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As filed with the Securities and Exchange Commission on July 31, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-8
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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FELCOR SUITE HOTELS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 75-2541756
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
545 E. JOHN CARPENTER FRWY. , SUITE 1300
IRVING, TEXAS 75062
(972) 444-4900
(Address, including ZIP Code, and telephone number, including
area code, of registrant's principal executive offices)
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FELCOR SUITE HOTELS, INC. 1994 RESTRICTED STOCK AND STOCK OPTION PLAN
FELCOR SUITE HOTELS, INC. 1995 RESTRICTED STOCK AND STOCK OPTION PLAN
(Full title of the plan(s))
----------------------
LAWRENCE D. ROBINSON
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
FELCOR SUITE HOTELS, INC.
545 E. JOHN CARPENTER FRWY., SUITE 1300
IRVING, TEXAS 75062
(972) 444-4900
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BEING REGISTERED REGISTERED (1) PER SHARE (2) PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par value..... 1,950,000 shares $31.261 $60,958,950 $18,473
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</TABLE>
(1) This Registration Statement also covers such additional number of shares of
Common Stock as may be issuable pursuant to the antidilution provisions of
the Plans.
(2) Estimated solely for the purpose of calculating the registration fee and,
pursuant to Rules 457(h)(1) and 457(c) under the Securities Act of 1933,
based upon the exercise price for outstanding stock options and the average
of the high and low sale prices of the Common Stock on the New York Stock
Exchange on July 28, 1997.
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EXPLANATORY NOTE
This Registration Statement includes a Reoffer Prospectus relating to only
those shares of Common Stock of the Registrant issued to participants pursuant
to one or more of the Plans prior to the filing of this Registration Statement.
<PAGE> 3
REOFFER PROSPECTUS
155,500 SHARES
[LOGO]
FELCOR SUITE HOTELS, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
This Prospectus relates to the offering ("Offering") by certain
present and former directors and officers of FelCor Suite Hotels, Inc.
("Company") named herein ("Selling Shareholders"), including persons who may be
deemed to be "affiliates" of the Company, as defined in Rule 405 promulgated
under the Securities Act of 1933, as amended ("Securities Act"), of up to
155,500 shares of the Company's Common Stock ("Shares") which previously have
been issued to such persons pursuant to the Company's 1994 Restricted Stock and
Stock Option Plan and/or 1995 Restricted Stock and Stock Option Plan
(collectively, "Plans"). The Selling Shareholders named herein constitute all
of the persons currently holding "restricted securities" (as that term is
defined in General Instruction C to Form S-8) heretofore issued pursuant to one
or more of the Plans, without regard to whether such persons have any present
intention of effecting resales pursuant hereto. The Offering of the Shares by
the Selling Shareholders is not subject to any underwriting agreement. The
Company will receive none of the proceeds from the sale of the Shares
hereunder. All expenses of registration incurred in connection with the
Offering are being borne by the Company, but all selling and other expenses
incurred by Selling Shareholders will be borne by such Selling Shareholders.
None of the Shares offered pursuant to this Prospectus have been registered
prior to the filing of the Registration Statement of which this Prospectus is a
part.
The Shares may be sold by the Selling Shareholders from time to time
on the New York Stock Exchange ("NYSE") or such other national securities
exchange or automated interdealer quotation system on which the Common Stock is
then listed, through negotiated transactions or otherwise at market prices
prevailing at the time of the sale or at negotiated prices. See "Plan of
Distribution."
The Common Stock of the Company is listed on the NYSE under the symbol
"FCH." The last reported sale price of Common Stock on July 28, 1997, on the
NYSE was $38-9/16 per share. To preserve its status as a real estate
investment trust ("REIT"), the Company's Charter limits the Common Stock that
may be owned by any single person or affiliated group to 9.9% of the
outstanding shares and restricts the transferability thereof under certain
circumstances.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
Each Selling Shareholder and any broker executing selling orders on
behalf of the Selling Shareholders may be deemed to be an "underwriter" within
the meaning of the Securities Act . Commissions received by any such broker
may be deemed to be underwriting commissions under the Securities Act.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JULY 31, 1997.
<PAGE> 4
THE COMPANY
FelCor Suite Hotels, Inc. is a self-administered equity REIT that, at
June 30, 1997, owned an approximate 93% general partner interest in FelCor
Suites Limited Partnership ("Partnership"), which holds the Company's
interests, directly or through subsidiaries, in 67 hotels with an aggregate of
16,486 suites and rooms in 25 states (collectively, "Hotels"). The Hotels
include 51 Embassy Suites(R) hotels, one hotel in Myrtle Beach, South Carolina,
that is in the process of conversion to an Embassy Suites hotel, nine
Doubletree Guest Suites(R) hotels, five Sheraton(R) hotels and one Hilton
Suites(R) hotel. Fifty of the 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. 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. At June 30, 1997, the Company was the largest owner of
Embassy Suites hotels in the United States.
To enable the Company to qualify as a REIT, the Partnership leases the
Hotels, and expects to lease any additional hotels acquired by it in the
future, to DJONT Operations, L.L.C., or a subsidiary thereof ("Lessee"),
pursuant to leases providing for the payment of rent based primarily upon the
suite or room 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
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.
The Company's executive offices are located at 545 E. John Carpenter
Frwy., Suite 1300, Irving, Texas 75062. The Company may also be reached by
telephone at (972) 444-4900, by facsimile transmission at (972) 444-4949, or by
e-mail addressed to [email protected]. Additional information regarding
the Company may be obtained from its Internet web site at
http://www.felcor.com.
GROWTH STRATEGY
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. The Company's senior management includes Hervey A.
Feldman, Chairman of the Board, and Thomas J. Corcoran, Jr., President and
Chief Executive Officer. 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 (the predecessor of Promus) 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. Messrs. Feldman and Corcoran
are the co-founders of the Company, which was formed through a merger with
entities originally formed in 1991. Messrs. Feldman and Corcoran, together
with other executive officers and directors of the Company, beneficially owned
an aggregate of approximately 3.5% of the Common Stock and units of limited
partner interest in the Partnership ("Units") outstanding at June 30, 1997.
The Company seeks to increase operating cash flow and enhance
shareholder value through both internal growth and acquisitions. The Company's
internal growth strategy is to utilize its asset management expertise to
improve the quality of its hotels through renovating, upgrading and
repositioning, thereby improving the revenue performance of the hotels, and to
participate, through the Percentage Leases, in any growth in revenues at its
hotels. The Company's acquisition growth strategy remains focused primarily
upon the purchase of additional existing or newly developed hotels that meet
the Company's investment criteria. The Company also may construct additional
suites, rooms and/or meeting space at certain of its hotels if market and other
conditions warrant. The Company is currently adding an aggregate of 134 suites
at two of its existing hotels and recently announced the completion of 129
suites at one of its hotels.
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The Company intends to continue to focus its acquisition strategy
primarily upon the purchase of upscale, full-service hotels (both all-suite
and traditional) that will fit within one of the Company's premium brand
owner/manager alliances with Promus, Doubletree Hotels Corporation
("Doubletree") and ITT Sheraton Corporation ("Sheraton"). The Company believes
that it has and will continue to benefit from its strong relationships with its
brand owner/managers.
STRATEGIC RELATIONSHIPS
The Company's primary business objectives are to (i) focus on sound
hotel selection, (ii) add value to its hotels through active asset management
and the strategic application of capital, and (iii) build solid working
relationships with, and be the "owner-of-choice" for, selected premium,
full-service hotel brand owner/managers who are willing to commit to the
on-going success of the hotels they license/manage for the Company. The
Company currently maintains brand owner/manager relationships with Promus,
Doubletree and Sheraton.
Promus Hotel Corporation is the owner of the Embassy Suites brand and
the manager of 50 of the Hotels. The relationship with Promus has provided the
foundation for the Company's historical growth and includes (i) a substantial
continuing equity investment by Promus in the Company, (ii) a 50% equity
interest in 12 of the Hotels, (iii) agreements to make subordinated loans to
the Lessee (in support of the Lessee's obligations under ceratin Percentage
Leases), (iv) the guaranty of a $25 million loan to the Company and (v) a
recently announced letter of intent to develop five to ten new Embassy Suites
hotels at mutually agreed locations for acquisition by new joint ventures with
the Company.
Doubletree Hotels Corporation is the owner of the nation's second
largest full-service, all-suite hotel brand, Doubletree Guest Suites, and is
(and is expected to continue as) the manager of all nine of the Company's
Hotels operated under such brand. As part of its relationship with the
Company, Doubletree (i) has acquired a 10% equity interest in three of the
Hotels, (ii) has agreed to make subordinated loans to the Lessee (in support of
the Lessee's obligations under certain Percentage Leases), (iii) has
subordinated certain of its customary fees to the Lessee's obligations under
applicable Percentage Leases and (iv) has granted the Lessee, under its
management agreements, certain performance-based termination rights.
ITT Sheraton Corporation is the owner of the Sheraton brand and one of
the world's largest hotel companies, with more than 410 hotels in over 60
countries. Under the Company's strategic relationship with Sheraton, Sheraton
has agreed (i) to provide its brand and management expertise to the Company
under long-term management contracts, (ii) to assist the Company in identifying
new hotel investment opportunities for operation under the Sheraton name, (iii)
in certain instances, to make subordinated loans to the Lessee (in support of
the Lessee's obligations under certain Percentage Leases), (iv) to subordinate
for designated periods of time certain of its customary fees to the Lessee's
obligations under applicable Percentage Leases, and (v) to grant the Lessee
termination rights in the event of certain changes of control with respect to
its parent or in the event Sheraton fails to meet certain performance-based
standards.
RISK FACTORS
In addition to the other information contained in, or incorporated by
reference into, this Prospectus, prospective investors should carefully
consider the following factors in evaluating an investment in the Shares
offered hereby.
OPERATIONAL RISKS OF RAPID GROWTH
The Company's acquisition of interests in 24 hotels during the six
months ended June 30, 1997, has resulted in a substantial increase in the
number and geographic dispersion of the hotels owned by the Company and leased
to the Lessee. The addition of the hotels recently acquired by the Company to
those previously leased to the Lessee pursuant to the Percentage Leases, may
result in increased demands upon, or require additions to, the Company'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.
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HOTEL INDUSTRY RISKS
Operating Risks
The 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 revenue)
result in decreased revenues to the Partnership under the Percentage Leases and
decreased amounts available for 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 that 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 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 distributions 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
Fifty-one of the 67 Hotels are operated under, and one is in the
process of being converted to, the Embassy Suites brand. 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
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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 Hotels are located in 25 states; however, approximately 43% of
such hotels are located in three states, with nine hotels located in each of
Florida and Texas and with 11 hotels located in California. Therefore, adverse
events or conditions that 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.
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 has a $400
million line of credit ("Line of Credit") which, at June 30, 1997, had
approximately $208 million available thereunder, although the Company is
currently negotiating with its banks to increase the Line of Credit to $550
million. The Company's Board of Directors has adopted a policy that 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 and amount 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 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 Messrs. Feldman and Corcoran 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 to which they relate. 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 and
current 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 Company's executive compensation plans have been
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
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the Lessee (representing the remaining 50% equity interest) is held by RGC
Leasing, Inc., a Nevada corporation owned by the children of Charles N.
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.
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 St. Louis (Airport), Missouri Embassy Suites hotel,
(ii) modify, dispose of or add to such existing interests or property, and
(iii) acquire new or additional interests in any hotel development on certain
undeveloped land owned by FelCor Affiliates in Irving, Texas. 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.
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 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 June 30, 1997, the Company's outstanding debt consisted of
approximately $314.6 million in principal amount outstanding, including
approximately $192.0 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 hotels, and must distribute annually at least
95% of its taxable 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, currently subject to certain
contractual limitations and a self-imposed policy limiting indebtedness to an
amount not exceeding 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 obtained 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 majority of Company's
floating rate debt bears interest at the 30-day London Interbank Offered Rate
("LIBOR") (5.72% at June 30, 1997) plus an amount between 0.45% and 1.75%.
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
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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 that may not permit
realization of the maximum return on such investments.
TAX RISKS
Failure to Qualify as a REIT
The Company operates, and will continue to operate, so as to qualify
as a REIT for federal income tax purposes. However, 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. Furthermore, 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 its shareholders. 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 alternative 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 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 for that year, (ii) 95% of its capital gain net income
for that year, and (iii) any undistributed taxable income from prior periods.
The Company has made, and intends to continue 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 distribution consists primarily of its share of cash distributions from the
Partnership. Differences in timing between taxable income and cash available
for distribution due to the 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, and will continue
to provide, 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."
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Failure of the Partnership to be Classified as a Partnership for Federal
Income Tax Purposes; Impact on REIT Status
The Company believes that the Partnership (and its subsidiaries) will
be classified as a partnership for federal income tax purposes and not as a
corporation or an association taxable as a corporation. However, 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, the Company likely would cease to qualify as
a REIT for a variety of reasons. Furthermore, the imposition of a corporate
income 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 COMMON STOCK
One of the factors that may influence the price of the Company's
Common Stock in public trading markets is the annual yield from distributions
by the Company on the Common 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.
SERIES A PREFERRED STOCK SENIOR TO COMMON STOCK IN THE PAYMENT OF DIVIDENDS AND
ON LIQUIDATION
The Series A Preferred Stock (as defined below) ranks senior to the
Common Stock with respect to the payment of dividends and amounts distributable
upon liquidation, dissolution or winding up of the Company. The holders of the
Company's outstanding Series A Preferred Stock are entitled to receive
dividends, cumulative from May 6, 1996, in an amount per share equal to the
greater of $0.4875 per quarter (equivalent to $1.95 per annum), or the cash
distributions declared or paid for the corresponding period on that number of
shares of Common Stock into which a share of Series A Preferred Stock is then
convertible. Unless all dividends then required to have been paid on the
Series A Preferred Stock have been paid or declared and set aside for payment,
no dividends may be declared or paid on the Common Stock. Similarly, in the
event of a liquidation, dissolution or winding up of the Company, holders of
Series A Preferred Stock are entitled to receive an amount per share equal to
any accrued but unpaid dividends thereon plus $25.00 before holders of Common
Stock will be entitled to any distribution on their shares.
RECENTLY ORGANIZED ENTITIES; LIMITED ASSETS AND OPERATING HISTORY
The Company, the Partnership and the Lessee were organized in 1994 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 management companies, to generate sufficient cash flow
from the operation of the Hotels to enable the Lessee to meet its rent
obligations under the Percentage Leases. Fifty of the 67 Hotels are managed on
behalf of the Lessee by Promus, nine are managed by Doubletree and five are
managed by Sheraton. The three remaining Hotels are managed on behalf of the
Lessee by other independent professional hotel management companies.
Generally, management contracts extend for a term of ten to 20 years from the
date of acquisition of the hotel to which such contract relates. 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 Hotels, the franchise licenses for the
Hotels, its rights and benefits under the Percentage Leases and the management
contracts relating to such hotels and, subject to certain limitations, its
right to borrow on a subordinated basis up to approximately $9 million from its
equity owners and/or managers. At June 30, 1997, the Lessee had a deficit in
total shareholders' equity of approximately $5.7 million. 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.
8
<PAGE> 11
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 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
similar 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. Eleven of the 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, 14 of
the Hotels are located in the coastal areas of Florida, Georgia, Louisiana,
Texas and South Carolina 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 Hotels located in California and hurricane insurance on such Florida,
Georgia, Louisiana, Texas and South Carolina 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.
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
9
<PAGE> 12
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 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 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 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
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, such Phase I audits 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 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 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 Hotels to comply
with the ADA, 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.
Increases in Property Taxes
Each 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, if properties are improved 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)
during the last half of any taxable year. For the purpose of preserving the
Company's REIT qualification, the Company's articles of incorporation, as
amended ("Charter"), prohibit ownership (taking into account applicable
constructive ownership provisions of the Code) of more than 9.9% of the
outstanding shares 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 or 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
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<PAGE> 13
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 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 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 the number of outstanding shares of any class of 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 1997, 1998 and 1999,
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 of the Company 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 Company has issued and outstanding 6,050,000 shares of its
$1.95 Series A Cumulative Convertible Preferred Stock ("Series A Preferred
Stock"), with an additional 3,950,000 shares of Preferred Stock available for
future issuance. The issuance of such Preferred Stock could have the effect of
delaying or preventing a change in control of the Company even if such a change
were to be in the shareholders' interests.
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<PAGE> 14
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 shareholder 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 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
Fifty-one of the Hotels are being operated under, and one is in the
process of being converted to, the Embassy Suites brand. Of the fifteen
remaining Hotels, nine are operated as Doubletree Guest Suites hotels under
management contracts with a subsidiary of Doubletree, five are operated as
Sheraton hotels (three of which are upscale, full-service traditional
non-suite hotels) under management contracts with a subsidiary of Sheraton and
one is, and may continue to be, operated under a franchise license as a Hilton
Suites hotel. No assurance can be provided that the Company will not be
required to make and fund significant improvements to the 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 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 June 30, 1997, the Company made, and in the future
may be obligated or deem it advisable to make, capital investments in the
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
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
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<PAGE> 15
of the franchise licenses for the 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
The Selling Shareholders will receive all of the proceeds from the
sale of Shares offered hereby. The Company will not receive any proceeds from
the sale of such Shares.
SELLING SHAREHOLDERS
The following table sets forth the name and relationship with the
Company of each Selling Shareholder and (i) the number of shares of Common
Stock beneficially owned by each Selling Shareholder as of July 15, 1997, (ii)
the maximum number of shares of Common Stock which may be offered for the
account of each Selling Shareholder under this Prospectus and (iii) the amount
and percentage of Common Stock that would be beneficially owned by each Selling
Shareholder after completion of the Offering, assuming the sale of all of the
Common Stock which may be offered hereunder. Except as otherwise noted below,
each of the Selling Shareholders has held the indicated relationship with the
Company since its inception of operations on July 28, 1994.
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
OF COMMON STOCK
OWNED AFTER
MAXIMUM NUMBER OF THE OFFERING(2)
NAME OF SHARES OWNED SHARES WHICH MAY BE ---------------------------
SELLING SHAREHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER AMOUNT PERCENTAGE
------------------- -------------------- ----------------------- ------ ----------
<S> <C> <C> <C> <C>
Hervey A. Feldman 464,315(3) 33,000 431,315(3) 1.2%
Chairman of the Board
Thomas J. Corcoran, Jr. 464,415(3) 33,000 431,415(3) 1.2%
President and
Chief Executive Officer
Nicholas R. Peterson(4) 35,000 35,000 0 *
William S. McCalmont(5) 36,000 17,500 18,500 *
Senior Vice President, Treasurer
and Chief Financial Officer
Lawrence D. Robinson(5) 36,500 14,500 22,000 *
Senior Vice President, General
Counsel and Secretary
William P. Stadler(5) 12,577 2,500 10,077 *
Vice President and Director of
Acquisition and Development
Lester C. Johnson(5) 6,000 2,000 4,000 *
Vice President, Controller and
Principal Accounting Officer
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
OF COMMON STOCK
OWNED AFTER
MAXIMUM NUMBER OF THE OFFERING(2)
NAME OF SHARES OWNED SHARES WHICH MAY BE ---------------------------
SELLING SHAREHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER AMOUNT PERCENTAGE
------------------- -------------------- ----------------------- ------ ----------
<S> <C> <C> <C> <C>
Jack Eslick(5) 12,000 2,000 10,000 *
Vice President and Director
of Asset Management
Thomas L. Wiese 14,300 2,000 12,300 *
Vice President, Assistant
Treasurer and Assistant Secretary
Richard S. Ellwood 4,500 3,500 1,000 *
Director
Richard O. Jacobson 21,200 3,500 17,700 *
Director
Thomas A. McChristy 45,900 3,500 42,400 *
Director
Donald J. McNamara 4,600 3,500 1,100 *
Director
</TABLE>
- -----------------
* Less than 1%.
(1) Beneficial ownership as of July 15, 1997, based upon information provided
by the respective Selling Shareholders. Certain of the shares reflected as
being beneficially owned were issued under the Plans subject to forfeiture
if certain conditions thereof are not satisfied.
(2) Assumes sale of the maximum number of shares of Common Stock which may be
sold hereunder, although Selling Shareholders are under no obligation known
to the Company to sell any shares of Common Stock at this time.
Percentages are based upon 36,587,733 shares outstanding as of July 15,
1997.
(3) Includes 294,915 shares issuable to FelCor, Inc. upon exercise of
redemption rights with respect to Units issued to it in connection with the
Company's initial public offering in July 1994. Messrs. Feldman and
Corcoran are the sole shareholders and directors of FelCor, Inc. and each
may be deemed to own beneficially all of the Units owned by FelCor, Inc.
(4) Mr. Peterson served as the Senior Vice President and Chief Financial
Officer of the Company from December 1994 to June 1996.
(5) The indicated officers have held such positions since the dates indicated:
Mr. McCalmont, August 1996; Mr. Robinson, May 1996; Mr. Eslick, April 1996;
Mr. Stadler, July 1995; and Mr. Johnson, October 1995.
PLAN OF DISTRIBUTION
The Shares may be sold pursuant to the offer made hereby from time to time
by the Selling Shareholders. The Selling Shareholders may sell the Shares
being offered hereby: (i) in ordinary brokerage transactions and in
transactions in which brokers solicit purchasers; (ii) in privately negotiated
direct sales or sales effected through agents not involving established trading
markets; or (iii) through transactions in put or call options or other rights
(whether exchange-listed or otherwise) established after the effectiveness of
the Registration Statement of which this Prospectus is a part. The Shares may
be sold at prices and at terms then prevailing or at prices related to the then
14
<PAGE> 17
current market price of the Common Stock on the NYSE or at other negotiated
prices. In addition, any of the Shares that qualify for sale pursuant to Rule
144 may be sold in transactions complying with such rule, rather than pursuant
to this Prospectus.
The Shares consist of Common Stock previously issued to Selling
Shareholders, pursuant to one or both of the Plans, in transactions exempt from
the registration requirements of the Securities Act.
In the case of sales of the Shares effected to or through broker-dealers,
such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Shareholders or the purchasers of
the Shares sold by or through such broker-dealers, or both. The Company has
advised the Selling Shareholders that the anti-manipulative rules of
Regulation M under the Securities Exchange Act of 1934, as amended ("Exchange
Act") may apply to their sales in the market and has informed them of the need
for delivery of copies of this Prospectus. The Company is not aware as of the
date of this Prospectus of any agreements between any of the Selling
Shareholders and any broker-dealers with respect to the sale of the shares
offered by this Prospectus. The Selling Shareholders and any broker-dealer or
other agent executing sell orders on behalf of the Selling Shareholders may be
deemed to be "underwriters" within the meaning of the Securities Act, in which
case the commissions received by any such broker-dealer or agent and profit on
any resale of the shares of Common Stock may be deemed to be underwriting
commissions under the Securities Act. The commissions received by a
broker-dealer or agent may be in excess of customary compensation. The Company
will receive no part of the proceeds from the sale of any Shares hereunder.
The Selling Shareholders will pay their costs and expenses of selling the
Shares hereunder, including commissions and discounts of underwriters, brokers,
dealers or agents, and the Company pay the costs and expenses incident to its
registration and qualification of the Shares offered hereby, including
applicable filing fees, legal and accounting fees and expenses.
The Selling Shareholders may elect to sell all, a portion or none of the
Shares offered by them hereunder.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred
Stock, par value $0.01 per share. The following summary 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."
COMMON STOCK
Under the Charter, the Company has authority to issue up to 50,000,000
shares of Common Stock. Under Maryland law, shareholders generally are not
responsible for the corporation's debts or obligations. At July 15, 1997, the
Company had outstanding 36,587,733 shares of Common Stock. In addition,
2,904,491 shares of Common Stock were issuable upon redemption of outstanding
Units by the Company.
Terms
Subject to the preferential rights of the outstanding Series A
Preferred Stock and of any other series of Preferred Stock that may be issued,
the holders of Common Stock are entitled to one vote per share on all matters
voted on by shareholders, 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 (as defined below) relating to Preferred Stock of any series, the
holders of Common Stock exclusively possess all voting power. See "--
Preferred Stock" and "Certain Charter, Bylaw and Statutory Provisions --
Charter and Bylaw Provisions."
In order to maintain its qualification as a REIT, the Company must
distribute to its shareholders at least 95% of its annual taxable income (which
does not include net capital gains). For the year ended December 31, 1996, the
Company had distributions totaling $1.92 per share, of which approximately
$1.64 per share was required to satisfy the 95% REIT distribution test for
maintaining its qualification as a REIT. For the year ended December 31, 1995,
the Company had
15
<PAGE> 18
distributions totaling $1.84 per share, of which $1.61 per share was required
to satisfy the 95% REIT distribution test. Under certain circumstances the
Company may be required to make distributions in excess of cash available for
distribution in order to meet such REIT distribution requirements. In such
event, the Company presently would expect to borrow funds, or to sell assets
for cash, to the extent necessary to obtain cash sufficient to make the
distributions required to retain its qualification as a REIT for federal income
tax purposes.
The Company paid a cash distribution for the first quarter of 1997 in
the amount of $0.50 per share on April 30, 1997 to holders of record on April
15, 1997 and has declared a second quarter dividend in the amount of $0.50 per
share, payable on July 30, 1997 to holders of record on July 15, 1997. The
Company currently anticipates that it will maintain at least the current
dividend rate for the immediate future, unless actual results of operations,
economic conditions or other factors differ from its current expectations.
Future distributions, if any, 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 Internal Revenue
Code and such other factors as the Board of Directors of the Company deem
relevant. For a discussion of the treatment of distributions to holders of
shares of Common Stock, see "Federal Income Tax Considerations" herein.
The holders of the Company's outstanding Series A Preferred Stock are
entitled to receive dividends, cumulative from May 6, 1996, in an amount per
share equal to the greater of $0.4875 per quarter (equivalent to $1.95 per
annum), or the cash distributions declared or paid for the corresponding period
on that number of shares of Common Stock into which a share of Series A
Preferred Stock is then convertible. Unless all dividends then required to
have been paid on the Series A Preferred Stock have been paid or declared and
set aside for payment, no dividends may be declared or paid on the Common
Stock. See "-- Series A Preferred Stock -- Dividends."
To the extent that cash flow from operations were to be insufficient
during any quarter, due to temporary or seasonal fluctuations in Percentage
Lease revenue, the Company expects to utilize other cash on hand or borrowings
under the Line of Credit to make such 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 under the Line of Credit.
No assurance can be given, however, that the Company will make distributions in
the future at the current rate, or at all.
The provisions of the Series A Preferred Stock prohibit the
declaration and payment of distributions on the Common Stock unless full
cumulative dividends on the Series A Preferred Stock have been or
contemporaneously are declared and paid or set aside for payment. All
preferred dividends on the Series A Preferred Stock are current. In addition,
the terms of the Company's agreements, under which the Company had incurred an
aggregate of approximately $314.7 million in debt and capital lease obligations
at June 30, 1997, further restrict the Company's ability to make distributions
with respect to it's capital stock, although the Company would be permitted, in
any event, to make distributions in amounts necessary to maintain its status as
a REIT. All of the Shares offered hereby are fully paid and nonassessable and
have no preemptive rights.
Restrictions on Ownership and Transfer
The Common Stock is subject to certain restrictions upon the ownership
and transfer thereof that 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 NYSE under the symbol "FCH."
Transfer Agent
The transfer agent and registrar for the Common Stock is SunTrust
Bank, Atlanta, Georgia.
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PREFERRED STOCK
The Charter authorizes the issuance of 10,000,000 shares of Preferred
Stock, par value $0.01 per share. Other than the Series A Preferred Stock, no
series of Preferred Stock has been authorized or issued. Prior to the
classification of unissued shares of a series, the Board of Directors is
required by the Maryland General Corporation Law ("MGCL") and the Company's
Charter to file Articles Supplementary with the Maryland Department of
Assessments and Taxation which fix for each series, subject to the Ownership
Limitation Provisions of the Company's Charter, the designation, voting powers,
set or change preferences, conversion or limitations as to other rights,
dividends, qualifications or the terms and conditions of redemption, of the
series, as are permitted by Maryland law (a "Designating Amendment"). The
Preferred Stock may be issued from time to time in one or more series, without
shareholder approval. Thus, without shareholder approval, the Company could
authorize the issuance of Preferred Stock with voting, conversion and other
rights that could dilute the voting power and other rights of the holders of
Common Stock and Series A Preferred Stock.
SERIES A PREFERRED STOCK
On June 30, 1997, there were issued and outstanding an aggregate of
6,050,000 shares of Series A Preferred Stock out of the 10,000,000 shares of
the Company's authorized Preferred Stock. This summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to the
terms and provisions of the Company's Charter, Bylaws and Articles
Supplementary to the Charter setting forth the particular terms of the Series A
Preferred Stock ("Series A Amendment"), including the definition of certain
terms, which are incorporated herein by reference.
The Series A Preferred Stock is validly issued, fully paid and
nonassessable, and the holders thereof have no preemptive rights with respect
to any shares of capital stock of the Company or any other securities of the
Company convertible into or carrying rights or options to purchase any such
shares. The Series A Preferred Stock is not subject to any sinking fund or
other obligation of the Company to redeem or retire the Series A Preferred
Stock. Unless converted or redeemed by the Company into shares of Common
Stock, the Series A Preferred Stock has a perpetual term, with no maturity.
The shares of Series A Preferred Stock are listed on the NYSE under the symbol
"FCHPrA."
Ranking
The Series A Preferred Stock rank senior to the Common Stock with
respect to the payment of dividends and amounts upon liquidation, dissolution
or winding up.
While any shares of Series A Preferred Stock are outstanding, the
Company may not authorize, create or increase the authorized amount of any
class or series of stock that ranks senior to the Series A Preferred Stock with
respect to the payment of dividends or amounts upon liquidation, dissolution or
winding up without the consent of the holders of two-thirds of the outstanding
shares of Series A Preferred Stock and all other shares of Voting Preferred
Stock, voting as a single class. However, the Company may create additional
classes of stock, increase the authorized number of shares of Preferred Stock
or issue series of Preferred Stock ranking on a parity with the Series A
Preferred Stock with respect, in each case, to the payment of dividends and
amounts upon liquidation, dissolution and winding up without the consent of any
holder of Series A Preferred Stock. See "--Voting Rights" below.
Dividends
Holders of shares of Series A Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of funds
of the Company legally available for payment, cash dividends payable in an
amount per share equal to the greater of $0.4875 per quarter (equivalent to
$1.95 per annum) or the cash dividends (determined as of the record date for
each of the respective quarterly dividend payment dates referred to below) on
the number of shares of Common Stock, or portion thereof, into which a share of
Series A Preferred Stock is then convertible. Dividends on the Series A
Preferred Stock are payable quarterly in arrears on the last calendar day of
January, April, July and October of each year (and, in the case of any accrued
but unpaid dividends, at such additional times and for such interim periods, if
any, as determined by the Board of Directors). Each such dividend will be
payable to holders of record as they appear on the stock records of the Company
at the close of business on such record dates, not exceeding 60 days preceding
the payment dates thereof, as shall be fixed by the Board of Directors of the
Company. Dividends accrue from May 6, 1996,
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<PAGE> 20
the date of original issuance of the Series A Preferred Stock. Dividends are
cumulative from such date, whether or not in any dividend period or periods
there shall be funds of the Company legally available for the payment of such
dividends. Accumulations of dividends on shares of Series A Preferred Stock do
not bear interest. Dividends payable on the Series A Preferred Stock for any
period greater or less than a full dividend period will be computed on the
basis of a 360-day year consisting of twelve 30-day months.
Except as provided in the next sentence, no dividend will be declared
or paid on any Parity Stock (as defined below) unless full cumulative dividends
have been or contemporaneously are declared and paid, or declared and a sum
sufficient for the payment thereof is set apart for such payment, on the Series
A Preferred Stock for all prior dividend periods and the then current dividend
period. If accrued dividends on the Series A Preferred Stock and any Parity
Stock for all prior dividend periods have not been paid in full, then any
dividend declared on the Series A Preferred Stock and any Parity Stock for any
dividend period will be declared ratably in proportion to accrued and unpaid
dividends on the Series A Preferred Stock and such Parity Stock.
Unless all dividends then required to be paid on the Series A
Preferred Stock and any Parity Stock have been or contemporaneously are
declared and paid, or declared and a sum sufficient for the payment thereof is
set apart for payment, the Company will not (i) declare, pay or set apart funds
for the payment of any dividend or other distribution with respect to any
Junior Stock (as defined below) or (ii) except as set forth in the following
sentence, redeem, purchase or otherwise acquire for consideration any Junior
Stock, through a sinking fund or otherwise. Notwithstanding the foregoing
limitations, the Company's may, at any time, acquire shares of its capital
stock, without regard to rank, for the purpose of preserving its status as a
REIT.
As used herein, (i) the term "dividend" does not include dividends
payable solely in shares of Junior Stock on Junior Stock, or in options,
warrants or rights to holders of Junior Stock to subscribe for or purchase any
Junior Stock, (ii) the term "Junior Stock" means the Common Stock, and any
other class of capital stock of the Company now or hereafter issued and
outstanding that ranks junior to the Series A Preferred Stock as to the payment
of dividends or amounts upon liquidation, dissolution or winding up of the
Company and (iii) the term "Parity Stock" means any other class or series of
capital stock of the Company now or hereafter issued and outstanding that ranks
equally with the Series A Preferred Stock as to the payment of dividends and
amounts upon liquidation, dissolution or winding up of the Company.
Liquidation Preference
The holders of shares of Series A Preferred Stock are entitled to
receive in the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, $25.00 per share of Series A
Preferred Stock plus an amount per share of Series A Preferred Stock equal to
all dividends (whether or not earned or declared) accrued and unpaid thereon to
the date of final distribution to such holders ("Liquidation Preference"), and
no more.
Until the holders of the Series A Preferred Stock have been paid the
Liquidation Preference in full, no payment will be made to any holder of Junior
Stock upon the liquidation, dissolution or winding up of the Company. If, upon
any liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
Series A Preferred Stock and any Parity Stock are insufficient to pay in full
the Liquidation Preference and the liquidation preference applicable with
respect to any such Parity Stock, then such assets, or the proceeds thereof,
will be distributed among the holders of shares of Series A Preferred Stock and
any such Parity Stock, ratably, in accordance with the respective amounts which
would be payable on such shares of Series A Preferred Stock and any such Parity
Stock if all amounts payable thereon were to be paid in full. Neither a
consolidation or merger of the Company with another corporation, a statutory
share exchange by the Company nor a sale, lease or transfer of all of
substantially all of the Company's assets will be considered a liquidation,
dissolution or winding up, voluntary or involuntary, of the Company.
Voting Rights
Except as indicated below, or except as otherwise from time to time
required by applicable Maryland law, the holders of shares of Series A
Preferred Stock have no voting rights.
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If six quarterly dividends (whether or not consecutive) payable on the
Series A Preferred Stock, or any Parity Stock, are in arrears, whether or not
earned or declared, the number of directors then constituting the Board of
Directors of the Company will be increased by two, and the holders of shares of
Series A Preferred Stock and any such other Parity Stock, voting together as a
single class ("Voting Preferred Shares"), will have the right to elect two
additional directors to serve on the Company's Board of Directors at an annual
meeting of shareholders or a properly called special meeting of the holders of
the Voting Preferred Shares and at each subsequent annual meeting of
shareholders until all such dividends, together with the dividends for the
current quarterly period, on the Voting Preferred Shares have been paid or
declared and set aside for payment.
The approval of two-thirds of the outstanding shares of Series A
Preferred Stock and any Parity Stock similarly affected, voting together as a
single class, will be required in order to amend the Series A Amendment to
affect materially and adversely the rights, preferences or voting power of the
holders of the Series A Preferred Stock and such Parity Stock, or to amend the
Charter to authorize, create, or increase the authorized amount of, any class
of stock having rights senior to the Series A Preferred Stock and such Parity
Stock with respect to the payment of dividends or amounts upon the liquidation,
dissolution or winding up of the Company. However, the Company may create
additional classes of Parity Stock and Junior Stock, increase the authorized
number of shares of Parity Stock and Junior Stock and issue additional series
of Parity Stock and Junior Stock, all without the consent of any holder of
Series A Preferred Stock.
Except as required by law, the holders of Series A Preferred Stock
will not be entitled to vote on any merger or consolidation involving the
Company or a sale, lease or transfer of all or substantially all of the assets
of the Company. See "-- Conversion Price Adjustments" below.
Redemption
Shares of Series A Preferred Stock are not redeemable by the Company
prior to April 30, 2001. On and after April 30, 2001, the shares of Series A
Preferred Stock will be redeemable, in whole or in part, at the option of the
Company, for (i) such number of shares of Common Stock as are issuable at a
conversion rate of 0.7752 shares of Common Stock for each share of Series A
Preferred Stock, subject to adjustment in certain circumstances, or (ii) cash
in an amount equal to the aggregate market value (determined as of the date of
the notice of redemption) of such number of shares of Common Stock. The
Company may exercise this redemption option only if for 20 trading days within
any period of 30 consecutive trading days, including the last trading day of
such period, the closing price of the Common Stock on the NYSE equals or
exceeds the Conversion Price per share, subject to adjustment in certain
circumstances. In order to exercise its redemption option, the Company must
issue a press release announcing the redemption prior to the opening of
business on the second trading day after the conditions in the preceding
sentences have been met. On the redemption date, the Company must pay on each
share of Series A Preferred Stock to be redeemed any accrued and unpaid
dividends, in arrears, for any dividend period ending on or prior to the
redemption date.
Conversion Rights
Shares of Series A Preferred Stock are convertible, in whole or in
part, at any time, at the option of the holders thereof, into shares of Common
Stock at a conversion price of $32.25 per share of Common Stock (equivalent to
a conversion rate of 0.7752 shares of Common Stock for each share of Series A
Preferred Stock), subject to adjustment as described below ("--Conversion Price
Adjustments"). The right to convert shares of Series A Preferred Stock called
for redemption will terminate at the close of business on such redemption date.
Conversion of shares of Series A Preferred Stock, or a specified
portion thereof, may be effected by delivering a certificate or certificates
evidencing such shares, together with written notice of conversion and a proper
assignment of such certificate or certificates to the Company or in blank, to
the office or agency to be maintained by the Company for that purpose.
Initially such office will be the principal corporate trust office of SunTrust
Bank, Atlanta located in Atlanta, Georgia.
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Conversion Price Adjustments
The Conversion Price is subject to adjustment upon certain events,
including (i) dividends (and other distributions) payable in Common Stock of
the Company, (ii) the issuance to all holders of Common Stock of certain rights
or warrants entitling them to subscribe for or purchase Common Stock at a price
per share less than the fair market value per share of Common Stock, (iii)
subdivisions, combinations and reclassifications of Common Stock, and (iv)
distributions to all holders of Common Stock of evidences of indebtedness of
the Company or assets (including securities, but excluding those dividends,
rights, warrants and distributions referred to above and excluding Permitted
Common Stock Cash Distributions (as herein defined), and cash dividends which
result in a payment of an equal cash dividend to the holders of the Series A
Preferred Stock). "Permitted Common Stock Cash Distributions" means cash
dividends and distributions paid with respect to the Common Stock after
December 31, 1995, not in excess of the sum of the Company's cumulative
undistributed net earnings at December 31, 1995, plus the cumulative amount of
funds from operations, as determined by the Board of Directors on a basis
consistent with the financial reporting practices of the Company, after
December 31, 1995, minus the cumulative amount of dividends accrued or paid on
the Series A Preferred Stock or any other class of Preferred Stock after
January 1, 1996. In addition to the foregoing adjustments, the Company will be
permitted to make such reductions in the Conversion Price as it considers to be
advisable in order that any event treated for federal income tax purposes as a
dividend of stock or stock rights will not be taxable to the holders of the
Common Stock, or, if that is not possible, to diminish any income taxes that
are otherwise payable because of such event.
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 9.9% of
any class of the Company's outstanding capital stock (the "Ownership Limit").
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 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
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<PAGE> 23
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 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.
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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, provided, however, that in no event
shall the number of directors be less than the minimum required by the MGCL.
At all times a majority of the directors shall be Independent Directors, as
defined by the Company's Charter, except that upon the death, removal or
resignation of an Independent Director, such requirement shall not be
applicable for 60 days. As of July 15, 1997, there were seven directors, four
of whom were 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 shareholder
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. Additionally, the Charter
and the MGCL provide that if shareholders of any class of capital stock of the
Company are entitled separately to elect one or more directors, such directors
may not be removed except by the affirmative vote of a majority of all of the
shares of such class or series entitled to vote for such directors.
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 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 entitled to vote on the
matter after the directors have adopted a resolution proposing the amendment
and submitted the resolution to the shareholders at either an annual or special
meeting, 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
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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 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 MGCL, certain "business
combinations" (including a merger, consolidation, share exchange, or, in
certain circumstances, an asset transfer of 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) two-thirds 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
provision 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 3-602 of the MGCL 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 two-thirds of the votes entitled to be cast by persons (if
any) who are not Interested Shareholders. The Charter has exempted from these
provisions of Maryland law, any business combination involving 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 MGCL (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 two-thirds 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
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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. If the foregoing exemption in the
bylaws is rescinded, the Maryland Control Share Statute could have the effect
of discouraging offers to acquire the Company and increasing the difficulty of
consummating any such offer.
PARTNERSHIP AGREEMENT
The following summary of the 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.
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.
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CAPITAL CONTRIBUTION
The Company and the original Limited Partners contributed cash and
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 additional hotels. The Company
has contributed, and will continue to 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 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 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 July 15, 1997, the aggregate
number of shares of Common Stock issuable upon exercise of the redemption
rights by the Limited Partners was 2,904,491. 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 the 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 the registration statement of which
this Prospectus is a part. 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
shareholders. See "Selling Shareholders."
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.
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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.
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 Common Stock. The
discussion does not purport to deal with all aspects of taxation that may be
relevant to a holder of Common Stock 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 SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE COMMON STOCK 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
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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 tax counsel to the Company in
connection with the Offering and the Company's election to be taxed as a REIT.
The Company believes that it qualified to be taxed as a REIT for its
taxable years ended December 31, 1994 through December 31, 1996, 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, 1997 and
in the future. Continued qualification and taxation as a REIT depend upon the
Company's ability to meet on a continuing basis, through actual annual
operating results, distribution levels, and stock ownership, the various
qualification tests imposed under the Code discussed below. 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 tax 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 an 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 undistributed 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 an amount equal to (i) the gross income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test multiplied by (ii) a fraction intended to reflect the
Company's profitability. 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 ten-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. See "--Pending Tax
Legislation."
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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 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
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 Common Stock 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.
The Company currently does not have any corporate subsidiaries but it
may have corporate subsidiaries in the future. Code section 856(i) provides
that a corporation that is a "qualified REIT subsidiary" shall not be treated
as a separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of which
has been held by the REIT at all times during the period that such corporation
was in existence. Thus, in applying the requirements described herein, any
"qualified REIT subsidiaries" acquired or formed by the Company will be
ignored, and all assets, liabilities, and items of income, deduction, and
credit of such subsidiaries will be treated as assets, liabilities and items of
income, deduction, and credit of the Company.
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 its subsidiary partnerships (the "Subsidiary
Partnerships") 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
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from such real property or temporary investments, and from dividends, other
types of interest, and gain from the sale or disposition of Common Stock, 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)
Common Stock 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 "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 Hotels for a
ten-year period. The Percentage Leases provide that the Lessee is obligated to
pay to the 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. For purposes of this section, 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
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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. Such belief is 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 dictates 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. 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 basis 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 in
Hotels acquired for cash was determined either by appraisals performed by a
professional appraiser, or by internal appraisals performed by the Company
using the same methodology employed by professional appraisers. The initial
adjusted basis of 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. 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 such
Hotel
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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
exceed the Adjusted Basis Ratio as to one or more of the Hotels, 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 has represented 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 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 has represented 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.
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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 income that is nonqualifying income for purposes of the 95% gross
income test, 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 test.
In addition to the Rents, the Lessee is required to pay to the
Partnership and Subsidiary Partnerships 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 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
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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
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 might be unable to satisfy
the 75% and 95% gross income tests.
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. See "--Pending Tax Legislation."
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
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
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issuer's outstanding voting securities (except for its ownership interest in
the Partnership and Subsidiary Partnerships 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 tests, the Company will be deemed to own its
proportionate share of the assets of the Partnership (and Subsidiary
Partnerships), rather than its general partnership interest in the Partnership.
The Company has represented that, at all relevant times, (i) at least 75% of
the value of its total assets has been and will be represented by real estate
assets, cash and cash items (including receivables), and government securities
and (ii) it does not and will not own any securities that do not qualify for
the 75% asset test (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 has represented 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 test. The Company believes
that it satisfies both asset tests for REIT status.
If the Company should fail inadvertently to satisfy the asset tests 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 tests arose from
changes in the market values of its assets and was not wholly or partly caused
by an acquisition of one or more nonqualifying 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 has
complied and intends to continue 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 authorizes 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
applies 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 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 believes that the Anti-Abuse Rule will not have any
adverse impact on its 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.
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. Distributions 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 distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless
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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.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of the Company's current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by such U.S. shareholders as ordinary income and will not be
eligible for the dividends received deduction generally available to
corporations. For purposes of determining whether distributions to the
Company's shareholders are made out of current or accumulated earnings and
profits, the Company's earnings and profits are allocated first to the
Preferred Stock and then allocated to the Common Stock. As used herein, the
term "U.S. shareholder" means a holder of Common Stock that for U.S. federal
income tax purposes is (i) a citizen or resident of the United States, (ii) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) an
estate whose income from sources without the United States is includible in
gross income for U.S. federal income tax purposes regardless of its connection
with the conduct of a trade or business within the United States, or (iv) any
trust with respect to which (A) a U.S. court is able to exercise primary
supervision over the administration of such trust and (B) one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust. Distributions that are designated as capital gain dividends will be
taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which a shareholder has held his Common Stock. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income.
Distributions in excess of the Company's current and accumulated
earnings and profits will not be taxable to a shareholder to the extent that
they do not exceed the adjusted basis of the shareholder's Common Stock, but
rather will reduce the adjusted basis of such stock. To the extent that such
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a shareholder's Common Stock, such distributions will be
included in income as long-term capital gain (or short-term capital gain if the
Common Stock has been held for one year or less) assuming the Common Stock is a
capital asset in the hands of the shareholder. In addition, any distribution
declared by the Company in October, November, or December of any year and
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the distribution is actually paid by
the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns
any net operating losses or capital losses of the Company. Instead, such
losses would be carried over by the Company for potential offset against its
future income (subject to certain limitations). Taxable distributions from the
Company and gain from the disposition of the Common Stock will not be treated
as passive activity income and, therefore, shareholders generally will not be
able to apply any "passive activity losses" (such as losses from certain types
of limited partnerships in which the shareholder is a limited partner) against
such income. In addition, taxable distributions from the Company generally
will be treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Common Stock (or
distributions treated as such) will be treated as investment income only if the
shareholder so elects, in which case such capital gains will be taxed at
ordinary income rates. The Company will notify shareholders after the close of
the Company's taxable year as to the portions of the distributions attributable
to that year that constitute ordinary income, return of capital, and capital
gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of
the Common Stock by a shareholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Stock has been held for
more than one year and otherwise as short-term capital gain or loss. However,
any loss upon a sale or exchange of Common Stock by a shareholder who has held
such stock for six months or less (after applying certain holding period rules)
will
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be treated as a long-term capital loss to the extent of such distributions from
the Company required to be treated by such shareholder as long-term capital
gain. All or a portion of any loss realized upon a taxable disposition of the
Common Stock may be disallowed if other Common Stock is purchased within 30
days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order
for gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is
39.6%, and the tax rate on net capital gains applicable to individuals is 28%.
Thus, the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital or ordinary may affect the deductibility of capital losses. Capital
losses not offset by capital gains may be deducted against an individual's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years. See "Pending Tax
Legislation."
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and to the Service
the amount of distributions paid during each calendar year, and the amount of
tax withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (ii) provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with the applicable requirements of
the backup withholding rules. A shareholder who does not provide the Company
with his correct taxpayer identification number also may be subject to
penalties imposed by the Service. Any amount paid as backup withholding will
be creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any shareholders who fail to certify their nonforeign status to the Company.
The Service issued proposed regulations in April 1996 regarding the backup
withholding rules as applied to Non-U.S. Shareholders. The proposed
regulations would alter the technical requirements relating to backup
withholding compliance and are proposed to be effective for distributions made
after December 31, 1997. See "--Taxation of Non-U.S. Shareholders" herein.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject
to taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by the Company to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of Common Stock with debt, a portion of
its income from the Company will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions
from the Company as UBTI. In addition, in certain circumstances, a pension
trust that owns more than 10% of the Company's stock is required to treat a
percentage of the dividends from the Company as UBTI (the "UBTI Percentage").
The UBTI Percentage is the gross income derived by the Company from an
unrelated trade or business (determined as if the Company were a pension trust)
divided by the gross income of the Company for the year in which the dividends
are paid. The UBTI rule applies to a pension trust holding more than 10% of
the Company's stock only if (i) the UBTI Percentage is at least 5%, (ii) the
Company qualifies as a REIT by reason of the modification of the 5/50 Rule that
allows the beneficiaries of the pension trust to be treated as holding stock of
the Company in proportion to their actuarial interests in the pension trust,
and (iii) either (A) one pension trust
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owns more than 25% of the value of the Company's stock or (B) a group of
pension trusts individually holding more than 10% of the value of the Company's
stock collectively owns more than 50% of the value of the Company's stock.
However, the Ownership Limit should prevent any Exempt Organization from owning
more than 10% of the value of the Company's stock.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresidents alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
has been made herein to provide more than a summary of such rules. PROSPECTIVE
NON U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by the Company of U.S. real property interests and
are not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from an investment in the Common Stock is treated as
effectively connected with a Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch
profits tax in the case of a Non-U.S. Shareholder that is a non-U.S.
corporation). The Company expects to withhold U.S. income tax at the rate of
30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the Company or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that
the distribution is effectively connected income. The Service issued proposed
regulations in April 1996 that would modify the manner in which the Company
complies with the withholding requirement.
Distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a shareholder to the extent that
such distributions do not exceed the adjusted basis of the shareholder's Common
Stock, but rather will reduce the adjusted basis of such stock. To the extent
that such distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Shareholder's shares of Common
Stock, such distributions will give rise to tax liability if the Non-U.S.
Shareholder otherwise would be subject to tax on any gain from the sale or
disposition of his shares of Common Stock, as described below. Because it
generally cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. However, a Non-U.S. Shareholder
can file a claim for refund with the Service for the overwithheld amount to the
extent it is determined subsequently that a distribution was, in fact, in
excess of the current and accumulated earnings and profits of the Company.
In August 1996, the U.S. Congress passed the Small Business Job
Protection Act of 1996, which requires the Company to withhold 10% of any
distribution in excess of its current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of U.S.
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
U.S. real property interests are taxed to a Non-U.S. Shareholder as if such
gain were effectively connected with a U.S. business. Non-U.S. Shareholders
thus would be taxed at the normal capital gain rates applicable to U.S.
shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax
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in the case of nonresident alien individuals). Distributions subject to FIRPTA
also may be subject to a 30% branch profits tax in the hands of a non-U.S.
corporate shareholder not entitled to treaty relief or exemption. The Company
is required to withhold 35% of any distribution that is designated by the
Company as a capital gains dividend. The amount withheld is creditable against
the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his shares of
Common Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by non-U.S. persons. Because the shares of Common
Stock are publicly traded, no complete assurance can be given that the Company
is or will be a "domestically controlled REIT." In addition, a Non-U.S.
Shareholder that owns, actually and constructively, 5% or less of the Company's
shares throughout a specified "look-back" period will not recognize gain on the
sale of his shares under FIRPTA if the shares are traded on an established
securities market. Gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (i) investment in the Common Stock is effectively connected with
the Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. Shareholders with
respect to such gain, or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and certain other conditions apply, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's capital
gains. If the gain on the sale of Common Stock were to be subject to taxation
under FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment
as U.S. Shareholders with respect to such gain (subject to applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals, and the possible application of the 30% branch
profits tax in the case of non-U.S. corporations).
OTHER TAX CONSEQUENCES
The Company and holders of Common Stock 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 holders of Common Stock may not conform to the
federal income tax consequences discussed above. CONSEQUENTLY, PROSPECTIVE
HOLDERS OF COMMON STOCK 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 AND SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Partnership and
the 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 entity 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.
In general, under the Check-the-Box Regulations, an unincorporated
entity 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
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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. The Partnership and Subsidiary Partnerships intend to
continue to be treated as partnerships under the Check-the-Box Regulations. In
addition, the Company has represented that neither the Partnership nor a
Subsidiary Partnership will elect to be treated as an association taxable as a
corporation for federal income tax purposes under the Check-the-Box
Regulations.
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 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 Company believes that the Partnership and
Subsidiary Partnerships qualify for the Private Placement Exclusion and that if
the Partnership or a Subsidiary Partnership were 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 are properly treated as partnerships for federal income tax
purposes. The Company has not requested, and does not intend to request, a
ruling from the Service that the Partnership or any Subsidiary Partnership will
be classified as a partnership for federal income tax purposes. 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.
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 qualify as a REIT. 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
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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.
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
has 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 are 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
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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) 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. The
Partnership's initial basis in the Hotels acquired in exchange for Units
generally was a carryover of the basis of the previous owners of the Hotels on
the date of such transfer. 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 are 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's initial
basis in Hotels acquired for cash generally was equal to the purchase price.
The Partnership generally depreciates any depreciable hotel property which it
has acquired for cash under either the modified accelerated cost recovery
system of depreciation ("MACRS") or the alternative depreciation system of
depreciation ("ADS"). The Partnership generally uses MACRS for subsequently
acquired furnishings and equipment. Under MACRS, the Partnership generally
depreciates 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 uses ADS for the depreciation of
subsequently acquired buildings and improvements. Under ADS, the Partnership
generally depreciates such buildings and improvements over a 40-year recovery
period using a straight line method and a mid-month convention.
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.
PENDING TAX LEGISLATION
Both houses of the U.S. Congress have passed legislation known as the
Revenue Reconciliation Act of 1997 (the "Act") that would modify certain Code
provisions relating to REIT qualification. First, REITs no longer would be
subject to the 30% gross income test. Second, income and gain from the sale of
all instruments entered into by a REIT to hedge interest rate risk with respect
to debt incurred to acquire or carry real estate assets, including interest
rate swap or cap agreements, options, futures and forward rate contracts, and
other similar financial instruments, would be qualifying income for purposes of
the 95% income test. Third, a REIT that complied with all the requirements for
ascertaining the ownership of its outstanding shares in a taxable year and did
not have reason to know that it violated the 5/50 Rule would be deemed to have
satisfied the 5/50 Rule for such taxable year. Fourth, amounts received by a
42
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REIT with respect to real or personal property for noncustomary services
furnished by the REIT to its tenants or for operating such property
("Impermissible Tenant Service Income") would qualify as "rents from real
property" as long as the amount of Impermissible Tenant Service Income received
by the REIT with respect to a property did not exceed one percent of the REIT's
gross income from the property during the taxable year. The amount treated as
received by the REIT for any service (or operation of property) would not be
less than 150% of the REIT's direct cost of such service or operation. Fifth,
a REIT could elect to retain and pay income tax on its net long-term capital
gain. In such a case, the REIT's shareholders would include in income their
proportionate share of the REIT's undistributed long-term capital gain and
would be deemed to have paid their proportionate share of the tax paid by the
REIT. Sixth, amounts includible in a REIT's income by reason of cancellation
of indebtedness would not be subject to the 95% distribution requirement. The
proposed legislation described above, if enacted in its present form, would be
effective for taxable years beginning after the date of enactment of the Act.
The Act would reduce the tax rate on long-term capital gains
applicable to individuals from 28% to a maximum of 20%. That proposed
legislation is proposed to be effective for sales or exchanges occurring after
May 6, 1997. There can be no assurance, however, that any of such proposed
legislation will be enacted into law.
President Clinton has proposed legislation separate from the Act that
would require a REIT to recognize built-in gain immediately upon the
acquisition of an asset with built-in gain from a large C corporation (i.e., a
C corporation the fair market value of whose stock exceeds $5 million at the
time of the transfer of the asset). If such legislation is enacted as
currently written, if a REIT failed to qualify as a REIT, no relief provisions
applied, and the REIT reelected REIT status after the four-year
disqualification period, upon such reelection, the REIT would be required to
recognize any built-in gain associated with its assets. That proposed
legislation, if enacted in its present form, would be effective for transfers
of assets made after December 31, 1997.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission
("SEC") a Registration Statement on Form S-8 ("Registration Statement") under
the Securities Act with respect to the Shares. 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
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. Further, the SEC maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, including the Company (as of May
1996). The address of such Web site is http://www.sec.gov.
No person is authorized to give any information or to make any
representations, other than those contained or incorporated by reference in
this Prospectus, in connection with the offering of Shares described herein
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or any Selling Shareholder. This
Prospectus does not constitute an offer to sell, or the solicitation of an
offer to buy, nor shall
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<PAGE> 46
there be any sale of the Shares by any person in any jurisdiction in which it
is unlawful for such person to make such offer, solicitation or sale. Neither
the delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create an implication that the information contained herein is
correct as of any time subsequent to the date hereof.
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:
(1) The 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 description;
(2) The description of the Company's $1.95 Series A
Cumulative, Convertible Preferred Stock contained in the Company's
Registration Statement on Form 8-A, including any amendments or
reports filed for the purpose of updating such description;
(3) The Company's Annual Report on Form 10-K for the year
ended December 31, 1996;
(4) The Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997; and
(5) The Company's Current Reports on Form 8-K dated June
4, 1997 and July 11, 1997.
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 Shares made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing 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 that 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 at 545 E. John
Carpenter Frwy., Suite 1300, Irving, Texas 75062, Attention: Investor
Relations.
LEGAL MATTERS
The validity of the Shares will be passed upon for the Company by
Bracewell & Patterson, L.L.P., Dallas, Texas. Bracewell & Patterson, L.L.P.
has relied upon the opinion of Miles & Stockbridge, a Professional Corporation,
Baltimore, Maryland, with respect to all matters involving Maryland law.
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EXPERTS
The consolidated financial statements and financial statement schedule
of FelCor Suite Hotels, Inc. as of December 31, 1996 and 1995 and for the years
ended December 31, 1996 and 1995 and for the period July 28, 1994 (inception of
operations) through December 31, 1994 and the financial statements of DJONT
Operations, L.L.C. as of December 31, 1996 and 1995 and for the years ended
December 31, 1996 and 1995 and for the period July 28, 1994 (inception of
operations) through December 31, 1994 are incorporated by reference in this
Prospectus by reference to the Company's Annual Report on Form 10-K. The
combined financial statements of the DS Hotels as of and for the year ended
December 31, 1996 are incorporated by reference in this Prospectus by reference
to the Company's Current Report on Form 8-K, dated June 4, 1997. The above
said financial statements have been so incorporated in reliance on the reports
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The combined financial statements of the Promus/GE EPT Combined
Limited Partnership Hotels, EPT Meadowlands Limited Partnership Hotel and
Barshop--HII Joint Venture Hotel, each as of and for the years ended December
31, 1996 and 1995, are incorporated by reference in this Prospectus by
reference to the Company's Current Report on Form 8-K dated June 4, 1997. The
above said financial statements have been so incorporated in reliance on the
reports of Arthur Andersen LLP, independent accountants given on the authority
of said firm as experts in auditing and accounting.
The combined financial statements of the AEW Doubletree Portfolio as
of and for the year ended December 31, 1996, are incorporated by reference in
this Prospectus by reference to the Company's Current Report on Form 8-K dated
June 4, 1997. The above said financial statements have been so incorporated in
reliance on the report of Ernst & Young LLP, independent accountants given on
the authority of said firm as experts in auditing and accounting.
The financial statements of the PSH Master L.P. I Hotels as of and for
the years ended December 31, 1996 and 1995, are incorporated by reference in
this Prospectus by reference to the Company's Current Report on Form 8-K dated
June 4, 1997. The above said financial statements have been so incorporated in
reliance on the report of Deloitte & Touche LLP (which expresses an unqualified
opinion on those financial statements and includes an explanatory paragraph
about the entity's ability to continue as a going concern), independent
accountants given on the authority of said firm as experts in auditing and
accounting.
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===============================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE SELLING SHAREHOLDERS. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
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The Company . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . 3
Use of Proceeds . . . . . . . . . . . . . . . 13
Selling Shareholders . . . . . . . . . . . . 13
Plan of Distribution . . . . . . . . . . . . 14
Description of Capital Stock . . . . . . . . 15
Certain Charter, Bylaw and Statutory
Provisions . . . . . . . . . . . . . . . 20
Partnership Agreement . . . . . . . . . . . . 24
Federal Income Tax Considerations . . . . . . 26
Available Information . . . . . . . . . . . . 43
Incorporation of Certain Documents
by Reference . . . . . . . . . . . . . . 44
Legal Matters . . . . . . . . . . . . . . . . 44
Experts . . . . . . . . . . . . . . . . . . . 45
===============================================================================
155,500 SHARES
[LOGO]
FELCOR SUITE HOTELS, INC.
COMMON STOCK
----------
PROSPECTUS
----------
===============================================================================
<PAGE> 49
PART I
INFORMATION REQUIRED IN THE SECTION 10(A) PROSPECTUS
ITEM 1. PLAN INFORMATION*
ITEM 2. REGISTRANT INFORMATION AND EMPLOYEE PLAN ANNUAL INFORMATION*
* Information required by Part I to be contained in the Section 10(a)
prospectus is omitted from the Registration Statement in accordance
with Rule 428 under the Securities Act of 1933, as amended
("Securities Act"), and the Note to Part I of Form S-8.
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 3. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed with the Securities and
Exchange Commission ("Commission") by FelCor Suite Hotels, Inc. ("Company")
under the Securities Exchange Act of 1934, as amended ("Exchange Act") are
incorporated herein by reference and shall be deemed to be a part hereof:
(a) The 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 description.
(b) The description of the Company's $1.95 Series A Cumulative,
Convertible Preferred Stock contained in the Company's Registration Statement
on Form 8-A, including any amendments or reports filed for the purpose of
updating such description.
(c) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
(d) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
(e) The Company's Current Reports on Form 8-K dated June 4, 1997 and
July 11, 1997.
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 Registration Statement
and prior to the filing of a post-effective amendment which indicates that all
securities offered hereby have been sold or which deregisters all securities
then remaining unsold, are deemed to be incorporated by reference into this
Registration Statement and to be a part hereof from the respective dates of
filing of such documents (such documents, and the documents enumerated above,
being hereinafter referred to as "Incorporated Documents").
Any statement contained in an Incorporated Document shall be deemed
to be modified or superseded for purposes of this Registration Statement to the
extent that a statement contained herein or in any other subsequently filed
Incorporated Document 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 Registration Statement.
ITEM 4. DESCRIPTION OF SECURITIES
Not applicable.
ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL
Not applicable.
<PAGE> 50
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Charter of the Company generally limits the liability of the
Company's directors and officers to the Company and the shareholders for money
damages to the fullest extent permitted from time to time by the laws of the
state of Maryland. The Charter also provides, generally, for the
indemnification of directors and officers, among others, against judgments,
settlements, penalties, fines, and reasonable expenses actually incurred by
them in connection with any proceeding to which they may be made a party by
reason of their service in those or other capacities except in connection with
a proceeding by or in the right of the Company in which the director was
adjudged liable to the Company or in connection with any other proceeding,
whether or not involving action in his official capacity, in which he was
adjudged liable on the basis that personal benefit was improperly received by
him. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors
and officers of the Company pursuant to the foregoing provisions or otherwise,
the Company has been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable.
The Company may purchase director and officer liability insurance for
the purpose of providing a source of funds to pay any indemnification described
above.
ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED
The 155,500 shares of Common Stock heretofore issued by the Company
pursuant to the Plans was issued to current or former executive officers or
directors of the Company. Such shares were not registered under the Securities
Act in reliance upon certain exemptions from the registration requirements
thereof, including the exemptions provided by Sections 4(2) and 4(6) of that
act.
ITEM 8. EXHIBITS
Exhibit Description of Exhibit
- ------- ----------------------
3.1.1 -- Articles of Amendment and Restatement dated June 22, 1995, amending
and restating the Charter of Registrant, as amended or supplemented
by Articles of Merger dated June 23, 1995, Articles Supplementary
dated April 30, 1996 and Articles of Amendment dated August 8, 1996
(filed as Exhibit 3.1 to the Registrant's Form 10-Q for the quarter
ended June 30, 1996 and incorporated herein by reference).
3.1.2 -- Articles of Amendment dated June 16, 1997 (filed as Exhibit 3.1.2 to
the Registrant's Form 8-K dated July 11, 1997 and incorporated
herein by reference).
3.2 -- Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-11 (File No. 33-98332)
and incorporated herein by reference).
4.1 -- Form of Share Certificate for Common Stock (filed as Exhibit 4.1 to
the Registrant's Registration Statement on Form S-11 (File No.
33-79214) and incorporated herein by reference).
4.2 -- Form of Share Certificate for Series A Preferred Stock (filed as
Exhibit 4.4 to the Registrant's Registration Statement on Form S-3
(File No. 333-3170) and incorporated herein by reference).
5.1 -- Opinion of Bracewell & Patterson, L.L.P.
23.1 -- Consent of Bracewell & Patterson, L.L.P. (included in Exhibit 5.1).
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Arthur Andersen L.L.P.
23.4 -- Consent of Ernst & Young LLP.
23.5 -- Consent of Deloitte & Touche LLP
24.1 -- Power of Attorney (set forth on signature page).
<PAGE> 51
ITEM 9. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offering therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referred to in Item 15 of
this Registration Statement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question as to whether such indemnification by it
is against public policy as expressed in the act, and will be governed by the
final adjudication of such issue.
<PAGE> 52
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Dallas, State of Texas, on the 28th day of July, 1997.
FELCOR SUITE HOTELS, INC.,
a Maryland corporation (Registrant)
By: Thomas J. Corcoran, Jr.
-------------------------------------
Thomas J. Corcoran, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full
power to act without the other, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities (until revoked in writing) to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, to file the same, together with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, to sign any and all applications, registration statements, notices
and other documents necessary or advisable to comply with the applicable state
securities laws, and to file the same, together with all other documents in
connection therewith, with the appropriate state securities authorities,
granting unto said attorneys-in-fact and agents or any of them, or their or his
substitutes or substitute, full power and authority to perform and do each and
every act and thing necessary and advisable as fully to all intents and
purposes as he might or could perform and do in person, thereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their
or his substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Hervey A. Feldman Chairman of the Board and July 28, 1997
- ------------------------------------------- Director
Hervey A. Feldman
Thomas J. Corcoran, Jr. President and Chief Executive July 28, 1997
- ------------------------------------------- Officer and Director
Thomas J. Corcoran, Jr.
William S. McCalmont Senior Vice President and Chief July 28, 1997
- ------------------------------------------- Financial Officer (Principal
William S. McCalmont Financial Officer)
Lester C. Johnson Vice President and Controller July 28, 1997
- ------------------------------------------- (Principal Accounting Officer)
Lester C. Johnson
Charles N. Mathewson Director July 28, 1997
- -------------------------------------------
Charles N. Mathewson
Director July __, 1997
- -------------------------------------------
Donald J. McNamara
Richard S. Ellwood Director July 28, 1997
- -------------------------------------------
Richard S. Ellwood
Richard O. Jacobson Director July 28, 1997
- -------------------------------------------
Richard O. Jacobson
Director July __, 1997
- -------------------------------------------
Thomas A. McChristy
</TABLE>
<PAGE> 53
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1.1 -- Articles of Amendment and Restatement dated June 22, 1995, amending
and restating the Charter of Registrant, as amended or supplemented
by Articles of Merger dated June 23, 1995, Articles Supplementary
dated April 30, 1996 and Articles of Amendment dated August 8, 1996
(filed as Exhibit 3.1 to the Registrant's Form 10-Q for the quarter
ended June 30, 1996 and incorporated herein by reference).
3.1.2 -- Articles of Amendment dated June 16, 1997 (filed as Exhibit 3.1.2 to
the Registrant's Form 8-K dated July 11, 1997 and incorporated
herein by reference).
3.2 -- Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-11 (File No. 33-98332)
and incorporated herein by reference).
4.1 -- Form of Share Certificate for Common Stock (filed as Exhibit 4.1 to
the Registrant's Registration Statement on Form S-11 (File No.
33-79214) and incorporated herein by reference).
4.2 -- Form of Share Certificate for Series A Preferred Stock (filed as
Exhibit 4.4 to the Registrant's Registration Statement on Form S-3
(File No. 333-3170) and incorporated herein by reference).
5.1 -- Opinion of Bracewell & Patterson, L.L.P.
23.1 -- Consent of Bracewell & Patterson, L.L.P. (included in Exhibit 5.1).
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Arthur Andersen L.L.P.
23.4 -- Consent of Ernst & Young LLP.
23.5 -- Consent of Deloitte & Touche LLP
24.1 -- Power of Attorney (set forth on signature page).
<PAGE> 1
[BRACEWELL & PATTERSON, L.L.P.]
July 31, 1997
FelCor Suite Hotels, Inc.
545 E. John Carpenter Freeway
Suite 1300
Irving, Texas 75062
Gentlemen:
We refer to the Registration Statement on Form S-8 (the "Registration
Statement") of FelCor Suite Hotels, Inc., a Maryland corporation (the
"Company"), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), and the reoffer
prospectus contained therein (the "Prospectus"), for the purpose of registering
under the Securities Act 1,950,000 shares (the "Plan Shares") of its common
stock, $0.01 par value per share ("Common Stock"), in connection with the
Company's 1994 Restricted Stock and Stock Option Plan and 1995 Restricted Stock
and Stock Option Plan (together, the "Plans") as referenced in the Registration
Statement.
We have examined copies, certified or otherwise identified to our satisfaction,
of the Articles of Amendment and Restatement, as further amended and
supplemented, and Bylaws of the Company, as amended to date, the Plans, minutes
of applicable meetings, or written consents in lieu of meetings, of the
stockholders and the Board of Directors of the Company, and such other
corporate records, certificates of public officials and of officers of the
Company as we have deemed relevant for the purposes of this opinion. Based upon
the foregoing, and having regard to the legal considerations which we deem
relevant, it is our opinion that the outstanding Plan Shares are, and the
remaining Plan Shares, when duly issued, sold and delivered in accordance with,
as contemplated by and for the consideration stated in the authorizing
resolutions and the Plans, will be, legally issued, fully paid and
nonassessable.
We are attorneys admitted to practice in the State of Texas. We express no
opinion concerning the laws of any jurisdiction other than the laws of the
United States of America and the State of Texas. With respect to matters of
Maryland law, we have relied upon the opinion of Miles and Stockbridge, a
Professional Corporation, Baltimore, Maryland.
<PAGE> 2
FelCor Suite Hotels, Inc.
July 31, 1997
Page 2
We hereby consent to the reference to us under the caption "Legal Matters" in
the Prospectus which constitutes a part of the Registration Statement referred
to above. We also consent to the inclusion in the Registration Statement of
this opinion as Exhibit 5.1 thereto.
Very truly yours,
/s/ BRACEWELL & PATTERSON, L.L.P.
Bracewell & Patterson, L.L.P.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
FelCor Suite Hotels, Inc.
We consent to the incorporation by reference in this registration statement of
FelCor Suite Hotels, Inc. on Form S-8 (File No. 333-_____) of our report dated
January 22, 1997, except as to the information presented in the second
paragraph of Note 5, the first paragraph of Note 6 and Note 17 for which the
date is March 10, 1997, on our audits of the consolidated financial statements
and financial statement schedule of FelCor Suite Hotels, Inc. as of December
31, 1996 and 1995 and for the years ended December 31, 1996 and 1995 and the
period from July 28, 1994 (inception of operations) through December 31, 1994
and our report dated January 22, 1997, except as to the information presented
in Note 7 for which the date is February 21, 1997, on our audits of the
financial statements of DJONT Operations, L.L.C. as of December 31, 1996 and
1995 and for the years ended December 31, 1996 and 1995 and the period from
July 28, 1994 (inception of operations) through December 31, 1994, which
reports are included in the Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated June 2, 1997, on our audit of
the combined financial statements of the DS Hotels as of December 31, 1996 and
for the year then ended, which report is included in FelCor Suite Hotels,
Inc.'s Current Report on Form 8-K dated June 4, 1997.
We also consent to the reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
July 31, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports with respect to the
audited financial statements of EPT Meadowlands Limited Partnership, Promus
Hotels, Inc. GE EPT Combined Limited Partnerships, and Barshop - HII Joint
Venture as of December 31, 1996 and 1995, and for the years then ended,
included in the Company's previously filed Form 8-K dated June 4, 1997. We also
consent to the reference to our Firm under the caption "Experts."
/s/ ARTHUR ANDERSEN LLP
Memphis, Tennessee,
July 31, 1997.
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-8 and related Prospectus of FelCor Suite
Hotels, Inc. and to the incorporation by reference therein of our report dated
February 7, 1997, (except as to the information presented in Note 5, for which
the date is March 20, 1997), with respect to the financial statements of AEW
Doubletree Portfolio for the year ended December 31, 1996 included in
the Current Report on Form 8-K of FelCor Suite Hotels, Inc. dated June 4, 1997
filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
July 31, 1997
<PAGE> 1
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of FelCor Suite Hotels, Inc. on Form S-8 of our report regarding PSH Master
L.P.I. dated February 14, 1997 (except for Note 12 as to which the date is May
30, 1997), which expresses an unqualified opinion on those financial statements
and includes an explanatory paragraph about the entity's ability to continue as
a going concern, appearing in Form 8-K of FelCor Suite Hotels, Inc., and to the
reference to us under the heading "Experts" in Form S-8.
DELOITTE & TOUCHE LLP
Columbus, Ohio
July 31, 1997
