any trustee or trustees under any indenture pursuant to which any such
Senior Indebtedness may have been issued, as their respective interests
appear, to the extent necessary to pay all such Senior Indebtedness in full,
in cash or cash equivalents after giving effect to any concurrent payment,
distribution or provision therefor to or for the holders of such Senior
Indebtedness.
No direct or indirect payment by or on behalf of the Company of Senior
Subordinated Obligations (other than with the money, securities or proceeds
held under any defeasance trust established in accordance with the Indenture),
whether pursuant to the terms of the Notes or upon acceleration or otherwise
shall be made if, at the time of such payment, there exists a default in the
payment of all or any portion of the obligations on any Senior Indebtedness of
the Company and such default shall not have been cured or waived or the
benefits of this sentence waived by or on behalf of the holders of such Senior
Indebtedness. In addition, during the continuance of any other event of
default with respect to any Designated Senior Indebtedness pursuant to which
the maturity thereof may be accelerated, upon receipt by the Trustee of
written notice from the trustee or other representative for the holders of
such Designated Senior Indebtedness (or the holders of at least a majority in
principal amount of such Designated Senior Indebtedness then outstanding), no
payment of Senior Subordinated Obligations (other than with the money,
securities or proceeds held under any defeasance trust established in
accordance with the Indenture) may be made by or on behalf of the Company upon
or in respect of the Notes for a period (a "Payment Blockage Period")
commencing on the date of receipt of such notice and ending 179 days
thereafter (unless, in each case, such Payment Blockage Period shall be
terminated by written notice to the Trustee from such trustee of, or other
representatives for, such holders or by payment in full in cash or cash
equivalents of such Designated Senior Indebtedness or such event of default
has been cured or waived). Not more than one Payment Blockage Period may be
commenced with respect to the Notes during any period of 360 consecutive days.
Notwithstanding anything in the Indenture to the contrary, there must be 180
consecutive days in any 360-day period in which no Payment Blockage Period is
in effect. No event of default (other than an event of default pursuant to the
financial maintenance covenants under the Credit Agreement) that existed or
was continuing (it being acknowledged that any subsequent action that would
give rise to an event of default pursuant to any provision under which an
event of default previously existed or was continuing shall constitute a new
event of default for this purpose) on the date of the commencement of any
Payment Blockage Period with respect to the Designated Senior Indebtedness
initiating such Payment Blockage Period shall be, or shall be made, the basis
for the commencement of a second Payment Blockage Period by the representative
for, or the holders of, such Designated Senior Indebtedness, whether or not
within a period of 360 consecutive days, unless such event of default shall
have been cured or waived for a period of not less than 90 consecutive days.
To the extent any payment of Senior Indebtedness (whether by or on behalf of
the Company, as proceeds of security or enforcement of any right of setoff or
otherwise) is declared to be fraudulent or preferential, set aside or required
to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent
or other similar Person under any bankruptcy, insolvency, receivership,
fraudulent conveyance or similar law, then if such payment is recovered by, or
paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent
or other similar Person, the Senior Indebtedness or part thereof originally
intended to be satisfied shall be deemed to be reinstated and outstanding as
if such payment had not occurred. To the extent the obligation to repay any
Senior Indebtedness is declared to be fraudulent, invalid, or otherwise set
aside under any bankruptcy, insolvency, receivership, fraudulent conveyance or
similar law, then the obligation so declared fraudulent, invalid or otherwise
set aside (and all other amounts that would come due with respect thereto had
such obligation not been so affected) shall be deemed to be reinstated and
outstanding as Senior Indebtedness for all purposes hereof as if such
declaration, invalidity or setting aside had not occurred.
33
<PAGE>
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors of the Company who are not holders of
Senior Indebtedness may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than Holders of the Notes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other
capitalized term used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition from such Person by a Restricted Subsidiary and not Incurred
by such Person in connection with, or in anticipation of, such Person becoming
a Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness
of such Person which is redeemed, defeased, retired or otherwise repaid at the
time of or immediately upon consummation of the transactions by which such
Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be
Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such
period determined on a consolidated basis in conformity with GAAP; provided
that the following items shall be excluded in computing Adjusted Consolidated
Net Income (without duplication): (i) the net income of any Person (other than
the Company or a Restricted Subsidiary), except to the extent of the amount of
dividends or other distributions actually paid to the Company or any of its
Restricted Subsidiaries by such Person during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any
Person accrued prior to the date it becomes a Restricted Subsidiary or is
merged into or consolidated with the Company or any of its Restricted
Subsidiaries or all or substantially all of the property and assets of such
Person are acquired by the Company or any of its Restricted Subsidiaries;
(iii) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income to the Company or any Restricted
Subsidiary is not at the time of such determination permitted by the operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to such Restricted
Subsidiary; (iv) any gains or losses (on an after-tax basis) attributable to
Asset Sales; (v) except for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below, any amount paid
or accrued as dividends on Preferred Stock of the Company or any Restricted
Subsidiary owned by Persons other than the Company and any of its Restricted
Subsidiaries; and (vi) all extraordinary gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting
from write-ups of capital assets (excluding write-ups in connection with
accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense and other
like intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control
34
<PAGE>
with"), as applied to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; provided that such
Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company
or any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business, or one or more hotel properties, of such Person;
provided that the property and assets acquired are related, ancillary or
complementary to the businesses of the Company and its Restricted Subsidiaries
on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary of the Company or (ii) all or substantially all of
the assets that constitute a division or line of business, or one or more
hotel properties, of the Company or any of its Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or
a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted
Subsidiaries or (iii) any other property and assets of the Company or any of
its Restricted Subsidiaries (other than the Capital Stock or other Investment
in an Unrestricted Subsidiary) outside the ordinary course of business of the
Company or such Restricted Subsidiary and, in each case, that is not governed
by the provisions of the Indenture applicable to mergers, consolidations and
sales of assets of the Company; provided that "Asset Sale" shall not include
(a) sales or other dispositions of inventory, receivables and other current
assets, (b) sales, transfers or other dispositions of assets with a fair
market value not in excess of $1 million in any transaction or series of
related transactions, (c) sales, transfers or other dispositions of assets
constituting a Restricted Payment permitted to be made under the "Limitation
on Restricted Payments" covenant, (d) sales or other dispositions of assets
for consideration at least equal to the fair market value of the assets sold
or disposed of, to the extent that the consideration received would satisfy
clause (B) of the "Limitation on Asset Sales" covenant or (e) sales, transfers
or other dispositions of property or equipment that has become worn out,
obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Company or its Restricted Subsidiaries.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the
amount of such principal payment by (ii) the sum of all such principal
payments.
"Bank Agent" means The Industrial Bank of Japan, Limited, or its successors
as agent for the lenders under the Credit Agreement.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
35
<PAGE>
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than the
Existing Stockholders and their respective Affiliates, becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than 35% of the total voting power of the Voting Stock of the Company on a
fully diluted basis and such ownership represents a greater percentage of the
total voting power of the Voting Stock of the Company, on a fully diluted
basis, than is held by or for the Existing Stockholders and their Affiliates
on such date; or (ii) individuals who on the Closing Date constitute the Board
of Directors (together with any new or replacement directors whose election by
the Board of Directors or whose nomination by the Board of Directors for
election by the Company's stockholders was approved by a vote of at least a
majority of the members of the Board of Directors then still in office who
either were members of the Board of Directors on the Closing Date or whose
election or nomination for election was so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in office.
"Closing Date" means the date on which the Old Notes were originally issued
under the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all series
and classes of common stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, (A) to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary gains or losses or sales of assets),
(iii) depreciation expense, (iv) amortization expense and (v) all other non-
cash items reducing Adjusted Consolidated Net Income less all non-cash items
increasing Adjusted Consolidated Net Income, provided that increases or
decreases from changes in the amounts of current assets or current
liabilities, respectively, shall not result in adjustments to Adjusted
Consolidated Net Income pursuant to this clause (v), all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries in
conformity with GAAP, and (B) $25 million (for fiscal periods ending on or
prior to December 31, 1998), $15 million (for fiscal periods ending after
December 31, 1998 and on or prior to December 31, 1999) and $10 million (for
fiscal periods ending after December 31, 1999 and on or prior to December 31,
2000); provided that, if any Restricted Subsidiary is not a Wholly Owned
Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not
otherwise reduced in accordance with GAAP) by an amount equal to (X) the
amount of the Adjusted Consolidated Net Income attributable to such Restricted
Subsidiary multiplied by (Y) the percentage ownership interest in the income
of such Restricted Subsidiary not owned on the last day of such period by the
Company or any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of
the definition thereof (but only in the same proportion as the net income of
such Restricted Subsidiary is excluded from the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof)
and (ii) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Notes or the establishment of
the Credit Agreement or the Amended Credit Agreement, all as determined on a
consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP.
36
<PAGE>
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 135 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
the Capital Stock of the Company or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of
foreign currency exchange adjustments under Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 52); provided that for
purposes of clause (viii) of the "Limitation on Indebtedness" covenant, pro
forma effect shall be given to any issuance and sale of Capital Stock (other
than Disqualified Stock) after the date of such consolidated balance sheet.
"Credit Agreement" means the credit agreement dated as of September 26,
1997, and amended as of March 10, 1998 (the "Amended Credit Agreement"), among
the Company, various banks, Morgan Stanley Senior Funding, Inc., as
syndication agent and arranger, and the Industrial Bank of Japan, Limited, as
administrative agent, together with any agreements, instruments and documents
executed or delivered pursuant to or in connection with such credit agreement
(including without limitation any Guarantees and security documents), in each
case as such credit agreement or such agreements, instruments or documents may
be amended (including any amendment and restatement thereof), supplemented,
extended, renewed, replaced or otherwise modified from time to time and
including any agreement extending the maturity of, refinancing or otherwise
restructuring (including, but not limited to, the inclusion of additional
borrowers thereunder that are Subsidiaries of the Company) all or any portion
of the Indebtedness under such agreement or any successor agreement, as such
agreement may be amended, renewed, extended, substituted, replaced, restated
and otherwise modified from time to time).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) any Indebtedness under the Credit
Agreement (except that any Indebtedness which represents a partial refinancing
of Indebtedness theretofore outstanding pursuant to the Credit Agreement,
rather than a complete refinancing thereof, shall only constitute Designated
Senior Indebtedness if such partial refinancing meets the requirements of
clause (ii) below) and (ii) any other Indebtedness constituting Senior
Indebtedness that, at the date of determination, has an aggregate principal
amount outstanding of at least $25 million and that is specifically designated
by the Company, in the instrument creating or evidencing such Senior
Indebtedness as "Designated Senior Indebtedness."
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder
of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Notes; provided that
any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change of control" occurring prior to the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in "Limitation
on Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants
described below and such Capital Stock specifically provides that such Person
will not repurchase or redeem any such stock pursuant to such provision prior
to the Company's repurchase of such Notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described below.
37
<PAGE>
"Existing Stockholders" means H. Wayne Huizenga, George D. Johnson, Jr. and
Stewart H. Johnson, their spouses and any one or more of their lineal
descendants and their spouses or any trust created solely for the benefit of
any such Persons.
"Extended Stay Assets" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; provided that such
Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the Closing Date;
(ii) an acquisition by the Company or any of its Restricted Subsidiaries of
the property and assets of any Person other than the Company or any of its
Restricted Subsidiaries, that are related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the Closing Date;
or (iii) the construction or development of property or assets that are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the Closing Date, in each case including the costs
and expenses in connection therewith (including, the cost of design,
development, construction, acquisition or improvement).
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive
if evidenced by a Board Resolution.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as approved by a significant
segment of the accounting profession. All ratios and computations contained or
referred to in the Indenture shall be computed in conformity with GAAP applied
on a consistent basis, except that calculations made for purposes of
determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the offering of the
Notes or the establishment of the Credit Agreement and the Amended Credit
Agreement (including the write-off of debt issuance costs in connection
therewith), (ii) the costs related to the acquisition of Studio Plus Hotels
Inc., and (iii) except as otherwise provided, the amortization of any amounts
required or permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Government Securities" means direct obligations of, obligations fully
guaranteed by, or participations in pools consisting solely of obligations of
or obligations guaranteed by, the United States of America for the payment of
which guarantee or obligations the full faith and credit of the United States
of America is pledged and which are not callable or redeemable at the option
of the issuer thereof.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or
by agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such
38
<PAGE>
Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided
that neither the accrual of interest nor the accretion of original issue
discount shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v),
(vi) or (vii) below) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third
Business Day following receipt by such Person of a demand for reimbursement),
(iv) all obligations of such Person to pay the deferred and unpaid purchase
price of property or services, which purchase price is due more than six
months after the date of placing such property in service or taking delivery
and title thereto or the completion of such services, except Trade Payables,
(v) all Capitalized Lease Obligations, (vi) all Indebtedness of other Persons
secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not
otherwise included in this definition, obligations under Currency Agreements
and Interest Rate Agreements. The amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date of all unconditional
obligations as described above and, with respect to contingent obligations,
the maximum liability upon the occurrence of the contingency giving rise to
the obligation, provided (A) that the amount outstanding at any time of any
Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP, (B) that money borrowed and set aside at the time of the Incurrence of
any Indebtedness in order to prefund the payment of the interest on such
Indebtedness shall not be deemed to be "Indebtedness" so long as such money is
held to secure the payment of such interest, and (C) that Indebtedness shall
not include any liability for federal, state, local or other taxes.
"Indebtedness to Capitalization Ratio" means, on any Transaction Date, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis on such Transaction Date to
(ii) the sum of (A) the aggregate amount of Indebtedness of the Company and
its Restricted Subsidiaries on a consolidated basis on such Transaction Date
plus (B) the Consolidated Net Worth of the Company on such Transaction Date.
"Interest Coverage Ratio" means, on any Transaction Date, the ratio of (i)
the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters prior to such Transaction Date for which reports have been
filed with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant (the "Four Quarter
Period") to (ii) the aggregate Consolidated Interest Expense during such Four
Quarter Period. In making the foregoing calculation, (A) pro forma effect
shall be given to any Indebtedness Incurred or repaid during the period (the
"Reference Period") commencing on the first day of the Four Quarter Period and
ending on the Transaction Date (other than Indebtedness Incurred or repaid
under a revolving credit or similar arrangement to the extent of the
commitment thereunder (or under any predecessor revolving credit or similar
arrangement) in effect on the last day of such Four Quarter Period unless any
portion of such Indebtedness is projected, in the reasonable judgment of the
senior management of the Company, to remain outstanding for a period in excess
of 12 months from the date of the Incurrence thereof), in each case as if such
Indebtedness had been Incurred or repaid on the first day of such Reference
Period (and pro forma effect shall be given to the purchase of any U.S.
government securities required to be purchased with the proceeds of any such
Indebtedness and set aside to prefund the payment of interest on such
Indebtedness at the time such Indebtedness is Incurred); (B) Consolidated
Interest Expense attributable to interest on any Indebtedness (whether
existing or being Incurred) computed on a pro forma basis and bearing a
floating interest
39
<PAGE>
rate shall be computed as if the rate in effect on the Transaction Date
(taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months or, if shorter, at least equal to the remaining term of such
Indebtedness) had been the applicable rate for the entire period; (C) pro
forma effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving pro forma effect to the application of proceeds of any Asset
Disposition) and the designation of Unrestricted Subsidiaries as Restricted
Subsidiaries that occur during such Reference Period as if they had occurred
and such proceeds had been applied on the first day of such Reference Period;
and (D) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of proceeds
of any asset disposition) that have been made by any Person that has become a
Restricted Subsidiary or has been merged with or into the Company or any
Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; provided
that to the extent that clause (C) or (D) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the four full fiscal quarters
immediately preceding the Transaction Date of the Person, or division or line
of business of the Person, that is acquired or disposed for which financial
information is available.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers, suppliers or
contractors in the ordinary course of business that are, in conformity with
GAAP, recorded as accounts receivable, prepaid expenses or deposits on the
balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase or acquisition of Capital Stock, bonds, notes, debentures or
other similar instruments issued by, such Person and shall include (i) the
designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii)
the fair market value of the Capital Stock (or any other Investment), held by
the Company or any of its Restricted Subsidiaries, of (or in) any Person that
has ceased to be a Restricted Subsidiary, including without limitation, by
reason of any transaction permitted by clause (iii) of the "Limitation on the
Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant;
provided that the fair market value of the Investment remaining in any Person
that has ceased to be a Restricted Subsidiary shall not exceed the aggregate
amount of Investments previously made in such Person valued at the time such
Investments were made less the net reduction of such Investments. For purposes
of the definition of "Unrestricted Subsidiary" and the "Limitation on
Restricted Payments" covenant described below, (i) "Investment" shall include
the fair market value of the assets (net of liabilities (other than
liabilities to the Company or any of its Restricted Subsidiaries)) of any
Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary, (ii) the fair market value of the
assets (net of liabilities (other than liabilities to the Company or any of
its Restricted Subsidiaries)) of any Unrestricted Subsidiary at the time that
such Unrestricted Subsidiary is designated a Restricted Subsidiary shall be
considered a reduction in outstanding Investments and (iii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent
40
<PAGE>
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of (i) brokerage
commissions and other fees and expenses (including fees and expenses of
counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes (whether or not such taxes will actually be paid or are payable)
as a result of such Asset Sale without regard to the consolidated results of
operations of the Company and its Restricted Subsidiaries, taken as a whole,
(iii) payments made to repay Indebtedness or any other obligation outstanding
at the time of such Asset Sale that either (A) is secured by a Lien on the
property or assets sold or (B) is required to be paid as a result of such sale
and (iv) appropriate amounts to be provided by the Company or any Restricted
Subsidiary as a reserve against any liabilities associated with such Asset
Sale, including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale, all as
determined in conformity with GAAP and (b) with respect to any issuance or
sale of Capital Stock, the proceeds of such issuance or sale in the form of
cash or cash equivalents, including payments in respect of deferred payment
obligations (to the extent corresponding to the principal, but not interest,
component thereof) when received in the form of cash or cash equivalents
(except to the extent such obligations are financed or sold with recourse to
the Company or any Restricted Subsidiary) and proceeds from the conversion of
other property received when converted to cash or cash equivalents, net of
attorney's fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Payment Date"); (iii) that any Note not tendered will continue
to accrue interest pursuant to its terms; (iv) that, unless the Company
defaults in the payment of the purchase price, any Note accepted for payment
pursuant to the Offer to Purchase shall cease to accrue interest on and after
the Payment Date; (v) that Holders electing to have a Note purchased pursuant
to the Offer to Purchase will be required to surrender the Note, together with
the form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately
preceding the Payment Date; (vi) that Holders will be entitled to withdraw
their election if the Paying Agent receives, not later than the close of
business on the third Business Day immediately preceding the Payment Date, a
telegram, facsimile transmission or letter setting forth the name of such
Holder, the principal amount of Notes delivered for purchase and a statement
that such Holder is withdrawing his election to have such Notes purchased; and
(vii) that Holders whose Notes are being purchased only in part will be issued
new Notes equal in principal amount to the unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall
be in a principal amount of $1,000 or integral multiples thereof. On the
Payment Date, the Company shall (i) accept for payment on a pro rata basis
Notes or portions thereof tendered pursuant to an Offer to Purchase; (ii)
deposit with the Paying Agent money sufficient to pay the purchase price of
all Notes or portions thereof so accepted; and (iii) deliver, or cause to be
delivered, to the Trustee all Notes or portions thereof so accepted together
with an Officers' Certificate specifying the Notes or portions thereof
accepted for payment by the Company. The Paying Agent shall promptly mail to
the Holders of Notes so accepted payment in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail to such Holders a
new Note equal in principal amount to any unpurchased portion of the Note
surrendered; provided that each Note purchased and each new Note issued shall
be in a principal amount of $1,000 or integral multiples thereof. The Company
will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The Trustee shall act as the Paying Agent
for an Offer to Purchase. The Company will comply with Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable, in the event that the Company
is required to repurchase Notes pursuant to an Offer to Purchase.
41
<PAGE>
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with
or into or transfer or convey all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided that such person's primary
business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such Investment; (ii)
Temporary Cash Investments; (iii) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses in accordance with GAAP; (iv) stock, obligations or
securities received in satisfaction of judgments; (v) an Investment in an
Unrestricted Subsidiary consisting solely of an Investment in another
Unrestricted Subsidiary; (vi) Interest Rate Agreements and Currency Agreements
designed solely to protect the Company or its Restricted Subsidiaries against
fluctuations in interest rates or foreign currency exchange rates; (vii) loans
or advances to employees in the ordinary course of business in aggregate
amount outstanding not to exceed $1 million; and (viii) Investments in any
Person the primary business of which is related, ancillary or complementary to
the businesses of the Company and its Restricted Subsidiaries; provided that
the aggregate amount of such Investments does not exceed $50 million plus the
net reduction in such Investments.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference stock, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred or preference stock.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Senior Indebtedness" means the following obligations of the Company,
whether outstanding on the Closing Date or thereafter Incurred: (i) all
Indebtedness and all other monetary obligations (including, without
limitation, expenses, fees, principal, interest, reimbursement obligations
under letters of credit and indemnities payable in connection therewith) of
the Company under (or in respect of) the Credit Agreement or any Interest Rate
Agreement or Currency Agreement relating to the Indebtedness under the Credit
Agreement and (ii) all other Indebtedness and all other monetary obligations
of the Company (other than the Notes), including principal and interest on
such Indebtedness, unless such Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such Indebtedness is issued, is
pari passu with, or subordinated in right of payment to, the Notes; provided
that the term "Senior Indebtedness" shall not include (a) any Indebtedness of
the Company that, when Incurred, was without recourse to the Company, (b) any
Indebtedness of the Company to a Subsidiary of the Company, or to a joint
venture in which the Company has an interest, (c) any Indebtedness of the
Company, to the extent not permitted by the "Limitation on Indebtedness"
covenant or the "Limitation on Senior Subordinated Indebtedness" covenant
described below, (d) any repurchase, redemption or other obligation in respect
of Disqualified Stock, (e) any Indebtedness to any employee of the Company or
any of its respective Subsidiaries, (f) any liability for taxes owed or owing
by the Company or (g) any Trade Payables. Senior Indebtedness will also
include interest accruing subsequent to events of bankruptcy of the Company
and its respective Subsidiaries at the rate provided for in the document
governing such Senior Indebtedness, whether or not such interest is an allowed
claim enforceable against the debtor in a bankruptcy case under bankruptcy
law.
"Senior Subordinated Obligations" means any principal of, premium, if any,
interest, or other amounts due, on the Notes payable pursuant to the terms of
the Notes or upon acceleration, including any amounts received upon the
exercise of rights of rescission or other rights of action (including claims
for damages) or otherwise, to the extent relating to the purchase price of the
Notes or amounts corresponding to such principal, premium, if any, or interest
on the Notes.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent
fiscal year of the Company, accounted for more than 10% of the consolidated
revenues of the Company and its Restricted Subsidiaries or (ii) as of the end
of such fiscal year, was the owner of more than 10% of the consolidated assets
of the Company and its Restricted Subsidiaries, all as set forth on the most
recently available consolidated financial statements of the Company for such
fiscal year.
42
<PAGE>
"S&P" means Standard & Poor's Ratings Services, a division of The McGraw-
Hill Companies, and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association, business trust or other business entity of which more than 50% of
the voting power of the outstanding Voting Stock is owned, directly or
indirectly, by such Person and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or
obligations fully and unconditionally guaranteed by the United States of
America or any agency thereof, (ii) time deposit accounts, certificates of
deposit and money market deposits maturing within one year of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50 million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) commercial paper, maturing
not more than one year after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America, any state thereof or any foreign country
recognized by the United States of America with a rating at the time as of
which any investment therein is made of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P, (v) securities with maturities of one
year or less from the date of acquisition issued or fully and unconditionally
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and
rated at least "A" by S&P or Moody's and (vi) other dollar denominated
securities issued by any Person incorporated in the United States rated at
least "A" or the equivalent by S&P or at least "A2" or the equivalent by
Moody's and in each case either (A) maturing not more than one year after the
date of acquisition or (B) which are subject to a repricing arrangement (such
as a Dutch auction) not more than one year after the date of acquisition (and
reprices at least yearly thereafter) which the Person making the investment
believes in good faith will permit such Person to sell such security at par in
connection with such repricing mechanism.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services, including without limitation, obligations under (or in respect of)
construction contracts (to the extent such obligations do not constitute
Indebtedness for borrowed money).
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below; and (ii) any Subsidiary
of an Unrestricted Subsidiary. The Board of Directors may designate any
Restricted Subsidiary (including any newly acquired or newly formed Subsidiary
of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns
any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any Restricted Subsidiary; provided that (A) any Guarantee by the
Company or any Restricted Subsidiary of
43
<PAGE>
any Indebtedness of the Subsidiary being so designated shall be deemed an
"Incurrence" of such Indebtedness and an "Investment" by the Company or such
Restricted Subsidiary (or both, if applicable) at the time of such
designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on
Restricted Payments" covenant described below; and (C) if applicable, the
Incurrence of Indebtedness and the Investment referred to in clause (A) of
this proviso would be permitted under the "Limitation on Indebtedness" and
"Limitation on Restricted Payments" covenants described below. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that (i) no Default or Event of Default shall have
occurred and be continuing at the time of or after giving effect to such
designation and (ii) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if Incurred
at such time, have been permitted to be Incurred (and shall be deemed to have
been Incurred) for all purposes of the Indenture. Any such designation by the
Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the Board Resolution giving effect to such designation
and an Officers' Certificate certifying that such designation complied with
the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company or any Restricted
Subsidiary may Incur Indebtedness if, after giving effect to the Incurrence of
such Indebtedness and the receipt and application of the proceeds therefrom,
the Interest Coverage Ratio would be greater than (x) 1.50:1, for Indebtedness
Incurred on or prior to December 31, 1998, (y) 1.75:1, for Indebtedness
Incurred after December 31, 1998 and on or prior to December 31, 1999 and (z)
2.00:1, for Indebtedness Incurred thereafter.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $800 million, less any amount of such Indebtedness permanently repaid
as provided under the "Limitation on Asset Sales" covenant described below;
(ii) Indebtedness owed (A) by a Restricted Subsidiary to the Company; provided
that if such Indebtedness exceeds $500,000 it shall be evidenced by a
promissory note or (B) by the Company or a Restricted Subsidiary to any
Restricted Subsidiary; provided that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund,
then outstanding Indebtedness (other than Indebtedness Incurred under clause
(i), (ii), (iv), (vi), (vii), (viii) or (ix) of this paragraph) and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, fees and expenses); provided that
Indebtedness the proceeds of which are used to refinance or refund the Notes
or Indebtedness that is pari passu with, or subordinated in right of payment
to, the Notes shall only be permitted under this clause (iii) if (A) in case
the Notes are refinanced in part or the Indebtedness to be refinanced is pari
passu with the Notes, such new Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made pari passu with, or subordinate in
44
<PAGE>
right of payment to, the remaining Notes, (B) in case the Indebtedness to be
refinanced is subordinated in right of payment to the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is issued or remains outstanding, is
expressly made subordinate in right of payment to the Notes at least to the
extent that the Indebtedness to be refinanced is subordinated to the Notes and
(C) such new Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness
to be refinanced or refunded, and the Average Life of such new Indebtedness is
at least equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded; and provided further that in no event may Indebtedness
of the Company that is pari passu with or subordinated in right of payment to
the Notes be refinanced by means of any Indebtedness of any Restricted
Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in respect of
performance, surety or appeal bonds provided in the ordinary course of
business, (B) under Currency Agreements and Interest Rate Agreements; provided
that such agreements (a) are designed solely to protect the Company or its
Restricted Subsidiaries against fluctuations in foreign currency exchange
rates or interest rates and (b) do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder; and (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such business, assets or Restricted Subsidiary
for the purpose of financing such acquisition), in a principal amount not to
exceed the gross proceeds actually received by the Company or any Restricted
Subsidiary in connection with such disposition; (v) Indebtedness of the
Company, to the extent the net proceeds thereof are promptly (A) used to
purchase Notes tendered in an Offer to Purchase made as a result of a Change
in Control or (B) deposited to defease the Notes as described below under
"Defeasance"; (vi) Guarantees of the Notes and Guarantees of Indebtedness of
the Company by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant described below;
(vii) Indebtedness, Incurred to finance Extended Stay Assets or to refinance
such Indebtedness, in an aggregate amount not to exceed at any one time
outstanding (A) the Net Cash Proceeds, or the fair market value of property
other than cash, received by the Company after the Closing Date from the
issuance and sale of its Capital Stock (other than Disqualified Stock),
including an Incurrence (permitted by the Indenture) of Indebtedness of the
Company upon conversion of such Indebtedness into Capital Stock (other than
Disqualified Stock) of the Company, to a Person that is not a Subsidiary of
the Company, to the extent such sale of Capital Stock has not been used
pursuant to clause (C)(2) of the first paragraph, or clause (iii), (iv) or
(vi) of the second paragraph, of the "Limitation on Restricted Payments"
covenant to make a Restricted Payment less (B) the aggregate amount of
Indebtedness outstanding under clause (viii) below; (viii) Indebtedness
Incurred prior to December 31, 1999 to finance Extended Stay Assets or to
refinance such Indebtedness, in an aggregate amount not to exceed $150 million
at any one time outstanding; provided that after giving pro forma effect to
the Incurrence of such Indebtedness, the Company's Indebtedness to
Capitalization Ratio would be less than 60%; and (ix) Indebtedness, in
addition to Indebtedness permitted under clauses (i) through (viii) above, in
an aggregate principal amount outstanding at any time not to exceed
$15 million less any amount of such Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred under
the Credit Agreement on or prior to the Closing Date shall be treated as
Incurred pursuant to clause (i) of the second paragraph of this "Limitation on
Indebtedness" covenant, (2) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise
45
<PAGE>
included in the determination of such particular amount shall not be included
and (3) any Liens granted pursuant to the equal and ratable provisions
referred to in the "Limitation on Liens" covenant described below shall not be
treated as Indebtedness. For purposes of determining compliance with this
"Limitation on Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses (other than Indebtedness referred to in clause
(1) of the preceding sentence), the Company, in its sole discretion, shall
classify, and from time to time may reclassify, such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
such clauses.
Limitation on Senior Subordinated Indebtedness
The Company shall not Incur any Indebtedness that is subordinate in right of
payment to any Senior Indebtedness unless such Indebtedness is pari passu
with, or subordinated in right of payment to, the Notes; provided that the
foregoing limitation shall not apply to distinctions between categories of
Senior Indebtedness of the Company that exist by reason of any Liens or
Guarantees arising or created in respect of some but not all such Senior
Indebtedness.
Limitation on Liens
The Company shall not Incur any Indebtedness secured by a Lien ("Secured
Indebtedness") which is not Senior Indebtedness unless contemporaneously
therewith effective provision is made to secure the Notes equally and ratably
with (or, if the Secured Indebtedness is subordinated in right of payment to
the Notes, prior to) such Secured Indebtedness for so long as such Secured
Indebtedness is secured by a Lien.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any
distribution on or with respect to its Capital Stock (other than (x) dividends
or distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares
of such Capital Stock and (y) pro rata dividends or distributions on Common
Stock of Restricted Subsidiaries held by minority stockholders) held by
Persons other than the Company or any of its Restricted Subsidiaries, (ii)
purchase, redeem, retire or otherwise acquire for value any shares of Capital
Stock of (A) the Company or an Unrestricted Subsidiary (including options,
warrants or other rights to acquire such shares of Capital Stock) held by any
Person or (B) a Restricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Affiliate of the
Company (other than a Wholly Owned Restricted Subsidiary) or any holder (or
any Affiliate of such holder) of 5% or more of the Capital Stock of the
Company, (iii) make any voluntary or optional principal payment, or voluntary
or optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Notes or (iv) make any Investment, other than a
Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) above being collectively "Restricted
Payments") if, at the time of, and after giving effect to, the proposed
Restricted Payment: (A) a Default or Event of Default shall have occurred and
be continuing, (B) the Company could not Incur at least $1.00 of Indebtedness
under the first paragraph of the "Limitation on Indebtedness" covenant or (C)
the aggregate amount of all Restricted Payments (the amount, if other than in
cash, to be determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) made
after the Closing Date shall exceed the sum of (1) 50% of the aggregate amount
of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net
Income is a loss, minus 100% of the amount of such loss) (determined by
excluding income resulting from transfers of assets by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative
basis during the period (taken as one accounting period) beginning on the
first day of the fiscal quarter immediately following the Closing Date and
ending on the last day of the last fiscal quarter preceding the Transaction
Date for which reports have been filed with the Commission or provided to the
Trustee pursuant to the "Commission Reports and Reports to Holders" covenant
plus (2) the aggregate Net Cash Proceeds received by the Company after the
Closing Date from the issuance and
46
<PAGE>
sale permitted by the Indenture of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Subsidiary of the Company, including an
issuance or sale permitted by the Indenture of Indebtedness of the Company for
cash subsequent to the Closing Date upon the conversion of such Indebtedness
into Capital Stock (other than Disqualified Stock) of the Company, or from the
issuance to a Person who is not a Subsidiary of the Company of any options,
warrants or other rights to acquire Capital Stock of the Company (in each
case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Notes), in each case except to
the extent such Net Cash Proceeds are used to Incur Indebtedness outstanding
under clause (vii) of the "Limitation on Indebtedness" covenant, plus (3) an
amount equal to the net reduction in Investments (other than reductions in
Permitted Investments) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers
of assets, in each case to the Company or any Restricted Subsidiary or from
the Net Cash Proceeds from the sale of any such Investment (except, in each
case, to the extent any such payment or proceeds are included in the
calculation of Adjusted Consolidated Net Income), or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investments"), not to exceed, in each case, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at
said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment
to the Notes including premium, if any, and accrued and unpaid interest, with
the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii)
of the second paragraph of part (a) of the "Limitation on Indebtedness"
covenant; (iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company or an Unrestricted Subsidiary (or options, warrants or
other rights to acquire such Capital Stock) in exchange for, or out of the
proceeds of a substantially concurrent offering of, shares of Capital Stock
(other than Disqualified Stock) of the Company (or options, warrants or other
rights to acquire such Capital Stock); (iv) the making of any principal
payment or the repurchase, redemption, retirement, defeasance or other
acquisition for value of Indebtedness of the Company which is subordinated in
right of payment to the Notes in exchange for, or out of the proceeds of, a
substantially concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (v) payments or distributions, to dissenting
stockholders pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions
of the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; (vi) Investments
acquired in exchange for Capital Stock (other than Disqualified Stock) of the
Company; or (vii) Restricted Payments in an aggregate amount not to exceed $50
million; provided that, except in the case of clauses (i) and (iii), no
Default or Event of Default shall have occurred and be continuing or occur as
a consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) or (vii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clause (vi)
thereof), and the Net Cash Proceeds from any issuance of Capital Stock
referred to in clauses (iii) and (iv), shall be included in calculating
whether the conditions of clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant have been met with respect to any
subsequent Restricted Payments. In the event the proceeds of an issuance of
Capital Stock of the Company are used for the redemption, repurchase or other
acquisition of the Notes, or Indebtedness that is pari passu with the Notes,
then the Net Cash Proceeds of such issuance shall be included in clause (C) of
the first paragraph of this "Limitation on Restricted Payments" covenant only
to the extent such proceeds are not used for such redemption, repurchase or
other acquisition of Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction of any kind on the ability of any
47
<PAGE>
Restricted Subsidiary to (i) pay dividends or make any other distributions
permitted by applicable law on any Capital Stock of such Restricted Subsidiary
owned by the Company or any other Restricted Subsidiary, (ii) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (iii)
make loans or advances to the Company or any other Restricted Subsidiary or
(iv) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Credit Agreement, the
Indenture or any other agreements in effect on the Closing Date, and any
modifications, extensions, refinancings, renewals, substitutions or
replacements of such agreements; provided that the encumbrances and
restrictions in any such modifications, extensions, refinancings, renewals,
substitutions or replacements are no less favorable in any material respect to
the Holders than those encumbrances or restrictions that are then in effect
and that are being modified, extended, refinanced, renewed, substituted or
replaced; (ii) existing under or by reason of applicable law; (iii) existing
with respect to any Person or the property or assets of such Person acquired
by the Company or any Restricted Subsidiary, existing at the time of such
acquisition and not incurred in contemplation thereof, which encumbrances or
restrictions are not applicable to any Person or the property or assets of any
Person other than such Person or the property or assets of such Person so
acquired; (iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) existing by
virtue of any transfer of, agreement to transfer, option or right with respect
to, or Lien on, any property or assets of the Company or any Restricted
Subsidiary not otherwise prohibited by the Indenture or (C) arising or agreed
to in the ordinary course of business, not relating to any Indebtedness, and
that do not, individually or in the aggregate, detract from the value of
property or assets of the Company or any Restricted Subsidiary in any manner
material to the Company or any Restricted Subsidiary; (v) with respect to a
Restricted Subsidiary and imposed pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary; or
(vi) contained in the terms of any Indebtedness or any agreement pursuant to
which such Indebtedness was issued if (A) the encumbrance or restriction
applies only in the event of a payment default or a default with respect to a
financial covenant contained in such Indebtedness or agreement, (B) the
encumbrance or restriction is not materially more disadvantageous to the
Holders of the Notes than is customary in comparable financings (as determined
by the Company) and (C) the Company determines that any such encumbrance or
restriction will not materially affect the Company's ability to make principal
or interest payments on the Notes. Nothing contained in this "Limitation on
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries"
covenant shall prevent the Company or any Restricted Subsidiary from (1)
creating, incurring, assuming or suffering to exist any Liens otherwise
permitted in the "Limitation on Liens" covenant or (2) restricting the sale or
other disposition of property or assets of the Company or any of its
Restricted Subsidiaries that secure Indebtedness of the Company or any of its
Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been
permitted to be made under the "Limitation on Restricted Payments" covenant if
made on the date of such issuance or sale; or (iv) issuances or sales of
Common Stock of a Restricted Subsidiary, provided that the Company or such
Restricted Subsidiary applies the Net Cash Proceeds, if any, of any such sale
in accordance with clause (A) or (B) of the "Limitation on Asset Sales"
covenant described below.
48
<PAGE>
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the Notes by such
Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not
in any manner whatsoever claim or take the benefit or advantage of, any rights
of reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Subsidiary Guarantee; provided that this
paragraph shall not be applicable to any Guarantee of any Restricted
Subsidiary that existed at the time such Person became a Restricted Subsidiary
and was not Incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) pari
passu with the Notes, then the Guarantee of such Guaranteed Indebtedness shall
be pari passu with, or subordinated to, the Subsidiary Guarantee or (B)
subordinated to the Notes, then the Guarantee of such Guaranteed Indebtedness
shall be subordinated to the Subsidiary Guarantee at least to the extent that
the Guaranteed Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the
Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release
or discharge of the Guarantee which resulted in the creation of such
Subsidiary Guarantee, except a discharge or release by or as a result of
payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or any
Affiliate of such holder) of 5% or more of any class of Capital Stock of the
Company or with any Affiliate of the Company or any Restricted Subsidiary,
except upon fair and reasonable terms no less favorable to the Company or such
Restricted Subsidiary than could be obtained, at the time of such transaction
or, if such transaction is pursuant to a written agreement, at the time of the
execution of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized
investment banking firm stating that the transaction is fair to the Company or
such Restricted Subsidiary from a financial point of view; (ii) any
transaction solely between the Company and any of its Wholly Owned Restricted
Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the
payment of reasonable and customary fees and expenses to directors of the
Company who are not employees of the Company; (iv) any payments or other
transactions pursuant to any tax-sharing agreement between the Company and any
other Person with which the Company files a consolidated tax return or with
which the Company is part of a consolidated group for tax purposes; or (v) any
Restricted Payments not prohibited by the "Limitation on Restricted Payments"
covenant. Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this "Limitation on
Transactions with Shareholders and Affiliates" covenant and not covered by
clauses (ii) through (v) of this paragraph, (a) the aggregate amount of which
exceeds $5 million in value, must be approved or determined to be fair in the
manner provided for in clause (i)(A) or (B) above and (b) the aggregate amount
of which exceeds $10 million in value, must be determined to be fair in the
manner provided for in clause (i)(B) above.
49
<PAGE>
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the
Company or such Restricted Subsidiary is at least equal to the fair market
value of the assets sold or disposed of and (ii) at least 75% of the
consideration received consists of cash or Temporary Cash Investments or the
assumption of Senior Indebtedness of the Company or Indebtedness of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
is irrevocably released from all liability under such Indebtedness. In the
event and to the extent that the Net Cash Proceeds received by the Company or
any of its Restricted Subsidiaries from one or more Asset Sales occurring on
or after the Closing Date in any period of 12 consecutive months exceed 10% of
Adjusted Consolidated Net Tangible Assets (determined as of the date closest
to the commencement of such 12-month period for which a consolidated balance
sheet of the Company and its Subsidiaries has been filed with the Commission
or provided to the Trustee pursuant to the "Commission Reports and Reports to
Holders" covenant), then the Company shall or shall cause the relevant
Restricted Subsidiary to (i) within twelve months after the date Net Cash
Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets
(A) apply an amount equal to such excess Net Cash Proceeds to permanently
repay Senior Indebtedness of the Company, or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or
Indebtedness of any other Restricted Subsidiary, in each case owing to a
Person other than the Company or any of its Restricted Subsidiaries or (B)
invest an equal amount, or the amount not so applied pursuant to clause (A)
(or enter into a definitive agreement committing to so invest within 12 months
after the date of such agreement), in property or assets (other than current
assets) of a nature or type or that are used in a business (or in a company
having property and assets of a nature or type, or engaged in a business)
similar or related to the nature or type of the property and assets of, or the
business of, the Company and its Restricted Subsidiaries existing on the date
of such investment and (ii) apply (no later than the end of the 12-month
period referred to in clause (i)) such excess Net Cash Proceeds (to the extent
not applied pursuant to clause (i)) as provided in the following paragraph of
this "Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
12-month period as set forth in clause (i) of the preceding sentence and not
applied as so required by the end of such period shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $10 million, the
Company must commence, not later than the fifteenth Business Day of such
month, and consummate an Offer to Purchase from the Holders on a pro rata
basis an aggregate principal amount of Notes equal to the Excess Proceeds on
such date, at a purchase price equal to 100% of the principal amount of the
Notes, plus, in each case, accrued interest (if any) to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding,
at a purchase price equal to 101% of the principal amount thereof, plus
accrued interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well
as may be contained in other securities of the Company which might be
outstanding at the time). The above covenant requiring the Company to
repurchase the Notes will, unless consents are obtained, require the Company
to repay all indebtedness then outstanding which by its terms would prohibit
such Note repurchase, either prior to or concurrently with such Note
repurchase.
The Company will not be required to make an Offer to Purchase pursuant to
this covenant if a third party makes an Offer to Purchase in compliance with
this covenant and repurchases all Notes validly tendered and not withdrawn
under such Offer to Purchase.
50
<PAGE>
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is then required to file reports with the
Commission, the Company shall file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Securities Exchange Act of 1934 if it were
subject thereto; provided that, if filing such documents by the Company with
the Commission is not permitted under the Exchange Act, the Company shall
provide such documents to the Trustee and upon written request supply copies
of such documents to any prospective Holder. The Company shall supply the
Trustee and each Holder or shall supply to the Trustee for forwarding to each
such Holder, without cost to such Holder, copies of such reports and other
information.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise, whether or not such payment is prohibited by the
provisions described above under "--Ranking"; (b) default in the payment of
interest on any Note when the same becomes due and payable, and such default
continues for a period of 30 days, whether or not such payment is prohibited
by the provisions described above under "--Ranking"; (c) default in the
performance or breach of the provisions of the Indenture applicable to
mergers, consolidations and transfers of all or substantially all of the
assets of the Company or the failure to make or consummate an Offer to
Purchase in accordance with the "Limitation on Asset Sales" or "Repurchase of
Notes upon a Change of Control" covenant; (d) the Company defaults in the
performance of or breaches any other covenant or agreement of the Company in
the Indenture or under the Notes (other than a default specified in clause
(a), (b) or (c) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of 25% or
more in aggregate principal amount of the Notes; (e) there occurs with respect
to any issue or issues of Indebtedness of the Company or any Significant
Subsidiary having an outstanding principal amount of $15 million or more in
the aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (I) an event of default
that has caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (II) the failure to make a
principal payment at the final (but not any interim) fixed maturity and such
defaulted payment shall not have been made, waived or extended within 30 days
of such payment default; (f) any final judgment or order (not covered by
insurance) for the payment of money in excess of $15 million in the aggregate
for all such final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be rendered
against the Company or any Significant Subsidiary and shall not be paid or
discharged, and there shall be any period of 60 consecutive days following
entry of the final judgment or order that causes the aggregate amount for all
such final judgments or orders outstanding and not paid or discharged against
all such Persons to exceed $15 million during which a stay of enforcement of
such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; (g) a court having jurisdiction in the premises enters
a decree or order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, (B) appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any Significant
Subsidiary or (C) the winding up or liquidation of the affairs of the Company
or any Significant Subsidiary and, in each case, such decree or order shall
remain unstayed and in effect for a period of 60 consecutive days; or (h) the
Company or any Significant Subsidiary (A) commences a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or consents to the entry of an order for relief in an involuntary case
under any such law, (B) consents to the appointment of or taking possession by
a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any Significant
Subsidiary or (C) effects any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25%
51
<PAGE>
in aggregate principal amount of the Notes, then outstanding, by written
notice to the Company (and to the Trustee if such notice is given by the
Holders), may, and the Trustee at the request of such Holders shall, declare
the principal of, premium, if any, and accrued interest on the Notes to be
immediately due and payable. Upon a declaration of acceleration, such
principal of, premium, if any, and accrued interest shall be immediately due
and payable; provided that any such declaration of acceleration shall not
become effective until the earlier of (A) five Business Days after receipt of
the acceleration notice by the Bank Agent and the Company or (B) acceleration
of the Indebtedness under the Credit Agreement; provided further that such
acceleration shall automatically be rescinded and annulled without any further
action required on the part of the Holders in the event that any and all
Events of Default specified in the acceleration notice under the Indenture
shall have been cured, waived or otherwise remedied as provided in the
Indenture prior to the expiration of the period referred to in the preceding
clauses (A) and (B). In the event of a declaration of acceleration because an
Event of Default set forth in clause (e) above has occurred and is continuing,
such declaration of acceleration shall be automatically rescinded and annulled
if the event of default triggering such Event of Default pursuant to clause
(e) shall be remedied or cured by the Company or the relevant Significant
Subsidiary or waived by the holders of the relevant Indebtedness within 60
days after the declaration of acceleration with respect thereto. If an Event
of Default specified in clause (g) or (h) above occurs with respect to the
Company, the principal of, premium, if any, and accrued interest on the Notes
then outstanding shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
The Holders of at least a majority in principal amount of the outstanding
Notes by written notice to the Company and to the Trustee, may waive all past
defaults and rescind and annul a declaration of acceleration and its
consequences if (i) all existing Events of Default, other than the nonpayment
of the principal of, premium, if any, and interest on the Notes that have
become due solely by such declaration of acceleration, have been cured or
waived and (ii) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction. For information as to the waiver of
defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of Holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from Holders of Notes. A
Holder may not pursue any remedy with respect to the Indenture or the Notes
unless: (i) the Holder gives the Trustee written notice of a continuing Event
of Default; (ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the Holders of a
majority in aggregate principal amount of the outstanding Notes do not give
the Trustee a direction that is inconsistent with the request. However, such
limitations do not apply to the right of any Holder of a Note to receive
payment of the principal of, premium, if any, or interest on, such Note or to
bring suit for the enforcement of any such payment, on or after the due date
expressed in the Notes, which right shall not be impaired or affected without
the consent of the Holder.
The Indenture will require certain officers of the Company to certify, on or
before a date not more than 105 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof.
The Company will also be obligated to notify the Trustee of any default or
defaults in the performance of any covenants or agreements under the
Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
52
<PAGE>
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any state
or jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the obligations of
the Company on all of the Notes and under the Indenture; (ii) immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Company or any Person becoming the
successor obligor of the Notes shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of the Company immediately prior to
such transaction; (iv) immediately after giving effect to such transaction on
a pro forma basis the Company, or any Person becoming the successor obligor of
the Notes, as the case may be, could Incur at least $1.00 of Indebtedness
under the first paragraph of the "Limitation on Indebtedness" covenant;
provided that this clause (iv) shall not apply to a consolidation, merger or
sale of all (but not less than all) of the assets of the Company if all Liens
and Indebtedness of the Company or any Person becoming the successor obligor
on the Notes, as the case may be, and its Restricted Subsidiaries outstanding
immediately after such transaction would, if Incurred at such time, have been
permitted to be Incurred (and all such Liens and Indebtedness, other than
Liens and Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be deemed to have been
Incurred) for all purposes of the Indenture; and (v) the Company delivers to
the Trustee an Officers' Certificate (attaching the arithmetic computations to
demonstrate compliance with clauses (iii) and (iv)) and Opinion of Counsel, in
each case stating that such consolidation, merger or transfer and such
supplemental indenture complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with; provided, however, that clauses (iii) and (iv) above do not apply if, in
the good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose
of such transaction is to change the state of incorporation of the Company and
that any such transaction shall not have as one of its purposes the evasion of
the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that the Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to
the Notes (except for, among other matters, certain obligations to register
the transfer or exchange of the Notes, to replace stolen, lost or mutilated
Notes, to maintain paying agencies and to hold monies for payment in trust)
if, among other things, (A) the Company has deposited with the Trustee, in
trust, money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if
any, and accrued interest on the Notes on the Stated Maturity of such payments
in accordance with the terms of the Indenture and the Notes, (B) the Company
has delivered to the Trustee (i) either (x) an Opinion of Counsel to the
effect that Holders will not recognize income, gain or loss for federal income
tax purposes as a result of the Company's exercise of its option under this
"Defeasance" provision and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred, which Opinion
of Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the Closing Date such that a ruling is
no longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after
giving effect to such deposit on a pro forma basis, no Event of Default, or
event that after the giving of notice or lapse of time or both would become an
Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit,
53
<PAGE>
and such deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound, (D) the Company is not prohibited from making payments
in respect of the Notes by the provisions described under "--Ranking" and (E)
if at such time the Notes are listed on a national securities exchange, the
Company has delivered to the Trustee an Opinion of Counsel to the effect that
the Notes will not be delisted as a result of such deposit, defeasance and
discharge.
Defeasance of Certain Covenants and Certain Events of Default. The Indenture
further will provide that the provisions of the Indenture will no longer be in
effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and
Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such clauses (iii) and
(iv) under "Consolidation, Merger and Sale of Assets," clause (d) under
"Events of Default" with respect to such other covenants and clauses (e) and
(f) under "Events of Default" shall be deemed not to be Events of Default
upon, among other things, the deposit with the Trustee, in trust, of money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance
with the terms of the Indenture and the Notes, the satisfaction of the
provisions described in clauses (B)(ii), (C), (D) and (E) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance of certain covenants and Events of Default and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions
of the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Notes at the time
of the acceleration resulting from such Event of Default. However, the Company
will remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that
no such modification or amendment may, without the consent of each Holder
affected thereby, (i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, (ii) reduce the principal amount of, or
premium, if any, or interest on, any Note, (iii) change the place or currency
of payment of principal of, or premium, if any, or interest on, any Note, (iv)
impair the right to institute suit for the enforcement of any payment on or
after the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose Holders is necessary to modify or amend
the Indenture, (vi) waive a default in the payment of principal of, premium,
if any, or interest on the Notes, (vii) modify the subordination provisions in
a manner adverse to the Holders or (viii) reduce the percentage or aggregate
principal amount of outstanding Notes the consent of whose Holders is
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any
of the Notes or because of the
54
<PAGE>
creation of any Indebtedness represented thereby, shall be had against any
incorporator, stockholder, officer, director, employee or controlling person
of the Company or of any successor Person thereof. Each Holder, by accepting
the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in
its exercise of the rights and powers vested in it under the Indenture as a
prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign. The Trustee
is one of the lenders that are parties to the Credit Agreement.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will initially be represented by
one or more permanent global Notes in definitive, fully-registered form
without interest coupons (each a "Global Note") and will be deposited with the
Trustee as custodian for, and registered in the name of a nominee of, DTC.
Except in the limited circumstances described below under "--Certificated
Notes," owners of beneficial interests in a Global Note will not be entitled
to receive physical delivery of Certificated Notes (as defined below).
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture and, if applicable, those of Euroclear and Cedel Bank.
Payments of the principal of, and interest on, a Global Note will be made to
DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records
of DTC or its nominee. The Company also expects that payments by participants
to owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
55
<PAGE>
The Company expects that DTC will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in a Global Note are credited and only in respect of such
portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if
there is an Event of Default under the Notes, DTC will exchange the applicable
Global Note for Certificated Notes, which it will distribute to its
participants.
The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates and certain other organizations. Indirect access to
the DTC system is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC
it is under no obligation to perform or continue to perform such procedures,
and such procedures may be discontinued at any time. Neither the Company nor
the Trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Notes in registered form without
interest coupons ("Certificated Notes") in exchange for the Global Notes.
Holders of an interest in a Global Note may receive Certificated Notes in
accordance with the DTC's rules and procedures in addition to those provided
for under the Indenture.
56
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE AMENDED CREDIT FACILITY
The following summary of the material provisions of the Amended Credit
Facility does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the Amended Credit Facility, a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Defined terms that are used but not defined in this
section have the meanings given to such terms in the Amended Credit Facility.
On March 10, 1998 (the "Effective Date"), the Company amended its existing
Credit Facility, which had provided for up to $500 million of revolving loans,
subject to meeting certain conditions, on a senior secured basis. The Credit
Facility had a maturity of December 31, 2002.
The Amended Credit Facility converted $150 million of the amounts available
under the Credit Facility into a term loan facility (the "Converted Term
Loans"), with the $350 million balance of the amounts available under the
Credit Facility remaining as a revolving loan facility (the "Revolving
Facility" and, together with the Converted Term Loans, the "Converted
Facilities"). With respect to the Converted Term Loans, $100 million was drawn
on the Effective Date and the balance may be drawn no later than July 31,
1998.
The Amended Credit Facility also provides for up to $300 million in
additional term loans (the "Additional Term Loans"), $200 million of which
were committed as of the Effective Date. The amount of that commitment may be
reduced on each monthly anniversary of the Effective Date if certain amounts
are not drawn. The loans drawn pursuant to the commitment must be borrowed
prior to July 10, 1998 (as drawn, the "Committed Loans"). Additional Term
Loans in excess of Committed Loans may be borrowed at any time after the
Effective Date, provided that the total Additional Term Loans cannot exceed
$200 million before January 1, 1999. Further, to the extent that the
Additional Term Loans exceed $200 million, at least $275 million must be
outstanding under the Revolving Facility on the date the Additional Term Loans
are incurred.
The Company is required to repay indebtedness outstanding under the Amended
Credit Facility with the net cash proceeds from certain sales of assets, from
issuances of debt or equity by the Company, and from insurance recovery events
(subject to certain reinvestment rights). The Company is also required to
repay indebtedness outstanding under the Amended Credit Facility annually in
an amount equal to 50% of the Company's Excess Cash Flow. All mandatory or
voluntary prepayments under the Amended Credit Facility will be applied first
on a pro rata basis to the Converted Term Loans and the Additional Term Loans
and, after such loans have been repaid, to the Revolving Facility.
Amounts drawn under the Converted Facilities bear interest, at the Company's
option, at either the Base Rate or the Eurodollar Rate, plus an Applicable
Margin. The Applicable Margin is an annual rate which fluctuates based on the
Company's ratio of Consolidated Debt to Consolidated EBITDA and which will be
between .875% and 0% for Base Rate Loans and 1.875% and 1% for Reserve
Adjusted Eurodollar Loans.
Committed Loans will bear interest, at the Company's option, at either the
Base Rate plus 1.75% or the Eurodollar Plus Rate plus 2.75%. Additional Term
Loans that are not Committed Loans will bear interest at rates to be agreed
upon.
The Converted Facilities mature on December 31, 2002. Additional Term Loans
will mature no earlier than December 31, 2003, subject to maximum principal
amortization of 1% of the initially funded amounts in each of the years 1999
through 2002 and payment of the balance due in four equal quarterly payments
in 2003.
Availability under the Amended Credit Facility is dependent upon the Company
satisfying the following ratios of Consolidated Senior Debt to Run Rate
EBITDA, Consolidated Debt to Run Rate EBITDA, and Run Rate EBITDA to interest
on a pro forma basis, but in no event will availability under the Amended
Credit Facility be less than $200 million at any time (subject to the
satisfaction of applicable conditions precedent to borrowing under the Amended
Credit Facility):
57
<PAGE>
<TABLE>
<CAPTION>
SENIOR DEBT/ CONSOLIDATED DEBT/ RUN RATE EBITDA/
YEAR RUN RATE EBITDA RUN RATE EBITDA PRO FORMA INTEREST
---- ------------------- ------------------- -----------------------
<S> <C> <C> <C>
1998..... less than 4.5 times less than 6.5 times greater than 1.75 times
1999..... less than 4.0 times less than 6.0 times greater than 2.00 times
2000+.... less than 3.5 times less than 5.5 times greater than 2.50 times
</TABLE>
Run Rate EBITDA is calculated as Property Level EBITDA less the Annualized
Corporate Overhead Amount (not including depreciation, interest, and tax
expense). Property Level EBITDA includes the sum of (i) the actual last twelve
months property level EBITDA for all Qualifying Properties operational for at
least 12 months and (ii) an adjusted property level EBITDA for all Qualifying
Properties operational for less than 12 months. Qualifying Property means
acquired or constructed hotels (i) meeting specified criteria, including being
a full service, limited service or extended stay hotel, having more than 50
rooms or units, being owned or leased (subject to aggregate dollar limitations
and criteria for lease terms) and the Company receiving Phase I environmental
surveys, property engineering reports, title, and investment memoranda in
accordance with the Company's past practice, or (ii) approved by the
affirmative vote of lenders holding more than 50% of the commitments under the
Amended Credit Facility.
The Company's obligations under the Converted Facilities are guaranteed by
each of the Company's subsidiaries (the "Guarantors") and are collateralized
by a first priority lien on all stock owned by the Company and the Guarantors
and all other current and future assets of the Company and the Guarantors
(other than mortgages on the Company's and the Guarantors' real property). The
obligations of the Company and the Guarantors under the Additional Term Loans
are collateralized on a pari passu basis by way of a perfected first priority
security interest in the assets securing the Converted Facilities.
The Amended Credit Facility contains a number of covenants, including, among
others, covenants limiting the ability of the Company and its subsidiaries to
incur debt, make investments, pay dividends, prepay other indebtedness, engage
in transactions with affiliates, enter into sale-leaseback transactions,
create liens, make capital expenditures, acquire or dispose of assets, or
engage in mergers or acquisitions. In addition, the Amended Credit Facility
contains affirmative covenants, including, among others, covenants requiring
maintenance of corporate existence, compliance with laws, maintenance of
properties and insurance, and the delivery of financial and other information.
The Amended Credit Facility also requires the Company to comply with certain
financial tests and to maintain certain financial ratios on a consolidated
basis. The Company must maintain: (i) a Consolidated Interest Coverage Ratio
of no less than 1.5 to 1.0 through December 31, 1998, 1.75 to 1.0 from January
1, 1999 to December 31, 1999, 2.0 to 1.0 from January 1, 2000 to December 31,
2000, and 2.25 to 1.0 thereafter; (ii) a ratio of Consolidated Debt to Run
Rate EBITDA of no greater than 7.0 to 1.0 through December 31, 1998, 6.5 to
1.0 from January 1, 1999 to December 31, 1999, and 5.75 to 1.0 thereafter;
(iii) a ratio of Consolidated Senior Debt to Run Rate EBITDA of no greater
than 5.0 to 1.0 through December 31, 1998, 4.5 to 1.0 from January 1, 1999 to
December 31, 1999, and 3.75 to 1.0 thereafter; and (iv) Consolidated Debt no
greater than 55% of Consolidated Capitalization. Consolidated Interest
Coverage Ratio means, for any period, the ratio of EBITDA, on a consolidated
basis, to (i) the total consolidated cash interest expense reduced by cash
interest income and other investment earnings earned on cash equivalents, plus
(ii) that portion of capitalized lease obligations representing the interest
factor for such period, but excluding (iii) the amortization of any deferred
financing costs.
Failure to satisfy any of the covenants would constitute an Event of Default
under the Amended Credit Facility, notwithstanding the ability of the Company
to meet its debt service obligations. The Amended Credit Facility also
includes other customary events of default, including, without limitation, a
cross-default to other indebtedness, undischarged judgments, bankruptcy, and a
change of control.
58
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences applicable to the exchange of Old Notes for New Notes pursuant to
the Exchange Offer (the "Exchange") and the ownership and disposition of New
Notes. This summary deals only with New Notes held as capital assets by
holders who purchased Old Notes at 100% of their principal amount, and not
with special classes of holders, such as dealers in securities or currencies,
banks, tax-exempt organizations, life insurance companies, persons that hold
New Notes as a hedge (or hedged against) on currency or interest rate risks or
that are part of a straddle or conversion transaction, or persons whose
functional currency is not the U.S. dollar. Investors who purchased the Old
Notes at a price other than 100% of their principal amount should consult
their tax advisor as to the possible applicability to them of the amortizable
bond premium or market discount rules. This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), its legislative history,
existing and proposed regulations thereunder, published rulings, and court
decisions, all as currently in effect and all subject to change at any time,
perhaps with retroactive effect.
HOLDERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
CONSEQUENCES, IN THEIR PARTICULAR CIRCUMSTANCES, UNDER THE CODE AND THE LAWS
OF ANY OTHER TAXING JURISDICTION, OF THE EXCHANGE AND OWNERSHIP OF NEW NOTES.
For United States federal income tax purposes, the Exchange will be
disregarded and each New Note will be treated as a continuation of the
corresponding Old Note. Accordingly, holders will not recognize gain or loss
upon the Exchange. For purposes of determining gain or loss upon the
subsequent sale or exchange of the New Notes, a holder's basis in the New
Notes should be the same as such holder's basis in the Old Notes exchanged
therefor. Holders should be considered to have held the New Notes from the
time of their original acquisition of the Old Notes.
PLAN OF DISTRIBUTION
The New Notes will be offered by the Company to the holders of the Old Notes
in exchange for the Old Notes pursuant to the Exchange Offer.
Except as described below, a broker-dealer may not participate in the
Exchange Offer in connection with a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes was acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 120 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until November 28, 1998 all dealers effecting transactions in the
New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any broker
or dealer that participates in a distribution of such New Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of New Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a
59
<PAGE>
prospectus a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers and expenses
of counsel for the holders of the New Notes and will indemnify the holders of
the New Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Bell, Boyd & Lloyd, Chicago, Illinois.
EXPERTS
The consolidated balance sheets of Extended Stay America, Inc. and
subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997, as incorporated by
reference into this Prospectus, have been incorporated herein in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
60
<PAGE>
LOGO
