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As filed with the Securities and Exchange Commission on January 22, 1997
Registration No. 333-_________________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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JAMESON INNS, INC.
(Exact name of registrant as specified in governing instruments)
GEORGIA 58-2079583
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(State or other jurisdiction of organization) I.R.S. Employer I.D. No.
8 PERIMETER CENTER EAST - SUITE 8050
ATLANTA, GEORGIA 30346-1603
(770) 901-9020
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
THOMAS W. KITCHIN
PRESIDENT, CHIEF EXECUTIVE OFFICER
JAMESON INNS, INC.
8 PERIMETER CENTER EAST - SUITE 8050
ATLANTA, GEORGIA 30346-1603
(770) 901-9020
(Name, address of agent for service)
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COPIES TO:
LYNNWOOD R. MOORE, JR., ESQUIRE JAY L. BERNSTEIN, ESQUIRE
CONNER & WINTERS, A PROFESSIONAL CORPORATION ROGERS & WELLS
2400 FIRST PLACE TOWER 200 PARK AVENUE
TULSA, OKLAHOMA 74103 NEW YORK, NEW YORK 10166
(918) 586-5711 (212) 878-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to
time or at one time after the effective date of the Registration Statement as
determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. |_| ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |X|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Proposed
Maximum Proposed
Amount Offering Maximum
TITLE OF SECURITIES to be Price Per Aggregate Amount of
BEING REGISTERED(1) Registered Share(3) Offering Price Registration Fee (4)
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<S> <C> <C> <C> <C>
Common Stock, $.10 par value......... (2) 100% (2) --
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Common Stock Warrants................ (2) 100% (2) --
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Preferred Stock, $1.00 par value..... (2) 100% (2) --
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Total................................ $100,000,000(2) 100% $ 100,000,000 $30,304.00
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</TABLE>
(1) This Registration Statement also covers delayed delivery contracts that
may be issued by the Registrant under which the party purchasing such
contract may be required to purchase Common Stock, Common Stock
Warrants or Preferred Stock, including shares of Common Stock issuable
upon the exercise of Common Stock Warrants and upon conversion of
shares of Preferred Stock ("Offered Securities"). Such contracts may be
required to purchase Offered Securities. Such contracts may be issued
together with the specific Offered Securities to which they relate. In
addition, Offered Securities registered hereunder may be sold either
separately or as units comprising more than one type of Offered
Security registered hereunder.
(2) In no event will the aggregate initial price of Offered Securities
registered hereunder exceed $100,000,000 or the equivalent thereof in
one or more foreign currencies or composite currencies.
(3) Estimated solely for purposes of calculating the registration fee.
(4) The registration fee has been calculated in accordance with Rule 457(o)
under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME
<PAGE> 2
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL
THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
2
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED _____, 1997
PROSPECTUS
$100,000,000
JAMESON INNS, INC.
COMMON STOCK, COMMON STOCK WARRANTS AND PREFERRED STOCK
Jameson Inns, Inc. (the "Company") may from time to time offer in one
or more series (i) shares of its common stock, par value $.10 per share (the
"Common Stock"), (ii) warrants to purchase Common Stock (the "Common Stock
Warrants"), and (iii) shares or fractional shares of its preferred stock, par
value $1.00 per share (the "Preferred Stock"), with an aggregate public offering
price of up to $100,000,000 (or the equivalent thereof in foreign currencies or
currency units). The Common Stock, Common Stock Warrants and Preferred Stock
(the "Offered Securities") may be offered separately or together, in separate
series, in amounts, at prices and on terms to be determined at the time of
offering and set forth in one or more supplements to this Prospectus (each, a
"Prospectus Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, (i) in the case of Common Stock,
the number of shares and the public offering price; (ii) in the case of Common
Stock Warrants, the duration, offering price, exercise price and detachability
features; and (iii) in the case of Preferred Stock, the specific number of
shares, designation, any distribution, dividend, liquidation, redemption,
conversion, voting and other rights and any initial public offering price. In
addition, such specific terms of the Offered Securities may include limitations
on direct or beneficial ownership and restrictions on transfer of the Offered
Securities, in each case as may be appropriate to preserve the status of the
Company as a real estate investment trust ("REIT") for federal income tax
purposes.
The applicable Prospectus Supplement will also contain information,
where applicable, about all material federal income tax considerations relating
to, and any listing on a securities exchange of, the Offered Securities covered
by such Prospectus Supplement.
The Offered Securities may be offered directly, through agents
designated from time to time by the Company, or to or through underwriters or
dealers. If any designated agents or underwriters are involved in the sale of
any Offered Securities, their names, and any applicable purchase price, fee,
commission or discount arrangement with, between or among them will be set
forth, or will be calculable from information set forth, in the applicable
Prospectus Supplement. See "Plan of Distribution." No Offered Securities may be
sold without delivery of the applicable Prospectus Supplement describing the
method and terms of the offering of such series of Offered Securities.
-----------------------
SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
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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.
-----------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF OFFERED
SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
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The date of this Prospectus is , 1997
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS, AGENTS OR DEALERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AT ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
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, the Company files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
Company's Registration Statement on Form S-3 (the "Registration Statement"), the
exhibits and schedules forming a part thereof and the reports, proxy statements
and other information filed by the Company can be inspected and copied, at the
prescribed rates, at the public reference facilities of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at Seven World Trade Center, Suite 1300, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661. 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 which file electronically with the
Commission. The Common Stock is listed on The Nasdaq Stock Market and such
reports, proxy and information statements and other information concerning the
Company can be inspected and copied at The Nasdaq Stock Market, 1725 K Street,
N.W., Washington, D.C. 20006-1506.
This Prospectus constitutes a part of the Registration Statement filed
by the Company with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"). This Prospectus omits certain of the information
contained in the Registration Statement and the exhibits and schedules thereto,
in accordance with the rules and regulations of the Commission. For further
information concerning the Company and the Offered Securities, reference is
hereby made to the Registration Statement and the exhibits and schedules filed
therewith, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of which may be
obtained from the Commission at prescribed rates. Any statements contained
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 as
an exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Exchange Act with the Commission (Commission File No. 0-23256) and are
incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995;
2. The Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, June 30, and September 30, 1996; and
3. The Company's Registration Statement on Form 8-A, dated
January 18, 1994, which contains a description of the Common
Stock, including any amendment or report filed for the
purposes of updating such description.
2
<PAGE> 5
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Offered Securities shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from the
respective dates of filing such documents.
Any statement or information contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed modified or
superseded for the purposes of this Prospectus to the extent that a statement
contained herein or in any 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 hereby undertakes to provide without charge to each person
to whom this Prospectus is delivered, upon the written or oral request of such
person, a copy of any or all of the documents incorporated by reference herein
(not including any exhibits to the information that is incorporated by reference
unless such exhibits are specifically incorporated by reference to the
information that this Prospectus incorporates). Requests should be directed to
the Company at 8 Perimeter Center East - Suite 8050, Atlanta, Georgia
30346-1603, Attention: Investor Relations, (770) 901-9020.
3
<PAGE> 6
THE COMPANY
The Company, a Georgia corporation, was formed in 1988 by Thomas W.
Kitchin for the purpose of developing and owning limited service hotel
properties ("Inns"). The Company is a self-administered REIT which develops and
owns Inns operating in the southeastern United State under the trademark "The
Jameson Inn(R)." The Company became a public company upon consummation of its
initial public Common Stock offering in February 1994.
The Company's growth strategy is to enhance shareholder value by
increasing funds from operations and cash available for distribution by
developing additional Inns, expanding existing Inns and participating in
increased room revenues generated through operation of the Inns by Jameson
Operating Company (the "Operator") pursuant to the master lease (the "Lease")
between the Company and the Operator. New Inns are expected to be constructed by
Jameson Development Company, LLC.
In order to maintain its status as a REIT, the Company is precluded
from operating the Inns. Therefore, all of the existing Inns are, and the
Company expects that all future Inns developed by the Company during the Lease
term will be, leased to and operated by the Operator which is responsible for
the day-to-day management, operation and marketing of the Inns. Under the Lease,
the Company receives a fixed base rent per Inn room ("Base Rent") and, if
applicable, percentage rent ("Percentage Rent') based on room revenues from the
Inns.
The officers and employees of the Company are also officers and
employees of the Operator and are compensated directly by Kitchin Investments,
Inc. ("KI"), which also directly pays the Company's overhead costs. Under the
terms of an agreement between the Company and KI (the "Cost Reimbursement
Agreement"), the Company reimburses KI for employee compensation and general and
administrative overhead costs attributable to the Company. KI is owned by Thomas
W. Kitchin, Chairman, President and Chief Executive Officer of the Company.
Jameson Construction Company, which is wholly owned by KI, and its successor,
Jameson Development Company LLC (the "Contractor"), which is owned by Mr.
Kitchin and his wife, have acted as general contractor with respect to all
except two of the existing Inns and Inn expansions pursuant to construction
agreements ("Construction Agreements") covering one or more Inns or Inn
expansions. The Company expects that the Contractor will continue to act as
contractor for future Inns and Inn expansions in the future.
USE OF PROCEEDS
Except as otherwise provided in the applicable Prospectus Supplement,
the Company intends to use the net proceeds from any sale of the Offered
Securities for working capital and for general corporate purposes, which may
include the repayment of indebtedness, the financing of capital commitments and
possible future acquisitions associated with the continued expansion of the
Company's business.
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's consolidated ratios of
earnings to combined fixed charges and preferred stock dividends for the nine
months ended September 30, 1996 and for each of the last five fiscal years. With
respect to periods prior to December 31, 1993, the Company's consolidated ratios
of earnings to combined fixed charges and preferred stock dividends reflect the
operating results from the businesses previously conducted by the Company and
its affiliates and predecessors.
4
<PAGE> 7
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
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1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined fixed
charges and preferred stock dividends(2) .64(1) .77(1) .87(1) 3.16 1.37 2.75
</TABLE>
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(1) Earnings were inadequate to cover fixed charges by $530,678 in 1991,
$369,283 in 1992 and $216,551 in 1993. These deficiencies occurred in
years prior to the Company's business recapitalization on December 31,
1993.
(2) For purposes of computing these ratios, earnings have been calculated by
adding fixed charges (excluding capitalized interest and preferred stock
dividends) to income (loss) before extraordinary items. Fixed charges
consist of interest costs whether expensed or capitalized, amortization of
debt discounts and issue costs whether expensed or capitalized and
preferred stock dividends in applicable periods. The Company paid
preferred stock dividends in 1991, 1992, 1993 and 1995.
RISK FACTORS
In evaluating an investment in the Offered Securities, prospective
investors should carefully consider the following risk factors in addition to
the other information in this Prospectus and any applicable Prospectus
Supplement.
RISKS OF AN INVESTMENT IN THE COMPANY
The following Risk Factors describe matters which may specifically
affect an investment in the Company.
Risks of Rapid Expansion
The Company's growth strategy contemplates a rapid and continuous
development of new Inns and expansions of existing Inns. The successful
implementation of this strategy is dependent on numerous factors, including
those unique to the Company and those generally associated with overall hotel,
real estate and general economic conditions. Those risk factors specific to the
Company include its ability (i) to secure construction and permanent financing
to finance such development on terms and conditions favorable to the Company
since the Company plans to borrow 100% of the costs of developing new Inns and
expanding existing Inns, (ii) to assess accurately the market demand for new
Inns and expansions of existing Inns, (iii) to identify and purchase new sites
which meet its various criteria, including reasonable land prices, (iv) to
contract for the construction of new Inns and expansions in a manner which
produces Inns consistent with its present quality and standards at a reasonable
cost and without significant delays, and (v) to manage its business in a
cost-effective manner given the increase in the number of Inns. In addition,
risk factors affecting the profitable ownership of any Inn include the
Operator's ability to manage the Inns and to attract, develop and retain the
personnel, procedures and practices necessary to generate the Room Revenues (as
defined in the following sentence) which the Company anticipates will result
from development and expansions of Inns. Room Revenues includes in accordance
with the Lease all gross rentals from Inn rooms, telephone, vending and other
miscellaneous income and excludes all credits, rebates and refunds, sales taxes
and other excise taxes.
No assurance can be given that some or all of the factors discussed
above will not preclude or at least delay the development of new Inns and the
expansion of existing Inns, or that the terms of financing available to the
Company or the operating results of any new or expanded Inns will not actually
have a negative economic effect on the Company and reduce the amount of Cash
Available for Distribution, calculated as described in the following sentence.
Cash Available for Distribution is calculated, in the Company's case, as Funds
from Operations (as defined by NARETT and further interpreted by it in February
1995) plus non-cash expenses (stock compensation and loan fee amortization),
less 4% of Room Revenues for the replacement and refurbishment of furniture,
fixtures and equipment since July 1, 1995, less loan principal repayments.
5
<PAGE> 8
Conflicts of Interest
In addition to his positions with and stock ownership interest in the
Company, Thomas W. Kitchin, the Chairman, President and Chief Executive Officer
of the Company, is the 9.9% beneficial owner of the Operator, the sole owner of
KI and the owner of the Contractor. Steven A. Curlee, General Counsel and
Secretary of the Company, beneficially owns the remaining 90.1% of the Operator.
The Company does not own any interest in the Operator, the Contractor or KI. As
a result of Mr. Kitchin's positions with and ownership interests in the various
entities, there are inherent conflicts of interest in connection with the
development of additional Inns and expansion of existing Inns by the Company and
in the Company's dealings with (i) the Operator under the Lease, (ii) the
Contractor under the Construction Agreements, and (iii) KI with respect to
allocation and payment of overhead expenses under the Cost Reimbursement
Agreement. In that regard, the Lease, the form of the Construction Agreement and
the Cost Reimbursement Agreement were not negotiated on an arm's-length basis.
The Company believes, however, that the terms and conditions of the Lease, the
Construction Agreements and the Cost Reimbursement Agreement are fair to the
Company, and each was approved by the directors of the Company who are not
officers or members of management of the Company and who are not affiliates in
any way with the Operator or the Contractor ("Independent Directors").
The Company expects that all future Inns developed by the Company
during the term of the Lease will be added to the Lease, that most if not all
future Inns and Inn expansions will be constructed by the Contractor pursuant to
Construction Agreements and that KI will continue to pay the Company's salaries
and other administrative overhead, subject to reimbursement thereof by the
Company under the Cost Reimbursement Agreement. In an effort, however, to reduce
conflicts of interest inherent in Mr. Kitchin's relationships with the various
entities, each transaction or arrangement involving the Company and the Operator
or the Contractor, or any affiliate of either entity, has been and will be
subject to approval by a majority of the Independent Directors. Further, the
Operator has agreed that neither it nor any of its affiliates will (i) operate
or manage a hotel property in which the Company has not invested that is within
a 20-mile radius of an Inn, or (ii) own or have any interest in any hotel
property in which the Company or an affiliate does not have an interest. In
addition, Mr. Kitchin is prohibited under the terms of his employment agreement
with the Company from owning, managing or operating, directly or indirectly, any
hotel property other than the Inns during the term of his employment or, subject
to certain conditions, any hotel property within a 20-mile radius of an Inn for
two years following such employment.
Exclusive Dependence on the Operator for Lease Revenues
Certain rules relating to the qualification of REITs prohibit the
Company from operating the Inns. To comply with these rules, the Company has
leased the Inns to the Operator. Although not required by the applicable
Internal Revenue Code rules and regulations, the Company chose to lease all of
the Inns to the Operator rather than to one or more independent hotel management
companies. By virtue of this arrangement, the Company is exclusively dependent
on the Operator for Lease revenues, and is further dependent on the Operator's
ability to generate sufficient cash flow from the operation of the Inns to
enable the Operator to meet both the Base Rent and Percentage Rent payments. The
obligations of the Operator under the Lease are unsecured. The Operator has only
nominal assets other than its rights under the Lease, and, as a result, has very
limited resources to perform certain of its financial obligations under the
Lease, including fulfilling its obligation to indemnify the Company against
various claims, damages and losses and, if Room Revenues from the Inns decrease
substantially or new Inns take longer than expected to reach break-even
operations, making payments of Base Rent.
In addition, under the Lease, the Operator controls the daily
operations of the Inns and the Company has no ability to participate in those
decisions. Thus, even if the Inns were being managed inefficiently or in a
manner which failed to maximize the amount of Percentage Rent the Company
receives, the Company would be unable to require a change in Inn operating
procedures. Under the Lease, the Company is limited to seeking redress only if
the Operator violates the Lease terms, and then only to the extent of the
remedies set forth therein. Such remedies include the Company's ability to
terminate the Lease upon certain limited events of default, including the
Operator's failure to pay Base Rent.
6
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Need for Additional Debt Financing and Related Risks
The Company intends to borrow 100% of the funds required to finance the
development of new Inns and expansion of existing Inns. There is no assurance
that the Company will be able to obtain such financing. In addition, the Company
may borrow additional funds in the future and/or issue corporate debt securities
in public or private offerings and may need to maintain borrowing capacity to
fulfill its commitment regarding funds required to be available for payment of
the costs of replacement and refurbishment of furniture, fixtures and equipment
of the Inns. There can be no assurance that the Company will be able to continue
to meet its debt service obligations, and, to the extent that it cannot, the
Company risks the loss of some or all of its assets, including the Inns, to
foreclosure. Because of the current relative unavailability and high cost of
fixed interest rate long-term financing, it is anticipated that any future
borrowings by the Company will be at interest rates which adjust with certain
indices. Therefore, the Company's cost of financing will vary subject to events
beyond the Company's control. Adverse economic conditions could result in higher
interest rates which would increase debt service requirements on floating rate
debt and could reduce Cash Available for Distribution. Adverse economic
conditions could cause the terms on which borrowings are available to the
Company to be unfavorable. In such circumstances, if the Company were in need of
capital to repay indebtedness, it could be required to liquidate one or more
investments in the Inns at times which might not permit realization of the
maximum return on such investments.
Current loan agreements provide for cross-collateralization and
cross-default with respect to the Company's debt, and future loan agreements
will likely contain similar provisions. The result of a cross-default provision
is that a default by the Company in its payment or other obligations with
respect to one loan or one Inn will result in a default with respect to all
loans. The result of cross-collateralization is that all Inns effectively secure
repayment of all of the Company's loans and a default on one loan creates a
default with respect to other loans. In general, cross-collateralization and
cross-default provisions in the Company's loans may place the Company's assets
at a greater risk of foreclosure.
The foreclosure of a mortgage on an Inn could have material adverse tax
effects on the Company. In the event a mortgage lender were to foreclose on an
Inn to enforce its lien in satisfaction of non-recourse debt, the Company might
be required to recognize income. If the amount of the debt discharged exceeded
the Inn's fair market value, the amount of debt discharge income to be
recognized would be equal to the excess of the amount of such debt over the fair
market value of the Inn. In addition, the Company would recognize a capital gain
to the extent, if any, that the fair market value of the Inn exceeded its basis.
The debt discharge income would be subject to the 95% distribution requirement
described below in "Federal Income Tax Considerations--Annual Distribution
Requirements."
Also, if the Company's debt service obligations continue to be based on
15- to 20-year amortizations, the portion of the Company's cash flow necessary
to make principal payments on obligations to finance future Inns may exceed the
cost recovery deductions, which are based on 39-year useful lives, available
with respect to such Inns for federal income tax purposes. As a result, the
Company's cash available for distribution to its shareholders may not be
adequate to allow distribution of 95% of the Company's taxable income. The
Company might be forced to borrow to fund such distribution. If the Company were
unable to obtain financing, and as a result did not make the requisite
distribution, the Company's status as a REIT would be jeopardized.
Finally, the Company currently has a policy of limiting its outstanding
indebtedness to 65% of the aggregate appraised value of the Inns; however, the
Company's organizational documents do not limit the amount of indebtedness that
the Company may incur. Accordingly, the Board of Directors of the Company could
change the current policies of the Company and the Company could become more
highly leveraged, resulting in an increased risk of default on the obligations
of the Company and in an increase in debt service requirements. Such an increase
could adversely affect the financial condition and results of operations of the
Company, the Company's ability to make dividend distributions to its
shareholders and could, as a result, jeopardize the Company's status as a REIT.
See "Federal Income Tax Considerations--Annual Distribution Requirements."
7
<PAGE> 10
Lack of Industry Diversification, Concentration of Inns in Southeastern
United States
The Company currently invests only in Inns and intends to continue
similarly to limit its investments in the future. As a result, an investment in
the Company carries with it the risks of an investment concentrated in a single
industry and in a single narrow segment of that industry. In addition, all
currently operating Inns are located in the Southeastern United States and for
the foreseeable future the Company will continue to restrict development of new
Inns to that region of the country. This concentration of the Company's
investments in a narrow segment of a single industry and in a single geographic
region makes the Company more vulnerable to adverse effects of regional
occurrences such as regional economic recessions, seasonal factors and natural
disasters. Any such occurrence could have a more significant effect on operation
of the Inns, and, therefore, on Lease revenues and Cash Available for
Distribution than if the Company's investments were more economically and
geographically diverse.
Reliance on Current Management
Although the Company's management team includes individuals with
substantial experience in operating, managing, developing and acquiring Inns and
other hotel and real estate properties, the Company has relied and will continue
to rely for strategic business direction upon the services and expertise of
Thomas W. Kitchin, Chairman, President and Chief Executive Officer of the
Company. In addition, certain of the Company's loan agreements provide for a
default upon a change of management. The occurrence of any event which would
cause the Company to lose the services of Mr. Kitchin could have a material
adverse effect on the Company. The Company has purchased a $1.0 million key-man
life insurance policy covering Mr. Kitchin. There is no assurance, however, that
the Company will continue to maintain such insurance policy in effect or that
any proceeds thereof would be sufficient to compensate the Company for the loss
of Mr. Kitchin's services.
Potential Increases in Outstanding Shares
The Company maintains certain stock option and stock grant plans to
provide incentive compensation to its directors, officers and key employees and
to those of the Operator (the "Stock Plans"). The availability for resale
of shares of Common Stock issued or issuable under the Stock Plans may depress
the market price of the Common Stock. In addition, to the extent stock options
and other incentive awards which may be granted under the Stock Plans vest and
are exercised at prices below the net book value of the Common Stock, the
issuance of shares of Common Stock resulting therefrom will cause an immediate
dilution of the interests of other shareholders in the Company.
Effect of Market Interest Rates on Price of Common Stock; Trading Volume
One of the factors that may influence the price of the Common Stock in
public trading markets will be the annual yield from distributions by the
Company on the price paid for shares of Common Stock as compared to yields on
other financial instruments. Thus, an increase in market interest rates may
result in higher yields on other financial instruments, which could adversely
affect the market price of the Common Stock. In addition, the trading volume of
equity interests in REITs is generally not as high as in equity interests in
other entities. Accordingly, the trading volume of shares of Common Stock may be
adversely affected by the Company's status as a REIT, thereby reducing the
liquidity of an investment in the Company.
Certain Antitakeover Provisions
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and amended Bylaws (as amended,
the "Bylaws") may have the effect of discouraging a third party from making an
acquisition proposal for the Company without the approval of the Board of
Directors and may thereby inhibit a change in control of the Company under
circumstances that could give the holders of Common Stock the opportunity to
realize a premium over the then prevailing market prices. For example, the Board
of
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Directors of the Company has three classes of Directors with staggered terms of
office. Directors for each class have been elected for a three-year term upon
the expiration of the then current class' term. The staggered terms of Directors
may affect the shareholders' ability to change control of the Company even if a
change of control were in the shareholders' interest. In addition, to comply
with the various restrictions imposed on REITs, the Articles of Incorporation
contain a provision limiting the amount of voting stock of the Company which a
stockholder or group of stockholders may own (the "Ownership Limit Provision").
Such limit may have the effect of precluding an acquisition of control of the
Company without the approval of the Board of Directors.
The Articles of Incorporation authorize the Board of Directors to issue
up to 100,000 shares of Preferred Stock, par value, $1.00 per share, and to
establish the preferences and rights of any shares so issued. Accordingly, the
Board of Directors is empowered, without shareholder approval, to issue
Preferred Stock with distribution, dividend, liquidation, conversion, voting or
other rights which could adversely affect the voting power or other rights of
the holders of shares of Common Stock. Through February 3, 1999, however, any
issuance of Preferred Stock is subject to approval of a majority of the
Company's Independent Directors. Issuance of Preferred Stock could have the
effect of delaying or preventing a change of control of the Company even if a
change of control were in the shareholders' interest. No shares of Preferred
Stock are currently outstanding.
Possibility that Changes in Investment and Financing Policies May Adversely
Affect Financial Condition or Results of Operations
The Board of Directors determines the investment and financing policies
of the Company and its policies with respect to certain other activities,
including growth, debt capitalization, distributions, operating policies and the
Company's qualification as a REIT. Among other things, the Board of Directors
could make financing decisions which could result in the creation of interests
in the Company and/or the Inns with priority over the interests of the
shareholders, and/or make equity investments in concerns with debt superior to
the Company's equity interest. The Board of Directors has no present intention
to amend or revise these policies. However, except with respect to the Company's
qualification as a REIT, the Board of Directors may do so at any time without
the approval of the shareholders. Any decision by the Board of Directors to
relinquish the Company's status as a REIT is subject to the approval of a
majority of the voting stock of the Company present at a meeting of the
Company's shareholders. A change in these policies could adversely affect the
Company's financial condition or results of operations.
RISKS OF HOTEL INVESTMENTS
The following Risk Factors are descriptions of risks associated with
investments in lodging properties such as the Inns.
General Factors Affecting Investments in Hotels; Effect of Economic and
Real Estate Conditions
The Company's ownership of the Inns is subject to varying degrees of
risk generally incident to the ownership and operation of real property and, in
particular, hotels. Such ownership may be adversely affected by a number of
factors, including the national, regional or local economic climate (which may
be adversely impacted by plant closings, industry slowdowns, inflation and other
factors); local lodging market conditions (such as an oversupply of guest
rooms); perceptions by travelers of the safety, convenience and attractiveness
of the Inns; the willingness and ability of the Operator to provide capable
management and adequate maintenance; changes in governmental regulations, zoning
or tax laws; operating cost increases; labor problems; potential environmental
or other legal liabilities; and changes in interest rate levels. Although the
Company does not operate the Inns, the impact of these factors on the Operator's
ability to manage the Inns profitably may affect not only the Inn's value, but
Room Revenues from the Inns and, therefore, rental payments under the Lease and
the amount of the Company's distributions to its shareholders.
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Competition
There are numerous hotels, including those that are part of major
chains with substantial advertising budgets, national reservation systems,
marketing programs and greater name recognition than the Company, that compete
with the Inns in attracting travelers. In addition, the Inns are generally
located in smaller communities where the entry of even one additional competitor
into the market may materially affect the financial performance of the Inn in
that community. Also, to the extent the Company builds new Inns in larger
communities, the Operator may encounter additional and stronger competition.
Increased competition could adversely affect the Operator's ability to make
Lease payments to the Company.
Renovation and Refurbishment Costs
Hotels in general, including the Inns, have an ongoing need for
renovation and refurbishment. The Company seeks to control such costs through
the construction of new Inns rather than the purchase and renovation of existing
hotel properties. Nonetheless, the Inns require periodic replacement of
furniture, fixtures and equipment and the Lease requires that the Company pay
the costs of such refurbishment. The Company has adopted a policy of maintaining
sufficient cash or available borrowings to fund expenditures for replacement and
refurbishment of furniture, fixtures and equipment for the Inns up to an amount
equal to 4% of the Operator's total aggregate room revenues since July 1, 1995,
less the amounts actually expended since that date. While management believes
that such amount is adequate to support proper refurbishment of the Inns, the
actual amounts necessary to pay such costs could exceed the Company's estimate.
In such case, expenditure of additional funds for furniture, fixtures and
equipment could have an adverse effect on the Company's ability to make the full
amount of expected distributions to shareholders.
Uninsured and Underinsured Losses
The ownership of hotel properties by its nature presents risks of
liability resulting from injuries to guests and resulting litigation. Under the
terms of the Lease, the Company carries comprehensive liability, fire, extended
coverage, rental loss and business interruption insurance covering all of the
Inns with policy specifications and insured limits customarily carried for
similar properties. However, no assurance can be given that such insurance
coverage will be sufficient to fully protect the business and assets of the
Company from all claims or liabilities, including environmental liabilities, or
that the Company will be able to obtain additional insurance at commercially
reasonable rates. In the event losses or claims are beyond the limits or scope
of the Company's insurance coverage, the Company's business and assets could be
materially adversely affected. In addition, certain types of losses (such as
certain environmental liabilities) are not generally insured because they are
either uninsurable or not economically insurable. Should an uninsured loss or a
loss in excess of insured limits occur, the Company could lose its capital
invested in the Inn(s), as well as anticipated future revenues from the Inn(s),
while remaining obligated for any mortgage indebtedness or other financial
obligations related to the Inn(s). Any such loss could have a material adverse
effect on the Company's financial condition and results of operations.
Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. The Company believes that all existing
Inns are substantially in compliance with these requirements and intends to
construct future Inns in accordance with such requirements as well. In 1993, the
Company engaged a disabilities consultant to make recommendations to the Company
regarding the Inns' compliance with the ADA. The consultant submitted a report
recommending a number of improvements for access to and use by disabled persons
with respect to certain of the Inns then in operation, which improvements were
made. In addition to remedial costs, noncompliance with the ADA could result in
imposition of fines or an award of damages to private litigants. If the Company
were required to make modifications to comply with the ADA, the Company's
ability to make expected distributions to its shareholders could be adversely
affected.
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Seasonality
The hotel industry is seasonal in nature. Hotel revenues are generally
greater in the second and third calendar quarters than in the first and fourth
quarters. This seasonality can be expected to cause quarterly fluctuations in
the Company's Lease revenues.
RISKS OF REAL ESTATE INVESTMENTS
The following Risks Factors describe certain risks generally incident
to an investment in real estate.
Illiquidity of Investments
Equity real estate investments, including the Company's investments in
the Inns, are relatively illiquid. The illiquidity of the Company's investment
in the Inns is further increased by their location in smaller communities. As a
result, the ability of the Company to sell or otherwise dispose of any Inn in
response to changes in economic or other conditions may be limited.
Environmental Matters
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 hazardous or toxic
substances, or the failure to properly remediate such 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 may also be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is owned or operated by such person. While the Company has not incurred any such
costs in connection with its ownership of the Inns, the Company may be
potentially liable for such costs. The Company generally develops Inns in areas
where the historical use of the land is well known and often agricultural.
Management is not aware of any potential material liability or claims for which
the Company may be responsible. However, no assurances can be given that (i)
there are no material claims or liabilities related to real property ownership
by the Company; (ii) future laws, ordinances or regulations will not impose any
material environmental liability on the Company; and (iii) the current
environmental condition of the Inns will not be affected by operation of the
Inns, by the condition of properties in the vicinity of the Inns (such as the
presence of underground storage tanks) or by third parties. Under the terms of
the Lease, the Company indemnifies the Operator against environmental
liabilities, except those caused by the acts or negligent failures of the
Operator. In addition, the Lease provides that the Operator will indemnify the
Company against environmental liabilities caused by the Operator's acts or
negligent failures, although the Operator's financial condition may limit the
value of such indemnity and, in any event, such indemnity will not apply to or
protect the Company against past unknown violations and related liabilities.
TAX RISKS
Inability to Qualify as a Real Estate Investment Trust
The Company believes that it has qualified as a REIT under Sections
856-860 of the Internal Revenue Code of 1986, as amended (the "Code") since
January 1, 1994, and intends to continue to operate so as to qualify in the
future. Although the Company currently operates in a manner consistent with its
qualification as a REIT, no assurances can be given that the Company has
qualified or will remain qualified as a REIT. Qualification as a REIT involves
the adherence to requirements set forth in complex Code provisions and income
tax regulations promulgated under the Code (the "Treasury Regulations"), for
which there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the Company's
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control may affect its ability to qualify as a REIT. In addition, no assurance
can be given that legislation, new regulations, administrative interpretations
or court decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. See "Federal Income Tax Considerations."
If in any taxable year the Company were to fail to qualify as a REIT,
the Company would not be allowed a deduction for distributions to shareholders
in computing its taxable income for federal income tax purposes and would be
subject to federal income tax on its taxable income at regular corporate rates.
Unless entitled to relief under certain statutory provisions, the Company would
also be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. As a result, the funds
available for distribution to the Company's shareholders could be reduced for
each of the years involved. Although the Company currently intends to operate in
a manner designed to enable it to continue to qualify as a REIT, it is possible
that future economic, market, legal or other considerations may cause the
Company's Board of Directors, with the consent of holders of a majority of the
Company's voting stock present and voting at a meeting, to revoke the REIT
election. See "Federal Income Tax Considerations."
Distributions to Shareholders; Potential Requirement to Borrow
To obtain the favorable tax treatment associated with REITs, the
Company generally will be required each year to distribute to its shareholders
at least 95% of its net taxable income (excluding any net capital gain). In
addition, the Company will be subject to tax on its undistributed net taxable
income and net capital gain, and a 4% nondeductible excise tax on the amount, if
any, by which certain distributions paid by it with respect to any calendar year
are less than the sum of 85% of its ordinary net income plus 95% of its capital
gain net income for the calendar year.
The Company intends to make distributions to its shareholders to comply
with the distribution provisions of the Code and to avoid or minimize income
taxes and the nondeductible excise tax. The Company's income and cash flow will
consist primarily of the rents received under the Lease. Differences in timing
between the receipt of income and the payment of expenses in arriving at taxable
income of the Company and the effect of required debt amortization payments
could require the Company to borrow funds on a short-term basis to meet the
distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT. In such instances, the Company might need
to borrow funds, if such borrowings were available to the Company, in order to
avoid adverse tax consequences, even if management believed that then prevailing
market conditions were not generally favorable for such borrowings or that such
borrowings would not be advisable in the absence of such tax considerations. For
federal income tax purposes, distributions paid to shareholders may consist of
ordinary income, capital gains, nontaxable return of capital or a combination
thereof. The Company will provide each shareholder with an annual statement
indicating the tax character of the distributions.
Distributions by the Company are determined by the Company's Board of
Directors and will be dependent on a number of factors, including the amount of
Cash Available for Distribution, the Company's financial condition, any decision
to reinvest rather than to distribute such funds, the Company's capital
expenditures, the annual distribution requirements under the REIT provisions of
the Code and such other factors as the Board of Directors deems relevant.
Accordingly, there is no assurance that the Company will be able to maintain its
expected distribution rate. See "Federal Income Tax Considerations--Requirements
for Qualification" and "--Annual Distribution Requirements."
Ownership Limit Necessary to Maintain REIT Qualification
Not more than 50% in value of a REIT's outstanding stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
also to include certain entities) after its first taxable year as a REIT.
Therefore, the Company's Articles of Incorporation prohibit ownership (directly
or indirectly within the limitations
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of the attribution rules of the Code) of more than the applicable ownership
limit as set forth in the Articles of Incorporation by any shareholder, subject
to adjustment as described below.
Any transfer of shares that would prevent the Company from continuing
to qualify as a REIT under the Code will be void ab initio and the intended
transferee of such shares will be deemed never to have had an interest in such
shares or such shares will have limited rights and will be subject to redemption
by the Company. Further, if, in the opinion of the Board of Directors, a
proposed transfer of shares may jeopardize the qualification of the Company as a
REIT under the Code, the Board of Directors may, in its sole discretion, refuse
to allow the shares to be transferred to the proposed transferee.
Taxation of Non-U.S. Shareholders
The Company will withhold U.S. income tax at the rate of 30% on the
gross amount of any distributions of income items described in Code Section 1441
(excluding, generally, amounts which constitute a return of capital) made to a
non-U.S. shareholder unless (i) a lower treaty rate applies or (ii) the non-U.S.
shareholder files the appropriate IRS form with the Company claiming that the
distribution is "effectively connected" income within the meaning of Section 871
of the Code. See "Federal Income Tax Considerations--Taxation of Non-U.S.
Shareholders."
Built-In Gain
The adjusted tax basis of the Company in each of the 14 Inns acquired
by the Company at the time of its IPO and its election to be taxed as a REIT was
substantially below the fair market value of each of such Inns based on the
appraisals obtained in connection with such offering. Consequently, if the
Company were to sell one of such Inns before December 31, 2003, the Company
would realize a significant amount of "Built-In Gain" which would be taxable to
the Company without deduction for any amount distributed to the Company's
shareholders from the sale proceeds and the amount of the gain realized (after
payment of the tax) would be included in the gross income of the Company for
purposes of the annual distribution requirements for qualification as a REIT.
See "Federal Income Tax Considerations--Taxation of the Company--Annual
Distribution Requirements."
ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
Shareholders' rights and related matters are governed by the Company's
Articles of Incorporation and its Bylaws. As used in this discussion, the term
"Voting Stock" means outstanding shares of the Company's capital stock which are
entitled to vote in the election of directors, voting together as a single
class. Certain provisions of the Articles of Incorporation and Bylaws of the
Company, which are summarized below, may make it more difficult to change the
composition of the Company's Board of Directors and may discourage or make more
difficult any attempt by a person or group to obtain control of the Company.
MAJORITY VOTING REQUIREMENT
The Company's Articles of Incorporation may not be amended without the
affirmative vote of at least a majority of the Voting Stock, voting as a single
voting group. The Company's Bylaws may be amended by either the affirmative vote
of a majority of all Voting Stock, voting as a single group, or by an
affirmative vote of a majority of the Company's directors then holding office,
unless the shareholders prescribe that any such bylaw may not be amended or
repealed by the Company's Board of Directors.
SPECIAL MEETINGS
The Articles of Incorporation and the Bylaws provide that, subject to
the rights of any holders of Preferred Stock to elect additional directors under
specified circumstances, shareholder action can be taken at an annual or special
meeting of shareholders or by written consent. Shareholders holding 25% or more
of the Voting Stock
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entitled to vote on any issue to be considered at a proposed special meeting may
call a special meeting of shareholders.
STAGGERED BOARD OF DIRECTORS
The Articles of Incorporation and the Bylaws provide that the Board of
Directors will be divided into three classes of directors, each class
constituting approximately one-third of the total number of directors and with
the classes serving staggered three-year terms. The classification of directors
will have the effect of making it more difficult for shareholders to change the
composition of the Board of Directors. The Company believes, however, that the
longer time required to elect a majority of a classified Board of Directors will
help to ensure continuity and stability of the Company's management and
policies.
The classification provisions could also have the effect of
discouraging a third party from accumulating large blocks of the Company's stock
or attempting to obtain control of the Company, even though such an attempt
might be beneficial to the Company and its shareholders. Accordingly,
shareholders could be deprived of certain opportunities to sell their shares at
a higher market price than might otherwise be the case.
NUMBER OF DIRECTORS, REMOVAL; FILLING VACANCIES
The Articles of Incorporation provide that, subject to any rights of
holders of Preferred Stock to elect additional directors under specified
circumstances, the number of directors will be fixed by the Bylaws or pursuant
to a resolution passed by the Board of Directors or by holders of at least a
majority of the Voting Stock, voting together as a single class. In addition,
the Articles of Incorporation and the Bylaws provide that, subject to any rights
of holders of Preferred Stock, and unless the Board of Directors otherwise
determines, any vacancies will be filled by the affirmative vote of a majority
of the remaining directors, though less than a quorum; provided that vacancies
created by an increase by shareholder vote of the number of members of the Board
of Directors will be filled by a vote of the holders of a majority of the Voting
Stock.
Under the Georgia Business Corporation Code (the "Georgia Code"),
unless the articles of incorporation provide otherwise, directors serving on a
classified board may only be removed by the shareholders for cause. The Articles
of Incorporation and the Bylaws of the Company provide that, subject to the
right of the holders of Preferred Stock to elect additional directors under
specified circumstances, directors may be removed for cause upon the affirmative
vote of holders of at least a majority of the Voting Stock, voting together as a
single class. Directors may be removed without cause upon the affirmative vote
of at least 75% of the Voting Stock voting together as a single class.
RELEVANT FACTORS TO BE CONSIDERED BY THE BOARD OF DIRECTORS
The Articles of Incorporation provide that in determining what is in
the best interest of the Company, a director of the Company must consider the
interests of the shareholders of the Company and, in his or her discretion, may
consider (i) the interests of the Company's employees, suppliers, creditors and
customers, (ii) the economy of the nation, (iii) community and societal
interests and (iv) the long-term as well as short-term interests of the Company
and its shareholders, including the possibility that these interests may be best
served by the continued independence of the Company. Pursuant to this provision,
the Board of Directors may consider numerous judgmental or subjective factors
affecting a proposal, including certain nonfinancial matters, and on the basis
of these considerations may oppose a business combination or other transaction
which, as an exclusively financial matter, might be attractive to some or a
majority of the Company's shareholders.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Articles of Incorporation authorize the Board of Directors to
create and issue rights entitling the holders thereof to purchase from the
Company shares of capital stock or other securities or property. The times at
which
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and terms upon which such rights are to be issued would be determined by the
Board of Directors and set forth in the contracts or instruments that evidence
such rights. This provision is intended to confirm the Board of Directors'
authority to issue share purchase rights, which may have terms that could impede
a merger, tender offer or other takeover attempt, or other rights to purchase
securities of the Company or any other corporation.
RELINQUISHMENT OF REIT STATUS
Approval of a majority of the directors and the affirmative vote of a
majority of the Voting Stock, voting together as a single class, present at a
meeting of shareholders are required before the Company may relinquish its
status as a REIT.
LIMITATION OF LIABILITY OF DIRECTORS
The Company's Articles of Incorporation and Bylaws provide that no
officer or director shall be personally liable to the Company or its
shareholders for monetary damages for any breach of his duty of care or any
other duty he may have as an officer or director, except liability for any
appropriation, in violation of the director's duties, of any business
opportunity of the Company, for any acts or omissions that involve intentional
misconduct or a knowing violation of law, for liability under the Georgia Code
for unlawful distributions to shareholders, and for any transaction from which
the director receives an improper personal benefit. The Articles of
Incorporation also provide that if the Georgia Code is amended after adoption
thereof to authorize the further elimination or limitation of an officer's or
director's liability, then the liability of each officer or director shall be
further eliminated or limited in such manner, without further action by the
Company's shareholders (unless such amended provisions of the Georgia Code
require such further action).
The Company's Bylaws provide that each officer and director shall be
indemnified for all losses and expenses (including attorneys' fees and costs of
investigation) arising from any action or other legal proceeding, whether civil,
criminal, administrative or investigative, including any action by and in the
right of the Company, because he is or was a director, officer, employee or
agent of the Company or, at the Company's request, of any other organization.
Such indemnification is subject to the same exceptions, described in the
preceding paragraph, that apply to the limitation of a director's monetary
liability to the Company or its shareholders. The Bylaws also provide for the
advance of expenses with respect to any such action, subject to the officer's or
director's written affirmation of his good faith belief that he has met the
applicable standard of conduct, and the officer's or director's written
agreement to repay any advances if it is determined that he is not entitled to
be indemnified. The Bylaws permit the Company to enter into agreements providing
to each officer or director indemnification rights substantially similar to
those set forth in the Bylaws, and such agreements will be executed between the
Company and each director. Although the form of indemnification agreement offers
substantially the same scope of coverage afforded by provisions in the Articles
of Incorporation and Bylaws, it provides greater assurances to officers and
directors that indemnification will be available, because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or by
the shareholders to eliminate the rights it provides.
In accordance with the applicable provisions of the Georgia Code, the
shareholders of the Company have approved the limitation of liability provision
in the Articles of Incorporation and the indemnification provisions of the
Bylaws.
Any indemnification by the Company pursuant to the provisions of the
Articles of Incorporation and Bylaws described above will be paid out of the
assets of the Company and will not be recoverable from the shareholders. To the
extent that the foregoing indemnification provisions include indemnification for
liabilities arising under the Securities Act, in the opinion of the Securities
and Exchange Commission such indemnification is contrary to public policy and,
therefore, unenforceable. The Company intends to purchase director and officer
liability insurance for the purpose of providing a source of funds to pay any
indemnification described above.
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RESTRICTIONS ON TRANSFER
For the Company to continue to qualify as a REIT under the Code after
January 1, 1995, not more than 50% in value of its outstanding stock may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to also include certain entities) during the last half of a taxable year,
and such stock must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year. These restrictions did not apply to 1994, which was the
first taxable year for which the Company's REIT election was effective. In
addition, certain percentages of the Company's gross income must be from
particular activities (see "Federal Income Tax Considerations--Requirements for
Qualification" and "--Income Tests"). Because the Board of Directors believes it
is essential for the Company to continue to qualify as a REIT, the Board of
Directors has adopted, and the shareholders prior to the IPO have approved, the
Ownership Limit Provision (as defined below) of the Articles of Incorporation
restricting the acquisition of shares.
The Ownership Limit Provision provides that, subject to certain
exceptions specified in the Articles of Incorporation, Mr. Kitchin cannot own,
or be deemed to own by virtue of the attribution provisions of the Code, more
than that number of shares which is equal to 20.75% of the outstanding Common
Stock or the Related Party Limit (as defined below), American Real Estate
Company Ltd. cannot own, directly or indirectly, more than that number of shares
which is equal to 9% of the outstanding Common Stock and no other shareholder
may own, or similarly be deemed to own, more than 6.75% of the outstanding
Common Stock. In addition, since rent from any tenant 10% of which is owned,
directly or constructively, by the Company, including an owner of 10% or more of
the Company, is not qualifying rent for purposes of the gross income tests under
the Code (see "Federal Income Tax Considerations--Taxation of the
Company--Income Tests"), the Company's Articles of Incorporation include an
additional ownership restriction referred to as the "Related Party Limit." The
Related Party Limit provides that any shareholder who owns, or is deemed to own
by virtue of the attribution provisions of the Code (which differ from the
attribution provisions applied to the Ownership Limit), in excess of a 9.9%
interest or voting power in the capital stock, net assets or profits of an
entity from whom the Company derives gross income cannot own more than 9.9% of
the outstanding Common Stock. The Board of Directors has the power to grant a
waiver of the Ownership Limit or the Related Party Limit upon application by a
shareholder. As a condition of such waiver, the Board of Directors may require
opinions of counsel satisfactory to it and/or an undertaking from the applicant
with respect to preserving the REIT status of the Company. The Ownership Limit
and Related Party Limit will not apply if the Board of Directors and the
shareholders of the Company determine that they are no longer in the best
interests of the Company to continue to qualify as a REIT. If shares in excess
of the Ownership Limit, or shares which would cause the Company to be
beneficially owned by fewer than 100 persons, are issued or transferred to any
person, such issuance or transfer shall be null and void and the intended
transferee will acquire no rights to the stock.
Shares owned, or deemed to be owned, or transferred to a shareholder in
excess of the Ownership Limit or Related Party Limit ("Excess Shares") will be
automatically transferred, pursuant to the Articles of Incorporation, to the
Company as trustee of a trust for the exclusive benefit of the transferee or
transferees to whom the shares are ultimately transferred (without violating the
Ownership Limit or Related Party Limit). While the Excess Shares are held in
trust, they will not be entitled to vote, they will not be considered for
purposes of any shareholder vote or the determination of a quorum for such vote
and they will not be entitled to participate in any distributions made by the
Company. The intended transferee-shareholder may, at any time the Excess Shares
are held by the Company in trust, transfer the Excess Shares at a price not to
exceed the price paid by the intended transferee-shareholder to any individual
whose ownership of such Excess Shares would be permitted under the Ownership
Limit, at which time the Excess Shares would no longer be Excess Shares. In
addition, the Company would have the right, for a period of 90 days during the
time the Excess Shares are held by the Company in trust, to purchase all or any
portion of the Excess Shares from the intended transferee-shareholder at the
lesser of the price paid for the Common Stock by the intended
transferee-shareholder and the closing market price for the Common Stock on the
date the Company exercises its option to purchase. The 90-day period would
commence on the date of the violative transfer of ownership if the intended
transferee-shareholder gives notice of the transfer to the Company, or, if no
notice is given, the date the Board of Directors determines that a violative
transfer of ownership has occurred.
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The Ownership Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Except as otherwise described above, any change in the Ownership
Limit or Related Party Limit would require an amendment to the Articles of
Incorporation. Amendments to the Articles of Incorporation require the
affirmative vote of holders owning a majority of the outstanding Voting Stock.
In addition to preserving the Company's status as a REIT, the Ownership Limit
and Related Party Limit may have the effect of precluding an acquisition of
control of the Company without the approval of the Board of Directors.
All certificates representing shares of Common Stock and Preferred
Stock will bear a legend referring to the restrictions described above. All
persons who own, directly or by virtue of the attribution provisions of the
Code, more than 5% of the outstanding Common Stock must file an affidavit with
the Company containing the information specified in the Articles of
Incorporation within 30 days after January 1 of each year. In addition, each
shareholder shall upon demand be required to disclose to the Company in writing
such information with respect to the direct, indirect and constructive ownership
of shares as the Board of Directors deems necessary to comply with the
provisions of the Code applicable to a REIT or to comply with the requirements
of any taxing authority or governmental agency.
COMMON STOCK
Under the Articles of Incorporation, the Company is authorized to issue
a total of 20,000,000 shares of Common Stock, par value $.10 per share. At
December 31, 1996, a total of 7,357,471 shares of Common Stock were issued and
outstanding, held by 319 record owners.
The following description of the Common Stock sets forth certain
general terms and provisions of the Common Stock to which any Prospectus
Supplement may relate, including a Prospectus Supplement providing that Common
Stock will be issuable upon conversion of Preferred Stock or upon the exercise
of Common Stock Warrants. The statements below describing the Common Stock are
in all respects subject to and qualified in their entirety by reference to the
applicable provisions of the Articles of Incorporation.
The holders of Common Stock are entitled to one vote per share on all
matters voted on by shareholders, including elections of directors, and the
holders of such shares exclusively possess all voting power, except as otherwise
required by law or provided in any resolution adopted by the Board of Directors
with respect to any series of Preferred Stock establishing the powers,
designations, preferences and relative, participating, option or other special
rights of such series. The Articles of Incorporation do not provide for
cumulative voting in the election of directors. Subject to any preferential
rights of any outstanding series of Preferred Stock, the holders of Common Stock
are entitled to such distributions as may be declared from time to time by the
Board of Directors from funds available therefor, and upon liquidation are
entitled to receive pro rata all assets of the Company available for
distribution to such holders. All shares of Common Stock issued in the Offering
will be fully paid and nonassessable and the holders thereof will not have
preemptive rights.
First Union National Bank of North Carolina, Charlotte, North Carolina,
is the transfer agent for the Common Stock.
COMMON STOCK WARRANTS
The Company may issue Common Stock Warrants for the purchase of Common
Stock. Common Stock Warrants may be issued independently or together with any
other Offered Securities offered pursuant to any Prospectus Supplement and may
be attached to or separate from such Offered Securities. Each series of Common
Stock Warrants will be issued under a separate warrant agreement (each, a
"Warrant Agreement") to be entered into between the Company and the Common Stock
Warrant recipient or, if the recipients are numerous, a warrant agent
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identified in the applicable Prospectus Supplement (the "Warrant Agent"). The
Warrant Agent, if engaged, will act solely as an agent of the Company in
connection with the Common Stock Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any holders or
beneficial owners of Common Stock Warrants. Further terms of the Common Stock
Warrants and the applicable Warrant Agreements will be set forth in the
Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of any
Common Stock Warrants in respect of which this Prospectus is being delivered,
including, where applicable, the following: (i) the title of such Common Stock
Warrants; (ii) the aggregate number of such Common Stock Warrants; (iii) the
price or prices at which such Common Stock Warrants will be issued; (iv) the
designation, number and terms of the shares of Common Stock purchasable upon
exercise of such Common Stock Warrants; (v) the designation and terms of the
other Offered Securities with which such Common Stock Warrants are issued and
the number of such Common Stock Warrants issued with such other Offered
Securities; (vi) the date, if any, on and after which such Common Stock Warrants
and the related Common Stock will be separately transferable; (vii) the price at
which each share of Common Stock purchasable upon exercise of such Common Stock
Warrants may be purchased; (viii) the date on which the right to exercise such
Common Stock Warrants shall commence and the date on which such right shall
expire; (ix) the minimum or maximum amount of such Common Stock Warrants which
may be exercised at any one time; (x) information with respect to book-entry
procedures, if any; (xi) a discussion of certain federal income tax
considerations relevant to a holder of such Common Stock Warrants; and (xii) any
other terms of such Common Stock Warrants, including terms, procedures and
limitations relating to the exchange and exercise of such Common Stock Warrants.
Reference is made to the section captioned "Common Stock" for a general
description of the Common Stock to be acquired upon the exercise of the Common
Stock Warrants. Additionally, the section captioned "Restrictions on Transfer"
includes a description of certain restrictions regarding ownership and transfer
of the Common Stock.
PREFERRED STOCK
GENERAL
Under the Articles of Incorporation, the Company is authorized to issue
100,000 shares of Preferred Stock, none of which was outstanding at December 31,
1996.
The following description of the Preferred Stock sets forth anticipated
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of
Preferred Stock (which terms be different from those stated below) will be
described in the Prospectus Supplement to which such series relates. The
statements below describing the Preferred Stock are in all respects subject to
and qualified in their entirety by reference to the applicable provisions of the
Prospectus Supplement and Articles of Incorporation (including the amendment
describing the designations, rights and preferences for each series of Preferred
Stock) and Bylaws.
The Board of Directors is empowered by the Company's Articles of
Incorporation to designate and issue from time to time one or more classes or
series of Preferred Stock without shareholder approval; however, until November
1998, no Preferred Stock may be issued except with the consent of a majority of
the Independent Directors. The Board of Directors may affix and determine the
relative rights, preferences and privileges of each class or series of Preferred
Stock so issued. Because the Board of Directors has the power to establish the
preferences and rights of each class or series of Preferred Stock, it may afford
the holders in any series or class of Preferred Stock preferences, powers and
rights, voting or otherwise, senior to the rights of holders of Common Stock.
The Preferred Stock will, when issued, be fully paid and nonassessable. The
issuance of Preferred Stock could have the effect of delaying or preventing a
change in control of the Company.
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Reference is made to the Prospectus Supplement relating to the
Preferred Stock offered thereby for specific terms, including: (i) the title and
stated value of such Preferred Stock; (ii) the number of shares of such
Preferred Stock offered, the liquidation preference per share and the offering
price of such Preferred Stock; (iii) the dividend or distribution rate(s),
period(s), and/or payment date(s) or method(s) of calculation thereof applicable
to such Preferred Stock; (iv) the date from which dividends on such Preferred
Stock shall accumulate, if applicable; (v) the procedures for any auction and
remarketing, if any, for such Preferred Stock; (vi) the provision for a sinking
fund, if any, for such Preferred Stock; (vii) the provisions for redemption, if
applicable, of such Preferred Stock; (viii) any listing of such Preferred Stock
on any securities exchange; (ix) the terms and conditions, if applicable, upon
which such Preferred Stock will be convertible into Common Stock, including the
conversion price (or manner of calculation thereof); (x) a discussion of
certain federal income tax considerations relevant to a holder of such Preferred
Stock; (xi) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; (xii) any limitation on issuance of any series of
Preferred Stock ranking senior to or on a parity with such series of Preferred
Stock as to dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company; (xiii) any limitations on direct or beneficial
ownership and restrictions on transfer, in each case as may be appropriate to
preserve the status of the Company as a REIT; and (xiv) any other specific
terms, preferences, rights, limitations or restrictions of such Preferred Stock.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend or distribution rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to all
classes or series of Common Stock of the Company, and to all equity and debt
securities which are specifically designated as ranking junior to such Preferred
Stock with respect to dividend rights or rights upon liquidation, dissolution or
winding up of the Company; and (ii) on a parity with all equity and debt
securities issued by the Company the terms of which specifically provide that
such equity and debt securities rank senior to the Common Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
DIVIDENDS
Holders of shares of the Preferred Stock of each series shall be
entitled to receive, when, as and if declared by the Board of Directors of the
Company, out of assets of the Company legally available for payment, cash
dividends (or dividends in kind or in other property if expressly permitted and
described in the applicable Prospectus Supplement) at such rates and on such
dates as will be set forth in the applicable Prospectus Supplement. Each such
dividend shall be payable to holders of record as they appear on the stock
transfer books of the Company on such record dates as shall be fixed by the
Board of Directors of the Company.
Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
Prospectus Supplement. If the Board of Directors of the Company fails to declare
a dividend payable on a dividend payment date on any series of the Preferred
Stock for which dividends are noncumulative, then the holders of such series of
the Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
Unless otherwise specified in the applicable Prospectus Supplement, if
any shares of the Preferred Stock of any series are outstanding, no full
dividends shall be declared or paid or set apart for payment on the Preferred
Stock of the Company of any other series ranking, as to dividends, on a parity
with or junior to the Preferred Stock of such series for any period unless full
dividends (which include all unpaid dividends in the case of cumulative dividend
Preferred Stock) have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such payment
on the Preferred Stock of such series.
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When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon the shares of Preferred Stock of any series
and the shares of any other series of Preferred Stock ranking on a parity as to
dividends with the Preferred Stock of such series, all dividends declared upon
shares of Preferred Stock shall be declared pro rata among the holders of such
series. No interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment or payments on Preferred Stock of such series
which may be in arrears.
Until required dividends are paid, no dividends (other than on
Preferred Stock or other capital stock ranking on a parity to the Preferred
Stock of such series as to dividends and upon liquidation) shall be declared or
paid or set aside for payment or other distribution declared or made upon the
Common Stock or any other capital stock of the Company ranking junior to or on a
parity with the Preferred Stock of such series as to dividends or upon
liquidation, nor shall any Common Stock or any other capital stock of the
Company ranking junior to or on a parity with the Preferred Stock of such series
as to dividends or upon liquidation be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any shares of any such stock) by the Company (except
by conversion into or exchange for other capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation).
Any dividend payment made on shares of a series of Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of Preferred Stock of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at the
option of the Company, as a whole or in part, in each case upon the terms, at
the times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that
is subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the Prospectus Supplement. If the redemption price for
Preferred Stock of any series is payable only from the net proceeds of the
issuance of capital stock of the Company, the terms of such Preferred Stock may
provide that, if no such capital stock shall have been issued or to the extent
the net proceeds from any issuance are insufficient to pay in full the aggregate
redemption price then due, such Preferred Stock shall automatically and
mandatorily be converted into shares of the applicable capital stock of the
Company pursuant to conversion provisions specified in the applicable Prospectus
Supplement.
So long as any dividends on shares of any series of the Preferred Stock
of the Company ranking on a parity as to dividends and distributions of assets
with such series of the Preferred Stock are in arrears, no shares of any such
series of the Preferred Stock of the Company will be redeemed (whether by
mandatory or optional redemption) unless all such shares are simultaneously
redeemed, and the Company will not purchase or otherwise acquire any such
shares; provided, however, that the foregoing will not prevent the purchase or
acquisition of such shares of preferred Stock to preserve the REIT status of the
Company or pursuant to a purchase or exchange offer made on the same terms to
holders of all outstanding shares of Preferred Stock of such series. In
addition, unless the full cumulative dividends on all outstanding shares of any
cumulative Preferred Stock of such series and any other stock of the Company
ranking on a parity with such series as to dividends and upon liquidation shall
have been paid or contemporaneously are declared and paid for all past dividend
periods, the Company shall not purchase or otherwise acquire directly or
indirectly any shares of Preferred Stock of such series (except by conversion
into or exchange for stock of the Company ranking junior to the Preferred Stock
of such series as to dividends and upon liquidation); provided, however, that
the foregoing will not prevent the purchase or acquisition of such shares of
Preferred Stock
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to preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of Preferred
Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any
series are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares held
by such holders (with adjustments to avoid redemption of fractional shares) or
any other equitable method determined by the Company that will not result in the
issuance of any Excess Shares.
Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of record of a share of
Preferred Stock of any series to be redeemed at the address shown on the stock
transfer books of the Company. If notice of redemption of any shares of
Preferred Stock has been given and if the funds necessary for such redemption
have been set aside by the Company in trust for the benefit of the holders of
any shares of Preferred Stock so called for redemption, then from and after the
redemption date dividends will cease to accrue on such shares of Preferred
Stock, such shares of Preferred Stock shall no longer be deemed outstanding and
all rights of the holders of such shares will terminate, except the right to
receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Company, then, before any distribution or payment shall
be made to the holders of Common Stock, or any other class or series of capital
stock of the Company ranking junior to the Preferred Stock in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Stock shall be entitled to receive out of
assets of the Company legally available for distribution to shareholders
liquidating distributions in the amount of the liquidation preference per share
(set forth in the applicable Prospectus Supplement), plus an amount equal to all
dividends accrued and unpaid thereon (which shall not include any accumulation
in respect of unpaid dividends for prior dividend periods if such Preferred
Stock does not have a cumulative dividend). After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of shares
of Preferred Stock will have no right or claim to any of the remaining assets of
the Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the legally available assets of the
Company are insufficient to pay the amount of the liquidating distributions on
all outstanding shares of Preferred Stock and the corresponding amounts payable
on all shares of other classes or series of capital stock of the Company ranking
on a parity with the Preferred Stock in the distribution of assets upon
liquidation, dissolution or winding up, then the holders of the Preferred Stock
and all other such classes or series of capital stock shall share ratably in any
such distribution of assets in proportion to the full liquidating distributions
to which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all
holders of shares of Preferred Stock, the remaining assets of the Company shall
be distributed among the holders of any other classes or series of capital stock
ranking junior to the Preferred Stock upon liquidation, dissolution or winding
up, according to their respective rights and preferences and in each case
according to their respective number of shares.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except
as set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Any series of Preferred Stock may provide that, so long as any shares
of such series of Preferred Stock remain outstanding, the holders of such series
may vote as a separate class on certain specified matters, which may include
changes in the Company's capitalization, amendments to the Articles of
Incorporation, and mergers and dispositions.
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The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of such series of Preferred Stock
shall have been redeemed or called for redemption upon prior notice and
sufficient funds shall have been irrevocably deposited in trust to effect such
redemption.
The provisions of a series of Preferred Stock may provide for
additional rights, remedies and privileges if dividends on such series are in
arrears for specified periods, which rights and privileges will be described in
the applicable Prospectus Supplement.
Under Georgia law, notwithstanding anything to the contrary set forth
above, holders of each series of Preferred Stock will be entitled to vote upon a
proposed amendment to the Articles of Incorporation, whether or not entitled to
vote thereon by the Articles of Incorporation, if the amendment would alter the
contract rights as set forth in the Articles of Incorporation, of their shares
of stock.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such Preferred Stock.
RESTRICTIONS ON OWNERSHIP
The Preferred Stock is subject to certain restrictions on ownership and
transfer described above under "Restrictions on Transfer."
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities through underwriters or
dealers, directly to one or more purchasers (including executive officers of the
Company or other persons that may be deemed affiliates of the Company), through
agents or through a combination of any such methods of sale. Any underwriter
involved in the offer and sale of the Offered Securities will be named in the
applicable Prospectus Supplement.
The distribution of the Common Stock may be effected from time to time
in one or more transactions (which may involve block transactions) on the Nasdaq
National Market, in negotiated transactions, through the writing of Common Stock
Warrants or through the issuance of Preferred Stock convertible into Common
Stock (whether such Common Stock Warrants or Preferred is listed on a securities
exchange or otherwise, or a combination of such methods of distribution, at a
fixed price or prices, which may be changed, at market prices prevailing at the
time of the sale, at prices related to such prevailing market prices or at
negotiated prices. Further, the distribution of any Common Stock in one or more
special offerings pursuant to a dividend reinvestment plan or other similar plan
of the Company may be effected from time to time at a fixed price or prices,
which may be changed, at market prices prevailing at the time of the sale, at
prices related to such prevailing market prices or at negotiated prices.
In connection with the sale of the Offered Securities, underwriters or
agents may receive compensation from the Company or from purchasers of the
Offered Securities, for whom they may act as agents in the form of discounts,
concessions or commissions. Underwriters may sell the Offered Securities to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents. Underwriters, dealers and
agents that participate in the distribution of the Offered Securities may be
deemed to be underwriters under the Securities Act,
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and any discounts or commissions they receive from the Company and any profit on
the resale of the Offered Securities they realize may be deemed to be
underwriting discounts and commissions under the Securities Act. Any such
underwriter or agent will be identified, and any such compensation received from
the Company will be described, in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement,
each series of the Offered Securities will be a new issue with no established
trading market, other than the Common Stock which is listed on the Nasdaq
National Market System. Any shares of Common Stock sold pursuant to a Prospectus
Supplement will be listed on the Nasdaq National Market System, subject to
official notice of issuance. The Company may elect to list any series of Common
Stock Warrants or Preferred Stock on an exchange, but is not obligated to do so.
It is possible that one or more underwriters may make a market in a series of
the Offered Securities, but will not be obligated to do so and may discontinue
any market making at any time without notice. Therefore, no assurance can be
given as to the liquidity of, or the trading market for, the Offered Securities.
Under agreements into which the Company may enter, underwriters,
dealers and agents who participate in the distribution of the Offered Securities
may be entitled to indemnification by the Company against certain liabilities,
including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, or be tenants of, the Company in the ordinary course of
business.
In order to comply with the securities laws of certain states, if
applicable, the Offered Securities will be sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
states the Offered Securities may not be sold unless they have been registered
or qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering is based on current law and does not purport to deal with
all aspects of taxation that may be relevant to particular shareholders in light
of their personal investment or tax circumstances, or to certain types of
shareholders (including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
The Company made an election to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year beginning January 1,
1994. The Company made such election at the time of the filing of its federal
income tax return for 1994. The Company believes that commencing with such
taxable year, it was organized and has operated in such a manner as to qualify
for taxation as a REIT under the Code. The Company intends to continue to
operate in such a manner, but no assurance can be given that it has qualified or
will operate in a manner so as to remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. This discussion is qualified in its
entirety by applicable Code provisions,
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Treasury Regulations and administrative and judicial interpretations thereof.
Conner & Winters, A Professional Corporation ("Conner & Winters") has acted as
counsel to the Company in connection with the Offering and the Company's
election to be taxed as a REIT.
It is the opinion of Conner & Winters that, commencing with the
Company's taxable year beginning January 1, 1994, the Company was organized and
has operated in conformity with the requirements for qualification as a REIT and
its proposed method of operations will enable it to continue to meet the
requirements for qualification and taxation as a REIT under current Code
provisions. It must be emphasized that the opinion of Conner & Winters is based
on various assumptions and is conditioned upon certain representations made by
the Company as to factual matters which are set forth below as well as
representations of the Company concerning its business and properties as set
forth elsewhere in this Prospectus. Unlike a tax ruling, an opinion of counsel
is not binding upon the IRS and no assurance can be given that the IRS will not
challenge the status of the Company as a REIT for federal income tax purposes.
Moreover, the Company's qualification and taxation as a REIT depends upon its
ability to meet, through actual annual operating results, distribution levels,
stock ownership requirements and various qualification requirements imposed
under the Code and discussed below. No assurance can be given that the actual
results of the Company's operations for any particular taxable year will satisfy
such requirements. For a discussion of the tax consequences of the failure to
qualify as a REIT, see "--Failure to Qualify" below.
As long as the Company qualifies for taxation as a REIT, it generally
will not be subject to federal corporate income taxes on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investment in a corporation. However, the Company will be subject
to federal income or excise tax as follows: First, the Company will be taxed at
regular corporate rates on its REIT taxable income, which is defined generally
as taxable income (subject to certain adjustments), including net capital gains,
less dividends to shareholders. Second, the Company will generally be subject to
the "alternative minimum tax" if REIT taxable income plus any tax adjustments
and preferences is greater than dividends paid to shareholders. Third, if the
Company has (i) net income from the sale or other disposition of "foreclosure
property" which is held primarily for sale to customers in the ordinary course
of a trade of business or (ii) other nonqualifying net income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if the Company has net income from prohibited transactions
(generally certain sales or other dispositions of property (other than
foreclosure property) held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy the 75% or 95% gross income tests discussed below
and has nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income tests. Sixth, generally, if the Company should fail to
distribute to its shareholders during each calendar year an amount equal to its
required distribution, it will be subject to a 4% nondeductible excise tax on
the excess of such required distribution amount over the amount actually
distributed for the year. The amount of required distribution is equal to the
sum of (i) 85% of its ordinary income for such year ("REIT taxable income"
without regard to the dividends paid deduction or any net capital gain), (ii)
95% of its REIT capital gain net income less any net operating losses incurred
by the REIT for such year and (iii) generally the amount, if any, of the
required distribution for the previous year over the amount actually distributed
for that year as modified by this provision.
In addition, pursuant to IRS Notice 88-19, if during the 10-year period
(the "Recognition Period") beginning on the first day of the first taxable year
for which the Company qualified as a REIT, the Company recognizes gain on the
disposition of any asset held by the Company as of the beginning of such
Recognition Period, then, to the extent of the excess of (a) the fair market
value of such asset as of the beginning of such Recognition Period over (b) the
Company's adjusted basis in such asset as of the beginning of the Recognition
Period (the "Built- In Gain"), such Built-In Gain, which may be reduced by
certain net operating loss carryforwards of the Company, will be subject to tax
at the highest regular corporate rate, pursuant to regulations that have not yet
been promulgated. The Recognition Period began January I, 1994 and will expire
December 31, 2003. Further, if the Company acquires any asset from a C
corporation in a transaction in which the basis of the asset in the Company's
hands is determined by reference to the basis of the asset (or any other
property) in the hands of the C corporation,
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and the Company recognizes gain on the disposition of such asset during the
ten-year period beginning on the date on which such asset was acquired by the
Company, then, to the extent of the Built-In Gain, such gain will be subject to
tax at the highest regular corporate rate, pursuant to regulations that have not
yet been promulgated. The amount of the Company's Built-In-Gain based on the
appraisals obtained in connection with its IPO is approximately $8.1 million and
will discourage a disposition by the Company of any Inn held at the time of the
IPO until after 2003.
In addition, because the amount of the difference between the fair
market value and aggregate adjusted basis of the Company's assets (excluding
cash, marketable securities which have not substantially appreciated and cash
items such as receivables and government securities) immediately before the date
of the closing of the Company's IPO (the "Change Date") exceeded the lesser of
$10 million or 15 percent of the fair market value of such assets, such amount
was considered to be "net built-in gain." Any Built-In Gain recognized upon the
sale or other disposition of any of such assets in a taxable year which includes
a part of the five-year recognition period beginning on the Change Date will
increase the Limitation by the amount of such Built-In Gain recognized for that
taxable year only. Gain recognized on the sale or disposition of any such assets
in excess of the Built-In Gain (on an asset-by-asset basis) as of the Change
Date will not increase the Limitation. These provisions of Code Section 382 may
permit the Company to absorb more (or accelerate the absorption of) pre-Change
Date NOL carryforwards.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (1)
which is managed by one or more trustees or directors; (2) the beneficial
ownership of which is evidenced by transferable shares or by transferable
certificates of beneficial interest; (3) which would be taxable as a domestic
corporation, but for Sections 856 through 860 of the Code; (4) which is neither
a financial institution nor an insurance company subject to certain provisions
of the Code; (5) the beneficial ownership of which is held by 100 or more
persons; (6) at any time during the last half of each taxable year not more than
50% in value of the outstanding stock of which is owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
entities); (7) which makes an election to be a REIT and satisfies all relevant
filing and other administrative requirements established by the IRS that must be
met in order to elect and maintain REIT status; (8) which uses a calendar year
for federal income tax purposes and complies with the record keeping
requirements of the Code and Treasury Regulations promulgated thereunder; and
(9) which meets certain other tests, described below, regarding the nature of
its income and assets. The Code provides that conditions (1) to (4), inclusive,
must be met during the entire taxable year and that condition (5) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. The Company has
represented that it has met since the closing of the IPO, and currently does
meet, all of such definitional requirements.
INCOME TESTS
In order for the Company to maintain its qualification as a REIT, it
must satisfy three gross income tests annually. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must consist of defined types of income derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or qualified temporary investment income. Second, at least 95% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from such real property or temporary
investments, and from dividends and other types of interest and gain from the
sale or disposition of stock or securities. Third, short-term gain from the sale
or other disposition of stock or securities, gain from prohibited transactions
and gain on the sale or other disposition of certain real property held for less
than four years (apart from involuntary conversions and sales of foreclosure
property) must represent less than 30% of the Company's gross income for each
taxable year.
Rents received by the Company under the Lease will qualify as "rents
from real property" in satisfying the gross income requirements for a REIT
described above only if several conditions are met. First, the amount of rent
must not be based in whole or in part on the income or profits of any person.
However, an amount received or
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accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Therefore, the Percentage Rent provisions of the Lease should not
disqualify rental income received from the Operator. Second, the Code provides
that rents received from a tenant, directly or indirectly, will not qualify as
"rents from real property" in satisfying the gross income tests if the REIT, or
a direct or indirect owner of 10% or more of the REIT, directly or
constructively owns 10% or more of such tenant (a "Related Party Tenant"). The
Company has represented that it has since the Change Date satisfied and will
continue to satisfy this requirement, i.e. the Operator is not a Related Party
Tenant (by reason of its adherence to the Ownership Limit and the Related Party
Limit). Third, if rent attributable to personal property, leased in connection
with a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Applicable Code provisions
provide that with respect to each lease, rent attributable to the personal
property for the taxable year is that amount which bears the same ratio to total
rent as the average of a REIT's adjusted bases of all personal property at the
beginning and at the end of each taxable year bears to the average of the REIT's
aggregate adjusted bases of all real and personal property at the beginning and
at the end of such taxable year. The Company has represented that the resulting
rental income attributable to personal property has been since January 1, 1994,
and will continue to be less than 15%; however, should the resulting rental
income attributable to personal property exceed 15% of all rental income, a
portion of the personal property will be sold by the Company to the Operator at
the Company's depreciated cost of the property and the lease payments under the
Leases will be adjusted accordingly.
Finally, for rents received to qualify as "rents from real property,"
the REIT generally must not operate or manage the leased property or furnish or
render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no revenue; provided, however,
the Company may directly perform certain services other than services which are
considered rendered to the occupant of the property. The Company has represented
that it has not, does not and will not knowingly (i) charge rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage of receipts or sales, as
described above); (ii) rent any property to a Related Party Tenant; (iii) lease
personal property in connection with the rental of the Inns which would cause
the rental income attributable to such personal property to exceed 15% of the
amount of total rental income; or (iv) perform services considered to be
rendered for the occupants of the Inns other than through an independent
contractor.
Under the Lease, the Operator has leased the land, buildings,
improvements, furnishings, and equipment comprising the Inns from the Company
for a 10-year term. The Operator pays the Company Total Rent. In order for the
Total Rent to constitute "rents from real property," the Lease must be respected
as a true lease for federal income tax purposes and not treated as a service
contract, joint venture or some other type of arrangement. The determination of
whether the Lease is a true lease depends on an analysis of all of the
surrounding facts and circumstances.
In addition, pursuant to Code Section 7701(e), a service contract,
partnership agreement, or some other type of arrangement may be treated instead
as a lease of property if the contract, agreement or arrangement is properly
treated as a lease of property, taking into account all relevant factors,
including whether or not: (i) the service recipient is in physical possession of
the property, (ii) the service recipient controls the property, (iii) the
service recipient has a significant economic or possessory interest in the
property (e.g., the property's use is likely to be dedicated to the service
recipient for a substantial portion of the useful life of the property, the
service recipient shares the risk that the property will decline in value, the
service recipient shares in any appreciation in the value of the property, the
service recipient shares in savings in the property's operating costs, or the
service recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the lease,
(v) the service provider does not use the property concurrently to provide
significant services to entities unrelated to the service recipient and (vi) the
contract price under the lease does not substantially exceed the rental value of
the property for the term of the lease.
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Under the Lease, (i) the Operator has the right to exclusive
possession, use and quiet enjoyment of the Inns during the term of the Lease,
(ii) the Operator bears the cost of, and is responsible for daily maintenance
and repair of the Inns, other than the cost of maintaining underground utilities
and structural elements (including the roofs) of the improvements, (iii) the
Operator dictates how the Inns are operated, maintained, and improved and bears
all of the costs and expenses of operating the Inns (including the cost of any
inventory used in their operation) during the term of the Lease (other than real
and personal property taxes, casualty, liability and other types of insurance
and equipment and the maintenance of structural elements, roofs and underground
utilities), (iv) the Operator benefits from any savings in the costs of
operating the Inns during the term of the Lease, (v) in the event of damage or
destruction to an Inn, the Operator is at economic risk because it will be
obligated to restore the property to its prior condition and bear all costs of
such restoration in excess of any insurance proceeds (except, under certain
circumstances, during the last six months of the term of the Lease), (vi) the
Operator has indemnified the Company against all liabilities imposed on the
Company during the term of the Lease by reason of injury to persons or damage to
property occurring at the Inns or due to the Operator's use, management,
maintenance or repair of the Inns, and (vii) the Operator is obligated to pay
substantial fixed rent for the term of the Lease. In addition, the Company has
represented that the Total Rent under the Lease does not substantially exceed
the fair rental value of the Inns.
Pursuant to IRS Revenue Ruling 55-540, if one or more of the following
conditions are present, the Lease will instead be considered as a conditional
contract for purchase and sale of the Inns: (i) portions of the periodic
payments are made specifically applicable to an equity interest in the property
to be acquired by the lessee, (ii) the lessee will acquire title upon the
payment of a stated amount of "rentals" under the contract which it is required
to make, (iii) the total amount which the lessee is required to pay for a
relatively short period of use constitutes an inordinately large proportion of
the total sum required to be paid to secure the transfer of the title, (iv) the
agreed "rental" payments materially exceed the current fair rental value, (v)
the property may be acquired under a purchase option at a price which is nominal
in relation to the value of the property at the time when the option may be
exercised, as determined at the time of entering into the original agreement, or
which is a relatively small amount when compared with the total payments which
are required to be made and (vi) some portion of the periodic payments is
specifically designated as interest or is otherwise readily recognizable as the
equivalent of interest.
Under the Lease, (i) no portion of the Total Rent has been or will be
applied to any equity interest in the Inns to be acquired by the Operator, (ii)
the Operator has not acquired and will not be acquiring title to the Inns upon
the payment of a stated amount of either Base Rent or Percentage Rent, (iii) the
Total Rent does not and will not materially exceed the current fair rental value
of the Inns (according to the Company's representation), (iv) the Inns may not
be acquired by the Operator under a purchase option and (v) no portion of either
Base Rent or Percentage Rent has been or will be specifically designated as
interest or will be recognizable as the equivalent of interest. Based on a
review of the relevant authorities, and such facts and representations of the
Company, Conner & Winters is of the opinion that the Lease will be treated as a
true lease for federal income tax purposes. As stated above, an opinion of
counsel is not binding on the IRS or any court. Accordingly, no assurance can be
given that the IRS will not challenge the tax treatment of the Lease, or, if it
does, that it will not be successful. If the Lease is recharacterized as a
service contract, partnership agreement, or some other type of arrangement
rather than a true lease, part or all of the payments that the Company receives
from the Operator may not satisfy the various requirements for qualification as
"rents from real property." In that case, the Company likely would not be able
to satisfy either the 75% or 95% gross income tests and, as a result, would fail
to qualify as a REIT.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. The Company has represented that none of
its assets are or have been held for sale to customers in the ordinary course of
its business and that the sale of an Inn and associated property will not be in
the ordinary course of business of the Company. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular property. Nevertheless, the Company has
represented that it has since January 1, 1994 complied with and covenanted that
it
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will attempt to continue to comply with the terms of the safe-harbor provisions
in the Code prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company can
comply with the safe-harbor provisions of the Code or avoid owning property that
may be characterized as property held "primarily for sale to customers in the
ordinary course of a trade or business."
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will generally be available if (i) the Company's failure
to meet such tests is due to reasonable cause and not due to willful neglect,
(ii) the Company attaches a schedule of the sources of its gross income to its
return, and (iii) any incorrect information on such schedule was not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances the Company would be entitled to the benefit of these relief
provisions. (However, no relief provisions are available if the 30% of gross
income test is violated.) As discussed above, even if these relief provisions
apply, a 100% tax would be imposed which would be equal to the excess of 75% or
95% of the Company's gross income over the Company's qualifying income in the
relevant category, whichever is greater, multiplied by the ratio that REIT
taxable income bears to gross income for the taxable year (with certain
adjustments).
ASSET TESTS
At the close of each quarter of the Company's taxable year, it must
also satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by "real
estate assets" which means (i) real property (including interests in real
property and interests in mortgages on real property), (ii) shares in other
REIT's and (iii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, (iv) cash, cash items (including
receivables) and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of such issuer's outstanding voting securities. The Company has represented
that it has satisfied these asset tests since December 31, 1993, and covenanted
that it will use its best efforts to satisfy such tests in the future.
After meeting the assets tests at the close of any quarter, the Company
will not lose its status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter, the failure can be cured by disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
The Company has represented that it maintains adequate records of the value of
its assets to ensure compliance with the asset test and intends to take such
other action within 30 days after the close of any quarter as may be required to
cure any noncompliance. However, there can be no assurance that such action will
always be successful.
ANNUAL DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
at least equal to (A) the sum of (i) 95% of the "REIT taxable income" of the
Company (computed without regard to the dividends paid deduction and any net
capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of noncash income. In
addition, if the Company disposes of any asset during its Recognition Period,
the Company will be required, pursuant to IRS regulations which have not yet
been promulgated, to distribute at least 95% of the Built-In Gain (after tax),
if any, recognized on the disposition of such asset. Such distributions must be
paid in the taxable year to which they relate, or in the following taxable year
if declared before the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration. To
the extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100% of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular corporate tax rates.
Furthermore,
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as explained above in "--Taxation of the Company," if the Company should fail to
distribute its required distribution during each calendar year, the Company
would be subject to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed.
The Company has represented that it has since January 1, 1994 made, and
hereafter will make, timely distributions sufficient to satisfy all annual
distribution requirements. However, it is possible that, from time to time, the
Company may experience timing differences between (i) the actual receipt of
income and actual payment of deductible expenses and (ii) the inclusion of that
income and deduction of such expenses in arriving at its REIT taxable income. In
addition, as explained above, in the event of the foreclosure of an Inn by a
mortgage lender, any debt discharge income would be subject to the annual 95%
distribution requirement even though the Company would receive no cash as a
consequence of a foreclosure. Therefore, the Company could have less Cash
Available for Distribution than would be necessary to meet its annual 95%
distribution requirement or to avoid federal corporate income tax with respect
to capital gain or the 4% nondeductible excise tax imposed on certain
undistributed income. To meet the 95% distribution requirement necessary to
qualify as a REIT or to avoid federal income tax with respect to capital gain or
the excise tax, it could be necessary for the Company to borrow funds.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying dividends to
shareholders in a later year. If the Company declares a dividend before the date
on which its tax return is due for a taxable year (including extensions) and
distributes the amount of such dividend to shareholders in the 12-month period
following the close of such taxable year, such subsequent year dividend may be
deductible by the Company in computing its REIT taxable income for the
immediately preceding year. The distribution of such dividend must be made no
later than the date of the first regular dividend payment made after the
declaration and distribution of such dividend and the Company must elect such
treatment in its return.
Shareholders receiving subsequent year distributions are taxable on
such distributions in the year of actual receipt except in the following case.
Any distributions declared by the Company in October, November or December of
any year payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
shareholder on December 31, provided that the distribution is actually paid by
the Company during January of the following calendar year. However, if the
Company actually pays the declared distributions before December 31, the
distributions will be treated as both paid by the Company and received by the
shareholders on the actual dates paid and received, respectively.
If, as a result of an audit by the IRS, the REIT taxable income for a
prior taxable year is increased, the Company may elect to distribute an
additional "deficiency dividend," as defined under Section 860 of the Code, and
claim an additional deduction for dividends paid for such taxable year in order
to meet the annual distribution requirement. All deficiency dividends must be
distributed within 90 days after the final determination of an audit, and the
claim for such deficiency dividends must be filed within 120 days of such
termination. The Company would also be liable for the payment of interest
charges on the amount of the deficiency dividend. However, the payment of such
dividends would ensure that the Company's qualification as a REIT would not be
jeopardized due to a failure to meet its annual distribution requirement.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction (such
deduction is not available to corporate distributees so long as the Company
qualifies as a REIT). Unless entitled
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to relief under specific statutory provisions, the Company will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which the Company ceased to qualify as a REIT.
TAXATION OF SHAREHOLDERS
TAX CONSEQUENCES TO NON TAX-EXEMPT U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders from current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income in the year they are
received and will not be eligible for the dividends received deduction for
corporations. Such distributions will be treated as portfolio income and not as
income from passive activities. Accordingly, shareholders will not be able to
apply any passive losses against such income. Distributions that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Company's actual net capital gain for the taxable
year) without regard to the period for which a shareholder has held its stock.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a U.S. shareholder to the extent such distributions do
not exceed the adjusted basis of such U.S. shareholder's shares, but rather will
reduce the adjusted basis of such shares. To the extent that distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a U.S. shareholder's shares, such distributions will be included in income as
long-term capital gain (or short-term capital gain if the shares have been held
for one year or less) assuming the shares are held as a capital asset by the
U.S. shareholder. Moreover, U.S. shareholders may not include in their income
tax returns any net operating losses or capital losses of the Company. Finally,
in general, any loss upon a sale or exchange of shares by a shareholder who has
held such shares for six months or less (after applying certain holding period
rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such shareholder as
long-term capital gain.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and the IRS the amount
of distributions paid during each calendar year and the amount of tax withheld,
if any. Under the backup withholding rules, a U.S. shareholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
such holder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide the Company with his
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any shareholders who fail to
certify their non-foreign status to the Company. See below "--Taxation of
Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Distributions by the Company to a U.S. shareholder that is a tax-exempt
entity should not constitute "unrelated business taxable income" as defined in
Section 512(a) of the Code ("UBTI"), provided that the tax-exempt entity has not
financed the acquisition of its shares with "acquisition indebtedness" within
the meaning of Section 514(c) of the Code and the shares are not otherwise used
in an unrelated trade or business of the tax-exempt entity. In addition, if the
Company is considered to be a pension-held REIT, then a portion of the dividends
paid to qualified trusts (any trust defined under Section 401(a) and exempt from
tax under Section 501(a)) that owns more than 10 percent by value in the REIT
may be considered UBTI. A pension-held REIT is a REIT that is held by one
qualified trust holding no more than 25% by value of the interests in the REIT
or by one or more
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qualified trusts (each of whom owns more than 10% by value) holding in the
aggregate more than 50% by value of the interests in the REIT. The Company does
not expect to be a pension-held REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex
and no attempt will be made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO
AN INVESTMENT IN SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by the Company of United States real property
interests and not designated by the Company as capital gains dividends will be
treated as dividends of ordinary income to the extent their source is current or
accumulated earnings and profits of the Company. Such distributions will
ordinarily be subject to a withholding tax equal to 30% of the gross amount of
the distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from a Non-U.S. Shareholder's investment in the Shares is
treated as effectively connected with the Non-U.S.Shareholder's conduct of a
United States trade or business, the Non-U.S. Shareholder generally will be
subject to a tax at graduated rates, in the same manner as U.S. Shareholders are
taxed with respect to such distributions (and may also be subject to the 30%
branch profits tax in the case of a shareholder that is a foreign corporation).
The Company expects to withhold United States income tax at the rate of 30% on
the gross amount of any such distributions made to a Non-U.S. Shareholder unless
(i) a lower treaty rate applies or (ii) the Non-U.S. Shareholder files an IRS
Form 4224 with the Company claiming that the distribution is "effectively
connected" income within the meaning of Section 871 of the Code. Distributions
in excess of current and accumulated earnings and profits of the Company will
not be taxable to a Non-U.S. Shareholder to the extent that such distributions
do not exceed the adjusted basis of the Non-U.S. Shareholder's shares, but
rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a Non-U.S. Shareholder's shares, such distributions will
give rise to tax liability if the Non-U.S. Shareholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares in the
Company, as described below. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the distribution will be subject
to withholding at a 30% rate. However, amounts thus withheld may be refundable
if it is subsequently determined that such distribution was in excess of current
and accumulated earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of United
States real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
United States real property interests are taxed to a Non-U.S. Shareholder as if
such gain were "effectively connected" with a United States business. Non-U.S.
Shareholders would thus be taxed at the normal capital gain rates applicable to
U.S. Shareholders (subject to any applicable alternative minimum tax). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the case of a foreign corporate shareholder not entitled to treaty exemption.
The Company is required by Treasury Regulations to withhold 35% of any
distribution to a Non-U.S. Shareholder that could be designated by the Company
as a capital gains dividend. This amount is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the REIT's stock was held
directly or indirectly by foreign persons. The Company believes that it is a
"domestically controlled REIT," and therefore the sale of its shares will not be
subject to taxation under FIRPTA. The Company anticipates that it will continue
to be a
31
<PAGE> 34
"domestically controlled REIT" and that sales of the Shares by Non-U.S.
Shareholders will not be subject to U.S. taxation unless (i) the investment in
the Shares is "effectively connected" with the Non-U.S. Shareholder's trade or
business in the United States, in which case such Non-U.S. Shareholder would be
taxed at the normal capital gain rates applicable to U.S. Shareholders (subject
to any applicable alternative minimum tax), or (ii) in the case of a Non-U.S.
Shareholder who is a "nonresident alien individual", such Non-U.S. Shareholder
was present in the United States for a period or periods aggregating 183 days or
more during the taxable year and certain other conditions apply, in which case
such person would be subject to a 30% tax on his capital gains.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS
ON AN INVESTMENT IN THE COMPANY.
LEGAL MATTERS
The validity of the Offered Securities issued hereunder, as well as
legal matters described under "Federal Income Tax Considerations," will be
passed upon for the Company by Conner & Winters, A Professional Corporation,
Tulsa, Oklahoma, and certain legal matters will be passed upon for any
underwriters, dealers or agents by the counsel named in the applicable
Prospectus Supplement.
EXPERTS
The consolidated financial statements and schedules of the Company
included in its annual report on Form 10-K for the year ended December 31, 1995,
incorporated herein by reference have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
32
<PAGE> 35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses (not including
underwriting commissions and fees) in connection with the issuance and
distribution of the securities being registered hereunder. Except for the
Securities and Exchange Commission registration fee and the NASD filing fee, all
amounts are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission
registration fee................................................ $30,304
NASD filing fee................................................... _______*
Accounting fees and expenses...................................... _______*
Counsel fees and expenses......................................... _______*
Blue sky fees and expenses........................................ _______*
Miscellaneous expenses............................................ _______*
Total.................................................... $_______*
</TABLE>
---------------------
* To be filed by amendment or by a current report on Form 8-K
pursuant to the Securities Exchange Act of 1934, as
appropriate.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Amended and Restated Articles of Incorporation of the Company (the
"Articles of Incorporation") and the Bylaws of the Company, as amended,
generally limit the liability of the Company's directors and officers to the
Company and the shareholders for money damages to the fullest extent permitted
from time to time by the laws of the State of Georgia. The Articles of
Incorporation also provide, generally, for the indemnification of directors and
officers, among others, in connection with any proceeding to which they may be
made parties by reason of their service in those or other capacities except in
connection with a proceeding by or in the right of the Company in which the
director was adjudged liable to the Company or in connection with any other
proceeding charging improper personal benefit to him whether or not involving
action in his official capacity in which he was adjudged liable on the basis
that personal benefit was improperly received by them. Insofar as
indemnification for liabilities arising under the Securities act of 1933, as
amended (the "Securities Act"), may be permitted to directors and officers of
the Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable.
II-1
<PAGE> 36
The Company has purchased and maintains director and officer liability
insurance. The Company has also entered into an agreement with each of its
officers and directors which provides for indemnification of liabilities arising
from their services as an officer or director of the Company.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement (for Common Stock)*
1.2 Form of Underwriting Agreement (for Common Stock Warrants)*
1.3 Form of Underwriting Agreement (for Preferred Stock)*
3.1 Articles of Incorporation of the Registrant incorporated by reference to Exhibit 3.1.1
to the Registration Statement filed on Form S-11, File No. 33-71160
3.2 Articles of Amendment to the Articles of Incorporation of the Registrant incorporated
by reference to Exhibit 3.1.2 to the Registration Statement filed on Form S-11, File
No. 33-71160
3.3 Articles of Amendment to the Articles of Incorporation of the
Registrant setting forth the Designation of Preferences, Rights,
Privileges and Restrictions of Preferred Stock of the Registrant
incorporated by reference to Exhibit 2.1 to the Registrant's Form
10-K/A1 (Amendment No. 1 to the Registrant's Annual Report on Form
10-K) for the year ended December 31, 1993
3.4 Articles of Amendment to the Articles of Incorporation of the
Registrant incorporated by reference to Exhibit 3.3.1 to Form
10-K/A2 (Amendment No. 2 to the Registrant's Annual Report on Form
10-K) for the year ended December 31, 1993
3.5 Articles of Amendment to the Articles of Incorporation of the
Registrant Amending the Designation of Preferences, Rights,
Privileges and Restrictions of Preferred Stock of the Registrant
incorporated by reference to Exhibit 3.6 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
3.6 Bylaws of the Registrant incorporated by reference to Exhibit 3.2.1 to the Registration
Statement on Form S-11, File No. 33-71160
3.7 Amendment to the Bylaws of the Registrant incorporated by reference to Exhibit 3.2.2
to the Registration Statement on Form S-11, File No. 33-71160
3.8 Amendment No. 2 to Registrant's Bylaws incorporated by reference to Exhibit 3.8 to
the Annual Report on Form 10-K for the year ended December 31, 1995
4.1 Specimen of Common Stock Certificate incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-11 (File No. 33-71160)
4.2 Form of Common Stock Warrant Agreement*
4.3 Form of Preferred Stock Certificate*
5.1 Opinion of Conner & Winters, A Professional Corporation, regarding legality of
securities being offered
8 Opinion of Conner & Winters, A Professional Corporation, regarding tax matters
12 Calculation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
23.1 Consent of Ernst & Young LLP
23.2 Consent of Conner & Winters, A Professional Corporation (contained
in its opinions filed as Exhibits 5.1 and 8)
24 Powers of Attorney (included on signature page)
</TABLE>
II-2
<PAGE> 37
- ----------------
* To be filed by amendment or by a current report on Form 8-K pursuant to
the Securities Exchange Act of 1934, as appropriate.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high and of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; provided, however, that subparagraphs (i) and (ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrants pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is
II-3
<PAGE> 38
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
II-4
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on January 17, 1997.
JAMESON INNS, INC.
By: /s/ Thomas W. Kitchin
-------------------------------------
Thomas W. Kitchin
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Thomas W. Kitchin and Craig R.
Kitchin, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him in his name, place
and stead, in any and all capacities, to sign any or all amendments (including
post-effective amendments) to this Registration Statement, and to cause the same
to be filed, with all exhibits thereto and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all acts and things that
said attorneys-in-fact and agents, or any of them, or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Thomas W. Kitchin President, Chief Executive January 17, 1997
- -------------------------- Officer, Chairman of the Board
THOMAS W. KITCHIN of Directors, (principal
executive officer)
/s/ Craig R. Kitchin Treasurer and Chief Financial January 17, 1997
- -------------------------- Officer (principal accounting
CRAIG R. KITCHIN officer)
/s/ Robert D. Hisrich Director January 17, 1997
- --------------------------
ROBERT D. HISRICH
/s/ Michael E. Lawrence Director January 17, 1997
- --------------------------
MICHAEL E. LAWRENCE
/s/ Thomas J. Kearns Director January 17, 1997
- --------------------------
THOMAS J. KEARNS
</TABLE>
II-5
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
<S> <C>
1.1 Form of Underwriting Agreement (for Common Stock)*
1.2 Form of Underwriting Agreement (for Common Stock Warrants)*
1.3 Form of Underwriting Agreement (for Preferred Stock)*
3.1 Articles of Incorporation of the Registrant incorporated by reference to Exhibit 3.1.1
to the Registration Statement filed on Form S-11, File No. 33-71160
3.2 Articles of Amendment to the Articles of Incorporation of the Registrant incorporated
by reference to Exhibit 3.1.2 to the Registration Statement filed on Form S-11, File
No. 33-71160
3.3 Articles of Amendment to the Articles of Incorporation of the
Registrant setting forth the Designation of Preferences, Rights,
Privileges and Restrictions of Preferred Stock of the Registrant
incorporated by reference to Exhibit 2.1 to the Registrant's Form
10-K/A1 (Amendment No. 1 to the Registrant's Annual Report on Form
10-K) for the year ended December 31, 1993
3.4 Articles of Amendment to the Articles of Incorporation of the
Registrant incorporated by reference to Exhibit 3.3.1 to Form
10-K/A2 (Amendment No. 2 to the Registrant's Annual Report on Form
10-K) for the year ended December 31, 1993
3.5 Articles of Amendment to the Articles of Incorporation of the
Registrant Amending the Designation of Preferences, Rights,
Privileges and Restrictions of Preferred Stock of the Registrant
incorporated by reference to Exhibit 3.6 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
3.6 Bylaws of the Registrant incorporated by reference to Exhibit 3.2.1 to the Registration
Statement on Form S-11, File No. 33-71160
3.7 Amendment to the Bylaws of the Registrant incorporated by reference to Exhibit 3.2.2
to the Registration Statement on Form S-11, File No. 33-71160
3.8 Amendment No. 2 to Registrant's Bylaws incorporated by reference to Exhibit 3.8 to
the Annual Report on Form 10-K for the year ended December 31, 1995
4.1 Specimen of Common Stock Certificate incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-11 (File No. 33-71160)
4.2 Form of Common Stock Warrant Agreement*
4.3 Form of Preferred Stock Certificate*
5.1 Opinion of Conner & Winters, A Professional Corporation, regarding legality of
securities being offered
8 Opinion of Conner & Winters, A Professional Corporation, regarding tax matters
12 Calculation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
23.1 Consent of Ernst & Young LLP
23.2 Consent of Conner & Winters, A Professional Corporation (contained
in its opinions filed as Exhibits 5.1 and 8)
24 Powers of Attorney (included on signature page)
</TABLE>
- -----------------
* To be filed by amendment or by a current report on Form 8-K pursuant to
the Securities Exchange Act of 1934, as appropriate.
II-6
<PAGE> 1
EXHIBIT 5.1
CONNER & WINTERS
[LETTERHEAD]
January 17, 1997
Jameson Inns, Inc.
8 Perimeter Center East
Suite 8050
Atlanta, Georgia 30346-1603
Re: Jameson Inns, Inc. - Registration Statement on Form S-3
(the "Registration Statement")
Gentlemen:
We have acted as counsel to Jameson Inns, Inc., a Georgia corporation
(the "Company"), in connection with the proposed public offering by the Company
from time to time (the "Offering") of shares of the Company's Common Stock, $.10
par value per share (the "Common Stock"), warrants to purchase shares of Common
Stock (the "Common Stock Warrants") and shares of the Company's Preferred Stock,
$1.00 par value per share (the "Preferred Stock") having an aggregate initial
offering price of up to $100,000,000.00. The shares of Common Stock and
Preferred Stock and the Common Stock Warrants so offered are sometimes referred
to below as the "Offered Securities."
In reaching the conclusions expressed in this opinion, we have (a)
examined such certificates of public officials and of corporate officers and
directors and such other documents and matters as we have deemed necessary or
appropriate, (b) relied upon the accuracy of facts and information set forth in
all such documents, and (c) assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as copies, and the authenticity of
the originals from which all such copies were made.
We have also assumed that (i) prior to the issuance of any shares of
any Offered Securities, there will exist under the Amended and Restated Articles
of Incorporation of the Company (the "Articles of Incorporation") the requisite
number of authorized but unissued shares of Common Stock and/or Preferred Stock,
as the case may be, and (ii) with respect to
<PAGE> 2
January 17, 1997
Page 2
the issuance of shares of each series of Preferred Stock offered from time to
time under the Registration Statement, the Board of Directors of the Company
shall have approved and adopted Articles of Amendment to the Articles of
Incorporation setting forth the Company's Designation of Preferences, Rights,
Privileges and Restrictions of Preferred Stock with respect to such series.
Further, with respect to Common Stock Warrants issued from time to time
pursuant to such warrant agreement(s) as shall be entered into by the Company
(individually, a "Warrant Agreement" and, collectively, the "Warrant
Agreements"), to the extent that the obligation of the Company under any such
Warrant Agreement may be dependent upon such matters, we assume for purposes of
this opinion that (a) any warrant agent named therein ("Warrant Agent") is duly
qualified to engage in the activities contemplated by the Warrant Agreement, (b)
the Warrant Agreement has been duly authorized, executed and delivered by the
Warrant Agent and constitutes the legally valid and binding obligation of the
Warrant Agent enforceable against the Warrant Agent in accordance with its
terms, (c) the Warrant Agent is in compliance, generally, with respect to acting
as Warrant Agent under the Warrant Agreement with all applicable laws and
regulations, and (d) the Warrant Agent has the requisite organizational and
legal power and authority to perform its obligations under the Warrant
Agreement.
We have further assumed that the Offered Securities will be offered and
sold pursuant to and in accordance with the terms and conditions set forth in
one or more underwriting agreements (collectively, the "Underwriting Agreement")
between the Company and Oppenheimer & Co., Inc. as the Representative of the
Underwriters for the Offering (the "Underwriters"), covering the sale by the
Corporation and the purchase by the Underwriters of up to such number of Offered
Securities as shall have been authorized by the Board of Directors of the
Company, and providing, among other things, for payment to the Company of such
consideration for such purchase and sale as shall constitute sufficient and
valid consideration pursuant to the Articles of Incorporation, the Bylaws of the
Company, as amended, and the laws of the State of Georgia.
Based on the foregoing, we are of the opinion that:
1. The shares of Common Stock to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in accordance with the terms
and conditions of the Underwriting Agreement and in accordance with applicable
laws of the State of Georgia, will be validly issued, fully paid and
non-assessable shares of Common Stock of the Company.
2. When a series of Preferred Stock has been duly authorized and
established in accordance with applicable action by the Board of Directors of
the Company ("Board Action"), the Articles of Incorporation and applicable laws
of the State of Georgia, and upon payment for the shares of Preferred Stock in
such series in the manner contemplated by applicable Board Action and any
applicable Underwriting Agreement and in accordance with applicable laws of
<PAGE> 3
January 17, 1997
Page 3
the State of Georgia, that such shares of Preferred Stock issued by the Company
pursuant to the Offering will be duly authorized, validly issued, fully paid and
non-assessable shares of Preferred Stock of the Company.
3. When the Common Stock Warrants have been (a) duly established by the
related Warrant Agreement, (b) duly authenticated by the Warrant Agent and (c)
duly authorized and established by Board Action, and warrant certificates
representing the Common Stock Warrants have been duly executed and delivered on
behalf of the Company against payment therefor in accordance with Board Action,
the applicable Underwriting Agreement and applicable requirements of the laws of
the State of Georgia, the Common Stock Warrants will be duly authorized and will
constitute valid and binding obligations of the Company.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to our firm in the Registration Statement and the
Prospectus constituting a part thereof under the caption "Legal Matters."
Sincerely,
CONNER & WINTERS,
A Professional Corporation
<PAGE> 1
EXHIBIT 8
CONNER & WINTERS
[LETTERHEAD]
January 17, 1997
Board of Directors
Jameson Inns, Inc.
8 Perimeter Center East
Suite 8050
Atlanta, GA 30346-1603
Gentlemen:
We have acted as counsel to Jameson Inns, Inc., a Georgia corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission (the "Commission"), in accordance with the
provisions of the Securities Act of 1933, as amended, and the rules and
regulations of the Commission thereunder (the "Act"), a Registration Statement
on Form S-3 (the "Registration Statement") of an offering (the "offering") to
sell on a delayed or continuous basis an indeterminate number of (i) shares of
the Company's common stock par value $.10 per share (the "Common Stock") (ii)
warrants to purchase shares of Common Stock, and (iii) shares of the Company's
preferred stock, par value $1.00 per share.
In connection with our representation of the Company in the preparation
and filing of the Registration Statement, you have requested our opinion as to
certain federal income tax matters related to the offering. We are rendering
this opinion pursuant to such request. All terms capitalized in this opinion
shall have the same meanings as in the Registration Statement unless otherwise
defined herein.
In connection with this opinion, we have examined such certificates,
documents and instruments as we have deemed necessary as a basis for the
opinions hereinafter expressed. In
<PAGE> 2
January 17, 1997
Page 2
our examination, we have assumed the genuineness of all signatures, the
accuracy, authenticity and completeness of all documents, certificates and
records submitted to us as originals, and the conformity with the originals of
all documents, certificates and records submitted to us as copies. In addition,
for purposes of our opinion we have relied upon the initial and continuing
accuracy of the following statements, representations and covenants which have
been made by the Company and Thomas W. Kitchin to us in letters dated January
17, 1997:
Representations from the Company:
1. As of the date hereof, the Registration Statement does not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
2. The accountants who certified or will certify the financial
statements included in the financial reports of the Company to be delivered to
prospective investors with the Registration Statement or incorporated by
reference in the Registration Statement are and will be independent certified
public accountants with respect to the Company.
3. The balance sheet of the Company as of September 30, 1996 which is
incorporated by reference in the Registration Statement presents fairly the
Company's financial position as of the date indicated; said balance sheet has
been prepared in conformity with general accepted accounting principles applied
on a consistent basis; and since September 30, 1996 through the date hereof,
there has not been any material adverse change in the financial position of the
Company.
4. The amounts of the Company's net operating loss carryforwards and
its Built-In Gain, as presented in the Registration Statement, are accurately
stated.
5. On or before the due date (including extensions, if applicable) for
the filing of its federal income tax return for its taxable year ending December
31, 1994, the Company made an election with the filing of such return to be
taxed as a real estate investment trust ("REIT") under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code").
6. The Company has been continuously since the date of the closing of
its initial public offering of stock (the "Closing Date") and currently is a
corporation (1) which is managed by one or more directors; (2) the beneficial
ownership of which is evidenced by transferable shares; (3) which would be
taxable as a domestic corporation, but for Sections 856 through 860 of the Code;
(4) which is neither (A) a financial institution referred to in Code Section
582(c)(5), nor (B) an insurance company to which subchapter L of the Code
applies; (5) which uses a
<PAGE> 3
January 17, 1997
Page 3
calendar year for income tax purposes; (6) which maintains the actual ownership
records as required by Code Section 857(a)(2) as well as other recordkeeping,
filing and other administrative requirements of the Code and Treasury
Regulations that must be met in order to elect and maintain REIT status; and (7)
which meets certain other tests described below regarding the nature of its
income and assets which are necessary to qualify for and remain qualified as a
REIT.
7. The beneficial ownership of the Company has been since the Closing
Date through the date hereof held by 100 or more persons.
8. Beginning January 1, 1994, through the date hereof (i) at least 95
percent of the Company's gross income for each tax year (excluding gross income
from "prohibited transactions" as such term is defined in Code Section
857(b)(6)) has been derived from the following sources: dividends, interest,
rents from real property and gross income from the other remaining sources
listed in Code Section 856(c)(2); (ii) at least 75 percent of its gross income
for each tax year (excluding gross income from "prohibited transactions") has
been derived from the following sources: rents from real property, interest on
obligations secured by mortgages on real property or on interests in real
property and gross income from the other remaining sources listed in Code
Section 856(c)(3); and (iii) less than 30 percent of its gross income has been
derived from the sale or other disposition of stock or securities held for less
than one year, property in a "prohibited transaction", and real property held
for less than four years other than property which is involuntarily converted or
which is foreclosure property within the definition of Code Section 856(e).
9. The Company currently satisfies the following assets tests and has
satisfied such tests at the end of each calendar quarter beginning on or after
January 1, 1994: (i) at least 75% of value of the Company's total assets is
represented by "real estate assets," as such term is defined in Section
856(b)(6) of the Code, cash, cash items (including receivables) and government
securities; and (ii) no more than 25 percent of the value of the Company's total
assets is represented by securities other than those includable in the 75
percent asset class, with the value of any one issuer's securities owned by the
Company not exceeding 5 percent of the value of the Company's total assets and
with not more than 10 percent of the outstanding voting securities of such
issuer being owned by the Company.
10. Before January 1, 1994, the Company distributed all of its earnings
and profits, if any, as of December 31, 1993. At December 31, 1993, the Company
had no accumulated or current earnings and profits.
11. The Company made an election, as provided by Internal Revenue
Notice 88-19, to allow it to be subject to rules similar to those imposed on S
corporations under Section 1374 of the Code with respect to the recognition of
the "built-in-gain", as defined in Code
<PAGE> 4
January 17, 1997
Page 4
Section 1374(a), of the Company's assets at the effective time of its REIT
election at January 1, 1994.
12. The Company has not and will not manage or operate the Inns; the
Company has not and will not furnish or render services of any kind to the
occupants of the Inns; the Company entered into the Lease with Jameson Operating
Company on the Closing Date; and the Lease has been continuously in effect since
the Closing Date through the date hereof.
13. The Company has not charged and does not and will not charge rent
for any property that is based in whole or in part on the income or profits of
any person (except by reason of being based on a percentage of gross daily room
revenues under the Lease).
14. The rental income derived by the Company from the Lease
attributable to personal property, as calculated under Code Section 856(d)(1),
has been through the date hereof and will continue to be less than 15 percent of
the total rental income attributable to both the real and personal property
leased under the Lease.
15. The Company has not received and will not receive income, directly
or indirectly, from any person in which it owns, directly or indirectly (within
the limitations of Code Section 318(a) as modified by Code Section 856(d)(5))
(i) in the case of any person which is a corporation, either 10 percent or more
of the total combined voting power of all classes of stock of the corporation
entitled to vote, or 10 percent or more of the total number of shares of all
classes of stock of the corporation and (ii) in the case of a person which is
not a corporation, an interest of 10 percent or more in the net assets or net
profits of such person.
16. The Company has adhered and will adhere to the terms of the Lease.
Further, (i) the total amount of the Rent under the Lease has not substantially
exceeded and will not substantially exceed the fair rental value of the Inns;
(ii) there has not been and there is no arrangement, agreement or understanding
between the Company and the Operator whereby it is contemplated that the
Operator will or may acquire the Inns; and (iii) no portion of the Rent has been
or will be specifically designated as interest or has been or will be
recognizable as the equivalent of interest.
17. The Company has not been since January 1, 1994 and is not and will
not be primarily engaged in the business of the sale of Inns. However, in the
event the Company decides to sell an Inn and associated property at a future
time, the Company will comply with the safe harbor provisions of the Code with
respect to such sales, as provided in Code Section 857(b)(6).
18. Attached hereto as Exhibit A are the Company's Amended and Restated
Articles of Incorporation including all amendments thereto through the date of
this letter. The Company
<PAGE> 5
January 17, 1997
Page 5
has observed and will observe the restrictions on ownership provided for in such
Articles (the "Ownership Limit" and the "Related Party Limit" provisions) and
will not amend such provisions.
19. The Company has distributed for each of its taxable years beginning
on or after January 1, 1994 and will distribute to its stockholders each taxable
year dividends in an amount at least equal to: (A) the sum of (i) 95 percent of
the "real estate investment trust taxable income" for the taxable year (as
defined in Code Section 857(b)(2)) computed without regard to the dividends paid
deduction and excluding net capital gain; and (ii) 95 percent of its net income
(after tax), if any from foreclosure property as defined in Code Section 856(e);
less (B) the sum of certain items of noncash income, as determined under Code
Section 857(e).
20. There are no other documents or agreements which alter, modify or
change in any way the validity and accuracy of the above representations and
information.
Representation from Thomas W. Kitchin:
1. From and after January 31, 1994, Thomas W. Kitchin has not owned and
will not acquire ownership, directly or constructively (under Code section
318(a), as modified by Code section 856(d)(5)) of 10 percent or more (in the
case of a corporation, of the total combined voting power of all classes of
stock entitled to vote or the total number of shares of all classes of stock of
such corporation and in the case of any person which is not a corporation, in
the assets or net profits of such person) of a person, as such term is defined
in the Code, from whom the Company derives income.
On the basis of the foregoing and subject to the qualifications and
limitations set forth herein, it is our opinion that the Company has met the
qualification requirements for a "real estate investment trust" during its
taxable years ending on or after December 31, 1994, and its proposed method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a "real estate investment trust" under the Code, assuming no
change in applicable underlying law. The discussion in the Registration
Statement under the caption "Federal Income Tax Considerations" is accurate and
complete in all material respects.
We are members of the Oklahoma Bar and, accordingly, do not express or
purport to express any opinions with respect to any laws other than the laws of
the State of Oklahoma and the federal laws of the United States of America. In
rendering the foregoing opinion, we have with your permission relied on certain
factual matters have been based on certificates of officers of the Company. The
certificates referred to above are in form satisfactory to us and copies thereof
have been delivered to you. We and you are justified in relying thereon.
<PAGE> 6
January 17, 1997
Page 6
This opinion is being rendered for your benefit and is not to be used,
circulated or otherwise referred to in connection with any transactions other
than those contemplated in the Agreement.
Sincerely,
CONNER & WINTERS,
A Professional Corporation
<PAGE> 1
EXHIBIT 12
<TABLE>
<CAPTION>
JAMESON INNS, INC.
CALCULATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Year Ended December 31,
-----------------------------------------------------------------------
Nine Months
Ended September 30,
1991 1992 1993 1994 1995 1996
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated income
(loss) before
extraordinary items ($495,548) ($312,290) ($143,459) $1,311,157 $1,791,268 $2,948,485
Interest 1,311,060 1,412,646 1,442,224 305,130 1,503,373 1,073,758
Amortization 114,041 150,736 136,227 34,312 87,151 73,059
---------------------------------------------------------------------------------------------
Earnings $929,553 $1,251,092 $1,434,992 $1,650,599 $3,381,792 $4,095,302
=============================================================================================
Interest $1,311,060 $1,412,646 $1,442,224 $305,130 $1,503,373 $1,073,758
Amortization 114,041 150,736 136,227 34,312 87,151 73,059
Preferred stock
dividends 26,950 27,000 24,750 -- 489,949 --
Interest capitalized
during the period 8,180 29,993 48,342 182,569 381,508 342,323
---------------------------------------------------------------------------------------------
Fixed Charges $1,460,231 $1,620,375 $1,651,543 $522,011 $2,461,981 $1,489,140
=============================================================================================
Ratio of earnings to
fixed charges and
preferred stock
dividends .64 .77 .87 3.16 1.37 2.75
=============================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Jameson Inns, Inc.
for the registration of $100,000,000 of its common stock, common stock warrants
and preferred stock and to the incorporation by reference therein of our report
dated January 31, 1996, with respect to the consolidated financial statements
and schedules of Jameson Inns, Inc. included in its Annual Report (Form 10-K)
for the year ended December 31, 1995, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Atlanta, Georgia
January 16, 1997
