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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-3170
PROSPECTUS
$500,000,000
LOGO
F E L C O R S U I T E H O T E L S
, I N C .
DEBT SECURITIES, PREFERRED STOCK, COMMON
STOCK
AND COMMON STOCK WARRANTS
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FelCor Suite Hotels, Inc. ("Company") may offer from time to time in one or
more series (i) its unsecured senior or subordinated debt securities ("Debt
Securities"), (ii) whole or fractional shares of its preferred stock, $0.01 par
value per share ("Preferred Stock"), (iii) shares of its common stock, $0.01 par
value per share ("Common Stock"), or (iv) warrants to purchase Common Stock
("Common Stock Warrants") with an aggregate public offering price of up to
$500,000,000 (or its equivalent based on the exchange rate at the time of sale)
in amounts, at prices and on terms to be determined at the time of offering. The
Debt Securities, Preferred Stock, Common Stock and Common Stock Warrants
(collectively, "Securities") may be offered separately or together, in separate
series, in amounts, at prices and on terms to be set forth in one or more
supplements to this Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Debt Securities, the specific
title, aggregate principal amount, ranking, currency, form (which may be
registered or bearer, or certificated or global), authorized denominations,
maturity, rate (or manner of calculation thereof) and time of payment of
interest, terms for redemption at the option of the Company or repayment at the
option of the holder, terms for sinking fund payments, terms for conversion into
Common Stock, Preferred Stock or Debt Securities of another series, covenants
and any initial public offering price; (ii) in the case of Preferred Stock, the
specific number of shares, designation, stated value per share, any dividend,
liquidation, redemption, conversion, exchange, voting and other rights, and any
initial public offering price per share; (iii) in the case of Common Stock, the
specific number of shares and any initial public offering price per share; and
(iv) in the case of Common Stock Warrants, the duration, offering price,
exercise price and detachability. In addition, such specific terms may include
limitations on direct or beneficial ownership and restrictions on transfer of
the Securities, in each case as may be consistent with the Company's Charter (as
hereinafter defined) or otherwise appropriate to preserve the status of the
Company as a real estate investment trust ("REIT") for federal income tax
purposes. See "Certain Charter, Bylaw and Statutory Provisions -- Charter and
Bylaw Provisions -- Restrictions on Ownership and Transfer."
The applicable Prospectus Supplement will also contain information, where
appropriate, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered by the Company directly to one or more
purchasers, through agents designated from time to time by the Company or to or
through underwriters or dealers. If any agents or underwriters are involved in
the sale of any of the Securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them, will be
set forth, or will be calculable from the information set forth, in the
Prospectus Supplement describing the method and terms of the offering of such
Securities. See "Plan of Distribution." No Securities may be sold pursuant to
this Prospectus without the delivery of a Prospectus Supplement describing the
method and terms of the offering of such Securities.
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SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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THE DATE OF THIS PROSPECTUS IS APRIL 25, 1996.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission ("SEC") a
Registration Statement on Form S-3 ("Registration Statement") under the
Securities Act of 1933, as amended ("Securities Act"), with respect to the
Securities. This Prospectus, which constitutes part of the Registration
Statement, omits certain of the information contained in the Registration
Statement and the exhibits thereto on file with the SEC pursuant to the
Securities Act and the rules and regulations of the SEC thereunder. The
Registration Statement, including exhibits thereto, may be inspected and copied
at the public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the SEC's Regional Offices at 7
World Trade Center, 13th Floor, New York, New York 10048, and Northwestern
Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and
copies may be obtained at the prescribed rates from the public reference Section
of the SEC at its principal office in Washington, D.C. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and in accordance therewith
files reports and proxy statements and other information with the SEC. Such
reports, proxy statements and other information can be inspected and copied at
the locations described above. Copies of such materials can be obtained by mail
from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, at prescribed rates. In addition, certain of such
materials can be inspected at The New York Stock Exchange, Inc., 20 Broad
Street, New York, New York.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been previously filed by the Company
with the SEC, under the Exchange Act (File No. 0-24250) are incorporated herein
by reference:
(i) Annual Report on Form 10-K for the year ended December 31, 1995,
as amended by Form 10-K/A filed on April 2, 1996;
(ii) Current Report on Form 8-K dated December 29, 1995, as amended by
Form 8-K/A filed on February 12, 1996; and
(iii) Description of the Company's Common Stock contained in the
Company's registration statement on Form 8-A, including any amendments or
reports filed for the purpose of updating such descriptions.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Securities made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents.
Any statement contained herein, or in any document incorporated or deemed
to be incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide, without charge, to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, on the written
request of any such person, a copy of any or all of the documents incorporated
herein by reference, except the exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Requests for such
copies should be directed to the Company, prior to June 1, 1996, at 5215 N.
O'Connor Blvd., Suite 330, Irving, Texas 75039, Attention: Investor Relations
and, on or after June 1, 1996, at 545 E. John Carpenter Frwy., Suite 1300,
Irving, Texas 75062, Attention: Investor Relations.
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THE COMPANY
FelCor Suite Hotels, Inc. is a self-administered equity REIT that, at March
31, 1996, owned an approximately 88% general partner interest in FelCor Suites
Limited Partnership ("Partnership"), which at such date owned directly, or
through consolidated subsidiaries, 34 hotels with an aggregate of 7,880 suites
in 16 states (collectively, "Current Hotels"). Thirty-one of the Current Hotels
are operated as, or are in the process of being converted to, Embassy Suites(R)
hotels. Thirty of the Current Hotels are managed by a subsidiary of Promus Hotel
Corporation ("Promus"), which is the largest operator of full-service, all-suite
hotels in the United States. The Company will (i) contribute all of the net
proceeds from the sale of Common Stock and/or Preferred Stock offered hereby to
the Partnership in exchange for units of partnership interest ("Units") and (ii)
loan all of the net proceeds from the sale of Debt Securities offered hereby to
the Partnership. The specific terms of the Units to be so issued by the
Partnership and of any such loan to the Partnership, to the extent such terms
are not described herein, will be set forth in the Prospectus Supplement
relating to such offering. Unless the context otherwise requires, all references
herein to the business and assets of the Company refer to FelCor Suite Hotels,
Inc., the Partnership and their respective subsidiaries, on a consolidated
basis.
The Company expects to acquire two additional hotels located in California,
with an aggregate of 454 suites, for an aggregate purchase price, consisting of
cash and assumed indebtedness, of approximately $45.9 million, subject to
certain adjustments. These hotels were part of the Crown Sterling Suites(R)
hotel chain (collectively, "CSS Hotels") that the Company agreed to acquire in
September 1995. Upon completion of the purchase of these two CSS Hotels
(collectively, "Acquisition Hotels"), the Company will own interests in 36
hotels with an aggregate of 8,334 suites, and will remain the largest franchisee
of Embassy Suites hotels. At March 31, 1996, the Company was the largest hotel
REIT, in equity market capitalization and was the largest owner and franchisee
of Embassy Suites hotels in the United States.
To enable the Company to qualify as a REIT, the Partnership leases the
Current Hotels, and upon completion of the purchase thereof will lease the
Acquisition Hotels and any other hotels acquired by it in the future, to DJONT
Operations, L.L.C., or a wholly-owned subsidiary thereof ("Lessee") pursuant to
leases providing for the payment of rent based primarily upon the suite revenues
of such hotels ("Percentage Leases"). The Lessee pays rent to the Company under
the Percentage Leases and, in addition, pays all franchise fees, management fees
and other operating expenses of the hotels leased by it. The Lessee, which
provides its audited financial statements to the Company, is controlled by
Hervey A. Feldman, the Chairman of the Board of the Company, and Thomas J.
Corcoran, Jr., the President and Chief Executive Officer of the Company. Messrs.
Feldman and Corcoran beneficially own an aggregate 50% equity interest in the
Lessee and have entered into an agreement with the Company to utilize any
amounts distributed to them from the Lessee, in excess of their tax liability
for the earnings of the Lessee, to purchase from the Company on an annual basis
additional shares of Common Stock, or Units, at then current market prices. A
corporation owned by the children of Charles N. Mathewson, a director of the
Company, owns the remaining 50% equity interest in the Lessee. Messrs. Feldman
and Corcoran, together with other executive officers and directors of the
Company, beneficially owned an aggregate of approximately 4.4% of the Common
Stock and limited partner Units outstanding at March 11, 1996.
The Company's growth strategy is to utilize management's expertise and
knowledge of the hotel industry to acquire hotel assets and oversee the
management of such assets. Mr. Feldman has been engaged in the hotel business
for approximately 30 years, including serving as the founding President and
Chief Executive Officer of Embassy Suites, Inc. from January 1983 to May 1990
and as its Chairman of the Board from June 1990 until January 1992. Mr. Corcoran
has been engaged in the hotel and restaurant business since 1979, with
experience in the development, financing and acquisition of hotel and restaurant
properties.
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The Company seeks to increase operating cash flow and enhance shareholder
value through both acquisitions and internal growth. The purchase of the
Acquisition Hotels is consistent with the Company's current acquisition strategy
of focusing primarily on the acquisition of hotels that may be converted to, or
are, Embassy Suites hotels. The Company believes that Embassy Suites hotels are
particularly attractive investments because of the following factors: the
favorable recognition of the Embassy Suites brand among consumers; the
leadership position of Embassy Suites hotels within the market niche of upscale
full-service hotels and the relative strength of that market within the hotel
industry; the limited additions to hotel supply within the upscale full-service
hotel market; and the Company's positive experience and expertise with Embassy
Suites hotels. The Company believes that a substantial number of hotels meeting
its investment criteria remain available at attractive prices.
The Company's internal growth strategy is to utilize its asset management
role to improve the quality of its hotels through upgrading and repositioning,
thereby improving their revenue performance. Pursuant to the Percentage Leases,
the Company participates in any increases in hotel revenues, thereby increasing
its operating cash flow. In addition, the Company may expand certain of its
hotel properties by constructing additional suites and/or meeting space, if
market and other conditions warrant.
The Company was formed as a Delaware corporation on May 16, 1994 and was
reincorporated as a Maryland corporation on June 23, 1995, primarily to
eliminate the franchise tax liability it incurred as a Delaware corporation. The
reincorporation did not result in any change in the business, properties or
management of the Company. Through May 31, 1996, the Company's executive offices
will be located at 5215 N. O'Connor Blvd., Suite 330, Irving, Texas 75039, and
its telephone number will be (214) 869-8180. Effective June 1, 1996, the
Company's executive offices will be located at 545 E. John Carpenter Frwy.,
Suite 1300, Irving, Texas 75062 and its telephone number will be (214) 869-0013.
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RISK FACTORS
In addition to the other information contained in, or incorporated by
reference into, this Prospectus and in any Prospectus Supplement, prospective
investors should carefully consider the following factors in evaluating an
investment in the Securities offered hereby.
HISTORICAL OPERATING LOSSES
The CSS Hotels, as a group, have experienced significant net losses before
extraordinary items of approximately $38 million, $14 million and $5 million for
the years ended December 31, 1993 and 1994 and for the nine months ended
September 30, 1995, respectively. In addition, three of the CSS Hotel entities
(Los Angeles, Minneapolis Airport and Mandalay Beach) have operated under
Chapter 11 of the U.S. bankruptcy code for varying periods of time since 1992.
Each has since had a reorganization plan approved. No assurance can be given
that some or all of the Company's hotels will not experience net losses in the
future.
OPERATIONAL RISKS OF RAPID GROWTH
The Company's acquisition of interests in 21 hotels during the five-month
period ended March 31, 1996, has resulted in a substantial increase in the
number and geographic dispersion of the Embassy Suites hotels managed by Promus,
resulting in Promus' need for additional management, sales and accounting
personnel. Promus has offered employment to substantially all of the employees
at the hotels so acquired by the Company that are managed by Promus. Promus has
hired, or intends to hire, additional accounting and, if needed, marketing
personnel. However, there can be no assurance that Promus will be able to retain
the services of its existing employees or hire additional accounting or
marketing personnel. To the extent Promus is unable to retain or hire
experienced personnel to operate the Company's hotels, the operations of such
hotels could be adversely affected. The addition of the hotels recently acquired
by the Company to those previously leased to the Lessee pursuant to the
Percentage Leases, and the need for the Lessee to supervise the conversion
and/or renovation thereof, may result in increased demands upon, or additions
to, the Lessee's staff. The increased demand upon the time of such employees,
particularly if additional qualified staff cannot be obtained, could adversely
affect the operations and revenues of the Company's hotels and, in such event,
the lease payments due under the Percentage Leases and the amounts available for
the payment of indebtedness and distribution to shareholders. Further,
deteriorating operations could adversely affect the Lessee's operating results
and jeopardize the Lessee's ability to make lease payments.
HOTEL INDUSTRY RISKS
Operating Risks
The Company's hotels are subject to all operating risks common to the hotel
industry. These risks include, among other things, intense competition from
other hotels; over-building in the hotel industry which has adversely affected
occupancy, average daily rate ("ADR") and revenue per available room or suite
("REVPAR") in the past; increases in operating costs due to inflation and other
factors, which increases have not always been, and may not necessarily in the
future be, offset by increased suite rates; dependence on business and
commercial travelers and tourism; increases in energy costs and other expenses
of travel; and adverse effects of general and local economic conditions. Such
factors could adversely affect the Lessee's ability to make lease payments and,
consequently, the Company's ability to make any required payments of principal
and interest on indebtedness and to make distributions to shareholders. Further,
annual adjustments to the base rent and the thresholds for computation of
percentage rent, based upon a formula taking into account changes in the U.S.
Consumer Price Index ("CPI"), would (in the absence of offsetting increases in
suite revenue and in the event of any decrease in suite revenues) result in
decreased revenues to the Partnership under the Percentage Leases and decreased
amounts available for
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required payments of principal and interest on indebtedness and to make
distributions to the Company's shareholders.
Competition
Competition for Guests; Operations. The hotel industry is highly
competitive. Each of the Company's hotels experiences competition primarily from
other upscale hotels in its immediate vicinity, but also competes with other
hotel properties in its geographic market. Some of the competitors of the
Company's hotels have substantially greater marketing and financial resources
than the Company and the Lessee. A number of additional hotel rooms are in
development, have been announced or have recently been completed in a number of
the Company's markets, and additional hotel rooms may be developed in the
future. Such additional hotel rooms could have an adverse effect on the revenues
of the Company's hotels in such markets.
Competition for Acquisitions. The Company may be competing for investment
opportunities with entities which have substantially greater financial resources
than the Company. These entities may generally be able to accept more risk than
the Company prudently can manage. Competition may generally reduce the number of
suitable investment opportunities offered to the Company and increase the
bargaining power of property owners seeking to sell.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
Through diversity in the geographic location and in the primary customer base of
the Company's hotels, the Company may be able to lessen, but not eliminate, the
effects of seasonality. Accordingly, seasonality can be expected to cause
significant quarterly fluctuations in the Company's lease revenue, to the extent
it receives percentage rent.
Investment Concentration in Single Industry
The Company's current strategy is to acquire interests exclusively in hotel
properties. The Company will not seek to invest in assets selected to reduce the
risks associated with investments in the hotel industry, and will be subject to
risks inherent in concentrating investments in a single industry. Therefore, the
adverse effect on the Company's lease revenue and amounts available for required
payments of principal and interest on indebtedness and to make distribution to
shareholders resulting from a downturn in the hotel industry will be more
pronounced than if the Company had diversified its investments outside of the
hotel industry.
Emphasis on Embassy Suites Hotels; Market Concentration
Thirty-one of the Company's 34 Current Hotels are, or are in the process of
being converted to, Embassy Suites hotels. Accordingly, the Company is subject
to risks inherent in concentrating the Company's investments in the Embassy
Suites brand, such as a reduction in business following adverse publicity
related to the brand, which could have an adverse effect on the Company's lease
revenues and amounts available for required payments of principal and interest
on indebtedness and to make distributions to shareholders.
The Current Hotels are located in 16 states; however, 40% of such hotels
are located in two states, with nine hotels being located in Florida and five
hotels being located in California. Therefore, adverse events or conditions
which affect those areas particularly (such as natural disasters or adverse
changes in local economic conditions) could have a more pronounced negative
impact on the operations of the Company and amounts available for required
payments of principal and interest on indebtedness and on the Company's ability
to make distributions to the Company's shareholders than events affecting other
areas.
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CONSTRAINTS ON ACQUISITIONS AND IMPROVEMENTS
The Company intends to continue to pursue its current growth strategy,
which includes acquiring and improving hotel properties. There is a risk that
the Company will not have access to sufficient equity or debt capital to pursue
its acquisition strategies indefinitely. The Company generally cannot retain
cash generated by operating activities. To qualify as a REIT, the Company must
distribute at least 95% of its taxable income annually. The Company's $100
million secured line of credit ("Line of Credit") currently expires in 1997, and
its Charter (as herein defined) limits the Company's indebtedness to 40% of its
investment in hotel properties, at cost. Since the Company generally cannot
retain earnings and the term of the Company's Line of Credit is limited, the
Company's ability to continue to make hotel acquisitions following the
expiration or utilization of such facilities will depend primarily on its
ability to obtain additional private or public equity or debt financing. There
can be no assurance that such financing will be available to make future
investments.
CONFLICTS OF INTEREST
General
Because of the direct and indirect ownership interests of Messrs. Feldman,
Corcoran and Mathewson in, and their positions with, the Company and the Lessee,
there are inherent conflicts of interest in connection with the Company's
purchase of hotels in which such persons held an interest and in the ongoing
lease and operation of the Company's hotels. Accordingly, the interests of the
Company's shareholders may not have been, and in the future may not be, solely
reflected in all decisions made or actions taken by officers and directors of
the Company. In an effort to address one of the primary continuing conflicts,
Messrs. Feldman and Corcoran have entered into an agreement with the Company to
utilize any amounts distributed to them from the Lessee, in excess of their tax
liability for the earnings of the Lessee, to purchase from the Company,
annually, additional shares of Common Stock (or Units) at the then current
market price.
No Arms-Length Bargaining on Percentage Leases and Compensation Arrangements
for Officers and Directors
The terms of the Percentage Leases and the initial compensation
arrangements for officers and directors of the Company were not negotiated on an
arms-length basis and, accordingly, may not reflect fair market values or terms.
Management of the Company believes, however, that the terms of such agreements
are fair to the Company. The lease payments under the Percentage Leases have
been, and will be, calculated with reference to historical financial data and
the projected operating and financial performance of the Hotels. The terms of
the Percentage Leases are believed by management of the Company to be typical of
provisions found in other leases entered into in similar transactions.
Management believes that the initial compensation arrangements for officers and
directors of the Company provide incentives for them to seek to maximize
shareholder value, by tying incentive compensation to increases in the market
value of the Common Stock. The Percentage Leases and the initial employee
compensation plans were approved by the Company's "Independent Directors," being
those directors who are not officers or employees of the Company or affiliates
of any subsidiary or lessee thereof. The Company does not own any interest in
the Lessee. All of the voting Class A membership interest in the Lessee
(representing a 50% equity interest) is owned by Messrs. Feldman and Corcoran
and all of the non-voting Class B membership interest in the Lessee
(representing the remaining 50% equity interest) is held by RGC Leasing, Inc., a
Nevada corporation owned by the children of Mr. Mathewson, a director of the
Company. As a result, such persons may have a conflict of interest with the
Company in the performance of their management services to the Company in
connection with the Percentage Leases.
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Continuing Hotel Operation, Development and Investment by FelCor Affiliates
Messrs. Feldman and Corcoran, or entities controlled by them ("FelCor
Affiliates"), may (i) continue to own, develop and operate their respective
existing interests in the Holiday Inn -- DFW (Dallas/Fort Worth) Airport South
hotel (including development of the property adjacent thereto) and in the St.
Louis (Airport), Missouri Embassy Suites hotel, (ii) modify, dispose of or add
to such existing interests or properties, and (iii) acquire new or additional
interests in any hotel development at or adjacent to the Holiday Inn -- DFW
Airport South hotel property. Except as provided above, the FelCor Affiliates
have no present intent to develop, own or operate additional hotel properties,
and in any event will not do so without the approval of a majority of the Board
of Directors, including a majority of the Independent Directors. The Partnership
has a right of first refusal and option to acquire the St. Louis (Airport),
Missouri Embassy Suites hotel which is owned by a FelCor Affiliate. This hotel
was completed and commenced operations in December 1994. The Company's decision
as to the exercise of the right of first refusal or option with respect to the
St. Louis hotel will be made by a majority of the Independent Directors. In the
event that the Company elects to exercise the right of first refusal or option
with respect to such property, the interests of Messrs. Feldman, Corcoran and
Mathewson could differ from those of the Company with respect to the Company's
acquisition of the property.
Adverse Tax Consequences to Certain Affiliates on a Sale of Certain Hotels
Certain affiliates of the Company may have unrealized gain in their
investments in the six hotels acquired by the Company at its inception on July
28, 1994 ("Initial Hotels"). A subsequent sale of such hotels by the Company may
cause adverse tax consequences to such persons. Therefore, the interests of the
Company and certain of its affiliates, including Messrs. Feldman, Corcoran and
Mathewson, could be different in connection with the disposition of any of such
hotels. However, decisions with respect to the disposition of all hotel
properties in which the Company invests will be made by a majority of the Board
of Directors, which majority must include a majority of the Independent
Directors when the disposition involves any of the Initial Hotels.
Conflicting Demands for Management Time
Messrs. Feldman and Corcoran will be involved in the ownership and
management of the Lessee, as well as other activities, in addition to their
functions as officers and directors of the Company. Such activities will
include, without limitation, the ownership and management of their interests in
the Holiday Inn-DFW Airport South and the St. Louis (Airport), Missouri Embassy
Suites hotel, subject to certain restrictions set forth in their employment
agreements. Therefore, Messrs. Feldman and Corcoran, as well as other officers
and employees of the Company, some of whom are also officers of or provide
services to the Lessee, will be subject to competing demands on their time.
RISKS OF LEVERAGE; SUBSTANTIAL AMOUNTS OF FLOATING RATE DEBT
At February 29, 1996, the Company's outstanding debt consisted of
approximately $134.4 million in principal amount outstanding, including
approximately $27.2 million under the Line of Credit, a substantial portion of
which indebtedness bears interest at floating rates. Since the Company intends
to continue to acquire additional all-suite hotels, including the Acquisition
Hotels, and must distribute annually at least 95% of its taxable net income to
maintain its REIT status, it may borrow additional funds to make investments or
distributions. The Board of Directors has the discretion to permit the Company
to incur debt in an amount not to exceed 40% of the Company's investment in
hotel properties, at cost, on a consolidated basis, after giving effect to the
Company's use of proceeds from any indebtedness. The Company has secured the
Line of Credit to provide, as necessary, funds for investments in additional
hotel properties, working capital and cash to make distributions. The Company's
use of the Line of Credit for working capital, distributions and general
corporate purposes is limited to 10% of the amount available thereunder. The
Line of Credit
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is secured by a first lien on the Company's interest in 13 of the Current
Hotels. The majority of Company's floating rate debt bears interest at the
30-day London Interbank Offered Rate ("LIBOR") (5.46875% at March 31, 1996) plus
an amount between .62% and 2.0%.
There can be no assurance that the Company will be able to meet its present
or future debt service obligations and, to the extent that it cannot, it risks
the loss of some or all of its assets to foreclosure. Changes in economic
conditions could result in higher interest rates which could increase debt
service requirements on the Company's substantial amount of floating rate debt
and could reduce the amounts available for distribution to its shareholders.
Adverse economic conditions could cause the terms on which borrowings become
available to be unfavorable. In such circumstances, if the Company is in need of
capital to repay indebtedness in accordance with its terms or otherwise, it
could be required to liquidate one or more investments in hotel properties at
times which may not permit realization of the maximum return on such
investments.
TAX RISKS
Failure to Qualify as a REIT
The Company operates so as to qualify as a REIT for federal income tax
purposes. Although the Company has not requested, and does not expect to
request, a ruling from the Internal Revenue Service ("Service") that it
qualifies as a REIT, it has received an opinion of its counsel that, based on
certain assumptions and representations, it so qualifies. Investors should be
aware, however, that opinions of counsel are not binding on the Service or any
court. The REIT qualification opinion only represents the view of counsel to the
Company based on counsel's review and analysis of existing law, which includes
no controlling precedent. Furthermore, both the validity of the opinion and the
continued qualification of the Company as a REIT will depend on the Company's
continuing ability to meet various requirements concerning, among other things,
the ownership of its outstanding stock, the nature of its assets, the sources of
its income, and the amount of its distributions to the shareholders of the
Company. See "Federal Income Tax Considerations -- Taxation of the Company."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal income tax
(including any applicable minimum tax) on its taxable income at regular
corporate rates. Unless entitled to relief under certain provisions of the
Internal Revenue Code of 1986, as amended ("Code"), the Company also would be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification was lost. As a result, the funds available for
required payments of principal and interest on indebtedness and to make
distributions to the shareholders would be reduced for each of the years
involved. Although the Company operates in a manner designed to allow it to
qualify as a REIT, it is possible that future economic, market, legal, tax or
other considerations may cause the Board of Directors, with the consent of a
majority of the shareholders, to revoke the REIT election. See "Federal Income
Tax Considerations."
REIT Minimum Distribution Requirements
In order to qualify as a REIT, the Company generally is required each year
to distribute to its shareholders at least 95% of its net taxable income
(excluding any net capital gain). In addition, the Company is subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85% of
its ordinary income, (ii) 95% of its capital gain net income for that year, and
(iii) any undistributed taxable income from prior periods.
The Company intends to make distributions to its shareholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
The Company's income consists primarily of its share of the income of the
Partnership, and the Company's cash available for
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distribution consists primarily of its share of cash distributions from the
Partnership. Differences in timing between taxable income and cash available for
distribution and seasonality of the hospitality industry could require the
Company, through the Partnership, to borrow funds on a short-term basis to meet
the 95% distribution requirement and to avoid the nondeductible excise tax. For
federal income tax purposes, distributions paid to shareholders may consist of
ordinary income, capital gains, nontaxable return of capital, or a combination
thereof. The Company provides its shareholders with an annual statement as to
its designation of the taxability of distributions.
Distributions by the Partnership will be determined by the Company's Board
of Directors and will be dependent on a number of factors, including the amount
of the Partnership's cash available for distribution, the Partnership's
financial condition, any decision by the Board of Directors to reinvest funds
rather than to distribute such funds, the Partnership's capital expenditures,
the annual distribution requirements under the REIT provisions of the Code and
such other factors as the Board of Directors deems relevant. See "Federal Income
Tax Considerations -- Requirements for Qualification -- Distribution
Requirements."
Failure of the Partnership to be Classified as a Partnership for Federal Income
Tax Purposes; Impact on REIT Status
The Company has received an opinion of its counsel stating that the
Partnership (and its subsidiaries) will be classified as a partnership for
federal income tax purposes. If the Service were to challenge successfully the
tax status of the Partnership as a partnership for federal income tax purposes,
the Partnership would be taxable as a corporation. In such event, since the
value of the Company's ownership interest in the Partnership constitutes more
than 10% of the Partnership's voting securities and exceeds 5% of the Company's
assets, the Company likely would cease to qualify as a REIT. Furthermore, the
imposition of a corporate tax on the Partnership would substantially reduce the
amount of cash available for distribution to the Company and its shareholders.
EFFECT OF MARKET INTEREST RATES ON PRICE OF CAPITAL STOCK
One of the factors that may influence the price of the Company's Common
Stock and any Preferred Stock in public trading markets is the annual yield from
distributions by the Company on the Common Stock and any Preferred Stock, as
compared to yields on other financial instruments. Thus, an increase in market
interest rates will result in higher yields on other financial instruments,
which could adversely affect the market price of the shares of Common Stock and
any Preferred Stock.
RECENTLY ORGANIZED ENTITIES; LIMITED ASSETS AND OPERATING HISTORY
The Company, the Partnership and the Lessee have been recently organized
and have limited operating histories. Although the management of the Company and
of the Lessee have substantial experience in developing, financing and operating
hotel properties, they have limited experience in operating as a REIT. The
Company must rely on the Lessee, and the Lessee, in turn, will depend upon the
hotel managers, to generate sufficient cash flow from the operation of the
Hotels to enable the Lessee to meet its rent obligations under the Percentage
Leases. Thirty of the 34 Current Hotels are, and upon acquisition both of the
Acquisition Hotels are expected to be, managed on behalf of the Lessee by
Promus. The four remaining Current Hotels are managed on behalf of the Lessee by
other independent professional hotel management companies. All management
contracts extend for a term of 10 years from the date of acquisition of the
hotel to which such contract relates, but neither Promus nor any such other
manager has, or will have, any liability or obligation to the Partnership for
the payment of rent under the Percentage Leases. The obligations of the Lessee
under the Percentage Leases are unsecured. The Lessee's only assets are cash,
receivables, inventory, supplies and prepaid expenses needed in the operation of
the Current Hotels, the franchise licenses for the Current Hotels, and its
rights and benefits under the Percentage Leases and the management
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contracts relating to such hotels. At December 31, 1995, the Lessee had a
deficit in total shareholders' equity of approximately $773,000. See "The
Company" and "Partnership Agreement."
RELIANCE ON KEY PERSONNEL AND BOARD OF DIRECTORS
Shareholders have no right or power to take part in the management of the
Company except through the exercise of voting rights on certain specified
matters. The Board of Directors is responsible for managing the Company. The
Company's future success, including particularly the implementation of the
Company's acquisition growth strategy, is substantially dependent on the active
participation of Messrs. Feldman and Corcoran. The loss of the services of
either of these individuals could have a material adverse effect on the Company.
REAL ESTATE INVESTMENT RISKS
The Company's investments are subject to varying degrees of risk generally
incident to the ownership of real property, including, in addition to the risks
discussed below, adverse changes in general or local economic conditions, zoning
laws, traffic patterns and neighborhood characteristics, tax rates, governmental
rules and fiscal policies, and by civil unrest, acts of war, and other adverse
factors which are beyond the control of the Company.
Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions
will be limited. Also, no assurances can be given that the market value of any
of the Hotels will not decrease in the future. There can be no assurance that
the Company will be able to dispose of an investment when it finds disposition
advantageous or necessary or that the sale price realized in any disposition
will recoup or exceed the amount of the Company's investment therein.
Uninsured and Underinsured Losses
Each of the Current Hotels is covered by comprehensive policies of
insurance, including liability, fire and extended coverage. Management believes
such specified coverage is of the type and amount customarily obtained by owners
of real property assets. However, there are certain types of losses, generally
of a catastrophic nature, such as earthquakes, hurricanes and floods, that may
be uninsurable or not economically insurable. Five of the Current Hotels, and
the two Acquisition Hotels, are located in California, which is subject to
relatively higher seismic risks. Although each of such hotels was constructed
under the more recent and stringent post-1984 building codes that were intended
to reduce the likelihood or extent of damage from seismic activity, no assurance
can be given that an earthquake would not cause substantial damage and losses.
Additionally, 13 of the Current Hotels are located in the coastal areas of
Florida, Georgia, Louisiana or Texas and may, therefore, be particularly
susceptible to potential damage from hurricanes or high-wind activity. The
Company presently maintains and intends to continue to maintain earthquake
insurance on each of the Current Hotels located in California and hurricane
insurance on such Florida, Georgia, Louisiana and Texas hotels, to the extent
practicable. The Company's Board of Directors may exercise discretion in
determining amounts, coverage limits and the deductibility provisions of
insurance, with a view to maintaining appropriate insurance coverage on the
Company's investments at a reasonable cost and on suitable terms. This may
result in insurance coverage that, in the event of a substantial loss, would not
be sufficient to pay the full current market value or current replacement cost
of the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations, and other factors also might make it
impractical to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the insurance
proceeds received by the Company might not be adequate to restore its economic
position with respect to such property.
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Environmental Matters
Under various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Liability also may extend to persons holding a
security interest in the property, under certain limited circumstances. In
addition, the presence of contamination from hazardous or toxic substances, or
the failure to properly remediate such contaminated property, may adversely
affect the owner's ability to dispose of such property, to fully utilize such
property without restriction or to borrow using such property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is or ever was owned or operated by such person. Certain environmental laws and
common law principles could be used to impose liability for release of hazardous
or toxic substances, including the release of asbestos-containing materials
("ACMs") into the air, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage associated
with such releases, including exposure to released ACMs. Environmental laws also
may impose restrictions on the manner in which property may be used or
businesses may be operated, and these restrictions may require expenditures.
Environmental laws provide for sanctions in the event of noncompliance and may
be enforced by governmental agencies or, in certain circumstances, by private
parties. In connection with the ownership of the Current Hotels and any
subsequently acquired hotels, the Company may be potentially liable for such
costs. The cost of defending against claims of liability, of compliance with
environmental regulatory requirements or of remediating a contaminated property
could materially adversely affect the business, assets or results of operations
of the Company and the Partnership and, consequently, amounts available for
required payments of principal and interest on indebtedness and to make
distributions to the Company's shareholders.
Phase I environmental audits from independent environmental engineers were
obtained with respect to each of the Current Hotels prior to the acquisition
thereof by the Company. The principal purpose of Phase I audits is to identify
indications of potential environmental contamination for which the Current
Hotels may be responsible and, secondarily, to assess, to a limited extent, the
potential for environmental regulatory compliance liabilities. The Phase I
audits of the Current Hotels were designed to meet the requirements of the then
current industry standards governing Phase I audits, and consistent with those
requirements, none of the audits involved testing of groundwater, soil or air.
Accordingly, they do not represent evaluations of conditions at the studied
sites that would be revealed only through such testing. In addition, their
assessment of environmental regulatory compliance issues was general in scope
and was not a detailed determination of the Current Hotels' complete compliance
status. Similarly, the audits did not involve comprehensive analysis of
potential off-site liability. The Phase I audit reports have not revealed any
environmental liability that management believes would have a material adverse
effect on the Company's business, assets or results of operations, nor is the
Company aware of any such liability. Nevertheless, it is possible that these
reports do not reveal all environmental liabilities or that there are material
environmental liabilities of which the Company is unaware.
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 ("ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While management of the Company believes
that, based upon an examination thereof and consultation with professionals, the
Current Hotels are substantially in compliance with these requirements, a
determination that the Company is not in compliance with the ADA could result in
the imposition of fines or an award of damages to private litigants. If the
Company were required to make substantial modifications at the Current Hotels to
comply with the ADA, the Company's ability to make required
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payments of principal and interest on indebtedness and to make distributions to
its shareholders could be adversely affected.
Increases in Property Taxes
Each Current Hotel is subject to real and personal property taxes. The real
and personal property taxes on hotel properties in which the Company invests may
increase as property tax rates change and as the properties are assessed or
reassessed by taxing authorities. If property taxes increase, the Company's
ability to make required payments of principal and interest on indebtedness and
to make distributions to its shareholders could be adversely affected.
OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of its outstanding stock may be owned, actually and
constructively under the applicable attribution provisions of the Code, by five
or fewer individuals (as defined in the Code to include certain entities). For
the purpose of preserving the Company's REIT qualification, the Company's
Articles of Incorporation, as amended ("Charter"), prohibits ownership (taking
into account applicable constructive ownership provisions of the Code) of more
than 9.9% of any class of the Company's outstanding capital stock by any person
("Ownership Limit"), and, subject to certain exceptions, prohibits any transfer
that would result in (i) any person owning shares in excess of the Ownership
Limit, (ii) the Company's shares being beneficially owned by fewer than 100
persons (determined without reference to any constructive ownership rules),
(iii) the Company being "closely held" within the meaning of the Code or
otherwise failing to qualify as a REIT under the Code, or (iv) the Company
owning, actually and constructively under the applicable constructive ownership
provisions of the Code, 10% or more of the ownership interests in the Lessee or
any sublessee. Any attempted transfer of shares that would violate any one or
more of such prohibitions will be void and of no force or effect whatsoever with
respect to any shares in excess of such limits (and, in the case of the
prohibition against the Company having fewer than 100 shareholders, will be
entirely void), and the attempted transferee will not acquire any right or
interest in such excess shares. The Company may take any lawful action deemed
necessary or advisable to ensure compliance with the Ownership Limit provisions
and to preserve its status as a REIT, including without limitation refusing to
recognize or record any prohibited transfer.
Should any person at any time hold any shares in violation of the Ownership
Limit (other than a violation of the requirement that a REIT have at least 100
shareholders), then that number of shares in excess of the number such person
could hold without violating the Ownership Limit will be immediately designated
as "Shares-in-Trust" and transferred automatically and by operation of law to,
and be held in, a trust for the benefit of such beneficiaries as may be
designated by the trustee of such trust (which trustee shall be designated by
the Company and be a person that is unaffiliated with the Company or any
prohibited owner). The trustee will be entitled to receive all distributions and
distributions on, and to exercise all voting rights of, any Shares-in-Trust. The
record holder of any shares so designated as Shares-in-Trust and transferred to
a trustee shall have no right or interest in such shares or trust, except the
right (upon satisfaction of certain conditions) to receive from the proceeds of
sale of such shares to a qualified person or entity an amount equal to the
lesser of (i) the amount paid therefor by such record holder (if acquired by him
for value), or the market price of such shares determined as provided in the
Charter (if acquired by him otherwise than for value), and (ii) the amount
received by the trustee from the sale of such Shares-in-Trust.
The Company or its designee may elect, within specified time limits, to
purchase from the trustee any Shares-in-Trust at the lesser of (a) the amount to
which the record holder would be entitled pursuant to clause (i) of the
immediately preceding paragraph or (b) the market price of such shares,
determined as provided in the Charter, on the date of its election to purchase
such shares. Accordingly, the record holder of any shares that are designated as
Shares-in-Trust may experience a financial loss if the price at which such
shares are sold to a qualified person or entity, or
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the Company, is less than that paid by such record holder therefor. See "Certain
Charter, Bylaw and Statutory Provisions -- Charter and Bylaw
Provisions -- Restrictions on Ownership and Transfer" and "Federal Income Tax
Considerations -- Requirements for Qualification."
LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
Ownership Limit
The Ownership Limit, which provides that no person may own more than 9.9%
in value of any class of the outstanding stock of the Company, may have the
effect of precluding an acquisition of control of the Company by a third party
without the approval of the Board of Directors, even if such change of control
were to be in the shareholders' interests.
Staggered Board
The Board of Directors of the Company has three classes of directors. The
terms of the Company's current directors expire in 1996, 1997 and 1998,
respectively. Directors for each class are elected for a three-year term upon
the expiration of the term of that class. The staggered terms of directors may
affect the shareholders' ability to change control of the Company even if such a
change in control were to be in the shareholders' interests. See "Certain
Charter, Bylaw and Statutory Provisions -- Charter and Bylaw
Provisions -- Restrictions on Ownership and Transfer."
Authority to Issue Preferred Stock
The Charter authorizes the Board of Directors to issue up to 10,000,000
shares of Preferred Stock, in one or more series, and to establish the relative
preferences and rights of any series of Preferred Stock so issued. The issuance
of Preferred Stock could have the effect of delaying or preventing a change in
control of the Company even if such a change in control were to be in the
shareholders' interests.
Maryland Anti-Takeover Statutes
As a Maryland corporation, the Company is subject to various legislative
acts set forth under the Maryland General Corporation Law ("MGCL"), including
(i) the Maryland Business Combination Statute, which imposes certain
restrictions upon, and mandates that certain procedures be followed in
connection with, certain takeovers and business combinations, and (ii) the
Maryland Control Share Statute, which denies voting rights with respect to
shares acquired in certain transactions involving the acquisition of one-fifth
or more of the voting control of the subject company. Although the Company's
Charter contains a provision exempting any and all acquisitions from the
provisions of the Maryland Control Share Statute, if such provision is
subsequently amended or eliminated, it may deter any stockholder from acquiring
any substantial amount of the outstanding stock of the Company. In addition, to
the extent that the foregoing statutes discourage or make more difficult a proxy
contest or the assumption of control by a holder of a substantial block of the
Company's stock, they could increase the likelihood that incumbent directors of
the Company would retain their positions, and may also have the effect of
discouraging a tender offer or other attempts to obtain control of the Company
even though such attempts might be beneficial to the Company and its
shareholders. See "Certain Charter, Bylaw and Statutory Provisions -- Maryland
Anti-Takeover Statutes."
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
Thirty-one of the Current Hotels are, or are in the process of being
converted to, the Embassy Suites brand. Of the three remaining Current Hotels,
two are operated as Doubletree Guest Suites(R) hotels, under management
contracts with a subsidiary of Doubletree Hotels Corporation, and one is, and
may continue to be, operated under a franchise license as a Hilton Suites(R)
hotel. The Company will be obligated to complete improvements at the CSS Hotels,
at an estimated cost of approximately
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$50 million over 12 to 18 months, as a condition to obtaining and maintaining
the franchise licenses with respect to such hotels. Promus has guaranteed a loan
of up to $25 million to be used to fund a portion of the cost of such
improvements at the CSS Hotels. No assurance can be provided that the Company
will not be required to make and fund significant additional improvements to the
Current Hotels in the future to obtain or maintain its franchise licenses.
Failure to complete improvements, when required, in a manner satisfactory to the
franchisor could result in the failure to issue, or the cancellation, of one or
more franchise licenses. In addition, the Company may desire to operate
additional hotels acquired by it under franchise licenses from Promus or another
franchisor, and such franchisors may require that significant capital
expenditures be made to such additional hotels as a condition of granting such
franchise licenses.
The continuation of franchise licenses for the Current Hotels is subject to
the maintenance of specified operating standards and other terms and conditions.
Promus periodically inspects its licensed properties to confirm adherence to its
maintenance and operating standards. Under each Percentage Lease, the Company is
obligated, among other things, to pay the costs of maintaining the structural
elements of each hotel and to set aside as a reserve 4% of hotel suite revenues
per month, on a cumulative basis, and to fund from the reserve or from other
sources capital expenditures (subject to approval by the Company's Board of
Directors) for the periodic replacement or refurbishment of furniture, fixtures
and equipment required for the retention of such franchise licenses. During the
period from the closing of the Company's initial public offering to December 31,
1995, the Company made, and in the future may be obligated or deem it advisable
to make, capital investments in the Current Hotels of more than 4% of the suite
revenues thereof. Should the Company be required or elect to do so in the
future, such investments may necessitate the use of borrowed funds or the
reduction of distributions. The Lessee is responsible for routine maintenance
and repair expenditures with respect to the Current Hotels. The failure to
maintain the standards or adhere to the other terms and conditions of the
Embassy Suites or other franchise licenses could result in the loss or
cancellation of such franchise licenses. It is possible that a franchisor could
condition the continuation of a franchise license upon the completion of
substantial capital improvements, which the Board of Directors may determine to
be too expensive or otherwise unwarranted in light of general economic
conditions or the operating results or prospects of the affected hotel. In that
event, the Board of Directors may elect to allow the franchise license to lapse,
in which event the Company will be obligated to indemnify the Lessee against any
loss or liability incurred by it as a consequence of such decision. In any case,
if a franchise is terminated, the Company and the Lessee may seek to obtain a
suitable replacement franchise, or to operate the affected hotel independent of
a franchise license. The loss of any franchise license could have a material
adverse effect upon the operations or the underlying value of the hotel covered
by such license because of the loss of associated name recognition, marketing
support and centralized reservation systems provided by the franchisor. The loss
of a number of the franchise licenses for the Current Hotels could have a
material adverse effect on the Company's revenues under the Percentage Leases
and the Company's cash available to make required payments of principal and
interest on indebtedness and to make distributions to its shareholders.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company will contribute the net proceeds from the sale of the Securities to the
Partnership, in exchange for comparable securities thereof, and the Partnership
expects to use such net proceeds for various purposes, which may include the
acquisition of additional hotel assets, the repayment of outstanding
indebtedness, the improvement and/or expansion of one or more of its hotel
properties or for working capital purposes. Pending such uses, the net proceeds
of any offering of Securities may be invested in short-term, investment grade
securities or instruments, interest-bearing bank accounts, certificates of
deposit, mortgage participations or similar securities, to the extent consistent
with the
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Company's qualification as a REIT, the Company's Charter, and the Company's
agreements with its lenders.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratios of
earnings to fixed charges for the periods shown:
<TABLE>
<CAPTION>
JULY 28, 1994
(INCEPTION) THROUGH YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
- ------------------- -----------------
<C> <C>
32.4x 8.6x
</TABLE>
For purposes of computing this ratio, earnings have been calculated by
adding fixed charges (excluding capitalized interest) to income before minority
interest. Fixed charges consist of interest costs, whether expensed or
capitalized, and amortization of loan costs. To date, the Company has not issued
any Preferred Stock; therefore, the ratios of earnings to combined fixed charges
and preferred stock dividends requirements are the same as the ratios of
earnings to fixed charges presented above.
DISTRIBUTION POLICY
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its shareholders of at least 95% of its taxable income
(which does not include net capital gains). While future distributions paid by
the Company will be at the discretion of the Board of Directors of the Company
and will depend on the actual cash flow of the Company, its financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Code, and such other factors as the directors of the Company
deem relevant, it is the present intention of the Company to pay regular
quarterly distributions.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct unsecured obligations of the Company.
The Debt Securities will be issued under one or more indentures ("Indentures"),
each dated as of a date prior to the issuance of the Debt Securities to which it
relates, in each case between the Company and a trustee ("Trustee") meeting the
requirements of the Trust Indenture Act of 1939, as amended ("TIA"), and in the
form that has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, subject to such amendments or supplements as may be
adopted from time to time. The Indentures will be subject to and governed by the
TIA. The statements made under this heading relating to the Debt Securities and
the Indentures are summaries of the anticipated provisions thereof, do not
purport to be complete and are qualified in their entirety by reference to the
description of such Debt Securities contained in the applicable Prospectus
Supplement and to the Indentures relating to such Debt Securities.
Capitalized terms used, but not defined, under this caption shall have the
meanings assigned to them in the applicable Indentures.
TERMS
The indebtedness represented by the Debt Securities will rank equally with
all other unsecured and unsubordinated indebtedness of the Company. The
particular terms of the Debt Securities offered by a Prospectus Supplement will
be described in the applicable Prospectus Supplement, along with any applicable
modifications of or additions to the general terms of the Debt Securities as
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described herein and in the applicable Indenture and any applicable federal
income tax considerations. Accordingly, for a description of the terms of any
series of Debt Securities, reference must be made to both the Prospectus
Supplement relating thereto and the description of the Debt Securities set forth
in this Prospectus.
Except as set forth in any Prospectus Supplement, the Debt Securities may
be issued without limit as to aggregate principal amount, in one or more series,
in each case as established from time to time by the Company or as set forth in
the applicable Indenture or in one or more indentures supplemental to such
Indenture. All Debt Securities of one series need not be issued at the same
time, and, unless otherwise provided in the applicable Prospectus Supplement, a
series may be reopened, without the consent of the holders of the Debt
Securities of such series, for the issuance of additional Debt Securities of
such series.
Each Indenture will designate one or more than one Trustee thereunder, each
with respect to one or more series of Debt Securities. Any Trustee under an
Indenture may resign or be removed with respect to one or more series of Debt
Securities and a successor Trustee may be appointed to act with respect to such
series. In the event that two or more persons are acting as Trustee with respect
to different series of Debt Securities, each such Trustee shall be a Trustee of
a trust under the applicable Indenture separate and apart from the trust
administered by any other Trustee, and, except as otherwise indicated herein,
any action described herein to be taken by each Trustee may be taken by each
such Trustee with respect to, and only with respect to, the one or more series
of Debt Securities for which it is trustee under the applicable Indenture.
The following summaries set forth certain general terms and provisions of
the Debt Securities and the Indentures. The Prospectus Supplement relating to
the series of Debt Securities being offered will contain further terms of such
Debt Securities, including the following specific terms:
(1) The title of such Debt Securities and whether such Debt Securities are
senior securities or subordinated securities;
(2) The aggregate principal amount of such Debt Securities and any limit on
such aggregate principal amount;
(3) The price (expressed as a percentage of the principal amount thereof)
at which such Debt Securities will be issued and, if other than the
principal amount thereof, the portion of the principal amount thereof
payable upon declaration of acceleration of the maturity thereof, or
(if applicable) the portion of the principal amount of such Debt
Securities that is convertible into Common Stock, Preferred Stock or
Debt Securities of another series, or the method by which any such
portion shall be determined;
(4) If convertible, the terms on which such Debt Securities are convertible
into Common Stock, Preferred Stock or Debt Securities of another
series, including the terms and conditions upon which such conversion
will be effected, the initial conversion price or rate, the conversion
period or periods and any applicable limitations on the ownership or
transferability of any Common Stock or Preferred Stock receivable on
conversion;
(5) The date or dates, or the method for determining such date or dates, on
which the principal of such Debt Securities will be payable;
(6) The rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(7) The date or dates, or the method for determining such date or dates,
from which any such interest will accrue, the date or dates on which
any such interest will be payable, the regular record dates for such
interest payment dates, or the method by which such dates shall be
determined, the persons to whom such interest shall be payable, and the
basis upon which interest shall be calculated if other than that of a
360-day year of twelve 30-day months;
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(8) The place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where such
Debt Securities may be surrendered for conversion or registration of
transfer or exchange and where notices or demands to or upon the
Company in respect of such Debt Securities and the applicable Indenture
may be served;
(9) The period or periods, if any, within which, the price or prices at
which and the other terms and conditions upon which such Debt
Securities may, pursuant to any optional or mandatory redemption
provisions, be redeemed, as a whole or in part, at the option of the
Company;
(10) The obligation, if any, of the Company to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof and the period or
periods within which, the price or prices at which, and the other
terms and conditions upon which, such Debt Securities will be
redeemed, repaid or purchased, as a whole or in part, pursuant to such
obligation;
(11) If other than U.S. dollars, the currency or currencies in which such
Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite
currency or currencies, and the terms and conditions relating thereto;
(12) Whether the amount of payments of principal of (premium, if any) or
interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula
or method may, but need not, be based on a currency, currencies,
currency unit or units, or composite currency or currencies) and the
manner in which such amounts shall be determined;
(13) Whether such Debt Securities will be issued in certificated and/or
book-entry form and, if so, the identity of the depository for such
Debt Securities;
(14) Whether such Debt Securities will be in registered or bearer form and,
if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the
denominations thereof and terms and conditions relating thereto;
(15) The applicability, if any, of the defeasance and covenant defeasance
provisions described herein or set forth in the applicable Indenture,
or any modification thereof;
(16) Whether and under what circumstances the Company will pay any
additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Company will
have the option to redeem such Debt Securities in lieu of making such
payment;
(17) Any deletions from, modifications of or additions to the events of
default or covenants of the Company, to the extent different from
those described herein or set forth in the applicable Indenture with
respect to such Debt Securities, and any change in the right of any
Trustee or any of the holders to declare the principal amount of any
such Debt Securities due and payable; and
(18) Any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
If so provided in the applicable Prospectus Supplement, the Debt Securities
may be issued at a discount below their principal amount and provide for less
than the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof ("Original Issue Discount Securities"). In
such cases, any special U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
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Except as may be set forth in any Prospectus Supplement, the Debt
Securities and Indentures will not prohibit, restrict, or require the Company to
obtain the consent of the holders of any Debt Securities, or to redeem or permit
holders to cause a redemption of Debt Securities, in the event of, (i) a
consolidation, merger, sale of assets or other similar transaction that may
adversely affect the creditworthiness of the Company or the successor or
combined entity, (ii) a change in control of the Company or (iii) the incurrence
of unsecured debt, whether or not in a highly leveraged transaction, involving
the Company whether or not involving a change in control. Accordingly, the
holders of the Debt Securities would not have protection in the event of a
highly leveraged transaction, reorganization, restructuring, merger or similar
transaction involving the Company that may adversely affect the holders of the
Debt Securities. The existing protective covenants applicable to the Debt
Securities would continue to apply to the Company in the event of a leveraged
buyout initiated or supported by the Company, the management of the Company, or
any affiliate of the Company or its management, but may not prevent such a
transaction from taking place. However, the Company's Charter prohibits it from
incurring indebtedness in excess of 40% of the Company's investment in hotel
properties, at cost, on a consolidated basis, after giving effect to the
Company's use of proceeds from any indebtedness. Restrictions set forth in the
Company's Charter with respect to the ownership and transfer of Common Stock and
Preferred Stock, which are designed to preserve the Company's status as a REIT,
may also act to prevent or hinder a change of control. See "Certain Charter,
Bylaw and Statutory Provisions -- Charter and Bylaw Provisions -- Restrictions
on Ownership and Transfer." Reference is made to the applicable Prospectus
Supplement for information with respect to any deletions from, modifications of
or additions to the events of default or covenants of the Company that are
described below, including any addition of a covenant or other provision
providing event risk or similar protection.
If any Debt Securities are to be offered that provide for the optional
redemption, prepayment or conversion of such Debt Securities upon the occurrence
of the events described in the foregoing paragraph, the Prospectus Supplement
relating to such Debt Securities will provide information with respect to the
following:
(a) the effects that such provisions may have in deterring certain
mergers, tender offers or other takeover attempts, as well as any possible
adverse effect on the market price of the Company's securities or the
Company's ability to obtain additional financing in the future as a result
of such provisions;
(b) certain specific risk factors associated with the occurrence of
the specified events, including, if applicable, that the occurrence of such
events may give rise to cross-defaults on other indebtedness such that the
payment on the Debt Securities may be effectively subordinated, that there
may be no assurance that sufficient funds will be available at the time of
the occurrence of an event to make any required repurchases and that there
may be limitations on the Company's financial or legal ability to
repurchase the Debt Securities upon the occurrence of an event requiring
such a repurchase or offer to repurchase;
(c) the Company's compliance, if necessary, with the requirements of
Rule 13e-4 and Rule 14e-1 under the Exchange Act and any other applicable
securities laws in connection with any repurchase of such Debt Securities;
(d) the impact, if any, under the Indenture of the failure to make the
required repurchase, including whether, and under what circumstances, such
failure would be an event of default under the Indenture; and
(e) if the Debt Securities are to be subordinated to other obligations
of the Company that would be accelerated upon the occurrence of one of the
specified events, the material effects of such an acceleration upon the
specified events and the Debt Securities.
In addition, the Indenture under which any such Debt Securities will be issued
will contain, and the applicable Prospectus Supplement will include, if
applicable, a definition of "change in control" for
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purposes of such Debt Securities, including sufficient information to enable a
holder of Debt Securities to determine when a change in control has occurred.
DENOMINATION, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt Securities
at the corporate trust office of the applicable Trustee or at the office of any
transfer agent designated by the Company for such purpose. In addition, subject
to certain limitations imposed upon Debt Securities issued in book-entry form,
Debt Securities of any series may be surrendered for conversion or registration
of transfer or exchange thereof at the corporate trust office of the applicable
Trustee or at the office of any transfer agent designated by the Company for
such purpose. Debt Securities surrendered for conversion, registration of
transfer or exchange must be duly endorsed or accompanied by a written
instrument of transfer, and the person requesting such action must provide
evidence of title and identity satisfactory to the applicable Trustee or
transfer agent. No service charge will be made for any registration of transfer
or exchange of any Debt Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. If the applicable Prospectus Supplement refers to any transfer agent
(in addition to the applicable Trustee) initially designated by the Company with
respect to any series of Debt Securities, the Company may at any time rescind
the designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, except that the Company will be
required to maintain a transfer agent in each place of payment for such series.
The Company may at any time designate additional transfer agents with respect to
any series of Debt Securities.
Neither the Company nor any Trustee or transfer agent shall be required (i)
to issue, register the transfer of or exchange Debt Securities of any series
during a period beginning at the opening of business 15 days before the date of
mailing of a notice of redemption of any Debt Securities that may be selected
for redemption and ending at the close of business on the date of such mailing;
(ii) to register the transfer of or exchange any Debt Securities, or portion
thereof, so selected for redemption, in whole or in part, except the unredeemed
portion of any Debt Securities being redeemed in part; or (iii) to issue,
register the transfer of or exchange any Debt Securities that have been
surrendered for repayment at the option of the holder, except the portion, if
any, of such Debt Securities not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indentures will provide that Company may, without the consent of the
holders of any outstanding Debt Securities, lease all or any portion of its
assets to the Lessee, or any other entity, to the extent required to maintain
the Company's status as a REIT, and neither the Lessee nor any such other entity
shall be required to assume any obligation or liability of the Company with
respect to the Debt Securities. In addition, the Indentures are expected to
provide that the Company may, without the consent of the holders of any
outstanding Debt Securities, otherwise sell, transfer or convey all or
substantially all of its assets to, or consolidate with or merge with or into,
any other entity; provided that (a) either the Company shall be the continuing
entity, or the successor entity (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received the
transfer of such assets is organized under the laws of any domestic jurisdiction
and assumes the Company's obligations to pay principal of (premium, if any) and
interest, if any, on all of the Debt Securities and the due and punctual
performance and observance of all of the covenants and conditions contained in
each Indenture; (b) immediately after giving effect to such transaction and
treating any indebtedness that becomes an obligation of the Company
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or any subsidiary as a result thereof as having been incurred by the Company or
such subsidiary at the time of such transaction, no event of default under the
Indentures, and no event which, after notice or the lapse of time, or both,
would become such an event of default, shall have occurred and be continuing;
and (c) an officers' certificate and legal opinion covering such conditions
shall be delivered to each Trustee.
CERTAIN COVENANTS
Existence. Except as permitted under "-- Merger, Consolidation or Sale of
Assets," the Indentures will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence.
Maintenance of Properties. The Indentures will require the Company to
cause all of its material properties used or useful in the conduct of its
business or the business of any subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment,
and will make or cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that the
Company and its subsidiaries shall not be prevented from selling, leasing or
otherwise disposing of their properties for value in the ordinary course of
business.
Limitations on Liens. The Indenture will provide that the Company may not,
nor may it permit any subsidiary to, issue, assume or guarantee evidences of
indebtedness for money borrowed which are secured by any mortgage, security
interest, pledge or lien ("mortgage") of or upon any principal property or of or
upon any shares of stock or evidences of indebtedness for borrowed money issued
by any subsidiary that owns principal property and owned by the Company or any
subsidiary, whether owned at the date of the Indenture or thereafter acquired,
without effectively providing that the principal amount of the Debt Securities
from time to time outstanding shall be secured equally and ratably by (or at the
option of the Company, prior to) such mortgage, except that this restriction
will not apply to (i) mortgages for taxes or other governmental charges either
not yet delinquent or the nonpayment of which is being contested in good faith
by appropriate proceedings; mortgages comprising landlord's liens or liens of
carriers, warehousemen, mechanics or materialmen incurred in the ordinary course
of business for sums not yet due and payable or which are being contested in
good faith by appropriate proceedings; and any other mortgages incurred or
created in the ordinary course of business not arising in connection with
indebtedness that do not materially impair the use or value of the assets of the
Company and its subsidiaries; (ii) mortgages existing on the date of the
Indenture; (iii) mortgages on any property existing at the time of its
acquisition; (iv) mortgages on property of a corporation existing at the time
such corporation is merged into or consolidated with, or disposes of
substantially all its properties (or those of a division) to, the Company or a
subsidiary; (v) mortgages on property of a corporation, shares of capital stock
or debt of any corporation existing at the time such corporation first becomes a
subsidiary; (vi) mortgages securing indebtedness of a subsidiary to the Company
or to another subsidiary; (vii) mortgages to secure the cost of acquisition,
construction, development or substantial repair, alteration or improvement of
property if the commitment to extend the credit secured by any such mortgage is
obtained within 12 months after the later of the completion or the placing in
operation of the acquired, constructed, developed or substantially repaired,
altered or improved property; (viii) mortgages securing current indebtedness;
(ix) any extension, renewal or replacement (or successive extensions, renewals
or replacements), in whole or in part, of any mortgage referred to in clauses
(i) through (viii), provided, however, that the principal amount of indebtedness
secured thereby and not otherwise authorized by said clauses (i) to (viii),
inclusive, shall not exceed the principal amount of indebtedness, plus any
premium or fee payable in connection with any such extension, renewal or
replacement, so secured at the time of such extension, renewal or replacement;
(x) mortgages in favor of the United States or any State thereof, or any
department, agency or instrumentality or political subdivision of
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the United States or any State thereof, to secure partial progress, advance or
other payments pursuant to any contract or statute or to secure any indebtedness
incurred for the purpose of financing all or any part of the purchase price or
the cost of constructing or improving the property subject to such mortgages;
(xi) mortgages arising out of a final judgment for the payment of money
aggregating not in excess of $10,000,000 or mortgages related to any legal
proceeding being contested in good faith by appropriate proceedings, provided
that the enforcement of any lien has been stayed; and (xii) easements or similar
encumbrances, the existence of which do not materially impair the use of the
property subject thereto. However, the Company or any subsidiary may issue,
assume or guarantee indebtedness secured by mortgages which would otherwise be
subject to the foregoing restriction in an aggregate amount which, together with
all other such indebtedness outstanding does not at the time exceed the
limitations set forth in the Company's Charter.
Additional Covenants. Any additional covenants of the Company with respect
to any series of Debt Securities will be set forth in the Prospectus Supplement
relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture will provide that if an Event of Default shall have occurred
and be continuing with respect to a series of Debt Securities or if certain
indebtedness in excess of $25,000,000 for money borrowed by the Company shall
have been accelerated, then either the Trustee or the holders of not less than
25% in outstanding principal amount of the Debt Securities of such series may
declare to be due and payable immediately the principal amount of such Debt
Securities, together with interest, if any, accrued thereon.
Under the Indenture, an Event of Default with respect to each series of
Debt Securities will be any one of the following events: (a) default for 30 days
in payment of any interest due with respect to any Debt Security of such series;
(b) default in payment of principal of any Debt Security of such series when
due; (c) default for 90 days after notice to the Company by the Trustee or by
holders of not less than 25% in principal amount of the Debt Securities then
outstanding of such series in the performance of any other covenant for the
benefit of such Debt Securities of such series; and (d) certain events of
bankruptcy, insolvency and reorganization.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of a default with respect to a series of Debt Securities, give to the
holders of the Debt Securities of such series notice of such default known to
it, unless cured or waived; provided that, except in the case of default in the
payment of principal or interest, if any, in respect of any of the Debt
Securities of such series, the Trustee will be protected in withholding such
notice if it in good faith determines that the withholding of such notice is in
the interests of the holders of the Debt Securities of such series. The term
"default" for the purpose of this provision means any event which is, or after
notice or lapse of time, or both, would become, an Event of Default.
The Indenture contains a provision entitling the Trustee, subject to the
duty of the Trustee during the continuance of an Event of Default to act with
the required standard of care, to be indemnified by the holders of the Debt
Securities of such series before proceeding to exercise any right or power under
the Indenture at the request of such holders. The Indenture provides that the
holders of a majority in outstanding principal amount of the Debt Securities of
such series may, subject to certain exceptions, on behalf of the holders of the
Debt Securities of such series direct the time, method and place of conducting
proceedings for remedies available to the Trustee, or exercising any trust or
power conferred on the Trustee.
The Indenture includes a covenant that the Company will file annually with
the Trustee a certificate of no default, or specifying any default that exists.
In certain cases, the holders of a majority in outstanding principal amount
of the Debt Securities of a given series may on behalf of the holders of the
Debt Securities of such series rescind a declaration of acceleration or waive,
as to the Debt Securities of such series, any past default or
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Event of Default relating to the Debt Securities of such series, except a
default not theretofore cured in payment of the principal of or interest, if
any, on any of such Debt Securities of such series or in respect of a provision
which under the Indenture cannot be modified or amended without the consent of
the holder of each Debt Security of such series.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES OR STOCKHOLDERS
No director, officer, employee or stockholder of the Company, as such,
shall have any liability for any obligations of the Company under any Debt
Securities, under any Indenture relating thereto or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder of
Debt Securities by accepting the same, waives and releases all such liability.
This waiver and release is part of the consideration for the issuance of such
Debt Securities. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the SEC that such a waiver is
against public policy.
MODIFICATION OF THE INDENTURE
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the holders of not less than a majority in principal
amount of all outstanding Debt Securities issued under such Indenture affected
by such modification or amendment; provided, however, that no such modification
or amendment may, without the consent of the holder of each of the Debt
Securities affected thereby, (a) change the stated maturity of any installment
of the principal of (premium, if any) or interest, if any, on any such Debt
Securities; (b) reduce the principal amount of, the amount of any premium
payable on the redemption of, or the rate or amount of any interest on, any such
Debt Securities, or reduce the amount of principal of any Original Issue
Discount Securities that would be due and payable upon declaration of
acceleration of the maturity thereof or would be provable in bankruptcy, or
adversely affect any right of repayment of the holder of any such Debt
Securities; (c) change the place of payment, or the coin or currency, for
payment of principal of (premium, if any) or interest on any such Debt
Securities; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Securities; (e) reduce the
above-stated percentage of outstanding Debt Securities of any series necessary
to modify or amend the applicable Indenture, to waive compliance with certain
provisions thereof or certain defaults and consequences thereunder or to reduce
the quorum or voting requirements set forth in the applicable Indenture; or (f)
modify any of the foregoing provisions or any of the provisions relating to the
waiver of certain past defaults or certain covenants, except to increase the
required percentage to effect such action or to provide that certain other
provisions may not be modified or waived without the consent of the holders of
such Debt Securities.
The holders of a majority in aggregate principal amount of the outstanding
Debt Securities of each series may, on behalf of all holders of Debt Securities
of that series, waive, insofar as that series is concerned, compliance by the
Company with certain affirmative or restrictive covenants of the applicable
Indenture.
Modifications and amendments of an Indenture will be permitted to be made
by the Company and the respective Trustee thereunder without the consent of any
holder of Debt Securities for any of the following purposes: (i) to evidence the
succession of another person to the Company, and the assumption by any such
successor of the covenants of the Company herein and in the Securities; (ii) to
add to the covenants of the Company, for the benefit of the holders of the
Securities of any one or more series of Securities (and if such covenants are to
be for the benefit of less than all series of Securities, stating that such
covenants are expressly being included solely for the benefit of such series),
or to surrender any right or power herein conferred upon the Company; (iii) to
add any additional Events of Default for the benefit of the holders of all or
any series of Securities (and if such Events of Default are to be for the
benefit of less than all series of Securities, stating that such Events of
Default are expressly being included solely for the benefit of such series);
(iv) to add to or
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change any of the provisions of this Indenture to such extent as shall be
necessary to permit or facilitate the issuance of Securities in bearer form,
registrable or not registrable as to principal and with or without interest
coupons, or to permit or facilitate the issuance of Securities in uncertificated
form; (v) to cure any ambiguity, to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising under
this Indenture, provided that such action shall not adversely affect the
interests of the holders of the Securities of any series in any material
respect; (vi) to modify, eliminate or add to the provisions of this Indenture to
such extent as shall be necessary to effect the qualification of this Indenture
under TIA, or under any similar federal statute hereafter enacted, and to add to
this Indenture such other provisions as may be expressly permitted by TIA,
excluding, however, the provisions referred to in Section 316(a)(2) of TIA or
any corresponding provision in any similar federal statute hereafter enacted;
(vii) to provide for the issuance under this Indenture of Securities in the form
only of an entry or entries in the Security Register and without delivery
thereof in any form (including all appropriate notification and publication and
other provisions), and to provide for exchangeability of such Securities with
the Securities of the same series issued hereunder; (viii) to set forth the
forms and terms (including, without limitation, additional covenants and changes
in or eliminations of covenants previously set forth in this Indenture) of any
one or more series of Securities not previously issued; (ix) to add to, change
or eliminate any of the provisions of this Indenture in respect of one or more
series of Securities, provided, however, that any such addition, change or
elimination shall become effective only when there is no Security outstanding of
any series authorized prior to the execution of such supplemental indenture
which is entitled to the benefit of such provision; (x) to evidence and provide
for the acceptance of appointment hereunder by a successor Trustee with respect
to the Securities of one or more series and to add to or change any of the
provisions of this Indenture as shall be necessary to provide for or facilitate
the administration of the trusts hereunder by more than one Trustee; or (xi) to
supplement any of the provisions of this Indenture to such extent as shall be
necessary to permit or facilitate the defeasance and discharge of any series of
Securities; provided, however, that any such action shall not adversely affect
the interests of the holders of Securities of such series or any other series of
Securities in any material respect.
The Indentures will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Securities
that shall be deemed to be outstanding shall be the amount of the principal
thereof that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of any Debt Securities denominated in a foreign currency that shall be deemed
Outstanding shall be the U.S. dollar equivalent, determined as of the issue date
of such Debt Securities, of the principal amount thereof (or, in the case of an
Original Issue Discount Securities, the U.S. dollar equivalent on the issue date
of such Debt Securities of the amount determined as provided in (i) above),
(iii) the principal amount of an indexed security that shall be deemed
outstanding shall be the principal face amount of such indexed security at
original issuance, unless otherwise provided with respect to such indexed
security pursuant such Indenture, and (iv) Debt Securities owned by the Company
or any other obligor upon the Debt Securities or any affiliate of the Company or
of such other obligor shall be disregarded.
The Indentures will contain provisions for convening meetings of the
holders of Debt Securities of a series. A meeting will be permitted to be called
at any time by the applicable Trustee, and also, upon request, by the Company or
the holders of at least 10% in principal amount of the outstanding Debt
Securities of such series, in any such case upon notice given as provided in
such Indenture. Except for any consent that must be given by the holder of each
of the Debt Securities affected by certain modifications and amendments of an
Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present may be adopted by the affirmative vote
of the holders of a majority in principal amount of the outstanding Debt
Securities of that series;
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provided, however, that, except as referred to above, any resolution with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the holders of a
specified percentage, which is less than a majority, in principal amount of the
outstanding Debt Securities of a series may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the holders of such specified percentage in principal amount of the outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of holders of Debt Securities of any series duly held in accordance with
an Indenture will be binding on all holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be persons holding or representing a majority in principal amount
of the outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the holders of not less than a specified percentage in principal
amount of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, the Indentures will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver or other action that such Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or by the holders of
such series and one or more additional series: (i) there shall be no minimum
quorum requirement for such meeting, (ii) the principal amount of the
outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under such Indenture and (iii) any such action may be taken by
the written consent, without a meeting, of the holders of the requisite
percentage in principal amount of the outstanding Debt Securities.
DEFEASANCE
The Company will be discharged from any and all obligations in respect of
Debt Securities of a series (except for certain obligations to register the
transfer or exchange of Debt Securities, to replace stolen, lost or mutilated
Debt Securities, to maintain paying agencies and hold monies for payment in
trust and to pay the principal of and interest, if any, on Debt Securities),
upon the irrevocable deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations which through the payment of interest and principal
thereof in accordance with their terms will provide money in an amount
sufficient to pay any installment of principal and interest, if any, in respect
of Debt Securities of such series on the dates on which such payments are due in
accordance with the terms of the Indenture and such Debt Securities. Such a
trust may only be established if establishment of the trust would not cause any
Debt Securities of such series listed on any nationally recognized securities
exchange to be de-listed as a result thereof. Also, such establishment of such a
trust will be conditioned on the delivery by the Company to the Trustee of an
Opinion of Counsel (who may be counsel to the Company) to the effect that, based
upon applicable U.S. federal income tax law or a ruling published by the United
States Internal Revenue Service, such a defeasance and discharge will not be
deemed, or result in, a taxable event with respect to holders of Debt Securities
of such series.
The Company may also omit to comply with the restrictive covenants
described under "Limitation on Liens" above (together with certain other
covenants set forth in the Indenture) and any such omission shall not be an
Event of Default with respect to Debt Securities of a series, upon the deposit
with the Trustee, in trust, of money and/or U.S. Government Obligations which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay any
installment of principal and interest in respect of the Debt
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Securities of such series on the dates on which such payments are due in
accordance with the terms of the Indenture and such Debt Securities. The
obligations of the Company under the Indenture and such Debt Securities other
than with respect to such covenants shall remain in full force and effect. Such
a trust may only be established if establishment of the trust would not cause
any Debt Securities of such series listed on any nationally recognized
securities exchange to be de-listed as a result thereof. Also, such
establishment of such a trust will be conditioned on the delivery by the Company
to the Trustee of an Opinion of Counsel (who may be counsel to the Company) to
the effect that such a defeasance and discharge will not be deemed, or result
in, a taxable event with respect to holders of Debt Securities of such series.
In the event the Company exercises its option to omit compliance with
certain covenants as described in the preceding paragraph with respect to Debt
Securities of a series and such Debt Securities are declared due and payable
because of the occurrence of any Event of Default, then the amount of money and
U.S. Government Obligations on deposit with the Trustee will be sufficient to
pay amounts due on such Debt Securities at the time of the acceleration
resulting from such Event of Default. The Company shall in any event remain
liable for such payments as provided in such Debt Securities.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock, Preferred Stock or Debt Securities of another
series will be set forth in the applicable Prospectus Supplement relating
thereto. Such terms will include whether such Debt Securities are convertible
into shares of Common Stock, Preferred Stock or Debt Securities of another
series, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities and any restrictions on conversion, including restrictions directed
at maintaining the Company's REIT status.
PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (premium, if any) and interest, if any, on any series of Debt
Securities will be payable at the corporate trust office of the Trustee, the
address of which will be stated in the applicable Prospectus Supplement;
provided that, at the option of the Company, payments of interest may be made by
check mailed to the address of the person entitled thereto as it appears in the
applicable register for such Debt Securities or by wire transfer of funds to
such person at an account maintained within the United States.
All moneys paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Securities
which remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Securities thereafter may look only to the Company for the
payment thereof.
GLOBAL SECURITIES
Each series of Debt Securities may be represented by one or more global
securities (collectively with respect to each series, a "Global Security")
registered in the name of The Depository Trust Company (the "Depository").
Except as set forth below, a Global Security may be transferred in
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whole and not in part, only to the Depository or another nominee of the
Depository or to a successor of the Depository or its nominee.
Upon the issuance of a Global Security, the Depository will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Debt Securities represented by such Global Security to the accounts of
institutions that have accounts with the Depository or its nominee
("Participants"). The accounts to be credited will be designated by the
Underwriters, dealers or agents. Ownership of beneficial interests in a Global
Security will be limited to Participants or persons that may hold interests
through participants. Ownership of interests in such Global Security will be
shown on, and the transfer of those ownership interests will be effected only
through, records maintained by the Depository (with respect to Participants'
interests) and such Participants (with respect to the owners of beneficial
interests in such Global Security). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in a Global Security.
So long as the Depository, or its nominee, is the registered holder and
owner of such Global Security, the Depository or such nominee, as the case may
be, will be considered the sole owner and holder of the related Debt Securities
for all purposes of such Debt Securities and for all purposes under the
Indenture. Except as set forth below, owners of beneficial interests in a Global
Security will not be entitled to have the Debt Securities represented by such
Global Security registered in their names, will not receive or be entitled to
receive physical delivery of Debt Securities in definitive form and will not be
considered to be the owners or holders of any Debt Securities under the
Indenture or such Global Security.
Accordingly, each person owning a beneficial interest in a Global Security
must rely on the procedures of the Depository and, if such person is not a
Participant, on the procedures of the Participant through which such person owns
its interest, to exercise all rights of a holder of Debt Securities of a series
under the Indenture or such Global Security. The Company understands that under
existing industry practice, in the event the Company requests any action of
holders of Debt Securities of a series or an owner of a beneficial interest in a
Global Security desires to take any action that the Depository, as the holder of
such Global Security, is entitled to take, the Depository would authorize the
Participants to take such action, and that the Participants would authorize
beneficial owners owning through such Participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
The Prospectus Supplement relating to any Global Security will disclose the
terms under which any Depository may or shall take any action permitted or
required to be taken by it as the owner and holder of record of any such Global
Security.
Payment of principal and interest on notes represented by a Global Security
will be made to the Depository or its nominee, as the case may be, as the
registered owner and holder of such Global Security.
The Company expects that the Depository, upon receipt of any payment of
principal or interest, will immediately credit the accounts of the Participants
with such payment in amounts proportionate to their respective holdings in
principal amount of beneficial interest in the Global Security as shown in the
records of the Depository. Payments by Participants to owners of beneficial
interests in a Global Security held through such Participants will be governed
by standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in "street name", and
will be the responsibility of such Participants. The Company and the Trustee
will not have any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial ownership interests in a
Global Security for any Debt Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between the Depository and its Participants or
the
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relationship between such Participants and the owners of beneficial interests in
such Global Security owned through such Participants.
Unless and until it is exchanged in whole or in part for Debt Securities in
definitive form, a Global Security may not be transferred except as a whole by
the Depository to a nominee of such Depository, by a nominee of such Depository
to such Depository or another nominee of such Depository, or to a successor of
the Depository or its nominee.
Debt Securities represented by a Global Security will be exchangeable for
Debt Securities in definitive form of like tenor as such Global Security in
denominations of $1,000 and in any greater amount that is an integral multiple
thereof if (i) the Depository notifies the Company that it is unwilling or
unable to continue as Depository for such Global Security or the Depository
ceases to be a clearing agency registered under the Exchange Act, (ii) the
Company executes and delivers to the Trustee a Company Order that such Global
Security shall be so transferable, registrable and exchangeable and such
transfers shall be registrable or (iii) there shall have occurred and be
continuing an Event of Default with respect to the Debt Securities evidenced by
such Global Security. Any Global Security that is exchangeable pursuant to the
preceding sentence is exchangeable for Debt Securities issuable in authorized
denominations and registered in such names as the Depository shall direct and an
owner of a beneficial interest in a Global Security will be entitled to physical
delivery of such Security in definitive form. Subject to the forgoing, a Global
Security is not exchangeable except for a Global Security or Global Securities
of the same aggregate denominations to be registered in the name of the
Depository or its nominee.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. The Depository was created
to hold securities of Participants and to facilitate the clearance and
settlement of securities transactions among the Participants, thereby
eliminating the need for physical delivery of securities and certificates.
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations, some of which (and/or
their representatives) own the Depository. Access to the Depository's book-entry
system is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with
Participants, either directly or indirectly ("Indirect Participants"). Persons
who are not Participants may beneficially own securities held by the Depository
only through Participants or Indirect Participants. The rules applicable to the
Depository and the Participants are on file with the SEC. The Depository
currently accepts only notes denominated and payable in U.S. dollars.
DESCRIPTION OF PREFERRED STOCK
GENERAL
Under the Charter, the Company has authority to issue up to 10,000,000
shares of Preferred Stock, none of which was outstanding as of the date of this
Prospectus. Shares of Preferred Stock may be issued from time to time, in one or
more series, as authorized by the Board of Directors of the Company. Prior to
issuance of shares of each series, the Board of Directors is required by the
Maryland General Corporation Law ("MGCL") and the Company's Charter to fix for
each series, subject to the Ownership Limitation Provisions (as hereinafter
defined) of the Company's Charter, the designation, powers, preferences,
conversion, dividend, redemption, voting or other rights, and the
qualifications, limitations or restrictions thereon, as are permitted by
Maryland law (a "Designating Amendment"). The Preferred Stock will, when issued,
be fully paid and nonassessable and will have no preemptive rights. The Board of
Directors could authorize the issuance of shares of Preferred Stock with terms
and conditions that could have the effect of delaying or preventing a
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change of control or other transaction that holders of Common Stock might
believe to be in their best interests or in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their shares
over the then market price of such shares of Common Stock.
TERMS
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Charter (including the applicable
Designating Amendment) and its bylaws, as amended and restated ("Bylaws"). See
"Certain Charter, Bylaw and Statutory Provisions -- Charter and Bylaw
Provisions."
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including, without limitation:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Preferred Stock;
(4) The date from which dividends on such Preferred Stock shall accumulate,
if applicable;
(5) The provision for a sinking fund, if any, for such Preferred Stock;
(6) The provisions for redemption, if applicable, of such Preferred Stock;
(7) Any listing of such Preferred Stock on any securities exchange;
(8) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock, Preferred Stock of another
series or Debt Securities, including the conversion price (or manner of
calculation thereof);
(9) A discussion of certain federal income tax considerations relevant to a
holder of such Preferred Stock;
(10) The relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(11) Any limitations on issuance of any series of Preferred Stock ranking
senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(12) Any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT; and
(13) Any other specific terms, preferences, rights, qualifications,
limitations or restrictions applicable to such Preferred Stock.
RANKING
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, rank (i) senior to all classes or
series of Common Stock of the Company, and to all equity securities ranking
junior to such Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; (ii) on a parity with all
equity securities issued by the Company the terms of which specifically provide
that such equity securities rank on a parity with the Preferred Stock with
respect to dividend rights or rights upon liquidation, dissolution or winding up
of the Company; and (iii) junior to all equity securities issued by the Company
the terms of which specifically provide that such equity securities rank senior
to the Preferred Stock with respect to
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dividend rights or rights upon liquidation, dissolution or winding up of the
Company. The term "equity securities" does not include convertible debt
securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of assets
of the Company legally available for the payment thereof, cash dividends at such
rates and on such dates as will be set forth in the applicable Prospectus
Supplement. Each such dividend shall be payable to holders of record as they
appear on the stock transfer books of the Company on such record dates as shall
be fixed by the Board of Directors of the Company.
Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors of the Company fails
to declare a dividend payable on a dividend payment date on any series of the
Preferred Stock for which dividends are non-cumulative, then the holders of such
series of the Preferred Stock will have no right to receive a dividend in
respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to declare or pay the dividend accrued for such
period, whether or not dividends on such series are declared and paid on any
future dividend payment date.
If Preferred Stock of any series is outstanding, no dividends will be
declared or paid or set apart for payment on any capital stock of the Company of
any other series ranking, as to dividends, on a parity with or junior to the
Preferred Stock of such series, for any period, unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends have been
or contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof is set apart for such payment, on the Preferred Stock of
such series for all past dividend periods and the then current dividend period
or (ii) if such series of Preferred Stock does not have a cumulative dividend,
full dividends for the then current dividend period have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof is set apart for such payment, on the Preferred Stock of
such series.
When dividends are not paid in full (or a sum sufficient for the full
payment thereof is not so set apart) upon Preferred Stock of any series and the
shares of any other series of Preferred Stock ranking on a parity as to
dividends with the Preferred Stock of such series, all dividends declared upon
Preferred Stock of such series and any other series of Preferred Stock ranking
on a parity as to dividends with such Preferred Stock shall be declared pro rata
so that the amount of dividends declared per share of Preferred Stock of such
series and of each other series of Preferred Stock ranking on a parity as to
dividends with such Preferred Stock shall in all cases bear to each other the
same ratio that accrued dividends per share on the Preferred Stock of such
series (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such Preferred Stock does not have a cumulative
dividend) and such other series of Preferred Stock bear to each other. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on Preferred Stock of any series which may be
in arrears.
Unless all dividends then required to be paid on Preferred Stock of any
series shall have been or contemporaneously are so declared and paid, or
declared and a sum sufficient for the payment thereof is set apart for payment,
no dividends or other distributions (other than in shares of Common Stock or
other shares of capital stock ranking junior to the Preferred Stock of such
series as to dividends and upon liquidation) shall be declared or paid or set
aside for payment, upon the Common Stock or any other capital stock ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation, nor shall any shares of Common Stock or any other shares of capital
stock of the Company ranking junior to or on a parity with the Preferred Stock
of such series as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any moneys to be paid to or made
available for a sinking fund for the redemption of any such
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stock) by the Company (except by conversion into or exchange for other capital
stock of the Company ranking junior to the Preferred Stock of such series as to
dividends and upon liquidation); provided, however, that the foregoing shall not
prevent the Company from the purchase or other acquisition of any of its capital
stock for the purpose of preserving its status as a REIT.
Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred Stock
will be subject to mandatory redemption or redemption at the option of the
Company, as a whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of shares of capital stock of the Company, the terms of
such Preferred Stock may provide that, if no such shares of capital stock shall
have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Stock shall automatically and mandatorily be converted into the
applicable shares of capital stock of the Company pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless all dividends then required to be
paid on Preferred Stock of any series shall have been or contemporaneously are
declared and paid, or declared and a sum sufficient for the payment thereof set
apart for payment, (i) no shares of such series of Preferred Stock shall be
redeemed unless all outstanding shares of Preferred Stock of such series are
simultaneously redeemed and (ii); provided, however, that the foregoing shall
not prevent the Company from the purchase or acquisition of any Preferred Stock
of such series which is made pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of Preferred Stock of such
series or made for the purpose of preserving the Company's status as a REIT. In
addition, unless (i) if such series of Preferred Stock has a cumulative
dividend, full cumulative dividends on all outstanding shares of such series of
Preferred Stock have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period, and (ii) the Company
shall not purchase or otherwise acquire directly or indirectly any shares of
Preferred Stock of such series (except by conversion into or exchange for
capital stock of the Company ranking junior to the Preferred Stock of such
series as to dividends and upon liquidation); provided, however, that the
foregoing shall not prevent the purchase or acquisition of shares of Preferred
Stock of such series to preserve the REIT status of the Company or pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
shares of Preferred Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any
series are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares held
or for which redemption is requested by such holder (with adjustments to avoid
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redemption of fractional shares) or in any other equitable manner determined by
the Company that will not result in a violation of the Ownership Limitation
Provisions of the Company's Charter.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the stock transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such Preferred Stock are
to be surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and (vi) the
date upon which the holder's conversion rights, if any, as to such shares shall
terminate. If fewer than all the shares of Preferred Stock of any series are to
be redeemed, the notice mailed to each such holder thereof shall also specify
the number of shares of Preferred Stock to be redeemed from each such holder. If
notice of redemption of any Preferred Stock has been given and if the funds
necessary for such redemption have been set aside by the Company in trust for
the benefit of the holders of any Preferred Stock so called for redemption, then
from and after the redemption date dividends will cease to accrue on such shares
of Preferred Stock, such shares of Preferred Stock shall no longer be deemed to
be outstanding and all rights of the holders of such shares of Preferred Stock
will terminate, except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock or any other capital stock of the
Company ranking junior to the Preferred Stock of any series in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Stock shall be entitled to receive, out of
assets of the Company legally available for distribution to stockholders,
liquidating distributions in the amount of the liquidation preference per share,
if any, set forth in the applicable Prospectus Supplement, plus an amount equal
to all dividends accrued and unpaid thereon (which shall not include any
accumulation in respect of unpaid dividends for prior dividend periods if such
Preferred Stock does not have a cumulative dividend). After payment of the full
amount of the liquidating distributions to which they are entitled, the holders
of Preferred Stock will have no right or claim to any of the remaining assets of
the Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the legally available assets of the
Company are insufficient to pay the amount of the liquidating distributions on
all outstanding shares of Preferred Stock and the corresponding amounts payable
on all shares of other capital stock of the Company ranking on a parity with the
Preferred Stock in the distribution of assets upon any liquidation, dissolution
or winding up of the Company, then the holders of the Preferred Stock and all of
such other capital stock shall share ratably in any such distribution of assets,
in direct proportion to the full liquidating distributions to which they would
otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other shares of capital stock ranking junior to the Preferred
Stock upon liquidation, dissolution or winding up of the Company, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except (i)
as set forth below, (ii) as from time to time required by law or (iii) as
expressly provided in the Designating
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Amendment for any series of Preferred Stock and described in the applicable
Prospectus Supplement.
Unless otherwise expressly provided in the Designating Amendment for any
series of Preferred Stock and described in the applicable Prospectus Supplement,
so long as any shares of Preferred Stock of a series remain outstanding, the
Company will not, without the affirmative vote of the holders of at least
two-thirds of the shares of such series of Preferred Stock outstanding (such
series voting separately as a class), amend, alter or repeal the provisions of
the Company's Charter or the Designating Amendment for such series of Preferred
Stock, whether by merger, consolidation or otherwise (an "Event"), so as to
materially and adversely affect any right, preference, privilege or voting power
of such series of Preferred Stock or the holders thereof; provided, however,
with respect to the occurrence of any Event set forth above, so long as the
Preferred Stock remains outstanding with the terms thereof materially unchanged
(whether or not as a consequence of such Event the Company is the surviving
entity), the occurrence of any such Event shall not be deemed to materially and
adversely affect the rights, preferences, privileges or voting powers of such
series of preferred Stock or the holders thereof; and provided further that (x)
any increase in the amount of the authorized Preferred Stock or the creation or
issuance of any other series of Preferred Stock, or (y) any increase in the
amount of authorized shares of such series or of any other series of Preferred
Stock, in each case whether ranking senior to, on a parity with or junior to the
Preferred Stock of such series with respect to the payment of dividends or the
distribution of assets upon the liquidation, dissolution or winding up of the
Company, shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the Event with respect to which such vote otherwise would be required shall
be effected, all outstanding shares of such series of Preferred Stock shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into Common Stock, Preferred Stock of another series or Debt
Securities will be set forth in the applicable Prospectus Supplement relating
thereto. Such terms will include the number of shares of Common Stock or
Preferred Stock of another series or the amount of Debt Securities into which
shares of such series of Preferred Stock are convertible, the conversion price
(or manner of calculation thereof), the conversion period, provisions as to
whether conversion will be at the option of the holders of the Preferred Stock
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such series of
Preferred Stock.
RESTRICTIONS ON OWNERSHIP AND TRANSFERS
The Preferred Stock is subject to certain restrictions upon the ownership
and transfer thereof which were adopted for the purpose of enabling the Company
to preserve its status as a REIT. For a description of such restrictions, see
"Certain Charter, Bylaw and Statutory Provisions -- Charter and Bylaw
Provisions -- Restrictions on Ownership and Transfer."
TRANSFER AGENT
The transfer agent and registrar for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
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DESCRIPTION OF COMMON STOCK
The description of the Company's Common Stock set forth below describes
certain general terms and provisions of the Common Stock to which any Prospectus
Supplement may relate, including a Prospectus Supplement providing that Common
Stock will be issuable upon conversion of Debt Securities or Preferred Stock of
the Company or upon the exercise of Common Stock Warrants issued by the Company.
The following description does not purport to be complete and is qualified in
its entirety by reference to the Company's Charter and Bylaws. See "Certain
Charter, Bylaw and Statutory Provisions -- Charter and Bylaw Provisions."
GENERAL
Under the Charter, the Company has authority to issue up to 50,000,000
shares of Common Stock. Under Maryland law, stockholders generally are not
responsible for the corporation's debts or obligations. At March 11, 1996, the
Company had outstanding 22,778,492 shares of Common Stock.
TERMS
Subject to the preferential rights of any series of Preferred Stock
outstanding, the holders of Common Stock are entitled to one vote per share on
all matters voted on by stockholders, including in the election of directors.
The Company's Charter does not provide for cumulative voting in the election of
directors. Except as otherwise required by law or provided in a Designating
Amendment relating to Preferred Stock of any series, the holders of Common Stock
exclusively possess all voting power. See "Certain Charter, Bylaw and Statutory
Provisions -- Charter and Bylaw Provisions."
Subject to any preferential rights of any series of Preferred Stock
outstanding, the holders of Common Stock are entitled to such dividends, if any,
as may be declared from time to time by the Board of Directors from funds
legally available therefor and, upon liquidation, are entitled to receive, pro
rata, all assets of the Company available for distribution to such holders. All
shares of Common Stock will, when issued, be fully paid and nonassessable and
will have no preemptive rights.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Common Stock is subject to certain restrictions upon the ownership and
transfer thereof which were adopted for the purpose of enabling the Company to
preserve its status as a REIT. For a description of such restrictions and the
Maryland Anti-Takeover Statutes, see "Certain Charter, Bylaw and Statutory
Provisions -- Charter and Bylaw Provisions -- Restrictions on Ownership and
Transfer" and "-- Maryland Anti-Takeover Statutes.
EXCHANGE LISTING
The Company's Common Stock is listed on The New York Stock Exchange under
the symbol "FCH."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is SunTrust Bank,
Atlanta, Georgia.
DESCRIPTION OF COMMON STOCK WARRANTS
The following description of Common Stock Warrants does not purport to be
complete and is qualified in its entirety by reference to the description of a
particular series of Common Stock Warrants contained in an applicable Prospectus
Supplement. For information relating to the Common Stock which may be purchased
pursuant to Common Stock Warrants, see "Description of Common Stock."
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The Company may issue one or more series of Common Stock Warrants for the
purchase of Common Stock. Common Stock Warrants of any series may be issued
independently of, or together with, any Securities offered pursuant to any
Prospectus Supplement. If offered together with other Securities, Common Stock
Warrants may be attached to, or separate from, such Securities. Each series of
Common Stock Warrants will be issued under a separate warrant agreement (each a
"Warrant Agreement") to be entered into between the Company and the holder of
such Common Stock Warrants or, if the holders are expected to be numerous, a
warrant agent identified in the applicable Prospectus Supplement ("Warrant
Agent"). Any Warrant Agent, if engaged, will act solely as an agent of the
Company in connection with the Common Stock Warrants of the series specified in
the Warrant Agreement relating thereto and such Warrant Agent will not assume
any relationship or obligation of agency or trust for or with any holders or
beneficial owners of Common Stock Warrants. Further terms of the Common Stock
Warrants and the related Warrant Agreements will be set forth in the applicable
Prospectus Supplement.
The Common Stock Warrants will be subject to certain restrictions upon the
exercise, ownership and transfer thereof which were adopted for the purpose of
enabling the Company to preserve its status as a REIT. For a description of such
restrictions and the Maryland Anti-Takeover Statutes, see "Certain Charter,
Bylaw and Statutory Provisions -- Charter and Bylaw Provisions -- Restrictions
on Ownership and Transfer" and "-- Maryland Anti-Takeover Statutes.
CERTAIN CHARTER, BYLAW AND STATUTORY PROVISIONS
CHARTER AND BYLAW PROVISIONS
Restrictions on Ownership and Transfer
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding stock. Specifically,
not more than 50% in value of the Company's outstanding stock may be owned,
actually and constructively under the applicable attribution provisions of the
Code, by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year (other than the first year) or
during a proportionate part of a shorter taxable year, and the Company must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year (other than the first year) or during a proportionate part of a shorter
taxable year. See "Federal Income Tax Considerations -- Requirements for
Qualification." For the purpose of preserving the Company's REIT qualification,
the Company's Charter contains the Ownership Limitation Provisions, which
restrict the ownership and transfer of the Company's capital stock under certain
circumstances.
The "Ownership Limitation Provisions" provide that, subject to certain
exceptions specified in the Charter, no person may own, or be deemed to own by
virtue of the applicable attribution provisions of the Code, more than the
Ownership Limit of 9.9% of any class of the Company's outstanding capital stock.
The Board of Directors may, but in no event will be required to, waive the
Ownership Limit if it determines that such ownership will not jeopardize the
Company's status as a REIT. As a condition of such waiver, the Board of
Directors may require opinions of counsel satisfactory to it and/or undertakings
or representations from the applicant with respect to preserving the REIT status
of the Company. The Ownership Limitation Provisions will not apply if the Board
of Directors and the holders of 66 2/3% of the outstanding shares of capital
stock entitled to vote on such matter determine that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as a
REIT.
Any purported transfer of capital stock of the Company and any other event
that would otherwise result in any person or entity violating the Ownership
Limit will be void and of no force or effect as to that number of shares in
excess of the Ownership Limit, and the purported transferee ("Prohibited
Transferee") shall acquire no right or interest (or, in the case of any event
other than a purported transfer, the person or entity holding record title to
any such shares in excess of the
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Ownership Limit ("Prohibited Owner") shall cease to own any right or interest)
in such excess shares. In addition, if any purported transfer of capital stock
of the Company or any other event otherwise would cause the Company to become
"closely held" under the Code or otherwise fail to qualify as a REIT under the
Code (other than as a result of a violation of the requirement that a REIT have
at least 100 shareholders), then any such purported transfer will be void and of
no force or effect as to that number of shares in excess of the number that
could have been transferred without such result, and the Prohibited Transferee
shall acquire no right or interest (or, in the case of any event other than a
transfer, the Prohibited Owner shall cease to own any right or interest) in such
excess shares. Also, if any purported transfer of capital stock of the Company
or any other event would otherwise cause the Company to own, or be deemed to own
by virtue of the applicable attribution provisions of the Code, 10% or more of
the ownership interests in the Lessee or in any sublessee, then any such
purported transfer will be void and of no force or effect as to that number of
shares in excess of the number that could have been transferred without such
result, and the Prohibited Transferee shall acquire no right or interest (or, in
the case of any event other than a transfer, the Prohibited Owner shall cease to
own any right or interest) in such excess shares.
Any such excess shares described above will be transferred automatically,
by operation of law, to a trust, the beneficiary of which will be a qualified
charitable organization selected by the Company (the "Beneficiary"). The trustee
of the trust who shall be designated by the Company and be unaffiliated with the
Company and any Prohibited Owner, will be empowered to sell such excess shares
to a qualified person or entity and distribute to a Prohibited Transferee an
amount equal to the lesser of the price paid by the Prohibited Transferee for
such excess shares or the sales proceeds received by the trust for such excess
shares. In the case of any excess shares resulting from any event other than a
transfer, or from a transfer for no consideration, the trustee will be empowered
to sell such excess shares to a qualified person or entity and distribute to the
Prohibited Owner an amount equal to the lesser of the fair market value of such
excess shares on the date of such event or the sales proceeds received by the
trust for such excess shares. Prior to a sale of any such excess shares by the
trust, the trustee will be entitled to receive, in trust for the benefit of the
Beneficiary, all dividends and other distributions paid by the Company with
respect to such excess shares, and also will be entitled to exercise all voting
rights with respect to such excess shares.
Any purported transfer of capital stock of the Company that would otherwise
cause the Company to be beneficially owned by fewer than 100 persons will be
null and void in its entirety, and the intended transferee will acquire no
rights in such stock.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as may be required by
the Code or Treasury Regulations) of the outstanding shares of capital stock of
the Company must file a written notice with the Company containing the
information specified in the Charter no later than January 30 of each year. In
addition, each shareholder shall upon demand be required to disclose to the
Company in writing such information as the Company may request in order to
determine the effect, if any, of such shareholder's actual and constructive
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limit.
The Ownership Limitation Provisions may have the effect of precluding an
acquisition of control of the Company without approval of the Board of
Directors.
Staggered Board of Directors
The Charter provides that the Board of Directors will be divided into three
classes of directors, each class constituting approximately one-third of the
total number of directors and with the classes serving staggered three-year
terms. The classification of directors will have the effect of making it more
difficult for shareholders to change the composition of the Board of Directors.
The Company
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believes, however, that the longer time required to elect a majority of a
classified Board of Directors will help to ensure continuity and stability of
the Company's management and policies.
The classification provisions could also have the effect of discouraging a
third party from accumulating large blocks of the Company's stock or attempting
to obtain control of the Company, even though such an attempt might be
beneficial to the Company and its shareholders. Accordingly, shareholders could
be deprived of certain opportunities to sell their shares of Common Stock at a
higher price than might otherwise be the case.
Number of Directors; Removal; Filling Vacancies
The Charter and Bylaws provide that, subject to any rights of holders of
Preferred Stock to elect additional directors under specified circumstances, the
number of directors will consist of not less than three nor more than nine
persons, subject to increase or decrease by the affirmative vote of 80% of the
members of the entire Board of Directors. At all times a majority of the
directors shall be Independent Directors, except that upon the death, removal or
resignation of an Independent Director, such requirement shall not be applicable
for 60 days. Currently, there are seven directors, four of whom are Independent
Directors. The holders of Common Stock shall be entitled to vote on the election
or removal of directors, with each share entitled to one vote. The Charter
provides that, subject to any rights of holders of Preferred Stock, and unless
the Board of Directors otherwise determines, any vacancies will be filled by the
affirmative vote of a majority of the remaining directors, though less than a
quorum. Any director so elected may qualify as an Independent Director only if
he has received the affirmative vote of at least a majority of the remaining
Independent Directors, if any. Accordingly, the Board of Directors could
temporarily prevent any holder of Common Stock from enlarging the Board of
Directors and filling the new directorships with such shareholder's own
nominees. Any director so elected shall hold office until the next annual
meeting of shareholders.
A director may be removed with cause by the vote of the holders of a
majority of the outstanding shares of Common Stock at a special meeting of the
shareholders called for the purpose of removing him.
Limitation of Liability
The Charter provides that to the maximum extent that Maryland law in effect
from time to time permits limitation of liability of directors and officers, no
director or officer of the Company shall be liable to the Company or its
shareholders for money damages.
Indemnification of Directors and Officers
The Charter and Bylaws require the Company to indemnify its directors,
officers, employees and agents to the fullest extent permitted from time to time
by Maryland law. Maryland law permits a corporation to indemnify its directors,
officers, employees and agents against judgments, penalties, fines, settlements
and reasonable expenses (including attorneys fees) actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the corporation, unless it is established
that (i) the act or omission of the indemnified party was material to the matter
giving rise to the proceeding and the act or omission was committed in bad faith
or was the result of active and deliberate dishonesty, (ii) the indemnified
party actually received an improper personal benefit in money, property or
services, or (iii) in the case of any criminal proceeding, the indemnified party
had reasonable cause to believe that the act or omission was unlawful.
Indemnification is mandatory if the indemnified party has been successful on the
merits or otherwise in the defense of any proceeding unless such indemnification
is not otherwise permitted as provided in the preceding sentence. In addition to
the foregoing, a court of competent jurisdiction, under certain circumstances,
may order indemnification if it determines that the person is fairly and
reasonably entitled thereto in view of all the relevant circumstances, unless
the
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proceeding was an action by or in the right of the corporation or involved a
determination that the person received an improper personal benefit.
Amendment
The Charter may be amended by the affirmative vote of the holders of a
majority of the outstanding shares of the Common Stock, with the shareholders
voting as a class with one vote per share; provided, that the Charter provision
providing for the classification of the Company's Board of Directors into three
classes may not be amended, altered, changed or repealed without the affirmative
vote of at least 80% of the members of the Board of Directors and the
affirmative vote of holders of 75% of the outstanding shares of capital stock
entitled to vote generally in the election of directors voting as a class. The
provisions relating to restrictions on transfer, designation of shares-in-trust,
shares-in-trust and ownership of the Lessee may not be amended, altered, changed
or repealed without the affirmative vote of a majority of the members of the
Board of Directors and adopted by an affirmative vote of the holders of not less
than 66 2/3% of the outstanding shares of capital stock of the Company entitled
to vote generally in the election of directors, voting together as a class.
Operations
The Company generally is prohibited from engaging in certain activities,
including incurring indebtedness, in the aggregate, in excess of 40% of the
Company's investment in hotel properties, at its cost, on a consolidated basis,
after giving effect to the Company's use of proceeds from any indebtedness, and
acquiring or holding property or engaging in any activity that would cause the
Company to fail to qualify as a REIT.
MARYLAND ANTI-TAKEOVER STATUTES
Under Sections 3-601 et seq. of the Maryland General Corporation Law,
certain "business combinations" (including a merger, consolidation, share
exchange, or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland corporation and any
person who beneficially owns 10% or more of the voting power of the
corporation's shares or an affiliate of the corporation who, at any time within
the two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then outstanding voting stock of the
corporation (an "Interested Shareholder") or an affiliate thereof are prohibited
for five years after the most recent date on which the Interested Shareholder
became an Interested Shareholder. Thereafter, any "business combination" must be
recommended by the board of directors of the corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled to cast by holders of
outstanding voting shares of the corporation and (b) 66 2/3% of the votes
entitled to be cast by holders of outstanding voting shares of the corporation
other than shares held by the Interested Shareholder with whom the business
combination is to be effected, unless, among other conditions, the corporation's
shareholders receive a minimum price (as defined under Maryland law) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for its shares. These provisions
of Maryland law do not apply, however, to business combinations that are (i)
with respect to specifically identified or unidentified existing or future
Interested Shareholders, approved or exempted by the board of directors of the
corporation prior to the time that the Interested Shareholder becomes an
Interested Shareholder, or (ii) if the original articles of incorporation of the
corporation contain a provision expressly electing not to be governed by Section
602 of the Maryland Business Combination Statute or the shareholders of the
corporation adopt a charter amendment by a vote of at least 80% of the votes
entitled to be cast by outstanding shares of voting stock of the corporation,
voting together in a single group, and 66 2/3% of the votes entitled to be cast
by persons (if any) who are not Interested Shareholders. The Board of Directors
has exempted from these provisions of Maryland law, any business combination
involving
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Mr. Feldman or Mr. Corcoran or any present or future affiliates, associates or
other persons acting in concert or as a group with Mr. Feldman or Mr. Corcoran.
Sections 3-701 et seq. of the Maryland General Corporation Law (the
"Control Share Statute") provides that "control shares" of a Maryland
corporation acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of 66 2/3% of the votes entitled to be
case on the matter, excluding shares of stock as to which the acquiring person,
officers of the corporation and directors of the corporation who are employees
of the corporation are entitled to direct or exercise the voting power in the
election of directors. "Control shares" are voting shares of stock that, if
aggregated with all other shares of stock previously acquired by that person,
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
shareholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions. Voting rights will not be denied
to "control shares" if the acquisition of such shares, as to specifically
identified or unidentified future or existing shareholders or their affiliates,
has been approved by the charter or bylaws of the corporation prior to the
acquisition of such shares.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of shareholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any shareholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to voting rights, as of
the date of the last control share acquisition or of any meeting of shareholders
at which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of the appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a control share acquisition.
The Maryland Control Share Statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by a corporation's articles
of incorporation or bylaws.
The Charter and Bylaws contain a provision exempting any and all
acquisitions of the Company's shares of capital stock from the control shares
provision of Maryland law. There can be no assurance that this provision will
not be amended or eliminated in the future.
PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement of the Partnership
("Partnership Agreement"), and the descriptions of certain provisions thereof
set forth herein, are qualified in their entirety by reference to the
Partnership Agreement, which is an exhibit to the Registration Statement of
which this Prospectus is a part.
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MANAGEMENT
The Partnership is a Delaware limited partnership and was formed pursuant
to the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Partnership ("General
Partner"), has full, exclusive and complete responsibility and discretion in the
management and control of the Partnership, and the limited partners of the
Partnership ("Limited Partners") have no authority to transact business for, or
participate in the management activities or decisions of, the Partnership.
However, any amendment to the Partnership Agreement that would (i) affect the
Redemption Rights described under "-- Redemption Rights" below, (ii) adversely
affect the Limited Partners' rights to receive cash distributions, (iii) alter
the Partnership's allocations of income, or (iv) impose on the Limited Partners
any obligations to make additional contributions to the capital of the
Partnership, requires the consent of Limited Partners holding at least a
majority of the Units.
TRANSFERABILITY OF INTERESTS
The Company may not voluntarily withdraw from the Partnership or transfer
or assign its interest in the Partnership unless the transaction in which such
withdrawal or transfer occurs results in the Limited Partners receiving property
in an amount equal to the amount they would have received had they exercised
their Redemption Rights immediately prior to such transaction, or unless the
successor to the Company contributes substantially all of its assets to the
Partnership in return for an interest in the Partnership. The Limited Partners
may not transfer their interests in the Partnership without the consent of the
Company, which the Company may withhold in its sole discretion. The Company may
not consent to any transfer that would cause the Partnership to be treated as a
separate corporation for federal income tax purposes.
CAPITAL CONTRIBUTIONS
The Company and the original Limited Partners contributed cash and certain
interests in the Company's six initial hotels to the Partnership in connection
with the Company's initial public offering of Common Stock in 1994 ("IPO").
Subsequently, the Partnership issued additional Units in exchange for cash
contributions from Promus and for interests in two additional hotels. The
Company will contribute all of the net proceeds from the sale of capital stock
to the Partnership in exchange for additional Units having distribution,
liquidation and conversion provisions substantially identical to the capital
stock so offered by the Company. As required by the Partnership Agreement,
immediately prior to a capital contribution by the Company, the Partners'
capital accounts and the Carrying Value (as that term is defined in the
Partnership Agreement) of the Partnership property shall be adjusted to reflect
the unrealized gain or unrealized loss attributable to the Partnership property
as if such items had actually been recognized immediately prior to such issuance
and had been allocated to the Partners at such time.
The Partnership Agreement provides that if the Partnership requires
additional funds at any time or from time to time in excess of funds available
to the Partnership from borrowing or capital contributions, the Company may
borrow such funds from a financial institution or other lender and lend such
funds to the Partnership on the same terms and conditions as are applicable to
the Company's borrowing of such funds. As an alternative to borrowing funds
required by the Partnership, the Company may contribute the amount of such
required funds as an additional capital contribution to the Partnership. If the
Company so contributes additional capital to the Partnership, the Company will
receive additional Units.
REDEMPTION RIGHTS
Pursuant to the Partnership Agreement, the Limited Partners are entitled to
certain rights of redemption ("Redemption Rights"), which enable them to cause
the Partnership to redeem their interests in the Partnership (subject to certain
restrictions) in exchange for shares of Common
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Stock, cash or a combination thereof, at the election of the Company. The
Redemption Rights may not be exercised if the issuance of shares of Common Stock
by the Company, as General Partner, for any part of the interest in the
Partnership sought to be redeemed would (i) result in any person violating the
Ownership Limit contained in the Company's Charter, (ii) cause the Company to be
"closely held" within the meaning of the Code, (iii) cause the Company to be
treated as owning 10% or more of the Lessee or any sublessee within the meaning
of the Code, or (iv) otherwise cause the Company to fail to qualify as a REIT.
In any case, the Partnership or the Company (as the case may be) may elect, in
its sole and absolute discretion, to pay the Redemption Amount in cash. The
Redemption Rights may be exercised by the Limited Partners, in whole or in part
(in either case, subject to the above restrictions), at any time or from time to
time, following the satisfaction of any applicable holding period requirements.
At March 11, 1996, the aggregate number of shares of Common Stock issuable upon
exercise of the Redemption Rights by the Limited Partners was 3,105,663. The
number of shares issuable upon the exercise of the Redemption Rights will be
adjusted upon the occurrence of stock splits, mergers, consolidations or similar
pro rata share transactions, which otherwise would have the effect of diluting
the ownership interests of the Limited Partners or the shareholders of the
Company.
REGISTRATION RIGHTS
The Limited Partners have, or will have, certain rights to the registration
for resale of any shares of Common Stock held by them or received by them upon
redemption of their Units. Such rights include piggyback rights and the right to
include such shares in a registration statement that the Company is required to
cause to become effective prior to July 1, 1996. The Company is required to bear
the costs of such registration statements, exclusive of underwriting discounts,
commissions and certain other costs attributable to, and to be borne by, the
selling stockholders.
TAX MATTERS
Pursuant to the Partnership Agreement, the Company is the tax matters
partner of the Partnership and, as such, has authority to make tax elections
under the Code on behalf of the Partnership.
Profit and loss of the Partnership generally are allocated among the
partners in accordance with their respective interests in the Partnership based
on the number of Units held by the partners.
OPERATIONS
The Partnership Agreement requires that the Partnership be operated in a
manner that enables the Company to satisfy the requirements for being classified
as a REIT and to avoid any federal income tax liability.
DISTRIBUTIONS
The Partnership Agreement provides that the Partnership will distribute
cash from operations (including net sale or refinancing proceeds, but excluding
net proceeds from the sale of the Partnership's property in connection with the
liquidation of the Partnership) quarterly, in amounts determined by the Company
in its sole discretion, to the partners in accordance with their respective
percentage interests in the Partnership. Upon liquidation of the Partnership,
after payment of, or adequate provision for, debts and obligations of the
Partnership, including any partner loans, any remaining assets of the
Partnership will be distributed to all partners with positive capital accounts
in accordance with their respective positive capital account balances. If any
partner, including the Company, has a negative balance in its capital account
following a liquidation of the Partnership, it will be obligated to contribute
cash to the Partnership equal to the negative balance in its capital account.
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TERM
The Partnership will continue until December 31, 2044, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the Company as
General Partner (unless the Limited Partners elect to continue the Partnership),
(ii) the sale or other disposition of all or substantially all the assets of the
Partnership, (iii) the redemption of all limited partnership interests in the
Partnership (other than those held by the Company, if any), or (iv) the election
by the General Partner.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal tax income tax
considerations relevant to a prospective holder of Securities. The discussion
does not purport to deal with all aspects of taxation that may be relevant to a
holder of Securities in light of their personal investment or tax circumstances,
or to certain types of shareholders (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, foreign corporations,
and persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its initial taxable year ended December
31, 1994. The Company currently is qualified as a REIT and intends to continue
to operate in such manner, but no assurance can be given that the Company will
operate in a manner so as to remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof, all of which are subject to change prospectively or
retrospectively. Hunton & Williams has acted as counsel to the Company in
connection with the Offering.
The Company believes that it qualified to be taxed as a REIT for its
taxable years ended December 31, 1994 and December 31, 1995, and that its
organization and current and proposed method of operation will enable it to
continue to qualify as a REIT for its taxable year ended December 31, 1996 and
in the future. Prior to issuing Securities, the Company expects to obtain an
opinion of Hunton & Williams as to its REIT qualification. Investors should be
aware, however, that opinions of counsel are not binding upon the Service or any
court. It must be emphasized that the opinion of Hunton & Williams will be based
on various assumptions and will be conditioned upon certain representations made
by the Company as to factual matters, including representations regarding the
nature of the Company's properties and the future conduct of its business. Such
factual assumptions and representations are described below in this discussion
of "Federal Income Tax Considerations." Moreover, such continued qualification
and taxation as a REIT depends upon the Company's ability to meet on a
continuing basis, through actual annual operating results, distribution levels,
and stock ownership, the various qualification tests imposed under the Code
discussed below. Hunton & Williams will not review the Company's compliance with
those tests on a
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continuing basis. Accordingly, no assurance can be given that the actual results
of the Company's operation for any particular taxable year will satisfy such
requirements. For a discussion of the tax consequences of failure to qualify as
a REIT, see "-- Failure to Qualify."
If the Company continues to qualify for taxation as a REIT, it generally
will not be subject to federal corporate income taxes on its net income that is
distributed currently to the shareholders. That treatment substantially
eliminates the "double taxation" (i.e., taxation at both the corporate and
shareholder levels) that generally results from investment in a corporation.
However, the Company will be subject to federal income tax in the following
circumstances. First, the Company will be taxed at regular corporate rates on
any undistributed REIT taxable income, including undistributed net capital
gains. Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference. Third, if the Company
has (i) net income from the sale or other disposition of "foreclosure property"
that is held primarily for sale to customers in the ordinary course of business
or (ii) other nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income. Fourth, if the Company has
net income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if the Company acquires any asset from a
C corporation (i.e., a corporation generally subject to full corporate-level
tax) in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the disposition of
such asset during the 10-year period beginning on the date on which such asset
was acquired by the Company, then to the extent of such asset's "built-in gain"
(i.e., the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such time),
such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in gain" assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year ("5/50 Rule"); (vii)
that makes an election to be a REIT (or has made such election for a previous
taxable year) and satisfies all relevant filing and other administrative
requirements established by the Service that must be met in order to elect and
to maintain REIT status; (viii) that uses a calendar year for federal income tax
purposes and complies with the recordkeeping requirements of the Code and
Treasury Regulations promulgated thereunder; and (ix) that meets certain other
tests, described below, regarding the nature of its income and assets. The Code
provides that conditions (i) to (iv), inclusive, must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of 12
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months, or during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made by the Company to be taxed as a REIT. The Company has
issued and will issue sufficient common stock in sufficient diversity of
ownership to allow it to satisfy requirements (v) and (vi). In addition, the
Company's Charter provides for restrictions regarding transfer of the Securities
that are intended to assist the Company in continuing to satisfy the share
ownership requirements described in (v) and (vi) above.
For purposes of determining stock ownership under the 5/50 Rule, a (i)
supplement unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual, and (ii) stock held by a trust
that is a qualified trust under Code section 401(a) is treated as held by the
trust's beneficiaries in proportion to their actuarial interests in the pension
trust for purposes of the 5/50 Rule.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the character
of the assets and gross income of the partnership will retain the same character
in the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income and asset tests, described below. Thus, the
Company's proportionate share of the assets, liabilities and items of income of
the Partnership (and any lower tier partnership) will be treated as assets and
gross income of the Company for purposes of applying the requirements described
herein.
Income Tests
In order for the Company to maintain its qualification as a REIT, there are
three requirements relating to the Company's gross income that must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. Third, not more than 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year may be gain from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) dealer property that is not
foreclosure property, and (iii) certain real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property).
The specific application of these tests to the Company is discussed below.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts of sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the Company, or an owner of 10% or more of the Company, directly
or constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the Company generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an
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"independent contractor" from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant."
Pursuant to the Percentage Leases, the Lessee leases from the Partnership
and the Subsidiary Partnerships (as defined below) the land, buildings,
improvements, furnishings, and equipment comprising the Current Hotels for a
10-year period. The Percentage Leases provide that the Lessee is obligated to
pay to the Partnership or the Subsidiary Partnership (i) the greater of a fixed
rent ("Base Rent") or a percentage rent ("Percentage Rent") (collectively,
"Rents") and (ii) certain other amounts, including interest accrued on any late
payments or charges ("Additional Charges"). The Percentage Rent is calculated by
multiplying fixed percentages by the gross suite revenues and food and beverage
rent revenues for each of the Hotels in excess of certain levels. The Base Rent
accrues and is required to be paid monthly. Although Percentage Rent is due
quarterly, the Lessee will not be in default for non-payment of Percentage Rent
due in any calendar year if the Lessee pays, within 90 days of the end of the
calendar year, the excess of Percentage Rent due and unpaid over the Base Rent
with respect to such year. The Partnership and the Subsidiary Partnerships will
enter into leases with the Lessee with respect to the Acquisition Hotels that
are substantially similar to the Percentage Leases with respect to the Current
Hotels. For purposes of this section, the term "Percentage Leases" includes the
Acquisition Leases and the term "Partnership" includes the Subsidiary
Partnerships when the context requires.
In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property).
In addition, Code Section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a lease
of property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property, (ii) the service recipient controls the
property, (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property), (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract, (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient, and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
The Company believes that the Percentage Leases will be treated as true
leases for federal income tax purposes, and prior to issuing Securities, the
Company expects to obtain an opinion of Hunton & Williams as to the "true lease"
status of the Percentage Leases for federal income tax
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purposes. Such opinion will be based, in part, on the following facts: (i) the
Partnership and the Lessee intend for their relationship to be that of a lessor
and lessee and such relationship will be documented by lease agreements, (ii)
the Lessee has the right to exclusive possession and use and quiet enjoyment of
the Hotels during the term of the Percentage Leases, (iii) the Lessee bears the
cost of, and will be responsible for, day-to-day maintenance and repair of the
Hotels, other than the cost of maintaining underground utilities and structural
elements, and will dictate how the Hotels are operated, maintained, and
improved, (iv) the Lessee bears all of the costs and expenses of operating the
Hotels (including the cost of any inventory and supplies used in their
operation) during the term of the Percentage Leases (other than real and
personal property taxes, and the cost of replacement or refurbishment of
furniture, fixtures and equipment, to the extent such costs do not exceed the
allowance for such costs provided by the Partnership under each Percentage
Lease), (v) the Lessee benefits from any savings in the costs of operating the
Hotels during the term of the Percentage Leases, (vi) in the event of damage or
destruction to a Hotel, the Lessee will be at economic risk because it will be
obligated either (A) to restore the property to its prior condition, in which
event it will bear all costs of such restoration or (B) purchase the Hotel for
an amount generally equal to the Partnership's investment in the Property, (vii)
the Lessee will indemnify the Partnership against all liabilities imposed on the
Partnership during the term of the Percentage Leases by reason of (A) injury to
persons or damage to property occurring at the Hotels or (B) the Lessee's use,
management, maintenance or repair of the Hotels, (viii) the Lessee is obligated
to pay substantial fixed rent for the period of use of the Hotels, and (ix) the
Lessee stands to incur substantial losses (or reap substantial gains) depending
on how successfully it operates the Hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, any
opinion of Hunton & Williams with respect to the relationship between the
Partnership and the Lessee will be based upon all of the facts and circumstances
and upon rulings and judicial decisions involving situations that are considered
to be analogous. Opinions of counsel are not binding upon the Service or any
court, and there can be no complete assurance that the Service will not assert
successfully a contrary position. If the Percentage Leases are recharacterized
as service contracts or partnership agreements, rather than true leases, part or
all of the payments that the Partnership receives from the Lessee may not be
considered rent or may not otherwise satisfy the various requirements for
qualification as "rents from real property." In that case, the Company likely
would not be able to satisfy either the 75% or 95% gross income tests and, as a
result, would lose its REIT status.
In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel must not be greater than 15% of the Rents
received under the Percentage Lease. The Rents attributable to the personal
property in an Hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the adjusted bases of the personal property
in the Hotel at the beginning and at the end of the taxable bears to the average
of the aggregate adjusted bases of both the real and personal property
comprising the Hotel at the beginning and at the end of the such taxable year
("Adjusted Basis Ratio"). The initial adjusted basis of the personal property in
each Hotel was less than 15% of the initial adjusted bases of both the real and
personal property comprising such hotel. The basis of personal property
contained in Hotels acquired for cash was determined either by appraisals
performed by a professional appraiser, with respect to nine of the Current
Hotels acquired in connection with the initial and secondary public offerings of
the Common Stock, or by internal appraisals performed by the Company using the
same methodology employed by professional appraisers, with respect to other
Current Hotels and Acquisition Hotels. The initial adjusted basis of personal
property contained in Current Hotels acquired in exchange for Units generally
was the same as the basis of the transferor of the hotel at the time of the
transfer. The Company believes that the value of the personal property at each
Acquisition Hotel to be acquired for cash is less than 15%
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of the expected purchase price of such hotel and is performing internal
appraisals of such property using the same methodology employed by professional
appraisers that are expected to confirm such belief. However, in the event that
appraisals show that the Adjusted Basis Ratio with respect to any Acquisition
Hotel would exceed 15% for the taxable year of any acquisition, a portion of the
personal property of that hotel will be purchased or leased by the lessee and
the lease payments under the Percentage Leases will be adjusted appropriately.
In addition, the Company believes that its initial adjusted basis in the
personal property contained in each Acquisition Hotel acquired in exchange for
Units will be less than 15% of its initial adjusted basis in such Acquisition
Hotel. The Company anticipates that any additional personal property that the
Partnership acquires with a portion of the proceeds of the Offering likewise
will not cause the Adjusted Basis Ratio under any Percentage Lease to exceed
15%. Further, in no event will the Partnership acquire additional personal
property for a Hotel to the extent that such acquisition would cause the
Adjusted Basis Ratio for that hotel to exceed 15%. There can be no assurance,
however, that the Service would not assert that the personal property originally
acquired by the Partnership had a value in excess of the appraised value, or
that a court would not uphold such assertion. If such a challenge were
successfully asserted, the Company could fail the 15% Adjusted Basis Ratio as to
one or more of the Percentage Leases, which in turn potentially could cause it
to fail to satisfy the 95% or 75% gross income test and thus lose its REIT
status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages (i) are fixed at the time the Percentage Leases are entered
into, (ii) are not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(iii) conform with normal business practice. More generally, the Percentage Rent
will not qualify as "rents from real property" if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means of basing the
Percentage Rent on income or profits. Since the Percentage Rent is based on
fixed percentages of the gross revenues from the Hotels that are established in
the Percentage Leases, and the Company represented that the percentages (i) will
not be renegotiated during the terms of the Percentage Leases in a manner that
has the effect of basing the Percentage Rent on income or profits and (ii)
conform with normal business practice, the Percentage Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company represented that, with respect to other hotel
properties that it acquires in the future, it will not charge rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage of gross revenues,
as described above).
A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of the Lessee. The constructive ownership rules generally provide that, if
10% or more in value of the stock of the Company is owned, directly or
indirectly, by or for any person, the Company is considered as owning the
ownership interests in any lessee that are owned, directly or indirectly, by or
for such person. The Company does not currently own, directly or constructively,
any ownership interest in the Lessee. In addition, the Partnership Agreement
provides that a redeeming Limited Partner will not be permitted to redeem Units
(unless the Company elects, in its sole discretion, to pay cash in lieu of
Common Stock) to the extent that the acquisition of Common Stock by such partner
would result in the Company being treated as owning, directly or constructively,
10% or more of the ownership interests of the Lessee or of the ownership
interests in any sublessee. Thus, the Company should never own, directly or
constructively, 10% or more of the Lessee or any sublessee. Furthermore, the
Company represents that, with respect to other hotel properties that it acquires
in the future, it will not rent any property to a Related Party Tenant. However,
because the Code's constructive ownership rules for purposes of the Related
Party Tenant rules are broad and it is not possible to monitor continually
direct and indirect transfers of shares of Common Stock, no absolute assurance
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can be given that such transfers or other events of which the Company has no
knowledge will not cause the Company to own constructively 10% or more of the
Lessee at some future date.
A fourth requirement for qualification of the Rents as "rents from real
property" is that the Company cannot furnish or render noncustomary services to
the tenants of the Hotels, or manage or operate the Hotels, other than through
an independent contractor from whom the Company itself does not derive or
receive any income. Provided that the Percentage Leases are respected as true
leases, the Company should satisfy that requirement because the Partnership is
not performing any services other than customary ones for the Lessee.
Furthermore, the Company represents that, with respect to other hotel properties
that it acquires in the future, it will not perform noncustomary services with
respect to the tenant of the property. As described above, however, if the
Percentage Leases are recharacterized as service contracts or partnership
agreements, the Rents likely would be disqualified as "rents from real property"
because the Company would be considered to furnish or render services to the
occupants of the Hotels and to manage or operate the Hotels other than through
an independent contractor who is adequately compensated and from whom the
Company derives or receives no income.
If the Rents do not qualify as "rents from real property" because the rents
attributable to personal property exceed 15% of the total Rents for a taxable
year, the portion of the Rents that is attributable to personal property will
not be qualifying income for purposes of either the 75% or 95% gross income
tests. Thus, if the Rents attributable to personal property, plus any other
nonqualifying income, during a taxable year exceeds 5% of the Company's gross
income during the year, the Company would lose its REIT status. If, however, the
Rents do not qualify as "rents from real property" because either (i) the
Percentage Rent is considered based on income or profits of the Lessee, (ii) the
Company owns, directly or constructively, 10% or more of the Lessee, or (iii)
the Company furnishes noncustomary services to the Lessee (other than through a
qualified independent contractor) or manages or operates the Hotels, none of the
Rents would qualify as "rents from real property." In that case, the Company
likely would lose its REIT status because it would be unable to satisfy either
the 75% or 95% gross income tests.
In addition to the Rents, the Lessee is required to pay to the Partnership
the Additional Charges. To the extent that the Additional Charges represent
either (i) reimbursements of amounts that the Lessee is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such amounts,
the Additional Charges should qualify as "rents from real property." To the
extent, however, that the Additional Charges represent interest that is accrued
on the late payment of the Rents or the Additional Charges, the Additional
Charges should not qualify as "rents from real property," but instead should be
treated as interest that qualifies for the 95% gross income test.
The Company believes that the Rents and the Additional Charges will qualify
as "rents from real property" for purposes of the 75% and 95% gross income
tests, except to the extent that the Additional Charges represent interest that
is accrued on the late payment of the Rents or the Additional Charges (which
will be qualifying gross income for the 95% test but not the 75% test).
Moreover, prior to issuing Securities, the Company expects to obtain an opinion
from Hunton & Williams, based on the foregoing discussion, that the Rents and
the Additional Charges will qualify as "rents from real property" for purposes
of the 75% and 95% gross income tests except to the extent the Additional
Charges represent interest that is accrued on the late payment of the Rents or
the Additional Charges. As described above, the opinion of Hunton & Williams
will be based upon an analysis of all the facts and circumstances and upon
rulings and judicial decisions involving situations that are considered to be
analogous, as well as representations by the Company and assumptions that are
described above and which will be set out in the federal income tax opinion of
Hunton & Williams. Opinions of counsel are not binding upon the Service or a
court. Accordingly, there can be no complete assurance that the Service will not
assert successfully a contrary position and, therefore, prevent the Company from
qualifying as a REIT.
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The term "interest," as defined for purposes of the 75% gross income test,
generally does not include any amount received or accrued (directly or
indirectly) if the determination of such amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "interest" solely by reason of
being based on a fixed percentage or percentages of receipts or sales.
Furthermore, to the extent that interest from a loan that is based on the
residual cash proceeds from sale of the property securing the loan constitutes a
"shared appreciation provision" (as defined in the Code), income attributable to
such participation feature will be treated as gain from the sale of the secured
property.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. All inventory required in the operation
of the Hotels will be purchased by the Lessee or its designee as required by the
terms of the Percentage Leases. Accordingly, the Company and the Partnership
believe that no asset owned by the Company or the Partnership is held for sale
to customers and that a sale of any such asset will not be in the ordinary
course of business of the Company or the Partnership. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to the particular property. Nevertheless, the Company
and the Partnership will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be characterized as
prohibited transactions. Complete assurance cannot be given, however, that the
Company or the Partnership can comply with the safe-harbor provisions of the
Code or avoid owning property that may be characterized as property held
"primarily for sale to customers in the ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualified
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will qualify under the 75% and 95% gross income tests. "Foreclosure
property" is defined as any real property (including interests in real property)
and any personal property incident to such real property (i) that is acquired by
a REIT as the result of such REIT having bid in such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness that such property secured and (ii)
for which such REIT makes a proper election to treat such property as
foreclosure property. However, a REIT will not be considered to have foreclosed
on a property where such REIT takes control of the property as a
mortgagee-in-possession and cannot receive any profit or sustain any loss except
as a creditor of the mortgagor. Under the Code, property generally ceases to be
foreclosure property with respect to a REIT on the date that is two years after
the date such REIT acquired such property (or longer if an extension is granted
by the Secretary of the Treasury). The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the first day (i) on
which a lease is entered into with respect to such property that, by its terms,
will give rise to income that does not qualify under the 75% gross income test
or any amount is received or accrued, directly or indirectly, pursuant to a
lease entered into on or after such day that will give rise to income that does
not qualify under the 75% gross income test, (ii) on which any construction
takes place on such property (other than completion of a building, or any other
improvement, where more than 10% of the construction of such building or other
improvement was completed before default became imminent) or (iii) which is more
than 90 days after the day on which such property was acquired by the REIT and
the property is used in a trade or business that is conducted by the REIT (other
than through an independent contractor from whom the REIT itself does not derive
or receive any income). As a result of the rules with respect to foreclosure
property, if the Lessee defaults on its obligations under a Percentage Lease for
a Hotel, the Company terminates the Lessee's leasehold
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interest, and the Company is unable to find a replacement Lessee for such Hotel
within 90 days of such foreclosure, gross income from hotel operations conducted
by the Company from such Hotel would cease to qualify for the 75% and 95% gross
income tests. In such event, the Company likely would be unable to satisfy the
75% and 95% gross income tests and, thus, would fail to qualify as a REIT.
It is possible that, from time to time, the Company or the Partnership will
enter into hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the Company or the
Partnership enters into an interest rate swap or cap contract to hedge any
variable rate indebtedness incurred to acquire or carry real estate assets, any
periodic income or gain from the disposition of such contract should be
qualifying income for purposes of the 95% gross income test. Furthermore, any
such contract would be considered a "security" for purposes of applying the 30%
gross income test. To the extent that the Company or the Partnership hedges with
other types of financial instruments or in other situations, it may not be
entirely clear how the income from those transactions will be treated for
purposes of the various income tests that apply to REITs under the Code. The
Company intends to structure any hedging transactions in a manner that does not
jeopardize its status as REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions will be generally available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "-- Taxation of the Company," even if those relief provisions
apply, a tax would be imposed with respect to the net income attributable to the
excess of 75% or 95% of the Company's gross income over its qualifying income in
the relevant category, whichever is greater. No such relief is available for
violations of the 30% income test.
Asset Tests
The Company, at the close of each quarter of its taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," and, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the mortgage balance does
not exceed the value of the associated real property, and shares of other REITs.
For purposes of the 75% asset requirement, the term "interest in real property"
includes an interest in land and improvements thereon, such as buildings or
other inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold in real property, and
an option to acquire real property (or a leasehold in real property). Second, of
the investments not included in the 75% asset class (the "25% asset
requirement"), the value of any one issuer's securities owned by the Company may
not exceed 5% of the value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting securities (except for
its ownership interest in the Partnership and Subsidiary Partnership or the
stock of a subsidiary with respect to which it has held 100% of the stock at all
times during the subsidiary's existence).
For purposes of the asset requirements, the Company will be deemed to own
its proportionate share of the assets of the Partnership (and any Subsidiary
Partnership), rather than its general
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partnership interest in the Partnership. The Company represents that, at all
relevant times, (i) at least 75% of the value of its total assets will be
represented by real estate assets, cash and cash items (including receivables),
and government securities and (ii) it will not own any securities that do not
satisfy the 25% asset requirement (except for the stock of subsidiaries with
respect to which it has held 100% of the stock at all times during the
subsidiary's existence). In addition, the Company represents that it will not
acquire or dispose, or cause the Partnership to acquire or dispose, of assets in
the future in a way that would cause it to violate either asset requirement. The
Company believes that it satisfies both asset requirements for REIT status, and
prior to issuing Securities, the Company expects to obtain an opinion of Hunton
& Williams that, based on the foregoing, the Company will satisfy both asset
requirements for REIT status.
If the Company should fail inadvertently to satisfy the asset requirements
at the end of a calendar quarter, such a failure would not cause it to lose its
REIT status if (i) it satisfied all of the asset tests at the close of the
preceding calendar quarter and (ii) the discrepancy between the value of the
Company's assets and the standards imposed by the asset requirements either did
not exist immediately after the acquisition of any particular asset or was not
wholly or partly caused by such an acquisition (i.e., the discrepancy arose from
changes in the market values of its assets). If the condition described in
clause (ii) of the preceding sentence were not satisfied, the Company still
could avoid disqualification by eliminating any discrepancy within 30 days after
the close of the calendar quarter in which it arose.
Distribution Requirements
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and (B)
95% of the net income (after tax), if any from foreclosure property, minus (ii)
the sum of certain items of noncash income. Such dividends must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before the Company timely files its tax return for such year and if paid on or
before the first regular dividend payment after such declaration. To the extent
that the Company does not distribute all of its net capital gain or distributes
at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it
will be subject to tax thereon at regular ordinary and capital gains corporate
tax rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% nondeductible excise tax on the excess of such required distribution over
the amounts actually distributed. The Company has made, and intends to continue
to make, timely distributions sufficient to satisfy all annual distribution
requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, under the
Percentage Leases, the Lessee may defer payment of the excess of the Percentage
Rent over the Base Rent for a period of up to 90 days after the end of the
calendar year in which such payment was due. In that case, the Partnership still
would be required to recognize as income the excess of the Percentage Rent over
the Base Rent in the calendar quarter to which it relates. Further, it is
possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciated property which exceeds its
allocable share of cash attributable to that sale. Therefore, the Company may
have less cash available for distribution than is necessary to meet its annual
distribution requirements to avoid corporate income tax or the excise tax
imposed on certain undistributed income. In such a situation, the Company may
find it necessary to arrange for short-term (or possibly long-term) borrowings
or to raise funds through the issuance of additional shares of common or
preferred stock.
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Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirements for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
Recordkeeping Requirement
Pursuant to applicable Treasury Regulations, in order to be able to elect
to be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its shareholders designed to disclose
the actual ownership of its outstanding stock. The Company intends to comply
with such requirements.
Partnership Anti-Abuse Rule
The Treasury Department has issued a final regulation ("Anti-Abuse Rule"),
under the partnership provisions of the Code ("Partnership Provisions"), that
would authorize the Service, in certain abusive transactions involving
partnerships, to disregard the form of the transaction and recast it for federal
tax purposes as the Service deems appropriate. The Anti-Abuse Rule would apply
where a partnership is formed or availed of in connection with a transaction (or
series of related transactions) a principal purpose of which is to reduce
substantially the present value of the partners' aggregate federal tax liability
in a manner inconsistent with the intent of the Partnership Provisions. The
Anti-Abuse Rule states that the Partnership Provisions are intended to permit
taxpayers to conduct joint business (including investment) activities through a
flexible economic arrangement that accurately reflects the partners' economic
agreement and clearly reflects the partners' income without incurring an
entity-level tax. The purposes for structuring a transaction involving a
partnership are determined based on all of the facts and circumstances,
including a comparison of the purported business purpose for a transaction and
the claimed tax benefits resulting from the transaction. A reduction in the
present value of the partners' aggregate federal tax liability through the use
of a partnership does not, by itself, establish inconsistency with the intent of
the Partnership Provisions. The Anti-Abuse Rule is generally effective for all
transactions relating to a partnership occurring on and after May 12, 1994.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partner interest. The
limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. The
Company believe that the Anti-Abuse Rule will not have any adverse impact on its
ability to qualify as a REIT, and prior to issuing Securities, the Company
expects to obtain an opinion of Hunton & Williams that, based on the foregoing,
the Anti-Abuse Rule will not have any adverse impact on the Company's ability to
qualify as a REIT. However, because the Anti-Abuse Rule is extraordinarily broad
in scope and is applied based on an analysis of all of the facts and
circumstances, there can be no assurance that the Service will not attempt to
apply the Anti-Abuse Rule to the Company. If the conditions of the Anti-Abuse
Rule are met, the Service is authorized to take appropriate enforcement action,
including disregarding the Partnership for federal tax purposes or treating one
or more of its partners as nonpartners. Any such action potentially could
jeopardize the Company's status as a REIT.
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FAILURE TO QUALIFY
If the Company fails to qualify for taxation as REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Dividends to the shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current and accumulated
earnings and profits, all dividends to shareholders will be taxable as ordinary
income and, subject to certain limitations of the Code, corporate distributees
may be eligible for the dividends received deduction. Unless entitled to relief
under specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
the Company ceased to qualify as a REIT. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief.
OTHER TAX CONSEQUENCES
The Company and Securities holders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they own property, transact business or reside. The state and local tax
treatment of the Company and Securities holders may not conform to the federal
income tax consequences discussed above. CONSEQUENTLY, PROSPECTIVE HOLDERS OF
SECURITIES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE
AND LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY.
TAX ASPECTS OF THE PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Partnership and the
Partnership's investment in certain "Subsidiary Partnerships." The discussion
does not cover state or local tax laws or any federal tax laws other than income
tax laws.
Classification as a Partnership
The Company is entitled to include in its income its distributive share of
the Partnership's income (including the Partnership's distributive share of
income of a Subsidiary Partnership) and to deduct its distributive share of the
Partnership's losses (including the Partnership's distributive share of losses
of a Subsidiary Partnership) only if the Partnership (and each Subsidiary
Partnership) is classified for federal income tax purposes as a partnership
rather than as a corporation or an association taxable as a corporation. An
organization will be classified as a partnership rather than as a corporation
for federal income tax purposes if the entity (i) is treated as a partnership
under Treasury regulations, effective January 1, 1997, relating to entity
classification (the "Check-the-Box Regulations") and (ii) is not a "publicly
traded" partnership. Pursuant to the Check-the-Box Regulations, an
unincorporated organization with at least two members may elect to be classified
either as an association or as a partnership. If such an entity fails to make an
election, it generally will be treated as a partnership for federal income tax
purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnership (and Subsidiary
Partnerships), will be respected for all periods prior to January 1, 1997 if (i)
the entity had a reasonable basis for its claimed classification, (ii) the
entity and all members of the entity recognized the federal tax consequences of
any changes in the entity's classification within the 60 months prior to January
1, 1997, and (iii) neither the entity nor any member of the entity was notified
in writing on or before May 8, 1996 that the classification of the entity was
under examination. A "publicly traded" partnership is a partnership whose
interests are traded on an established securities market or are readily tradable
on a secondary market (or the substantial equivalent thereof). A publicly traded
partnership will be treated as a corporation for federal income tax purposes
unless at least 90% of such partnership's gross income for a taxable year
consists of "qualifying income" under section 7704(d) of the Code, which
generally includes any income that
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is qualifying income for purposes of the 95% gross income test applicable to
REITs (the "90% Passive-Type Income Exception"). See "Federal Income Tax
Considerations -- Requirements for Qualification -- Income Tests."
The U.S. Treasury Department has issued regulations effective for taxable
years beginning after December 31, 1995 (the "PTP Regulations") that provide
limited safe harbors from the definition of a publicly traded partnership.
Pursuant to one of those safe harbors (the "Private Placement Exclusion"),
interests in a partnership will not be treated as readily tradable on a
secondary market or the substantial equivalent thereof if (i) all interests in
the partnership were issued in a transaction (or transactions) that was not
required to be registered under the Securities Act of 1933, as amended, and (ii)
the partnership does not have more than 100 partners at any time during the
partnership's taxable year. In determining the number of partners in a
partnership, a person owning an interest in a flow-through entity (i.e., a
partnership, grantor trust, or S corporation) that owns an interest in the
partnership is treated as a partner in such partnership only if (a)
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (b) a principal purpose of the use of the flow-
through entity is to permit the partnership to satisfy the 100-partner
limitation. The Partnership and each Subsidiary Partnership qualify for the
Private Placement Exclusion. If the Partnership or a Subsidiary Partnership is
considered a publicly traded partnership under the PTP Regulations because it is
deemed to have more than 100 partners, the Partnership or Subsidiary Partnership
should not be treated as a corporation because it should be eligible for the 90%
Passive-Type Income Exception.
The Company believes that the Partnership and each Subsidiary Partnership
will be treated as partnerships for federal income tax purposes and not as
corporations or associations taxable as corporations. The Partnership has not
requested, and does not intend to request, a ruling from the Service that it or
any Subsidiary Partnership will be classified as a partnership for federal
income tax purposes. However, prior to issuing Securities, the Company expects
to obtain an opinion of Hunton & Williams that, based on the provisions of the
Partnership Agreement, the partnership agreements of each Subsidiary
Partnership, certain factual assumptions, and certain representations, the
Partnership and each Subsidiary Partnership will be treated for federal income
tax purposes as partnerships and not as corporations or associations taxable as
corporations. Unlike a tax ruling, an opinion of counsel is not binding upon the
Service, and no assurance can be given that the Service will not challenge the
status of the Partnership or a Subsidiary Partnership as a partnership for
federal income tax purposes. If such challenge were sustained by a court, the
Partnership or Subsidiary Partnership would be treated as a corporation for
federal income tax purposes, as described below. In addition, the opinion of
Hunton & Williams will be based on existing law, which is to a great extent the
result of administrative and judicial interpretation. No assurance can be given
that administrative or judicial changes would not modify the conclusions
expressed in the opinion.
Effect of Failure to Qualify as a Partnership
If for any reason the Partnership or a Subsidiary Partnership were taxable
as a corporation, rather than as a partnership, for federal income tax purposes,
the Company would not be able to satisfy the income and asset requirements for
REIT status. See "-- Requirements for Qualification -- Income Tests" and
"-- Requirements for Qualification -- Asset Tests." In addition, any change in
the Partnership's or a Subsidiary Partnership's status for tax purposes might be
treated as a taxable event, in which case the Company might incur a tax
liability without any related cash distribution. See "-- Requirements for
Qualification -- Distribution Requirements." Further, items of income and
deduction of the Partnership and the Subsidiary Partnership would not pass
through to its partners, and its partners would be treated as shareholders for
tax purposes. Consequently, the Partnership or a Subsidiary Partnership would be
required to pay income tax at corporate tax rates on its net income, and
distributions to its partners would constitute distributions that would not be
deductible in computing the Partnership's or a Subsidiary Partnership's taxable
income.
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Income Taxation of the Partnership, the Subsidiary Partnerships and their
Partners
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of the Partnership's income, gains,
losses, deductions, and credits for any taxable year of the Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution of the Partnership. Such
items will include the Partnership's available share of income, gain, loss,
deductions and credits of the Subsidiary Partnerships.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under Section 704(b) of the Code if they do
not comply with the provisions of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
The Partnership's allocations of taxable income and loss of the Partnership and
the Subsidiary Partnerships are intended to comply with the requirements of
Section 704(b) of the Code and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department recently
issued regulations requiring partnerships to use a "reasonable method" for
allocating items affected by Section 704(c) of the Code and outlining certain
two reasonable allocation methods.
Under the Partnership Agreement, depreciation or amortization deductions of
the Partnership generally will be allocated among the partners in accordance
with their respective interests in the Partnership, except to the extent that
Section 704(c) of the Code requires that the Company receive a
disproportionately large share of such deductions. In addition, gain on sale of
a Hotel will be specially allocated to the Limited Partners to the extent of any
"built-in" gain with respect to such Hotel for federal income tax purposes. The
application of Section 704(c) to the Partnership is not entirely clear, however,
and may be affected by Treasury Regulations promulgated in the future. Similar
provisions are included in the partnership agreements of the Subsidiary
Partnerships.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally (i) equals the amount of cash
and the basis of any other property contributed to the Partnership by the
Company, (ii) is increased by (A) its allocable share of the Partnership's
income and (B) its allocable share of indebtedness of the Partnership and (iii)
is reduced, but not below zero, by the Company's allocable share of (A) the
Partnership's loss and (B) the amount of cash distributed to the Company and by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Partnership. Similar rules apply to the Partnership's tax
basis in the Subsidiary Partnerships.
If the allocation of the Company's distributive share of the Partnership's
loss would reduce the adjusted tax basis of the Company's partnership interest
in the Partnership below zero, the recognition of such loss will be deferred
until such time as the recognition of such loss would not reduce the Company's
adjusted tax basis below zero. To the extent that the Partnership's
distributions, or any decrease in the Company's share of the indebtedness of the
Partnership (such decrease being considered a constructive cash distribution to
the partners), would reduce the Company's adjusted tax basis below zero, such
distributions (including such constructive distributions)
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constitute taxable income to the Company. Such distributions and constructive
distributions normally will be characterized as capital gain, and, if the
Company's partnership interest in the Partnership has been held for longer than
the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain.
Depreciation Deductions Available to the Partnership. Immediately after
the IPO, the Company made a cash contribution to the Partnership in exchange for
a general partnership interest in the Partnership. The Partnership's initial
basis in the Initial Hotels for federal income tax purposes generally is a
carryover of the basis of the previous ownership entities in the Initial Hotels
on the date of such merger. Although the law is not entirely clear, the
Partnership has depreciated such depreciable hotel property for federal income
tax purposes under the same methods used by the transferors. The Partnership's
tax depreciation deductions will be allocated among the partners in accordance
with their respective interests in the Partnership, except to the extent that
Section 704(c) of the Code requires that the Company receive a
disproportionately large share of such deductions. The Partnership plans to
depreciate, for federal income tax purposes, any depreciable hotel property
which it may acquire for cash in the future under either the modified
accelerated cost recovery system of depreciation ("MACRS") or the alternative
depreciation system of depreciation ("ADS"). The Partnership plans to use MACRS
for subsequently acquired furnishings and equipment. Under MACRS, the
Partnership generally will depreciate such furnishings and equipment over a
seven-year recovery period using a 200% declining balance method and a half-year
convention. If, however, the Partnership places more than 40% of its furnishings
and equipment in service during the last three months of a taxable year, a
mid-quarter depreciation convention must be used for the furnishings and
equipment placed in service during that year. The Partnership plans to use ADS
for the depreciation of subsequently acquired buildings and improvements. Under
ADS, the Partnership generally will depreciate such buildings and improvements
over a 40-year recovery period using a straight line method and a mid-month
convention.
To the extent that the Partnership acquires additional hotels in exchange
for Partnership Units, the Partnership's initial basis in each such hotel, for
federal income tax purposes, should be the same as the transferor's basis in
that hotel on the date of acquisition.
Sale of the Partnership's Property
Generally, any gain realized by the Partnership or the Subsidiary
Partnerships on the sale of property held for more than one year will be
long-term capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture. Any gain recognized by the Partnership
on the disposition of the Initial Hotels will be allocated first to the Limited
Partners under Section 704(c) of the Code to the extent of their "built-in gain"
on those Hotels. The Limited Partners' "built-in gain" on the Initial Hotels
sold will equal the excess of the Limited Partners' proportionate share of the
book value of those Initial Hotels over the Limited Partners' tax basis
allocable to those Initial Hotels at the time of sale. Any remaining gain
recognized by the Partnership on the disposition of the Initial Hotels will be
allocated among the partners in accordance with their respective percentage
interests in the Partnership. The Board of Directors has adopted a policy that
any decision to sell the Initial Hotels will be made by a majority of the
Independent Directors.
The Company's share of any gain realized by the Partnership or a Subsidiary
Partnership on the sale of any property held as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's or a
Subsidiary Partnership's trade or business, however, will be treated as income
from a prohibited transaction that is subject to a 100% penalty tax. See
"-- Requirements for Qualification -- Income Tests." Such prohibited transaction
income also may have an adverse effect upon the Company's ability to satisfy the
income test for REIT status. See "-- Requirements for Qualification -- Income
Tests" above.
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PLAN OF DISTRIBUTION
The Company may sell Securities in or outside the United States through
underwriters or dealers, directly to one or more purchasers, through agents or
through a combination of any such methods of sale. The Prospectus Supplement
with respect to the Securities will set forth the terms of the offering of the
Securities, including the name or names of any underwriters, dealers or agents,
the initial public offering price, any underwriting discounts and other items
constituting underwriters compensation, any discounts or concessions allowed or
reallowed or paid to dealers, and any securities exchanges on which the
Securities may be listed.
Securities may be sold directly by the Company through agents designated by
the Company from time to time at fixed prices, which may be changed, or at
varying prices determined at the time of sale. Any agent involved in the offer
or sale of the Securities will be named, and any commissions payable by the
Company to such agent will be set forth, in the Prospectus Supplement relating
thereto. Unless otherwise indicated in the Prospectus Supplement, any such agent
will be acting on a best efforts basis for the period of its appointment.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities, for whom
they may act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers, and agents that participate in the distribution
of Securities may be deemed to be underwriters under the Securities Act, and any
discounts or commissions they receive from the Company and any profit on the
resale of Securities they realize may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company will be
described, in the applicable Prospectus Supplement. Unless otherwise set forth
in the Prospectus Supplement relating thereto, the obligations of the
underwriters or agents to purchase the Securities will be subject to conditions
precedent and the underwriters will be obligated to purchase all the Securities
if any are purchased. The initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock which is traded on The New York Stock Exchange
("NYSE") under the symbol "FCH". Any shares of Common Stock sold pursuant to a
Prospectus Supplement will be approved for trading, upon notice of issuance, on
the NYSE. The Company may elect to list any series of Debt Securities or
Preferred Stock on an exchange, but is not obligated to do so. It is possible
that one or more underwriters may make a market in a series of Securities, but
will not be obligated to do so and may discontinue any market making at any time
without notice. Therefore, no assurance can be given as to the liquidity of, or
the trading market for, the Securities.
Under agreements into which the Company may enter, underwriters, dealers
and agents who participate in the distribution of Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, the Company in the ordinary course of business.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states Securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and complied with.
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LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Bracewell & Patterson, L.L.P., Dallas, Texas. In addition, the description of
federal income tax consequences contained in the Prospectus under the caption
"Federal Income Tax Considerations" is based upon the opinion of Hunton &
Williams, Richmond, Virginia. Bracewell & Patterson, L.L.P. and Hunton &
Williams will rely upon the opinion of Miles & Stockbridge, a Professional
Corporation, Baltimore, Maryland, with respect to all matters involving Maryland
law.
EXPERTS
The Consolidated Financial Statements of FelCor Suite Hotels, Inc. as of
December 31, 1995 and 1994 and for the year ended December 31, 1995 and the
period from July 28, 1994 (inception of operations) through December 31, 1994;
the Financial Statements of DJONT Operations, L.L.C. as of December 31, 1995 and
1994 and for the year ended December 31, 1995 and the period from July 28, 1994
(inception of operations) through December 31, 1994; the Combined Financial
Statements of FelCor Hotels as of December 31, 1993 and July 27, 1994 and for
the year ended December 31, 1993 and the period from January 1, 1994 through
July 27, 1994; the Combined Financial Statements of the E-5 Hotels as of July
15, 1993 and for the period from January 1, 1993 through July 15, 1993; the
Combined Financial Statements of the CSS Hotels as of September 30, 1995 and the
nine months ended September 30, 1995, which includes an explanatory paragraph
related to substantial doubt about certain partnerships' abilities to continue
as a going concern; and the Financial Statements of the Cleveland Finance
Associates, L.P. and the Hilton Suites of Lexington Green included in the
Combined Financial Statements of the Additional Hotels as of December 31, 1994
and for the year then ended incorporated by reference in this Registration
Statement, have been incorporated by reference herein in reliance on the reports
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The financial statements of the Piscataway-Centennial Associates Limited
Partnership included in the Combined Financial Statements of the Additional
Hotels as of December 31, 1994 and for the year then ended incorporated by
reference in this Registration Statement have been incorporated by reference
herein in reliance on the report of Richard A. Eisner & Company, L.L.P.,
independent accountants, given on their authority as experts in accounting and
auditing.
The Combined Financial Statements of the CSS Hotels as of December 31, 1994
and for the years ended December 31, 1993 and 1994 incorporated by reference in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon (which contain
explanatory paragraphs with respect to: (1) the inability to obtain sufficient
evidential matter to conclude as to a related party transaction described in
Notes 4 and 5 to the Combined Financial Statements, and (2) the ability of
certain of the combined partnerships to continue as going concerns as described
in Note 2 to the Combined Financial Statements) incorporated by reference in
this Prospectus and Registration Statement, and are incorporated by reference in
reliance upon such reports given on their authority as experts in accountancy
and auditing. The Company accepts full responsibility for the financial
statements of the CSS Hotels incorporated by reference herein as of and for the
year ended December 31, 1994 being in accordance with generally accepted
accounting principles.
58
