<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-20143
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 THAT A FINAL PROSPECTUS SUPPLEMENT
IS DELIVERED. THIS PROSPECTUS SUPPLE- MENT AND THE ACCOMPANYING 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, DATED MARCH 6, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 28, 1997)
1,000,000 SHARES
JAMESON INNS, INC.
% SERIES A CUMULATIVE PREFERRED STOCK
LIQUIDATION PREFERENCE $25 PER SHARE
The % Series A Cumulative Preferred Stock, $1.00 par value per share (the
"Series A Preferred Stock"), of Jameson Inns, Inc. (the "Company") offered
hereby (the "Offering") bears dividends which are cumulative from the date of
original issue and are payable quarterly in arrears on or about the 20th day of
January, April, July and October of each year at the rate of % per annum of
the $25 liquidation preference (the "Liquidation Preference") per share
(equivalent to a fixed annual amount of $ per share). Such dividends are
payable to shareholders of record as they appear in the stock records of the
Company at the close of business on the applicable record date for the
respective dividend payment. The first record date for determination of
shareholders entitled to receive dividends on the Series A Preferred Stock is
expected to be March 31, 1998. See "Description of Series A Preferred Stock --
Dividends."
Except (i) in certain circumstances relating to preservation of the
Company's qualification as a real estate investment trust (a "REIT") and (ii) in
connection with a change of control of the Company, the Series A Preferred Stock
is not redeemable prior to March , 2003. On and after such date, the Series A
Preferred Stock may be redeemed for cash at the option of the Company, in whole
or in part, at a redemption price of $25 per share, plus accrued and unpaid
dividends thereon, if any, up to the date of such redemption. The Series A
Preferred Stock has no stated maturity, will not be subject to any sinking fund
or mandatory redemption and will not be convertible into any other securities of
the Company. See "Description of Series A Preferred Stock -- Maturity,"
"-- Redemption of Series A Preferred Stock Upon a Change of Control" and
"-- Redemption."
In order to ensure that the Company continues to meet the requirements for
qualification as a REIT for federal income tax purposes, shares of Series A
Preferred Stock will be deemed "Excess Shares" pursuant to the amendment to
Company's Amended and Restated Articles of Incorporation creating the Series A
Preferred Stock if, with certain limited exceptions, a holder owns shares
representing more than 6.75% of the Company's aggregate outstanding Series A
Preferred Stock, and the Company will have the right to purchase Excess Shares
from the holder. See "Description of Series A Preferred Stock -- Restrictions on
Ownership and Transfer."
The Company has applied to list the Series A Preferred Stock on the Nasdaq
Stock Market ("Nasdaq") under the symbol "JAMSP." If approved, trading of the
Series A Preferred Stock on Nasdaq is expected to commence within a 30-day
period after the initial delivery of the Series A Preferred Stock. The
Underwriters have advised the Company that each intends to make a market in the
Series A Preferred Stock prior to the commencement of trading on Nasdaq, but is
not obligated to do so and may discontinue market making at any time without
notice. See "Underwriting."
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT AND
PAGE 5 OF THE ACCOMPANYING PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SERIES A PREFERRED
STOCK OFFERED HEREBY.
---------------------
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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
- -----------------------------------------------------------------------------------------------------------------------
Total....................................... $ $ $
=======================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $150,000.
---------------------
The shares of Series A Preferred Stock are offered by the several
Underwriters named herein, subject to prior sale, when, as and if issued to and
accepted by them, and subject to certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of Series A
Preferred Stock will be made through the facilities of The Depository Trust
Company, New York, New York, on or about March , 1998.
MORGAN KEEGAN & COMPANY, INC. CIBC OPPENHEIMER
March , 1998
<PAGE> 2
(Jameson Map)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A PREFERRED
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
SERIES A PREFERRED STOCK OFFERING AND MAY BID FOR AND PURCHASE SHARES OF SERIES
A PREFERRED STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein and therein by reference. Unless
the context otherwise requires, as used herein the term "Company" shall mean and
refer to the business and assets of Jameson Inns, Inc. and its subsidiaries on a
consolidated basis.
THE COMPANY
Jameson Inns, Inc., a Georgia corporation (the "Company"), is a
self-administered real estate investment trust ("REIT") headquartered in
Atlanta, Georgia, which develops and owns limited service hotel properties
("Inns") operating in the southeastern United States under the trademark "The
Jameson Inn(R)." At December 31, 1997, the Company had a total of 84 Inns either
in operation or under development, including 62 Inns in operation (2,924
available rooms), 11 Inns under construction and contracts to acquire 11 parcels
of land on which additional Inns are expected to be constructed during 1998. In
addition, at that date, two of the Inns in operation were undergoing 20-room
expansions. Upon completion of these projects, the Company expects to have 84
Inns in operation containing 3,844 available rooms.
The Company focuses on developing Inns in communities in the southeastern
United States which have a strong and growing industrial or commercial base and
a shortage of quality hotel rooms. Generally, the Inns are rooms-only facilities
designed to appeal to price and quality conscious business travelers, such as
sales representatives, government officials and others who travel to these
communities on business, as well as family and leisure travelers attending
activities in the communities such as college and university sponsored events,
fairs, festivals and other cultural events and family reunions. The standard Inn
is initially built as a 40-unit, two-story, Colonial-style structure constructed
generally on a one- to two-acre tract with an outdoor swimming pool, fitness
center and parking area. As initially constructed, the standard Inn has 38 guest
rooms and two executive suites and features amenities such as remote-controlled
television with access to cable programming, including HBO, free local telephone
calls, complimentary continental breakfast and newspaper, king-sized or double
beds, attractive decor, quality furnishings and, in select rooms, whirlpool
baths and small refrigerators. Based on market demand, two Inns were initially
constructed with 60 rooms and other Inns have been expanded one or more times
since their initial construction. As of December 31, 1997, a total of 19 Inns
had 58 or more rooms each. The Company expects to construct Inns in the future
with 40 or 60 rooms initially depending on market demand and other factors.
Substantially all of the Inns have been constructed by Jameson Development
Company, LLC (the "Contractor") or its predecessor Jameson Construction Company.
It is expected that all future Inns will also be constructed by the Contractor.
The Company seeks to enhance shareholder value by: (i) participating in any
increased room revenue from the Inns through Percentage Rent (as defined below);
(ii) developing additional Inns in locations which meet the Company's criteria;
and (iii) selectively expanding existing Inns as market conditions warrant.
In order for the Company to qualify as a REIT, neither the Company nor its
subsidiaries can operate the Inns. Therefore, the Company leases all of the Inns
to Jameson Operating Company, LLC ("JOCLLC") and, prior to December 28, 1997,
its predecessor Jameson Operating Company ("JOC") pursuant to master leases
(individually or jointly as the context requires, the "Lease") covering all of
the Inns. In addition, references to the "Operator" herein refer to either JOC
or JOCLLC as the context requires. Under the Lease, the Operator is obligated to
pay the Company base rent ("Base Rent") based on the number of rooms in
operation on the first day of each month and, where required under the formula
set forth in the Lease, percentage rent ("Percentage Rent") based on room
revenues as defined in the Lease. Percentage Rent is designed to allow the
Company to participate in any growth in revenues at the Inns by providing that a
portion of aggregate room revenues in excess of specified amounts will be paid
to the Company as Percentage Rent, except as limited by the Lease.
S-1
<PAGE> 4
RECENT DEVELOPMENTS
Inns Under Construction. From January 1, 1998, through February 28, 1998,
the Company opened three additional new Inns and commenced construction of four
additional Inns. The following sets forth the location of new Inns either under
construction by the Company at December 31, 1997, or on which it commenced
construction after that date. All such Inns have either recently opened or are
expected to open in 1998. Each such Inn initially has or will have 40 or 60
rooms. Of the Inns listed below, the Inns in Spartanburg, South Carolina, Dunn,
North Carolina, and Perry, Georgia opened in January 1998.
<TABLE>
<S> <C>
Alabama: Trussville
Georgia: Dalton, Kingsland and Perry
North Carolina: Clayton, Dunn, Eden, Greenville, Hickory, Lenoir,
Roanoke Rapids and Smithfield
South Carolina: Duncan and Spartanburg
Tennessee: Cleveland
</TABLE>
Marketing. In January 1998, the Operator began an advertising campaign
designed to increase the Inns' name recognition in the southeastern region of
the United States and thereby improve occupancy rates at the Inns. In addition
to billboard advertising which the Operator has traditionally utilized and will
continue to utilize, the Operator is placing advertisements for the Inns on
selected television and radio broadcasts, in regional and special event
publications and in newspapers.
S-2
<PAGE> 5
THE INNS
The following table sets forth certain information about the 62 Inns
operating at December 31, 1997.
<TABLE>
<CAPTION>
YEAR NUMBER 1997 ROOM
OPENED/ OF NIGHTS
LOCATION EXPANDED ROOMS AVAILABLE(1)
- -------- ------------ --------- -------------------
<S> <C> <C> <C>
ALABAMA:
Albertville................................................. 94 40 14,600
Alexander City.............................................. 94/95 60 21,900
Arab........................................................ 95 40 14,600
Auburn...................................................... 97 40 5,352
Decatur..................................................... 96 40 14,605
Eufaula..................................................... 96 40 14,600
Florence.................................................... 96/96 65 23,725
Greenville.................................................. 96 40 14,600
Jasper...................................................... 97 40 1,920
Oxford...................................................... 97 40 8,080
Ozark....................................................... 95 40 14,600
Selma....................................................... 92/95 60 21,900
Sylacauga................................................... 97 40 3,400
Tuscaloosa.................................................. 97 40 4,280
----- -------
Subtotal............................................. 625 178,162
----- -------
GEORGIA:
Albany...................................................... 95/96 62 22,630
Americus.................................................... 92/93/94 79 28,835
Bainbridge.................................................. 94/95 60 21,900
Brunswick................................................... 95/96 60 21,900
Calhoun..................................................... 88/94 59 21,535
Carrollton.................................................. 94/95 60 21,900
Commerce.................................................... 96 40 14,408
Conyers..................................................... 96 39 14,235
Covington................................................... 90 40 13,767
Douglas..................................................... 95 40 14,524
Dublin...................................................... 97 40 4,308
Eastman..................................................... 89 41 14,938
Fitzgerald.................................................. 94 40 14,600
Greensboro.................................................. 90 41 14,965
Hartwell.................................................... 92 40 14,600
Jesup....................................................... 90/91 61 22,265
LaGrange(2)................................................. 96 40 14,600
Macon....................................................... 97 40 400
Milledgeville............................................... 91 100 35,258
Oakwood..................................................... 97 40 14,232
Statesboro.................................................. 89 39 13,864
Thomaston................................................... 90/96 61 21,900
Valdosta.................................................... 95/95 55 19,972
Warner Robins............................................... 97 59 3,426
Washington.................................................. 90 41 14,965
Waycross.................................................... 93/96 60 21,878
Waynesboro.................................................. 96 40 14,591
Winder...................................................... 88 40 14,600
----- -------
Subtotal............................................. 1,417 470,996
----- -------
NORTH CAROLINA:
Asheboro.................................................... 97 40 3,040
Forest City(2).............................................. 97 40 12,834
Laurinburg.................................................. 97 40 9,224
Sanford..................................................... 97 40 4,096
Wilson...................................................... 97 40 301
----- -------
Subtotal............................................. 200 29,495
----- -------
SOUTH CAROLINA:
Anderson.................................................... 93/94 60 21,900
Cheraw...................................................... 95 40 14,600
Easley...................................................... 95 40 14,600
Gaffney..................................................... 95/97 58 19,375
Georgetown.................................................. 96 40 14,513
Greenwood................................................... 95/96 64 23,193
Lancaster................................................... 95 40 14,600
Orangeburg.................................................. 95 40 14,600
Seneca...................................................... 96 40 14,490
Simpsonville................................................ 96 40 14,508
Union....................................................... 97 40 13,366
----- -------
Subtotal............................................. 502 179,745
----- -------
TENNESSEE:
Clinton..................................................... 97 40 3,320
Decherd..................................................... 97 40 8,487
Johnson City................................................ 97 60 11
Tullahoma................................................... 97 40 7,840
----- -------
Subtotal............................................. 180 19,658
----- -------
Total................................................ 2,924 878,056
===== =======
</TABLE>
- ---------------
(1) As to Inns opened or expanded during 1997, room nights available reflects
all rooms available from the opening date of the Inn or its expansion but
does not include periods during which rooms may have been unavailable due to
repairs or renovations.
(2) A 20-room expansion of this Inn was under construction at December 31, 1997,
and opened in January or February 1998.
S-3
<PAGE> 6
At February 28, 1998, 31 of the Company's 65 operating Inns were pledged to
secure indebtedness under the Company's approximately $36 million credit
facility. In addition, 20 operating Inns were pledged to secure other mortgage
indebtedness and seven of the 12 Inns under construction at February 28, 1998,
were pledged to secure construction loans. It is expected that approximately
$23.9 million of indebtedness secured by 18 operating Inns will be repaid with
the net proceeds of the Offering. Such repayment will result in there being a
total of 32 Inns available to secure future borrowings for the development of
additional Inns and expansion of existing Inns. The Company is negotiating with
its lenders to increase the Line to an aggregate of approximately $55 million,
but has not received a full commitment regarding such increase.
THE OFFERING
Securities Offered......... 1,000,000 shares of % Series A Cumulative
Preferred Stock. The Company has applied to list
the Series A Preferred Stock on Nasdaq under the
symbol "JAMSP." See "Underwriting."
Maturity................... Series A Preferred Stock has no stated maturity and
will not be subject to any sinking fund or
mandatory redemption. See "Description of Series A
Preferred Stock -- Maturity."
Use of Proceeds............ The Company intends to use all of the net proceeds
of the sale of Series A Preferred Stock for
repayment of indebtedness outstanding under the
Company's approximately $36 million credit facility
(the "Line") and other mortgage indebtedness.
Amounts repaid under the Line may be reborrowed.
See "Use of Proceeds."
Ranking.................... With respect to the payment of dividends and
amounts upon liquidation, the Series A Preferred
Stock will rank senior to the Company's common
stock, par value $.10 per share (the "Common
Stock"), which is the only capital stock of the
Company currently outstanding. See "Description of
Series A Preferred Stock -- Rank," "-- Dividends"
and "-- Liquidation Preference."
Dividends.................. Dividends on the Series A Preferred Stock are
cumulative from the date of original issue and are
payable quarterly in arrears on or about the 20th
day of January, April, July and October to
shareholders of record on the last business day of
December, March, June and September, respectively,
commencing on April 20, 1998, at the fixed rate of
% per annum of the Liquidation Preference
(equivalent to a fixed annual rate of $
per share). See "Description of Series A Preferred
Stock -- Dividends."
Liquidation Preference..... Equal to $25 per share of Series A Preferred Stock,
plus accrued and unpaid dividends (whether or not
declared). See "Description of Series A Preferred
Stock -- Liquidation Preference."
Change of Control.......... Upon the occurrence of a Change of Control Event
(as defined herein), at any time prior to March ,
2003, the Company may redeem all of the outstanding
Series A Preferred Stock at a purchase price
ranging from $25.05 to $26.05 per share (depending
on the date of the redemption), plus accrued and
unpaid dividends (if any) to the date of
redemption. See "Description of Series A Preferred
Stock -- Redemption of Series A Preferred Stock
Upon a Change of Control."
Redemption................. Except in certain circumstances relating to
preservation of the Company's status as a REIT and
in connection with a change of control of the
S-4
<PAGE> 7
Company, the Series A Preferred Stock is not
redeemable prior to March , 2003. On and after
such date, the Series A Preferred Stock will be
redeemable for cash at the option of the Company,
in whole or in part, at a redemption price of $25
per share, plus dividends accrued and unpaid to the
redemption date (whether or not declared) without
interest. See "Description of Series A Preferred
Stock -- Redemption" and "-- Restrictions on
Ownership and Transfer."
Voting Rights.............. Holders of Series A Preferred Stock generally will
have no voting rights except as required by law.
However, whenever dividends on any shares of Series
A Preferred Stock are in arrears for six or more
quarters (whether consecutive or not), the holders
of such shares (voting separately as a voting group
with all other series of parity preferred stock
upon which like voting rights have been conferred
and are exercisable) will be entitled to vote for
the election of two additional directors of the
Company until all dividends accumulated on such
shares of Series A Preferred Stock have been fully
paid or declared and a sum sufficient for the
payment thereof set aside for payment. In addition,
certain changes to the terms of the Series A
Preferred Stock that would be materially adverse to
the rights of holders of the Series A Preferred
Stock cannot be made without the affirmative vote
of holders of at least a majority of the
outstanding Series A Preferred Stock. Holders of
Series A Preferred Stock will have certain other
voting rights under Georgia law. See "Description
of Series A Preferred Stock -- Voting Rights."
Conversion................. The Series A Preferred Stock is not convertible
into or exchangeable for any other property or
securities of the Company.
Ownership Limitation....... Subject to certain exceptions, no person, directly
or indirectly, may own shares representing more
than 6.75% of the outstanding Series A Preferred
Stock. Mr. Thomas W. Kitchin, President and Chief
Executive Officer of the Company, may own up to
20.75% and American Real Estate Company Ltd. may
own up to 9% of such stock. See "Description of
Series A Preferred Stock -- Restrictions on
Ownership and Transfer."
S-5
<PAGE> 8
SUMMARY FINANCIAL AND OTHER DATA
The following table sets forth summary financial information on an
historical, pro forma and as adjusted basis for the Company. The following
information should be read in conjunction with all of the financial statements
and notes thereto included in the Annual Report on Form 10-K for the year ended
December 31, 1997, which are incorporated by reference into the accompanying
Prospectus. The consolidated historical financial data have been derived from
the audited historical consolidated financial statements. The pro forma data
assume that the Company's 1994 initial public offering and all related
transactions occurred on January 1, 1993, and the Company qualified as a REIT,
distributed all of its taxable income and, therefore, incurred no income tax
expense during the periods. The as adjusted data assume the Offering and the
application of the proceeds therefrom as described under "Use of Proceeds"
occurred on January 1, 1997, for purposes of the Other Data and on December 31,
1997, for purposes of the Balance Sheet Data. The as adjusted data assume a
9.25% annual dividend rate on the Series A Preferred Stock.
JAMESON INNS, INC.
SUMMARY HISTORICAL, PRO FORMA AND AS ADJUSTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
HISTORICAL PRO FORMA HISTORICAL
--------------- --------------- -------------------------
1993 1994 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ -------
(DOLLARS AND WEIGHTED AVERAGE SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA, ADR AND REVPAR)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gross Revenues:(1)
Lease revenue from Operator................... $ -- $3,973 $2,886 $3,973 $6,342 $9,376 $12,966
Pre-REIT total revenues....................... 6,880 -- -- -- -- -- --
Expenses:
Depreciation.................................. 1,159 1,427 1,213 1,471 1,825 2,670 3,898
Inn real estate taxes and insurance .......... 247 412 247 412 514 733 1,107
Interest expense, net......................... 1,485 339 -- 187 1,590 1,386 778
Corporate administration expenses(2).......... -- 479 341 479 622 499 445
Income (loss) before limited partners' interest
and extraordinary item(3)..................... (51) 1,316 1,085 1,424 1,791 4,040 6,595
Income (loss) before extraordinary item......... (143) 1,311 1,085 1,424 1,791 4,040 6,595
Extraordinary item(4)........................... 146 (250) -- -- (19) (989) (689)
Net income...................................... 3 1,061 1,085 1,424 1,772 3,051 5,906
Basic earnings per common share(5).............. -- 0.35 0.28 0.42 0.34 0.49 0.64
Diluted earnings per common share(5)............ -- 0.34 0.28 0.37 0.45 0.48 0.63
Dividends paid per common share(6).............. -- 0.50 -- -- 0.80 0.86 0.90
Weighted average number of common shares --
basic(5)...................................... -- 3,067 3,852 3,364 3,750 6,178 9,222
Weighted average number of common shares --
diluted(5).................................... -- 3,085 3,852 3,870 3,901 6,366 9,414
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
AS
HISTORICAL ADJUSTED
------------------------------------------------ --------
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate (before accumulated
depreciation).................................. $25,247 $38,525 $57,370 $80,816 $117,515 $117,515
Net investment in real estate.................... 21,909 33,760 50,780 71,611 104,931 104,931
Total assets..................................... 23,073 35,074 52,806 73,985 107,606 107,606
Total mortgage debt.............................. 19,117 11,530 30,214 22,317 29,625 5,744
Shareholders' equity............................. 1,279 23,282 21,754 50,763 75,161 99,042
</TABLE>
S-6
<PAGE> 9
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
AS
HISTORICAL PRO FORMA HISTORICAL ADJUSTED
----------------- ----------------- --------------------------- --------
1993 1994 1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, ADR AND REVPAR)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(7).......... $ 1,016 $ 2,738 $ 2,298 $ 2,895 $ 3,616 $ 6,758 $10,637 $11,335
Occupancy Rate.................... 68.2% 70.1% 68.2% 70.1% 67.5% 66.9% 64.9% 64.9%
ADR............................... $ 38.03 $ 39.43 $ 38.03 $ 39.43 $ 42.80 $ 45.80 $ 47.25 $ 47.25
REVPAR............................ $ 25.94 $ 27.64 $ 25.94 $ 27.64 $ 28.89 $ 30.64 $ 30.68 $ 30.68
Room Revenues..................... $ 6,322 $ 8,373 $ 6,322 $ 8,373 $13,310 $19,950 $27,588 $27,588
Ratio of earnings to combined
fixed charges and preferred
stock dividends(8).............. .87 3.16 22.60 4.35 1.37 2.84 5.21 2.43
As adjusted ratio of EBITDA to
debt service plus preferred
dividends(9).................... 4.74
As adjusted preferred dividend
coverage ratio(10).............. 4.85
Room nights available............. 236,170 295,193 236,170 295,193 448,906 634,549 878,056 878,056
Operating Inns (at period end).... 15 20 15 20 32 43 62 62
Rooms available (at period end)... 707 966 707 966 1,537 2,107 2,924 2,924
</TABLE>
- ---------------
(1) Revenues for historical 1993 include room revenues of the Inns and other
revenue of the Company. Revenues in 1994, 1995, 1996 and 1997 and the 1993
and 1994 pro forma periods consist solely of lease payments from the
Operator calculated using the provisions in the Lease applied to the
historical room revenues of the Inns.
(2) Corporate administration expenses for the Company consist of amounts
allocated from Kitchin Investments, Inc. for salaries for the management
and overhead of the Company, office, audit, legal and printing expenses,
etc. pursuant to the terms of an agreement between the Company and Kitchin
Investments, Inc. effective January 1, 1994. Kitchin Investments, Inc. is a
corporation wholly owned by the Company's President, Chief Executive
Officer and Chairman.
(3) Prior to its initial public common stock offering in early 1994, the
Company financed the development of new Inns through the formation of
general and limited partnerships to which outside investors contributed
equity capital. Following completion of its initial public offering, the
Company acquired all such partnerships' interests in the Inns and the
partnerships were liquidated and terminated. Therefore, the limited
partners' interest is applicable only for the 1993 and 1994 historical
periods.
(4) Extraordinary items in 1994 through 1997 consist of write-offs of deferred
finance costs and prepayment penalties due to the early extinguishment of
debt. The extraordinary item in 1993 consists of a gain due to the early
extinguishment of debt.
(5) All earnings per share have been restated to conform to Financial
Accounting Standards Board Statement No. 128, Earnings per Share, and
Securities and Exchange Commission Staff Accounting Bulletin No. 98. Pro
forma earnings per share assume the 3,851,752 shares of Common Stock
outstanding after the Company's initial public offering in February 1994
were outstanding the entire period, excluding any conversions of preferred
stock in the basic earnings per share calculations. See Notes 2 and 6 to
the consolidated financial statements. Earnings per share for historical
1993 are not presented as they are not meaningful due to the November 15,
1993, reincorporation, similar to a recapitalization, and the Company's
initial public offering described in Note 1 to the consolidated financial
statements.
(6) Represents amounts paid during the year and does not equate to dividends
declared for the year due to the lag between the end of the period and
payment of dividends.
(7) Funds from Operations is defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), according to the March 1995 interpretation,
as net income (computed in accordance with generally accepted accounting
principles ("GAAP")) excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation and after adjustments for
unconsolidated partnerships and joint ventures. The Company has made
adjustments to its net income consisting only of
S-7
<PAGE> 10
depreciation, loss on disposals and the extraordinary item for debt
restructuring. The Company notes that industry analysts and investors use
Funds from Operations as another tool to evaluate and compare equity REITs.
The Company also believes it is meaningful as an indicator of net income
excluding most non-cash items and provides information about the Company's
cash available for distributions, debt service and capital expenditures.
Other non-cash expenses such as deferred finance cost amortization and
stock option expense have not been added back in Funds from Operations.
Funds from Operations does not represent cash flow from operating
activities in accordance with GAAP and is not indicative of cash available
to fund all of the Company's cash needs. Funds from Operations should not
be considered as an alternative to net income or any other GAAP measure as
an indicator of performance and should not be considered as an alternative
to cash flows as a measure of liquidity. In addition, the Company's Funds
from Operations may not be comparable to other companies' Funds from
Operations due to differing methods of calculating Funds from Operations
and varying interpretations of the NAREIT definition.
(8) 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 1993 and 1995 and is assumed to pay such dividends in
the 1997 as adjusted period. Earnings were inadequate to cover fixed
charges by $216,551 in 1993. This deficiency occurred prior to the
Company's business recapitalization on December 31, 1993.
(9) EBITDA represents income (loss) before limited partners' interest,
extraordinary items, depreciation and amortization. EBITDA is frequently
used by securities analysts and is presented here to provide additional
information about the Company's operations. EBITDA is not a measurement
presented in accordance with GAAP. EBITDA should not be considered in
isolation or as a substitute for net income or other data prepared in
accordance with GAAP or as a measure of the Company's profitability or
liquidity. Debt service includes required principal and interest payments
but excludes early repayments of debt.
(10) Represents EBITDA less interest payments divided by preferred stock
dividend payments during the period.
FORWARD LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus, including
documents incorporated by reference, contain "forward-looking" statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including, but not limited to, those paragraphs
relating to the Company's expansion plans, acquisition of or leasing additional
parcels of land, construction of new Inns and expansion of existing Inns,
availability of debt financing and capital, payment of quarterly dividends and
other matters. These statements are based on certain assumptions and analyses
made by the Company in the light of its experience and its perception of
historical trends, current conditions and expected future developments as well
as other factors it believes are appropriate under the circumstances. However,
whether actual results and developments will conform to the Company's
expectations and predictions is subject to a number of risks and uncertainties,
including: (1) the Company's ability to (a) secure construction and permanent
financing to finance such development on terms and conditions favorable to the
Company, (b) assess accurately the market demand for new Inns and expansions of
existing Inns, particularly in light of recent indications that the hotel
industry may be entering a period of oversupply, (c) identify and purchase or
lease new sites which meet its various criteria, including reasonable land
prices or ground lease terms, (d) contract for the construction of new Inns and
expansions of existing Inns in a manner which produces Inns consistent with its
present quality and standards at a reasonable cost and without significant
delays, (e) provide ongoing renovation and refurbishment of the Inns sufficient
to maintain consistent quality among the Inns, and (f) manage its business in a
cost-effective manner given the increase in the number of Inns; (2) the
Operator's ability to manage the Inns profitably; (3) general economic, market
and business conditions, particularly those in the
S-8
<PAGE> 11
lodging industry generally and in the geographic markets where the Inns are
located; (4) the business opportunities (or lack thereof) that may be presented
to and pursued by the Company; (5) the availability of qualified managers and
employees necessary for the Company's planned growth, particularly in light of
current low rates of unemployment; (6) changes in laws or regulations; (7) the
Company's continued qualification as a REIT and continuation of favorable income
tax treatment for REITs under federal law; (8) factors identified in the
Company's filings with the Securities and Exchange Commission, including the
factors listed in the Registration Statement on Form S-3 in which this
Prospectus Supplement and the accompanying Prospectus are included and the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, which
are incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus and (9) other factors, most of which are beyond the control of the
Company. Consequently, all of such forward-looking statements are qualified by
these cautionary statements and there can be no assurance that the actual
results or developments anticipated by the Company will be realized, or even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations.
S-9
<PAGE> 12
RISK FACTORS
An investment in the Series A Preferred Stock involves various risks,
including those described below and in the accompanying Prospectus under the
heading "Risk Factors" beginning on page 5. Investors should carefully consider
such risk factors, together with all of the information contained in or
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus in determining whether to purchase shares of the Series A Preferred
Stock offered hereby.
RISKS RELATED TO ISSUANCE OF ADDITIONAL PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation (the "Articles
of Incorporation") do not limit the issuance of additional series of preferred
stock ranking in parity with or superior to the Series A Preferred Stock. The
issuance of additional preferred stock in parity with or superior to the Series
A Preferred Stock could have the effect of diluting the interests of holders of
the Series A Preferred Stock. None of the provisions relating to the Series A
Preferred Stock contain any provisions affording the holders of the Series A
Preferred Stock protection in the event of a highly leveraged or other
transaction that might adversely affect the holders of the Series A Preferred
Stock.
HOTEL INDUSTRY RISKS -- COMPETITION
Certain segments of the hotel industry, including the segment in which the
Company operates, have experienced an increase in room supply in recent years.
The Company expects room supply in the future to continue to increase. There can
be no assurance that demand will support such increased room supply. The Company
believes that due to its strategy of selectively expanding into markets which
have a shortage of quality rooms, it is less susceptible to possible downturns
in the hotel industry caused by an oversupply of rooms. Continued increases in
supply, however, could result in decreased average daily room rate ("ADR"),
occupancy and revenue per available room ("REVPAR") at the Inns.
RISKS RELATED TO LACK OF AS-BUILT SURVEYS
For certain of its properties, the Company has not obtained surveys showing
the location and orientation of the completed improvements ("as-built surveys").
Without as-built surveys, there is a possibility that as to any particular Inn
or expansion (i) the Inn and other improvements on the property were not
constructed within the boundary lines of the property, (ii) the Inn and such
other improvements exist in, or encroach upon, a restricted area of the
property, (iii) the Inn and such other improvements violate certain other types
of private or governmental restrictions, covenants, easements or rights
affecting the property or (iv) in some cases, the Inn does not have good and
legal access to a public road or right of way. In addition, several of the title
policies for such Inns do not insure against losses for matters that would be
shown on an as-built survey. The costs of remedying such conditions, if any,
could adversely affect the Company's results from operations and financial
condition. The existence of such conditions could adversely affect the Company's
ability to dispose of such an Inn or reduce the sales price received by the
Company for such an Inn upon disposition.
The Company believes that such risks are mitigated by the fact that each of
such Inns (i) is open and operating for its intended use, (ii) has received a
building permit and a certificate of occupancy upon completion issued for the
improvements by the appropriate governmental authorities, (iii) was constructed
by the Contractor under close supervision by the Company and in accordance with
procedures and guidelines established by the Company in connection with the
construction of its other Inns and (iv) is small in comparison to the size of
the typical site on which it is constructed. However, the Company is in the
process of obtaining as-built surveys on the remaining approximately 32 Inns
without surveys, and intends to obtain such surveys on Inns constructed in the
future on an ongoing basis.
S-10
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series A Preferred
Stock offered hereby are estimated to be approximately $23.9 million. The
Company intends to use all of the net proceeds for repayment of certain
indebtedness outstanding under the Line and certain other mortgage indebtedness
which was incurred to finance the development of new Inns and expansions of
existing Inns. At February 28, 1998, a total of approximately $14.4 million and
$22.6 million were outstanding under the Line and all mortgage and construction
loans, respectively. Loans under the Line bear interest at rates initially
ranging from 8.5% to 8.75%, which are adjustable annually to equal a major
leader's prime rate as published in the Wall Street Journal plus .25% or .50%.
The minimum annual interest rate payable under the Line is 7% and the maximum is
13%. The annual interest rates at February 28, 1998, ranged from 8.75% to 9.00%.
Loans made under the Line are secured by mortgages on 31 of the Inns. Payments
of interest are due monthly, and monthly payments of principal commence in June
1999. Principal on loans under the Line is amortized using a 15-year period and
is payable in full in May 2006. The Company's other mortgage indebtedness to be
repaid consists of loans with terms of seven years and maturity dates ranging
from 2003 to 2004. Payments of principal and interest are due monthly and any
remaining unpaid balances are payable in full on the individual note's maturity
date. Interest rates are adjusted to a specified spread above the prime rate,
and ranged from 8.5% to 9.0% at February 28, 1998. At that date, such loans were
secured by mortgages on 16 of the Inns. The Company is currently negotiating
with its lenders to increase the Line to approximately $55 million, but has no
full commitment from such lenders at this time regarding such an increase.
S-11
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, and as adjusted to give effect to the sale of 1,000,000
shares of Series A Preferred Stock offered hereby and the application of the
estimated net proceeds therefrom.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including lines of credit).................. $ 29,625 $ 5,744
Shareholders' Equity:
Preferred Stock, $1.00 par value, 100,000 shares
authorized, 20,000,000 shares authorized, as adjusted;
no shares issued and outstanding, 1,000,000 shares
% Series A Cumulative Preferred Stock, issued and
outstanding, as adjusted............................... 0 1,000
Common Stock, $.10 par value, 20,000,000 shares
authorized, 40,000,000 shares authorized, as adjusted;
9,774,075 shares issued and outstanding, actual and as
adjusted............................................... 977 977
Additional paid-in capital................................ 75,211 98,092
Retained deficit.......................................... (1,027) (1,027)
-------- --------
Total shareholders' equity........................ 75,161 99,042
-------- --------
Total capitalization.............................. $104,786 $104,786
======== ========
</TABLE>
- ---------------
(1) Assumes a sale price of $25 per share for the Series A Preferred Stock sold
in the Offering less underwriters' discounts and estimated expenses for
estimated net proceeds to the Company of approximately $23.9 million.
S-12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
historical and pro forma consolidated financial statements and notes thereto
incorporated by reference in this Prospectus Supplement. Such financial
statements and information reflect the historical operations of the Company
through December 31, 1997.
The Company has grown from a hotel chain with four Inns containing 162
rooms at January 1, 1990, to 62 Inns containing 2,924 rooms at December 31,
1997. From its inception in 1988 until December 31, 1993, the Company was
engaged in the business of developing, owning and managing Inns. As part of its
activities, the Company engaged in development and construction of new Inns. On
December 31, 1993, the Company restructured by divesting itself of the
subsidiary corporations through which it conducted its construction activities,
securities brokerage activities and aviation operations. In addition, the
Company transferred its outdoor advertising business to the predecessor to
Jameson Outdoor Advertising Company, LLC, which is wholly owned by the Company's
Chairman and largest stockholder and his wife. The Company no longer manages or
operates the Inns upon their completion, but limits its activities to developing
and owning the Inns. The Operator leases the Inns from the Company and operates
them.
JOC was formed in 1993 to conduct the operation of the Inns and, effective
January 1, 1994, entered into a master lease (the "Initial Lease") with the
Company for that purpose. As of December 28, 1997, JOC sold all of its assets
and operations to JOCLLC which succeeded JOC as lessee under the Initial Lease.
In addition, effective in December 1997, in order to reduce its franchise tax
liability, the Company transferred ownership of Inns located in certain states
to subsidiaries of the Company which do business only in the respective states.
As of December 28, 1997, each such subsidiary also leases all of the Inns which
it owns to JOCLLC under the terms of a master lease which is substantially
similar to the Initial Lease.
The 1993 and 1994 pro forma financial information has eliminated those
businesses in which the Company has not been engaged since it divested these
businesses on December 31, 1993, so as to be comparable to the 1995, 1996 and
1997 historical financial information. Although in 1994, 1995, 1996 and 1997,
room revenues were earned by the Operator, not the Company, such revenues are
the basis upon which the Percentage Rent paid to the Company by the Operator
under the Lease is determined and, accordingly, such revenues are discussed
below. The Lease limits the aggregate amount of Base Rent and Percentage Rent
payable each year by the Operator under each Lease to an amount equal to 47% of
the Operator's room revenues from the Inns covered by such Lease. The term "Same
Inn Room Revenues" refers to revenues earned with respect to Inns which were
operating during all of both comparison periods and includes revenues
attributable to rooms added to existing Inns by virtue of expansion of such
Inns.
Effective January 1, 1994, the Company's primary source of revenue became
Lease payments by the Operator under the Lease, and prior thereto under the
predecessor leases with the partnerships which previously owned certain of the
Inns. The expenses of the Company consist of property taxes, insurance,
corporate overhead, compensation expense (or income) related to certain stock
options, interest on mortgage debt and depreciation of the Inns. The Lease
provides for the payment of Base Rent and Percentage Rent. For the year ended
December 31, 1997, Base Rent and Percentage Rent in the aggregate amount of $13
million was earned by the Company. The principal determinant of percentage rent
under the Lease is room revenues of the Inns. Therefore, management believes
that a review of the historical performance of the operations of the 62
operating Inns, particularly with respect to occupancy, ADR and REVPAR, is
appropriate for understanding the Lease revenue (see "-- Funds from Operations;
Cash Available for Distribution," below, for the calculation of ADR and REVPAR).
S-13
<PAGE> 16
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 1997 to the Year Ended December
31, 1996. Lease revenue for the Company for 1997 increased 38% to $13.0 million
as compared to $9.4 million for 1996. The increase was due to an increase in the
Operator's room revenues.
The number of room nights available increased from 634,549 in 1996 to
878,056 in 1997, or 38%, due to the opening from January 1996 through December
1997 of 30 new 40-room Inns, two new 60-room Inns and seven 20- to 26-room
expansions of existing Inns. The occupancy rate decreased from 66.9% for 1996 to
64.9% for 1997, while the ADR increased 3% from $45.80 in 1996 to $47.25 in
1997. As a result of these three factors, room revenues rose 38%, from $20
million for 1996 to $27.6 million in 1997. Same Inn Room Revenues for 1997
versus 1996 grew to $18.4 million from $18.3 million, or 1%. The growth is due
to an increase in ADR from $45.62 to $46.60 for these Inns and an increase in
room nights available (due to expansions of certain of these Inns) from 582,840
to 601,264, partially offset by a decrease in the occupancy rate from 67.0% to
64.0% for these Inns for 1997 compared to 1996. The decrease in overall
occupancy of the Inns is attributable primarily to (i) the expansion of several
high occupancy Inns which then experienced lower occupancy rates because of the
additional rooms available in the marketplace, (ii) the opening of new Inns
which typically require several months of operations before realizing higher
occupancy rates and (iii) additional competition in certain markets.
General and administrative expense includes overhead charges for
management, accounting and legal services for the corporate home office. General
and administrative expense for 1997 was $445,000, as compared to $499,000 for
1996, due to shared employees spending less time on the Company's business
matters as compared to the Operator's, Contractor's and other related entities'.
Property taxes and insurance expenses totaled $1.1 million in 1997,
compared with $733,000 for 1996. The increase is attributable to the increase in
the number of Inns and the expansion of existing Inns.
Interest expense decreased from $1.4 million in 1996 to $.8 million in 1997
due to the repayment of approximately $25.6 million and $30.8 million in debt in
March 1997 and April 1996, respectively. Proceeds to pay down debt were
generated by the sale of 2.3 million and 3.3 million shares of Common Stock in
March 1997 and April 1996, respectively. As a result of the early extinguishment
of debt in 1997 and 1996, the Company had losses of $689,542 and 989,376,
respectively, comprised of the write-offs of deferred finance costs and
prepayment penalties, which are reflected as extraordinary items.
Depreciation expense increased from $2.7 million in 1996 to $3.9 million in
1997, due to an increase in the number of operating Inns and the expansion of
existing Inns.
Comparison of the Year Ended December 31, 1996 to the Year Ended December
31, 1995. Lease revenue for the Company for 1996 increased 49% to $9.4 million
as compared to $6.3 million for 1995. The increase was due to the increase in
the Operator's room revenues, partially offset by the effect of a change in the
Percentage Rent formula under the Lease amendment effective July 1, 1995.
The number of room nights available increased from 448,906 in 1995 to
634,549 in 1996, or 41%, due to the opening from January 1996 through December
1996 of 11 new 40-room Inns and six 20- to 26-room expansions of existing Inns.
The occupancy rate decreased from 67.5% for 1995 to 66.9% for 1996. However, ADR
increased 7% from $42.80 in 1995 to $45.80 in 1996. As a result of these three
factors, room revenues rose 50%, from $13.3 million for 1995 to $20 million in
1996. Same Inn Room Revenues for 1996 versus 1995 grew to $13.8 million from
$12.1 million, or 14%. The growth is due to an increase in ADR from $42.73 to
$45.76 for these Inns and an increase in room nights available (due to
expansions of certain of these Inns) from 400,187 to 445,451, partially offset
by a decrease in the occupancy rate from 68.8% to 66.1% for these Inns for 1996
compared to 1995. The decrease in overall occupancy of the Inns is attributable
primarily to (i) the expansion of several high occupancy Inns which then
experienced lower occupancy rates because of the additional rooms available in
the marketplace, (ii) the opening of new Inns which typically require several
months of operations before realizing higher occupancy rates, and (iii)
additional competition in certain markets.
S-14
<PAGE> 17
General and administrative expense includes overhead charges for
management, accounting and legal services for the corporate home office. General
and administrative expense for 1996 was $499,000, as compared to $622,000 for
1995, due to shared employees spending less time on the Company's business
matters as compared to the Operator's, Contractor's and other related entities'.
Property taxes and insurance expenses totaled $733,000 in 1996, compared
with $514,000 for 1995. The increase is attributable to the increase in the
number of Inns and the expansion of existing Inns.
Interest expense decreased from $1.6 million in 1995 to $1.4 million in
1996 due to the repayment of approximately $30.8 million in debt in April 1996
with proceeds from the sale of 3.3 million shares of Common Stock. As a result
of the early extinguishment of this debt in 1996, the Company had a loss of
$989,376, comprised of the write-offs of deferred finance costs, which are
reflected as extraordinary items.
Depreciation expense increased from $1.8 million in 1995 to $2.7 million in
1996, due to an increase in the number of operating Inns and the expansion of
existing Inns.
FUNDS FROM OPERATIONS; CASH AVAILABLE FOR DISTRIBUTION
The following table illustrates the Company's calculation of Funds from
Operations and Cash Available for Distribution on an historical basis for the
years ended December 31, 1995, 1996 and 1997. In March 1995, NAREIT published a
new interpretation of Funds from Operations which the Company retroactively
adopted at that time.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
($ IN THOUSANDS)
<S> <C> <C> <C>
Net Income.................................................. $1,772 $3,051 $5,906
Add:
Depreciation expense...................................... 1,825 2,670 3,898
Loss on disposals......................................... -- 48 144
Extraordinary item........................................ 19 989 689
------ ------ ------
Funds from Operations, per March 1995
NAREIT interpretation..................................... 3,616 6,758 10,637
Add:
Stock compensation expense................................ 77 -- --
Loan fee amortization expense............................. 87 93 80
Less:
Additions to reserve for furniture, fixtures and
equipment(1)........................................... (288) (778) (1,077)
Required loan principal repayments........................ (218) (319) (78)
------ ------ ------
Cash Available for Distribution............................. $3,274 $5,754 $9,562
====== ====== ======
</TABLE>
- ---------------
(1) Prior to July 1, 1995, the Operator was responsible for the replacement and
refurbishment of furniture, fixtures and equipment. After that date and in
conjunction with the Lease amendment, the Company assumed this
responsibility. This amount equals 4% of the Inns' aggregate room revenues
for the period.
Funds from Operations is defined by NAREIT according to the March 1995
interpretation as net income (computed in accordance with GAAP) excluding gains
(or losses) from debt restructuring and sales of property, plus depreciation and
after adjustments for unconsolidated partnerships and joint ventures. The
Company has made adjustments to its net income consisting only of depreciation,
loss on disposals and the extraordinary item for debt restructuring. The Company
notes that industry analysts and investors use Funds from Operations as another
tool to evaluate and compare equity REITs. The Company also believes it is
meaningful as an indicator of net income excluding most non-cash items and
provides information about the Company's cash available for distributions, debt
service and capital expenditures. Other non-cash expenses such as deferred
finance cost amortization and stock option expense have not been added back in
Funds from Operations. Funds from Operations does not represent cash flow from
operating activities in accordance with
S-15
<PAGE> 18
GAAP and is not indicative of cash available to fund all of the Company's cash
needs. Funds from Operations should not be considered as an alternative to net
income or any other GAAP measure as an indicator of performance and should not
be considered as an alternative to cash flows as a measure of liquidity. In
addition, the Company's Funds from Operations may not be comparable to other
companies' Funds from Operations due to differing methods of calculating Funds
from Operations and varying interpretations of the NAREIT definition.
Cash Available for Distribution is calculated as Funds from Operations plus
non-cash stock option expense and loan fee amortization, less amounts estimated
for future replacement and refurbishment of furniture, fixtures and equipment
and required loan principal repayments. On July 1, 1995, the Company adopted a
policy of maintaining cash or sufficient access to borrowings equal to 4% of the
Inns' aggregate room revenues since July 1, 1995, less amounts actually spent
from that date forward. Prior to this date, the obligation to fund replacement
and refurbishment of furniture, fixtures and equipment was the Operator's. For
the period July 1, 1995, through December 31, 1997, 4% of room revenues equaled
$2,143,000 and the Company expended $1,645,000 on such items in that same
period. In addition, the Company expects to retain some portion of the Cash
Available for Distribution for working capital and capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
Since its election to be taxed as a REIT, the Company has financed and
currently intends to continue financing the construction of new Inns entirely
with bank borrowings. At December 31, 1997, the Company had approximately $29.8
million in outstanding debt. It is management's intention to continue to borrow
from some or all of its previous lenders to finance future projects.
The Company's approximately $36 million Line is convertible in June 1999 to
a term note. At December 31, 1997, the Company had drawn down $11.3 million
under the Line with approximately $24.7 million remaining available credit. At
February 28, 1998, the Company had drawn down $14.4 million under the Line with
approximately $21.6 million remaining available credit. Loans made under the
Line bear interest at rates initially ranging from 8.5% to 8.75%, which are
adjustable annually to equal a major lender's prime rate as published in the
Wall Street Journal plus .25% or .50%. The minimum annual interest rate payable
under the Line is 7% and the maximum is 13%. The annual interest rates at
December 31, 1997, ranged from 8.75% to 9%. Loans made under the Line are
secured by mortgages on 31 of the Inns. Payments of interest are due monthly,
and monthly payments of principal commence in June 1999. Principal on loans
under the Line is amortized using a 15-year period and is payable in full in May
2006.
Construction and long-term mortgage financing are expected to be available
to fund the balance of anticipated construction costs not funded under the Line.
For each new Inn developed by the Company, generally a construction loan for
approximately $1.1 million has been obtained. Each construction loan converts to
a long-term mortgage financing upon completion of the Inn without any further
action by the Company. Each of the mortgage and construction loans outstanding
at December 31, 1997, is amortized over 15 years and is payable in full seven
years from its inception. The interest rate on each of such loans is adjusted
annually, after an 18-month interest-only period, to the prime rate then
prevailing plus .25% to 1.5% with a floor of 7% and a cap of 12%, with no annual
change greater than 1%. As of December 31, 1997, the construction loans are
secured by mortgages on seven of the Inns.
The Company believes it can continue to finance new Inns and Inn expansions
with these construction and long-term mortgage loans. As of December 31, 1997,
the Company had 15 Inns which were debt free and could be used as collateral
should the Company need additional borrowing capacity. In addition, after
completion of the Offering and the expected application of the net proceeds
therefrom, an additional 18 Inns will be debt free and available as collateral
for additional borrowings. Management believes the Company can adequately meet
its financing needs for the next year through available borrowings under the
Line and other traditional debt financing methods available to the Company. The
Company is currently negotiating with its lenders to increase the Line to an
aggregate of approximately $55 million, but has not received a full commitment
from such lenders at this time regarding such increase. Since the Company
presently intends to rely primarily on borrowings for construction and permanent
financing of new Inns and the expansion of
S-16
<PAGE> 19
existing Inns, the lack of sufficient financing on favorable terms and
conditions could prevent or significantly deter the Company from constructing
new Inns or expanding existing Inns. The availability of such financing depends
on a number of factors over which the Company has no control, including general
economic conditions, the economic and competitive environments of the
communities in which the Inns are located and the level and stability of
long-term interest rates. The Company also is considering possible additional
long-term debt or equity financing that would be available to fund its ongoing
development activities.
In January 1997, the Company filed a shelf registration statement with the
Securities and Exchange Commission that provides for the issuance of an
aggregate of up to $100 million in Common Stock, Preferred Stock and Common
Stock warrants to be offered and sold from time to time. On March 10, 1997, the
Company completed the sale of 2,300,000 newly issued shares of common stock. Net
proceeds of approximately $26 million were used to repay certain existing
mortgage indebtedness at that date. The Company intends to use future net
proceeds, if any, from any sale of securities under such registration statement
for the repayment of existing indebtedness, working capital and general
corporate purposes.
The Company expects to continue to develop additional Inns as suitable
opportunities arise, and the Company will not undertake investments unless
adequate sources of financing December 31, 1997, the Company had also borrowed
approximately $2.8 million to finance the construction of seven new Inns located
at Kingsland and Perry, Georgia; Dunn, Lenoir and Smithfield, North Carolina;
and Duncan and Spartanburg, South Carolina. In addition, the Company is
negotiating construction loans for the construction of new Inns at Trussville,
Alabama; Eden and Roanoke Rapids, North Carolina; and Cleveland, Tennessee.
Total construction costs of these 11 Inns, excluding land and closing costs, is
expected to be approximately $15.7 million when complete. The Company is also
currently expanding the Inns in Forest City, North Carolina and LaGrange,
Georgia. The expansions are being financed under the Line. The Company may in
the future expand additional Inns if management determines that sufficient
market demand exists and financing is available for any such expansion.
As with most real estate investments, the Company's investments in the Inns
are relatively illiquid and such illiquidity is further increased by many of the
Inns being located in smaller communities. As a result, the ability of the
Company to sell or otherwise dispose of any Inn to provide liquidity will be
very limited.
In connection with its initial public offering in 1994, the Company sold to
Commonwealth Associates, for an aggregate of $260, warrants to purchase up to
260,000 shares of Common Stock at an exercise price of $14.85 per share
exercisable at any time until January 27, 1999.
The Company has four stock incentive plans in place. As of December 31,
1997, 1,738,007 shares of Common Stock were reserved for future grants and
options to purchase 807,851 shares of Common Stock were outstanding (including
365,855 which were exercisable). In addition, as of December 31, 1997, 64,401
shares of Common Stock issued to certain key officers and employees were
restricted as to sale until fully vested in 2006 and 2007.
YEAR 2000
Based on a recent assessment, the Company believes that the arrival of the
year 2000 and the potential related computer problems should not have a material
impact on either the Company or the Operator and that their current software is
year 2000 compliant.
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. Although the Operator raised its room rates by approximately 5% in each
of July 1994 and April 1995, 7% in 1996 and 3% in 1997, competitive pressures
have limited, and may in the future limit, the Operator's ability to raise rates
in the face of inflation.
S-17
<PAGE> 20
SEASONALITY
The Inns' historical operations have been seasonal in nature, reflecting
higher occupancy rates in the second and third quarters. This seasonality can be
expected to cause fluctuations in the Company's Lease revenue that it receives
from the Operator.
S-18
<PAGE> 21
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages at
February 28, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas W. Kitchin........ 56 President, Chief Executive Officer, Director,
Chairman of the Board of Directors
William D. Walker........ 44 Vice President -- Development
Craig R. Kitchin......... 30 Vice President -- Finance, Chief Financial
Officer, Treasurer
Steven A. Curlee......... 46 Vice President -- Legal, General Counsel,
Secretary
Robert D. Hisrich........ 53 Director
Michael E. Lawrence...... 52 Director
Thomas J. O'Haren........ 63 Director
</TABLE>
Set forth below is certain information concerning the Company's directors
and executive officers.
Thomas W. Kitchin is the founder and has been an officer and director of
the Company since its incorporation in 1988. Prior to founding the Company, he
spent 10 years in the oil and gas industry and served as chief executive officer
of an oil and gas company listed on the American Stock Exchange. Mr. Kitchin
serves as a director of the Association of Publicly Traded Companies, an
association that represents public companies that trade on The Nasdaq Stock
Market, New York Stock Exchange and American Stock Exchange; chairman of the
Georgia Hospitality and Travel Association; director of the American Hotel &
Motel Association; director of the Georgia State University Cecil B. Day School
of Hospitality Administration; director of the Georgia Southern University
Restaurant, Hotel and Institutional Administration Academic Advisory Board; and
director of the Northside Hospital Advisory Board. In addition, he has served on
the board of directors of a private school, several banks and oil companies and
numerous other civic, charitable and social service agencies. Mr. Kitchin is the
father of Craig R. Kitchin, Vice President -- Finance, Chief Financial Officer
and Treasurer of the Company. Mr. Kitchin and his spouse are also the sole
owners of the Operator, the Contractor and Kitchin Investments, Inc.
William D. Walker is Vice President -- Development of the Company. He has
been an officer of the Company since its inception in 1988 and served as a
director from 1988 through October 29, 1993. Prior to joining the Company, he
worked in various financial management positions for twelve years. Mr. Walker
received a B.B.A. degree in finance from Texas Tech University in 1975.
Craig R. Kitchin became Chief Financial Officer of the Company in February
1994 and Vice President -- Finance in November 1997. He joined the Company as
its Controller and Treasurer in June 1992, upon receiving his M.B.A. degree from
the University of Chicago with concentrations in accounting and finance. Before
attending the University of Chicago, he was a financial analyst with FMC
Corporation in Santa Clara, California, from 1989 to 1990, where his primary
responsibilities included budgeting and forecasting overhead expenses. Mr.
Kitchin graduated from Santa Clara University with a degree in finance in 1989.
Craig Kitchin is the son of Thomas W. Kitchin, the President of the Company.
Steven A. Curlee became General Counsel and Secretary of the Company on
January 1, 1993 and Vice President -- Legal in November 1997. From April 1985 to
July 1992, he was general counsel for an oil and gas company listed on the
American Stock Exchange. Prior thereto, he was engaged in the private practice
of law in Tulsa, Oklahoma for five years. From 1976 to 1980, Mr. Curlee served
on active duty in the U.S. Navy as a Judge Advocate. He continues to serve in
the Navy Reserves, having attained the rank of Commander. Mr. Curlee received a
B.A. degree in political science and his J.D. from the University of Arkansas.
He received a Master of Law in Taxation degree from Georgetown University. Mr.
Curlee is admitted to practice law in Arkansas, the District of Columbia,
Oklahoma, Texas and Georgia.
S-19
<PAGE> 22
Robert D. Hisrich, Ph.D., became a director in October 1993. Dr. Hisrich
has held the A. Malachi Mixon III Chair in Entrepreneurial Studies and has been
a professor at the Weatherford School of Management, Case Western Reserve
University, Cleveland, Ohio, since September 1993. From 1985 until his
appointment at Case Western Reserve University, Dr. Hisrich held the Bovaird
Chair of Entrepreneurial Studies and Private Enterprise, was a professor of
marketing, and was also a Director of the Enterprise Development Center at The
University of Tulsa, Tulsa, Oklahoma. In the spring of 1992, Dr. Hisrich was a
Visiting Professor of Entrepreneurship Studies at the University of Limerick,
Limerick, Ireland, and from 1990 through 1991, he was a Fulbright Professor and
holder of the Alexander Hamilton Chair in Entrepreneurship at the Foundation for
Small Enterprise Economic Development, Budapest, Hungary. In the spring of 1989,
Dr. Hisrich was a Fulbright Professor at the International Management Center,
Budapest, Hungary. In addition, since 1974 Dr. Hisrich has been Director of H &
B Associates, a marketing and management consulting firm. He has also held a
number of other academic positions and is widely published in the areas of
marketing, management and entrepreneurship. Dr. Hisrich has a B.A. degree in
English and science from DePauw University, an M.B.A. degree in marketing from
the University of Cincinnati and a Ph.D. degree in business administration from
the University of Cincinnati.
Michael E. Lawrence became a director in April 1994. Since March 1994, he
has been a director of Sea Pines Associates, Inc., a publicly held corporation
with approximately $35 million in annual revenues which owns and operates real
estate and recreational properties on Hilton Head Island, South Carolina. Mr.
Lawrence is president and chief executive officer of Sea Pines Company and Sea
Pines Real Estate Company, wholly-owned subsidiaries of Sea Pines Associates,
Inc. Prior to joining Sea Pines Associates, Inc., Mr. Lawrence was a management
consultant with Ernst & Young from 1969 through 1989 and was a partner in that
firm from 1982 through 1989. Mr. Lawrence is a certified public accountant with
a B.S. degree from Washington and Lee University and an M.B.A. degree from Emory
University.
Thomas J. O'Haren became a director in June 1997. He has been employed for
the past 26 years in sales and marketing for Cigna Financial Advisors, Inc., a
company engaged in the insurance business. Mr. O'Haren serves that company both
as a regional vice president and as a consultant. He is active in the insurance
industry, including serving as an adjunct professor of leadership at The
American College, the degree-granting college of the insurance industry, as a
member of The American College Leadership Institute and as chairman of the board
of trustees of the GAMA Foundation, a research foundation for the insurance
industry. Mr. O'Haren has a B.S. degree in finance from Pennsylvania State
University, received his Chartered Life Underwriter designation in 1966 and his
designation as a Chartered Financial Consultant in 1983.
S-20
<PAGE> 23
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of February 28, 1998, the beneficial
ownership of Common Stock by (i) each director, (ii) each executive officer, and
(iii) by all directors and executive officers of the Company as a group. Except
as otherwise noted, each person identified in the table has sole voting and
investment power over the shares shown as beneficially owned, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENTAGE
NAME OF OWNER OR IDENTITY OF GROUP OWNED(1) OF CLASS
- ---------------------------------- ------------ ----------
<S> <C> <C>
Thomas W. Kitchin........................................... 647,170(2) 6.6%
William D. Walker........................................... 53,422(3) *
Craig R. Kitchin............................................ 14,245(4) *
Steven A. Curlee............................................ 36,001(5) *
Robert D. Hisrich........................................... 30,900(6) *
Michael E. Lawrence......................................... 30,500(6) *
Thomas J. O'Haren........................................... 50,827(6) *
All directors and executive officers as a group (7
persons).................................................. 863,065(7) 8.6%
</TABLE>
- ---------------
* Less than one percent (1%)
(1) The total number includes shares issued and outstanding as of February 28,
1998, plus shares which the owner shown above has the right to acquire
within 60 days after February 28, 1998. For purposes of calculating the
percent of the class outstanding held by each owner shown above with a right
to acquire additional shares, the total number of shares excludes the shares
which all other persons have the right to acquire within 60 days after
February 28, 1998, pursuant to the exercise of outstanding stock options.
(2) Includes 46,938 shares owned by Kitchin Children's Trust, the beneficiaries
of which are members of the family of Mr. Kitchin and of which Mr. Kitchin
serves as trustee, 75,000 shares issuable upon the exercise of currently
vested stock options, 37,500 shares of unvested restricted Common Stock and
30,000 shares owned jointly with Mr. Kitchin's spouse.
(3) Includes 45,000 shares issuable upon the exercise of currently vested stock
options and 5,625 shares of unvested restricted Common Stock.
(4) Includes 67 shares issuable upon the exercise of currently vested stock
options and 3,750 shares of unvested restricted Common Stock.
(5) Includes 29,000 shares issuable upon the exercise of currently vested stock
options and 3,750 shares of unvested restricted Common Stock.
(6) Includes 30,000 shares issuable upon the exercise of currently vested stock
options.
(7) Includes 239,067 shares issuable upon the exercise of currently vested stock
options, and 50,625 shares of unvested restricted Common Stock.
S-21
<PAGE> 24
DESCRIPTION OF SERIES A PREFERRED STOCK
The description below of the particular terms of the Series A Preferred
Stock supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Preferred Stock set forth
in the accompanying Prospectus, to which description reference is hereby made.
GENERAL
The Company is authorized to issue up to 10,000,000 shares of preferred
stock ("Preferred Stock") from time to time, in one or more series, with such
designations, powers, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption, in each case, if any, as are permitted by
Georgia law and as the Board of Directors may determine prior to issuance
thereof by adoption of an amendment of the Company's Articles of Incorporation
without any further vote or action by the Company's shareholders. As of the date
of this Prospectus Supplement, no shares of Preferred Stock were outstanding.
None of the terms of the Series A Preferred Stock or, subject to limited
exceptions, any of the debt agreements of the Company contains any provisions
affording holders of the Series A Preferred Stock protection in the event of a
highly leveraged or other transaction that might adversely affect holders of the
Series A Preferred Stock.
The following summary of the terms and provisions of the Series A Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the pertinent sections of the Articles of Incorporation and the
amendment to the Articles of Incorporation creating the Series A Preferred Stock
(the "Designating Amendment"), each of which is available from the Company.
MATURITY
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
RANK
The Series A Preferred Stock will, with respect to dividend 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
securities ranking junior to the Series A Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company; (ii) on a parity with all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank on a parity
with the Series A Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company and (iii) junior to all
existing and future indebtedness of the Company. The term "equity securities"
does not include convertible debt securities, which will rank senior to the
Series A Preferred Stock prior to conversion.
DIVIDENDS
Holders of shares of the Series A Preferred Stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, preferential cumulative cash dividends at the rate
of % per annum of the Liquidation Preference per share (equivalent to a
fixed annual amount of $ per share).
Dividends on the Series A Preferred Stock will be cumulative from the date
of original issue and shall be payable quarterly in arrears on or about the 20th
day of January, April, July and October of each year, or, if not a business day,
the next succeeding business day (each, a "Dividend Payment Date"). The first
dividend will be paid on or before April 20, 1998. Dividends payable on the
Series A Preferred Stock for any partial dividend period will be computed on the
basis of a 360-day year consisting of 12 30-day months. Dividends will be
payable to holders of record as they appear in the stock records of the Company
at the close of business on the applicable record date, which shall be the last
business day of December, March, June and September,
S-22
<PAGE> 25
respectively, or on such other date designated by the Board of Directors of the
Company for the payment of dividends that is not more than 45 nor less than 20
days prior to the applicable Dividend Payment Date (each, a "Dividend Record
Date"). The first Dividend Record Date for determination of shareholders
entitled to receive dividends on the Series A Preferred Stock is expected to be
March 31, 1998.
No dividends on shares of Series A Preferred Stock will be declared by the
Board of Directors or paid or set apart for payment by the Company if the terms
and provisions of any agreement of the Company, including any agreement relating
to its indebtedness, prohibits such declaration, payment or setting apart for
payment or provides that such declaration, payment or setting apart for payment
would constitute a breach thereof or a default thereunder, or if such
declaration or payment will be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series A Preferred Stock
will accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series A
Preferred Stock will not bear interest and holders of the Series A Preferred
Stock will not be entitled to any distributions in excess of full cumulative
distributions described above.
If, for any taxable year, the Company elects to designate as "capital gain
dividends" (as defined in Section 857 of the Internal Revenue Code of 1986, as
amended (the "Code") any portion (the "Capital Gains Amount") of the dividends
(as determined for federal income tax purposes) paid or made available for the
year to holders of all classes of stock (the "Total Dividends"), then the
portion of the Capital Gains Amount that shall be allocable to the holders of
Series A Preferred Stock will be the amount that the total dividends (as
determined for federal income tax purposes) paid or made available to the
holders of the Series A Preferred Stock for the year bears to the Total
Dividends.
Except as set forth in the next sentence, no dividends will be declared or
paid or set apart for payment on any capital stock of the Company or any other
series of Preferred Stock ranking, as to dividends, on a parity with or junior
to the Series A Preferred Stock (other than a dividend in shares of the
Company's Common Stock or in shares of any other class of stock ranking junior
to the Series A Preferred Stock as to dividends and upon liquidation) for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof is
set apart for such payment on the Series A Preferred Stock for all past dividend
periods and the then current dividend period. When dividends are not paid in
full (or a sum sufficient for such full payment is not so set apart) upon the
Series A Preferred Stock and the shares of any other series of Preferred Stock
ranking on a parity as to dividends with the Series A Preferred Stock, all
dividends declared upon the Series A Preferred Stock and any other series of
Preferred Stock ranking on a parity as to dividends with the Series A Preferred
Stock will be declared pro rata so that the amount of dividends declared per
share of Series A Preferred Stock and such other series of Preferred Stock will
in all cases bear to each other the same ratio that accrued dividends per share
on the Series A Preferred Stock and such other series of Preferred Stock (which
will not include any accrual in respect of unpaid dividends for prior dividend
periods if such Preferred Stock does not have a cumulative dividend) bear to
each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series A Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period: (i) no dividends (other than in shares of Common
Stock or other shares of capital stock ranking junior to the Series A Preferred
Stock as to dividends and upon liquidation) will be declared or paid or set
aside for payment, (ii) no other distribution will be declared or made upon the
Common Stock or any other capital stock of the Company ranking junior to or on a
parity with the Series A Preferred Stock as to dividends or upon liquidation and
(iii) no shares of Common Stock, or any other shares of capital stock of the
Company ranking junior to or on a parity with the Series A Preferred Stock as to
dividends or upon liquidation, will be redeemed, purchased or otherwise acquired
for any consideration (or any moneys paid to or made available for a sinking
fund for the redemption of any such shares) by the Company (except by conversion
into or exchange for other capital stock of the Company ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation or redemption for
the purpose of preserving the Company's
S-23
<PAGE> 26
qualification as a REIT). Holders of shares of the Series A Preferred Stock will
not be entitled to any dividend, whether payable in cash, property or stock, in
excess of full cumulative dividends on the Series A Preferred Stock as provided
above. Any dividend payment made on shares of the Series A Preferred Stock will
first be credited against the earliest accrued but unpaid dividend due with
respect to such shares which remains payable.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, the holders of shares of Series A Preferred Stock
are entitled to be paid out of the assets of the Company legally available for
distribution to its shareholders the Liquidation Preference of $25 per share,
plus an amount equal to any accrued and unpaid dividends to the date of payment,
but without interest, before any distribution of assets is made to holders of
Common Stock or any other class or series of capital stock of the Company that
ranks junior to the Series A Preferred Stock as to liquidation rights. Holders
of Series A Preferred Stock will be entitled to written notice of any event
triggering the right to receive such Liquidation Preference. After payment of
the full amount of the Liquidation Preference, plus any accrued and unpaid
dividends to which they are entitled, the holders of Series A Preferred Stock
will have no right or claim to any of the remaining assets of the Company. The
consolidation or merger of the Company with or into any other corporation, trust
or entity or of any other corporation with or into the Company, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, will not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
REDEMPTION OF SERIES A PREFERRED STOCK UPON A CHANGE OF CONTROL
At any time prior to March , 2003, the Company may, at its option, upon
the occurrence of a Change of Control Event (as defined below) redeem all of the
outstanding Series A Preferred Stock at the applicable redemption price
reflected below, plus accrued and unpaid dividends (if any) to the date of
repurchase. The repurchase price (excluding dividends) will be as follows:
<TABLE>
<CAPTION>
PURCHASE
FROM THROUGH PRICE
- ---- ------- --------
<S> <C> <C>
Closing of Offering March 31, 1998.............................................. $26.05
April 1, 1998 June 30, 1998............................................... 26.00
July 1, 1998 September 30, 1998.......................................... 25.95
October 1, 1998 December 31, 1998........................................... 25.90
January 1, 1999 March 31, 1999.............................................. 25.85
April 1, 1999 June 30, 1999............................................... 25.80
July 1, 1999 September 30, 1999.......................................... 25.75
October 1, 1999 December 31, 1999........................................... 25.70
January 1, 2000 March 31, 2000.............................................. 25.65
April 1, 2000 June 30, 2000............................................... 25.60
July 1, 2000 September 30, 2000.......................................... 25.55
October 1, 2000 December 31, 2000........................................... 25.50
January 1, 2001 March 31, 2001.............................................. 25.45
April 1, 2001 June 30, 2001............................................... 25.40
July 1, 2001 September 30, 2001.......................................... 25.35
October 1, 2001 December 31, 2001........................................... 25.30
January 1, 2002 March 30, 2002.............................................. 25.25
April 1, 2002 June 30, 2002............................................... 25.20
July 1, 2002 September 30, 2002.......................................... 25.15
October 1, 2002 December 31, 2002........................................... 25.10
January 1, 2003 March , 2003.............................................. 25.05
</TABLE>
Such redemption may be consummated at any time prior to, contemporaneously
with or after the Change of Control (as defined below), provided that notice of
any such redemption pursuant to this paragraph is given
S-24
<PAGE> 27
no later than 90 days following the date upon which the Change of Control Event
occurred, the repurchase date must be within 60 days of the date of notice and a
sum sufficient to redeem the shares must be deposited in trust to effect the
redemption.
As used herein, a "Change of Control Event" means the execution by the
Company or any of its subsidiaries or affiliates of any agreement with respect
to any proposed transaction or event or series of transactions or events which,
individually or in the aggregate, may reasonably be expected to result in a
Change of Control.
A "Change of Control" will be deemed to have occurred at such time as (i) a
"person" or "group" (within the meaning of Sections 13(d) and 14(d) of the
Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, except that a person or group shall be deemed
to have beneficial ownership of all shares of Voting Stock that such person or
group has the right to acquire regardless of when such right is first
exercisable), directly or indirectly, of Voting Stock representing more than 35%
of the total voting power of the total Voting Stock of the Company on a fully
diluted basis; (ii) the date the Company sells, transfers or otherwise disposes
of all or substantially all of the assets of the Company; or (iii) the date of
the consummation of a merger or share exchange of the Company with another
corporation where the shareholders of the Company immediately prior to the
merger or share exchange would not beneficially own immediately after the merger
or share exchange, shares entitling such shareholders to 50% or more of all
votes (without consideration of the rights of any class of stock to elect
directors by a separate group vote) to which all shareholders of the corporation
issuing cash or securities in the merger or share exchange would be entitled in
the election of directors, or where members of the Board of Directors of the
Company immediately prior to the merger, or share exchange would not immediately
after the merger or share exchange constitute a majority of the board of
directors of the corporation issuing cash or securities in the merger or share
exchange. "Voting Stock" means capital stock of any class or kind having the
power to vote generally for the election of directors of the Company.
REDEMPTION
Other than upon the occurrence of a Change of Control Event as described
under "-- Redemption of Series A Preferred Stock Upon a Change of Control" or in
the event a shareholder acquires shares in excess of the Ownership Limitation as
described under "-- Restrictions on Ownership and Transfer", the Series A
Preferred Stock is not redeemable prior to March , 2003. However, in order to
enable the Company to continue to meet the stock ownership requirements for
qualification as a REIT, the Series A Preferred Stock will be subject to
provisions in the Designating Amendment pursuant to which any shares of Series A
Preferred Stock owned by a shareholder in excess of the Ownership Limitation (as
defined herein) will be transferred to a trust and the shareholder will have the
right to receive certain compensation for such shares. See "-- Restrictions on
Ownership and Transfer." On and after March , 2003, the Company, at its option
upon not less than 30 nor more than 60 days' written notice, may redeem shares
of the Series A Preferred Stock, in whole or in part, at any time or from time
to time, for cash at a redemption price of $25 per share, plus all accrued and
unpaid dividends thereon to the date fixed for redemption, without interest.
PROCEDURES FOR REDEMPTION
Holders of Series A Preferred Stock to be redeemed will surrender such
Series A Preferred Stock at the place designated in such notice and will be
entitled to the redemption price and any accrued and unpaid dividends payable
upon such redemption following such surrender. If notice of redemption of any
shares of Series A 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 Series A Preferred Stock so called for redemption,
then from and after the redemption date dividends will cease to accrue on such
shares of Series A Preferred Stock, such shares of Series A Preferred Stock will
no longer be deemed outstanding and all rights of the holders of such shares
will terminate, except the right to receive the redemption price. If less than
all of the outstanding Series A Preferred Stock is to be redeemed, the Series A
Preferred Stock to be redeemed will be selected pro rata (as nearly as may be
practicable without creating fractional shares) or by any other
S-25
<PAGE> 28
equitable method determined by the Company. The Company's ability to redeem
Series A Preferred Stock is subject to the limitations on distributions in the
Georgia Business Corporation Code.
Unless full cumulative dividends on all shares of Series A Preferred Stock
will have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no shares of Series A Preferred
Stock will be redeemed unless all outstanding shares of Series A Preferred Stock
are simultaneously redeemed. In addition, the Company will not purchase or
otherwise acquire directly or indirectly any shares of Series A Preferred Stock
(except by exchange for capital stock of the Company ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation). The foregoing
will not, however, prevent the redemption by the Company of shares of stock in
order to ensure that the Company continues to meet the requirements for
qualification as a REIT, or the purchase or acquisition of shares of Series A
Preferred Stock pursuant to a purchase or exchange offer made on the same terms
to holders of all outstanding shares of Series A Preferred Stock. So long as no
dividends are in arrears, the Company will be entitled at any time and from time
to time to repurchase shares of Series A Preferred Stock in open-market
transactions duly authorized by the Board of Directors and effected in
compliance with applicable laws.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two successive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice will be mailed by the Company, postage
prepaid, not less than 30 nor more than 60 days prior to the redemption date,
addressed to the respective holders of record of the Series A Preferred Stock to
be redeemed at their respective addresses as they appear on the stock transfer
records of the Company. No failure to give such notice or any defect therein or
in the mailing thereof will affect the validity of the proceedings for the
redemption of any shares of Series A Preferred Stock except as to the holder to
whom notice was defective or not given. Each notice will state: (i) the
redemption date; (ii) the redemption price; (iii) the number of shares of Series
A Preferred Stock to be redeemed; (iv) the place or places where the Series A
Preferred Stock is to be surrendered for payment of the redemption price and (v)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date. If less than all of the Series A Preferred Stock held by any
holder is to be redeemed, the notice mailed to such holder must also specify the
number of shares of Series A Preferred Stock held by such holder to be redeemed.
Immediately prior to any redemption of Series A Preferred Stock, the
Company will pay, in cash, any accumulated and unpaid dividends through the
redemption date, unless a redemption date falls after a Dividend Record Date and
prior to the corresponding Dividend Payment Date, in which case each holder of
Series A Preferred Stock at the close of business on such Dividend Record Date
will be entitled to the dividend payable on such shares on the corresponding
Dividend Payment Date notwithstanding the redemption of such shares before such
Dividend Payment Date.
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption. However, in order to ensure that
the Company continues to meet the requirements for qualification as a REIT,
Series A Preferred Stock acquired by a shareholder in excess of the Ownership
Limitation (as defined below) will automatically be transferred to a trust and
the shareholder will have the right to receive certain compensation for such
stock from the Company.
VOTING RIGHTS
Holders of the Series A Preferred Stock will not have any voting rights,
except as set forth below or as otherwise from time to time required by law.
Whenever dividends on any shares of Series A Preferred Stock are in arrears
for six or more quarters (whether consecutive or not) (a "Preferred Dividend
Default"), the holders of such shares of Series A Preferred Stock (voting
separately as a voting group with all other series of Preferred Stock ranking on
a parity with the Series A Preferred Stock as to dividends or upon liquidation
("Parity Preferred") upon which like voting rights have been conferred and are
exercisable) will be entitled to vote separately as a voting group for the
election of a total of two additional directors to serve on the Board of
Directors of the Company (the
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"Preferred Stock Directors"). The vote will be taken at a special meeting called
by the holders of record of at least 20% of the Series A Preferred Stock and the
holders of record of at least 20% of any series of Parity Preferred so in
arrears (unless such request is received less than 90 days before the date fixed
for the next annual or special meeting of shareholders) or at the next annual
meeting of shareholders. The holders of Series A Preferred Stock will be
entitled to vote at each subsequent annual meeting until all dividends
accumulated on such shares of Series A Preferred Stock for the past dividend
periods and the dividend for the then current dividend period have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment. A quorum for any such meeting will exist if at least a majority of the
outstanding shares of Series A Preferred Stock and shares of Parity Preferred
upon which like voting rights have been conferred and are exercisable are
represented in person or by proxy at such meeting. Such Preferred Stock
Directors will be elected upon the affirmative vote of a plurality of the shares
of Series A Preferred Stock and such Parity Preferred present and voting in
person or by proxy at a duly called and held meeting at which a quorum is
present. If and when all accumulated dividends and the dividend for the then
current dividend period on the Series A Preferred Stock have been paid in full
or set aside for payment in full, the holders thereof will be divested of the
foregoing voting rights (subject to revesting in the event of each and every
Preferred Dividend Default). Furthermore, if all accumulated dividends and the
dividend for the then current dividend period have been paid in full or declared
and set aside for payment in full on all series of Parity Preferred upon which
like voting rights have been conferred and are exercisable, the term of office
of each Preferred Stock Director so elected will terminate. Any Preferred Stock
Director may be removed at any time with or without cause by, and may not be
removed otherwise than by the vote of, the holders of record of a majority of
the outstanding shares of the Series A Preferred Stock and such Parity Preferred
when they have the voting rights described above (voting separately as a voting
group with all series of Parity Preferred upon which like voting rights have
been conferred and are exercisable). So long as a Preferred Dividend Default
continues, any vacancy in the office of a Preferred Stock Director may be filled
by written consent of the Preferred Stock Director remaining in office, or if
none remains in office, by a vote of the holders of record of a majority of the
outstanding shares of Series A Preferred Stock and such Parity Preferred when
they have the voting rights described above (voting separately as a voting group
with all series of Parity Preferred upon which like voting rights have been
conferred and are exercisable). The Preferred Stock Directors will each be
entitled to one vote per director on any matter.
Under Georgia law, the Series A Preferred Stock will be entitled to vote as
a separate voting group on the adoption of any proposed amendment of the
Articles of Incorporation that would: (i) change the aggregate number of
authorized shares of that class of stock; (ii) effect an exchange or
reclassification of any shares of that class into shares of another class; (iii)
effect an exchange (or create a right of exchange) or reclassification of any
shares of another class into shares of that class; (iv) change the designation,
rights, preferences or limitations of any shares of that class; (v) change any
shares of that class into a different number of shares of the same class; (vi)
create a new class of shares having rights or preferences with respect to
distributions or dissolution that are prior, superior or substantially equal to
the shares of the class; (vii) increase the rights, preferences or number of
authorized shares of any class that, after giving effect to the amendment, would
have rights or preferences with respect to distributions or to dissolution that
are prior, superior, or substantially equal to the shares of that class; (viii)
limit or deny an existing preemptive right of any shares of that class; (ix)
cancel or otherwise affect rights to distributions or dividends that have
accumulated but not yet been declared on any shares of that class or (x) cancel,
redeem or repurchase any shares of the class. The above mandatory voting rights
apply regardless of whether the change is favorable or unfavorable to the
affected series or class. Under Georgia law, the Series A Preferred Stock will
also have the right to vote on any dividend payable in shares of Series A
Preferred Stock to holders of shares of another class or series of the Company's
stock.
Unless the Articles of Incorporation, the Company's bylaws, or the Board of
Directors requires a higher vote, the vote required within each voting group
will be a majority of shares actually cast at a meeting at which a quorum is
present, except that if the proposed amendment creates dissenters' rights for
any voting group, the vote required within that voting group will be a majority
of the total votes in that voting group entitled to be cast on the amendment.
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Under Georgia law, the Series A Preferred Stock will be entitled to vote
separately on a plan of merger if the plan of merger contains a provision that,
if contained in a proposed amendment to the Articles of Incorporation, would
require action on the proposed amendment. If shares of Series A Preferred Stock
are included in a proposed share exchange, holders of Series A Preferred Stock
will be entitled to vote as a separate voting group. The right to vote
separately as a group on a plan of merger does not apply to a voting group if
(i) the articles of incorporation of the surviving corporation will not differ
from the Company's Articles of Incorporation as then in effect; (ii) each
shareholder of the surviving corporation whose shares were outstanding
immediately before the effective date of the merger will hold the same number of
shares, with identical designations, preferences, limitation, and relative
rights, immediately after the merger and (iii) the number and kind of shares
outstanding immediately after the merger, plus the number and kind of shares
issuable as a result of the merger and by the conversion of securities issued
pursuant to the merger or the exercise of rights and warrants issued pursuant to
the merger, will not exceed the total number and kind of shares of the surviving
corporation authorized by its articles of incorporation immediately after the
merger. Unless the Articles of Incorporation, the Company's bylaws or the Board
of Directors requires a greater vote, the plan of merger or share exchange must
be approved by each voting group entitled to vote separately on the plan by a
majority of all the votes entitled to be cast on the plan by that voting group.
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 Series A Preferred Stock have been
redeemed or called for redemption upon proper notice and sufficient funds have
been deposited in trust to effect such redemption.
CONVERSION
The Series A Preferred Stock is not convertible into or exchangeable for
any other property or securities of the Company.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to continue to qualify as a REIT under the Code, 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. In
addition, certain percentages of the Company's gross income must be from
particular activities. Because the Board of Directors believes it is essential
for the Company to continue to qualify as a REIT, the Designating Amendment
restricts the ownership, acquisition and transfer of shares of Series A
Preferred Stock (the "Ownership Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in the Designating Amendment, Mr. Thomas W. 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 Series A
Preferred Stock or the Related Party Limit (as defined below), American Real
Estate Company Ltd. cannot own, directly or indirectly, more than 9% of the
outstanding Series A Preferred Stock and no other shareholder may own, or
similarly be deemed to own, more than 6.75% of the outstanding Series A
Preferred 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, the Designating Amendment includes 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 Limitation), 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 Series A Preferred
Stock. Under this provision, Thomas W. Kitchin, sole owner of the Operator,
would be precluded from owning or acquiring more than 9.9% of the outstanding
Series A Preferred Stock.
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The Board of Directors has the power to grant a waiver of the Ownership
Limitation 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.
If shares in excess of the Ownership Limitation or Related Party 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 will
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 Limitation or Related Party Limit ("Excess Shares") will
be automatically transferred, pursuant to the Designating Amendment, 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 Limitation 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 Series A Preferred Stock by the intended
transferee-shareholder and the closing market price for shares of Series A
Preferred Stock on the date the Company exercises its option to purchase. The
90-day period would commence on the later of the date of the violative transfer
of ownership and the date 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.
The Ownership Limitation or Related Party 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 Limitation 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
Limitation 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 Series A 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 Series A Preferred Stock must file an affidavit with the Company
containing the information specified in the Designating Amendment within 30 days
after January 1 of each year. In addition, each shareholder will 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.
TRANSFER AND DIVIDEND PAYING AGENT
First Union Bank of North Carolina, N.A., will act as the transfer and
dividend payment agent in respect of the Series A Preferred Stock.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This discussion supplements, and to the extent inconsistent therewith
replaces, the discussion set forth in the accompanying Prospectus under the
heading "Federal Income Tax Considerations."
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Except as noted below, this discussion does not address the taxation of the
Company or the impact on the Company of its election to be taxed as a REIT. Such
matters are discussed in the accompanying Prospectus under "Federal Income Tax
Considerations." Prospective investors should consult, and must depend on, their
own tax advisors regarding the state, local, foreign and other tax consequences
of holding and disposing of Series A Preferred Stock.
TAXATION OF THE COMPANY
In the opinion of Conner & Winters, A Professional Corporation ("Conner &
Winters"), the Company qualified to be taxed as a REIT pursuant to sections 856
through 860 of the Code for its taxable years ended December 31, 1994, through
December 31, 1997, and the Company's organization and proposed method of
operation will enable it to qualify to be taxed as a REIT for its taxable year
ending December 31, 1998, and future taxable years. Investors should be aware,
however, that opinions of counsel are not binding upon the Internal Revenue
Service or any court. It must be emphasized that Conner & Winters' opinion is
based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters, including representations regarding
the nature of the Company's properties and the future conduct of its business.
Such factual assumptions and representations are set out in the federal income
tax opinion that will be delivered by Conner & Winters at the closing of the
Offering. Moreover, such qualification and taxation as a REIT depend upon the
Company's ability to meet on a continuing basis, through actual annual operating
results, distribution levels and stock ownership, the various qualification
tests imposed under the Code. Conner & Winters will not review the Company's
compliance with those tests on a continuing basis. Accordingly, 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 failure to qualify as a REIT, see "Federal Income Tax
Considerations -- Failure to Qualify" in the accompanying Prospectus.
TAXPAYER RELIEF ACT OF 1997
On August 5, 1997, President Clinton signed into law the Taxpayer Relief
Act of 1997 (H.R. 2014) (the "1997 Act"), which modified several provisions of
the Code relating to REITs. Some of the REIT-related modifications, which first
became effective with respect to the Company for its taxable year beginning on
January 1, 1998, include the following: (i) the rule disqualifying a REIT for
any year in which it fails to comply with certain regulations requiring the REIT
to monitor its stock ownership is replaced with a monetary penalty; (ii) the
rule disqualifying a REIT that is "closely held" does not apply if, during such
year, the REIT complied with certain regulations which require the REIT to
monitor its stock ownership, and the REIT did not know or have reason to know
that it was closely held (i.e., a REIT is "closely held" if, during the last
half of its taxable year, 50% or more in value of its outstanding stock is
owned, actually or constructively, by five or fewer individuals (as defined in
the Code to include certain entities)); (iii) a REIT is permitted to render a de
minimis amount of impermissible services to tenants of its rental property and
still treat amounts received with respect to such property (other than amounts
attributable to such services) as "rents from real property"; (iv) the rules
regarding attribution to partnerships for purposes of defining "rents from real
property" are modified; (v) the 30% gross income test is repealed and (vi) any
corporation wholly owned by a REIT is permitted to be treated as a qualified
REIT subsidiary regardless of whether such subsidiary always has been owned by
the REIT.
CLINTON ADMINISTRATION'S PROPOSED LEGISLATIVE CHANGES
The Clinton Administration's budget proposal announced on February 2, 1998,
includes a proposal to amend the REIT asset tests. (For a discussion of the REIT
asset tests under current law, see the discussion in the accompanying Prospectus
under "Federal Income Tax Consideration -- Asset Tests.") The proposal would
prohibit a REIT from owning more than 10% of the vote or value of the
outstanding stock of any corporation other than a qualified REIT subsidiary.
Stock of a non-qualified REIT subsidiary already owned by the REIT on the
specified effective date (i.e., the date of first Congressional committee
action) would be exempt from the new law, and therefore subject only to the 5%
asset test and 10% voting securities test of current law. Such exemption,
however, would terminate if the subsidiary engaged in a new trade or business or
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acquired substantial new assets on or after the effective date. The Company
currently does not own stock in any corporation that is not a qualified REIT
subsidiary, but the proposal, if enacted, could affect the Company's ability in
the future to acquire stock in a corporation other than a qualified REIT
subsidiary.
The Clinton Administration's budget proposal also would provide that no one
person (including a corporation) could own, actually or constructively, stock of
a REIT possessing more than 50% of the total combined voting power of all
classes of the REIT's voting stock or more than 50% of the total value of the
shares of all classes of the REIT's stock. This proposal would apply only to
entities first electing REIT status for taxable years beginning on or after the
specified effective date (i.e., the date of first Congressional committee
action). Consequently, it would not apply to the Company, because the Company's
REIT election took effect in its taxable year that began on January 1, 1994.
At this time, it is uncertain whether either of these provisions will be
enacted. In addition, there can be no assurance that other legislation having a
material effect on the Company's operations or its ability to qualify as a REIT
will not be proposed or enacted.
CAPITAL GAINS RATES UNDER THE 1997 ACT
In addition to modifying certain provisions of the Code relating to REITs,
the 1997 Act lowered the tax rates that apply to capital gains of a
non-corporate taxpayer. A capital gain of a non-corporate taxpayer generally
will be taxed at a maximum rate of 20 percent with respect to capital assets
held for more than 18 months, and generally will be taxed at a rate of 28
percent with respect to capital assets held for more than one year but not more
than 18 months. The tax rates applicable to ordinary income apply to gain
attributable to the sale or exchange of capital assets held for one year or
less. In the case of capital gain attributable to the sale or exchange of
certain real property held for more than 18 months, an amount of such gain equal
to the amount of all prior depreciation deductions not otherwise required to be
taxed as ordinary depreciation recapture income will be taxed at a maximum rate
of 25 percent.
DIVIDENDS AND OTHER DISTRIBUTIONS; BACKUP WITHHOLDING
For a discussion regarding the taxation of dividends and other
distributions with respect to shares of the Company's capital stock, and the
backup withholding rules, see "Federal Income Tax Considerations -- Taxation of
Shareholders" in the accompanying Prospectus.
In determining the extent to which a distribution on the Series A Preferred
Stock constitutes a dividend for tax purposes, the earnings and profits of the
Company will be allocated, on a pro rata basis, first to distributions with
respect to the Series A Preferred Stock and then to the Common Stock.
The 1997 Act provides that the Company may make an election to treat all or
a portion of its undistributed net capital gain as if it had been distributed to
the Company's shareholders. If the Company were to make such an election, the
Company's shareholders would be required to include in their income as long-term
capital gain their proportionate share of the Company's undistributed net
capital gain, as designated by the Company. Each such shareholder would be
deemed to have paid his proportionate share of the income tax imposed on the
Company with respect to such undistributed net capital gain, and this amount
would be credited or refunded to the shareholder. In addition, the tax basis of
the shareholder's stock would be increased by his or her proportionate share of
undistributed net capital gain included in his income less his or her
proportionate share of the income tax imposed on the Company with respect to
such gains.
With respect to distributions designated by the Company as capital gain
dividends, the Company may designate (subject to certain limits) whether the
dividend is taxable to shareholders as a 20 percent rate gain distribution, an
unrecaptured depreciation distribution taxed at a 25 percent rate, or a 28
percent rate gain distribution. See "Capital Gains Rates under the 1997 Act,"
above.
REDEMPTION OF SERIES A PREFERRED STOCK
A redemption of Series A Preferred Stock will be treated under Section 302
of the Code as a distribution that is taxable at ordinary income tax rates as a
dividend (to the extent of the Company's current or
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accumulated earnings and profits), unless the redemption satisfies certain tests
set forth in Section 302(b) of the Code enabling the redemption to be treated as
sale of the Series A Preferred Stock. The redemption will satisfy such tests if
it (i) is "substantially disproportionate" with respect to the holder (which
will not be the case if only Series A Preferred Stock is redeemed, since it
generally does not have voting rights), (ii) results in a "complete termination"
of the holder's stock interest in the Company, or (iii) is "not essentially
equivalent to a dividend" with respect to the holder, all within the meaning of
Section 302(b) of the Code. In determining whether any of these tests have been
met, shares considered to be owned by the holder by reason of certain
constructive ownership rules set forth in the Code, as well as shares actually
owned, must generally be taken into account. Because the determination as to
whether any of the alternative tests of Section 302(b) of the Code will be
satisfied with respect to any particular holder of Series A Preferred Stock
depends upon the facts and circumstances at the time that the determination must
be made, prospective investors are advised to consult their own tax advisors to
determine such tax treatment.
If a redemption of Series A Preferred Stock is treated as a distribution
that is taxable as a dividend, a shareholder's adjusted tax basis in the
redeemed Series A Preferred Stock will be transferred to such shareholder's
remaining stock holdings in the Company. If the shareholder does not retain any
stock ownership in the Company, such basis could be transferred to a related
person or it may be lost.
NEW TREASURY REGULATIONS REGARDING WITHHOLDING, INFORMATION REPORTING AND BACKUP
WITHHOLDING
The Treasury Department recently issued final regulations relating to
withholding, information reporting and backup withholding on U.S. source income
paid to foreign persons (including, for example, dividends paid by the Company
to Non-U.S. Shareholders). These regulations generally will be effective with
respect to payments made after December 31, 1998, subject to certain transition
rules. Prospective investors should consult their own tax advisors as to the
effect, if any, of the final regulations on their purchase, ownership and
disposition of the Series A Preferred Stock.
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<PAGE> 35
UNDERWRITING
Morgan Keegan & Company, Inc. and CIBC Oppenheimer Corp. (the
"Underwriters") have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement among the Company and the Underwriters
(the "Underwriting Agreement"), to purchase from the Company the number of
shares of Series A Preferred Stock set forth opposite their respective names
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Morgan Keegan & Company, Inc................................
CIBC Oppenheimer............................................
---------
Total............................................. 1,000,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Series A Preferred Stock offered hereby, if any
such shares are purchased. The Company has been advised by the Underwriters that
the Underwriters propose to offer the shares of Series A Preferred Stock to the
public at the offering price set forth on the cover page of this Prospectus
Supplement and to certain dealers at such price less a concession not in excess
of $ per share of Series A Preferred Stock. The Underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per share to other
dealers. The public offering price and the concessions and discount to dealers
may be changed by the Underwriters after the initial offering.
The Company has agreed, subject to certain exceptions, that it will not,
without the prior written consent of the Underwriters, directly or indirectly
sell, offer to sell, grant any option for the sale of, or otherwise transfer or
dispose of any shares of Preferred Stock for a period of 90 days from the date
hereof.
During and after the Offering, the Underwriters may purchase and sell the
Series A Preferred Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. The Underwriters may
also impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers for the Series A Preferred Stock sold in the
Offering for their account may be reclaimed by the syndicate if such Series A
Preferred Stock are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Series A Preferred Stock, which may be higher than the price
that might otherwise prevail in the open market, and, if commenced, may be
discontinued at any time.
In connection with the offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market-making
transactions in the Series A Preferred Stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M, during the one business day prior to
the pricing of the offering before the commencement of offers or sales of the
Series A Preferred Stock. The passive market-making transactions must comply
with applicable volume and price limitations and be identified as such. In
general, a passive market maker must display its bid at a price not in excess of
the highest independent bid for the security; however, if all independent bids
are lowered below the passive market maker's bid, such bid must then be lowered
when certain purchase limits are exceeded.
The Company has agreed to indemnify the several Underwriters or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
The Company has applied to list the Series A Preferred Stock on Nasdaq
under the symbol "JAMSP." If approved, trading of the Series A Preferred Stock
on Nasdaq is expected to commence within a 30-day period after the initial
delivery of the Series A Preferred Stock. Prior to the Offering, there has been
no public market for the shares of Series A Preferred Stock. The Underwriters
have advised the Company that each intends to make a market in the Series A
Preferred Stock prior to the commencement of trading on Nasdaq, but is not
obligated to do so and may discontinue market making at any time without notice.
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LEGAL MATTERS
The legality of the shares of Series A Preferred Stock offered hereby will
be passed upon for the Company by Conner & Winters, A Professional Corporation,
Tulsa, Oklahoma ("Conner & Winters"). Conner & Winters will rely on the opinion
of Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia, with respect to
all matters involving Georgia law. The validity of the shares of Series A
Preferred Stock offered hereby will be passed upon for the Underwriters by King
& Spalding, Atlanta, Georgia. The description of federal tax consequences in the
Prospectus Supplement under the caption "Certain Federal Income Tax
Considerations" and contained in the accompanying Prospectus under the caption
"Federal Income Tax Considerations" is based upon the opinion of Conner &
Winters.
EXPERTS
The consolidated financial statements and schedule of the Company and the
financial statements of the Operator included in Jameson Inns, Inc.'s annual
report on Form 10-K for the year ended December 31, 1997, incorporated herein by
reference, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon included therein and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company may be
examined without charge at, or copies obtained upon payment of prescribed fees
from, the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and are also available for inspection
and copying at the regional offices of the Commission located at Seven World
Trade Center, New York, New York 10048 and at 500 West Madison Street, Chicago,
Illinois 60661-2511. The Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding the Company. In addition, the Company's Common Stock is traded on
Nasdaq 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.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 22549, a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act, and the rules and regulations promulgated
thereunder, with respect to the Series A Preferred Stock offered hereby. This
Prospectus Supplement, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and financial schedules thereto. For further information concerning the
Company and the Series A Preferred Stock, reference is made to the Registration
Statement and the exhibits and schedules filed therewith, which may be examined
without charge at, or copies obtained upon payment of prescribed fees from, the
Commission and its regional offices at the locations listed above. 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.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document heretofore filed by the Company (File No. 0-23256)
with the Commission is incorporated herein by reference:
(a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus Supplement
(and the accompanying Prospectus) and prior to the termination of the Offering
of the Series A Preferred Stock shall be deemed to be incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus and made a part
hereof from the date of the filing of such documents. Any statement contained in
a document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus
Supplement (and the accompanying Prospectus) to the extent that a statement
contained herein or in any other document subsequently filed with the Commission
which also 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 Supplement or the accompanying Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus Supplement and the accompanying
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
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should be
directed to: Jameson Inns, Inc., 8 Perimeter Center East, Suite 8050, Atlanta,
Georgia 30346-1603, Attention: Investor Relations, (770) 901-9020.
S-35
<PAGE> 38
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.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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.
---------------------
The date of this Prospectus is February 28, 1997
<PAGE> 39
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> 40
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> 41
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. For definitions of the terms "Funds from Operations" and "Cash
Available for Distributions," see "Risk Factors -- Risks of an Investment in the
Company -- Risks of Rapid Expansion."
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
4
<PAGE> 42
combined fixed charges and preferred stock dividends reflect the operating
results from the businesses previously conducted by the Company and its
affiliates and predecessors.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined fixed charges
and preferred stock dividends(1) .64(2) .77(2) .87(2) 3.16 1.37 2.75
</TABLE>
- ---------------
(1) 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.
(2) 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.
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 the National Association of Real Estate
Investment Trusts and further interpreted by it in February 1995) plus non-cash
expenses (stock compensation and loan fee amortization),
5
<PAGE> 43
less 4% of Room Revenues for the replacement and refurbishment of furniture,
fixtures and equipment since July 1, 1995, less loan principal repayments.
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
6
<PAGE> 44
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.
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
7
<PAGE> 45
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."
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,
8
<PAGE> 46
the Board of 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 Inns' 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. The Company also believes that since such report was received, Inns have
been constructed in a manner consistent with the recommendations contained
therein. 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 Risk 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 the Inns' 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 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
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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 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
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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 generally withhold U.S. income tax at the rate of 30% on
the gross amount of any distributions 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 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
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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 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.
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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.
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.
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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 it is 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.
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
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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 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
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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.
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.
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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.
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).
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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 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.
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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.
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.
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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, 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. Any shares of Common Stock sold pursuant to a Prospectus Supplement will
be listed on the Nasdaq National Market, 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.
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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, 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 tax 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
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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, (ii) 95% of its REIT capital gain net income for such year
and (iii) the amount, if any, of the required distribution for the previous year
over the amount actually distributed for that year.
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 1, 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, 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.
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.
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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 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 and covenanted that it has since the
Change Date satisfied and will use its best efforts to continue to satisfy this
requirement. Therefore, the Operator is not and should not become a Related
Party Tenant of the Company (by reason of the Company's 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 since January 1, 1994 has been, 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 may
be sold by the Company to the Operator, with the lease payments 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
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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 does not substantially exceed the rental value of the property
for the term of the lease.
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
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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 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 continue 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
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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, 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
covenanted that it 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
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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 determination. 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 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
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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. In general, a pension-held REIT is a REIT that is held
by at least one qualified trust holding more than 25% by value of the interests
in the REIT or by one or more 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. Further, pursuant to recently enacted legislation,
the Company will be required to withhold 10% of any distribution in excess of
current and accumulated earnings and profits. However, amounts withheld may be
refundable if it is subsequently determined that such distribution was in excess
of current and accumulated
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earnings and profits of the Company and the amount withheld exceeded the
Non-U.S. Shareholder's U.S. tax liability, if any.
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
"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.
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=========================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR EITHER OF THE
UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SERIES A PREFERRED STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SERIES A
PREFERRED STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary................... S-1
Risk Factors.................................... S-10
Use of Proceeds................................. S-11
Capitalization.................................. S-12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... S-13
Management...................................... S-19
Security Ownership of Management................ S-21
Description of Series A Preferred Stock......... S-22
Certain Federal Income Tax Considerations....... S-29
Underwriting.................................... S-33
Legal Matters................................... S-34
Experts......................................... S-34
Available Information........................... S-34
Incorporation of Certain Documents by
Reference..................................... S-35
PROSPECTUS
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 2
The Company..................................... 4
Use of Proceeds................................. 4
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends..................... 4
Risk Factors.................................... 5
Articles of Incorporation and Bylaw
Provisions.................................... 13
Restrictions on Transfer........................ 15
Common Stock.................................... 17
Common Stock Warrants........................... 17
Preferred Stock................................. 18
Plan of Distribution............................ 22
Federal Income Tax Considerations............... 23
Legal Matters................................... 31
Experts......................................... 31
</TABLE>
=========================================================
=========================================================
1,000,000 SHARES
JAMESON INNS, INC.
% SERIES A CUMULATIVE
PREFERRED STOCK
-------------------------------------------
PROSPECTUS SUPPLEMENT
MARCH , 1998
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MORGAN KEEGAN & COMPANY, INC.
CIBC OPPENHEIMER
=========================================================
