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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
April 21, 1998
-----------------------------------------------
Date of Report (Date of Earliest Event Reported)
EQUITY INNS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Tennessee 0-23290 62-155084
- ---------------------------- --------------------- ------------------
(State or Other Jurisdiction (Commission File No.) (I.R.S. Employer
of Incorporation) Identification No.)
4735 Spottswood
Suite 102
Memphis, Tennessee 38117
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(Address of Principal Executive Offices) (Zip Code)
(901) 761-9651
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(Registrant's Telephone Number, Including Area Code)
N/A
---------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS.
ANNOUNCEMENT OF RFS ASSET SALE TO AND MERGER WITH EQUITY INNS
On April 21, 1998 Equity Inns, Inc. (the "Company") announced
that the Company, RFS Hotel Investors, Inc. ("RFS"), RHI Acquisition, Inc., RFS
Partnership, L.P., and Equity Inns Partnership, L.P have signed an Asset Sale
Agreement and Plans of Mergers dated April 21, 1998 (the "Agreement") providing
for the merger of RFS into a wholly owned subsidiary of the Company.
If the average of the Company's common stock price is between $14.00
and $17.00 per share during an agreed-upon 20-day measurement period prior to
closing as provided in the Agreement, RFS shareholders will receive 1.5 shares
of the Company's common stock for each share of common stock of RFS. If the
Company's average stock price during the measurement period exceeds $17.00, the
exchange ratio will be adjusted to provide RFS' shareholders with $25.50 worth
of the Company's common stock for each share of the common stock of RFS. Upon
the closing of such merger, RFS board members Robert M. Solmson and Bruce E.
Campbell, Jr. will join the Company's Board of Directors, increasing its size
from four to six persons. In addition, Mr. Solmson will become a member of a
newly-created executive committee of the Company's Board of Directors,
consisting of Messrs. Phillip H. McNeill, Sr., Robert M. Solmson and William W.
Deupree, Jr. Mr. McNeill will continue as Chairman of the Board and Chief
Executive Officer of the combined REIT following such transaction. The
transaction is expected to close in the third quarter of 1998 and is subject to
the approval of both companies' shareholders and to other customary conditions.
The transaction includes the Company's assumption of approximately $330
million of RFS's debt which includes the anticipated costs of terminating
certain of the operating leases on RFS' hotels. The acquisition would add 62
hotels with an aggregate of 8,932 rooms in 24 states, plus six hotel development
opportunities, to the Company's current portfolio of 95 hotels with rooms in 32
states and upon completion of the transaction and certain announced
acquisitions, the Company would own 167 hotels with 21,782 rooms and suites in
34 states.
The Company's headquarters will remain in Memphis following the
completion of the merger.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain matters discussed in this Current Report on Form 8-K may
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and as such may involve known and unknown risks,
uncertainities and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks include, but are not limited to, the risk that the
transaction described herein may not receive the requisite approval of either
companies' shareholders; the risk that the Company's average stock price may
fall below the average price specified by the Agreement; and the risk that
certain conditions to closing of the transaction may not be met. There can be no
assurance, therefore, that the transactions contemplated by the Agreement will
be consummated.
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ITEM 7. EXHIBITS.
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(c) Exhibits. The following exhibits are filed with this Form 8-K.
10.1 Asset Sale Agreement and Plans of Mergers among RFS Hotel Investors, Inc., RHI Acquisition, Inc.,
Equity Inns, Inc., RFS Partnership, L.P. and Equity Inns Partnership, L.P. dated April 21, 1998
(the "Merger Agreement")
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of KPMG Peat Marwick LLP
99.1 Press release dated April 21, 1998
99.2 Pro forma financial information (unaudited) for Equity Inns, Inc. for the year ended
December 31, 1997 and for the three months ended March 31, 1998 reflecting the pro forma effects
of the transactions described in the Merger Agreement, as well as certain other transactions
specific to RFS Hotel Investors, Inc. and Equity Inns, Inc.
99.3 Historical audited financial statements of RFS Hotel Investors, Inc. as of December 31, 1997
and 1996 and for the three-year period ended December 31, 1997
99.4 Historical unaudited financial statements of RFS Hotel Investors, Inc. as of March 31, 1998 and for
the three months ended March 31, 1998 and 1997 (unaudited)
99.5 Historical audited financial statements of RFS, Inc. as of December 31, 1997 and 1996 and for the
three-year period ended December 31, 1997
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
EQUITY INNS, INC.
(REGISTRANT)
May 15, 1998 By: /s/ Howard A. Silver
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Howard A. Silver, Executive Vice President,
Secretary, Treasurer and Chief Financial Officer
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EXHIBITS
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Item Number Description
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10.1 Asset Sale Agreement and Plans of Mergers among RFS Hotel Investors, Inc., RHI Acquisition, Inc.,
Equity Inns, Inc., RFS Partnership, L.P. and Equity Inns Partnership, L.P. dated April 21, 1998
(the "Merger Agreement")
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of KPMG Peat Marwick LLP
99.1 Press release dated April 21, 1998
99.2 Pro forma financial information (unaudited) for Equity Inns, Inc. for the year ended
December 31, 1997 and for the three months ended March 31, 1998 reflecting the pro forma
effects of the transaction described in the Merger Agreement, as well as certain other
transactions specific to RFS Hotel Investors, Inc. and Equity Inns, Inc.
99.3 Historical audited financial statements of RFS Hotel Investors, Inc. as of December 31, 1997 and 1996
and for the three-year period ended December 31, 1997
99.4 Historical unaudited financial statements of RFS Hotel Investors, Inc. for the three months ended
March 31, 1998 and 1997 (Unaudited)
99.5 Historical audited financial statements of RFS, Inc. as of December 31, 1997 and 1996 and for the three-year
period ended December 31, 1997
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EXHIBIT 10.1
ASSET SALE AGREEMENT
AND
PLANS OF MERGERS
AMONG
RFS HOTEL INVESTORS, INC., A TENNESSEE CORPORATION
("TARGET REIT"),
RHI ACQUISITION, INC., A TENNESSEE CORPORATION
("MERGER SUB"),
EQUITY INNS, INC., A TENNESSEE CORPORATION
("ACQUIROR REIT"),
RFS PARTNERSHIP, L.P., A TENNESSEE LIMITED PARTNERSHIP
("CONTRIBUTOR OP")
AND
EQUITY INNS PARTNERSHIP, L.P., A TENNESSEE LIMITED PARTNERSHIP
("ACQUIROR OP")
APRIL 21, 1998
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TABLE OF CONTENTS
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ARTICLE I DEFINITIONS................................................... 2
1.1. [INTENTIONALLY OMITTED]..................................... 2
1.2. Acquiror CMBS OP............................................ 2
1.3. Acquiror CMBS OP Partner Approvals.......................... 2
1.4. Acquiror CMBS OP Partnership Agreement...................... 2
1.5. Acquiror OP................................................. 2
1.6. Acquiror OP General Units................................... 2
1.7. Acquiror OP Limited Units................................... 2
1.8. Acquiror OP Partner Approvals............................... 2
1.9. Acquiror OP Partnership Agreement........................... 2
1.10. Acquiror OP Units........................................... 2
1.11. Acquiror REIT............................................... 2
1.12. Acquiror REIT Charter....................................... 2
1.13. Acquiror REIT CMBS Lessee................................... 3
1.14. Acquiror REIT Common Stock.................................. 3
1.15. Acquiror REIT Employee Benefit Plans........................ 3
1.16. Acquiror REIT Employment Agreements......................... 3
1.17. Acquiror REIT Hotels........................................ 3
1.18. Acquiror REIT Leases........................................ 3
1.19. Acquiror REIT Lessee........................................ 3
1.20. Acquiror REIT Material Adverse Effect....................... 3
1.21. Acquiror REIT Options....................................... 3
1.22. Acquiror REIT Preferred Stock............................... 3
1.23. Acquiror REIT Restricted Stock Grants....................... 3
1.24. Acquiror REIT SEC Documents................................. 3
1.25. Acquiror REIT Subsidiaries.................................. 4
1.26. Acquisition Opportunity..................................... 4
1.27. Acquisition Proposal........................................ 4
1.27(a) Acquisition Proposal Notice................................. 4
1.28. Act of Bankruptcy........................................... 4
1.29. Affiliate................................................... 4
1.30. Agreement................................................... 4
1.31. Amended and Restated Acquiror OP Partnership Agreement...... 4
1.32. Articles of Merger.......................................... 4
1.33. Asset Sale.................................................. 5
1.34. Assumed Liabilities......................................... 5
1.35. Average Price............................................... 5
1.36. Bill of Sale (Inventory).................................... 5
1.37. Bill of Sale (Personal Property)............................ 5
1.38. Board....................................................... 5
1.39. Certificates................................................ 5
1.40. Certificates of Merger...................................... 5
1.41. Closing..................................................... 5
1.42. Closing Date................................................ 5
1.43. CMBS Agreement of Merger.................................... 5
1.44. CMBS Bonds.................................................. 6
1.45. CMBS OP Merger.............................................. 6
1.46. CMBS OP Merger Consideration................................ 6
1.47. OP Merger Consideration..................................... 6
1.48. CMBS OP Partner Approvals................................... 6
1.49. Code........................................................ 6
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1.49(a) Competing Transaction....................................... 6
1.50. Confidential Material....................................... 6
1.51. Contracts................................................... 6
1.52. Contributor CMBS OP......................................... 6
1.53. Contributor CMBS OP Partner Approvals....................... 6
1.54. Contributor CMBS OP Partnership Agreement................... 6
1.55. Contributor OP.............................................. 6
1.56. Contributor OP General Units................................ 7
1.57. Contributor OP Limited Units................................ 7
1.58. Contributor OP Partner Approvals............................ 7
1.59. Contributor OP Partnership Agreement........................ 7
1.60. Contributor OP Units........................................ 7
1.61. Deeds....................................................... 7
1.61(a) Definitive Competing Acquisition Agreement.................. 7
1.62. Effective Time.............................................. 7
1.63. Employee Benefit Plans...................................... 7
1.63(a) Entitled Party.............................................. 7
1.64. ERISA....................................................... 7
1.64(a) Escrow Agent................................................ 7
1.65. Exchange Act................................................ 8
1.66. Exchange Agent.............................................. 8
1.67. Exchange Ratio.............................................. 8
1.68. Expenses.................................................... 8
1.69. Final Target REIT Dividend.................................. 8
1.70. FIRPTA Certificate.......................................... 8
1.71. Form S-4.................................................... 8
1.72. Franchise Agreements........................................ 8
1.73. Franchisors................................................. 8
1.74. GAAP........................................................ 8
1.75. Hazardous Substance......................................... 8
1.76. HSR Act..................................................... 9
1.77. Improvements................................................ 9
1.78. Insurance Policies.......................................... 9
1.79. Intangible Personal Property................................ 9
1.80. Interests................................................... 9
1.81. Inventory................................................... 9
1.82. IRS......................................................... 9
1.83. Knowledge of Acquiror REIT.................................. 9
1.84. Knowledge of Target REIT.................................... 9
1.85. Land........................................................ 10
1.86. Lease Termination Agreement................................. 10
1.87. Termination Fee............................................. 10
1.88. material.................................................... 10
1.89. Material Adverse Effect..................................... 10
1.89(a) Maximum Expense Reimbursement............................... 10
1.89(b) Maximum Termination Fee..................................... 10
1.90. Mergers..................................................... 10
1.91. Merger Consideration........................................ 10
1.92. Merger Sub.................................................. 10
1.93. Mortgage Documents.......................................... 10
1.94. Mortgage Notes.............................................. 10
1.95. Mortgages................................................... 11
1.96. NYSE........................................................ 11
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1.97. OP Merger................................................... 11
1.98. OP Partner Approvals........................................ 11
1.99. Organizational Documents.................................... 11
1.90(a) Payor Party................................................. 11
1.100. Permit...................................................... 11
1.101. Permitted Title Exceptions.................................. 11
1.102. Person...................................................... 11
1.103. Personal Property........................................... 11
1.104. Plan of Merger.............................................. 11
1.105. Pricing Period.............................................. 12
1.106. Proxy Statement/Prospectus.................................. 12
1.107. Qualifying Income........................................... 12
1.108. Real Property............................................... 12
1.109. REIT........................................................ 12
1.110. REIT Merger................................................. 12
1.111. SEC......................................................... 12
1.112. SEC Documents............................................... 12
1.113. Securities Act.............................................. 12
1.114. Severance Benefits.......................................... 12
1.115. Shareholders and Shareholder................................ 12
1.116. Stock Purchase Agreement.................................... 12
1.117. Subsidiary.................................................. 13
1.118. Surviving Corporation....................................... 13
1.119. Surviving CMBS OP........................................... 13
1.120. Surviving OP................................................ 13
1.121. Takeover Statutes........................................... 13
1.122. Tangible Personal Property.................................. 13
1.123. Target C Corp............................................... 13
1.124. Target REIT................................................. 13
1.125. Target REIT Capital Stock................................... 13
1.126. Target REIT Charter......................................... 13
1.127. Target REIT CMBS Lessee..................................... 13
1.128. Target REIT Common Stock.................................... 13
1.129. Target REIT Employee Benefit Plans.......................... 14
1.130. Target REIT Employment Agreements........................... 14
1.131. Target REIT Hotels.......................................... 14
1.132. Target REIT Leases.......................................... 14
1.133. Target REIT Lessee.......................................... 14
1.134. Target REIT Material Adverse Effect......................... 14
1.135. Target REIT Options......................................... 14
1.136. Target REIT Preferred Stock................................. 14
1.137. Target REIT Restricted Stock Grants......................... 14
1.138. Target REIT SEC Documents................................... 14
1.139. Target REIT Subsidiaries.................................... 14
1.140. Tax Return.................................................. 15
1.141. Taxes....................................................... 15
1.142. Tennessee Act............................................... 15
1.143. Title Company............................................... 15
1.144. Transferred Assets.......................................... 15
1.145. TRULPA...................................................... 15
1.146. Undeveloped Land............................................ 15
1.147. Unit Certificates........................................... 15
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1.148. Utilities................................................... 15
1.149. Welfare Plans............................................... 15
ARTICLE II ASSET SALE AGREEMENT......................................... 16
2.1. Sale and Purchase........................................... 16
2.2. Effectuation of the Asset Sale.............................. 16
2.3. OP Partner Approvals........................................ 16
2.4. CMBS OP Partner Approvals................................... 16
2.5. Acquiror OP Partnership Agreement........................... 16
2.6. Contributor OP's and Contributor CMBS OP's Deliveries....... 16
2.7. Target REIT Lease Termination............................... 17
2.8. Schedules and Exhibits...................................... 17
ARTICLE III THE REIT MERGER............................................. 17
3.1. The REIT Merger............................................. 17
3.2. Closing..................................................... 18
3.3. Effective Time.............................................. 18
3.4. Effect of the REIT Merger................................... 18
3.5. Charter and Bylaws.......................................... 18
3.6. Officers and Directors...................................... 18
3.7. Employees................................................... 18
ARTICLE IV EFFECT OF REIT MERGER ON CAPITALIZATION; EXCHANGE OF
CERTIFICATES.......................................................... 19
4.1. Effect on Capitalization.................................... 19
4.2. Exchange of Certificates.................................... 20
4.3. Target REIT Options......................................... 21
ARTICLE V THE OP MERGER................................................. 22
5.1. The OP Merger............................................... 22
5.2. Effect of the OP Merger..................................... 23
5.3. Certificate of Limited Partnership and Partnership
Agreement................................................. 23
5.4. Effect on Partnership Interests............................. 23
5.5. Exchange of Certificates.................................... 23
ARTICLE VI THE CMBS OP MERGER........................................... 25
6.1. The CMBS OP Merger; CMBS Agreement of Merger................ 25
6.2. Effect of the CMBS OP Merger................................ 25
ARTICLE VII REPRESENTATIONS AND WARRANTIES OF........................... 25
CONTRIBUTOR OP AND TARGET REIT.......................................... 25
7.1. Organization................................................ 25
7.2. Authorization; Enforceability............................... 26
7.3. Capitalization.............................................. 26
7.4. No Violation or Conflict by Contributor OP or Target REIT... 27
7.5. No Litigation............................................... 27
7.6. Absence of Certain Changes.................................. 27
7.7. Subsidiaries................................................ 27
7.8. Contracts and Commitments................................... 27
7.9. Approvals and Consents...................................... 28
7.10. Target REIT Employee Benefit Plans.......................... 28
7.11. SEC Documents; Financial Statements; Undisclosed
Liabilities............................................... 29
7.12. No Special Taxes............................................ 29
7.13. Compliance with Existing Laws............................... 29
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7.14. Insurance................................................... 30
7.15. Condemnation Proceedings.................................... 30
7.16. Personal Property........................................... 30
7.17. Bankruptcy.................................................. 30
7.18. Title to Real Property...................................... 30
7.19. Zoning...................................................... 30
7.20. Hazardous Substances........................................ 30
7.21. Room Furnishings............................................ 31
7.22. Franchisors; Franchise Agreements........................... 31
7.23. Mortgage Documents.......................................... 31
7.24. Opinion of Financial Advisor................................ 31
7.25. Financial Advisor........................................... 31
7.26. Acquiror REIT Share Ownership............................... 31
7.27. Related Party Transactions.................................. 31
7.28. Takeover Statutes........................................... 32
7.29. Hart-Scott-Rodino Antitrust Improvements Act of 1976........ 32
7.30. Development................................................. 32
7.31. Tax Matters................................................. 32
7.32. Convertible Securities...................................... 33
7.33. Updating of Representations and Warranties.................. 33
7.34. Reorganization.............................................. 33
7.35. Intellectual Property....................................... 33
7.36. Employees................................................... 33
7.37. Labor Relations............................................. 34
7.38. Termination of Certain Target REIT Leases................... 34
ARTICLE VIII REPRESENTATIONS AND WARRANTIES OF ACQUIROR REIT, ACQUIROR
OP AND MERGER SUB..................................................... 34
8.1. Organization................................................ 34
8.2. Authorization; Enforceability............................... 35
8.3. Capitalization.............................................. 35
8.4. No Violation or Conflict by Acquiror OP, Acquiror REIT or
Merger Sub................................................ 36
8.5. No Litigation............................................... 36
8.6. Absence of Certain Changes.................................. 36
8.7. Subsidiaries................................................ 36
8.8. Contracts and Commitments................................... 36
8.9. Approvals and Consents...................................... 37
8.10. Acquiror REIT Employee Benefit Plans........................ 37
8.11. SEC Documents; Financial Statement; Undisclosed
Liabilities............................................... 38
8.12. Title to Properties and Assets.............................. 38
8.13. Insurance................................................... 38
8.14. Personal Property........................................... 38
8.15. Bankruptcy.................................................. 39
8.16. Zoning...................................................... 39
8.17. Hazardous Substances........................................ 39
8.18. Leases...................................................... 39
8.19. Opinion of Financial Advisor................................ 39
8.20. Financial Advisor........................................... 39
8.21. Target REIT Share Ownership................................. 39
8.22. Related Party Transactions.................................. 40
8.23. Takeover Statutes........................................... 40
8.24. Hart-Scott-Rodino Antitrust Improvements Act of 1976........ 40
8.25. Development................................................. 40
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8.26. Tax Matters................................................. 40
8.27. Convertible Securities...................................... 41
8.28. Acquiror REIT Common Stock.................................. 41
8.29. Interim Operations of Merger Sub............................ 41
8.30. Updating of Representations and Warranties.................. 41
8.31. Reorganization.............................................. 42
8.32. Intellectual Property....................................... 42
8.33. Employees................................................... 42
8.34. Labor Relations............................................. 42
8.35. No Special Taxes............................................ 42
8.36. Compliance with Existing Laws............................... 42
8.37. Condemnation Proceedings.................................... 43
8.38. Room Furnishings............................................ 43
8.39. Franchisors; Franchise Agreements........................... 43
8.40. Mortgage Documents.......................................... 43
8.41. New Leases.................................................. 43
ARTICLE IX CONDITIONS PRECEDENT TO CLOSING.............................. 44
9.1. Conditions Precedent to Obligations of Parties.............. 44
9.2. Conditions Precedent to the Obligations of Acquiror OP,
Acquiror REIT and Merger Sub.............................. 44
9.3. Conditions Precedent to the Obligations of Contributor OP
and Target REIT........................................... 46
ARTICLE X COVENANTS..................................................... 47
10.1. Acquisition Proposals....................................... 47
10.2. Conduct of Businesses....................................... 48
10.3. Meetings of Shareholders.................................... 52
10.4. Filings; Other Action....................................... 52
10.5. Inspection of Records....................................... 53
10.6. Publicity................................................... 53
10.7. Registration Statement...................................... 53
10.8. Listing Application......................................... 54
10.9. Further Action.............................................. 54
10.10. Expenses.................................................... 54
10.11. Indemnification............................................. 54
10.12. Governance.................................................. 54
10.13. Severance Benefits.......................................... 55
10.14. Reorganization.............................................. 55
10.15. Survival of Target REIT, Contributor OP and Contributor CMBS
OP Obligations............................................ 55
10.16. Third-Party Consents........................................ 55
10.17. Efforts to Fulfill Conditions............................... 55
10.18. Representations, Warranties and Conditions Prior to
Closing................................................... 56
10.19. Cooperation of the Parties.................................. 56
10.20. Amendment to Acquiror REIT Charter.......................... 56
10.21. Records..................................................... 56
10.22. Confidentiality............................................. 56
10.23. Acknowledgments............................................. 56
10.24. Target REIT Acquisition Opportunities....................... 57
10.25. CMBS Bonds.................................................. 57
10.26. Tax Treatment............................................... 57
10.27. Transfer and Gains Taxes.................................... 58
10.28. Transfer of Target C Corp. Shares........................... 58
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10.29. Existing Restrictions....................................... 58
10.30. Lease Termination/New Leases................................ 58
ARTICLE XI TERMINATION.................................................. 58
11.1. Termination by Mutual Consent............................... 58
11.2. Termination by Either Acquiror REIT or Target REIT.......... 59
11.3. Termination by Target REIT.................................. 59
11.4. Termination by Acquiror REIT................................ 59
11.5. Effect of Termination and Abandonment....................... 60
11.6. Expenses.................................................... 62
11.7. Extension; Waiver; Miscellaneous............................ 63
ARTICLE XII MISCELLANEOUS............................................... 63
12.1. Nonsurvival of Representations, Warranties and Agreements... 63
12.2. Notices..................................................... 63
12.3. Assignment; Binding Effect; Benefit......................... 64
12.4. Entire Agreement............................................ 64
12.5. Confidentiality............................................. 64
12.6. Amendment................................................... 66
12.7. Governing Law............................................... 66
12.8. Counterparts................................................ 66
12.9. Headings.................................................... 66
12.10. Interpretation.............................................. 67
12.11. Waivers..................................................... 67
12.12. Incorporation............................................... 67
12.13. Severability................................................ 67
12.14. Enforcement of Agreement.................................... 67
12.15. Non-Recourse................................................ 67
12.16. Arbitration................................................. 68
List of Schedules....................................................... 70
List of Exhibits........................................................ 72
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ASSET SALE AGREEMENT AND
PLANS OF MERGERS
ASSET SALE AGREEMENT AND PLANS OF MERGERS, made as of this 21st day of
April, 1998, by and among RFS HOTEL INVESTORS, INC., a Tennessee corporation
("Target REIT"), EQUITY INNS, INC., a Tennessee corporation ("Acquiror REIT"),
RHI ACQUISITION, INC., a Tennessee corporation and wholly-owned subsidiary of
Acquiror REIT ("Merger Sub"), EQUITY INNS PARTNERSHIP, L.P., a Tennessee limited
partnership ("Acquiror OP"), and RFS PARTNERSHIP, L.P., a Tennessee limited
partnership ("Contributor OP").
RECITALS
A. The Board of Directors of Acquiror REIT and the Board of Directors of
Target REIT have determined that a business combination on the terms described
herein between Acquiror REIT and Target REIT is in the best interests of their
respective Shareholders and presents an opportunity for their respective
companies to achieve long-term strategic and financial benefits, and accordingly
have agreed to effect a merger on the terms and conditions set forth herein.
B. For federal income tax purposes, it is intended that the REIT Merger (as
defined) shall qualify as tax-free reorganizations within the meaning of Section
368 of the Internal Revenue Code of 1986, as amended, (the "Code"), and that
this Agreement (as defined herein) shall constitute a plan of reorganization
under Section 368 of the Code.
C. Acquiror REIT, as the sole shareholder of the general partners of
Acquiror OP and Acquiror CMBS OP, and Target REIT, as the general partner of
Contributor OP and as the sole shareholder of the general partner of Contributor
CMBS OP, deem it advisable and in the best interests of their respective limited
partners, subject to the conditions and other provisions contained herein, that
Contributor OP shall merge into Acquiror OP with the holders of partnership
interests in Contributor OP receiving units of limited partnership interest in
Acquiror OP and that Contributor CMBS OP shall merge into Acquiror CMBS OP with
the holders of partnership interests in Contributor CMBS OP receiving limited
partnership interests in Acquiror CMBS OP.
D. For federal income tax purposes, it is intended that the OP Merger (as
defined herein), regardless of form, be treated as a contribution by Contributor
OP of all of its assets to Acquiror OP in exchange for partnership interests in
Acquiror OP under Section 721 of the Code, and a distribution of such
partnership interests by Contributor OP to its partners under Section 731 of the
Code. For federal income tax purposes, it is intended that the CMBS OP Merger
(as defined herein), regardless of form, be treated as a contribution by
Contributor CMBS OP of all of its assets to Acquiror CMBS OP in exchange for
partnership interests in Acquiror CMBS OP under Section 721 of the Code, and a
distribution of such partnership interests by Contributor CMBS OP to its
partners under Section 731 of the Code.
E. Acquiror REIT acknowledges and agrees that it will benefit directly from
the merger of Target REIT into Merger Sub, Contributor OP into Acquiror OP and
Contributor CMBS OP into Acquiror CMBS OP as provided for herein.
F. The parties hereto desire to make certain representations, warranties
and agreements in connection with the transactions contemplated by this
Agreement.
NOW, THEREFORE, in consideration of the Recitals and of the mutual
covenants, conditions and agreements set forth herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is hereby agreed that:
<PAGE> 10
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the meanings
specified:
1.1. [INTENTIONALLY OMITTED].
1.2. Acquiror CMBS OP.
"Acquiror CMBS OP" shall have the meaning provided in Section 10.25.
1.3. Acquiror CMBS OP Partner Approvals.
"Acquiror CMBS OP Partner Approvals" shall have the meaning provided in
Section 2.4.
1.4. Acquiror CMBS OP Partnership Agreement.
"Acquiror CMBS OP Partnership Agreement" shall mean the Agreement of
Limited Partnership of Acquiror CMBS OP to be entered into after the date hereof
upon organization of Acquiror CMBS OP as contemplated in Section 10.25.
1.5. Acquiror OP.
"Acquiror OP" shall mean Equity Inns Partnership, L.P., a Tennessee limited
partnership.
1.6. Acquiror OP General Units.
"Acquiror OP General Units" shall mean Acquiror OP Units representing an
interest as a general partner in Acquiror OP.
1.7. Acquiror OP Limited Units.
"Acquiror OP Limited Units" shall mean Acquiror OP Units that represent an
interest as a limited partner in Acquiror OP.
1.8. Acquiror OP Partner Approvals.
"Acquiror OP Partner Approvals" shall have the meaning provided in Section
2.3.
1.9. Acquiror OP Partnership Agreement.
"Acquiror OP Partnership Agreement" shall mean the Agreement of Limited
Partnership of Acquiror OP, as amended as of the date hereof.
1.10. Acquiror OP Units.
"Acquiror OP Units" shall mean units of partnership interest of Acquiror
OP, including Acquiror OP General Units and Acquiror OP Limited Units.
1.11. Acquiror REIT.
"Acquiror REIT" shall mean Equity Inns, Inc., a Tennessee corporation.
1.12. Acquiror REIT Charter.
"Acquiror REIT Charter" shall mean the Charter of Acquiror REIT, as amended
and restated as of the date hereof.
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1.13. Acquiror REIT CMBS Lessee.
"Acquiror REIT CMBS Lessee" shall have the meaning provided in Section
10.25.
1.14. Acquiror REIT Common Stock.
"Acquiror REIT Common Stock" shall mean the common stock of Acquiror REIT,
par value $.01 per share.
1.15. Acquiror REIT Employee Benefit Plans.
"Acquiror REIT Employee Benefit Plans" shall mean the employee benefit
plans of Acquiror REIT described on Schedule 8.10.
1.16. Acquiror REIT Employment Agreements.
"Acquiror REIT Employment Agreements" shall mean the employment agreements
described on Schedule 1.16.
1.17. Acquiror REIT Hotels.
"Acquiror REIT Hotels" shall mean all of the hotel properties owned by the
Acquiror REIT Subsidiaries as of the date hereof, as set forth on Schedule 1.17.
1.18. Acquiror REIT Leases.
"Acquiror REIT Leases" shall mean the lease agreements with respect to the
operation of the Acquiror REIT Hotels leased to third parties, as described in
Schedule 1.18.
1.19. Acquiror REIT Lessee.
"Acquiror REIT Lessee" shall mean, with respect to the Acquiror REIT
Hotels, affiliates of Interstate Hotels Company.
1.20. Acquiror REIT Material Adverse Effect.
"Acquiror REIT Material Adverse Effect" shall mean a Material Adverse
Effect with respect to Acquiror REIT and the Acquiror REIT Subsidiaries taken as
a whole.
1.21. Acquiror REIT Options.
"Acquiror REIT Options" shall mean the outstanding option grants to acquire
shares of Acquiror REIT Common Stock described in Schedule 1.21.
1.22. Acquiror REIT Preferred Stock.
"Acquiror REIT Preferred Stock" shall mean the preferred stock of Acquiror
REIT, $.01 par value per share.
1.23. Acquiror REIT Restricted Stock Grants.
"Acquiror REIT Restricted Stock Grants" shall mean the grants of shares of
Acquiror REIT Common Stock which are subject to vesting as described on Schedule
1.23 .
1.24. Acquiror REIT SEC Documents.
"Acquiror REIT SEC Documents" shall mean all registration statements,
reports, proxy statements and information statements filed by Acquiror REIT with
the SEC since the effective date of Acquiror REIT's initial registration
statement on Form S-11.
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1.25. Acquiror REIT Subsidiaries.
"Acquiror REIT Subsidiaries" shall mean the Subsidiaries of Acquiror REIT
described on Schedule 8.7, including, without limitation, Merger Sub, Acquiror
OP and Acquiror CMBS OP.
1.26. Acquisition Opportunity.
"Acquisition Opportunity" shall have the meaning provided in Section 10.24.
1.27. Acquisition Proposal.
"Acquisition Proposal" shall have the meaning provided in Section 10.1.
1.27(a) Acquisition Proposal Notice.
"Acquisition Proposal Notice" shall have the meaning provided in Section
11.5(a).
1.28. Act of Bankruptcy.
"Act of Bankruptcy" shall mean if a party hereto (or any of its
Subsidiaries) or any general partner thereof shall (a) apply for or consent to
the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property,
(b) admit in writing its inability to pay its debts as they become due, (c) make
a general assignment for the benefit of its creditors, (d) file a voluntary
petition or commence a voluntary case or proceeding under the Federal Bankruptcy
Code (as now or hereafter in effect), (e) be adjudicated a bankrupt or
insolvent, (f) file a petition seeking to take advantage of any other law
relating to bankruptcy, insolvency, reorganization, winding-up or composition or
adjustment of debts, (g) fail to controvert in a timely and appropriate manner,
or acquiesce in writing to, any petition filed against it in an involuntary case
or proceeding under the Federal Bankruptcy Code (as now or hereafter in effect),
or (h) take any corporate or partnership action for the purpose of effecting any
of the foregoing; or if a proceeding or case shall be commenced, without the
application or consent of a party hereto (or any of its Subsidiaries) or any
general partner thereof, in any court of competent jurisdiction seeking (1) the
liquidation, reorganization, dissolution or winding-up, or the composition or
readjustment of debts, of such party or general partner, (2) the appointment of
a receiver, custodian, trustee or liquidator of such party or general partner or
all or any substantial part of its assets, or (3) other similar relief under any
law relating to bankruptcy, insolvency, reorganization, winding-up or
composition or adjustment of debts, and such proceeding or case shall continue
undismissed; or an order (including an order for relief entered in an
involuntary case under the Federal Bankruptcy Code, as now or hereafter in
effect) judgment or decree approving or ordering any of the foregoing shall be
entered and continue unstayed and in effect, for a period of 60 consecutive
days.
1.29. Affiliate.
"Affiliate" shall mean, with respect to any Person, another Person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such first Person.
1.30. Agreement.
"Agreement" shall mean this Asset Sale Agreement and Plans of Mergers,
together with the Exhibits and Schedules attached hereto.
1.31. Amended and Restated Acquiror OP Partnership Agreement.
"Amended and Restated Acquiror OP Partnership Agreement" shall have the
meaning provided in Section 2.5.
1.32. Articles of Merger.
"Articles of Merger" shall have the meaning provided in Section 3.3.
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1.33. Asset Sale.
"Asset Sale" shall have the meaning provided in Section 2.1.
1.34. Assumed Liabilities.
"Assumed Liabilities" shall mean the liabilities of Contributor OP and
Contributor CMBS OP described on Schedule 1.34.
1.35. Average Price.
"Average Price" shall mean an amount equal to the quotient of (i) the sum
of the products of (A) the daily volume of shares of the Acquiror REIT Common
Stock traded on the NYSE on each trading day during the Pricing Period and (B)
the closing price for the Acquiror REIT Common Stock on the NYSE on each such
trading day, and (ii) the total volume of shares of Acquiror REIT Common Stock
traded on the NYSE during the Pricing Period (volumes and closing prices as
reported by The Wall Street Journal or, if not reported thereby, any other
authoritative source selected by Acquiror REIT).
1.36. Bill of Sale (Inventory).
"Bill of Sale (Inventory)" shall mean one or more bills of sale conveying
title to the Inventory owed by Target REIT Lessee or Target REIT CMBS Lessee
from Target REIT Lessee to Acquiror REIT Lessee or another designee of Acquiror
REIT, and from Target REIT CMBS Lessee to Acquiror REIT CMBS Lessee, in each
case without any additional consideration to such lessees.
1.37. Bill of Sale (Personal Property).
"Bill of Sale (Personal Property)" shall mean one or more bills of sale
conveying title to the Tangible Personal Property, Intangible Personal Property
and the Interests from Contributor OP (or its designee) to Acquiror OP (or its
designee), and from Contributor CMBS OP (or its designee) to Acquiror CMBS OP
(or its designee).
1.38. Board.
"Board" means, with respect to either Acquiror REIT or Target REIT, its
Board of Directors.
1.39. Certificates.
"Certificates" shall have the meaning provided in Section 4.2(c).
1.40. Certificates of Merger.
"Certificates of Merger" shall mean the certificates of merger referenced
in Sections 5.1(b) and 6.1(b).
1.41. Closing.
"Closing" shall mean the conference held on the Closing Date at which the
closing of the Mergers and the other transactions contemplated hereby (except as
otherwise provided herein) shall occur.
1.42. Closing Date.
"Closing Date" shall mean October 15, 1998, or such earlier date on which
the conditions set forth in Article IX shall have been satisfied or waived, or
such other date as may be mutually agreed by the parties hereto.
1.43. CMBS Agreement of Merger.
"CMBS Agreement of Merger" shall have the meaning provided in Section 6.1.
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1.44. CMBS Bonds.
"CMBS Bonds" shall have the meaning provided in Section 10.25.
1.45. CMBS OP Merger.
"CMBS OP Merger" shall mean the merger of Contributor CMBS OP with and into
Acquiror CMBS OP.
1.46. CMBS OP Merger Consideration.
"CMBS OP Merger Consideration" shall have the meaning provided in Section
6.4.
1.47. OP Merger Consideration.
"OP Merger Consideration" shall have the meaning provided in Section
5.4(b).
1.48. CMBS OP Partner Approvals.
"CMBS OP Partner Approvals" shall have the meaning provided in Section 2.4.
1.49. Code.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
1.49(a) Competing Transaction.
"Competing Transaction" shall have the meaning provided in Section 10.1.
1.50. Confidential Material.
"Confidential Material" shall have the meaning provided in Section 12.5(a).
1.51. Contracts.
"Contracts" shall mean contracts, agreements, leases (including ground
leases), licenses, arrangements, understandings, relationships and commitments,
whether written or oral, but shall not include any Employee Benefit Plan.
1.52. Contributor CMBS OP.
"Contributor CMBS OP" shall mean RFS Financing Partnership, L.P., a
Tennessee limited partnership.
1.53. Contributor CMBS OP Partner Approvals.
"Contributor CMBS OP Partner Approvals" shall have the meaning provided in
Section 2.4.
1.54. Contributor CMBS OP Partnership Agreement.
"Contributor CMBS OP Partnership Agreement" shall mean the Agreement of
Limited Partnership of Contributor CMBS OP, as amended as of the date hereof.
1.55. Contributor OP.
"Contributor OP" shall mean RFS Partnership, L.P., a Tennessee limited
partnership.
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1.56. Contributor OP General Units.
"Contributor OP General Units" shall mean Contributor OP Units representing
an interest as a general partner in Contributor OP.
1.57. Contributor OP Limited Units.
"Contributor OP Limited Units" shall mean Contributor OP Units representing
an interest as a limited partner in Contributor OP.
1.58. Contributor OP Partner Approvals.
"Contributor OP Partner Approvals" shall have the meaning provided in
Section 2.3.
1.59. Contributor OP Partnership Agreement.
"Contributor OP Partnership Agreement" shall mean the Agreement of Limited
Partnership of Contributor OP, as amended as of the date hereof.
1.60. Contributor OP Units.
"Contributor OP Units" shall mean units of partnership interest of
Contributor OP.
1.61. Deeds.
"Deeds" shall mean deeds as may reasonably be required to be delivered in
the sole discretion of Acquiror REIT conveying title to the Real Property from
Contributor OP or the Target REIT Subsidiaries to Acquiror OP (or its designee),
and from Contributor CMBS OP to Acquiror CMBS OP (or its designee), subject only
to Permitted Title Exceptions.
1.61(a) Definitive Competing Acquisition Agreement.
"Definitive Competing Acquisition Agreement" shall have the meaning
provided in Section 11.5.
1.62. Effective Time.
"Effective Time" shall mean the time at which the Mergers are consummated
by the filing of the Articles of Merger and the Certificates of Merger with the
Secretary of State of the State of Tennessee, or such later date as is specified
in such filings.
1.63. Employee Benefit Plans.
"Employee Benefit Plans" shall mean the Acquiror REIT Employee Benefit
Plans and the Target REIT Employee Benefit Plans, which are described on
Schedules 8.10 and 7.10, respectively.
1.63(a) Entitled Party.
"Entitled Party" shall have the meaning provided in Section 11.5(a).
1.64. ERISA.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
1.64(a) Escrow Agent.
"Escrow Agent" shall have the meaning provided in Section 11.5(a).
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1.65. Exchange Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
1.66. Exchange Agent.
"Exchange Agent" shall have the meaning provided in Section 4.2(a).
1.67. Exchange Ratio.
"Exchange Ratio" shall have the meaning provided in Section 4.1(b).
1.68. Expenses.
"Expenses" shall have the meaning provided in Section 10.10.
1.69. Final Target REIT Dividend.
"Final Target REIT Dividend" shall have the meaning provided in Section
4.2(d).
1.70. FIRPTA Certificate.
"FIRTPA Certificate" shall mean the affidavit of Contributor OP and
Contributor CMBS OP under Section 1445 of the Code certifying that neither
Contributor OP nor Contributor CMBS OP is a foreign corporation, foreign
partnership, foreign trust, foreign estate or foreign person (as those terms are
defined in the Code), in form and substance reasonably satisfactory to the
Acquiror REIT.
1.71. Form S-4.
"Form S-4" shall have the meaning provided in Section 10.7.
1.72. Franchise Agreements.
"Franchise Agreements" shall mean those certain agreements and licenses to
operate the Target REIT Hotels as listed on Schedule 7.22 hereto.
1.73. Franchisors.
"Franchisors" shall mean the franchisors listed on Schedule 7.22, the
issuers of the franchise licenses under which the Target REIT Hotels are
currently operated.
1.74. GAAP.
"GAAP" shall mean generally accepted accounting principles used in the
United States, consistently applied during the periods involved.
1.75. Hazardous Substance.
"Hazardous Substance" shall mean any substance or material whose presence,
nature, quantity or intensity of existence, use, manufacture, disposal,
transportation, spill, release or effect, either by itself or in combination
with other materials is either: (1) potentially injurious to the public health,
safety or welfare, the environment or the Transferred Assets, (2) regulated,
monitored or defined as a hazardous or toxic substance or waste by any
governmental agency, or (3) a basis for liability of the owner of the
Transferred Assets to any governmental agency or third party, and Hazardous
Substances shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil, or any products, by-products or components thereof, and
asbestos.
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1.76. HSR Act.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
1.77. Improvements.
"Improvements" shall mean the Target REIT Hotels, together with all other
buildings, improvements, fixtures and other items affixed to the Land.
1.78. Insurance Policies.
"Insurance Policies" shall mean all policies of insurance relating to the
Transferred Assets, or any portion thereof.
1.79. Intangible Personal Property.
"Intangible Personal Property" shall mean all intangible personal property
owned or possessed by Contributor OP or Contributor CMBS OP, as applicable, and
used in connection with the ownership of the Transferred Assets, including,
without limitation, Contracts, general intangibles, business records relating to
the Transferred Assets, plans and specifications, surveys and title insurance
policies pertaining to the Real Property and the Personal Property, all
licenses, permits and approvals with respect to the construction, ownership,
operation, leasing, occupancy or maintenance of the Transferred Assets, any
unpaid award for taking by condemnation or any damage to the Land by reason of a
change of grade or location of or access to any street or highway.
1.80. Interests.
"Interests" shall mean the partnership interests Contributor OP holds in
any Target REIT Subsidiary that is a partnership.
1.81. Inventory.
"Inventory" shall mean all "inventories" used in the operation of the
Target REIT Hotels, including all inventories of merchandise and inventories of
supplies (as such terms are used in the Uniform System of Accounts for Hotels
(9th Revised Edition, 1996) as published by the Hotel Association of New York
City, Inc., as the same may be revised from time to time as of the date hereof)
and similar consumable supplies and any property of the type described in
Section 1221(1) of the Code.
1.82. IRS.
"IRS" shall mean the Internal Revenue Service.
1.83. Knowledge of Acquiror REIT.
"Knowledge of Acquiror REIT" shall mean the actual knowledge of the
Chairman of the Board, the Chief Executive Officer, the President, any Executive
Vice President, the Secretary and the Treasurer of Acquiror REIT.
1.84. Knowledge of Target REIT.
"Knowledge of Target REIT" shall mean the actual knowledge of the Chairman
of the Board, the Chief Executive Officer, the President, any Executive
Vice-President, the Secretary and the Treasurer of Target REIT.
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1.85. Land.
"Land" shall mean those certain parcels of real estate upon which the
Target REIT Hotels are located, together with all easements, rights, privileges,
remainders, reversions and appurtenances thereunto belonging or in any way
appertaining, and all of the estate, right, title, interest, claim or demand
whatsoever of Contributor OP, Contributor CMBS OP or any other Target REIT
Subsidiary, as applicable, therein, in the streets and ways adjacent thereto and
in the beds thereof, either at law or in equity, in possession or expectancy,
now or hereafter acquired.
1.86. Lease Termination Agreement.
"Lease Termination Agreement" shall have the meaning provided in Section
7.38.
1.87. Termination Fee.
"Termination Fee" shall have the meaning provided in Section 11.5(a).
1.88. Material.
"Material" for purposes of this Agreement shall be determined in light of
the facts and circumstances of the matter in question; provided that any
specific monetary amount stated in this Agreement shall determine materiality in
that instance.
1.89. Material Adverse Effect.
"Material Adverse Effect" shall mean, with respect to any entity or group
of entities, a material adverse effect on the business or assets (financial or
otherwise) as manifested by a material decline or deterioration of the financial
condition or results of operation of such entity or group of entities taken as a
whole.
1.89(a) Maximum Expense Reimbursement.
"Maximum Expense Reimbursement" shall have the meaning provided in Section
11.6(a).
1.89(b) Maximum Termination Fee.
"Maximum Termination Fee" shall have the meaning provided in Section
11.5(a).
1.90. Mergers.
"Mergers" shall mean collectively the REIT Merger, the OP Merger and the
CMBS OP Merger.
1.91. Merger Consideration.
"Merger Consideration" shall have the meaning provided in Section 4.1(d).
1.92. Merger Sub.
"Merger Sub" shall mean RHI Acquisition, Inc., a Tennessee corporation and
wholly-owned subsidiary of Acquiror REIT.
1.93. Mortgage Documents.
"Mortgage Documents" shall mean collectively the Mortgage Notes, the
Mortgages and all other documents executed or delivered in connection therewith,
including all modifications thereto.
1.94. Mortgage Notes.
"Mortgage Notes" shall have the meaning provided in Section 7.23.
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1.95. Mortgages.
"Mortgages" shall have the meaning provided in Section 7.23.
1.96. NYSE.
"NYSE" shall mean the New York Stock Exchange.
1.97. OP Merger.
"OP Merger" shall mean the merger of Contributor OP with and into Acquiror
OP.
1.98. OP Partner Approvals.
"OP Partner Approvals" shall have the meaning provided in Section 2.3.
1.99. Organizational Documents.
"Organizational Documents" shall mean with respect to a corporation, its
charter (or articles of incorporation) and bylaws, and all amendments thereto as
of the date hereof; with respect to a limited partnership, its certificate of
limited partnership and agreement of limited partnership and all amendments
thereto as of the date hereof; and with respect to a limited liability company
its articles of organization and operating agreement and all amendments thereto
as of the date hereof.
1.90(a) Payor Party.
"Payor Party" shall have the meaning provided in Section 11.5(a).
1.100. Permit.
"Permit" shall mean any federal, state, local, and foreign governmental
approval, authorization, certificate, easement, filing, franchise, license,
notice, permit, or right to which any Person is a party or that is or may be
binding upon or inure to the benefit of any Person or its securities, assets or
business.
1.101. Permitted Title Exceptions.
"Permitted Title Exceptions" shall mean those exceptions to the title to
the Real Property listed on the title insurance policies for the Target REIT
Hotels and the Undeveloped Land that do not: (a) constitute a mortgage, deed of
trust, lien, encumbrance or security interest on the Transferred Assets that
after the Closing would not secure one of the Assumed Liabilities, or (b)
materially and adversely affect the operations of the hotels on such Real
Property, create a material financial liability on the owner of the Transferred
Assets, or render title unmarketable.
1.102. Person.
"Person" shall mean an individual, corporation, partnership, limited
liability company, limited liability partnership, joint venture, association,
trust, non-incorporated organization or any other entity.
1.103. Personal Property.
"Personal Property" shall mean the Tangible Personal Property and the
Intangible Personal Property.
1.104. Plan of Merger.
"Plan of Merger" shall mean the Plan of Merger in substantially the form
attached hereto as Exhibit A.
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1.105. Pricing Period.
"Pricing Period" shall mean the twenty (20) consecutive trading days
immediately preceding the fifth business day prior to the Closing Date, except
that any trading day on which trading of any newly-issued shares of Acquiror
REIT Common Stock (or securities convertible into Acquiror REIT Common Stock)
shall commence on a when-issued basis, shall be excluded from the Pricing Period
and the next earliest trading day shall be substituted therefor.
1.106. Proxy Statement/Prospectus.
"Proxy Statement/Prospectus" shall have the meaning provided in Section
10.7.
1.107. Qualifying Income.
"Qualifying Income" shall have the meaning provided in Section 11.5(a).
1.108. Real Property.
"Real Property" shall mean the Land, the Improvements and the Undeveloped
Land.
1.109. REIT.
"REIT" shall mean a real estate investment trust under Sections 856 through
859 of the Code.
1.110. REIT Merger.
"REIT Merger" shall mean the merger of Target REIT with and into Merger
Sub.
1.111. SEC.
"SEC" shall mean the Securities and Exchange Commission of the United
States.
1.112. SEC Documents.
"SEC Documents" shall mean Acquiror REIT SEC Documents or Target REIT SEC
Documents, as the context indicates.
1.113. Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
1.114. Severance Benefits.
"Severance Benefits" shall mean the payments and benefits for employees of
Target REIT and the Target REIT Subsidiaries as described in Section 10.13.
1.115. Shareholders and Shareholder.
"Shareholders" shall mean, with respect to Acquiror REIT, the holders of
Acquiror REIT Common Stock and, with respect to Target REIT, shall mean holders
of Target REIT Common Stock or Target REIT Preferred Stock, as the context
indicates. A "Shareholder" shall mean one of the Shareholders.
1.116. Stock Purchase Agreement.
"Stock Purchase Agreement" shall have the meaning provided in Section
10.28.
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1.117. Subsidiary.
"Subsidiary" of any Person shall mean any corporation, partnership, limited
liability company, limited liability partnership, joint venture or other legal
entity of which such Person (either directly or through or together with another
Subsidiary of such Person) owns 20% or more of the capital stock or other equity
interests of such corporation, partnership, limited liability company, limited
liability partnership, joint venture or other legal entity.
1.118. Surviving Corporation.
"Surviving Corporation" shall mean Merger Sub following completion of the
REIT Merger.
1.119. Surviving CMBS OP.
"Surviving CMBS OP" shall mean Acquiror CMBS OP following completion of the
CMBS OP Merger.
1.120. Surviving OP.
"Surviving OP" shall mean Acquiror OP following completion of the OP
Merger.
1.121. Takeover Statutes.
"Takeover Statutes" shall have the meaning provided in Section 7.28.
1.122. Tangible Personal Property.
"Tangible Personal Property" shall mean the items of tangible personal
property consisting of all furniture, fixtures, furnishings, machinery,
equipment and other tangible personal property situated on, attached to, or used
in the operation of Target REIT Hotels (including any capital leases of such
personal property), excluding (i) all Franchisor signage used thereon, (ii) the
Inventory owned by Target REIT Lessee or the Target REIT CMBS Lessee, and (iii)
tangible personal property leased pursuant to operating, as opposed to, capital
leases and set forth on Schedule 1.122.
1.123. Target C Corp.
"Target C Corp." shall mean Ridge Lake General Partner, Inc., a Tennessee
corporation.
1.124. Target REIT.
"Target REIT" shall mean RFS Hotels Investors, Inc., a Tennessee
corporation.
1.125. Target REIT Capital Stock.
"Target REIT Capital Stock" shall mean Target REIT Common Stock and Target
REIT Preferred Stock.
1.126. Target REIT Charter.
"Target REIT Charter" shall mean the Charter of Target REIT, as amended and
restated as of the date hereof.
1.127. Target REIT CMBS Lessee.
"Target REIT CMBS Lessee" shall mean, collectively, the parties described
in Schedule 1.133 as the lessee of the Target REIT Hotels described on Schedule
7.38 and owned by Contributor CMBS OP.
1.128. Target REIT Common Stock.
"Target REIT Common Stock" shall mean the common stock of Target REIT, par
value $.01 per share.
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1.129. Target REIT Employee Benefit Plans.
"Target REIT Employee Benefit Plans" shall mean the employee benefit plans
of Target REIT described on Schedule 7.10.
1.130. Target REIT Employment Agreements.
"Target REIT Employment Agreements" shall mean the employment agreements
described on Schedule 1.130.
1.131. Target REIT Hotels.
"Target REIT Hotels" shall mean all of the hotel properties owned by
Contributor OP, Contributor CMBS OP or the other Target REIT Subsidiaries as of
the date hereof, as set forth on Schedule 1.131.
1.132. Target REIT Leases.
"Target REIT Leases" shall mean the lease agreements with respect to the
operation of the Target REIT Hotels leased to third parties, as described in
Schedule 1.132.
1.133. Target REIT Lessee.
"Target REIT Lessee" shall mean, collectively, the parties described in
Schedule 1.133 as the lessee of the Target REIT Hotels described on Schedule
7.38 and owned by Contributor OP.
1.134. Target REIT Material Adverse Effect.
"Target REIT Material Adverse Effect" shall mean a Material Adverse Effect
with respect to Target REIT and the Target REIT Subsidiaries taken as a whole.
1.135. Target REIT Options.
"Target REIT Options" shall mean the outstanding option grants to acquire
shares of Target REIT Common Stock described in Schedule 4.3.
1.136. Target REIT Preferred Stock.
"Target REIT Preferred Stock" shall mean the Series A Preferred Stock of
Target REIT, $.01 par value per share.
1.137. Target REIT Restricted Stock Grants.
"Target REIT Restricted Stock Grants" shall mean the grants of shares of
Target REIT Common Stock which are subject to vesting as described on Schedule
1.137.
1.138. Target REIT SEC Documents.
"Target REIT SEC Documents" shall mean all registration statements,
reports, proxy statements and information statements filed by Target REIT with
the SEC since the effective date of Target REIT's initial registration statement
on Form S-11.
1.139. Target REIT Subsidiaries.
"Target REIT Subsidiaries" shall mean the Subsidiaries of Target REIT set
forth on Schedule 7.7, including, without limitation, Contributor OP and
Contributor CMBS OP.
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1.140. Tax Return.
"Tax Return" shall mean any report, return, information statement, payee
statement or other information required to be provided to any federal, state,
local or foreign governmental authority with respect to Taxes.
1.141. Taxes.
"Taxes" shall mean any and all taxes, levies, impositions, duties,
assessments, charges and withholdings imposed or required to be collected by or
paid over to any federal, state, local or foreign governmental authority or any
political subdivision thereof, including without limitation income, gross
receipts, ad valorem, value added, minimum, franchise, sales, use, excise,
license, real or personal property, unemployment, disability, stock transfer,
mortgage recording, estimated, withholding or other tax, governmental fee or
other like assessment or charge of any kind whatsoever, and including any
interest, penalties, fines, assessments or additions to tax imposed in respect
of the foregoing, or in respect of any failure to comply with any requirement
regarding Tax Returns.
1.142. Tennessee Act.
"Tennessee Act" shall mean the Tennessee Business Corporation Act.
1.143. Title Company.
"Title Company" shall mean Lawyers Title Insurance Company.
1.144. Transferred Assets.
"Transferred Assets" shall mean collectively the Real Property, the
Tangible Personal Property, the Intangible Personal Property and the Interests.
1.145. TRULPA.
"TRULPA" shall mean the Tennessee Revised Uniform Limited Partnership Act.
1.146. Undeveloped Land.
"Undeveloped Land" shall mean those certain unimproved parcels of real
estate listed on Schedule 1.146 attached hereto, together with all easements,
rights, privileges, remainders, reversions and appurtenances thereunto belonging
or in any way appertaining, and all of the estate, right, title, interest, claim
or demand whatsoever of Contributor OP, Contributor CMBS OP or any other Target
REIT Subsidiary, as applicable, therein, in the streets and ways adjacent
thereto and in the beds thereof, either at law or in equity, in possession or
expectancy, now or hereafter acquired.
1.147. Unit Certificates.
"Unit Certificates" shall have the meaning provided in Section 5.5(a).
1.148. Utilities.
"Utilities" shall mean public sanitary and storm sewers, natural gas,
telephone, public water facilities, electrical facilities and all other utility
facilities and services necessary for the operation and occupancy of a property
as a hotel.
1.149. Welfare Plans.
"Welfare Plans" shall mean those Employee Benefit Plans that are employee
welfare benefit plans under section 3(1) of ERISA.
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ARTICLE II
ASSET SALE AGREEMENT
2.1. Sale and Purchase
Subject to the terms and conditions set forth in this Agreement, effective
as of the Closing Date, Contributor OP agrees to, and Target REIT agrees to
cause Contributor CMBS OP to, sell, and Acquiror OP agrees to, and Acquiror REIT
agrees to cause Acquiror CMBS OP to, purchase, the Transferred Assets, subject
to the Assumed Liabilities, in the manner, on the terms and subject to the
conditions and covenants set forth herein (collectively, the "Asset Sale").
2.2. Effectuation of the Asset Sale.
Subject to the terms and conditions set forth in this Agreement, the
parties hereto agree that the Asset Sale shall be effectuated by the OP Merger
provided for in Article V and the CMBS OP Merger provided for in Article VI.
2.3. OP Partner Approvals.
Target REIT shall obtain the requisite approval of the partners of
Contributor OP to the OP Merger and any other transactions contemplated by this
Agreement, to the extent required by the Contributor OP Partnership Agreement or
the TRULPA (collectively, the "Contributor OP Partner Approvals"). Acquiror REIT
shall obtain the requisite approval of the partners of Acquiror OP to the OP
Merger and any other transactions contemplated by the Agreement, to the extent
required by the Acquiror OP Partnership Agreement or the TRULPA (collectively,
the "Acquiror OP Partner Approvals," and together with the Contributor OP
Partner Approvals, the "OP Partner Approvals").
2.4. CMBS OP Partner Approvals.
Target REIT shall obtain the requisite approval of the partners of
Contributor CMBS OP to the CMBS OP Merger and the other transactions
contemplated by this Agreement, to the extent required by the Contributor CMBS
OP Partnership Agreement or the TRULPA (collectively, the "Contributor CMBS OP
Partner Approvals"). Acquiror REIT shall obtain the requisite approval of the
partners of Acquiror CMBS OP to the CMBS OP Merger and the other transactions
contemplated by this Agreement, to the extent required by the Acquiror CMBS OP
Partnership Agreement or the TRULPA (collectively, the "Acquiror CMBS Partner
Approvals," and together with the Contributor CMBS Partner Approvals, the "CMBS
OP Partner Approvals").
2.5. Acquiror OP Partnership Agreement.
Effective as of the Effective Time, Acquiror OP and Acquiror REIT shall
cause the Acquiror OP Partnership Agreement to be amended and restated in the
form of Exhibit B hereto (the "Amended and Restated Acquiror OP Partnership
Agreement"). The Acquiror OP Limited Units delivered to the limited partners of
Contributor OP as a result of the OP Merger shall have the characteristics
described in such Amended and Restated Acquiror OP Partnership Agreement.
2.6. Contributor OP's and Contributor CMBS OP's Deliveries.
At the Closing, but prior to the Effective Time, if requested by Acquiror
REIT to further evidence the Asset Sale being consummated by the OP Merger and
the CMBS OP Merger, Contributor OP shall, and Target REIT and Contributor OP
shall cause Contributor CMBS OP to, deliver, or cause to be delivered, to
Acquiror OP or Acquiror CMBS OP, as applicable, all of the following instruments
and documents, each of
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which shall have been duly executed by Contributor OP, Contributor CMBS OP, or
other appropriate party, and, where applicable, acknowledged on behalf of such
parties, and shall be dated as of the Closing Date:
(a) The Deeds.
(b) The Bill of Sale (Inventory).
(c) The Bill of Sale (Personal Property).
(d) Such agreements, affidavits or other documents as may be
reasonably required by the Title Company to issue new owner's title
insurance policies for the Target REIT Hotels, or endorsements to all such
existing owner's title policies, together with an assignment of the
existing owner's title insurance policies consented to by the Title Company
(all subject only to the Permitted Title Exceptions).
(e) The FIRPTA Certificate.
(f) True, correct and complete copies of all warranties, if any, or if
locatable, of contractors, builders, roofers, architects, manufacturers,
suppliers and installers possessed by Contributor OP or Contributor CMBS OP
and relating to the Improvements and the Personal Property, or any part
thereof.
(g) All current real estate and personal property tax bills in
Contributor OP's or Contributor CMBS OP's possession or under their
control.
2.7. Target REIT Lease Termination.
Effective as of the Closing Date, but immediately prior to the Effective
Time, upon written notice from Acquiror REIT to Target REIT not less than thirty
(30) days prior to the Closing Date, Target REIT shall cause the Target REIT
Subsidiaries to terminate the Target REIT Leases described on Schedule 7.38
effective upon payment to the Target REIT Lessee or Target REIT CMBS Lessee, as
applicable, of the amounts set forth on Schedule 7.38 at the Closing.
2.8. Schedules and Exhibits.
Each of Target REIT and Acquiror REIT shall deliver any Schedules or
Exhibits described in this Agreement for which they are responsible but which
are not attached hereto at the date hereof within ten (10) business days
following the date of this Agreement. If such Schedules are not delivered by
such date or if either Target REIT or Acquiror REIT reasonably determines that
information contained in such Schedules discloses matters which could reasonably
be expected to have an Acquiror REIT Material Adverse Effect or a Target REIT
Material Adverse Effect, respectively, Target REIT or Acquiror REIT may elect to
terminate this Agreement after such date or the receipt of such Schedules by
written notice delivered to the other within fifteen (15) business days
following the date of this Agreement in accordance with Section 11.1. Failure to
so deliver such notice within such 15 day period shall constitute an irrevocable
waiver of such termination rights.
ARTICLE III
THE REIT MERGER
3.1. The REIT Merger.
Subject to the terms and conditions of this Agreement and the Plan of
Merger, at the Effective Time, Target REIT shall be merged with and into Merger
Sub in accordance with the provisions of, and with the effects provided in,
Sections 48-21-102, 48-21-104, 48-21-107 and 48-21-108 of the Tennessee Act and
in accordance with the Plan of Merger. Merger Sub shall be the Surviving
Corporation resulting from the REIT Merger and shall continue to be governed by
the laws of the State of Tennessee. The Plan of Merger provides for the terms
and conditions of the REIT Merger, which terms and conditions are incorporated
herein and made a part of this Agreement by reference.
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3.2. Closing.
Subject to the terms and conditions of this Agreement, the Closing shall
take place at the offices of Baker, Donelson, Bearman & Caldwell, 21st Floor,
First Tennessee Building, 165 Madison, Memphis, TN 38103, or such other location
as Acquiror REIT and Target REIT may agree, commencing at 9:00 a.m. local time
on the Closing Date. Subject to the provisions of Article XI, failure to
consummate the Closing on the date provided in this Section 3.2 will not result
in a termination of this Agreement and will not relieve any party of any
obligation under this Agreement.
3.3. Effective Time.
If all of the conditions set forth in Article IX have been fulfilled or
waived, the parties hereto shall cause, with respect to the REIT Merger,
articles of merger or other appropriate documents (the "Articles of Merger")
satisfying the requirements of the Tennessee Act, to be properly executed,
verified and delivered for filing with the Secretary of State of the State of
Tennessee in accordance with the Tennessee Act, on or before the Closing Date.
The REIT Merger shall become effective at the Effective Time. The parties hereto
shall cause the Effective Time to occur on the Closing Date.
3.4. Effect of the REIT Merger.
The REIT Merger shall have the effects specified in Section 48-21-108 of
the Tennessee Act.
3.5. Charter and Bylaws.
The Charter of Merger Sub as in effect immediately prior to the Effective
Time shall be the Charter of the Surviving Corporation, until duly amended in
accordance with applicable law. The Bylaws of Merger Sub as in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation, until duly amended in accordance with applicable law.
3.6. Officers and Directors.
The directors of Merger Sub in office immediately prior to the Effective
Time shall be the directors of the Surviving Corporation until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified as provided in the Bylaws of the Surviving Corporation, as
the case may be. The officers of Merger Sub in office immediately prior to the
Effective Time shall be the officers of the Surviving Corporation until the
earlier of their resignation or removal.
3.7. Employees.
At or before the Closing, Target REIT and the Target REIT Subsidiaries will
terminate the employment of all their employees, and shall satisfy all
compensation, vacation pay, sick pay and other obligations under the Worker
Adjustment, Retraining and Notification Act, and, subject to the provisions of
Section 10.13, shall pay or make provision for the Severance Benefits. Neither
Acquiror REIT nor any Acquiror REIT Subsidiary shall have any obligation to
employ former Target REIT or Target REIT Subsidiary employees but may, in their
sole discretion, offer employment to such employees on terms and conditions
established by them. Neither Target REIT nor Contributor OP makes any
representation or warranty as to whether such employees shall accept employment
with Acquiror REIT or any Acquiror REIT Subsidiary.
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ARTICLE IV
EFFECT OF REIT MERGER ON CAPITALIZATION; EXCHANGE OF CERTIFICATES
4.1. Effect on Capitalization.
By virtue of the REIT Merger and except as otherwise provided herein or in
the Plan of Merger, without any action on the part of the holder of any shares
of Target REIT Capital Stock or the holder of any shares of Acquiror REIT Common
Stock:
(a) Cancellation of Treasury Stock. As of the Effective Time, any
shares of Target REIT Capital Stock that are owned by Target REIT or any
Target REIT Subsidiary shall automatically be canceled and retired and all
rights with respect thereto shall cease to exist, and no consideration
shall be delivered in exchange therefor.
(b) Conversion of Target REIT Common Stock and Target REIT Preferred
Stock. As of the Effective Time, each issued and outstanding share of
Target REIT Common Stock and each issued and outstanding share of Target
REIT Preferred Stock (other than any shares canceled in accordance with
Section 4.1(a)) shall be converted into the right to receive from Acquiror
REIT a number of fully paid and nonassessable shares of Acquiror REIT
Common Stock determined as follows (the "Exchange Ratio"):
(i) if the Average Price is equal to or greater than $14.00
but less than or equal to $17.00, 1.5 shares of Acquiror REIT Common
Stock; or
(ii) if the Average Price is greater than $17.00, the number
of shares of Acquiror REIT Common Stock determined by dividing $25.50 by
the Average Price.
The Exchange Ratio and the Average Price shall be adjusted to reflect fully
the effect of any stock split, reverse stock split, stock dividend
(including any dividend or distribution of securities convertible into
Acquiror REIT Common Stock or Target REIT Capital Stock), reorganization,
recapitalization or other like change with respect to Acquiror REIT Common
Stock or Target REIT Capital Stock occurring after the date hereof and
prior to the Effective Time.
(c) Right of Termination. If the Average Price is less than $14.00,
either of Target REIT or Acquiror REIT may terminate this Agreement in
accordance with the provisions of Section 11.2.
(d) Cancellation of Target REIT Capital Stock. As of the Effective
Time, all shares of Target REIT Capital Stock shall no longer be
outstanding and shall automatically be canceled and retired and all rights
with respect thereto shall cease to exist, and each holder of a certificate
representing any such shares of Target REIT Common Stock or Target REIT
Preferred Stock shall cease to have any rights with respect thereto, except
the right to receive, upon surrender of such certificate in accordance with
Section 4.2(c), certificates representing Acquiror REIT Common Stock
required to be delivered by Acquiror REIT pursuant to this Section 4.1(d)
and any cash in lieu of fractional shares of Acquiror REIT Common Stock to
be issued or paid in consideration therefor upon surrender of such
certificate (the "Merger Consideration") as set forth in Section 4.2(g),
and any dividends or other distributions to which such holder is entitled
pursuant to Section 4.2(d), in each case without interest and less any
required withholding taxes.
(e) Acquiror REIT Common Stock. As of the Effective Time, each share
of Acquiror REIT Common Stock issued and outstanding immediately prior to
the Effective Time shall remain issued and outstanding and shall represent
one validly issued, fully paid and nonassessable share of Acquiror REIT
Common Stock.
(f) Shares of Merger Sub. As of the Effective Time, each share of
common stock, par value $.01 per share, of Merger Sub issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and shall represent one share of common stock, par value $.01
per share, of the Surviving Corporation.
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4.2. Exchange of Certificates.
(a) Exchange Agent. Prior to the Closing, Acquiror REIT shall appoint, or
shall cause to be appointed, SunTrust Bank or another bank or trust company to
act as exchange agent (the "Exchange Agent") for the exchange of the Merger
Consideration upon surrender of certificates representing issued and outstanding
shares of Target REIT Common Stock and Target REIT Preferred Stock.
(b) Acquiror REIT to Provide Merger Consideration. Acquiror REIT shall
provide, or shall cause to be provided, to the Exchange Agent on or prior to the
Closing certificates representing the shares of Acquiror REIT Common Stock into
which the Target REIT Capital Stock shall be converted pursuant to Section
4.1(b) and the cash payable in respect of fractional shares pursuant to Section
4.2(g).
(c) Exchange Procedure. As soon as reasonably practicable after the
Closing, the Exchange Agent shall mail to each holder of record of a certificate
or certificates which immediately prior to the Effective Time represented
outstanding shares of Target REIT Capital Stock (the "Certificates"), whose
shares were converted into the right to receive the Merger Consideration
pursuant to Section 4.1, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in a form and have such other provisions as Acquiror REIT reasonably specifies)
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Acquiror REIT, together with such letter of transmittal, duly
executed, and such other documents as may reasonably be required by the Exchange
Agent, the holder of such Certificate shall be entitled to receive in exchange
therefor the Merger Consideration into which the shares of Target REIT Capital
Stock theretofore represented by such Certificate shall have been converted
pursuant to Section 4.1(b) and all dividends or other distributions to which
such holder is entitled pursuant to Section 4.2(d), and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of ownership
of shares of Target REIT Capital Stock which is not registered in the transfer
records of Target REIT, payment may be made to a Person other than the Person in
whose name the Certificate so surrendered is registered only if such certificate
shall be properly endorsed or otherwise be in proper form for transfer and the
Person requesting such payment either shall pay any transfer or other taxes
required by reason of such payment being made to a Person other than the
registered holder of such Certificate or establish to the satisfaction of
Acquiror REIT that such tax or taxes have been paid or are not applicable. Until
surrender as contemplated by this Section 4.2, each Certificate shall be deemed
at any time after the Effective Time to represent only the right to receive upon
such surrender the Merger Consideration, without interest, into which the shares
of Target REIT Capital Stock theretofore represented by such Certificate shall
have been converted pursuant to Section 4.1, and all dividends or other
distributions to which such holder is entitled pursuant to Section 4.2(d). No
interest will be paid or will accrue on the Merger Consideration upon the
surrender of any Certificate or on any cash payable pursuant to Section 4.2(d)
or Section 4.2(g).
In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen or destroyed and, if required by Acquiror REIT or
the Exchange Agent, the posting by such Person of a bond in such reasonable
amount as Acquiror REIT may direct as indemnity against any claim that may be
made against it with respect to such Certificate, the Exchange Agent or Acquiror
REIT will issue with respect to such lost, stolen or destroyed Certificate the
shares of Acquiror REIT Common Stock and cash in lieu of fractional shares and
unpaid dividends and Final Target REIT Dividend as provided in Section 4.2(d)
deliverable in respect thereof pursuant to this Agreement.
(d) Record Dates for Final Dividends; Distributions with Respect to
Unexchanged Shares. To the extent necessary to satisfy the requirements of
Section 857(a)(1) of the Code for the taxable year of Target REIT ending at the
Closing Date (and to avoid the payment of tax with respect to undistributed
income), Target REIT shall declare a dividend (the "Final Target REIT Dividend")
to each holder of shares of Target REIT Common Stock and, if necessary, Target
REIT Preferred Stock, the record date for which shall be approximately 5
business days prior to the Closing Date, in an amount equal to the minimum
dividend
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sufficient (taking into account expected revenue and expenses through the day
prior to the Closing Date) to permit Target REIT to satisfy such requirements.
If Target REIT determines it necessary to declare the Final Target REIT
Dividend, it shall notify Acquiror REIT at least 10 days prior to the date for
the Target REIT shareholders' meeting described in Section 10.3, and Acquiror
REIT shall declare a dividend per share to holders of Acquiror REIT Common
Stock, the record date for which shall be approximately 5 business days prior to
the Closing Date, in an amount per share of Acquiror REIT Common Stock equal to
the quotient obtained by dividing (x) the Final Target REIT Dividend per share
of Target REIT Common Stock paid by Target REIT by (y) the Exchange Ratio. The
dividends payable hereunder to holders of Target REIT Common Stock, Target REIT
Preferred Stock (if necessary) and Acquiror REIT Common Stock shall be paid on
the close of business on the last business day prior to the Closing Date.
(e) No Further Ownership Rights in Shares of Target REIT Capital
Stock. All Merger Consideration paid upon the surrender of Certificates in
accordance with the terms of this Section 4.2 (including any cash paid pursuant
to Section 4.2(g)) shall be deemed to have been paid in full satisfaction of all
rights pertaining to the shares of Target REIT Capital Stock theretofore
represented by such Certificates, and at and after the Effective Time there
shall be no further registration of transfers on the stock transfer books of
Target REIT of the shares of Target REIT Capital Stock which were outstanding
immediately prior to the Effective Time.
(f) No Liability. None of Acquiror REIT, Merger Sub, Target REIT or the
Exchange Agent shall be liable to any Person in respect of any consideration or
dividends delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. Any portion of the Merger Consideration
delivered to the Exchange Agent pursuant to this Agreement that remains
unclaimed for one year after the Closing shall be redelivered by the Exchange
Agent to Acquiror REIT, upon demand, and any holders of Certificates who have
not theretofore complied with Section 4.2(c) shall thereafter look only to
Acquiror REIT for delivery of the Merger Consideration and any unpaid dividends,
subject to applicable escheat and other similar laws.
(g) No Fractional Shares. No certificates or scrip representing fractional
shares of Acquiror REIT Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote, to receive dividends or to any other rights of a
Shareholder of Acquiror REIT. In lieu of the issuance of any fractional shares
of Acquiror REIT Common Stock, cash payments will be made by Acquiror REIT to
the Exchange Agent for payment to holders in respect of any fractional shares of
Acquiror REIT Common Stock that otherwise would be issuable in an amount equal
to such fractional part of a share of Acquiror REIT Common Stock multiplied by
the Average Price.
(h) Withholding Rights. Acquiror REIT, Target REIT or the Exchange Agent
shall be entitled to deduct and withhold from the Merger Consideration otherwise
payable pursuant to this Agreement to any holder of shares of Target REIT
Capital Stock such amounts as Acquiror REIT, Target REIT or the Exchange Agent
is required to deduct and withhold with respect to the making of such payment
under the Code, or any provision of state, local or foreign tax law. To the
extent that such amounts are so withheld by Acquiror REIT, Target REIT or the
Exchange Agent, such withheld amount shall be treated for all purpose of this
Agreement as having been paid to the Shareholder of Target REIT in respect of
which such deduction and withholding was made by Acquiror REIT, Target REIT or
the Exchange Agent.
(i) No Appraisal Rights. The holders of Target REIT Capital Stock are not
entitled under applicable law to appraisal rights as a result of the REIT
Merger.
4.3. Target REIT Options.
At or prior to the Effective Time, holders of the currently exercisable
Target REIT Options described on Schedule 4.3 which have not been exercised as
of the Effective Time, including any unvested Target REIT Options with respect
to which vesting accelerates as a result of the transactions contemplated by
this Agreement as described in Schedule 4.3, may elect to either (i) exchange
such Target REIT Options for fully vested options to acquire a number of shares
of Acquiror REIT Common Stock equal to (x) the number of shares of Target REIT
Common Stock subject to such Target REIT Options multiplied by (y) the Exchange
Ratio with an option exercise price per share of Acquiror REIT Common Stock
equal to (A) the exercise price for the Target REIT Options divided by (B) the
Exchange Ratio (rounding to the nearest cent); or
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(ii) sell all of the Target REIT Options outstanding as of the Effective Time,
including any unvested Target REIT Options with respect to which vesting
accelerates as a result of the transactions contemplated hereby, for a cash
amount equal to (a) the number of shares of Target REIT Common Stock subject to
such Target REIT Options multiplied by (b) the difference between the exercise
price of each Target REIT Option and an amount equal to the Exchange Ratio
multiplied by the Average Price. Any options issued pursuant to clause (i) above
shall expire on the expiration date of the Target REIT Options for which they
are exchanged, disregarding any termination of employment resulting from, or
related to, Acquiror REIT's acquisition of Target REIT and its Subsidiaries
pursuant to this Agreement. Notwithstanding the provisions of clause (i) above,
Acquiror REIT shall not be obligated to issue any fraction of a share of
Acquiror REIT Common Stock upon exercise of such new options to acquire Acquiror
REIT Common Stock and any fraction of a share of Acquiror REIT Common Stock that
otherwise would be subject to such new options shall represent the right to
receive a cash payment upon exercise of such new option equal to the product of
such fraction and the difference between the market value of one share of
Acquiror REIT Common Stock at the time of exercise of such new option and the
per share exercise price of such new option. The market value of one share of
Acquiror REIT Common Stock at the time of exercise of such new option shall be
the last sale price of Acquiror REIT Common Stock on the NYSE (as reported by
The Wall Street Journal or, if not reported thereby, any other authoritative
source selected by Acquiror REIT) on the last trading day preceding the date of
exercise. In addition, notwithstanding clause (i) above, each Target REIT Option
which is an "incentive stock option" shall be adjusted as required by Section
424 of the Code, so as not to constitute a modification, extension or renewal of
the option, within the meaning of Section 424(h) of the Code. Acquiror REIT
agrees to take all necessary steps to effectuate the foregoing provisions of
this Section 4.3. As soon as practicable after the Effective Time, Acquiror REIT
shall deliver to the holders of the Target REIT Options who elect to exchange
their Target REIT Options as provided in clause (i) above an appropriate notice
setting forth such holder's rights pursuant to this Section 4.3. At or prior to
the Effective Time, Acquiror REIT shall take all corporate action necessary to
reserve for issuance sufficient number of shares of Acquiror REIT Common Stock
for delivery upon exercise of the new options provided for in this Section 4.3.
Nothing herein shall preclude any holder of Target REIT Options from exercising
any Target REIT Options which are currently vested or which vest by their terms
prior to the Effective Time, including those which vest as a result of the
transactions contemplated hereby. From and after the date of this Agreement, no
additional options shall be granted by Target REIT.
ARTICLE V
THE OP MERGER
5.1. The OP Merger.
(a) Subject to the terms and conditions of this Agreement, at the Effective
Time, and for the purpose of effecting the Asset Sale with respect to the
Transferred Assets owned by Contributor OP, Contributor OP shall be merged with
and into Acquiror OP in accordance with the provisions of, and with the effects
provided in, Section 61-2-211 of the TRULPA and in accordance with the
provisions of this Article V. Acquiror OP shall be the Surviving OP resulting
from the OP Merger and shall continue to be governed by the laws of the State of
Tennessee.
(b) If all of the conditions set forth in Article IX have been fulfilled or
waived, the parties hereto shall cause, with respect to the OP Merger, a
certificate of merger or other appropriate documents satisfying the requirements
of the TRULPA, to be properly executed, verified and delivered for filing with
the Secretary of State of the State of Tennessee in accordance with the TRULPA,
on or before the Closing Date. The OP Merger shall become effective at the
Effective Time.
(c) The sole general partner of the Surviving OP shall be Equity Inns
Trust, and the limited partners of the Surviving OP shall be all Persons who are
now or who hereafter are admitted to either Contributor OP or Acquiror OP as
limited partners.
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5.2. Effect of the OP Merger.
The OP Merger shall have the effects specified in Section 61-2-211(f) of
the TRULPA.
5.3. Certificate of Limited Partnership and Partnership Agreement.
The Certificate of Limited Partnership of Acquiror OP as in effect
immediately prior to the Effective Time shall be the Certificate of Limited
Partnership of the Surviving OP, until duly amended in accordance with
applicable law. The Acquiror OP Partnership Agreement of Acquiror OP as in
effect immediately prior to the Effective Time shall be the partnership
agreement of the Surviving OP, until duly amended in accordance with applicable
law.
5.4. Effect on Partnership Interests.
By virtue of the OP Merger and except as otherwise provided herein, without
any action on the part of the holder of any units of partnership interest of
Contributor OP or the holder of any units of partnership interest of Acquiror
OP:
(a) Conversion of Contributor OP Units. As of the Effective Time, (i)
each issued and outstanding Contributor OP Unit held by Target REIT,
including preferred units of partnership interest, shall be converted into
the right to receive from Acquiror OP a number of validly issued, fully
paid and nonassessable Acquiror OP General Units equal to the Exchange
Ratio, and (ii) each issued and outstanding Contributor OP Unit held by
limited partners of Contributor OP shall be converted into the right to
receive from Acquiror OP a number of fully paid and nonassessable Acquiror
OP Limited Units equal to the Exchange Ratio. Neither Acquiror OP nor
Contributor OP shall effect any reorganization, recapitalization or other
like change with respect to Acquiror OP Units or Contributor OP Units after
the date hereof and prior to the Effective Time.
(b) Cancellation of Contributor OP Units. As of the Effective Time,
all Contributor OP Units shall no longer be outstanding and shall
automatically be canceled and retired and all rights with respect thereto
shall cease to exist, and each holder of any certificate representing any
such units of Contributor OP shall cease to have any rights with respect
thereto, except the right to receive, upon surrender of such certificate in
accordance with Section 5.5(a) and delivery of such documents as may be
reasonably required by Acquiror OP, certificates representing Acquiror OP
Units required to be issued by Acquiror OP pursuant to Section 5.4(a) and
any cash in lieu of fractional Acquiror OP Units paid by Acquiror OP
pursuant to Section 5.5(f) (the "OP Merger Consideration"), without
interest and less any required withholding taxes.
(c) Acquiror OP Units. As of the Effective Time, each Acquiror OP
Limited Unit and Acquiror OP General Unit, respectively, issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and shall represent one validly issued, fully paid and
nonassessable Acquiror OP Limited Unit and Acquiror OP General Unit,
respectively.
5.5. Exchange of Certificates.
(a) Exchange Procedure. As soon as reasonably practicable after the
Closing, Acquiror OP shall mail to each limited partner of record of Contributor
OP, whose Contributor OP Units were converted into the right to receive the OP
Merger Consideration pursuant to Section 5.4, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to any
certificates representing Contributor OP Units ("Unit Certificates") shall pass,
only upon delivery of the Unit Certificates to Acquiror OP and shall be in a
form and have such other provisions as Acquiror OP reasonably specifies) and
(ii) instructions for use in effecting the surrender of any Unit Certificates in
exchange for the OP Merger Consideration. Upon surrender of a Unit Certificate
for cancellation to Acquiror OP or to such other agent or agents as may be
appointed by Acquiror OP, together with such letter of transmittal, duly
executed, and such other documents as may reasonably be required by Acquiror OP,
the holder of such Unit Certificate shall be entitled to receive in exchange
therefor the OP Merger Consideration into which the Contributor OP Units
theretofore represented
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by such Unit Certificate shall have been converted pursuant to Section 5.4 (a)
and all distributions to which such holder is entitled and the Unit Certificate
so surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Contributor OP Units which is not registered in the transfer
records of Contributor OP, payment may be made to a Person other than the Person
in whose name the Unit Certificate so surrendered is registered only if such
certificate shall be properly endorsed or otherwise be in proper form for
transfer and the Person requesting such payment either shall pay any transfer or
other taxes required by reason of such payment being made to a Person other than
the registered holder of such Unit Certificate or establish to the satisfaction
of Acquiror OP that such tax or taxes have been paid or are not applicable.
Until surrender as contemplated by this Section 5.5(a), each Unit Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive upon such surrender the OP Merger Consideration, without interest,
into which the Contributor OP Units theretofore represented by such Unit
Certificate shall have been converted pursuant to Section 5.4, and all
distributions to which such holder is entitled. No interest will be paid or will
accrue on the OP Merger Consideration upon the surrender of any Unit
Certificate. In the event any Unit Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such Unit Certificate to be lost, stolen or destroyed and, if required by
Acquiror OP, the posting by such Person of a bond in such reasonable amount as
Acquiror OP may direct as indemnity against any claim that may be made against
it with respect to such Unit Certificate, Acquiror OP will issue with respect to
such lost, stolen or destroyed Unit Certificate the Acquiror OP Units and cash
in lieu of fractional units deliverable in respect thereof pursuant to this
Agreement. The certificates evidencing the Acquiror OP Units will bear
appropriate legends indicating (A) that the Acquiror OP Units have not been
registered under the Securities Act, and (B) that the Acquiror OP Partnership
Agreement restricts the transfer of the Acquiror OP Units.
(b) No Further Ownership Rights in Contributor OP Units. All OP Merger
Consideration paid upon the surrender of Unit Certificates in accordance with
the terms of this Section 5.5 shall be deemed to have been paid in full
satisfaction of all rights pertaining to the Contributor OP Units theretofore
represented by such Unit Certificates, and at and after the Effective Time there
shall be no further registration of transfers on the unit transfer books of
Contributor OP of Contributor OP Units which were outstanding immediately prior
to the Effective Time.
(c) No Liability. Neither Contributor OP nor Acquiror OP shall be liable
to any Person in respect of any consideration delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(d) Withholding Rights. Acquiror OP or Contributor OP shall be entitled to
deduct and withhold from the OP Merger Consideration otherwise payable pursuant
to this Agreement to any holder of Contributor OP Units such amounts as Acquiror
OP or Target OP is required to deduct and withhold with respect to the making of
such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that such amounts are so withheld by Acquiror OP or Target
OP, such withheld amount shall be treated for all purpose of this Agreement as
having been paid to the partner of Acquiror OP in respect of which such
deduction and withholding was made by Acquiror OP or Target OP.
(e) No Appraisal Rights. The holders of Contributor OP Units are not
entitled under applicable law to appraisal rights as a result of the OP Merger.
(f) No Fractional Units. No fractional Acquiror OP Units shall be issued
in connection with the OP Merger, and such fractional unit interests will not
entitle the owner thereof to vote, to receive distributions or any other rights
of a partner of Acquiror OP. In lieu of the issuance of any fractional Acquiror
OP Units, upon surrender for exchange of Unit Certificates, cash payments will
be made by Acquiror OP to such owners in respect of any fractional Acquiror OP
Units that otherwise would be issuable in an amount equal to such fractional
part of an Acquiror OP Unit multiplied by the Average Price.
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ARTICLE VI
THE CMBS OP MERGER
6.1. The CMBS OP Merger; CMBS Agreement of Merger.
(a) Subject to the terms and conditions of this Agreement, at the Effective
Time, and for the purpose of effecting the Asset Sale with respect to the
Transferred Assets owned by Contributor CMBS OP, Contributor CMBS OP shall be
merged with and into Acquiror CMBS OP in accordance with the provisions of, and
with the effects provided in, Section 61-2-211 of the TRULPA and in accordance
with the provisions of this Article VI and an agreement of merger between
Contributor CMBS OP and Acquisition CMBS OP that Target REIT and Acquiror REIT
shall cause to be entered into prior to the Closing Date, and which will contain
terms and conditions consistent with this Article VI (the "CMBS Agreement of
Merger"). Acquiror CMBS OP shall be the Surviving CMBS OP resulting from the
CMBS OP Merger and shall continue to be governed by the laws of the State of
Tennessee.
(b) If all of the conditions set forth in Article IX have been fulfilled or
waived, the parties hereto shall cause, with respect to the CMBS OP Merger, a
certificate of merger or other appropriate documents satisfying the requirements
of the TRULPA, to be properly executed, verified and delivered for filing with
the Secretary of State of the State of Tennessee in accordance with the TRULPA,
on or before the Closing Date. The CMBS OP Merger shall become effective at the
Effective Time.
6.2. Effect of the CMBS OP Merger.
The CMBS OP Merger shall have the effects specified in Section 61-2-211(f)
of the TRULPA.
6.3. Certificate of Limited Partnership and Partnership Agreement.
The Certificate of Limited Partnership of Acquiror CMBS OP as in effect
immediately prior to the Effective Time shall be the Certificate of Limited
Partnership of the Surviving CMBS OP, until duly amended in accordance with
applicable law. The Acquiror CMBS OP Partnership Agreement of Acquiror CMBS OP
as in effect immediately prior to the Effective Time shall be the partnership
agreement of the Surviving CMBS OP, until duly amended in accordance with
applicable law.
6.4. Effect on Partnership Interests.
By virtue of the CMBS OP Merger and except as otherwise provided herein,
without any action on the part of the holder of any units of partnership
interest of Contributor CMBS OP or the holder of any units of partnership
interest of Acquiror CMBS OP, as of the Effective Time, each issued and
outstanding unit of partnership interest in Contributor CMBS OP shall be
converted into the right to receive from Acquiror CMBS OP a number of validly
issued, fully paid and nonassessable units of partnership interest in Acquiror
CMBS OP, as set forth in the CMBS Agreement of Merger (the "CMBS OP Merger
Consideration").
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF
CONTRIBUTOR OP AND TARGET REIT
Contributor OP and Target REIT hereby represent and warrant, jointly and
severally, to Acquiror OP, Acquiror REIT and Merger Sub that:
7.1. Organization.
(a) Target REIT is a corporation duly organized, validly existing and in
good standing under the laws of the State of Tennessee and is duly qualified as
a foreign corporation to do business in, and is in good standing under the laws
of, each jurisdiction in which the failure to qualify would have a Target REIT
Material
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Adverse Effect. Target REIT has the power and authority to carry on its business
as it is now being conducted and to own or lease its assets.
(b) Each of the Target REIT Subsidiaries is a corporation or limited
partnership, as indicated on Schedule 7.7, duly organized, validly existing and
in good standing under the laws of the state of its formation and is duly
qualified as a foreign entity to do business in, and is in good standing under
the laws of, each jurisdiction in which the failure to qualify would have a
Target REIT Material Adverse Effect. Each of the Target REIT Subsidiaries has
the power and authority to carry on its business as it is now being conducted
and to own or lease its assets.
(c) The copies of the Organizational Documents of Contributor OP and Target
REIT, which have heretofore been made available to Acquiror REIT, are true,
complete and correct copies of the Organizational Documents of Contributor OP
and Target REIT, as amended and in effect on the date hereof.
(d) The copies of the Organizational Documents of the Target REIT
Subsidiaries, which have heretofore been made available to Acquiror REIT, are
true, complete and correct copies of such Organizational Documents of the Target
REIT Subsidiaries, as amended and in effect on the date hereof.
(e) The copies of the minute books and records of the material proceedings
of Target REIT and the Target REIT Subsidiaries, which have heretofore been made
available to Acquiror REIT, are copies of the original minute books and records
of Target REIT and the Target REIT Subsidiaries, contain all proceedings of the
Shareholders, partners, boards of directors and any committees thereof with
respect to Target REIT and the Target REIT Subsidiaries prior to the date
hereof, and are true, correct and complete in all material respects.
7.2. Authorization; Enforceability.
Target REIT has the corporate power and authority to execute, deliver and
perform its obligations under this Agreement and to consummate the transactions
contemplated by this Agreement, subject to approval of this Agreement and the
Plan of Merger by the Shareholders of Target REIT as required by the Tennessee
Act. Contributor OP has the partnership power and authority to execute, deliver
and perform its obligations under this Agreement and to consummate the
transactions contemplated by this Agreement, subject to approval of this
Agreement and the OP Merger by the limited partners of Contributor OP as
required by the TRULPA. Subject to such Shareholder and limited partner
approvals, this Agreement is, and the other documents and instruments required
hereby will be, when executed and delivered by Contributor OP and Target REIT
and the other parties hereto and thereto, the valid and binding obligations of
Contributor OP and Target REIT, enforceable against Contributor OP and Target
REIT in accordance with their respective terms, except as may be limited by
bankruptcy or insolvency laws or similar laws or equitable principles affecting
rights of creditors generally. All necessary action on the part of the board of
directors of Target REIT and the general partner of Contributor OP has been
taken to authorize the execution and delivery of this Agreement and each
agreement or instrument executed in connection herewith, the performance of
their obligations hereunder and the consummation of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Target REIT and Contributor OP.
7.3. Capitalization.
The authorized capital stock of Target REIT consists of 100,000,000 shares
of Target REIT Common Stock and 5,000,000 shares of Target REIT Preferred Stock.
As of the date hereof, (i) 24,876,946 shares of Target REIT Common Stock are
issued and outstanding, (ii) Target REIT has issued 41,000 shares of Target REIT
Common Stock pursuant to unvested Target REIT Restricted Stock Grants, the
vesting of which accelerates as a result of the transactions contemplated by
this Agreement, and (iii) 973,684 shares of Target REIT Preferred Stock are
issued and outstanding. All such issued and outstanding shares of Target REIT
Capital Stock are validly issued, fully paid, nonassessable and were not issued
in violation of any preemptive rights. An aggregate of 2,567,609 shares of
Target REIT Common Stock are reserved for issuance upon redemption of 2,567,609
outstanding Contributor OP Units. Neither Target REIT nor any Target REIT
Subsidiary has any outstanding bonds, debentures, notes or other obligations the
holders of which have the
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right to vote with the Shareholders of Target REIT on any matter. There are not
any existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate Target REIT or any of the
Target REIT Subsidiaries to issue, transfer or sell any shares of capital stock,
partnership interests or other equity interests of Target REIT or any of the
Target REIT Subsidiaries, other than with respect to the Target REIT Options,
the Target REIT Restricted Stock Grants described on Schedule 1.137, and the
Contributor OP Units described on Schedule 7.7 and except as set forth in the
Target REIT Charter with respect to Target REIT Preferred Stock. There are no
agreements or understandings to which Target REIT is a party with respect to the
voting of any shares of Target REIT Capital Stock or which restrict the transfer
of any such shares, except as set forth in Target REIT's Organizational
Documents. Except as with respect to options issued pursuant to Section 4.3,
after the Closing, Acquiror REIT will have no obligation to issue, transfer or
sell any shares of capital stock or other equity interest of Acquiror REIT
pursuant to any Target REIT Benefit Plan.
7.4. No Violation or Conflict by Contributor OP or Target REIT.
Except as set forth on Schedule 7.4, the execution, delivery and
performance of this Agreement by Contributor OP and Target REIT do not and will
not conflict with or violate or constitute a breach or default under, (i) any
law, judgment, order or decree binding on Target REIT or any of the Target REIT
Subsidiaries, (ii) the Organizational Documents of Target REIT, Contributor OP,
or Contributor CMBS OP, or (iii) any Contract to which Target REIT or any of the
Target REIT Subsidiaries is a party or by which it is bound, the breach or
default of which would have a Target REIT Material Adverse Effect.
7.5. No Litigation.
Except as set forth on Schedule 7.5, there is no litigation or governmental
investigation pending or, to the Knowledge of Target REIT, proposed or
threatened against Target REIT or any of the Target REIT Subsidiaries, that (a)
is expected to have a Target REIT Material Adverse Effect, or (b) seeks
restraint, prohibition, damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby.
7.6. Absence of Certain Changes.
Except as set forth on Schedule 7.6, in the Target REIT SEC Documents, or
as contemplated by this Agreement, since December 31, 1997, there has not been
any sale, transfer or other disposition of material assets of Target REIT or the
Target REIT Subsidiaries, except in the ordinary course of business consistent
with past practice.
7.7. Subsidiaries.
All of the Target REIT Subsidiaries are disclosed on Schedule 7.7 hereto.
Schedule 7.7 also sets forth Target REIT's and Contributor OP's ownership of
equity interests in the Target REIT Subsidiaries, and to the Knowledge of Target
REIT, other Persons' ownership of equity interests in the Target REIT
Subsidiaries. Except as set forth on Schedule 7.7, Target REIT and Contributor
OP (directly or indirectly) have good and marketable title to all of the equity
interests in each of the Target REIT Subsidiaries as indicated on Schedule 7.7
free and clear of all liens, claims and encumbrances. Except for the Target REIT
Subsidiaries, Target REIT owns no ownership interest in any other corporation,
partnership, joint venture or other business organization or entity.
7.8. Contracts and Commitments.
Except as set forth on Schedule 7.8, Target REIT and the Target REIT
Subsidiaries are not a party to any Contract (a) involving remaining payment or
guarantee of obligations by Target REIT or any Target REIT Subsidiary in excess
of $25,000, or (b) with a remaining term in excess of one year and which cannot
be canceled by Target REIT or a Target REIT Subsidiary without penalty on prior
notice of 90 days or less. Schedule 7.8 sets forth the indebtedness (other than
trade payables arising in the ordinary course of business
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and obligations under the Employee Benefit Plans) of Target REIT and the Target
REIT Subsidiaries including the unpaid principal balance at March 31, 1998. With
respect to each Contract listed on Schedule 7.8 hereto: (i) the Contract is in
full force and effect, valid and enforceable in accordance with its terms, as
limited by applicable bankruptcy, reorganization, moratorium, or similar laws
and equitable principles affecting creditors' rights generally; (ii) neither
Target REIT nor any Target REIT Subsidiary is in material default thereunder;
(iii) neither Target REIT nor any Target REIT Subsidiary has repudiated or
waived any material provision of any such Contract; and (iv) no other party to
any such Contract is, to the Knowledge of Target REIT, in default in any
respect, or has repudiated or waived any material provision thereunder. Except
as disclosed on Schedule 7.8 hereto, all of the indebtedness set forth on
Schedule 7.8 hereto may be prepaid at borrower's sole option at any time without
penalty or premium. Except as set forth in Schedule 7.8, neither Target REIT nor
any Target REIT Subsidiary has entered into or is subject, directly or
indirectly, to any Tax Protection Agreements. As used herein, a "Tax Protection
Agreement" is an agreement, oral or written, (i) that has as one of its purposes
to permit a Person to take the position that such Person could defer federal
taxable income that otherwise might have been recognized upon a transfer of
property to the Contributor OP, Contributor CMBS OP or any other Target REIT
Subsidiary that is treated as a partnership for federal income tax purposes, and
(ii) that (A) prohibits or restricts in any manner the disposition of any assets
of Target REIT or any Target REIT Subsidiary, (B) requires that Target REIT or
any Target REIT Subsidiary maintain, or put in place, or replace, indebtedness,
whether or not secured by one or more of the Target REIT Hotels, or (C) requires
that Target REIT or any Target REIT Subsidiary offer to any Person at any time
the opportunity to guarantee or otherwise assume, directly or indirectly, the
risk of loss for federal income tax purposes for indebtedness or other
liabilities of Target REIT or any Target REIT Subsidiary.
7.9. Approvals and Consents.
Except as set forth on Schedule 7.9, no consent, approval or authorization
of, notice to, or filing with any governmental authority or any Person or entity
not a party to this Agreement is required to be obtained by Target REIT or any
Target REIT Subsidiary as a condition to the execution, delivery or performance
of this Agreement by Contributor OP or Target REIT, except where the failure to
obtain such consent, approval or authorization does not have a Target REIT
Material Adverse Effect.
7.10. Target REIT Employee Benefit Plans.
(a) Disclosure. Schedule 7.10 hereto sets forth a summary description of
all pension, retirement, profit-sharing, deferred compensation, stock option,
employee stock ownership, severance pay, vacation, bonus, or other incentive
plan, all other written employee programs, arrangements, or agreements, all
medical, vision, dental, or other health plans, all life insurance plans, and
all other employee benefit plans or fringe benefit plans, including, without
limitation, "employee benefit plans" as that term is defined in Section 3(3) of
ERISA, currently or previously adopted, maintained by, sponsored in whole or in
part by, contributed to, or required to be contributed to, by Target REIT or any
Target REIT Subsidiary or any entity which is considered a member of the same
controlled group as Target REIT under Section 4001 of ERISA or Section 414 of
the Code or Section 302 of ERISA (whether or not waived) for the benefit of
employees, retirees, dependents, spouses, directors, independent contractors, or
other beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries are eligible to
participate.
(b) Compliance with Law. The provisions of each Target REIT Employee
Benefit Plan and, to the Knowledge of Target REIT, the administration of each
Target REIT Employee Benefit Plan are and have been in all material respects in
compliance with all applicable laws, and neither Target REIT nor any Target REIT
Subsidiary has received any claim or notice alleging to the contrary with
respect to any Target REIT Employee Benefit Plan.
(c) Tax or Civil Liability. With respect to the Target REIT Employee
Benefit Plans, neither Target REIT nor any of the Target REIT Subsidiaries has
engaged in any "prohibited transaction" (as such term is defined in ERISA or the
Code), for which there is not an exception, that could subject Target REIT or
any
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Target REIT Subsidiary to an excise tax under Code Section 4975 or civil
liability under Section 502(i) of ERISA, except for a tax or liability that
would not have a Target REIT Material Adverse Effect.
(d) Claims and Liability. There is no action, claim or demand of any kind
(other than routine claims for benefits) that has been brought or, to the
Knowledge of Target REIT, threatened, against any Target REIT Employee Benefit
Plan or the assets thereof, or against any fiduciary of any such Target REIT
Employee Benefit Plan.
(e) Multiemployer Plans. Target REIT and the Target REIT Subsidiaries
neither maintain, participate in nor contribute to, and, except as set forth on
Schedule 7.10 hereto, have never maintained, participated in or contributed to,
any "multiemployer plans" as defined in Section 3(37) of ERISA. Target REIT and
the Target REIT Subsidiaries have no present liability under any multiemployer
plan.
(f) Reporting and Disclosure. Target REIT and the Target REIT Subsidiaries
have complied in all material respects with the reporting and disclosure
requirements of ERISA.
7.11. SEC Documents; Financial Statements; Undisclosed Liabilities.
The Target REIT SEC Documents constitute all forms, reports and documents
required to be filed by Target REIT with the SEC under applicable law. All of
the Target REIT SEC Documents (other than preliminary material) have been timely
filed, and, as of their respective filing dates or effective dates, as
applicable, complied in all material respects with all applicable requirements
of the Securities Act and the Exchange Act. None of the Target REIT SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except to the extent such statements
have been modified or superseded by later Target REIT SEC Documents filed and
publicly available prior to the date of this Agreement. The consolidated
financial statements of Target REIT and the Target REIT Subsidiaries included in
Target REIT SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by the applicable
rules and regulations of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
presented, in accordance with the applicable requirements of GAAP and the
applicable rules and regulations of the SEC, the consolidated financial position
of Target REIT and the Target REIT Subsidiaries, taken as a whole, as of the
dates thereof and the consolidated results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). Except as disclosed in the consolidated financial
statements of Target REIT and the Target REIT Subsidiaries included in the
Target REIT SEC Documents or on Schedule 7.11, neither Target REIT nor any
Target REIT Subsidiary has any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) required by GAAP to be set forth on
a consolidated balance sheet of Target REIT or in the notes thereto and which,
individually or in the aggregate, would have a Target REIT Material Adverse
Effect.
7.12. No Special Taxes.
Except as set forth in Schedule 7.12, neither Target REIT, Contributor OP,
nor Contributor CMBS OP has knowledge of, nor has received any notice of, any
special taxes or assessments relating to any of the Transferred Assets or any
part thereof or any planned public improvements that may result in a special tax
or assessment against a Target REIT Hotel which would have a Target REIT
Material Adverse Effect.
7.13. Compliance with Existing Laws.
Except as set forth on Schedule 7.13, neither Target REIT nor any Target
REIT Subsidiary has received any notice within the past twelve (12) months (or
since commencement of development or the date of acquisition of any Target REIT
Hotel if such development commenced or acquisition occurred within the past
twelve (12) months) of any existing or threatened violation of any provision of
any applicable building, zoning, subdivision, environmental or other
governmental ordinance, resolution, statute, rule, order or
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regulation, including but not limited to those of environmental agencies or
insurance boards of underwriters, with respect to the ownership, operation, use,
maintenance or condition of any Target REIT Hotel or any part thereof, or
requiring any repairs or alterations other than those that have been made prior
to the date hereof, except such violations as have been cured to the
satisfaction of the relevant authority or would have no Target REIT Material
Adverse Effect. Target REIT and each Target REIT Subsidiary have in effect all
Permits necessary for them to own, lease, or operate the Target REIT Hotels and
to carry on their businesses as now conducted, except for those Permits the
absence of which would have no Material Adverse Effect on any Target REIT Hotel,
and there has occurred no default under any such Permit other than defaults
which, singly or in the aggregate, would have no Material Adverse Effect on any
Target REIT Hotel. Except as disclosed on Schedule 7.13 hereto, neither Target
REIT nor any Target REIT Subsidiary is in violation of any laws, orders, or
Permits applicable to its business or employees conducting its business, except
for violations which would not have a Target REIT Material Adverse Effect.
7.14. Insurance.
All of the Insurance Policies are listed on Schedule 7.14, and all such
policies are valid and in full force and effect, all premiums for such policies
were paid when due and all future premiums for such policies (and any
replacements thereof) through the Closing Date shall be paid by Contributor OP,
Contributor CMBS OP or their lessees on or before the due date therefor.
7.15. Condemnation Proceedings.
Except as set forth on Schedule 7.15, neither Target REIT nor Contributor
OP has received any notice of any condemnation or eminent domain proceeding
pending or, to the Knowledge of Target REIT, threatened against the Transferred
Assets or any material part thereof.
7.16. Personal Property.
Subject only to the Permitted Title Exceptions and the Assumed Liabilities,
all of the Personal Property will be free and clear of all liens, encumbrances
and charges on the Closing Date and the Target REIT Subsidiaries have good and
marketable title thereto and the right to convey same in accordance with the
terms of this Agreement (except for capital leases of personal property entered
into in the ordinary cause of business). All of the Tangible Personal Property
is in good condition, reasonable wear and tear excepted, and are usable in the
ordinary course of business of the Target REIT Hotels consistent with past
practices.
7.17. Bankruptcy.
No Act of Bankruptcy has occurred with respect to Target REIT or any Target
REIT Subsidiary.
7.18. Title to Real Property.
Except for Permitted Title Exceptions and as set forth on Schedule 7.18,
the Target REIT Subsidiaries are the sole owners of good and marketable title to
the Real Property, free and clear of all liens, mortgages, security interests,
leases (except ground and other leases noticed on Schedule 7.18), encumbrances,
restrictions, conditions, and agreements. The Target REIT Subsidiaries have
title insurance polices insuring their fee simple titles or leasehold interests,
as the case may be, to the Target REIT Hotels.
7.19. Zoning.
Except as set forth on Schedule 7.19, to the Knowledge of Target REIT, the
current use and occupancy of the Target REIT Hotels for hotel purposes are
permitted under all laws applicable thereto.
7.20. Hazardous Substances.
To the Knowledge of Target REIT: except as set forth on Schedule 7.20,
there are no (a) Hazardous Substances on, under or in the Target REIT Hotels, or
any portion thereof, in violation of applicable law,
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(b) spills, releases, discharges, or disposal of Hazardous Substances in
violation of applicable law that have occurred or are presently occurring on or
onto the Target REIT Hotels, or any portion thereof, or (c) PCB (polychlorinated
biphenyls) transformers serving, or stored on, the Target REIT Hotels, or any
portion thereof. To the Knowledge of Target REIT, Target REIT and the Target
REIT Subsidiaries have complied with any applicable local, state and federal
environmental laws, regulations, ordinances and administrative and judicial
orders relating to the generation, recycling, reuse, sale, storage, handling,
transport and disposal of any Hazardous Substances, except for violations that
would not have a Target REIT Material Adverse Effect.
7.21. Room Furnishings.
All public spaces, lobbies, meeting rooms, and each room in each of the
Target REIT Hotels available for guest rental is generally furnished in
accordance with the applicable Franchisor's standards for the hotel and room
type.
7.22. Franchisors; Franchise Agreements.
The Target REIT Hotels are currently operated pursuant to Franchise
Agreements with the Franchisors as listed next to their name on Schedule 7.22.
7.23. Mortgage Documents.
All promissory notes, bonds and other evidences on indebtedness given by
Target REIT or any Target REIT Subsidiary that are secured by mortgages or
negative pledges encumbering the Real Property are listed on Schedule 7.23 (the
"Mortgage Notes"), together with a description of the corresponding mortgage
documents (the "Mortgages"). The Mortgage Documents are complete, are in full
force and effect and have not been modified or supplemented, except as otherwise
disclosed on Schedule 7.23, and no fact or circumstance has occurred that, by
itself or with the giving of notice or the passage of time or both, would
constitute a default under any of the Mortgage Documents. Neither Target REIT,
Contributor OP, nor Contributor CMBS OP has been advised nor have any of them
received any notice asserting that a default exists under any of the Mortgage
Documents.
7.24. Opinion of Financial Advisor.
Target REIT has retained Salomon Smith Barney Inc. to review the
transactions contemplated by this Agreement and to issue an opinion to the
effect that, as of the date of such opinion, the Exchange Ratio is fair, from a
financial point of view, to the holders of Target REIT Capital Stock and the
partners of Contributor OP, and Target REIT has received the opinion of Salomon
Smith Barney Inc. to such effect and such opinion has not been withdrawn or
materially modified.
7.25. Financial Advisor.
Except for fees payable to Salomon Smith Barney Inc., neither Target REIT
nor any Target REIT Subsidiary is committed to pay any financial advisory,
broker or finder fees or any similar fees in connection with the Mergers, the
Asset Sale or the transactions contemplated by this Agreement.
7.26. Acquiror REIT Share Ownership.
Neither Target REIT nor any of the Target REIT Subsidiaries owns any shares
of capital stock of Acquiror REIT or other securities convertible into any
capital stock of Acquiror REIT.
7.27. Related Party Transactions.
Except for the Target REIT Employment Agreements, the Target REIT Options,
Contributor OP Units, and the Target REIT Restricted Stock Grants, there are no
arrangements, agreements or contracts entered into by Target REIT or any of the
Target REIT Subsidiaries with any person who is an officer, director,
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employee or affiliate of Target REIT or any of the Target REIT Subsidiaries, any
relative of any of the foregoing persons or any entity of which any of the
foregoing persons is an Affiliate.
7.28. Takeover Statutes.
Target REIT has taken all actions required of Target REIT to exempt the
transactions contemplated hereby from the operation of any "fair price,"
"moratorium," "control share acquisition" or any other anti-takeover statute or
similar statute enacted under the state or federal laws of the United States or
similar statute or regulation ("Takeover Statutes").
7.29. Hart-Scott-Rodino Antitrust Improvements Act of 1976.
For purposes of determining compliance with the HSR Act, Target REIT
confirms that the conduct of its business, through the Target REIT Subsidiaries,
consists solely of investing in, owning and operating, real estate assets and
related personal property for the benefit of its Shareholders.
7.30. Development.
Set forth on Schedule 7.30 is a list of all material agreements entered
into by Target REIT or any of the Target REIT Subsidiaries relating to the
development, rehabilitation, capital improvement or construction of hotel
properties or additions thereto or other real estate properties which
development or construction has not been substantially completed as of the date
of this Agreement. Schedule 7.30 provides a description of each of Target REIT's
or its Subsidiaries' material development, rehabilitation, capital improvement
and construction projects, including budgeted amounts and costs incurred to date
for each such project.
7.31. Tax Matters.
Except as set forth in Schedule 7.31: (i) Target REIT and each of the
Target REIT Subsidiaries (a) has timely filed all material Tax Returns required
to be filed by any of them for tax periods ended prior to the date of this
Agreement, or requests for extensions have been timely filed and any such
request has been granted and has not expired, and all such tax returns are
accurate and complete in all material respects, (b) has paid or accrued all
Taxes shown to be due and payable on such returns or which have become due and
payable pursuant to any assessment or deficiency notice received by any of them,
and (c) has properly accrued in accordance with and to the extent required by
GAAP all Taxes for such periods and periods subsequent to the periods covered by
such Tax Returns; (ii) neither Target REIT nor any of the Target REIT
Subsidiaries has received any notice that any federal, state and local income,
excise and franchise Tax Return of Target REIT or any such Target REIT
Subsidiary has been or will be examined by any taxing authority; (iii) neither
Target REIT nor any of its the Target REIT Subsidiaries has executed or filed
with the IRS or any other taxing authority any agreement now in effect extending
the period for assessment or collection of any income or other Taxes; (iv)
Target REIT (a) has qualified to be taxed as a REIT pursuant to Sections 856
through 859 of the Code for its taxable years ended December 31, 1993, 1994,
1995, 1996 and 1997, and (b) has operated, and intends to continue to operate,
in such a manner as to qualify to be taxed as a REIT pursuant to Sections 856
through 859 of the Code for its taxable year ending on the date of the Effective
Time; (v) each Target REIT Subsidiary that is a partnership, joint venture or
limited liability company (A) has been since its formation and continues to be
treated for federal income tax purposes as a partnership and not as a
corporation or an association taxable as a corporation and (B) has not since the
later of its formation or the acquisition by Target REIT of a direct or indirect
interest therein, owned any assets (including, without limitation, securities)
that would cause Target REIT to violate Section 856(c)(5) of the Code; and (vi)
neither Target REIT nor any of the Target REIT Subsidiaries holds any asset (a)
the disposition of which could be subject to rules similar to Section 1374 of
the Code as a result of an election under IRS Notice 88-19, or (b) that is
subject to a consent filed pursuant to Section 341(f) of the Code and
regulations thereunder. No Target REIT Subsidiary (other than Target C. Corp.)
is a corporation (or an entity that would, under applicable federal income tax
principles, be classified as an association taxable as a corporation). Neither
Contributor OP nor Contributor CMBS OP is a publicly traded partnership within
the meaning of Section 7704 of the Code. True, correct and complete copies of
all federal, state and local income or franchise Tax Returns filed by Target
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REIT and each of the Target REIT Subsidiaries and all communications with taxing
authorities relating thereto have been made available to Acquiror REIT or its
representatives.
7.32. Convertible Securities.
Except as set forth herein or in Schedule 7.32 hereto, Target REIT has no
outstanding options, warrants, or other securities exercisable for, or
convertible into, Target REIT Capital Stock, the terms of which would require
any anti-dilution adjustments by reason of the consummation of the transaction
contemplated hereby.
7.33. Updating of Representations and Warranties.
Between the date hereof and the Closing Date, Contributor OP and Target
REIT will promptly disclose to Acquiror REIT any information which, to the
Knowledge of Target REIT, (a) would render any representation or warranty of
either of them under this Article VII untrue, (b) renders any information set
forth in this Agreement no longer correct in all material respects, or (c)
arises after the date hereof and which would have been required to be included
in this Agreement if such information had existed on the date hereof.
Each of the representations, warranties and covenants contained in this
Article VII and its various subparagraphs are intended for the benefit of
Acquiror REIT, Acquiror OP and Merger Sub and may be waived in whole or in part,
by Acquiror REIT, but only by an instrument in writing signed by Acquiror REIT.
No investigation, audit, inspection, review or the like conducted by or on
behalf of Acquiror REIT, Merger Sub or Acquiror OP shall be deemed to terminate
the effect of any such representations, warranties and covenants, it being
understood that Acquiror REIT, Merger Sub and Acquiror OP have the right to rely
thereon and that each such representation, warranty and covenant constitutes a
material inducement to Acquiror REIT, Merger Sub and Acquiror OP to execute this
Agreement, agree to the Merger and to consummate the transactions contemplated
by this Agreement.
7.34. Reorganization.
Neither Target REIT nor any Target REIT Subsidiary has taken any action, or
agreed to take any action, or has any knowledge of any fact or circumstance that
is reasonably likely to prevent the REIT Merger, from qualifying for treatment
as a "reorganization" within the meaning of Section 368(a) of the Code.
7.35. Intellectual Property.
Schedule 7.35 contains a true, correct and complete listing of all
trademarks, service marks, trade names, service names, patents, copyrights and
computer software owned or licensed by or registered in the name of Target REIT
or any Target REIT Subsidiary. Either Target REIT or any Target REIT Subsidiary,
as shown therein, is the sole owner of all right, title and interest in all
intellectual property described in Schedule 7.35 hereto, except and excluding
proprietary rights that either Target REIT or any Target REIT Subsidiary are
entitled to exercise and sublicense, by reason of license or otherwise, which
are identified in Schedule 7.35 hereof. Except as provided on Schedule 7.35
hereof, neither Target REIT nor Contributing OP has any knowledge nor have they
received any written notice to the effect that any service rendered by either
Target REIT or any Target REIT Subsidiary with respect to their businesses
infringes on any intellectual property right or other legally-protectable right
of another Person.
7.36. Employees.
Except as set forth on Schedule 7.36 hereof, neither Target REIT nor any
Target REIT Subsidiary has any written employment contract with any person
currently engaged, or previously engaged, in the businesses of Target REIT nor
any Target REIT Subsidiary. Schedule 7.36 lists all current employees of Target
REIT and the Target REIT Subsidiaries, showing each such person's name and
position.
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7.37. Labor Relations.
Neither Target REIT nor any Target REIT Subsidiary is the subject of any
litigation or governmental investigation asserting that Target REIT or any
Target REIT Subsidiary has committed an unfair labor practice (within the
meaning of the National Labor Relations Act or comparable state law) or seeking
to compel Target REIT or any Target REIT Subsidiary to bargain with any labor
organization as to wages or conditions of employment, nor is Target REIT or any
Target REIT Subsidiary a party to or bound by any collective bargaining
agreement, contract, or other agreement or understanding with a labor union or
labor organization, nor is there any strike or other labor dispute involving
Target REIT or any Target REIT Subsidiary, pending or, to the Knowledge of
Target REIT, threatened, or, to the Knowledge of Target REIT, is there any
activity involving Target REIT's or any Target REIT Subsidiary's employees
seeking to certify a collective bargaining unit or engaging in any other
organization activity.
7.38. Termination of Certain Target REIT Leases.
Target REIT, Contributor OP and Contributor CMBS OP have entered into a
letter agreement with the Target REIT Lessee dated October 17, 1997, a copy of
which is attached as Exhibit G hereto (the "Lease Termination Agreement"),
providing for the determination of certain amounts payable to the Target REIT
Lessee or the Target REIT CMBS Lessee, as applicable, in connection with the
termination by certain Target REIT Subsidiaries of the Target REIT Leases
described on Schedule 7.38 on or before December 31, 1998. Schedule 7.38 sets
forth the amounts determined pursuant to the Lease Termination Agreement for
termination of each of such Target REIT Leases. Target REIT or the Target REIT
Subsidiaries have the right to terminate such Target REIT Leases upon payment of
the amounts set forth in Schedule 7.38 and in accordance with the notice and
other provisions set forth in such Target REIT Leases.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF ACQUIROR REIT,
ACQUIROR OP AND MERGER SUB
Acquiror REIT, Acquiror OP and Merger Sub hereby represent and warrant,
jointly and severally, to Target REIT and Contributor OP that:
8.1. Organization.
(a) Acquiror REIT is a corporation duly organized, validly existing
and in good standing under the laws of the State of Tennessee and is duly
qualified as a foreign corporation to do business in, and is in good
standing under the laws of, each jurisdiction in which the failure to
qualify would have an Acquiror REIT Material Adverse Effect. Acquiror REIT
has the power and authority to carry on its business as it is now being
conducted and to own and lease its assets.
(b) Each of the Acquiror REIT Subsidiaries is a corporation, limited
liability company or limited partnership, as indicated on Schedule 8.7,
duly organized, validly existing and in good standing under the laws of the
state of its formation and is duly qualified as a foreign entity to do
business in, and is in good standing under the laws of, each jurisdiction
in which the failure to qualify would have an Acquiror REIT Material
Adverse Effect. Each of the Acquiror REIT Subsidiaries has the power and
authority to carry on its business as it is now being conducted and to own
or lease its assets.
(c) The copies of the Organizational Documents of Acquiror OP,
Acquiror REIT and Merger Sub, which have heretofore been made available to
Target REIT, are true, complete and correct copies of the Organizational
Documents of Acquiror OP, Acquiror REIT and Merger Sub, as amended and in
effect on the date hereof.
(d) The copies of the Organizational Documents of the Acquiror REIT
Subsidiaries, which have heretofore been made available to Target REIT, are
true, complete and correct copies of such
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Organizational Documents of the Acquiror REIT Subsidiaries, as amended and
in effect on the date hereof.
(e) The copies of the minute books and records of the material
proceedings of Acquiror REIT and the Acquiror REIT Subsidiaries, which have
heretofore been made available to Target REIT, are copies of the original
minute books and records of Acquiror REIT and the Acquiror REIT
Subsidiaries, contain all proceedings of the Shareholders, members,
partners, boards of directors and any committees thereof with respect to
Acquiror REIT and the Acquiror REIT Subsidiaries prior to the date hereof,
and are true, correct and complete in all material respects.
8.2. Authorization; Enforceability.
Each of Acquiror REIT and Merger Sub has the corporate power and authority
to execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated by this Agreement, subject to the
approval of the issuance of Acquiror REIT Common Stock contemplated herein by
the Shareholders of Acquiror REIT pursuant to applicable law and the rules of
the NYSE. Acquiror OP has the partnership power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated by this
Agreement, subject to approval of this Agreement and the OP Merger by the
limited partners of Acquiror OP as required by the TRULPA. Subject to such
Shareholder and limited partner approvals, this Agreement is, and the other
documents and instruments required hereby will be, when executed and delivered
by Acquiror OP, Acquiror REIT, Merger Sub and the other parties hereto and
thereto, the valid and binding obligations of Acquiror OP, Acquiror REIT and
Merger Sub, enforceable against Acquiror OP, Acquiror REIT and Merger Sub in
accordance with their respective terms, except as may be limited by bankruptcy
or insolvency laws or similar laws or equitable principles affecting rights of
creditors generally. All necessary action on the part of the board of directors
of Acquiror REIT and the board of directors and Shareholders of Merger Sub and
the general partner of Acquiror OP has been taken to authorize the execution and
delivery of this Agreement and each agreement or instrument executed in
connection herewith, the performance of their respective obligations hereunder
and the consummation of the transactions contemplated hereby. This Agreement has
been duly executed and delivered by each of Acquiror REIT, Acquiror OP and
Merger Sub.
8.3. Capitalization.
The authorized capital stock of Acquiror REIT consists of 50,000,000 shares
of Acquiror REIT Common Stock and 10,000,000 shares of Acquiror REIT Preferred
Stock. As of the date hereof, 36,234,030 shares of Acquiror REIT Common Stock
are issued and outstanding and no shares of Acquiror REIT Preferred Stock are
issued and outstanding. As of the date hereof, the authorized capital stock of
Merger Sub consists of 1,000 shares of common stock of Merger Sub, $.01 par
value per share, 1,000 shares of which common stock are issued and outstanding.
All such issued and outstanding shares of Acquiror REIT Common Stock and common
stock of Merger Sub are validly issued, fully paid, nonassessable and were not
issued in violation of any preemptive rights. An aggregate of 1,953,581 shares
of Acquiror REIT Common Stock are reserved for issuance upon redemption of
1,953,581 outstanding Acquiror OP Units. Neither Acquiror REIT nor any of the
Acquiror REIT Subsidiaries has any outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote with the Shareholders of
Acquiror REIT on any matter. There are not any existing options, warrants,
calls, subscriptions, convertible securities, or other rights, agreements or
commitments which obligate Acquiror REIT or any of the Acquiror REIT
Subsidiaries to issue, transfer or sell any shares of capital stock or other
equity interest of Acquiror REIT or any of the Acquiror Subsidiaries, other than
with respect to the Acquiror REIT Options, the Acquiror REIT Restricted Stock
Grants described on Schedule 1.23 and the Acquiror OP Units described on
Schedule 8.7. Except as set forth on Schedule 8.3, there are no agreements or
understandings to which Acquiror REIT is a party with respect to the voting of
any shares of Acquiror REIT Common Stock or which restrict the transfer of any
such shares, except as set forth in Acquiror REIT's Organizational Documents.
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8.4. No Violation or Conflict by Acquiror OP, Acquiror REIT or Merger Sub.
Except as set forth on Schedule 8.4, the execution, delivery and
performance of this Agreement by Acquiror OP, Acquiror REIT and Merger Sub do
not and will not conflict with or violate or constitute a breach or default
under, (i) any law, judgment, order or decree binding on Acquiror REIT or any of
the Acquiror REIT Subsidiaries, (ii) the Organizational Documents of Acquiror
REIT, Acquiror OP or Merger Sub, or (iii) any Contract to which Acquiror REIT or
any of the Acquiror REIT Subsidiaries is a party or by which it is bound, the
breach or default of which would have an Acquiror REIT Material Adverse Effect.
8.5. No Litigation.
Except as set forth on Schedule 8.5, there is no litigation or governmental
investigation pending or, to the Knowledge of Acquiror REIT, proposed or
threatened against Acquiror REIT or any of the Acquiror REIT Subsidiaries, that
(a) is expected to have an Acquiror REIT Material Adverse Effect, or (b) seeks
restraint, prohibition, damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby.
8.6. Absence of Certain Changes.
Except as set forth on Schedule 8.6, in the Acquiror REIT SEC Documents, or
as contemplated by this Agreement, since December 31, 1997, there has not been
any sale, transfer or other disposition of material assets of Acquiror REIT or
the Acquiror REIT Subsidiaries, except in the ordinary course of business
consistent with past practice.
8.7. Subsidiaries.
All of the Acquiror REIT Subsidiaries are disclosed on Schedule 8.7.
Schedule 8.7 also sets forth Acquiror REIT's and Acquiror OP's ownership of
equity interests in the Acquiror REIT Subsidiaries, and, to the Knowledge of
Acquiror REIT, other Persons' ownership of equity interests in the Acquiror REIT
Subsidiaries. Except as set forth on Schedule 8.7, Acquiror REIT and Acquiror OP
(directly or indirectly) have good and marketable title to all of the equity
interests in each of the Acquiror REIT Subsidiaries as indicated on Schedule 8.7
free and clear of all liens, claims and encumbrances. Except for the Acquiror
REIT Subsidiaries, Acquiror REIT owns no ownership interest in any other
corporation, partnership, joint venture or other business organization or
entity.
8.8. Contracts and Commitments.
Except as set forth on Schedule 8.8, Acquiror REIT and the Acquiror REIT
Subsidiaries are not a party to any Contract (a) involving remaining payment or
guarantee of obligations by Acquiror REIT or any Acquiror REIT Subsidiary in
excess of $25,000, or (b) with a remaining term in excess of one year and which
cannot be canceled by Acquiror REIT or an Acquiror REIT Subsidiary without
penalty on prior notice of 90 days or less. Schedule 8.8 sets forth the
indebtedness (other than trade payables arising in the ordinary course of
business and obligations under the Employee Benefit Plans) of Acquiror REIT and
the Acquiror REIT Subsidiaries, including the unpaid principal balance at March
31, 1998. With respect to each Contract listed on Schedule 8.8 hereto: (i) the
Contract is in full force and effect, valid and enforceable in accordance with
its terms, as limited by applicable bankruptcy, reorganization, moratorium, or
similar laws and equitable principles affecting creditors' rights generally;
(ii) neither Acquiror REIT nor any Acquiror REIT Subsidiary is in material
default thereunder; (iii) neither Acquiror REIT nor any Acquiror REIT Subsidiary
has repudiated or waived any material provision of any such Contract; and (iv)
no other party to any such Contract is, to the Knowledge of Acquiror REIT, in
default in any respect, or has repudiated or waived any material provision
thereunder. Except as set forth in Schedule 8.8, neither Acquiror REIT nor any
Acquiror REIT Subsidiary has entered into or is subject, directly or indirectly,
to any Tax Protection Agreements. As used herein, a "Tax Protection Agreement"
is an agreement, oral or written, (i) that has as one of its purposes to permit
a Person to take the position that such Person could defer federal taxable
income that otherwise might have been recognized upon a transfer of property to
the Acquiror OP or any other Acquiror REIT
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Subsidiary that is treated as a partnership for federal income tax purposes, and
(ii) that (A) prohibits or restricts in any manner the disposition of any assets
of Acquiror REIT or any Acquiror REIT Subsidiary, (B) requires that Acquiror
REIT or any Acquiror REIT Subsidiary maintain, or put in place, or replace,
indebtedness, whether or not secured by one or more of the Acquiror REIT Hotels,
or (C) requires that Acquiror REIT or any Acquiror REIT Subsidiary offer to any
Person at any time the opportunity to guarantee or otherwise assume, directly or
indirectly, the risk of loss for federal income tax purposes for indebtedness or
other liabilities of Acquiror REIT or any Acquiror REIT Subsidiary.
8.9. Approvals and Consents.
Except as set forth on Schedule 8.9, no consent, approval, or authorization
of, notice to, filing with any governmental authority or any Person or entity
not a party to this Agreement is required to be obtained by Acquiror REIT or any
Acquiror REIT Subsidiary as a condition to the execution, delivery or
performance of this Agreement by Acquiror OP, Acquiror REIT or Merger Sub,
except where the failure to obtain such consent, approval or authorization does
not have an Acquiror REIT Material Adverse Effect.
8.10. Acquiror REIT Employee Benefit Plans.
(a) Disclosure. Schedule 8.10 hereto sets forth a summary description of
all pension, retirement, profit-sharing, deferred compensation, stock option,
employee stock ownership, severance pay, vacation, bonus, or other incentive
plan, all other written employee programs, arrangements, or agreements, all
medical, vision, dental, or other health plans, all life insurance plans, and
all other employee benefit plans or fringe benefit plans, including, without
limitation, "employee benefit plans" as that term is defined in Section 3(3) of
ERISA, currently or previously maintained by, sponsored in whole or in part by,
or contributed to, or required to be contributed to, by Acquiror REIT or any
Acquiror REIT Subsidiary or any entity which is considered a member of the same
controlled group as Acquiror REIT under Section 4001 of ERISA or Section 414 of
the Code or Section 302 of ERISA (whether or not waived) for the benefit of
employees, retirees, dependents, spouses, directors, independent contractors, or
other beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries are eligible to
participate.
(b) Compliance with Law. The provisions of each Acquiror REIT Employee
Benefit Plan and, to the Knowledge of Acquiror REIT, the administration of each
Acquiror REIT Employee Benefit Plan are and have been in all material respects
in compliance with all applicable laws, and neither Acquiror REIT nor any
Acquiror REIT Subsidiary has received any claim or notice alleging to the
contrary with respect to any Acquiror REIT Employee Benefit Plan.
(c) Tax or Civil Liability. With respect to the Acquiror REIT Employee
Benefit Plans, neither Acquiror REIT nor any of the Acquiror REIT Subsidiaries
has engaged in any "prohibited transaction" (as such term is defined in ERISA or
the Code), for which there is not an exception, that could subject Acquiror REIT
or any Acquiror REIT Subsidiary to an excise tax under Code Section 4975 or
civil liability under Section 502(i) of ERISA, except for a tax or liability
that would not have an Acquiror REIT Material Adverse Effect.
(d) Claims and Liability. There is no action, claim or demand of any kind
(other than routine claims for benefits) that has been brought or, to the
Knowledge of Acquiror REIT, threatened, against any Acquiror REIT Employee
Benefit Plan or the assets thereof, or against any fiduciary of any such
Acquiror REIT Employee Benefit Plan.
(e) Multiemployer Plans. Acquiror REIT and the Acquiror REIT Subsidiaries
neither maintain nor participate in, and, except as set forth on Schedule 8.10
hereto, have never maintained or participated in, any "multiemployer plans" as
defined in Section 3(37) of ERISA. Acquiror REIT and the Acquiror REIT
Subsidiaries have no present liability under any multiemployer plan.
(f) Reporting and Disclosure. Acquiror REIT and the Acquiror REIT
Subsidiaries have complied in all material respects with the reporting and
disclosure requirements of ERISA.
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8.11. SEC Documents; Financial Statement; Undisclosed Liabilities.
The Acquiror REIT SEC Documents constitute all forms, reports and documents
required to be filed by Acquiror REIT with the SEC under applicable law. All of
the Acquiror REIT SEC Documents (other than preliminary material) have been
timely filed, and, as of their respective filing dates or effective dates, as
applicable, complied in all material respects with all applicable requirements
of the Securities Act and the Exchange Act. None of the Acquiror REIT SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except to the extent such statements
have been modified or superseded by later Acquiror REIT SEC Documents filed and
publicly available prior to the date of this Agreement. The consolidated
financial statements of Acquiror REIT and the Acquiror REIT Subsidiaries
included in Acquiror REIT SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with GAAP (except, in the case of unaudited statements, as permitted by the
applicable rules and regulations of the SEC) applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto),
and fairly presented, in accordance with the applicable requirements of GAAP and
the applicable rules and regulations of the SEC, the consolidated financial
position of Acquiror REIT and the Acquiror REIT Subsidiaries, taken as a whole,
as of the dates thereof and the consolidated results of operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments). Except as disclosed in the consolidated
financial statements of Acquiror REIT and the Acquiror REIT Subsidiaries
included in the Acquiror REIT SEC Documents or on Schedule 8.11, neither
Acquiror REIT nor any Acquiror REIT Subsidiary has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by GAAP to be set forth on a consolidated balance sheet of Acquiror
REIT or in the notes thereto and which, individually or in the aggregate, would
have an Acquiror REIT Material Adverse Effect.
8.12. Title to Properties and Assets.
Except as set forth on Schedule 8.12, the Acquiror REIT Subsidiaries are
the sole owners of good and marketable title to the Acquiror REIT Hotels and
other assets of Acquiror OP, free and clear of all liens, mortgages, security
interests, leases (except ground and other leases noticed on Schedule 8.12),
encumbrances, restrictions, conditions and agreements. Acquiror OP has title
insurance policies insuring its fee simple titles or leasehold interests, as the
case may be, to the Acquiror REIT Hotels.
8.13. Insurance.
All of the insurance policies with respect to the Acquiror REIT Hotels are
listed on Schedule 8.13, and all such policies are valid and in full force and
effect, all premiums for such policies were paid when due and all future
premiums for such policies (and any replacements thereof) shall be paid by
Acquiror OP or its lessee on or before the due date therefor.
8.14. Personal Property.
Except as disclosed in the consolidated financial statements of Acquiror
REIT and the Acquiror REIT Subsidiaries included in the Acquiror REIT SEC
Documents or on Schedule 8.14, each of Acquiror OP and the Acquiror Subsidiaries
has good and marketable title to all of the machinery, equipment, materials,
supplies and other personal property of every kind, tangible or intangible,
shown as assets in its records and books of account, free and clear of all
liens, encumbrances and charges (except for capital leases of personal property
entered into in the ordinary cause of business). All of such tangible personal
property is in good condition, reasonable wear and tear excepted, and are usable
in the ordinary course of business of the Acquiror REIT Hotels consistent with
past practices.
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8.15. Bankruptcy.
No Act of Bankruptcy has occurred with respect to Acquiror REIT or any
Acquiror REIT Subsidiary.
8.16. Zoning.
Except as set forth on Schedule 8.16, to the Knowledge of Acquiror REIT,
the current use and occupancy of the Acquiror REIT Hotels for hotel purposes are
permitted under all laws applicable thereto.
8.17. Hazardous Substances.
To the Knowledge of Acquiror REIT: except as set forth on Schedule 8.17,
there are no (a) Hazardous Substances on, under or in the Acquiror REIT Hotels,
or any portion thereof, in violation of applicable law, (b) spills, releases,
discharges, or disposal of Hazardous Substances in violation of applicable law
that have occurred or are presently occurring on or onto any of the Acquiror
REIT Hotels, or any portion thereof, or (c) PCB (polychlorinated biphenyls)
transformers serving, or stored on, any Acquiror REIT Hotels, or any portion
thereof. To the Knowledge of Acquiror REIT, Acquiror REIT and the Acquiror REIT
Subsidiaries have complied with any applicable local, state and federal
environmental laws, regulations, ordinances and administrative and judicial
orders relating to the generation, recycling, reuse, sale, storage, handling,
transport and disposal of any Hazardous Substances, except for violations which
would not have an Acquiror REIT Material Adverse Effect.
8.18. Leases.
Each Acquiror REIT Lease is in full force and effect, valid and enforceable
in accordance with its terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other similar laws and equitable
principles affecting creditors' rights generally and (b) as may be limited in
the jurisdiction where the relevant Acquiror REIT Hotel is located if such
limitation would not deprive the Acquiror REIT Subsidiaries, in total, of the
principal benefits contemplated by the Acquiror REIT Leases; and no Acquiror
REIT Subsidiary is in material default under any Acquiror REIT Lease, no
Acquiror Subsidiary has repudiated or waived any material provision of any such
Acquiror REIT Lease, and no other party to any such Acquiror REIT Lease is, to
the Knowledge of Acquiror REIT, in default in any respect, or has repudiated or
waived any material provision thereunder. No event or occurrence exists which
with notice or the passage of time, or both, would constitute an event of
default under any Acquiror REIT Lease. The Acquiror REIT Leases will not
adversely affect the tax qualification of Acquiror REIT as a REIT for federal
income tax purposes.
8.19. Opinion of Financial Advisor.
Acquiror REIT has retained Morgan Keegan & Company, Inc. to review the
transactions contemplated by this Agreement and to issue an opinion to the
effect that, as of the date of such opinion, the Exchange Ratio is fair, from a
financial point of view, to the holders of Acquiror REIT Common Stock and the
partners of Acquiror OP, and Acquiror REIT has received the opinion of Morgan
Keegan & Company, Inc. to such effect and such opinion has not been withdrawn or
materially modified.
8.20. Financial Advisor.
Except for fees payable to Bear, Stearns & Co., Inc. and Morgan Keegan &
Company, Inc., Acquiror REIT is not committed to pay any financial advisory,
broker or finder fees or any similar fees in connection with the Mergers, the
Asset Sale or the transactions contemplated by this Agreement.
8.21. Target REIT Share Ownership.
Neither Acquiror REIT nor any of the Acquiror REIT Subsidiaries owns any
shares of capital stock of Target REIT or other securities convertible into
capital stock of Target REIT.
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8.22. Related Party Transactions.
Except for the Acquiror REIT Employment Agreements, the Acquiror REIT
Options, Acquiror OP Units and the Acquiror REIT Restricted Stock Grants, there
are no arrangements, agreements, or contracts entered into by Acquiror REIT or
any of the Acquiror REIT Subsidiaries with any person who is an officer,
director, employee or affiliate of Acquiror REIT or any of the Acquiror REIT
Subsidiaries, any relative of any of the foregoing persons or any entity of
which any of the foregoing persons is an Affiliate.
8.23. Takeover Statutes.
Acquiror REIT and Merger Sub have taken all actions required of Acquiror
REIT and Merger Sub to exempt the transactions contemplated hereby from the
operation of any Takeover Statutes.
8.24. Hart-Scott-Rodino Antitrust Improvements Act of 1976.
For purposes of determining compliance with the HSR Act, Acquiror REIT and
Merger Sub confirm that the conduct of their business, through the Acquiror REIT
Subsidiaries, consists solely of investing in, owning and operating, real
estate, assets and related personal property for the benefit of the Shareholders
of Acquiror REIT.
8.25. Development.
Set forth on Schedule 8.25 is a list of all material agreements entered
into by Acquiror REIT or any of the Acquiror REIT Subsidiaries relating to the
development, rehabilitation, capital improvement or construction of hotel
properties or additions thereto or other real estate properties which
development or construction has not been substantially completed as of the date
of this Agreement. Schedule 8.25 provides a description of each of Acquiror
REIT's or its Subsidiaries' material development, rehabilitation, capital
improvement and construction projects, including budgeted amounts and costs
incurred to date for each such project.
8.26. Tax Matters.
Except as set forth in Schedule 8.26, (i) Acquiror REIT and each of the
Acquiror REIT Subsidiaries (a) has timely filed all material Tax Returns
required to be filed by any of them for tax periods ended prior to the date of
this Agreement, or requests for extensions have been timely filed and any such
request has been granted and has not expired, and all such tax returns are
accurate and complete in all material respects, (b) has paid or accrued all
Taxes shown to be due and payable on such returns or which have become due and
payable pursuant to any assessment or deficiency notice received by any of them,
and (c) has properly accrued in accordance with and to the extent required by
GAAP all Taxes for such periods and periods subsequent to the periods covered by
such Tax Returns; (ii) neither Acquiror REIT nor any of the Acquiror REIT
Subsidiaries has received any notice that any federal, state and local income,
excise and franchise Tax Return of Acquiror REIT or any such Acquiror REIT
Subsidiary has been or will be examined by any taxing authority; (iii) neither
Acquiror REIT nor any of the Acquiror REIT Subsidiaries has executed or filed
with the IRS or any other taxing authority any agreement now in effect extending
the period for assessment or collection of any income or other Taxes; (iv)
Acquiror REIT (a) has qualified to be taxed as a REIT pursuant to Sections 856
through 859 of the Code for its taxable years ended December 31, 1994, 1995,
1996 and 1997, and (b) has operated, and intends to continue to operate, in such
a manner as to qualify to be taxed as a REIT pursuant to Sections 856 through
859 of the Code for its taxable year ending after the Closing Date; (v) each
Acquiror REIT Subsidiary that is a partnership, joint venture or limited
liability company (A) has been since its formation and continues to be treated
for federal income tax purposes as a partnership and not as a corporation or an
association taxable as a corporation and (B) has not since the later of its
formation or the acquisition by Acquiror REIT of a direct or indirect interest
therein, owned any assets (including, without limitation, securities) that would
cause Acquiror REIT to violate Section 856(c)(5) of the Code; (vi) Acquiror REIT
represents that each of the Acquiror REIT Subsidiaries which is a corporation
for federal income tax purposes and of which all the outstanding capital stock
is owned solely by Acquiror REIT (or by Acquiror REIT and one or more of the
Acquiror REIT Subsidiaries or by one or more of the Acquiror REIT
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Subsidiaries) is a "Qualified REIT Subsidiary" as defined in Section 856 of the
Code; and (vi) neither Acquiror REIT nor any of the Acquiror REIT Subsidiaries
holds any asset, (a) the disposition of which could be subject to rules similar
to Section 1374 of the Code as a result of an election under IRS Notice 88-19,
or (b) that is subject to a consent filed pursuant to Section 341(f) of the Code
and regulations thereunder. No Acquiror REIT Subsidiary (other than Acquiror C.
Corp.) is a corporation (or an entity that would, under applicable federal
income tax principles, be classified as an association taxable as a
corporation). Acquiror OP is not a publicly traded partnership within the
meaning of Section 7704 of the Code. True, correct and complete copies of all
federal, state and local income or franchise Tax Returns filed by Acquiror REIT
and each of the Acquiror REIT Subsidiaries and all communications with taxing
authorities relating thereto have been made available to Target REIT or its
representatives.
8.27. Convertible Securities.
Except as set forth herein or in Schedule 8.27 hereto, Acquiror REIT has no
outstanding options, warrants or other securities exercisable for, or
convertible into, Acquiror REIT Common Stock, the terms of which would require
any anti-dilution adjustments by reason of the consummation of the transactions
contemplated hereby.
8.28. Acquiror REIT Common Stock.
Acquiror REIT has reserved for issuance a sufficient number of shares of
Acquiror REIT Common Stock to perform its obligations hereunder. The issuance
and delivery by Acquiror REIT of shares of Acquiror REIT Common Stock in
connection with the REIT Merger and this Agreement have been duly and validly
authorized by all necessary corporate action on the part of Acquiror REIT,
except for the approval of such issuance and delivery by Acquiror REIT's
Shareholders as contemplated by this Agreement. The shares of Acquiror REIT
Common Stock to be issued in connection with the REIT Merger, when issued in
accordance with the terms of this Agreement and the Plan of Merger, will be
validly issued, fully paid and nonassessable and not issued in violation of any
preemptive rights.
8.29. Interim Operations of Merger Sub.
Merger Sub was formed solely for the purpose of engaging in the REIT Merger
and has not engaged in any business activities or conducted any operations other
than as contemplated by this Agreement.
8.30. Updating of Representations and Warranties.
Between the date hereof and the Closing Date, Acquiror OP, Acquiror REIT
and Merger Sub will promptly disclose to Target REIT any information which, to
the Knowledge of Acquiror REIT, (a) would render any representation or warranty
of any of them under this Article VIII untrue, (b) renders any information set
forth in this Agreement no longer correct in all material respects, or (c)
arises after the date hereof and which would have been required to be included
in this Agreement if such information had existed on the date hereof.
Each of the representations, warranties and covenants contained in this
Article VIII and its various subparagraphs are intended for the benefit of
Target REIT and Contributor OP and may be waived in whole or in part, by Target
REIT, but only by an instrument in writing signed by Target REIT. No
investigation, audit, inspection, review or the like conducted by or on behalf
of Target REIT or Contributor OP shall be deemed to terminate the effect of any
such representations, warranties and covenants, it being understood that Target
REIT and Contributor OP have the right to rely thereon and that each such
representation, warranty and covenant constitutes a material inducement to
Target REIT and Contributor OP to execute this Agreement, agree to the Mergers
and to consummate the transactions contemplated by this Agreement.
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8.31. Reorganization.
Neither Acquiror REIT nor any Acquiror REIT Subsidiary has taken any
action, or agreed to take any action, or has any knowledge of any fact or
circumstance that is reasonably likely to prevent the REIT Merger, from
qualifying for treatment as a "reorganization" within the meaning of Section
368(a) of the Code.
8.32. Intellectual Property.
Schedule 8.32 contains a true, correct and complete listing of all
trademarks, service marks, trade names, service names, patents, copyrights and
computer software owned or licensed by or registered in the name of Acquiror
REIT or any Acquiror REIT Subsidiary. Either Acquiror REIT or any Acquiror REIT
Subsidiary, as shown therein, is the sole owner of all right, title and interest
in all intellectual property described in Schedule 8.32 hereto, except and
excluding proprietary rights that either Acquiror REIT or any Acquiror REIT
Subsidiary are entitled to exercise and sublicense, by reason of license or
otherwise, which are identified in Schedule 8.32 hereof. Except as provided on
Schedule 8.32 hereof, neither Acquiror REIT nor Acquiror OP has any knowledge
nor have they received any written notice to the effect that any service
rendered by either Acquiror REIT or any Acquiror REIT Subsidiary with respect to
their businesses infringes on any intellectual property right or other
legally-protectable right of another Person.
8.33. Employees.
Except as set forth on Schedule 8.33 hereof, neither Acquiror REIT nor any
Acquiror REIT Subsidiary has any written employment contract with any person
currently engaged, or previously engaged, in the businesses of Acquiror REIT nor
any Acquiror REIT Subsidiary.
8.34. Labor Relations.
Neither Acquiror REIT nor any Acquiror REIT Subsidiary is the subject of
any litigation or governmental investigation asserting that Acquiror REIT or any
Acquiror REIT Subsidiary has committed an unfair labor practice (within the
meaning of the National Labor Relations Act or comparable state law) or seeking
to compel Acquiror REIT or any Acquiror REIT Subsidiary to bargain with any
labor organization as to wages or conditions of employment, nor is Acquiror REIT
or any Acquiror REIT Subsidiary a party to or bound by any collective bargaining
agreement, contract, or other agreement or understanding with a labor union or
labor organization, nor is there any strike or other labor dispute involving
Acquiror REIT or any Acquiror REIT Subsidiary, pending or, to the Knowledge of
Acquiror REIT, threatened, or, to the Knowledge of Acquiror REIT, is there any
activity involving Acquiror REIT's or any Acquiror REIT Subsidiary's employees
seeking to certify a collective bargaining unit or engaging in any other
organization activity.
8.35. No Special Taxes.
Except as set forth in Schedule 8.35, neither Acquiror REIT nor Acquiror OP
has knowledge of, nor has received any notice of, any special taxes or
assessments relating to any of the Acquiror REIT Hotels or any part thereof or
any planned public improvements that may result in a special tax or assessment
against an Acquiror REIT Hotel which would have an Acquiror REIT Material
Adverse Effect.
8.36. Compliance with Existing Laws.
Except as set forth on Schedule 8.36, neither Acquiror REIT nor any
Acquiror REIT Subsidiary has received notice within the past twelve (12) months
(or since commencement of development or the date of acquisition of any Acquiror
REIT Hotel if such development commenced or acquisition occurred within the past
twelve (12) months) of any existing or threatened violation of any provision of
any applicable building, zoning, subdivision, environmental or other
governmental ordinance, resolution, statute, rule, order or regulation,
including but not limited to those of environmental agencies or insurance boards
of underwriters, with respect to the ownership, operation, use, maintenance or
condition of an Acquiror REIT Hotel or any part thereof, or requiring any
repairs or alterations other than those that have been made prior to the date
hereof, except such violations as have been cured to the satisfaction of the
relevant authority or would have no
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Acquiror REIT Material Adverse Effect. Acquiror REIT and each Acquiror REIT
Subsidiary have in effect all Permits necessary for them to own, lease, or
operate the Acquiror REIT Hotels and to carry on their businesses as now
conducted, except for those Permits the absence of which would have no Material
Adverse Effect on any Acquiror REIT Hotel, and there has occurred no default
under any such Permit other than defaults which, singly or in the aggregate,
would have no Material Adverse Effect on any Acquiror REIT Hotel. Except as
disclosed on Schedule 8.36 hereto, neither Acquiror REIT nor any Acquiror REIT
Subsidiary is in violation of any laws, orders, or Permits applicable to its
business or employees conducting its business, except for violations which would
not have an Acquiror REIT Material Adverse Effect.
8.37. Condemnation Proceedings.
Except as set forth on Schedule 8.37, neither Acquiror REIT nor Acquiror OP
has received notice of any condemnation or eminent domain proceeding pending or,
to the Knowledge of Acquiror REIT, threatened against the Acquiror REIT Hotels
or any material part thereof.
8.38. Room Furnishings.
All public spaces, lobbies, meeting rooms, and each room in each of the
Acquiror REIT Hotels available for guest rental is generally furnished in
accordance with the applicable franchisor's standards for the hotel and room
type.
8.39. Franchisors; Franchise Agreements.
The Acquiror REIT Hotels are currently operated pursuant to franchise
agreements with the franchisors as listed next to their name on Schedule 8.39.
8.40. Mortgage Documents.
All promissory notes, bonds and other evidences of indebtedness given by
Acquiror REIT or any Acquiror REIT Subsidiary that are secured by mortgages or
negative pledges encumbering the Acquiror REIT Hotels are listed on Schedule
8.40, together with a description of the corresponding mortgage documents. Such
mortgage documents are complete, are in full force and effect and have not been
modified or supplemented, except as otherwise disclosed on Schedule 8.40, and no
fact or circumstance has occurred that, by itself or with the giving of notice
or the passage of time or both, would constitute a default under any of such
mortgage documents. Neither Acquiror REIT nor Acquiror OP has been advised nor
received any notice asserting that a default exists under any of such mortgage
documents.
8.41. New Leases.
Acquiror REIT and Acquiror OP will use their good faith best efforts, and
will cause Acquiror CMBS OP to use its good faith best efforts, to enter into
new leases with respect to the Target REIT Hotels described on Schedule 7.38 (as
soon as practical after the date hereof concerning those hotels owned by
Contributor CMBS OP) on terms reasonably acceptable to Acquiror REIT effective
as of the Closing Date and will keep Target REIT and Contributor OP advised as
to the status of negotiations as to such new leases.
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ARTICLE IX
CONDITIONS PRECEDENT TO CLOSING
9.1. Conditions Precedent to Obligations of Parties.
The respective obligations of each party hereto to consummate the Mergers,
the Asset Sale and the other transactions contemplated hereby are subject to the
satisfaction at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved by the Shareholders of Target REIT and the Shareholders of
Acquiror REIT in the manner required by the Acquiror REIT Charter, the
Target REIT Charter and by applicable law and applicable regulations of the
NYSE.
(b) Each party hereto shall have obtained reasonable evidence of the
OP Partner Approvals.
(c) No order, decree or injunction shall have been enacted, entered,
promulgated or enforced by any United States court of competent
jurisdiction or any United States governmental authority which prohibits
the consummation of the Mergers, the Asset Sale and the other transactions
contemplated hereby; provided, however, that in case of the existence of
such order, decree or injunction, the parties hereto shall use their
reasonable best efforts to have any such order, decree or injunction
vacated or reversed.
(d) All applicable requirements under state securities or Takeover
Statutes, if any, relating to the issuance and trading of the shares of
Acquiror REIT Common Stock issuable hereunder, shall have been satisfied.
(e) Any waiting period applicable to the Mergers under the HSR Act, as
applicable, shall have terminated or expired.
(f) The Form S-4 shall have become effective under the Securities Act
and no stop order with respect thereto shall be in effect.
(g) Acquiror REIT shall have obtained the approval for the listing of
the shares Acquiror REIT Common Stock issuable hereunder on the NYSE,
subject to official notice of issuance.
(h) The Average Price shall be equal to or greater than $14.00.
(i) Acquiror OP and Acquiror CMBS OP shall have entered into new
leases with respect to the Target REIT Hotels described on Schedule 7.38
effective as of the Closing Date on terms reasonably acceptable to Acquiror
REIT.
(j) Each party hereto shall have obtained any and all consents,
approvals, authorizations, clearances, exemptions or waivers by any Person
pursuant to any Contract, law, order or Permit required for consummation of
the Mergers, the Asset Sale or any of the other transactions contemplated
herein, or for the prevention of a default under any Contract or Permit of
such party which, if not obtained or made, is reasonably likely to have a
Material Adverse Effect on such party.
(k) The Closing shall have occurred on or before October 15, 1998.
9.2. Conditions Precedent to the Obligations of Acquiror OP, Acquiror REIT
and Merger Sub.
Each and every obligation hereunder of Acquiror OP, Acquiror REIT and
Merger Sub to be performed on the Closing Date shall be subject to the
satisfaction prior to or at the Closing of the express conditions precedent set
forth below:
(a) Target REIT and Contributor OP shall have performed and complied
in all material respects with all of their obligations under this Agreement
that are to be performed or complied with by them prior to or on the
Closing Date.
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(b) All proceedings, corporate, partnership or other, to be taken by
or at the direction of Target REIT and Contributor OP in connection with
the transactions contemplated by this Agreement, and all documents incident
thereto, shall be reasonably satisfactory in form and substance to Acquiror
REIT, Acquiror OP and Merger Sub, and Target REIT and Contributor OP shall
have made available to Acquiror REIT, Merger Sub and Acquiror OP for
examination the originals or complete, true and correct copies of all
documents that Acquiror REIT, Acquiror OP and Merger Sub may reasonably
request in connection with the transactions contemplated by this Agreement.
(c) No investigation, suit, action or other proceeding shall be
threatened or pending before any court or governmental agency that seeks
restraint, prohibition, damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby.
(d) The representations and warranties made by Contributor OP and
Target REIT in this Agreement shall be true and correct in all material
respects as of the Effective Time with the same force and effect as though
such representations and warranties had been made on the and as of the
Effective Time (with such exceptions, if any, necessary to give effect to
events or transactions contemplated hereby and provided that representation
and warranties which are confined to a specific date shall speak only as of
such date), except where the failure to be true and correct does not have a
Target REIT Material Adverse Effect.
(e) Acquiror REIT shall have received the opinion of Baker, Donelson,
Bearman & Caldwell, counsel to Acquiror REIT, Acquiror OP and Merger Sub,
dated the Closing Date, to the effect that (i) the REIT Merger will be
treated for Federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, (ii) Acquiror REIT and Target REIT
will each be a party to that reorganization within the meaning of Section
368(b) of the Code, and (iii) no gain or loss will be recognized for
federal income tax purposes by Acquiror REIT, Merger Sub, or Target REIT,
on consummation of the REIT Merger. In rendering its opinion, said counsel
shall be entitled to rely as to any factual matter upon certificates given
by executive officers of Acquiror REIT and Target REIT and shall be
entitled to assume that the covenants of Section 10.14 shall be fully
complied with.
(f) Acquiror REIT shall have received (i) an opinion of Hunton &
Williams, dated as of the Closing Date, to the effect that, commencing with
its taxable year ended December 31, 1993, Target REIT was organized and has
operated in conformity with the requirements for qualification as a REIT
under the Code (with customary exceptions, assumptions and qualifications
and based upon customary representations) and (ii) an opinion of Baker,
Donelson, Bearman & Caldwell, dated as of the Closing Date, to the effect
that, commencing with its taxable year ending December 31, 1994, Acquiror
REIT was organized and has operated in conformity with the requirements for
qualification as a REIT under the Code and that, after giving effect to the
REIT Merger, Acquiror REIT's proposed method of operation will enable it to
continue to meet the requirements for qualification and taxation as a REIT
under the Code (with customary exceptions, assumptions and qualifications
and based upon customary representations and based upon and subject to the
opinion of counsel to Target REIT described in clause (i) above).
(g) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of Target REIT and the Target REIT Subsidiaries, taken as a
whole, that would have or would be reasonably likely to have a Target REIT
Material Adverse Effect, other than any such change that affects both
Target REIT and Acquiror REIT in a substantially similar manner.
(h) Acquiror REIT shall have received the opinion of Hunton &
Williams, counsel to Target REIT and Contributor OP, dated the Closing
Date, as to the matters set forth in Exhibit C.
(i) Target REIT and Contributor OP shall have delivered to Acquiror
REIT an officer's certificate, given as of the Effective Time, in
substantially the form attached hereto as Exhibit D.
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(j) Contributor OP shall have delivered to Acquiror OP, on or before
the Effective Time, all of the documents and other information required of
Contributor OP and Contributor CMBS OP pursuant to Section 2.6.
(k) Good and marketable fee simple title to the Real Property shall be
insurable as such by the Title Company subject only to Permitted Title
Exceptions.
(l) Acquiror REIT shall have received from Target REIT the executed
Articles of Merger.
(m) Acquiror REIT shall have received copies of resignations by each
director and officer of Target REIT and the Target REIT Subsidiaries.
(n) All of the shares of capital stock of the Target C Corp. owned by
Mr. Solmson shall have been transferred to Acquiror REIT, or its designees
or assigns, in accordance with the Stock Purchase Agreement.
(o) Acquiror REIT shall have received from Contributor CMBS OP the
executed CMBS Agreement of Merger.
9.3. Conditions Precedent to the Obligations of Contributor OP and Target
REIT.
Each and every obligation hereunder of Contributor OP and Target REIT to be
performed on the Closing Date shall be subject to the satisfaction prior to or
at the Closing of the express conditions precedent set forth below:
(a) Acquiror OP, Acquiror REIT and Merger Sub shall have performed and
complied in all material respects with all of their obligations under this
Agreement that are to be performed or complied with by them prior to or on
the Closing Date.
(b) All proceedings, corporate, partnership or other, to be taken by
or at the direction of Acquiror OP, Acquiror REIT and Merger Sub in
connection with the transactions contemplated by this Agreement, and all
documents incident thereto, shall be reasonably satisfactory in form and
substance to Target REIT and Contributor OP, and Acquiror REIT, Acquiror OP
and Merger Sub shall have made available to Target REIT and Contributor OP
for examination the originals or complete, true and correct copies of all
documents that Target REIT and Contributor OP may reasonably request in
connection with the transactions contemplated by this Agreement.
(c) No investigation, suit, action or other proceeding shall be
threatened or pending before any court or governmental agency that seeks
restraint, prohibition, damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby.
(d) The representations and warranties made by Acquiror OP, Acquiror
REIT and Merger Sub in this Agreement shall be true and correct in all
material respects as of the Effective Time with the same force and effect
as though such representations and warranties had been made on and as of
the Effective Time (with such exceptions, if any, necessary to give effect
to events or transactions contemplated hereby and provided that
representations and warranties which are confined to a specific date shall
speak only as of such date), except where the failure to be true and
correct does not have an Acquiror REIT Material Adverse Effect.
(e) Target REIT shall have received the opinion of Hunton & Williams,
counsel to Target REIT and Contributor OP, dated the Closing Date, to the
effect that (i) the REIT Merger will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Code, (ii) Acquiror REIT and Target REIT will each be a party to that
reorganization within the meaning of Section 368(b) of the Code, (iii) the
exchange in the REIT Merger of Acquiror REIT Common Stock for Target REIT
Capital Stock will not give rise to gain or loss to the Shareholders of
Target REIT with respect to such exchange (except with respect to the
receipt of cash in lieu of fractional shares), (iv) the transfer by
Contributor OP of all of its assets to Acquiror OP in exchange for limited
partnership interests in Acquiror OP will not cause Contributor OP to
recognize gain or loss for federal income tax purposes
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(except to the extent that Contributor OP receives cash in the exchange),
and (v) the distribution by Contributor OP of limited partnership interests
in Acquiror OP will not cause the partners of Contributor OP to recognize
gain or loss for federal income tax purposes (except to the extent that the
partners of Contributor OP receive cash in the distribution). In rendering
its opinion, said counsel shall be entitled to rely as to any factual
matter upon certificates given by executive officers of Acquiror REIT and
Target REIT and shall be entitled to assume that the covenants of Section
10.14 shall be fully complied with.
(f) Target REIT shall have received an opinion of Baker, Donelson,
Bearman & Caldwell, dated as of the Closing Date, that, commencing with its
taxable year ended December 31, 1994, Acquiror REIT was organized and has
operated in conformity with the requirements for qualification as a REIT
under the Code (with customary exceptions, assumptions and qualifications
and based upon customary representations).
(g) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of Acquiror REIT and the Acquiror REIT Subsidiaries, taken as a
whole, that would have or would be reasonably likely to have an Acquiror
REIT Material Adverse Effect, other than any such change that affects both
Acquiror REIT and Target REIT in a substantially similar manner.
(h) Target REIT shall have received the opinion of Baker, Donelson,
Bearman & Caldwell, counsel to Acquiror REIT, Merger Sub and Acquiror OP,
dated the Closing Date, as to the matters set forth in Exhibit E.
(i) Acquiror REIT, Acquiror OP and Merger Sub shall have delivered to
Target REIT an officer's certificate, given as of the Effective Time, in
substantially the form attached hereto as Exhibit F.
(j) Target REIT shall have received from Merger Sub the executed
Articles of Merger and from Acquiror OP and Acquiror CMBS OP the
Certificates of Merger.
(k) Target REIT shall have received from Acquiror CMBS OP the executed
CMBS Agreement of Merger.
ARTICLE X
COVENANTS
10.1. Acquisition Proposals.
Prior to the Effective Time, Acquiror REIT and Target REIT each agree (a)
that neither of them nor any of their Subsidiaries' shall, and each of them
shall direct and use its reasonable best efforts to cause its or any of its
Subsidiaries' respective officers, directors, trustees, partners, employees,
agents, affiliates and representatives (including, without limitation, any
investment banker, financial adviser, attorney or accountant retained by it or
any of its Subsidiaries) not to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its Shareholders)
by any Person with respect to a merger, acquisition, tender offer, exchange
offer, consolidation or similar transaction involving, or any purchase by any
Person of all or any significant portion of the assets or any equity securities
(or any debt securities convertible into equity securities) of, such party or
any of its Subsidiaries, other than the transactions contemplated by this
Agreement (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal" and any such proposed transaction being hereinafter
referred to as a "Competing Transaction"), or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any Person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal;
(b) that it or any of its Subsidiaries will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any Persons
conducted heretofore with respect to any of the foregoing and each will take, or
cause its Subsidiaries to take, the necessary steps to inform the individuals or
entities referred to above of the obligations undertaken in this Section 10.1;
and (c) that it will notify the other party, in writing in accordance with
Section 12.2, immediately if any such inquiries or proposals are received by,
any
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such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it or any of its Subsidiaries;
provided, however, that nothing contained in this Section 10.1 shall prohibit
the Board of Directors of such party from (i) furnishing information to or
entering into discussions or negotiations with, any Person that makes an
unsolicited bona fide Acquisition Proposal, if, and only to the extent that, (A)
the Board of Directors of such party determines in good faith based on the
written advice of counsel that such action is required for the Board of
Directors to comply with its fiduciary duties to Shareholders, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such Person, such party provides written notice to the other parties to
this Agreement to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such Person, and (C) subject to any
confidentiality agreement with such Person (which such party determined in good
faith was required to be executed in order for the Board of Directors to comply
with its fiduciary duties to Shareholders imposed by law as advised by counsel
in writing), such party keeps the other parties to this Agreement informed of
the status (but not the terms) of any such discussions or negotiations; and (ii)
to the extent applicable, complying with Rule 14e-2 promulgated under the
Exchange Act with regard to an Acquisition Proposal.
Nothing in this Section 10.1 shall (x) permit any party hereto to terminate
this Agreement (except as specifically provided in Article XI hereof), (y)
permit any party hereto to enter into any agreement with respect to an
Acquisition Proposal or with respect to any Competing Transaction during the
term of this Agreement (it being agreed that during the term of this Agreement,
no party hereto shall enter into any agreement with any Person that provides
for, or in any way facilitates, an Acquisition Proposal or with respect to any
Competing Transaction (other than a confidentiality agreement in customary
form)), or (z) affect any other obligation under this Agreement of any party
hereto.
10.2. Conduct of Businesses.
(a) Prior to the Effective Time, except as otherwise contemplated by
this Agreement, unless the other party has consented in writing thereto,
Acquiror REIT and Target REIT:
(i) Shall use their reasonable efforts, and shall cause each of
their respective Subsidiaries to use their reasonable efforts, to
preserve intact their business organizations and goodwill and keep
available the services of their respective officers and employees;
(ii) Shall confer on a regular basis with one or more
representatives of the other party to report operational matters of
materiality and, subject to Sections 10.2(b)(v) and 10.2(c)(v), any
proposals to engage in material transactions;
(iii) Shall promptly notify the other party of any material
emergency or other material adverse change in the condition (financial
or otherwise), business, properties, assets, liabilities, prospects or
the normal course of their businesses or in the operation of their
properties, any material governmental complaints, investigations or
hearings (or communications indicating that the same may be
contemplated), or the breach in any material respect of any
representation, warranty, covenant or agreement contained herein;
(iv) Shall set the record date for the quarterly dividend payable
with respect to Acquiror REIT Common Stock, Acquiror REIT Preferred
Stock and Target REIT Capital Stock, respectively, for the second
calendar quarter of 1998 to a date no later than June 30, 1998, and
shall mutually agree upon the payment date for each dividend (and
neither Acquiror REIT nor Target REIT shall make the election permitted
by Section 858(a) of the Code with respect to such dividend); provided,
however, that such record date for either party shall be modified to
prevent the elimination of a dividend for the Shareholders of either
party or to prevent the receipt by the Shareholders of either party of
dividends from both Acquiror REIT and Target REIT; and
(v) Shall promptly deliver to the other complete, true and correct
copies of any SEC Documents filed with the SEC subsequent to the date of
this Agreement.
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(b) Prior to the Effective Time, except as otherwise set forth herein,
unless Acquiror REIT, Merger Sub and Acquiror OP have consented (such
consent not to be unreasonably withheld or delayed) in writing thereto,
Contributor OP and Target REIT:
(i) Shall, and shall cause each of the Target REIT Subsidiaries
to, conduct their operations according to their usual, regular and
ordinary course in substantially the same manner as heretofore
conducted;
(ii) Shall not, and shall not permit any of the Target REIT
Subsidiaries to, amend their Organizational Documents;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including any
existing dividend reinvestment plan) existing on the date hereof and
disclosed pursuant to this Agreement, issue any shares of Target REIT's
capital stock or any units of partnership interests of Contributor OP
other than with respect to redemption of Contributor OP Units, or effect
any stock split, reverse stock split, stock dividend, recapitalization
or other similar transaction, (B) grant, confer or award any option,
warrant, conversion right or other right not existing on the date hereof
to acquire any shares of Target REIT's capital stock or any units of
partnership interests of Contributor OP, (C) increase materially any
compensation or enter into or amend any employment agreement with any of
their present or future officers, directors, partners or employees, or
(D) adopt any new employee benefit plan (including any stock option,
stock benefit or stock purchase plan) or amend any existing Target REIT
Employee Benefit Plan in any material respect;
(iv) Shall not (A) declare, set aside or pay any dividend or make
any other distribution or payment with respect to any shares of Target
REIT's capital stock, except (a) a dividend not to exceed $.375 per
share of Target REIT's Common Stock and $.3625 per share of Target REIT
Preferred Stock for the second calendar quarter of 1998 and (b) any
Final Target REIT Dividend pursuant to Section 4.2(d), or (B) except in
connection with the use of shares of Target REIT's capital stock to pay
the exercise price or tax withholding in connection with stock-based
employee benefit plans of Target REIT, directly or indirectly redeem,
purchase or otherwise acquire any shares of Target REIT's capital stock
or capital stock of any of the Target REIT Subsidiaries, or make any
commitment for any such action, provided, however, that Target REIT may
issue shares of Target REIT Common Stock in redemption of Contributor OP
Units as contemplated by the Contributor OP Partnership Agreement;
(v) Shall not, and shall not permit any of the Target REIT
Subsidiaries to, sell or otherwise dispose of (A) any Target REIT Hotels
or any of their capital stock of or other interests in the Target REIT
Subsidiaries or (B) except in the ordinary course of business consistent
with past practice for reasonable and adequate consideration, any of
their other assets which are material, individually or in the aggregate;
provided, however, that Target REIT and the Target REIT Subsidiaries may
sell the Target REIT Hotels set forth on Schedule 10.2(b)(v) hereto for
prices which equal or exceed the prices set forth opposite the name of
such Target REIT Hotels on Schedule 10.2(b)(v) hereto or which, in the
aggregate, equal or exceed the prices for all Target REIT Hotels set
forth on Schedule 10.2(b)(v);
(vi) Shall not, and shall not permit any of the Target REIT
Subsidiaries to, make any loans, advances or capital contributions to,
investments in, or guarantees on behalf of, any Person other than the
Target REIT Subsidiaries, or impose, or suffer the imposition, on any
Target REIT Hotel or on any other assets of Target REIT or any Target
REIT Subsidiary of any lien or encumbrance or permit such lien or
encumbrance to exist, other than liens and encumbrances (A) in effect on
the date hereof that are disclosed on the consolidated financial
statements of Target REIT and the Target REIT Subsidiaries included in
the Target REIT SEC Documents or (B) arising hereafter in the ordinary
course of business consistent with past practice;
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(vii) Shall not, and shall not permit any of the Target REIT
Subsidiaries to, pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business consistent with past practice (including,
without limitation, payments of outstanding principal amounts under
credit lines) or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of Target REIT
and the Target REIT Subsidiaries included in the Target REIT SEC
Documents or incurred in the ordinary course of business consistent with
past practice;
(viii) Shall not, and shall not permit any of the Target REIT
Subsidiaries to, enter into any Contract which individually may result
in total payments or liability by or to them in excess of $100,000 in
the case of any one Contract or in excess of $500,000 for all such
Contracts, or modify, amend or terminate any Contract or waive, release,
compromise or assign any material rights or claims thereunder, other
than in the ordinary course of business consistent with past practice;
provided, however, that Target REIT and the Target REIT Subsidiaries may
complete the acquisitions of the hotel properties described in Schedule
10.2(b)(viii), the purchase of which will be funded through borrowings
under Contributor OP's line of credit;
(ix) Shall not, and shall not permit any of the Target REIT
Subsidiaries to, enter into any Contract with any officer, director,
partner, employee or affiliate of Target REIT or any of the Target REIT
Subsidiaries, except to the extent the same occur in the ordinary course
of business consistent with past practice and would not have an Target
REIT Material Adverse Effect;
(x) Shall not, and shall not permit any of the Target REIT
Subsidiaries to, take any action that would adversely effect the status
of title to the real property;
(xi) Shall not, and shall not permit any of the Target REIT
Subsidiaries to, release or modify any warranties or guarantees, if any,
of contractors, builders, architects, manufacturers, suppliers and
installers relating to the Improvements and the Personal Property or any
part thereof;
(xii) Shall, and shall cause each of the Target REIT Subsidiaries
to, pay all premiums then-due on, and shall not cancel or voluntarily
allow to expire, any of the Insurance Policies unless such policy is
replaced, without any lapse of coverage, by another policy or policies
providing coverage at least as extensive as the policy or policies being
replaced; and
(xiii) Shall not, and shall not permit any of the Target REIT
Subsidiaries to, amend or supplement the Mortgage Documents in whole or
in part, and shall, and shall cause each of the Target REIT Subsidiaries
to, pay or make, as and when due and payable, all payments of principal,
interest and other amounts required to be paid or made under the
Mortgage Documents.
(c) Prior to the Effective Time, except as otherwise set forth herein,
unless Target REIT and Contributor OP have consented (such consent not to
be unreasonably withheld or delayed) in writing thereto, Acquiror OP,
Acquiror REIT and Merger Sub:
(i) Shall, and shall cause each of the Acquiror REIT Subsidiaries
to, conduct their operations according to their usual, regular and
ordinary course in substantially the same manner as heretofore
conducted;
(ii) Shall not, and shall not permit any of the Acquiror REIT
Subsidiaries to, amend their Organizational Documents, except as
provided in the proxy statement with respect to Acquiror REIT's 1998
annual meeting of shareholders;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including any
existing dividend reinvestment plan) existing on the date hereof and
disclosed pursuant to this Agreement or pursuant to this Agreement with
respect to the Merger Consideration, the OP Merger Consideration and the
CMBS OP Merger Consideration, issue any shares of Acquiror REIT's or
Merger Sub's capital stock or any units of partnership interest of
Acquiror OP other than with respect to redemption of Acquiror OP Units,
or effect any
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stock split, reverse stock split, stock dividend, recapitalization or
other similar transaction, (B) grant, confer or award any option,
warrant, conversion right or other right not existing on the date hereof
to acquire any shares of Acquiror REIT's or Merger Sub's capital stock
or any units of partnership interest of Acquiror OP, (C) increase
materially any compensation or enter into or amend any employment
agreement with any of their present or future officers, directors,
partners or employees, or (D) adopt any new employee benefit plan
(including any stock option, stock benefit or stock purchase plan) or
amend any existing Acquiror REIT Employee Benefit Plan in any material
respect; provided, however, that Acquiror REIT may sell, from time to
time, shares of Acquiror REIT Common Stock or shares of Acquiror REIT
Preferred Stock at fair market values then prevailing in the market
place for such securities;
(iv) Shall not (A) declare, set aside or pay any dividend or make
any other distribution or payment with respect to any shares of Acquiror
REIT's or Merger Sub's capital stock, except (subject to Section
10.2(a)(iv) a dividend not to exceed $.31 per share of Acquiror REIT
Common Share for the second calendar quarter of 1998 and any other
dividend pursuant to Section 4.2(d) or other distribution necessary for
Acquiror REIT to maintain its ability to qualify to be taxed as a REIT
under the Code, or (B) except in connection with the use of shares of
Acquiror REIT capital stock to pay the exercise price or tax withholding
in connection with stock-based employee benefit plans of Acquiror REIT,
directly or indirectly redeem, purchase or otherwise acquire any shares
of Acquiror REIT's or Merger Sub's capital stock or capital stock of any
of the Acquiror REIT Subsidiaries, or make any commitment for any such
action, provided, however, that Acquiror REIT may issue shares of
Acquiror REIT Common Stock in redemption of Acquiror OP Units as
contemplated by the Acquiror OP Partnership Agreement;
(v) Shall not, and shall not permit any of the Acquiror REIT
Subsidiaries to, sell or otherwise dispose of (A) any Acquiror REIT
Hotels or any of their capital stock of or other interests in the
Acquiror REIT Subsidiaries other than Acquiror OP Units issued in
connection with the acquisition of hotel properties as described in
Section 10.2(c)(viii) or (B) except in the ordinary course of business
consistent with past practices for reasonable and adequate
consideration, any of their other assets which are material,
individually or in the aggregate; provided however, that Acquiror REIT
and the Acquiror REIT Subsidiaries may sell the Acquiror REIT Hotels set
forth on Schedule 10.2(c)(v) for prices which equal or exceed the prices
set forth opposite the name of such Acquiror REIT Hotels set forth on
Schedule 10.2(c)(v) hereto or which, in the aggregate, equal or exceed
the prices for all Acquiror REIT Hotels set forth on Schedule
10.2(c)(v);
(vi) Shall not, and shall not permit any of the Acquiror REIT
Subsidiaries to, make any loans, advances or capital contributions to,
investments in, or guarantees on behalf of, any Person other than the
Acquiror REIT Subsidiaries, or impose, or suffer the imposition, on any
Acquiror REIT Hotel or any other assets of Acquiror REIT or any Acquiror
REIT Subsidiary of any lien or encumbrance or permit such lien or
encumbrance to exist, other than liens and encumbrances (A) in effect on
the date hereof that are disclosed on the consolidated financial
statements of Acquiror REIT and the Acquiror REIT Subsidiaries included
in the Acquiror REIT SEC Document or (B) arising hereafter in the
ordinary course of business consistent with past practice;
(vii) Shall not, and shall not permit any of the Acquiror REIT
Subsidiaries to, pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business consistent with past practice (including,
without limitation, payment of outstanding principal amounts under
credit lines) or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of Acquiror
REIT and the Acquiror REIT Subsidiaries included in the Acquiror REIT
SEC Documents or incurred in the ordinary course of business consistent
with past practice;
(viii) Shall not, and shall not permit any of the Acquiror REIT
Subsidiaries to, enter into any Contract which individually may result
in total payments or liability by or to them in excess of
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$100,000 in the case of any one such Contract or in excess of $500,000
for all such Contracts, or modify, amend or terminate any Contract, or
waive, release, compromise or assign any material rights in claims
thereunder, other than in the ordinary course of business consistent
with past practice, provided, however, that Acquiror REIT and the
Acquiror REIT Subsidiaries may complete the acquisitions of the hotel
properties described in Schedule 10.2(c)(viii);
(ix) Shall not, and shall not permit any of the Acquiror REIT
Subsidiaries to, enter into any Contract with any officer, director,
partner, employee or affiliate of Acquiror REIT or any of the Acquiror
REIT Subsidiaries, except as herein provided and except in the ordinary
course of business consistent with past practice and would not have an
Acquiror REIT Material Adverse Effect; and
(x) Shall, and shall cause each of the Acquiror REIT Subsidiaries
to, pay all premiums then-due on, and shall not cancel or voluntarily
allow to expire, any of the insurance policies with respect to the
Acquiror REIT Hotels unless such policy is replaced, without any lapse
of coverage, by another policy or policies providing coverage at least
as extensive as the policy or policies being replaced.
10.3. Meetings of Shareholders.
Each of Acquiror REIT and Target REIT will take all action necessary in
accordance with applicable law and its Organizational Documents to convene a
meeting of its Shareholders as promptly as practicable, but in any event,
subject to effectiveness of the Form S-4 and related requirements as to the
timing of distribution of proxy materials to Shareholders, no later than October
15, 1998, to consider and vote upon or otherwise to obtain the consent of its
Shareholders to (i) in the case of Acquiror REIT, the approval of this
Agreement, the issuance of the Acquiror REIT Common Stock pursuant to the REIT
Merger and the amendment of its Charter as provided in Section 10.20 hereof, and
(ii) in the case of Target REIT, the approval of this Agreement and the
transactions contemplated hereby. The Board of Directors of Acquiror REIT and
the Board of Directors of Target REIT shall each recommend such approval, and
Acquiror REIT and Target REIT shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing of the Proxy
Statement/Prospectus to its respective Shareholders; provided, however, that
such recommendation or solicitation is subject to any action taken by, or upon
authority of, the Board of Directors of Acquiror REIT or the Board of Directors
of Target REIT, as the case may be, in the exercise of its good faith judgment
as to its fiduciary duties to its Shareholders imposed by law as advised by
counsel in writing. Acquiror REIT and Target REIT shall coordinate and cooperate
with respect to the timing of such meetings and shall use their best efforts to
hold such meetings on the same day.
10.4. Filings; Other Action.
Subject to the terms and conditions herein provided, the parties hereto
shall: (a) use all reasonable efforts to cooperate with one another in (i)
determining which filings are required to be made prior to the Effective Time
with, and which consents, approvals, permits or authorizations are required to
be obtained prior to the Effective Time from, governmental or regulatory
authorities of the United States, the several states, third party secured and
unsecured lenders, franchisors and rating agencies in connection with the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby, and (ii) timely making all such filings
and timely seeking all such consents, approvals, permits or authorizations; (b)
use all reasonable efforts to obtain in writing any consents required from third
parties in form reasonably satisfactory to Target REIT and Acquiror REIT
necessary to effectuate the Mergers, the Asset Sale and the other transactions
contemplated herein; and (c) use all reasonable efforts to take, or cause to be
taken, all other action and do, or cause to be done, all other things necessary,
proper or appropriate to consummate and make effective the transactions
contemplated by this Agreement. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purpose of this
Agreement, the proper officers and directors of Acquiror REIT and Target REIT
shall take, or cause the Subsidiaries of Acquiror REIT and Target REIT to take,
any necessary action.
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10.5. Inspection of Records.
From the date hereof to the Effective Time, each of Target REIT and
Acquiror REIT shall allow all designated officers, attorneys, accountants,
investment bankers, financial advisers and other representatives of the other
access at all reasonable times to the records and files, correspondence, audits
and properties, as well as to all information relating to commitments,
contracts, titles and financial position, or otherwise pertaining to the
business and affairs of Target REIT and Acquiror REIT and their respective
Subsidiaries.
10.6. Publicity.
The initial press release relating to this Agreement and the transactions
contemplated hereby shall be a joint release and thereafter, prior to the
Effective Time, Target REIT and Acquiror REIT shall, subject to their respective
legal obligations (including requirements of stock exchanges and other similar
regulatory bodies), provide each other with copies of any proposed press release
a sufficient amount of time prior to the proposed release to allow for review
and discussion thereof, consult with each other, and use reasonable efforts to
agree upon the text of any press release, before issuing any such press release
or otherwise making public statements with respect to the transactions
contemplated hereby and in making any filings with any federal or state
governmental or regulatory agency or with any national securities exchange with
respect thereto.
10.7. Registration Statement.
Acquiror REIT and Target REIT shall cooperate and promptly prepare and
Acquiror REIT shall file with the SEC as soon as practicable a Registration
Statement on Form S-4 (together with any pre-effective or post-effective
amendments, the "Form S-4") under the Securities Act, with respect to the
Acquiror REIT Common Stock issuable in the REIT Merger, a portion of which
Registration Statement shall also serve as the joint proxy statement with
respect to the meetings of the Shareholders of Target REIT and of Acquiror REIT
in connection with the REIT Merger (the "Proxy Statement/Prospectus"). The
respective parties will cause the Proxy Statement/Prospectus and the Form S-4 to
comply as to form in all material respects with the applicable provisions of the
Securities Act and the Exchange Act. Acquiror REIT shall use all reasonable
efforts and Target REIT will cooperate with Acquiror REIT to have the Form S-4
declared effective by the SEC as promptly as practicable. Acquiror REIT shall
use its best efforts to obtain, prior to the effective date of the Form S-4, all
necessary state securities law or "Blue Sky" permits or approvals required to
carry out the transactions contemplated by this Agreement and will pay all
expenses incident thereto. Acquiror REIT agrees that the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the respective meetings of Shareholders of
Acquiror REIT and Target REIT, or, in the case of the Form S-4 and each
amendment or supplement thereto, at the time it is filed or becomes effective,
will not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the foregoing shall not apply to the extent
that any such untrue statement of a material fact or omission to state a
material fact was made by Acquiror REIT in reliance upon and in conformity with
written information concerning Target REIT or the Target REIT Subsidiaries
furnished to Acquiror REIT by Target REIT specifically for use in the Proxy
Statement/Prospectus or the Form S-4. Target REIT agrees that the written
information provided by it specifically for inclusion in the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the respective meetings of Shareholders of
Acquiror REIT and Target REIT, or, in the case of written information provided
by Target REIT specifically for inclusion in the Form S-4 or any amendments or
supplement thereto, at the time it is filed or becomes effective, will not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Acquiror
REIT will advise Target REIT, promptly after it receives notice thereof, of the
time when the Form S-4 has become effective or any supplement or amendment has
been filed, the issuance of any stop order, the suspension of the qualification
of the shares of Acquiror REIT Common Stock issuable in connection with the
Merger for offering or sale in any jurisdiction, or any request by the SEC for
amendment
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of the Proxy Statement/Prospectus or the Form S-4 or comments thereon and
responses thereto or requests by the SEC for additional information.
10.8. Listing Application.
Acquiror REIT shall promptly prepare and submit to the NYSE a listing
application covering the shares of Acquiror REIT Common Stock issuable in the
REIT Merger, and shall use its best efforts to obtain, prior to the Effective
Time, approval for the listing of such shares of Acquiror REIT Common Stock,
subject to official notice of issuance.
10.9. Further Action.
Each party hereto shall, subject to the fulfillment at or before the
Effective Time of each of the conditions of performances set forth herein or the
waiver thereof, perform such further acts and execute such documents as may
reasonably be required to effect the Mergers and the Asset Sale.
10.10. Expenses.
Except as otherwise specifically set forth herein, all out-of-pocket costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby ("Expenses") shall be paid by the party hereto incurring
such Expenses, except that each of Acquiror REIT and Target REIT shall bear and
pay one-half of (i) the SEC and Blue Sky filing fees incurred in connection with
the Form S-4 and the Proxy Statement/Prospectus, and (ii) the printing and
distribution costs incurred in connection with the printing and distribution to
the Shareholders of the Form S-4 and the Proxy Statement/Prospectus. However,
notwithstanding any other terms or conditions of this Agreement, Acquiror REIT
acknowledges that all unpaid Expenses incurred by Target REIT and the Target
REIT Subsidiaries in connection with the execution of this Agreement and the
performance of the transactions contemplated hereby will be obligations of
Merger Sub upon consummation of the REIT Merger and Merger Sub agrees to pay,
and Acquiror REIT agrees to cause Merger Sub to timely perform and pay, such
obligations in full.
10.11. Indemnification.
For a period of six years from and after the Effective Time, Acquiror REIT
shall indemnify the directors, officers, employees and agents of Target REIT and
the Target REIT Subsidiaries who at any time prior to the Effective Time were
entitled to indemnification under the Organizational Documents of Target REIT,
Organizational Documents of the Target REIT Subsidiaries or employment or other
agreements between Target REIT and such persons, or between any Target REIT
Subsidiary and such persons, existing on the date hereof to the same extent as
such directors, officers, employees and agents are entitled to indemnification
under such Organizational Documents or employment or other agreements in respect
of actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement). If
Acquiror REIT, the Surviving Corporation or any of its successors or assigns
shall consolidate with or merge into any other Person and shall not be the
continuing or surviving Person of such consideration or merger or shall transfer
all or substantially all of its assets to any Person, then and in each case,
proper provision shall be made so that the successors and assigns of Acquiror
REIT or the Surviving Corporation, as the case may be, shall assume the
obligations set forth in this Section 10.11.
10.12. Governance.
On or before the Closing Date, Acquiror REIT's Board shall take all action
necessary to expand the number of directorships on Acquiror REIT's Board from
the current four directorships to six directorships, and cause Robert M. Solmson
and Bruce E. Campbell, Jr. to be appointed as directors of Acquiror REIT to fill
such two new directorships effective as of the Effective Time for terms expiring
at the 1999 annual meeting of Shareholders of Acquiror REIT; provided that,
notwithstanding the foregoing, Acquiror REIT's Board shall recommend in Acquiror
REIT's proxy statement with respect to the 1999 annual meeting of Shareholders
of Acquiror REIT that Messr. Campbell and Solmson shall be nominated by the
Board of Acquiror REIT for
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election as Class I and Class II directors, respectively, with terms expiring at
Acquiror REIT's annual meetings of shareholders in 2001 and 2002, respectively.
If, prior to the Effective Time, either of such persons shall decline or be
unable to serve as a director of Acquiror REIT, Target REIT shall designate
another person to serve in such person's stead, which person shall be reasonably
acceptable to Acquiror REIT's Board.
On or before the Closing Date, Acquiror REIT's Board shall take all action
necessary to form a three (3) member executive committee of such Board, and
cause Robert M. Solmson, Phillip H. McNeill, Sr. and William W. Deupree to be
appointed to serve as members of such executive committee.
10.13. Severance Benefits.
Acquiror REIT agrees that Target REIT may pay to employees of Target REIT
or the Target REIT Subsidiaries, at or prior to the Effective Time, the
severance benefits described in Schedule 10.13 (the "Severance Benefits"),
provided that, if Target REIT does not pay the Severance Benefits prior to or at
the Effective Time, Acquiror OP, Merger Sub or Acquiror REIT will pay the
Severance Benefits to such employees within three (3) business days at the
Closing.
10.14. Reorganization.
From and after the date hereof and until the Effective Time, neither
Acquiror REIT nor Target REIT nor any of their respective Subsidiaries or other
affiliates shall (i) knowingly take any action that, or knowingly fail to take
any action the failure of which, would jeopardize qualification of the REIT
Merger as a reorganization within the meaning of Section 368(a) of the Code; or
(ii) enter into any contract, agreement, commitment or arrangement with respect
to the foregoing. Each of Acquiror REIT and Target REIT shall use its reasonable
best efforts before the Effective Time to obtain the opinions of counsel
referred to in Sections 9.2(e) and 9.3(e). Following the Effective Time, each of
Acquiror REIT, Acquiror OP and Merger Sub shall use its best efforts to conduct
its business in a manner that would not jeopardize the characterization of the
REIT Merger as a reorganization within the meaning of Section 368(a) of the
Code.
10.15. Survival of Target REIT, Contributor OP and Contributor CMBS OP
Obligations.
All of the obligations of Target REIT, Contributor OP and Contributor CMBS
OP that are outstanding at the Closing shall survive the Closing and shall not
be merged therein. Upon the consummation of the Mergers, such obligations shall
be assumed, automatically, by the Surviving Corporation, the Surviving OP and
the Surviving CMBS OP, respectively; provided, however, that such assumption
shall not impose upon or expose the Surviving Corporation, the Surviving OP and
the Surviving CMBS OP, respectively, to any liability for which Target REIT,
Contributor OP and Contributor CMBS OP was not liable, and provided, further,
that the Surviving Corporation, the Surviving OP and the Surviving CMBS OP,
respectively, shall be entitled to the same defenses, offsets and counterclaims
to which Target REIT, Contributor OP and Contributor CMBS OP would have been
entitled but for the Mergers.
10.16. Third-Party Consents.
Acquiror REIT, Acquiror OP, Merger Sub, Contributor OP and Target REIT each
shall take, and shall cause their respective Subsidiaries to take, all necessary
corporate and other action and will use its commercially reasonable efforts to
obtain, or cause its Subsidiaries to obtain, the consents and applicable
approvals from third parties that may be required by any agreement, lease,
instrument, arrangement, judgment, decree, order or license to enable it to
carry out the transactions contemplated by this Agreement.
10.17. Efforts to Fulfill Conditions.
Acquiror REIT, Acquiror OP, Merger Sub, Contributor OP and Target REIT each
shall use commercially reasonable efforts to ensure that all conditions
precedent to its obligations hereunder are fulfilled at or prior to the Closing.
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10.18. Representations, Warranties and Conditions Prior to Closing.
Each party hereto shall use its best efforts to cause its representations
and warranties contained in this Agreement to be true and correct on and as of
the Effective Time in all material respects. Prior to Closing, Acquiror OP,
Acquiror REIT and Merger Sub, on the one hand, and Contributor OP and Target
REIT, on the other hand, each shall promptly notify the other in writing (i) if
any representation or warranty contained in this Agreement is discovered to be
or becomes untrue or (ii) if any party hereto fails to perform or comply with
any of its covenants or agreements contained in this Agreement or it is
reasonably expected that it will be unable to perform or comply with any of its
covenants or agreements contained in this Agreement.
10.19. Cooperation of the Parties.
Each party hereto will cooperate with the other parties hereto in supplying
such information as may be reasonably requested by the others in connection with
obtaining consents or approvals to the transactions contemplated by this
Agreement. The parties hereto will execute and deliver to counsel for Acquiror
REIT and Target REIT certificates of executive officers with respect to matters
reasonably requested by such counsel in connection with the opinions of such
counsel pursuant to Sections 9.2(e) and (f) and 9.3(e) and (f) hereof.
10.20. Amendment to Acquiror REIT Charter.
If required to consummate the transactions contemplated herein, Acquiror
REIT's Board shall recommend to its Shareholders in the Proxy
Statement/Prospectus an amendment to the Acquiror REIT Charter and, if all the
conditions to the Mergers set forth in Article IX shall have been fulfilled or
waived (and this Agreement shall not have been terminated as provided in Article
XI below), Acquiror REIT shall promptly after the Effective Time cause articles
of amendment effectuating such amendment and satisfying the requirements of the
Tennessee Act to be filed in accordance with the Tennessee Act.
10.21. Records.
Acquiror REIT, Acquiror OP and Merger Sub shall preserve and keep, free of
charge, all books, papers and records of Target REIT and the Target REIT
Subsidiaries relating to periods prior to the Closing Date for a period of no
less than seven years following the Closing Date. Acquiror REIT, Acquiror OP and
Merger Sub agree to permit any officer of Target REIT and the attorneys,
accountants and advisors of Target REIT, access to the records of Target REIT
from and after the Closing Date for all reasonable purposes. Any such
examination shall be performed at the place where the records of Acquiror REIT
are regularly maintained and shall not unreasonably interfere with Acquiror
REIT's normal business activities.
10.22. Confidentiality.
The parties hereto shall, and shall cause their respective representatives
and agents to, keep the existence and terms of this Agreement strictly
confidential, except (a) to the extent disclosure must be made to enable such
parties to perform acts necessary to consummate Closing or take actions
permitted under this Agreement, (b) disclosure to attorneys, accountants and
other professionals who are similarly bound to confidentiality, and (c) such
confidentiality no longer shall apply from and after consummation of Closing.
10.23. Acknowledgments.
Acquiror OP, Acquiror REIT and Merger Sub have conducted an independent
investigation of the financial condition, results of operations, assets,
liabilities, properties and operations of Target REIT and the Target REIT
Subsidiaries. Contributor OP and Target REIT have conducted an independent
investigation of the financial condition, results of operations, assets,
liabilities, properties and operations of Acquiror REIT and the Acquiror REIT
Subsidiaries. The representations and warranties made by the parties hereto in
this Agreement and in any certificate delivered hereunder constitute the sole
and exclusive representations and warranties of such parties in connection with
the transactions contemplated under this Agreement, and the parties hereto
understand, acknowledge and agree that all other representations and warranties
of any kind or
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nature (including, but not limited to, any relating to the future or historical
financial condition, results or operations, assets or liabilities of any entity)
are specifically disclaimed by such parties.
10.24. Target REIT Acquisition Opportunities.
From the date hereof to the Effective Time, Target REIT or its Subsidiaries
may propose potential acquisitions of one or more hotel properties to Acquiror
REIT or its Subsidiaries, of which acquisition opportunity Acquiror REIT is not
otherwise aware (each, "Acquisition Opportunity"). Acquiror REIT and its
Subsidiaries shall have no obligation to pursue, or otherwise take advantage of,
any of Acquisition Opportunity. The parties hereto agree that in the event of a
termination of this Agreement pursuant to Article XI hereof, Acquiror REIT shall
not permit its Subsidiaries to take any action to pursue, or otherwise take
advantage of, any Acquisition Opportunity which Target REIT or its subsidiaries
presented to Acquiror REIT, and shall cause its Subsidiaries to, promptly upon
such termination and reimbursement by Target REIT for all out-of-pocket costs
and expenses incurred by Acquiror REIT or its Subsidiaries related thereto,
assign and transfer any and all of their rights, title or interests in any
Acquisition Opportunity to Target REIT (or its designee), including, without
limitation, any and all Contracts and Permits (as permitted by law) related to
such Acquisition Opportunity. In connection with any such assignment and
transfer, Target REIT shall assume all of the obligations under such Contracts
and shall indemnify and hold harmless Acquiror REIT and its Subsidiaries against
any claims by third parties thereunder.
10.25. CMBS Bonds.
The parties hereto shall to cooperate to use their best efforts to cause
Contributor CMBS OP's Series 1996-1 Commercial Mortgage Bonds, Class A and Class
B, in the aggregate original principal amount of $75,000,000 (collectively, the
"CMBS Bonds"), to remain outstanding after the Mergers, with Acquiror CMBS OP as
the issuer thereof rather than Contributor CMBS OP. Accordingly, Acquiror REIT
agrees to use its best efforts to promptly (a) create and establish a Tennessee
limited partnership ("Acquiror CMBS OP") with characteristics and ownership
structure substantially similar to the characteristics and ownership structure
of Contributor CMBS OP; (b) cause the creation and establishment of a legal
entity ("Acquiror REIT CMBS Lessee") with characteristics and ownership
structure substantially similar to the characteristics and ownership structure
of Target REIT CMBS Lessee; (c) prepare and cause Acquiror CMBS OP and Acquiror
REIT CMBS Lessee to enter into leases for each of the Target REIT Hotels owned
by Contributor CMBS OP that are substantially similar to the Target REIT Leases
currently in effect with respect to such hotels, provided such new leases shall
provide for rent terms no less favorable to Acquiror CMBS OP than the rent terms
contained in the corresponding Target REIT Leases and shall be effective upon
the Effective Time; and (d) take such further action as may be reasonably
required by rating agencies, trustees or other third parties in connection with
the transactions contemplated by this Section 10.25. Target REIT and Acquiror
REIT agree to use their best efforts to obtain all necessary consents required
to cause the CMBS Bonds to remain outstanding after the Mergers, with Acquiror
CMBS OP as the issuer thereof rather than Contributor CMBS OP, including,
without limitation, consents of the rating agency and trustee for the CMBS
Bonds.
10.26. Tax Treatment.
If, based upon the advice of counsel in writing, Acquiror REIT and Target
REIT determine that the transactions between the Acquiror OP and the Contributor
OP hereunder could reasonably be expected to create a risk that the REIT Merger
would not qualify as a reorganization under the provisions of Section 368(a) of
the Code, Acquiror REIT and Target REIT undertake to use reasonable best efforts
to negotiate and structure an alternative means to effect the REIT Merger, for
Acquiror REIT to acquire the interest in Contributor OP owned by Target REIT,
and for the holders of Contributor OP Units to receive Acquiror OP Units (or the
economic and tax equivalent thereof) in exchange for their Contributor OP Units.
Acquiror OP will use the "traditional method" under Treasury Regulations Section
1.704-3(b) for purposes of making allocations under Section 704(c) of the Code
with respect to the properties of or interests in the Contributor OP as of the
Effective Time (with no curative allocations of gross income with respect to
depreciation to offset the effects of the "ceiling rule" but with a curative
allocation of gain upon disposition of
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such properties to offset the effect of the "ceiling rule"). Acquiror OP and
Contributor OP shall negotiate in good faith to agree upon the "Section 704(c)
values" of the properties of Contributor OP, effective as of the Closing Date.
For purposes of allocating "excess nonrecourse liabilities" of the Acquiror OP
pursuant to Treasury Regulations Section 1.752-3(a)(3) following the Closing
Date, Acquiror OP shall use a methodology to be agreed upon between Acquiror OP
and Contributor OP.
10.27. Transfer and Gains Taxes.
Each party hereto shall cooperate in the preparation, execution and filing
of all returns, questionnaires, applications or other documents regarding any
real property transfer or gains, sales, use, transfer, value added stock
transfer and stamp taxes, any transfer, recording, registration and other fees
and any similar taxes which become payable in connection with the transactions
contemplated by this Agreement (together with any related interests, penalties
or additions to tax, "Transfer and Gains Taxes"). From and after the Effective
Time, Acquiror REIT shall pay or cause Acquiror OP, as appropriate, to pay or
cause to be paid, without deduction or withholding from any amounts payable to
the holders of Acquiror REIT Common Stock, or Acquiror OP Units, as applicable,
all Transfer and Gains Taxes (which term shall not in any event be construed to
include for these purposes any tax imposed under the Code).
10.28. Transfer of Target C Corp. Shares.
At the Closing and pursuant to the Stock Purchase Agreement, Target REIT
shall cause Robert M. Solmson to transfer to Acquiror REIT or such Person as
Acquiror REIT shall designate by written notice delivered to him prior to the
Closing, all of the shares of capital stock of the Target C Corp. owned by him
for an aggregate consideration of $95,000 paid to him in cash and in accordance
with a Stock Purchase Agreement (the "Stock Purchase Agreement") to be executed
between Mr. Solmson and Acquiror REIT.
10.29. Existing Restrictions.
Acquiror REIT, Acquiror OP and Acquiror CMBS OP shall assume the
obligations of Target REIT, Contributor OP, Contributor CMBS OP or the
applicable Target REIT Subsidiary, as the case may be, under the Tax Protection
Agreements described in Schedule 7.8.
10.30. Lease Termination/New Leases.
Acquiror REIT and Acquiror OP shall use their good faith best efforts, and
will cause Acquiror CMBS OP to use its good faith best efforts, to enter into
new leases with respect to the Target REIT Hotels described on Schedule 7.38 (as
soon as practical after the date hereof concerning those hotels owned by
Contributor CMBS OP) on terms reasonably acceptable to Acquiror REIT effective
as of the Closing Date and will keep Target REIT and Contributor OP advised as
to the status of negotiations as to such new Leases.
ARTICLE XI
TERMINATION
11.1. Termination by Mutual Consent.
This Agreement may be terminated and the transactions contemplated herein
may be abandoned at any time prior to the Effective Time, before or after the
approval of this Agreement by the Shareholders of Target REIT or Acquiror REIT,
by the mutual written consent of Acquiror REIT and Target REIT. This Agreement
may also be terminated and the transactions contemplated herein may be abandoned
at any time on or after the date hereof (a) by action of the Board of Target
REIT in the event that Acquiror REIT shall have failed to deliver to Target REIT
the Schedules and Exhibits for which it is responsible as described in Section
2.8 in form and substance reasonably satisfactory to Target REIT, or (b) by
action of the Board of Acquiror REIT in the event that Target REIT shall have
failed to deliver to Acquiror REIT the Schedules and Exhibits for
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which it is responsible as described in Section 2.8 in form and substance
reasonably satisfactory to Acquiror REIT.
11.2. Termination by Either Acquiror REIT or Target REIT.
This Agreement may be terminated and the transactions contemplated herein
may be abandoned at any time prior to the Effective Time, before or after the
approval of this Agreement by the Shareholders of Target REIT or Acquiror REIT,
by action of the Board of Target REIT or the Board of Acquiror REIT if (a) the
Mergers shall not have been consummated by October 15, 1998, or (b) a meeting of
Target REIT's Shareholders or a meeting of Acquiror REIT's Shareholders shall
have been duly convened and held and the approval of Target REIT's Shareholders
or the approval of Acquiror REIT's Shareholders required by Section 9.1(a) shall
not have been obtained at such meeting or at any adjournment thereof, or (c) a
United States federal or state court of competent jurisdiction or United States
federal or state governmental, regulatory or administrative agency or commission
shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable, provided, that the party seeking to
terminate this Agreement pursuant to this clause (c) shall have used its
reasonable best efforts to remove such order, decree, ruling or injunction, or
(d) any of the conditions set forth in Article IX shall not have been satisfied
or waived by the Effective Time, or (e) the Average Price is less then $14.00;
and provided, in the case of a termination pursuant to clause (a) or (d) above,
that the terminating party shall not have proximately contributed (including,
without limitation, failure to use all reasonable efforts to satisfy the
conditions set forth in Article IX) to the occurrence of the failure referred to
in said clauses.
11.3. Termination by Target REIT.
This Agreement may be terminated and the transactions contemplated herein
may be abandoned at any time prior to the Effective Time, before or after the
adoption and approval by the Shareholders of Target REIT referred to in Section
9.1(a), by action of the Board of Target REIT if (a) the Board of Acquiror REIT
withdraws, materially modifies or changes in a manner adverse to Target REIT its
recommendation to Acquiror REIT's Shareholders of this Agreement or the REIT
Merger, other than as a result of the occurrence of an event that, in the good
faith judgment of the Board of Acquiror REIT, has or is reasonably likely to
have a Target REIT Material Adverse Effect, (b) the Board of Acquiror REIT
postpones the date scheduled for the meeting of Shareholders of Acquiror REIT to
approve this Agreement and the transactions contemplated hereby beyond the date
set forth in Section 11.2(a), or fails to set a date for such meeting by such
date, except with the written consent of Target REIT, (c) there has been a
breach by Acquiror REIT, Acquiror OP or Merger Sub of any representation or
warranty contained in this Agreement which would have or would be reasonably
likely to have an Acquiror REIT Material Adverse Effect, which breach is not
curable or, if curable, either (i) is not cured by the earlier of (A) the date
set forth in Section 11.2(a) or (B) the Closing Date, or (ii) is waived by
Target REIT, (d) there has been a material breach of any of the covenants or
agreements set forth in this Agreement on the part of Acquiror REIT, Acquiror OP
or Merger Sub, which breach is not curable or, if curable, either (i) is not
cured by the earlier of (A) 30 days after written notice of such breach is given
by Target REIT to Acquiror REIT, or (B) the Closing Date, or (ii) is waived by
Target REIT, or (e) the Target REIT Board determines that, in the exercise of
its good faith judgment, termination of this Agreement is required in the
exercise of its fiduciary duties to the Target REIT Shareholders by reason of an
Acquisition Proposal being made.
11.4. Termination by Acquiror REIT.
This Agreement may be terminated and the transactions contemplated herein
may be abandoned at any time prior to the Effective Time, before or after the
approval by the Shareholders of Acquiror REIT referred to in Section 9.1(a), by
action of the Board of Acquiror REIT if (a) the Board of Target REIT withdraws,
materially modifies or changes in a manner adverse to Acquiror REIT its
recommendation to Target REIT's Shareholders of this Agreement or the REIT
Merger, other than as a result of the occurrence of an event that,
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in the good faith judgment of the Board of Target REIT, has or is reasonably
likely to have an Acquiror REIT Material Adverse Effect, (b) the Board of Target
REIT postpones the date scheduled for the meeting of Shareholders of Target REIT
to approve this Agreement and the transactions contemplated hereby beyond the
date set forth in Section 11.2(a), or fails to set a date for such meeting by
such date, except with the written consent of Acquiror REIT, (c) there has been
a breach by Target REIT or Contributor OP of any representation or warranty
contained in this Agreement which would have or would be reasonably likely to
have a Target REIT Material Adverse Effect, which breach is not curable or, if
curable, either (i) is not cured by the earlier of (A) the date set forth in
Section 11.2(a) or (B) the Closing Date, or (ii) is waived by Acquiror REIT, (d)
there has been a material breach of any of the covenants or agreements set forth
in this Agreement on the part of Target REIT or Contributor OP, which breach is
not curable or, if curable, either (i) is not cured the earlier of (A) thirty
(30) days after written notice of such breach is given by Acquiror REIT to
Target REIT, or (B) the Closing Date, or (ii) is waived by Acquiror REIT, or (e)
the Acquiror REIT Board determines that, in the exercise of its good faith
judgment, termination of this Agreement is required in the exercise of its
fiduciary duties to the Acquiror REIT Shareholders by reason of an Acquisition
Proposal being made.
11.5. Effect of Termination and Abandonment.
(a) If (i) Target REIT elects to terminate this Agreement pursuant to
Section 11.2(a), 11.2(b) (provided, in the case of termination pursuant to
either of these sections, that neither Target REIT nor Contributor OP shall be
the party who proximately contributed to a failure to consummate the
transactions hereunder or be the breaching party), or 11.3(e), or (ii) Acquiror
REIT elects to terminate this Agreement pursuant to Section 11.2(a), 11.2(b)
(provided, in the case of termination pursuant to either of these sections, that
none of Acquiror REIT, Acquiror OP or Merger Sub shall be the party proximately
contributing to a failure to consummate the transactions hereunder or be the
breaching party), or 11.4(e), and, in any event, an Acquisition Proposal
relating to Target REIT in the case of a termination pursuant to clause (i)
above or relating to Acquiror REIT in the case of a termination pursuant to
clause (ii) above (such party being sometimes hereinafter referred to as the
"Payor Party"), shall have been made and notice of same shall have been required
pursuant to Section 10.1 prior to such termination (an "Acquisition Proposal
Notice"), provided that the other party (the "Entitled Party") was not in
material breach of its obligations hereunder at the time of such termination,
the Payor Party shall at the time of such termination deposit by wire transfer
of same-day funds into an interest bearing escrow account with an escrow agent
selected by the Entitled Party (the "Escrow Agent") and on such terms as the
Entitled Party and the Escrow Agent shall agree, consistent with the terms of
this Article XI, for the benefit of the Entitled Party as reasonable
compensation to the Entitled Party for enhanced competitive risks resulting from
the Payor Party consummating a Competing Transaction, market risks in announcing
the REIT Merger, management time expended in pursuit of the Mergers and related
transactions, lost opportunities to consummate other merger or acquisition
transactions, transaction costs and expenses, and other incidental costs and
losses, and not as a penalty or forfeiture, an amount equal to $20,000,000 (the
"Termination Fee"). If a Competing Transaction shall be consummated within one
(1) year following the date of such termination or a definitive agreement for a
Competing Transaction (a "Definitive Competing Acquisition Agreement") shall be
executed and delivered by the Payor Party within one (1) year following the date
of such termination with the party named in the Acquisition Proposal Notice and
a Competing Transaction with such party is consummated within nine (9) months
following the date of execution of the Definitive Competing Acquisition
Agreement, the Escrow Agent shall, at the time any such Competing Transaction is
consummated, distribute to the Entitled Party out of the escrowed funds an
amount equal to the lesser of (A) $20,000,000, plus any accrued interest thereon
or on any part thereof through the date of payment (the "Maximum Termination
Fee") and (B) the sum of (1) the maximum amount that can be paid to the Entitled
Party without causing it to fail to meet the requirements of Sections 856(c)(2)
and (3) of the Code determined as if the payment of such amount did not
constitute income described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of
the Code ("Qualifying Income"), as determined by the Entitled Party's certified
public accountants, plus (2) in the event an Entitled Party receives a letter
from such Entitled Party's counsel indicating that the Entitled Party has
received a ruling from the IRS described in Section 11.5(c)(ii) or (iii), an
amount equal to the Maximum Termination
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Fee less the amount payable under clause (1) above. In the event no Competing
Transaction is consummated or no Definitive Competing Acquisition Agreement is
executed, delivered and consummated by Payor Party within the time periods
described above in this Section 11.5(a) following the termination of this
Agreement, with the party named in the Acquisition Notice, the Escrow Agent
shall return the Termination Fee to the Payor Party, together with interest
thereon from the date of deposit through the date of return.
(b) Moreover, if an Acquisition Proposal shall have been received by a
Payor Party so as to require an Acquisition Proposal Notice prior to that
party's Shareholders voting on approval of this Agreement, and this Agreement is
not terminated pursuant to Sections 11.1 through 11.4 above, and the
Shareholders of the Payor Party vote against approval of this Agreement, and if
a Competing Transaction with the party named in such Acquisition Proposal Notice
shall be consummated within one (1) year following the date of such shareholder
vote or a Definitive Competing Acquisition Agreement shall be executed and
delivered by the Payor Party within one (1) year following the date of such
shareholder vote with a party named in such Acquisition Proposal Notice and a
Competing Transaction with such party is consummated within nine (9) months
following the date of execution of such Definitive Competing Acquisition
Agreement, then, immediately upon consummating such Competing Transaction or
executing such Definitive Competing Acquisition Agreement, the Payor Party shall
deliver to the Escrow Agent in same-day funds for the benefit of the Entitled
Party an amount equal to the Termination Fee. Upon consummation of any such
Competing Transaction, the Escrow Agent shall immediately disburse to the
Entitled Party an amount equal to the lesser of (A) the Maximum Termination Fee
and (B) the sum of (i) the maximum amount that can be paid to the Entitled Party
without causing it to fail to meet the requirements of Sections 856(c)(2) and
(3) of the Code determined as if the payment of such amount did not constitute
Qualifying Income, as determined by the Entitled Party's certified public
accountants, plus (ii) in the event an Entitled Party receives a letter from
such Entitled Party's counsel indicating that the Entitled Party has received a
ruling from the IRS described in Section 11.5(c)(ii) or (iii), an amount equal
to the Maximum Termination Fee less the amount payable under clause (1) above.
In the event no Competing Transaction is consummated or no Definitive Competing
Acquisition Agreement is executed, delivered and consummated by Payor Party
within the time periods described above in this Section 11.5(b), with the party
named in the Acquisition Proposal Notice, the Escrow Agent shall return the
Termination Fee to the Payor Party, together with interest thereon from the date
of deposit through the date of return.
(c) In the event that the Entitled Party is not able to receive the Maximum
Termination Fee, the Escrow Agent shall hold the unpaid amount in escrow and
shall not release any portion thereof to the Entitled Party unless and until the
Payor Party receives, at any time or from time to time, any one or combination
of the following: (i) a letter from the Entitled Party's certified public
accountants indicating the maximum amount that can be paid at that time to the
Entitled Party without causing the Entitled Party to fail to meet the
requirements of Sections 856(c)(2) and (3) of the Code, determined as if the
payment of such amount did not constitute Qualifying Income or a subsequent such
letter revising or (in the case of later tax years) adding to that amount, in
which case and at each such time the Escrow Agent shall release such revised or
additional amount to the Entitled Party, or (ii) a letter from the Entitled
Party's counsel indicating that the Entitled Party received a ruling from the
IRS holding that the receipt by the Entitled Party of the Maximum Termination
Fee would either constitute Qualifying Income or would be excluded from gross
income within the meaning of Sections 856(c)(2) and (3) of the Code, in which
case the Escrow Agent shall release the remainder of the Maximum Termination
Fee, plus any interest accrued thereon, to the Entitled Party, or (iii) a letter
from the Entitled Party's counsel indicating that the Entitled Party received a
ruling from the IRS holding that the receipt by the Entitled Party of the
remaining balance of the Maximum Termination Fee following the receipt of and
pursuant to such ruling would not be deemed constructively received prior
thereto, in which case the Escrow Agent shall release the remainder of the
Maximum Termination Fee to the Entitled Party. If the Maximum Termination Fee
has not been distributed to the Entitled Party pursuant to this Section 11.5(c)
by the fifth anniversary of the date of termination, in the case of an escrow
established pursuant to Section 11(a), or the date of the Shareholder vote, in
the case of an escrow established pursuant to Section 11(b), any remaining funds
then in escrow, including any interest accrued thereon, shall be delivered by
the Escrow Agent to the Payor Party or its successor in interest.
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(d) In the event of termination of this Agreement and the abandonment of
the Mergers pursuant to this Article XI, all obligations of the parties hereto
shall terminate, except the obligations of the parties pursuant to this Section
11.5 or Section 11.6 and except for the provisions of Sections 12.4, 12.5, 12.6,
12.7, 12.15 and 12.16. In the event an Entitled Party has received the Maximum
Termination Fee pursuant to this Section 11.5, the Entitled Party shall not (i)
assert or pursue in any manner, directly or indirectly, any claim or cause of
action based in whole or in part upon alleged tortious or other interference
with rights under this Agreement against any entity or person submitting an
Acquisition Proposal, or (ii) assert or pursue in any manner, directly or
indirectly, any claim or cause of action against the Payor Party or any of its
officers or directors based in whole or part upon its or their receipt,
consideration, recommendation or approval of an Acquisition Proposal or the
Payor Party's exercise of its right of termination under Section 11.3(e) or
11.4(e), as applicable. Notwithstanding the foregoing, in the event an Entitled
Party is required to file suit or an arbitration proceeding to seek all or a
portion of such Maximum Termination Fee, and it ultimately succeeds, the
Entitled Party shall be entitled to receive from the Payor Party all expenses,
including attorneys' fees and expenses, which it has incurred in enforcing its
rights hereunder.
11.6. Expenses.
(a) If (i) Target REIT elects to terminate this Agreement pursuant to
Section 11.3(a), 11.3(b), 11.3(c) or 11.3(d) or (ii) Acquiror REIT elects to
terminate this Agreement pursuant to Section 11.4(a), 11.4(b), 11.4(c) or
11.4(d), and, in any event, no Acquisition Proposal shall have been made prior
to such termination, Acquiror REIT, in the case of termination in the events set
forth in clause (i) above, or Target REIT, in the case of termination in the
events set forth in clause (ii) above, provided that the Entitled Party was not
in material breach of its obligations hereunder at the time of such termination,
as liquidated damages and not as a penalty or forfeiture, shall pay to the
Entitled Party by wire transfer of same day funds on the business day after
receipt of notice of termination of this Agreement an amount equal to the lesser
of (A) all documented Expenses incurred by the Entitled Party in connection with
its pursuit of the transactions contemplated herein, (B) $5,000,000 (the
"Maximum Expense Reimbursement") and (C) the sum of (1) the maximum amount that
can be paid to the Entitled Party without causing it to fail to meet the
requirements of Sections 856(c)(2) and (3) of the Code determined as if the
payment of such amount did not constitute Qualifying Income, as determined by
the Entitled Party's certified public accountants, plus (2) in the event an
Entitled Party receives a letter from such Entitled Party's counsel indicating
that the Entitled Party has received a ruling from the IRS described in Section
11.5(c)(ii) or (iii), an amount equal to the Maximum Expense Reimbursement less
the amount payable under clause (1) above.
(b) In the event that the Entitled Party is not able to receive the Maximum
Expense Reimbursement in any tax year without causing it to fail to meet the
requirements of Section 856(c)(2) and (3) of the Code, determined as if the
payment of the Maximum Expense Reimbursement did not constitute Qualifying
Income, the Payor Party shall pay the unpaid amount of the Maximum Expense
Reimbursement at such time as the Payor Party receives, at any time or from time
to time, any one or combination of the following: (i) a letter from the Entitled
Party's certified public accountants indicating the maximum amount that can be
paid at that time to the Entitled Party without causing the Entitled Party to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code,
determined as if the payment of such amount did not constitute Qualifying Income
or a subsequent such letter revising or (in the case of later tax years) adding
to that amount, in which case and at each such time the Payor Party shall pay
such revised or additional amount to the Entitled Party subject to a total
maximum payment under this Section 11.6 of an amount equal to the Maximum
Expense Reimbursement, or (ii) a letter from the Entitled Party's counsel
indicating that the Entitled Party received a ruling from the IRS holding that
the receipt by the Entitled Party of the Maximum Expense Reimbursement would
either constitute Qualifying Income or would be excluded from gross income
within the meaning of Sections 856(c)(2) and (3) of the Code, in which case the
Payor Party shall pay the remainder of the Maximum Expense Reimbursement to the
Entitled Party, or (iii) a letter from the Entitled Party's counsel indicating
that the Entitled Party received a ruling from the IRS holding that the receipt
by the Entitled Party of the remaining balance of the Maximum Expense
Reimbursement following the receipt of and pursuant to such ruling would not be
deemed constructively received prior thereto, in which case the
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Payor Party shall release the remainder of the Maximum Expense Reimbursement to
the Entitled Party. The Payor Party's obligations under this Section 11.6(b)
shall terminate five (5) years from the date hereof.
(c) If this Agreement is terminated for any reason or under any
circumstances not addressed in subsection (a) or (b) of this Section 11.6, no
party hereto shall be liable to the other parties hereto for Expenses, except as
provided in Section 10.10.
(d) Except for payments as provided in Section 11.5, in no event shall any
party be liable hereunder for any amount in excess of the Maximum Expense
Reimbursement.
11.7. Extension; Waiver; Miscellaneous.
At any time prior to the Effective Time, any party hereto, by action taken
by its Board, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto, and (c)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in instrument in
writing signed on behalf of such party.
Acquiror REIT and Target REIT agree to amend Sections 11.5 and 11.6 above
at the request of the other party in order to (i) permit receipt of the Maximum
Termination Fee or the Maximum Expense Reimbursement by such other party
hereunder without causing such other party to fail to meet the requirements of
Sections 856(c)(2) and (3) of the Code or (ii) improve such other party's
chances of securing a favorable ruling from the IRS described in Section 11.5 or
11.6, provided that no such amendment may result in any additional cost or
expense to such other party.
ARTICLE XII
MISCELLANEOUS
12.1. Nonsurvival of Representations, Warranties and Agreements.
All representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Articles II, III, IV and XI,
the last sentence of Section 10.4 and Sections 10.8, 10.10, 10.11, 10.12, 10.13,
10.15, 10.20, 10.21, 10.24, 10.25, 10.27, 10.28, 10.29 and 10.30 and this
Article XII shall survive the Mergers. No third party (other than counsel for
Acquiror REIT and Target REIT with respect to delivery of their opinions
hereunder) is entitled to rely on any of the representations, warranties and
agreements contained in this Agreement and the parties hereto assume no
liability to any third party because of any reliance on the representations,
warranties and agreements contained in this Agreement.
12.2. Notices.
Any notice required to be given hereunder shall be in writing and shall be
sent by facsimile transmission (confirmed by any of the methods that follow),
courier service (with proof of service), hand delivery or certified or
registered mail (return receipt requested and first-class postage) and addressed
as follows:
If to Acquiror OP, Acquiror REIT or Merger Sub:
Equity Inns, Inc.
4735 Spottswood, Suite 102
Memphis, TN 38117
Facsimile No. 901/761-3945
Attention: Phillip H. McNeill, Sr.
Chairman of the Board and
Chief Executive Officer
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with a copy to:
Baker, Donelson, Bearman & Caldwell
20th Floor, First Tennessee Building
165 Madison
Memphis, TN 38103
Facsimile No. 901/577-2303
Attention: John A. Good, Esq.
If to Contributor OP or Target REIT:
RFS Hotel Investors, Inc. 850 Ridge Lake Boulevard, Suite 220
Memphis, TN 38120
Facsimile No. 901/818-5260
Attention: Robert M. Solmson
Chairman of the Board and
Chief Executive Officer
with a copy to:
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, VA 23219
Facsimile No. 804/788-8218
Attention: David C. Wright, Esq.
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
12.3. Assignment; Binding Effect; Benefit.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties
hereto. Subject to the preceding sentence, this Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any Person other than the parties hereto or their respective heirs,
successors, executors, administrators or assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
12.4. Entire Agreement.
This Agreement (including the Exhibits and the Schedules attached hereto)
and any documents and instruments delivered by the parties hereto in connection
herewith constitute the entire agreement among the parties hereto with respect
to the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect hereto. No addition to or
modification of any provision of this Agreement shall be binding upon any party
hereto unless made in writing and signed by all parties hereto.
12.5. Confidentiality.
(a) As used in Section 12.5, "Confidential Material" means, with respect to
any party hereto (the "Providing Party"), all information (written or oral)
furnished (whether before or after the date hereof) by the Providing Party and
its directors, trustees, officers, employees, affiliates or representatives of
advisors, including counsel, lenders and financial advisors (collectively, the
"Providing Party Representatives") to any other party hereto (the "Receiving
Party") or such Receiving Party's directors, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial advisors
or the Receiving Party's potential sources of financing for the transactions
contemplated by this Agreement (collectively "the
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Receiving Party Representatives") and all analyses, compilations, forecasts and
other studies or other documents prepared by the Providing Party or the
Providing Party Representatives in connection with its or their review of the
transactions contemplated by this Agreement which contain or reflect such
information. The term "Confidential Material" does not include, however,
information which (i) at the time of disclosure or thereafter is generally
available to and known by the public other than as a result of a disclosure
directly or indirectly by the Receiving Party or the Receiving Party
Representatives in violation of this Section 12.5, (ii) at the time of
disclosure was available on a nonconfidential basis from a source other than the
Providing Party or the Providing Party Representatives, providing that such
source is not and was not bound by a confidentiality agreement with the
Providing Party, (iii) was known by the Receiving Party prior to receiving the
Confidential Material from the Providing Party or has been independently
acquired or developed by the Receiving Party without violating any of its
obligations under this Section 12.5, or (iv) is contained in any Target REIT SEC
Documents or Acquiror REIT SEC Documents, the Form S-4 or the Proxy
Statement/Prospectus.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the prior
written consent of the Providing Party, be disclosed by the Receiving Party or
the Receiving Party Representatives, in whole or in part and will not be used by
the Receiving Party or the Receiving Party Representatives, directly or
indirectly, for any purpose other than in connection with this Agreement, the
Mergers, the Asset Sale or the evaluating, negotiating or advising with respect
to a transaction contemplated herein. Moreover, each Receiving Party agrees to
transmit Confidential Material to the Receiving Party Representatives only if
and to the extent that such representatives need to know the Confidential
Material for purposes of such transaction and are informed by the Receiving
Party of the confidential nature of the Confidential Material and of the terms
of this Section 12.5.
(c) In the event that either the Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or such representatives
supply the Confidential Material, are requested or required (by oral questions,
interrogatories, requests for information or documents, subpoena, civil
investigative demand, any informal or formal investigation by any government or
governmental agency or authority or otherwise in connection with legal
processes) to disclose any Confidential Material, such Receiving Party agrees
(i) to immediately notify the Providing Party of the existence, terms and
circumstances surrounding such a request, (ii) to consult with the Providing
Party on the advisability of taking legally available steps to resist or narrow
such request, and (iii) if disclosure of such information is required, to
furnish only that portion of the Confidential Material which, in the opinion of
the Receiving Party's counsel, such Receiving Party is legally compelled to
disclose and to cooperate with any action by the Providing Party to obtain an
appropriate protective order or otherwise reliable assurances that confidential
treatment will be accorded the Confidential Material (it being agreed that the
Providing Party shall reimburse the Receiving Party for all reasonable out-
of-pocket expenses incurred by the Receiving Party in connection with such
cooperation).
(d) In the event of termination of this Agreement in accordance with its
terms, promptly upon request from the Providing Party, the Receiving Party
shall, except to the extent prevented by law, redeliver to the Providing Party
or destroy all tangible Confidential Material and will not retain any copies,
extracts or other reproductions thereof in whole or in part. Any such
destruction shall be certified in writing to the Providing Party by an
authorized officer of the Receiving Party supervising the same. Notwithstanding
the foregoing, the Receiving Party and one of the Receiving Party
Representatives designated by the Receiving Party shall be permitted to retain
one permanent file copy of each document constituting the Confidential Material.
(e) Each party hereto further agrees that if this Agreement is terminated
in accordance with its terms, until two (2) years after such termination, (1) it
will not offer to hire or hire any person currently or formerly employed by any
other party with whom such party has had contact prior hereto other than persons
whose employment shall have been terminated by such other party prior to the
date of such offer to hire or hiring and (2) neither it nor its Affiliates shall
directly or indirectly, (a) (A) solicit, seek or offer to effect or effect, (B)
negotiate with or provide any information to the Board of Directors of the other
party, any director or officer of such other party or any stockholder of such
other party with respect to, (C) make any statement or proposal, whether written
or oral, either alone or in concert with others, to the Board of Directors of
such other party, any director or officer of such other party or any shareholder
of the other party or any other person with respect
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to, or (D) make any public announcement (except as required by law in respect of
actions permitted hereto) or proposal or offer whatsoever (including, but not
limited to, any "solicitation" of "proxies" as such terms are defined or used in
Regulation 14a of the Exchange Act) with respect to, (i) any form of business
combination or similar or other extraordinary transaction involving such other
party or any Affiliate thereof, including, without limitation, a merger, tender
offer or exchange offer or liquidation of such other party's assets, (ii) any
form of restructuring, recapitalization or similar transaction with respect to
such other party or any Affiliate thereto, (iii) any purchase of any securities
or assets, or rights or options to acquire any securities or assets (through
purchase, exchange, conversion or otherwise), of such other party or any
Affiliate thereof, (iv) any proposal to seek representation on the Board of
Directors of such other party or otherwise to seek to control or influence the
management, Board of Directors or policies of such other party or any Affiliate
thereof, (v) any request or proposal to waive, terminate or amend the provisions
of this Section 12.5 or (vi) any proposal or other statement inconsistent with
the terms of this Section 12.5, or (b) instigate, encourage, join, act in
concert with or assist (including, but not limited to, providing or assisting in
any way in the obtaining of financing for, or acting as a joint or co-bidder for
such other party with) any third party to do any of the foregoing, unless and
until such party has received the prior written invitation or approval of a
majority of the Board of Directors of such other party to do any of the
foregoing; provided that without such invitation or approval, any party hereto
may at any time, on a confidential non-public basis, submit to the Chief
Executive Officer or, if none, the President of any other party, a proposal to
(a) amend any of the provisions of this Section 12.5(e), or (b) effect a
business combination or other extraordinary transaction with such other party
providing for the acquisition or all or substantially all of the assets or the
securities of such other party, including without limitation, a merger, tender
offer or exchange offer. Each party hereto agrees that it will not agree with
any third party to waive its rights under this Section 12.5.
12.6. Amendment.
This Agreement may be amended by the parties hereto at any time before or
after approval of this Agreement or any other matter presented in connection
with the REIT Merger by the Shareholders of Acquiror REIT or Target REIT, but
after any such Shareholder approval, no amendment shall be made which by law
requires the further approval of Shareholders without obtaining such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
12.7. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Tennessee without regard to its rules of conflict of laws.
Each of the parties hereby irrevocably and unconditionally consents to submit to
the exclusive jurisdiction of the courts of the State of Tennessee and of the
United States District Court, Western District of Tennessee (collectively, the
"Tennessee Courts") for any litigation arising out of or relating to this
Agreement and the transactions contemplated hereby (and agrees not to commence
any litigation relating thereto except in such courts), waives any objection to
the laying of venue of any such litigation in the Tennessee Courts and agrees
not to plead or claim in any Tennessee Court that such litigation brought
therein has been brought in an inconvenient forum.
12.8. Counterparts.
This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
12.9. Headings.
Heading of the Articles and Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
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12.10. Interpretation.
In this Agreement, unless the context otherwise requires, words describing
the singular number shall include the plural and vice versa, and words denoting
any gender shall include all genders and words denoting natural persons shall
include corporations and partnerships and vice versa. Neither this Agreement nor
any uncertainty or ambiguity herein shall be construed or resolved against any
party hereto, whether under any rule of construction or otherwise.
12.11. Waivers.
Except as provided in this Agreement, no action taken pursuant to this
Agreement, including, without limitation, any investigation by or on behalf of
any party hereto, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
12.12. Incorporation.
The Schedules and all Exhibits attached hereto and thereto and referred to
herein and therein are hereby incorporated herein and made a part hereof for all
purposes as if fully set forth herein.
12.13. Severability.
Any term or provision of this Agreement which is invalid or unenforceable
in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
12.14. Enforcement of Agreement.
The parties hereto agree that irreparable damage would occur in the event
that any of the provisions of this Agreement was not performed in accordance
with its specific terms or was otherwise breached. It is accordingly agreed that
the parties hereto shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any Tennessee Court, this being in addition to any other remedy to
which they are entitled to at law or in equity.
12.15. Non-Recourse.
None of the officers, directors, limited partners or Shareholders of
Acquiror REIT, Acquiror OP or Merger Sub shall be personally bound or have any
personal liability hereunder. Target REIT and Contributor OP shall look solely
to the assets of Acquiror REIT, Acquiror OP and Merger Sub for satisfaction of
any liability of Acquiror REIT, Acquiror OP or Merger Sub with respect to this
Agreement. Neither Target REIT nor Contributor OP will seek recourse or commence
any action against any of the Shareholders of Acquiror REIT or any of their
personal assets, and will not commence any action for money judgments against
any of the directors, officers or limited partners of Acquiror REIT, Acquiror OP
or Merger Sub or seek recourse against their personal assets, for the
performance or payment of any obligation of Acquiror REIT, Acquiror OP or Merger
Sub hereunder or thereunder. None of the directors, officers, limited partners
or Shareholders of Target REIT and Contributor OP shall be personally bound or
have any personal liability hereunder. Acquiror REIT, Acquiror OP and Merger Sub
shall look solely to the assets of Target REIT and Contributor OP for
satisfaction of any liability of Target REIT or Contributor OP with respect to
this Agreement. Neither Acquiror REIT, Acquiror OP nor Merger Sub will seek
recourse or commence any action against any of the Shareholders of the Target
REIT or any of their personal assets, and will not commence any action for money
judgments against any of the directors, officers or limited partners of Target
REIT or Contributor OP or seek
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recourse against any of their personal assets, for the performance or payment of
any obligation of Target REIT or Contributor OP hereunder or thereunder.
12.16. Arbitration.
If any disputes between Contributor OP or Target REIT, on the one hand, and
Acquiror REIT, Acquiror OP or Merger Sub, on the other hand, are not resolved by
the parties hereto within 60 days, either Acquiror REIT or Target REIT may
submit the dispute to binding arbitration in accordance with the rules of the
American Arbitration Association (the "AAA").
Acquiror REIT and Target REIT each shall select one arbitrator from a list
of arbitrators maintained by the AAA, and the two arbitrators so selected shall
select a third arbitrator. Should either Acquiror REIT or Target REIT fail to
select an arbitrator within ten days after arbitration is sought by the other
party, or if the two arbitrators shall fail to select a third arbitrator within
15 days after arbitration is sought, the AAA shall select the arbitrator.
Expenses of arbitration shall be submitted to the arbitrators for determination
as to which parties shall bear such expenses.
[SIGNATURES ON THE FOLLOWING PAGE]
IN WITNESS WHEREOF, each party has caused this Agreement to be duly
executed on its behalf as of the day and year first above written.
TARGET REIT:
RFS HOTEL INVESTORS, INC.
By: /s/ ROBERT M. SOLMSON
------------------------------------
Name: Robert M. Solmson
--------------------------------------
Title: Chairman
--------------------------------------
CONTRIBUTOR OP:
RFS PARTNERSHIP, L.P.
By: RFS Hotel Investors, Inc., General
Partner
By: /s/ ROBERT M. SOLMSON
------------------------------------
Name: Robert M. Solmson
--------------------------------------
Title: Chairman
--------------------------------------
ACQUIROR REIT:
EQUITY INNS, INC.
By: /s/ PHILLIP H. MCNEILL, SR.
------------------------------------
Name: Phillip H. McNeill, Sr.
--------------------------------------
Title: Chairman of the Board
--------------------------------------
MERGER SUB:
RHI ACQUISITIONS, INC.
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By: /s/ PHILLIP H. MCNEILL, SR.
----------------------------------
Name: Phillip H. McNeill, Sr.
--------------------------------------
Title: Chairman of the Board
--------------------------------------
ACQUIROR OP:
EQUITY INNS PARTNERSHIP, L.P.
By: Equity Inns Trust, General Partner
By: /s/ PHILLIP H. MCNEILL, SR.
------------------------------------
Name: Phillip H. McNeill, Sr.
--------------------------------------
Title: Chairman of the Board
--------------------------------------
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Equity Inns, Inc. on Form S-3 (File No. 333-48169) of our report dated January
20, 1998 except for Note 13 as to which the date is February 28, 1998, on our
audits of the consolidated financial statements and financial statement
schedule of RFS Hotel Investors, Inc. as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997, which report
is included in this Form 8-K.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
May 15, 1998
<PAGE> 1
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
The Board of Directors
RFS, Inc.:
We consent to the inclusion in the Current Report on Form 8-K of Equity Inns,
Inc. of our report dated January 23, 1998, relating to the consolidated balance
sheets of RFS, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholder's equity, and cash
flows for the years then ended.
KPMG Peat Marwick LLP
Memphis, Tennessee
May 18, 1998
<PAGE> 1
Exhibit 99.1
FOR IMMEDIATE RELEASE:
April 21, 1998
EQUITY INNS, RFS AGREE TO STOCK MERGER
TO CREATE $1.8 BILLION HOTEL REIT
MEMPHIS, TN, APRIL 21, 1998 -- Equity Inns, Inc. (NYSE:ENN) and RFS Hotel
Investors, Inc. (NYSE:RFS) today announced that they have signed a definitive
agreement to merge the two companies in a stock transaction which will create a
$1.8 billion hotel REIT with a diversified portfolio of full service, upscale
extended stay, all suite and premium limited-service hotels.
Under the terms of the agreement, which was approved unanimously by the Boards
of Directors of both companies, each share of RFS will be exchanged for 1.5
shares of Equity Inns. At closing, RFS board members Robert M. Solmson and
Bruce E. Campbell, Jr. will join the Equity Inns Board of Directors, increasing
its size to six persons. In addition, Mr. Solmson will become a member of a
newly-created executive committee of the Equity Inns board consisting of
Messrs. Phillip H. McNeill, Sr., Robert M. Solmson and William W. Deupree, Jr.
Mr. McNeill will continue as chairman and CEO of the combined company. The
transaction is expected to close in the third quarter, and is subject to the
approval of both companies' shareholders and other customary conditions.
Based upon yesterday's closing stock price of Equity Inns, the transaction is
valued at approximately $990 million, including the assumption of approximately
$300 million in debt including the anticipated costs of terminating certain of
the operating leases on RFS' hotels. Upon completion of the transaction and
certain announced acquisitions, Equity Inns will have a total market
capitalization in excess of $1.8 billion and will own 156 hotels with over
20,000 rooms and suites.
The acquisition is expected to be immediately accretive to Equity Inns' funds
from operations (FFO) for 1998 and 1999, taking into account annual cost
savings of approximately $3.5 million, fees relating to termination of the
current RFS leases and new leases with an independent hotel
-MORE-
<PAGE> 2
Equity Inns, Inc.
Page 2
lessee/manager. The acquisition will add 61 hotels plus six hotel development
opportunities to Equity Inns' current portfolio of 95 hotels. In 1997,
approximately 66% of RFS' hotel revenues were derived from full service and
upscale extended stay properties. In addition, approximately 27% of RFS'
revenue was generated from hotels located in the state of California.
Equity Inns' Chairman and CEO Phillip H. McNeill, Sr. said, "We believe this is
an exceptional opportunity to acquire a high-quality portfolio of hotel
properties and to expand our presence in the upscale extended stay and full
service segments and in certain states, like California. This transaction
provides compelling financial and strategic benefits to our shareholders and
will more than double ENN's market capitalization and increase the number of
rooms owned by 82%. RFS' hotels are successful and are located in some of the
most attractive markets in the United States. Silicon Valley, for example, where
RFS invested over $100 million for four hotels last year, has been cited as
perhaps the best hotel market in the country.
This transaction complements our already strong mix of extended stay, all suite
and premier limited-service hotels, enhances the quality and diversity of our
assets and improves the internal growth prospects of our Company. Our focus on
growing our portfolio on both coasts and the Midwest part of the United States
is greatly accelerated with this merger. RFS also provides us with six
excellent development opportunities."
Equity Inns' headquarters will remain in Memphis, and Mr. McNeill noted that he
expects several RFS personnel to be offered positions with Equity Inns.
Upon closing of the acquisition, providing Equity Inns' average stock price is
between $14 and $17 per share during an agreed upon 20 day measurement period,
RFS shareholders will receive 1.5 Equity Inns shares for each RFS share. If
Equity Inns' average stock price during the measurement period exceeds $17 per
share, the exchange ratio will be adjusted to provide RFS shareholders with
$25.50 worth of Equity Inns' stock for each share of RFS.
The Board of Directors of Equity Inns was advised by Bear Stearns & Co. Inc.,
and Morgan Keegan & Company, Inc. The Board of Directors of RFS was advised by
Salomon Smith Barney.
STRATEGIC AND FINANCIAL BENEFITS:
The merger will provide a number of strategic and financial benefits to Equity
Inns, including:
Increased size and improved geographic diversity: The transaction increases
Equity Inns' portfolio by 82%, based on total rooms, and by 88%, based upon
lease revenue. The combined company will have hotels in 34 states and
significant market penetration in key markets including Silicon Valley,
Chicago, Dallas, Atlanta and Detroit.
Increase full service, upscale, extended stay: The transaction will further
diversify Equity Inns' portfolio, resulting in a reduction of the percentage of
1997 total hotel revenue derived from premium limited-service hotels from 61%
to 48% of the total portfolio. Conversely, income from
<PAGE> 3
Equity Inns, Inc.
Page 3
upscale extended stay, all suite and full service properties will increase from
39% of total revenue to 52%.
Increased critical mass and liquidity: Combined company equity value, based on
Equity Inns' current stock price, will exceed $1.2 billion with more than 80
million shares outstanding. Pro forma total market capitalization will be
approximately $1.8 billion. The companies expect the critical mass and brand,
segment and geographic diversity to result in lower funding costs.
Operating synergies: Asset management operations, acquisitions and the
development program will be enhanced. The best elements of each organization
will be combined, resulting in a larger, more professional management structure.
Financial synergies: The transaction is expected to result in approximately
$3.5 million in annual operating synergies and will be immediately accretive to
FFO in 1998 and 1999.
Enhanced internal growth: RFS' active development program together with its
significant portfolio of California hotels should accelerate internal growth
for the combined company.
RFS Chairman Robert M. Solmson said of the merger with Equity Inns, "We expect
that this transaction will add significant value to our shareholders'
investment. We have been examining for a number of months the best direction in
which to take the company, and we are confident that this merger, with a
company and a management team we know well and respect, is a decision that
benefits our shareholders and offers important synergies for the future."
Memphis-based Equity Inns, Inc. is a self-advised REIT that focuses on the
upscale extended stay, all suite and premium limited-service segments of the
hotel industy. With the settlement of previously announced acquisitions, the
Company will own 95 hotels with a total of 11,676 rooms located in 32 states.
RFS is a Memphis-based REIT that owns a diversified portfolio of 61 full
service, extended stay and premium limited-service hotels comprising
approximately 8,800 rooms in 24 states.
Certain matters discussed in this press release may constitute forward-looking
statements within the meaning of the federal securities laws. Actual results
and the timing of certain events could differ materially from those projected
in or contemplated by the forward-looking statements due to a number of factors
including general economic conditions, competitive factors, interest rates and
the other risks inherent in the real estate business. For further information
on factors which could impact the companies and the statements contained
herein, reference is made to the filings of Equity Inns and RFS, with the
Securities and Exchange Commission, including quarterly reports on Form 10-Q,
reports on Form 8-K and annual reports on Form 10-K, including factors
described in the Form 10-K for the fiscal year ended December 31, 1997 filed by
Equity Inns and RFS.
###
<PAGE> 4
Equity Inns, Inc.
Page 4
SUMMARY FACT SHEET
<TABLE>
<CAPTION>
RFS Equity Inns Combined
(actual) (actual) (pro forma)
-------- ----------- -----------
<S> <C> <C> <C>
Owned Hotels(1) 61 95 156
Rooms(1) 8,837 11,676 20,513
States 24 32 34
Brands 10 7 12
Leading Brands Residence Inn Hampton Inn Hampton Inn
Hampton Inn Residence Inn Residence Inn
Sheraton AmeriSuites Sheraton
AmeriSuites
Equity Market Capitalization(2) $550 $586 $1,246
Debt (3/31/98)(3) $223 $231 $ 561
Total Market Capitalization(2) $773 $817 $1,807
Debt/Total Market Capitalization 29.0% 28.3% 31.0%
Shares (fully diluted)(2) 28.5 38.1 81.0
</TABLE>
(1) Includes announced acquisitions. Excludes hotels under development.
(2) Combined based on 1.5 fixed exchange ratio and Equity Inns current stock
price of $15.38 per share.
(3) Combined debt includes anticipated costs of terminating certain of the
operating leases on RFS' hotels and estimated transaction expenses.
<PAGE> 1
EXHIBIT 99.2
Equity Inns
Unaudited Pro Forma Financial Information
(amounts in thousands except for per share amounts)
The following unaudited pro forma consolidated balance sheet as of March 31,
1998 gives effect to the Mergers as if such transactions had been consummated on
such date. The transaction will be accounted for by Equity Inns under the
purchase method of accounting for business combinations. The following unaudited
pro forma consolidated statements of operations of Equity Inns for the year
ended December 31, 1997 and the three months ended March 31, 1998 give effect to
the Mergers as if such transactions had been consummated on January 1, 1997 and
as if all the hotels acquired in the Mergers had been leased to one of Equity
Inns' lessees, pursuant to Percentage Leases. The pro forma financial
information does not include a lease incentive payment that Equity Inns expects
to receive from the future lessee of the hotels acquired in the Mergers.
Additionally, the pro forma effects of the following items specific to Equity
Inns and RFS are given effect as if such transactions had been consummated on
January 1, 1997:
Equity Inns, As Adjusted:
(i) the acquisition of 41 hotels acquired by Equity Inns in 1997 ("the 1997
Hotel Acquisitions") and as if all such hotels had been leased to one of Equity
Inns' lessees pursuant to Percentage Leases; and
(ii) the consummation of Equity Inns' May and November 1997 common stock
offerings ("the 1997 Offerings") and Equity Inns' February and March 1998 common
stock offerings ("the 1998 Offerings") and the application of the net proceeds
therefrom.
RFS, As Adjusted
(i) the acquisition of 9 hotels acquired by RFS in 1997 and as if all such
hotels had been leased to one of RFS' lessees pursuant to Percentage Leases.
Additionally, 3 of the 9 properties acquired by RFS in 1997 were properties
which began operations in 1997, and two of the RFS development properties opened
in the first quarter of 1998. Accordingly, the pro forma financial information
reflects an estimate for base rent only, depreciation and real estate and
personal property taxes for the period prior to their opening; and
(ii) the consummation of the RFS March 1998 common stock offering and the
application of the net proceeds therefrom.
The pro forma financial information excludes the pro forma effects of the Equity
Inns Acquisition Hotels. Such pro forma information is based in part upon the
historical consolidated financial statements of Equity Inns and RFS and should
be read in conjunction with such financial statements which are contained herein
or incorporated by reference. Certain historical RFS amounts have been
reclassified to conform with Equity Inns' presentation. In management's opinion,
all adjustments necessary to reflect the effects of these transactions have been
made.
The following unaudited pro forma financial information is not necessarily
indicative of the financial position or operating results that would have
occurred had such transactions been consummated on the date as of which, or at
the beginning of the periods for which, the transactions are being given effect,
nor is it necessarily indicative of future financial position or operating
results.
<PAGE> 2
Equity Inns
Pro Forma Consolidated Balance Sheet
March 31, 1998
<TABLE>
<CAPTION>
EQUITY
INNS RFS MERGER
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
ASSETS
<S> <C> <C> <C> <C>
Investment in hotel properties, net $619,606 $581,278 $381,485 (A) $1,582,369
Hotels under development 13,831 13,831
Cash and cash equivalents 6,324 17,370 (1,500)(B) 22,194
Due from Lessees 7,893 12,166 20,059
Note receivable 3,884 3,884
Deferred expenses, net 7,147 3,775 (3,775)(A) 10,647
2,000 (C)
1,500 (B)
Deposits and other assets 2,730 8,782 11,512
-------- -------- -------- ----------
Total Assets $647,584 $637,202 $379,710 $1,664,496
======== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $230,871 $222,621 $125,777 (D) $ 579,269
Accounts payable and accrued expenses 10,879 7,786 18,665
Distributions payable 11,603 11,603
Minority interest in Partnership 19,084 36,170 (36,170)(F) 77,035
59,743 (G)
(1,792)(E)
-------- -------- -------- ----------
Total Liabilities 272,437 266,577 147,558 686,572
-------- -------- -------- ----------
Shareholders' Equity:
Preferred stock 10 (10)(F)
Common stock 362 250 (250)(F) 750
388 (G)
Treasury stock (2,012) 2,012 (F)
Additional paid-in capital 407,099 373,307 (373,307)(F) 1,009,488
600,597 (G)
1,792 (E)
Unearned officers' and directors'
compensation (250) (598) 598 (F) (250)
Predecessor basis assumed (1,264) (1,264)
Distributions in excess of net earnings (30,800) (332) 332 (F) (30,800)
-------- -------- -------- ----------
Total Shareholders' Equity 375,147 370,625 232,152 977,924
-------- -------- -------- ----------
Total Liabilities and Shareholders'
Equity $647,584 $637,202 $379,710 $1,664,496
======== ======== ======== ==========
</TABLE>
See Notes to Pro Forma Consolidated Balance Sheet
<PAGE> 3
Equity Inns
Notes to Equity Inns Pro Forma
Consolidated Balance Sheet
(A) Represents adjustments attributable to the application of purchase
accounting to RFS based upon the estimated value of Equity Inns Common
Stock and Equity Inns OP Units to be issued upon consummation of the
Mergers, and the estimated additional borrowings incurred to pay direct
costs of the Mergers.
(B) Represents an adjustment for additional financing fees incurred to
restructure credit facilities upon consummation of the Mergers.
(C) Represents an adjustment for new anticipated franchise fees incurred
as a result of the Mergers.
(D) Represents an adjustment for the estimated additional borrowings
incurred to pay direct costs of the Mergers, including lease
termination fees incurred by RFS in connection with the Mergers
($95,500), franchise agreements ($2,000), professional and advisory
fees ($11,200), employee severance related costs ($9,507), real estate
property transfer taxes ($7,220) and other miscellaneous costs ($350).
(E) Represents an adjustment to the minority interest in Equity Inns OP to
reflect the pro forma minority ownership percentage of 7.06% at March
31, 1998, following the Mergers.
(F) Represents an adjustment for the elimination of the historical
shareholder equity of RFS and minority interest ownership in RFS OP.
(G) Represents an adjustment for the estimated value of Equity Inns Common
Stock and Equity Inns OP Units to be issued upon consummation of the
Mergers. The adjustment assumes each share of RFS Capital Stock and
each RFS OP Unit or 25,848,819 shares and 2,569,609 Units,
respectively, will be exchanged for 1.5 shares of Equity Inns Common
Stock or 1.5 Equity Inns OP Units, as applicable. The adjustment
assumes the shares and Units are valued at $15.50 per share or Unit as
of the date of the Mergers.
<PAGE> 4
Equity Inns
Pro Forma Consolidated Statement of Operations
For the Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
EQUITY
EQUITY INNS RFS
INNS PRO FORMA AS RFS PRO FORMA AS MERGER PRO
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL ADJUSTMENTS ADJUSTED ADJUSTMENTS FORMA
---------- ----------- -------- ---------- ----------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Percentage lease revenues $21,407 $21,407 $22,023 $240(A) $22,263 $2,642 (B) $46,312
Gain on sale of hotel 523 523 523
properties
Other income 170 170 86 86 256
------ ------ ------ ---- ------ ----- ------
Total Revenue 21,577 21,577 22,632 240 22,872 2,642 47,091
Expenses:
Real estate and personal
property taxes 2,433 2,433 2,302 37 (C) 2,339 587 (H) 5,359
Property and casualty
insurance -- -- 186 -- 186 (186)(I) --
Depreciation and 6,682 6,682 4,951 50 (D) 5,001 3,609 (J) 15,292
amortization
Interest 4,291 (278)(E) 4,013 3,548 (180)(E) 3,368 2,390 (K) 9,771
Amortization of loan 213 213 243 243 (117)(L) 339
costs
General and 1,410 1,410 1,409 1,409 (1,153)(M) 1,666
administrative
Amortization of unearned
directors' and
officers' compensation 23 23 196 196 (196)(N) 23
Rental expense 207 207 36 36 243
------ --- ------ ------ ---- ------ ----- ------
Total Expenses 15,259 (278) 14,981 12,871 (93) 12,778 4,934 32,693
Income before minority 6,318 6,596 9,761 10,094 14,398
interest
Minority interest 314 319 936 962 1,017
------ ------ ------ ------ ------
Net income 6,004 6,277 8,825 9,132 13,381
Net income per share:
Basic .17 .17 .18
Diluted .17 .17 .18
Weighted average number
of common shares
outstanding:
Basic 35,221 36,231 75,004
====== ====== ======
Diluted 37,160 38,170 80,847
====== ====== ======
</TABLE>
See Notes to Pro Forma Consolidated Statement of Operations
<PAGE> 5
Equity Inns
Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
EQUITY
EQUITY INNS RFS
INNS PRO FORMA AS RFS PRO FORMA AS MERGER PRO
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL ADJUSTMENTS ADJUSTED ADJUSTMENTS FORMA
---------- ----------- -------- ---------- ----------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Percentage lease revenues $70,590 $25,476(A) $96,066 $82,949 $5,641(A) $88,590 $8,949(B) $193,605
Gain on sale of hotel 666 666 666
properties
Other income 505 505 120 120 625
------- ------- ------- ------- ------ ------- ------ --------
Total Revenue 71,761 25,476 97,237 83,069 5,641 88,710 8,949 194,896
Expenses:
Real estate and personal
property taxes 6,688 2,361(C) 9,049 7,613 1,016(C) 8,629 2,349(H) 20,027
Property and casualty
insurance -- -- -- 744 -- 744 (744)(I) --
Depreciation and 20,214 6,620(D) 26,834 17,809 422(D) 18,231 14,404(J) 59,469
amortization
Interest 12,601 4,929(E) 17,530 11,562 1,142(E) 12,704 9,471(K) 39,705
Amortization of loan 1,013 27(F) 1,040 913 913 (413)(L) 1,540
costs
General and 4,142 4,142 4,499 4,499 (3,474)(M) 5,167
administrative
Amortization of unearned
directors' and
officers' compensation 92 92 738 738 (738)(N) 92
Rental expense 566 248(C) 814 180 180 994
Loss on sale of hotel 1,164 1,164 1,164
properties
------ ------ ------- ------- ------ ------- ------- --------
Total Expenses 45,316 14,185 59,501 45,222 2,580 47,802 20,855 128,158
Income before
extraordinary item
and minority
interest 26,445 37,736 37,847 40,908 66,738
Extraordinary charge from
write-off of deferred
financing fees 1,984 (1,984)(G)
------- ------- ------- ------- ------ ------- ------- --------
Income before minority 24,461 37,736 37,847 40,908 66,738
interest
Minority interest 918 1,830 3,615 3,821 4,716
------- ------- ------- ------- --------
Net income 23,543 35,906 34,232 37,087 62,022
Net income per share:
Basic .82 .99 .83
Diluted .82 .99 .83
Weighted average number
of common shares
outstanding:
Basic 28,773 36,152 74,926
======= ======= =======
Diluted 29,963 38,056 80,769
======= ======= =======
</TABLE>
See Notes to Pro Forma Consolidated Statement of Operations
<PAGE> 6
Equity Inns
Notes to Equity Inns Pro Forma
Consolidated Statement of Operations
(A) As it relates to Equity Inns, amount represents pro forma lease revenue
calculated by applying the rent provisions of the percentage leases to
the historical results of operations of the 1997 Hotel Acquisitions for
the period prior to their acquisition. As it relates to RFS, the pro
forma adjustment for the three months ended March 31, 1998 represents
an estimate for base rent for the period prior to the opening of two
hotels in 1998. The pro forma adjustment for the year ended December
31, 1997 represents pro forma lease revenue calculated by applying the
rent provisions of the percentage leases to the historical results of
operations of 6 hotels acquired by RFS in 1997 for the period prior to
their acquisition, and an estimate for base rent of $1,560 for the
period prior to the opening of 3 hotels in 1997. Additionally assumes
annual base rent of $960 for each of two hotels opened in the first
quarter of 1998.
(B) Represents an adjustment to reflect the pro forma results of increased
rent from new leases which Equity Inns expects to enter into with
respect to 57 of the RFS Hotels currently subject to Promus Leases,
and based upon Equity Inns management's estimate of the new rent terms
for such new leases. The actual rent provisions of such new leases may
vary from such estimate.
(C) As it relates to Equity Inns, amount represents a pro forma adjustment
for historical real estate and personal property taxes and rental
expense of the 1997 Hotel Acquisitions incurred during the period prior
to their respective dates of acquisition by Equity Inns. As it relates
to RFS, the pro forma adjustment for the three months ended March 31,
1998 represents an estimate for real estate taxes for two hotels for
the period prior to their opening in 1998. The pro forma adjustment for
the year ended December 31, 1997 represents an adjustment for
historical real estate taxes of 6 hotels acquired by RFS in 1997 for
the period prior to their acquisition, and an estimate for real estate
taxes of $195 for the period prior to the opening of 3 hotels in 1997.
Additionally, includes an estimate for annual real estate taxes of $320
for two hotels that were opened in the first quarter of 1998.
(D) As it relates to Equity Inns, amount represents an adjustment for
depreciation of buildings and improvements, and furniture, fixtures,
and equipment of the 1997 Hotel Acquisitions during the period prior to
their respective dates of acquisition by Equity Inns, based on their
respective acquisition costs. As it relates to RFS, amount represents
an adjustment for depreciation of buildings and improvements, and
furniture, fixtures, and equipment for two hotels opened in 1998, based
on their respective development costs. Depreciation and amortization is
computed on a straight-line basis over 31 years for building and
improvements, 7 years for furniture, fixtures and equipment, and 10-15
years for franchise agreements.
<PAGE> 7
Equity Inns
Notes to Equity Inns Pro Forma
Consolidated Statement of Operations, Continued
(E) As it relates to Equity Inns, the pro forma adjustment for interest
expense for the three months ended March 31, 1998 represents a
reduction in interest expense caused by the decrease in the borrowing
levels resulting from the assumption that the 1998 Offerings had
occurred prior to January 1, 1998, based on Equity Inns' borrowing
rates. The pro forma adjustment for the year ended December 31, 1997
represents interest expense related to the acquisition costs of the
1997 Hotel Acquisitions as if they had been acquired on January 1,
1997, based on Equity Inns' weighted average interest rate incurred
during the period on historical outstanding borrowings. This increase
in interest expense has been reduced by the decrease in the borrowing
levels caused by the assumption that the 1997 Offerings and the 1998
Offerings had occurred on January 1, 1997. As it relates to RFS, the
pro forma adjustment for interest expense for the three months ended
March 31, 1998 represents a reduction in interest expense caused by the
decrease in the borrowing levels resulting from the assumption that the
RFS March 1998 common stock offering had occurred prior to January 1,
1998, based on RFS' borrowing rates. The pro forma adjustment for the
year ended December 31, 1997 represents interest expense related to the
acquisition costs of 9 hotels acquired by RFS during 1997 as if they
had been acquired on January 1, 1997, based on RFS' borrowing rates.
This increase in interest expense has been reduced by the decrease in
the borrowing levels caused by the assumption that the RFS March 1998
common stock offering had occurred on January 1, 1997.
(F) Represents an adjustment for amortization expense on deferred loan
costs related to Equity Inns' issuance of the Bonds for the period in
1997 prior to their issuance.
(G) Represents the elimination of the historical extraordinary charge
incurred by Equity Inns in 1997.
(H) Represents an adjustment for estimated incremental annual real estate
taxes of $2,000 based upon Equity Inns' estimates of property value
reassessments of the RFS Hotels which will result from consummation of
the Mergers, and an annual amount of $349 for personal property taxes
previously paid by RFS Lessees.
(I) Represents the elimination of RFS' historical property and casualty
insurance expense which will be paid by Equity Inns Lessees following
consummation of the Mergers.
(J) Represents an adjustment necessary to reflect incremental depreciation
on the RFS Hotels due to the step-up in cost basis attributable to the
application of purchase accounting. The adjustment reflects an assumed
allocation of the step-up in cost basis of approximately $46 to land,
$335 to buildings and improvements, $2 to franchise agreements, and an
amount necessary to reflect an estimated useful life of 31 years for
buildings and improvements, 7 years for furniture, fixtures and
equipment and 10 to 15 years for franchise agreements. RFS historical
depreciation reflects a useful life of 40 years for buildings and
improvements. The estimated useful lives utilized by management are
based upon their knowledge of hotel properties and the hotel industry
in general.
(K) Represents an adjustment for interest expense related to the estimated
additional borrowings of $125,777 incurred to pay direct costs of the
Mergers, based on Equity Inns' weighted average interest rate incurred
during the respective periods on historical outstanding borrowings.
<PAGE> 8
Equity Inns
Notes to Equity Inns Pro Forma
Consolidated Statement of Operations, Continued
(L) Represents (i) the elimination of the historical amortization of
deferred financing costs of RFS and (ii) the amortization of the
estimated incremental financing costs of $1,500 that will be incurred
upon consummation of the Mergers.
(M) Represents (i) the elimination of the historical amounts of general and
administrative expenses of RFS and (ii) the estimated incremental
general and administrative expenses to be incurred by Equity Inns.
(N) Represents elimination of the 1997 historical amortization expense of
unearned directors' and officers' compensation of RFS as a result of
the Mergers.
<PAGE> 1
EXHIBIT 99.3
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investment in Hotel Properties, net $ 573,826 $ 415,618
Hotels under development 15,739 7,325
Cash and cash equivalents 6,645 57,935
Accounts receivable-Lessees 9,887 7,187
Deferred expenses, net 4,061 3,598
Prepaid and other assets 6,765 1,402
Escrow deposits 205 6,064
--------- ---------
$ 617,128 $ 499,129
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 6,423 $ 2,258
Accrued real estate taxes 3,491 1,774
Borrowings on line of credit 123,843 50,000
Bonds 71,892 74,769
Other debt 13,174 8,295
Minority interest 36,235 4,551
--------- ---------
255,058 141,647
--------- ---------
Commitments and Contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 973,684 shares outstanding 10 10
Common Stock, $.01 par value, 100,000,000 shares
authorized, 24,389,000 and 24,384,000 shares outstanding 244 244
Paid-in capital 363,066 356,548
Undistributed income 337 3,005
Unearned directors' and officers' compensation (1,587) (2,325)
--------- ---------
Total shareholders' equity 362,070 357,482
--------- ---------
$ 617,128 $ 499,129
--------- ---------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
<PAGE> 2
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Lease revenue $ 82,949 $ 61,594 $ 47,249
Interest income 120 392 1,058
-------- -------- --------
Total revenue 83,069 61,986 48,307
-------- -------- --------
Expenses:
Real estate taxes and property and
casualty insurance 8,357 6,289 5,019
Depreciation 17,664 10,919 8,578
Amortization of franchise fees and
unearned compensation 883 760 536
Compensation 2,394 2,120 936
Franchise taxes 300 260 283
General and administrative 1,985 2,037 968
Loss on sale of hotel properties 1,164 244
Write-down of a hotel property 668
Amortization of loan costs 913 398 310
Interest expense, net 11,562 3,204 592
-------- -------- --------
Total expenses 45,222 26,899 17,222
-------- -------- --------
Income before minority interest 37,847 35,087 31,085
Minority interest (3,615) (500) (439)
Net income 34,232 34,587 30,646
Preferred stock dividends (1,412) (1,195)
Net income applicable to common shareholders $ 32,820 $ 33,392 $ 30,646
-------- -------- --------
Basic earnings per share $ 1.35 $ 1.37 $ 1.26
-------- -------- --------
Diluted earnings per share $ 1.34 $ 1.37 $ 1.26
-------- -------- --------
Weighted average common shares 24,389 24,353 24,294
-------- -------- --------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
<PAGE> 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ending December 31, 1997, 1996 and 1995 (in thousands, except per
share data)
<TABLE>
<CAPTION>
Unearned
Officers' and
Preferred Stock Common Stock Paid-In Undistributed Directors'
Shares Dollars Shares Dollars Capital Income Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 24,294,000 $ 243 $ 336,344 $ 1,131 $ (1,825) $ 335,893
Distributions on common shares,
($1.18 per share) (28,666) (28,666)
Allocation from minority interest 513 513
Amortization of unearned
compensation 427 427
Net Income 30,646 30,646
Balances at December 31, 1995 24,294,000 $ 243 $ 336,857 $ 3,111 $ (1,398) $ 338,813
Issuance of preferred stock,
net of expenses of $357 973,684 $ 10 18,133 18,143
Issuance of restricted common
stock to officers and directors 90,000 1 1,558 (1,559) 0
Distributions on common shares,
($1.39 per share) (33,854) (33,854)
Distributions on preferred shares,
($0.86 per share) (839) (839)
Amortization of unearned
compensation 632 632
Net income 34,587 34,587
Balances at December 31, 1996 973,684 $ 10 24,384,000 $ 244 $ 356,548 $ 3,005 $ (2,325) $ 357,482
Issuance of common stock 5,000 72 72
Contribution of capital 90 90
Distributions on common shares,
($1.455 per share) (35,488) (35,488)
Distributions on preferred shares,
($1.45 per share) (1,412) (1,412)
Allocation from minority interest 6,356 6,356
Amortization of unearned
compensation 738 738
Net income 34,232 34,232
------- ---- ---------- ----- --------- --------- -------- ---------
Balances at December 31, 1997 973,684 $ 10 24,389,000 $ 244 $ 363,066 $ 337 $ (1,587) $ 362,070
------- ---- ---------- ----- --------- --------- -------- ---------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 34,232 $ 34,587 $ 30,646
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,460 12,077 9,424
Income allocated to minority interest 3,615 500 439
Loss on sale and write-down of hotel properties 1,164 912
Changes in assets and liabilities:
Accounts receivable-Lessees (2,700) (1,414) (1,898)
Prepaids and other assets (3,063) (828) 206
Accounts payable and other liabilities 5,882 614 79
--------- --------- ---------
Net cash provided by operating activities 58,590 46,448 38,896
--------- --------- ---------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (153,564) (73,356) (71,248)
Proceeds from sale of hotel property 15,566 3,891
Escrow deposits and prepayments under
purchase agreements (205) (5,053) (2,201)
Cash paid for franchise agreements (34) (579)
--------- --------- ---------
Net cash used by investing activites (138,237) (74,518) (74,028)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from sale of common stock 162
Net proceeds from sale of preferrred stock 18,143
Proceeds from issuance of bonds 75,000
Distributions to common and preferred shareholders (36,900) (34,693) (28,666)
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
Distributions to limited partners (3,738) (458) (510)
Borrowings under revolving credit agreement 183,843 92,750 21,850
Payments on revolving credit agreement (110,000) (64,600)
Payments on debt and bonds (3,523) (272)
Redemption of shares/units (125)
Loan fees paid (1,487) (2,545) (387)
--------- --------- ---------
Net cash provided (used) by financing activities 28,357 83,325 (7,838)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (51,290) 55,255 (42,970)
Cash and cash equivalents at beginning of year 57,935 2,680 45,650
--------- --------- ---------
Cash and cash equivalents at end of year $ 6,645 $ 57,935 $ 2,680
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 11,811 $ 3,820 $ 450
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
In 1997, the Company recorded a $6,356 allocation to paid-in capital from
minority interest.
In 1997, the Partnership issued 2,244,934 limited partnership units valued at
$38,200 in connection with the purchase of four hotels.
In 1997, the Partnership applied deposits of $6,064 towards the purchase of
hotels.
In 1997, RLGP assumed industrial development bonds of $5,525 in connection with
the purchase of a hotel.
In 1996, the Company issued 90,000 shares of Restricted Common Stock, which at
dates of issuance, were valued from $15 5/8 to $17 5/8 per share.
In 1996, the Partnership applied deposits of $1,190 toward the
purchase of acquired hotels and land.
In 1995, the Company recorded a $513 allocation to paid-in capital from minority
interest.
In 1995, the Partnership assumed a note payable of $5,916 in connection with the
purchase of a hotel.
In 1995, the Partnership applied a deposit of $1,002 towards the purchase of an
acquired hotel.
The accompanying notes are an integral
part of these consolidated financial statements.
<PAGE> 6
NOTE 1. ORGANIZATION
RFS Hotel Investors, Inc. (the "Company") was incorporated in Tennessee on June
1, 1993 and is a self-administered real estate investment trust ("REIT"). The
Company contributed substantially all of the net proceeds of its public
offerings to RFS Partnership, L.P. (the "Partnership") in exchange for the sole
general partnership interest in the Partnership. The Partnership began
operations in August 1993. At December 31, 1997, and 1996, the Company owned
approximately 90.5% and 98.7% of the Partnership, respectively. RFS Managers,
Inc. ("Managers") a wholly-owned subsidiary of the Company, was formed effective
January 1, 1995 to provide management services to the Company. During 1996, RFS
Financing Partnership, L.P., (the "Financing Partnership"), a bankruptcy remote,
single purpose Tennessee limited partnership, was formed to issue commercial
mortgage bonds (the "Bonds"). During 1997, Ridge Lake General Partners, Inc.
("RLGP") was formed to purchase a hotel. The Company owns approximately 95% of
RLGP.
The Company, through its subsidiary partnerships, acquires or develops and owns
hotel properties.
<PAGE> 7
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
INVESTMENT IN HOTEL PROPERTIES. Hotel properties are recorded at cost and are
depreciated using the straight-line method over the estimated useful lives of
the assets at 40 years for buildings and improvements and 5 to 7 years for
furniture and equipment. Upon disposition, both the asset and accumulated
depreciation accounts are relieved and the related gain or loss is credited or
charged to the income statement. Major renewals, betterments and improvements
are capitalized. At each reporting period, the Company reviews the carrying
value of each hotel property, for which management has not committed to a plan
of disposition, to determine if facts and circumstances exist which would
suggest that the investment in the hotel property may be impaired or that the
depreciation period should be modified. For hotel properties for which
management has committed to a plan of disposition, the Company adjusts the
carrying value to the lower of carrying value or fair value less costs of
disposition. The Company does not believe that there are any current facts or
circumstances indicating any material impairment of any hotel property at
December 31, 1997.
CASH AND CASH EQUIVALENTS. All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents. The
Company invests portions of its excess cash in money market funds.
DEFERRED EXPENSES. Deferred expenses consist of initial fees paid to
franchisors, annual loan fees and costs incurred in issuing the Bonds, and are
recorded at cost. Amortization of franchise fees is computed using the
straight-line method over the lives of the franchise agreements which range from
10 to 15 years. Amortization of annual loan fees is computed using the
straight-line method over 12 months. Amortization of the costs incurred in
issuing the Bonds is computed using the interest method over the stated maturity
of the Bonds. Accumulated amortization of the deferred expenses is $2.2 million
and $1.1 million at December 31, 1997 and 1996 respectively.
REVENUE RECOGNITION. The Partnership leases the hotels to third parties,
(collectively, the "Lessees"), pursuant to lease agreements ("Percentage
Leases") which provide for rent equal to the greater of (i) fixed base rent, or
(ii) rent payments based on percentages of revenues at the hotels. Base rent is
payable monthly. Percentage rent is payable quarterly. Lease revenue is
recognized as earned from the Lessee under the Percentage Leases from the date
of acquisition.
MINORITY INTEREST. Minority interest in the Partnership represents the limited
partners proportionate share of the equity in the Partnership. Income is
allocated to minority interest based on the weighted percentage ownership
throughout the year.
BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE. Basic
<PAGE> 8
earnings per share is computed by dividing net income less preferred dividends
by the weighted average number of shares of common stock outstanding for the
reporting period. Diluted earnings per share is computed by dividing net income
by the weighted average number of shares of preferred and common stock, and
common stock equivalents outstanding during the reporting period. Options are
considered common stock equivalents.
INCOME TAXES. The Company has qualified as a Real Estate Investment Trust
("REIT") under Sections 856 to 860 of the Internal Revenue Code. Accordingly, no
provision for federal income taxes has been reflected in the consolidated
financial statements.
Earnings and profits, which will determine the taxability of distributions to
shareholders, will differ from net income reported for financial reporting
purposes due to the differences for federal tax purposes in the estimated useful
lives used to compute depreciation and in the recognition of unearned
compensation to officers and directors. Distributions made in 1997, 1996, and
1995 were considered 100% ordinary income for federal income tax purposes.
DISTRIBUTIONS. The Company intends to pay regular quarterly distributions which
are dependent upon receipt of distributions from the Partnership in order to
maintain its REIT status under the Internal Revenue Code.
CONCENTRATIONS OF CREDIT RISK. The Company places cash deposits at financial
institutions. At December 31, 1997, bank account balances exceeded federal
depository insurance limits by $4.0 million.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE> 9
NOTE 3. INVESTMENTS IN HOTEL PROPERTIES
The investment in hotel properties consists of the following at December 31,
1997, and 1996, respectively (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land $ 69,087 $ 50,265
Building and improvements 478,142 351,889
Furniture and equipment 52,614 24,736
Capital improvements program expenditures 14,202 11,999
-------- --------
614,045 438,889
Less accumulated depreciation 40,219 23,271
-------- --------
$573,826 $415,618
-------- --------
</TABLE>
Capitalized interest during 1997 and 1996 was $1.0 and $.5 million,
respectively. At December 31, 1997, the Company owned 60 hotel properties in 24
states. Fifty-eight of the hotels are affiliated with national franchises. Eight
of the hotels with a net book value of $175.2 million at December 31, 1997 are
located in California.
NOTE 4. LINE OF CREDIT
The Company has a bank line of credit (the "Line of Credit") for $175 million.
Borrowings under the Line of Credit bear interest at LIBOR plus 1.45%. The Line
of Credit is secured by first priority mortgages on 28 hotels and agreements
restricting the transfer, pledge or other hypothecation of 9 hotels
(collectively, the "Collateral Pool") with a net book value of $330.1 million at
December 31, 1997. The Line of Credit contains various covenants including the
maintenance of a minimum net worth, minimum debt coverage and interest coverage
ratios, total indebtedness and total liabilities limitations and borrowing base
to value limitations. The Company was in compliance with these covenants at
December 31, 1997. The Company had borrowed $123.8 million on the Line of Credit
at December 31, 1997. The Line of Credit is due July 30, 2000.
The Company had a $75 million line of credit (the "Credit Line") which was
terminated and paid-off at the closing of the Line of Credit in July 1997.
Borrowings under the Credit Line bore interest at the 90-day LIBOR plus 1.75%.
The Company had outstanding borrowings of $75 million on the Credit Line at the
point of pay-off.
<PAGE> 10
NOTE 5. BONDS
In November, 1996, the Financing Partnership issued $75 million of commercial
mortgage bonds, series 1996-1 as follows:
<TABLE>
<CAPTION>
Initial Interest
Class Principal Amount Rate Stated Maturity
------- ---------------- -------- -----------------
<S> <C> <C> <C>
Class A $50 Million 6.83% August 20, 2008
Class B $25 Million 7.30% November 21, 2011
</TABLE>
Principal payments on the Class A Bonds are based on a 141-month amortization
schedule beginning in December 1996; principal payments on the Class B Bonds are
payable based on a 39-month amortization schedule beginning in September 2008.
Total monthly principal and interest payments approximate $.7 million.
Aggregate annual principal payments for the next five years at December 31, 1997
for the Bonds are as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $3,082
1999 3,302
2000 3,537
2001 3,790
2002 4,060
</TABLE>
The Bonds are collateralized by first priority mortgage liens on 15 hotel
properties with an aggregate net book value of $140.7 million at December 31,
1997. The Bonds cannot be prepaid prior to November 2001, and thereafter, only
upon payment of a yield maintenance premium.
NOTE 6. OTHER DEBT
In connection with the purchase of a hotel in Fishkill, NY, the Partnership
assumed industrial development bonds, ("IDB's"), issued in 1988 and which are
due December 1, 2002. The IDB's bear interest at a variable rate which, as of
December 31, 1997, was approximately 3.5% per year. Interest is payable
quarterly; principal is payable in installments of $.6 million every three (3)
years with the next installment due in 2000. The outstanding balance on the
IDB's is $1.8 million at December 31, 1997. The Fishkill hotel is collateral for
the IDB's and has a net book value of $12.7 million at December 31, 1997.
In connection with a purchase of a hotel in Atlanta, GA, the Partnership assumed
a promissory note payable which has a principal balance of $5.9 million at
December 31, 1997. The promissory note bears interest at 10.15% and is due in
monthly principal and
<PAGE> 11
interest installments of $53,000. The note is due July 1, 1998 and contains a
prepayment premium. A Residence Inn in Atlanta, GA is collateral for the note
and has a net book value of $11.6 million at December 31, 1997.
In connection with the purchase of a hotel in Birmingham, AL, RLGP assumed
industrial development bonds ("Birmingham IDB's"), which are due in 2001. The
Birmingham IDB's bear interest at a variable rate which, at December 31, 1997,
was approximately 4% per year. Interest is payable quarterly; principal is
payable annually. The outstanding balance on the Birmingham IDB's is $5.5
million at December 31, 1997. The Birmingham hotel is collateral for the
Birmingham IDB's and has a net book value of $18.2 million at December 31, 1997.
Aggregate annual principal payments for the next five years at December 31, 1997
for the above other debt are as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $6,354
1999 560
2000 3,915
2001 1,125
2002 1,220
</TABLE>
NOTE 7. COMMITMENTS
The Company has entered into a master agreement with one of the Lessees. The
master agreement requires the Lessee to maintain a certain net worth, as
defined, grants a ten-year right to lease hotel properties acquired or developed
by the Partnership or the Company, subject to certain exceptions, and restricts,
for a period of time, changes in control of the Lessee, among other items.
The Company must rely on the Lessees to generate sufficient cash flow from the
operation of the hotel properties to enable the Lessees to meet rent obligations
under the Percentage Leases. The rent obligations under the Percentage Leases
are unsecured and are not guaranteed. At December 31, 1997, the Lessees are in
compliance with the provisions of the master agreement and the Percentage
Leases.
Both the base rent and the percentage rent threshold room revenue in each lease
computation are subject to adjustments for changes in the Consumer Price Index
("CPI"). The adjustment is made for all leases entered into after December 31,
1993 and is calculated at the beginning of each calendar year following the year
of acquisition. Effective January 1, 1997 and 1996, adjustments to the leases
were computed using the average CPI increase for 1996 and 1995 of 2.95% and
2.83%, respectively.
<PAGE> 12
In 1997, 1996, and 1995, the Company earned base rents of $37.5 million, $25.9
million and $22.0 million, respectively, and percentage rents in excess of the
base rents, of $45.4 million, $35.7 million and $25.3 million, respectively.
Under the Percentage Leases, the Partnership is obligated to pay the costs of
real estate taxes, property insurance, maintenance of underground utilities and
structural elements of the hotel properties, and for the periodic replacement or
refurbishment of furniture, fixtures and equipment required for the retention of
the franchise licenses with respect to the hotel properties.
The Company has future lease commitments under the various Percentage Leases
from the Lessees for various terms extending through May 2012. Minimum future
rental income under these Percentage Leases for the next five (5) years is $37.3
million per year. Aggregate future minimum rental income under these Percentage
Leases is $449.9 million at December 31, 1997.
The Company leases office space. Annual lease payments total $132,000 through
December 2006. The Company has contracted to sell a hotel in Tupelo, Mississippi
for $4.6 million. The sale is expected to occur in the first quarter of 1998.
The Partnership is developing the following hotels:
<TABLE>
<CAPTION>
Number of Estimated Estimated
Rooms/ Development Opening
Franchise Location Suites Costs Quarter
- ----------------- ------------------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Residence Inn West Palm Beach, FL 78 $6.2 million 1Q98
Hampton Inn Jacksonville, FL 118 $6.2 million 1Q98
Homewood Suites Chandler, AZ 83 $6.6 million 1Q98
TownePlace Suites Fort Worth, TX 95 $6.3 million 3Q98
Courtyard Crystal Lake, IL 90 $6.5 million 4Q98
TownePlace Suites Miami, FL 95 $6.5 million 4Q98
</TABLE>
The Partnership is constructing a 40 room addition to the Beverly Heritage Hotel
in Milpitas, CA. Construction costs are estimated at $3.0 million. Completion of
the addition is expected in the third quarter of 1998. Additionally, the
Partnership is constructing a 36-suite addition to the Residence Inn in
Charlotte, NC. Construction costs are estimated at $3.6 million. Completion of
the addition is expected in the third quarter of 1998.
At December 31, 1997, the Company intends to spend, in 1998, a remaining $9.9
million to complete the 1997 capital improvement programs with respect to the
Hotels.
<PAGE> 13
NOTE 8. CAPITAL STOCK
The Board of Directors is authorized to provide for the issuance of shares of
Preferred Stock in one or more series, to establish the number of shares in each
series and to fix the designation, powers, preferences and rights of each such
series and the qualifications, limitations or restrictions thereof.
The Company has issued to one of the Lessees 973,684 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). The Series A
Preferred Stock has an initial preference value of $19.00 per share (the "Stated
Value"), a par value of $0.01, and is senior to the Company's common stock as to
dividends and upon liquidation of the Company. The shares of Series A Preferred
Stock are entitled to a $1.45 cumulative annual dividend per share. Each share
of Series A Preferred Stock has one vote and is convertible into one share of
common stock after February 2002. The shares of Series A Preferred Stock have
mandatory redemption rights upon the occurrence of certain events which are
under the Company's control. The Company can redeem the Series A Preferred Stock
after the seventh anniversary of issuance at the Stated Value, together with all
accrued and unpaid dividends.
Pursuant to the Partnership Agreement, holders of units of limited partnership
interests in the Partnership have certain rights ("Redemption Rights") which
enable them to cause the Partnership to redeem their units of limited
partnership interest in the Partnership for cash, or, at the Company's option,
for shares of Common Stock on a one-for-one basis. At December 31, 1997, an
aggregate of 2,569,609 shares are issuable upon exercise of Redemption Rights.
The units of limited partnership interests were valued at the fair market value
of Common Stock on the date of issuance of the units. In 1995, 8,626 limited
partnership units were redeemed for approximately $125,000 in cash. The number
of shares issuable upon exercise of the Redemption Rights will be adjusted upon
the occurrence of stocks splits, mergers, consolidations or similar pro rata
share transactions, which otherwise would have the effect of diluting the
ownership interests of the limited partners.
The Company's Amended and Restated 1993 Restricted Stock and Stock Option Plan
(the "Plan") provides for the grant of stock options to purchase a specified
number of shares of Common Stock ("Options") or grants of Restricted Shares of
Common Stock ("Restricted Stock"). The Plan is administered as two separate
plans, with 1,600,000 shares of Common Stock, of which 250,000 shares may be
Restricted Stock, being available for awards to the officers and key employees
of the Company and its subsidiaries and affiliates and 400,000 shares, of which
50,000 shares may be Restricted Stock, being available for awards to Directors
of the Company who are not officers or employees. The Company may grant
incentive stock options ("ISO's"), non-qualified stock options or both to
purchase the Company's Common Stock. Under the Plan, the exercise price of an
ISO may not be less than 100% of the fair market value of the common shares at
the date of grant, and must be at least 110% of the fair market value at the
date grant if the grantee possesses more than 10% of the voting
<PAGE> 14
power of the outstanding stock. Options issued under the plan have a maximum
term of ten years from the date of grant. The exercise price of the options
shall be determined on the date of each grant.
The following table summarizes the option activity under the Plan:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shares under options at beginning of year 775,000 525,000 500,000
Granted 417,700 250,000 25,000
Exercised 5,000 -- --
Lapsed -- -- --
Terminated -- -- --
Shares under option at end of year 1,187,700 775,000 525,000
Shares under option exercisable at
end of year 395,000 240,000 135,000
Price range of shares under option
at end of year $13.50-$18.8125 13.50-17.00 13.50-16.625
Options available for future grant 507,300 925,000 345,000
</TABLE>
<PAGE> 15
Also, under the Plan, the Company granted 90,000 and 125,000 shares of
Restricted Stock in 1996 and 1994, respectively subject to vesting. At December
31, 1997, 103,000 shares were vested.
The Company has also granted 20,000 shares of Restricted Stock at prices ranging
from $10.00 to $14.50 per share subject to vesting. These grants were not
granted under the Plan. At December 31, 1997, 15,000 shares were vested.
Options and Restricted Stock shares vest at 20% per year. Prior to vesting,
holders of the Restricted Stock are entitled to vote and receive distributions
with respect to unvested shares.
NOTE 9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
CASH AND CASH EQUIVALENTS. The carrying amount approximates fair value because
of the short maturity of those instruments.
BORROWING ON LINE OF CREDIT. The carrying amount approximates fair value due to
the Company's ability to obtain such borrowings at comparable interest rates.
BONDS AND OTHER DEBT. The fair value of the Company's Bonds and other debt is
based on the current rates offered to the Company for debt of the same remaining
maturities.
The estimated fair value of the Company's financial instruments at December 31,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 6,645 $ 6,645
Borrowing on Line of Credit 123,843 123,843
Bonds and Other Debt 85,066 86,241
</TABLE>
NOTE 10. STOCK-BASED COMPENSATION PLANS
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for The Plan. FASB Statement No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") was issued by the FASB in 1995 and, if fully adopted, changes the
methods for recognition of cost on plans similar to the Plan. Adoption of the
expense recognition provisions of SFAS 123 is optional; however, pro forma
disclosures as if the
<PAGE> 16
Company adopted the cost recognition requirements under SFAS 123 in 1995 are
presented below.
The fair value of each option granted during 1997, 1996 and 1995 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: (1) dividend of $1.50, (2) expected volatility of .24,
(3) a risk-free interest rate of 6.24% for 1997 and 6.94% for 1996 and 1995, and
(4) expected life of 10 years.
Had compensation cost for the Company's 1997, 1996 and 1995 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's pro forma net income, and net income per common share for 1997, 1996
and 1995 would not have been materially different from the reported amounts.
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1995, and
additional awards in future years are anticipated.
NOTE 11. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma condensed statements of operations of the Company are
presented as if the acquisition of the 60 hotel properties which are owned at
December 31, 1997 had occurred on January 1, 1996. These unaudited pro forma
condensed statements of operations are not necessarily indicative of what actual
results of operations of the Company would have been assuming such transactions
had been completed as of January 1, 1996, nor does it purport to forecast the
results of operations for future periods.
<TABLE>
<CAPTION>
1997 1996
------- -------
Operating Data: (in thousands)
<S> <C> <C>
Total revenue $86,670 $77,882
Real estate taxes and property an
casualty and insurance 8,858 7,645
Depreciation and amortization 21,300 21,300
Compensation 2,394 2,394
Franchise taxes 300 300
General and administrative 1,985 1,985
Loss on sale of hotel properties 1,164 244
Write-down of a hotel property -- 668
Interest expense 13,419 13,419
Income before minority interest 37,250 29,927
Minority Interest 3,550 2,852
Net income $33,700 $27,075
Basic earnings per share $ 1.32 $ 1.06
Weighted average common shares 24,389 24,353
</TABLE>
<PAGE> 17
NOTE 12. CALCULATION OF EARNINGS PER SHARE
Calculations of basic and diluted earnings per share under SFAS 128 are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Basic EPS:
Net income $ 34,232 $ 34,587 $ 30,646
Less dividends declared on preferred stock (1,412) (1,195) 0
$ 32,820 $ 33,392 $ 30,646
Weighted average common shares outstanding 24,389 24,353 24,294
$ 1.35 $ 1.37 $ 1.26
Diluted EPS:
Net income $ 34,232 $ 34,587 $ 30,646
Weighted average common shares outstanding 24,389 24,353 24,294
Preferred shares outstanding -- -- --
Common stock equivalents 147 34 0
Weighted average common shares and dilutive
common stock equivalents outstanding 24,536 24,387 24,294
$ 1.34 $ 1.37 $ 1.26
</TABLE>
The preferred shares are anti-dilutive and thus not considered in the
calculation of diluted earnings per share.
NOTE 13. SUBSEQUENT EVENTS
On January 28, 1998, the Partnership declared a cash distribution of $0.375 per
partnership unit and the Company declared a $0.375 cash distribution on each
share of Common Stock outstanding on February 9, 1998. The distributions were
paid on February 17, 1998.
In February 1998, the partnership sold a hotel in Tupelo, MS for $4.6 million.
In February 1998, due to the resignation of an officer of the Company, the
Company purchased $2.0 million of treasury stock and 180,000 Options became
available for future grant under the Plan.
<PAGE> 18
Report of Independent Accountants
To the Board of Directors and Shareholders:
We have audited the accompanying consolidated balance sheets of RFS Hotel
Investors, Inc. as of December 31, 1997 and 1996 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of RFS Hotel
Investors, Inc. as of December 31, 1997 and 1996 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Memphis, Tennessee
January 20, 1998, except for
Note 13 as to which the
date is February 28, 1998
<PAGE> 1
EXHIBIT 99.4
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in Hotel Properties, net $581,278 $573,826
Hotels under development 13,831 15,739
Cash and cash equivalents 14,220 4,131
Restricted cash 3,150 2,514
Accounts receivable-Lessees 12,166 9,887
Deferred expenses, net 3,775 4,061
Prepaid and other assets 8,597 6,765
Escrow deposits 185 205
$637,202 $617,128
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 4,185 $ 6,423
Accrued real estate taxes 3,601 3,491
Borrowings on line of credit 138,843 123,843
Bonds 71,141 71,892
Other debt 12,637 13,174
Minority interest 36,170 36,235
-------- --------
266,577 255,058
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 973,684 shares outstanding 10 10
Common Stock, $.01 par value, 100,000,000 shares
authorized, 24,986,946 and 24,389,000 shares outstanding 250 244
Paid-in capital 373,307 363,066
Treasury stock, 110,000 shares (2,012) 0
Undistributed income (332) 337
Unearned directors' and officers' compensation (598) (1,587)
-------- --------
Total shareholders' equity 370,625 362,070
-------- --------
$637,202 $617,128
======== ========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
<PAGE> 2
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FOR THE
3 MONTHS 3 MONTHS
ENDED ENDED
03/31/98 03/31/97
------------ -----------
(unaudited) (unaudited)
<S> <C> <C>
Revenue:
Leases $22,023 $17,863
Other 86 44
----------- ---------
Total revenue 22,109 17,907
----------- ---------
Expenses:
Real estate taxes and property and
casualty insurance 2,488 1,947
Depreciation 4,918 3,908
Amortization of franchise fees and
unearned compensation 229 221
Compensation 594 621
Franchise taxes 45 75
General and administrative 806 524
Gain on sale of a hotel property (523)
Amortization of loan costs 243 144
Interest expense, net 3,548 1,938
----------- ---------
Total expenses 12,348 9,378
----------- ---------
Income before minority interest 9,761 8,529
Minority interest (936) (835)
----------- ---------
Net income 8,825 7,694
Preferred stock dividends (348) (348)
----------- ---------
Net income applicable to common shareholders $8,477 $7,346
=========== =========
Basic earnings per share 0.35 0.30
Diluted earnings per share 0.35 0.30
Weighted average common shares outstanding 24,380 24,385
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
<PAGE> 3
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS MONTHS
MARCH 31, MARCH 31,
1998 1997
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,825 $ 7,694
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,390 4,273
Income allocated to minority interest 936 835
Gain on sale of a hotel property (523)
Write-off of old loan costs 129
Changes in assets and liabilities:
Accounts receivable-Lessees (2,279) (3,414)
Prepaids and other assets (968) 172
Accounts payable and other liabilities (2,128) (830)
-------- --------
Net cash provided by operating activities 9,382 8,730
-------- --------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (14,359) (64,637)
Proceeds from sale of hotel property 2,940
Escrow deposits and prepayments under
purchase agreements (10)
Refund on franchise agreements 8
-------- --------
Net cash used by investing activities (11,419) (64,639)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 11,040
Purchase of treasury stock (2,012)
Distributions to common and preferred shareholders (9,494) (9,138)
Distributions to limited partners (964) (925)
Borrowings on revolving credit agreement 15,000 13,000
Redemption of limited partnership units (37)
Payments on debt and bonds (1,288) (1,312)
Loan fees paid (119) (70)
-------- --------
Net cash provided by financing activities 12,126 1,555
-------- --------
Net increase (decrease) in cash and cash equivalents 10,089 (54,354)
Cash and cash equivalents at beginning of period 4,131 57,935
-------- --------
Cash and cash equivalents at end of period $ 14,220 $ 3,581
======== ========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
In 1998, the Company applied a deposit of $20 towards the
purchase of land
In 1998, due to the resignation of an officer, the Company cancelled
45,000 shares of restricted common stock which had not vested
In 1998, the Company sold a hotel for which the purchaser paid $2,940
in cash and signed a note to the Company for $1,500
In 1997, the Company recorded a $6,356 allocation to paid-in capital
from minority interest.
In 1997, the Partnership applied deposits of $6,064 towards the purchase
of hotels
The accompanying notes are an integral
part of these consolidated financial statements.
<PAGE> 4
RFS HOTEL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE, UNIT AND PER SHARE DATA)
1. ORGANIZATION AND PRESENTATION. RFS Hotel Investors, Inc. (the "Company") was
incorporated in Tennessee on June 1, 1993, and is a self-administered real
estate investment trust ("REIT"). The Company contributed substantially all of
the net proceeds of its public offerings to RFS Partnership, L.P. (the
"Partnership") in exchange for the sole general partnership interest in the
Partnership. The Partnership began operations in August 1993. At March 31, 1998,
the Company owned approximately 90.5% of the Partnership. RFS Managers, Inc.
("Managers") a wholly-owned subsidiary of the Company, was formed effective
January 1, 1995 to provide management services to the Company. RFS Financing
Partnership, L.P., (the "Financing Partnership"), a bankruptcy remote, single
purpose Tennessee limited partnership, was formed to issue commercial mortgage
bonds (the "Bonds"). During 1997, Ridge Lake General Partner, Inc. ("RLGP") was
formed to purchase a hotel. The Company owns 95% of RLGP.
The Company, through its subsidiary partnerships, acquires or develops and owns
hotel properties which are leased to third parties.
These unaudited consolidated financial statements include the accounts of
the Company, and its subsidiaries, and have been prepared pursuant to the
Securities and Exchange Commission ("SEC") rules and regulations and should be
read in conjunction with the financial statements and notes thereto of the
Company included in the Company's 1997 Annual Report on Form 10-K. The following
notes to the consolidated financial statements highlight significant changes to
notes included in the Form 10-K and present interim disclosures required by the
SEC. The accompanying consolidated financial statements reflect, in the opinion
of management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
2. DECLARATION OF DIVIDEND. On April 30, 1998, the Company declared a $0.375
dividend on each share of Common Stock outstanding to shareholders of record on
May 11, 1998. The dividend will be paid on May 21, 1998.
3. ACQUISITIONS OF REAL ESTATE. In February 1998, the Partnership completed
development of a 78-suite Residence Inn in West Palm Beach, FL. Development
costs were approximately $6.3 million and were paid with cash and borrowings
from the $175 million line of credit (the "Line of Credit").
In March 1998, the Partnership completed development of a 118-suite
Hampton Inn in Jacksonville, FL. Development costs were approximately $6.2
million and were paid with cash and borrowings from the Line of Credit.
4. SUBSEQUENT EVENTS. In April 1998, the Partnership completed the acquisition
of a hotel in San Francisco, CA for a purchase price of approximately $15
million. The purchase price
<PAGE> 5
was paid with funds from the sale of 547,946 shares of Common Stock in March
1998 and borrowings under the Line of Credit.
On April 21, 1998, the Company announced that it has signed a
definitive agreement to merge with Equity Inns, Inc. Under the terms of the
agreement, which was approved unanimously by the Board of Directors of both
companies, each share of the Company will be exchanged for 1.5 shares of Equity
Inns, Inc.
5. CALCULATION OF EARNINGS PER SHARE. Calculations of basic and diluted earnings
per share are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Basic EPS:
Net income $ 8,825 $ 7,694
Less dividends declared on preferred stock (348) (348)
-------- --------
$ 8,477 $ 7,346
======== ========
Weighted average common shares outstanding 24,380 24,385
$ 0.35 $ 0.30
======== ========
Diluted EPS:
Net income $ 8,825 $ 7,694
Less dividends declared on preferred stock (348) (348)
-------- --------
$ 8,477 $ 7,346
======== ========
Weighted average common shares outstanding 24,380 24,385
Preferred shares outstanding
Common stock equivalents 121 118
-------- --------
Weighted average common shares and
dilutive common stock equivalents
outstanding 24,501 24,503
======== ========
$ 0.35 $ 0.30
======== ========
</TABLE>
The preferred shares are anti-dilutive and thus not considered in the
calculation of diluted earnings per share.
<PAGE> 6
6. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro
forma condensed statements of income for the three months ended March 31, 1998
and 1997 of the Company are presented as if the 61 hotel properties owned at
March 31, 1998 were owned since January 1, 1997. These unaudited pro forma
condensed statements of income are not necessarily indicative of what actual
results of operations of the Company would have been assuming such transactions
had been completed as of January 1, 1997, nor does it purport to represent the
results of operations for future periods.
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Operating Data:
Total revenue $ 21,957 $ 19,098
Real estate taxes and casualty
insurance 2,203 1,967
Depreciation and amortization 5,355 5,355
Compensation 594 621
Franchise taxes 45 75
General and administrative 806 524
Gain on sale of a hotel property (523) --
Interest expense 3,548 3,759
-------- --------
Income before allocation to minority
interest 9,929 6,797
Less minority interest (930) (636)
-------- --------
Net income $ 8,999 $ 6,161
======== ========
Diluted earnings per share $ 0.35 $ 0.24
Weighted average common shares
and common stock equivalents 24,501 24,503
</TABLE>
<PAGE> 1
EXHIBIT 99.5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
RFS, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of RFS, Inc. and
Subsidiary (a wholly-owned subsidiary of Doubletree Corporation) as of December
31, 1997 and 1996 and the related consolidated statements of operations,
stockholder's equity and cash flows for the years then ended. These financial
statements are the responsibility of RFS, Inc.'s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits. The financial statements of RFS, Inc. for the year ended December 31,
1995 were audited by other auditors whose report was dated February 2, 1996,
except for a subsequent events note dated February 27, 1996, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RFS, Inc. and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
January 23, 1998
<PAGE> 2
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,322 $ 7,660
Trade receivables (net of an allowance for doubtful
accounts of $11 and $62 at December 31, 1997
and 1996, respectively) 4,300 3,680
Inventories 206 193
Prepaid expenses 943 387
Due from Parent 13,567 1,749
-------- --------
TOTAL CURRENT ASSETS 26,338 13,669
Investments in RFS Hotel Investors, Inc. 20,039 20,032
Note receivable 1,529 3,000
Leasehold improvements and office equipment, net 284 300
Capitalized franchise costs, net 2,303 2,478
Deferred costs and other assets, net 790 741
-------- --------
$ 51,283 $ 40,220
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Note payable $ -- $ 325
Accounts payable and accrued expenses 7,723 7,352
Percentage Lease payable 8,901 6,775
-------- --------
TOTAL CURRENT LIABILITIES 16,624 14,452
Distributions and losses in excess of investment in
partnerships and ventures 315 314
Deferred income taxes 70 61
-------- --------
TOTAL LIABILITIES 17,009 14,827
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, no par value; 5,000 shares authorized,
100 shares issued and outstanding at
December 31, 1997 and 1996 $ 282 $ 282
Additional paid-in capital 18,500 18,500
Unearned employee compensation (70) (141)
Unrealized gain on marketable equity securities,
net of income taxes 112 114
Retained earnings 15,450 6,638
-------- --------
TOTAL STOCKHOLDER'S EQUITY 34,274 25,393
-------- --------
Commitments and contingencies
-------- --------
$ 51,283 $ 40,220
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Hotel revenue $ 193,282 $ 148,699 $ 122,253
Management and consulting fees 1,611 817 452
Other 1,868 1,987 113
--------- --------- ---------
TOTAL REVENUES 196,761 151,503 122,818
--------- --------- ---------
EXPENSES:
Hotel expenses:
Salary and benefits 43,173 35,355 25,847
Franchise costs 13,183 10,153 8,315
Advertising and promotion 7,020 5,069 4,294
Utilities 8,368 7,090 6,151
Repair and maintenance 8,534 7,088 6,006
Leases, insurance and taxes 1,317 1,018 1,603
Other operating costs 16,403 11,626 14,624
--------- --------- ---------
97,998 77,399 66,840
General and administrative 3,972 3,430 5,386
Business combination expenses -- -- 1,007
Depreciation and amortization 460 266 172
Percentage Lease expense 80,049 60,148 47,249
--------- --------- ---------
TOTAL OPERATING EXPENSES 182,479 141,243 120,654
--------- --------- ---------
INCOME BEFORE INCOME TAXES 14,282 10,260 2,164
Income taxes (5,470) (3,592) (35)
--------- --------- ---------
NET INCOME $ 8,812 $ 6,668 $ 2,129
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Unearned Retained
Common paid-in employee Unrealized earnings
stock capital compensation Gain (deficit) Total
------ ---------- ------------ ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 $ 1 $ -- $-- $ -- $ (104) $ (103)
Issuance of 12 shares of common stock to
employees 281 -- (281) -- -- 0
Distributions ($2,294 per share) -- -- -- -- (2,055) (2,055)
Amortization of unearned employee compensation -- -- 70 -- -- 70
Unrealized gain on marketable equity
securities, net of taxes -- -- -- 22 -- 22
Net income -- -- -- -- 2,129 2,129
---- ------- ----- ----- -------- --------
Balances, December 31, 1995 282 -- (211) 22 (30) 63
Contribution of paid-in capital -- 18,500 -- -- -- 18,500
Amortization of unearned employee compensation -- -- 70 -- -- 70
Change in unrealized gain on marketable equity
securities, net of taxes -- -- -- 92 -- 92
Net income -- -- -- -- 6,668 6,668
---- ------- ----- ----- -------- --------
Balances, December 31, 1996 282 18,500 (141) 114 6,638 25,393
Amortization of unearned employee compensation -- -- 71 -- -- 71
Change in unrealized gain on marketable equity
securities, net of taxes -- -- -- (2) -- (2)
Net income -- -- -- -- 8,812 8,812
---- ------- ----- ----- -------- --------
Balances, December 31, 1997 $282 $18,500 $ (70) $ 112 $ 15,450 $ 34,274
==== ======= ===== ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,812 $ 6,668 $ 2,129
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 460 290 172
Equity in loss of partnerships -- -- 198
Provision for bad debts 48 22 40
Deferred income tax provision -- -- (158)
(Increase) decrease in accounts receivable (668) (1,159) 163
(Increase) decrease in other assets (737) (127) 121
Increase in accounts payable and accrued expenses 2,497 270 3,582
-------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,412 5,964 6,247
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in RFS Hotel Investors, Inc. -- (18,500) --
Investments in partnerships and ventures -- (175) (270)
Distributions from partnerships and ventures 1 2 1
Franchise application fees -- (2,626) --
Purchase of furniture and equipment (79) (79) (241)
Loan to owners of managed hotels -- (3,000) --
Collection of loan to owners of managed hotels 1,471 -- --
Purchase of marketable securities -- -- (516)
Increase in deferred costs and other assets -- (90) (82)
-------- -------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,393 (24,468) (1,108)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of paid-in capital from Parent -- 18,500 --
Increase in due from Parent (11,818) (1,749) --
Payments on notes payable (325) 175 (839)
Distributions to common stockholders -- -- (2,055)
-------- -------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (12,143) 16,926 (2,894)
-------- -------- -------
NET INCREASE (DECREASE) IN CASH $ (338) $ (1,578) $ 2,245
Cash and cash equivalents:
Beginning of year 7,660 9,238 6,993
-------- -------- -------
End of year $ 7,322 $ 7,660 $ 9,238
======== ======== =======
Supplemental Disclosures:
Interest paid $ 6 $ 19 $ 100
======== ======== =======
Income taxes paid $ 5,470 $ 3,666 $ 123
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(1) ORGANIZATION AND PRESENTATION
Effective February 27, 1996, RFS, Inc. became a wholly-owned subsidiary
of Doubletree Corporation ("Doubletree" or "Parent") in a transaction accounted
for as a pooling of interests. RFS, Inc. generates substantially all of its
revenue from operating and managing leased hotels owned by RFS Partnership, L.P.
(the "Partnership"). The Partnership is 90.5% owned by RFS Hotel Investors, Inc.
(the "Company"). On December 19, 1997, Doubletree became a wholly-owned
subsidiary of Promus Hotel Corporation ("Promus") pursuant to a merger
transaction in which each outstanding share of Doubletree common stock was
exchanged for one share of Promus common stock.
Substantially all of the hotels owned by the Partnership (the "Hotels")
are separately leased by the Partnership to RFS, Inc. under individual lease
agreements (collectively, the Percentage Leases). The Percentage Leases provide
for the payment of annual rent equal to the greater of (i) fixed base rent or
(ii) percentage rent based on a percentage of gross room revenue, food revenue
and beverage revenue at the Hotels. In connection with the February 27, 1996
merger with Doubletree, RFS, Inc. amended each of the individual Percentage
Leases. The significant amendments include extending the terms of the leases,
clarifying the RFS, Inc's and the Partnership's responsibilities with respect to
repairs and maintenance at the hotels and clarifying certain other provisions of
the Percentage Leases. These provisions include the Partnership granting RFS,
Inc. a 10-year right of first refusal to manage and lease future hotels acquired
or developed by the Partnership.
At December 31, 1997, RFS, Inc. leased 59 hotels from the Partnership
and operated 75 hotels. Four hotels leased by RFS, Inc. are operated by other
third party management companies. Six of the hotels operated by RFS, Inc. are
for unrelated entities. RFS, Inc. leases and/or manages hotel properties in 26
states, primarily in the Southeast and Midwest and substantially all are
affiliated with a nationally recognized franchise.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) REVENUE RECOGNITION
Revenue is recognized as earned. Ongoing credit evaluations are
performed and an allowance for potential credit losses is provided
against the portion of accounts receivable which is estimated to be
uncollectible.
<PAGE> 7
(B) PERCENTAGE LEASE EXPENSE
Lease expense is recognized as due to the Partnership under the
Percentage Leases commencing on the date a lease is executed between
the Partnership and RFS, Inc.
(C) CAPITALIZED FRANCHISE COSTS
In connection with RFS, Inc.'s acquisition by Doubletree, franchise
application fees were paid to various franchisors of the Hotels. These
fees are amortized over the remaining lives of the franchise
agreements. The recoverability of the franchise application fees are
periodically evaluated to determine whether such costs will be
recovered from future operations.
The initial cost of obtaining the franchise licenses is paid by the
Partnership, and the ongoing franchise fees are paid by RFS, Inc.
These fees are generally computed as a percentage of room revenue for
each respective hotel in accordance with the franchise agreements and
are expensed as incurred.
(D) LEASEHOLD IMPROVEMENTS AND OFFICE EQUIPMENT
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments at the hotels are the responsibility of the
Partnership.
Improvements to office leaseholds are amortized over the shorter of
the lives of the assets or the terms of the related leases. Office
furniture and equipment is depreciated using the straight-line basis
over their estimated useful lives, which is 7 years for furniture and
5 years for equipment. Accumulated depreciation at December 31, 1997
and 1996 was approximately $526,000 and $431,000, respectively.
(E) INVENTORIES
Inventories consisting of food and beverages are stated at the lower
of cost (generally first-in, first-out) or market.
(F) INVESTMENTS
Investments in partnerships and joint ventures are accounted for using
the equity method when RFS, Inc. has a general partnership interest or
its limited partnership interest exceeds 5% and RFS, Inc. does not
exercise control over the venture. Profits and losses of these joint
ventures are allocated in accordance with the joint venture
agreements. All other investments are accounted for using the cost
method with the exception of the marketable equity securities which
are classified as available-for-sale and recorded at fair value with
unrealized gains or losses
<PAGE> 8
reflected in stockholder's equity pursuant to Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." See note 3. If a joint venture
experiences operating losses which reduce the other joint venture
partner's equity to a zero balance, the loss which would otherwise be
attributable to the other joint venturer is absorbed within RFS,
Inc.'s operating results.
(G) INCOME TAXES
Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets, including net
operating loss carryforwards, and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
RFS, Inc.'s parent, Doubletree, files a consolidated federal income
tax return. Beginning in 1996, the intercompany settlement of taxes
paid is based on an informal tax sharing agreement which allocates
taxes to RFS, Inc. based upon a proportionate allocation of
Doubletree's consolidated current and deferred tax expenses. Prior to
its acquisition by Doubletree, RFS, Inc. elected Subchapter S
corporation status for federal income tax purposes and certain states
effective January 1, 1995. RFS, Inc.'s Subchapter S corporation
election was revoked upon RFS, Inc.'s acquisition by Doubletree.
(H) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
RFS, Inc. considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents for
purposes of the statement of cash flows.
(I) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
<PAGE> 9
(J) RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to 1997
presentation.
(K) RECENT ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1997, RFS, Inc. adopted the provisions of
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information About Capital Structure." This statement specifies the
disclosure requirements about the capital structure of an entity that
has issued securities addressed by the statement. The adoption of this
statement did not have a material effect on the consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting on
Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in financial statements. This
statement is effective for fiscal years beginning after December 15,
1997. The adoption of this statement will not have a material effect
on the consolidated financial statements.
Also in June 1997, Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related
Information," was issued, effective for years beginning after December
15, 1997. This statement requires companies to identify segments
consistent with the manner in which management makes decisions about
allocating resources to segments and measuring their performance.
Disclosures for the newly identified segments are similar to those
required under current standards, with the addition of certain
quarterly disclosure requirements. It also establishes standards for
related disclosures about products and services, geographic areas and
major customers.
(3) INVESTMENTS IN RFS HOTEL INVESTORS, INC.
RFS, Inc. has the following investments in the Company and the Partnership
(in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
RFS HOTEL INVESTORS, INC
Series A Convertible Preferred Stock $18,500 $18,500
Common Stock 698 691
RFS PARTNERSHIP, L.P.
Partnership Units 841 841
------- -------
$20,039 $20,032
======= =======
</TABLE>
<PAGE> 10
On February 27, 1996, RFS, Inc. received from the Company 973,684
shares of the Company's Series A Convertible Preferred Stock ("Series A
Preferred Stock") for an aggregate purchase price of $18.5 million or
$19.00 per share. The Series A Preferred Stock has an initial
preference value of $19.00 per share ("Stated Value"), a par value of
$.01, and is senior to the Company's common stock as to dividends and
upon liquidation of the Company. Each share of Series A Preferred Stock
has one vote and is convertible into one share of the Company's common
stock after the seventh anniversary of the issuance. The shares of
Series A Preferred Stock are entitled to a $1.45 annual cumulative
dividend per share. The Series A Preferred Stock has mandatory
redemption rights upon the occurrence of certain events which are under
the Company's control. The Company can redeem the Series A Preferred
Stock after the seventh anniversary of issuance at the Stated Value,
together with all accrued and unpaid dividends.
RFS, Inc.'s investment in the Partnership units is carried at the
amount of cash consideration RFS, Inc. could have received in lieu of
Partnership units which is approximately $841,000 on 77,904 units
owned. At present, there is no market for the Partnership units.
However, the Partnership units are convertible into Company common
stock. RFS, Inc. owns 35,000 shares of the Company's common stock
carried at their market value.
(4) INVESTMENTS IN PARTNERSHIPS
Information with respect to RFS, Inc.'s investments in partnerships at
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
CARRYING VALUE
% TYPE OF (IN THOUSANDS)
ENTITY OWNERSHIP INTEREST 1997 1996
------ --------- -------- ------- ------
<S> <C> <C> <C> <C>
Devonshire Associates 10% General $ 1 $ 1
SF Partners 2% General - -
Highland Plaza Partners, Ltd. 5% General 1 1
DDP Partners, L.P. 5% General 12 13
----- -----
14 15
Shelby Distribution Partners, L.P. 46% General (329) (329)
----- -----
$(315) $(314)
===== =====
</TABLE>
(5) NOTE RECEIVABLE
In June 1996, RFS, Inc. obtained management agreements for eight hotel
properties owned by entities unrelated to RFS, Inc. In connection with
obtaining these contracts, RFS, Inc. loaned $3 million to the owners,
principally for renovations. The note receivable was reduced by
approximately $1.5 million primarily as a result of new debt financing
and two hotel property sales by the owners. The note is unsecured,
bears
<PAGE> 11
interest at 10% and is repayable as follows: $300,000 on December 31,
1998, $600,000 on December 31, 1999, $300,000 on December 31, 2000,
$329,000 on December 31, 2001.
(6) NOTE PAYABLE
At December 31, 1996, RFS, Inc. had a note payable on premium financing
contracts totaling $325,000. The note payable was unsecured, required
monthly payments of approximately $47,000 including interest at 5.25%
and was paid in full in September 1997.
(7) PREFERRED AND COMMON STOCK
In connection with RFS, Inc.'s acquisition by Doubletree, RFS, Inc.
retired all its issued and outstanding common stock and issued 100 new
shares of common stock to Doubletree. In addition, Doubletree made a
$18,500,000 capital contribution to RFS, Inc. The proceeds from this
capital contribution were used to acquire Series A Preferred Stock
issued by the Company as discussed in note 3.
In 1995, RFS, Inc. granted a total of 12 shares of common stock to
certain employees. These shares were recorded at the estimated fair
value on the date of grant. These shares vest ratably over the next
four years. Such vesting requirements are contingent upon the
employees' continued employment with RFS, Inc. The value of such shares
at the grant date is being charged to compensation expense over the
four-year period.
(8) INCOME TAXES
Effective February 27, 1996, RFS, Inc.'s results of operations are
included in Doubletree's consolidated U.S. Federal income tax return.
Prior to RFS, Inc.'s acquisition by Doubletree, income taxes were the
responsibility of the RFS, Inc. Under the terms of an informal
agreement, RFS, Inc. makes payments to Doubletree for a proportionate
allocation of Doubletree's consolidated current and deferred income tax
expense. RFS, Inc. recorded income tax expense of approximately
$5,470,000 and $3,592,000 (based on an effective tax rate of 38.3% and
35% for the years ended December 31, 1997 and 1996, respectively) and
remitted $5,470,000 and $3,666,000 to Doubletree for income tax
payments for the years ended December 31, 1997 and 1996, respectively.
<PAGE> 12
The following represents the significant components of income tax
expense and the effect of recognizing deferred tax assets and
liabilities on various temporary differences for 1995 (in thousands):
<TABLE>
<S> <C>
Federal:
Change in tax status $(161)
-----
State:
Current 193
Deferred 3
-----
196
-----
$ 35
=====
</TABLE>
RFS, Inc.'s income tax provision for 1995 was calculated as follows (in
thousands):
<TABLE>
<S> <C>
State income taxes, net of federal benefit $ 196
Reduction in federal deferred tax liability
due to change in tax status (161)
-----
Income tax provision $ 35
=====
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
RFS, Inc. leases office space and equipment under noncancelable
operating lease agreements expiring at varying intervals through 2002.
The future minimum rental payments required under these leases as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1998 $ 301
1999 312
2000 315
2001 315
2002 79
Thereafter -
-------
$ 1,322
=======
</TABLE>
Rental expense, except for the lease expense described below, was
approximately $301,000, $301,000 and $431,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
<PAGE> 13
RFS, Inc. has future lease commitments to the Partnership under the
Percentage Leases through 2015. At December 31, 1997, minimum future
rental payments under the Percentage Leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ---------
<S> <C>
1998 $ 33,905
1999 33,905
2000 33,905
2001 33,905
2002 33,905
Thereafter 116,249
---------
$ 285,774
=========
</TABLE>
RFS, Inc. paid base rents of approximately $34,956,000, $25,255,000 and
$21,995,000 and percentage rents in excess of base rents of
approximately $45,093,000, $34,893,000 and $25,254,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. At December 31,
1997 and 1996, RFS, Inc. had a net payable to the Partnership of
$8,901,000 and $6,775,000, respectively, for percentage rents and other
transactions.
RFS, Inc. has management agreements with two hotel operators to manage
four of the leased hotels. The management agreements have terms ranging
from ten to twenty years and provide for a fee based on a percentage of
each hotel's revenue.
(10) RELATED PARTY TRANSACTIONS
RFS, Inc. has an intercompany receivable from its Parent subject to an
informal agreement where excess cash of RFS, Inc. is transferred to the
Parent. No interest is earned on this receivable.
Certain of the partnerships in which RFS, Inc. has an interest and
certain former stockholders owed RFS, Inc. approximately $321,000 and
$439,000 for advances and other transactions at December 31, 1997 and
1996, respectively. Such advances are recorded in distributions and
losses in excess of investment in partnerships and ventures in the
accompanying consolidated financial statements.
RFS, Inc. has recognized, as income, approximately $1,564,092 and
$1,340,956 of distributions received from the Partnership with respect
to Series A Preferred Stock, Partnership units and Company common stock
owned by RFS, Inc. for the years ended December 31, 1997 and 1996,
respectively.
On December 31, 1994, RFS, Inc. entered into a consulting agreement
("Agreement") with Hospitality Advisory Services, Inc. ("HAS"). The
Agreement requires monthly payments of $40,000 to HAS beginning January
1, 1995 through December 31, 1995 with the term of the Agreement
extended for one additional year. The Agreement also provides for
incentive fees at the discretion of RFS, Inc. The owners of HAS are
officers
<PAGE> 14
of the Company and were stockholders of RFS, Inc. Total fees paid
to HAS during 1995 were approximately $780,000. The Agreement was
terminated effective February 27, 1996 and was replaced with new
consulting agreements with two former officers of RFS, Inc. These
consulting agreements were terminated by RFS, Inc. on February 27,
1997. Total fees paid on these consulting agreements were $35,000 and
$175,000 in 1997 and 1996, respectively.
(11) EMPLOYEE BENEFIT PLANS
In January 1995, RFS, Inc. adopted an employee savings plan under
Section 401(k) of the Internal Revenue Code. This plan covers all
full-time employees of RFS, Inc. who are 21 years of age and have
completed at least one year of continuous service. The participants'
maximum contributions, limited under applicable IRS regulations, were
$9,500 per participant. RFS, Inc. currently contributes 50% of employee
contributions to the plan, up to a maximum of 2% of employee
compensation. RFS, Inc. contributions generally vest at 20% per year
becoming fully vested in the seventh year of service. Contribution
expense related to this plan was approximately $151,000 and $166,000
for the years ended December 31, 1997 and 1996, respectively.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. RFS, Inc.'s
financial instruments consist primarily of cash and cash equivalents,
trade receivables, note receivable, due from Parent, investments in RFS
Hotel Investors, Inc., investments in partnerships and ventures,
accounts payable and accrued expenses and Percentage Lease payable,
each as included in the balance sheets under such captions.
With the exception of note receivable, investments in partnerships and
ventures and the investments in RFS Partnership, L.P. units, the
carrying amounts of all other classes of financial instruments
approximate fair value due to the short maturity of those instruments
or, in the case of marketable equity securities they are carried at
their estimated fair value.
RFS, Inc. has determined that the fair value of its note receivable is
not significantly different from its carrying value based on interest
rate and payment terms RFS, Inc. would currently offer on notes with
similar security to borrowers of similar creditworthiness. The fair
value of the partnership interests, which is carried at cost, is
estimated based upon the residual value to the Company in the
respective partnership's net assets. RFS Partnership, L.P. units, which
are convertible into Company common shares, have a carrying value of
$841,000 and an estimated fair value of approximately $1,553,000 and
$1,539,000 at December 31, 1997 and 1996, respectively.
