<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1997
REGISTRATION NO. 333-______
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FELCOR SUITE HOTELS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 72-2541756
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
545 E. JOHN CARPENTER FRWY. LAWRENCE D. ROBINSON
SUITE 1300 SENIOR VICE PRESIDENT
IRVING, TEXAS 75062 AND GENERAL COUNSEL
(972) 444-4900 545 E. JOHN CARPENTER FRWY., SUITE 1300
(Address, including zip code and IRVING, TEXAS 75062
telephone number, including area (972) 444-4900
code, of registrant's principal (Name, address, including zip code,
executive offices) and telephone number, including area
code, of agent for service)
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Copies to:
ROBERT W. DOCKERY ALAN J. PRINCE
BRACEWELL & PATTERSON, L.L.P. ANDREW M. TUCKER
4000 LINCOLN PLAZA, 500 N. AKARD ST. KING & SPALDING
DALLAS, TEXAS 75201 191 PEACHTREE STREET
(214) 740-4000 ATLANTA, GEORGIA 30303
(404) 572-4600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to distribution or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with distribution or
interest reinvestment plans, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE/UNIT PRICE(1) REGISTRATION FEE(2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value(2)
Common Stock Warrants N/A N/A $500,000,000.00 $151,516.00
Preferred Stock, $0.01 par value(3)
Debt Securities(4)
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</TABLE>
(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(o) and based upon the maximum aggregate offering
price of all securities being registered.
(2) Such indeterminate number of shares of Common Stock as may from time to
time be issued at indeterminate prices or issuable upon conversion of
shares of the Preferred Stock registered hereunder or upon exercise of
the Common Stock Warrants registered hereunder, as the case may be.
(3) Such indeterminate number of shares of Preferred Stock as may from time to
time be issued at indeterminate prices and which may be issued in one or
more classes or series.
(4) Such indeterminate amount of Debt Securities as may from time to time be
issued in one or more series.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS
$500,000,000
[FELCOR LOGO]
FELCOR SUITE HOTELS, INC.
DEBT SECURITIES, PREFERRED STOCK, COMMON STOCK
AND COMMON STOCK WARRANTS
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FelCor Suite Hotels, Inc. ("Company") may offer from time to time in
one or more series (i) its unsecured senior or subordinated debt securities
("Debt Securities"), (ii) whole or fractional shares of its preferred stock,
$0.01 par value per share ("Preferred Stock"), (iii) shares of its common
stock, $0.01 par value per share ("Common Stock"), or (iv) warrants to purchase
Common Stock ("Common Stock Warrants") with an aggregate public offering price
of up to $500,000,000 (or its equivalent based on the exchange rate at the time
of sale) in amounts, at prices and on terms to be determined at the time of
offering. The Debt Securities, Preferred Stock, Common Stock and Common Stock
Warrants (collectively, "Securities") may be offered separately or together, in
separate series, in amounts, at prices and on terms to be set forth in one or
more supplements to this Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable: (i) in the case of Debt
Securities, the specific title, aggregate principal amount, ranking, currency,
form (which may be registered or bearer, or certificated or global), authorized
denominations, maturity, rate (or manner of calculation thereof) and time of
payment of interest, terms for redemption at the option of the Company or
repayment at the option of the holder, terms for sinking fund payments, terms
for conversion into Common Stock, Preferred Stock or Debt Securities of another
series, covenants and any initial public offering price; (ii) in the case of
Preferred Stock, the specific number of shares, designation, stated value per
share, any dividend, liquidation, redemption, conversion, exchange, voting and
other rights, and any initial public offering price per share; (iii) in the
case of Common Stock, the specific number of shares and any initial public
offering price per share; and (iv) in the case of Common Stock Warrants, the
duration, offering price, exercise price and detachability. In addition, such
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the Securities, in each case as may be consistent
with the Company's Charter (as hereinafter defined) or otherwise appropriate to
preserve the status of the Company as a real estate investment trust ("REIT")
for federal income tax purposes. See "Certain Charter, Bylaw and Statutory
Provisions -- Charter and Bylaw Provisions -- Restrictions on Ownership and
Transfer."
The applicable Prospectus Supplement will also contain information,
where appropriate, about certain United States federal income tax
considerations relating to, and any listing on a securities exchange of, the
Securities covered by such Prospectus Supplement.
The Securities may be offered by the Company directly to one or more
purchasers, through agents designated from time to time by the Company or to or
through underwriters or dealers. If any agents or underwriters are involved in
the sale of any of the Securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them, will be
set forth, or will be calculable from the information set forth, in the
Prospectus Supplement describing the method and terms of the offering of such
Securities. See "Plan of Distribution." No Securities may be sold pursuant to
this Prospectus without the delivery of a Prospectus Supplement describing the
method and terms of the offering of such Securities.
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS APRIL __, 1997.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission
("SEC") a Registration Statement on Form S-3 ("Registration Statement") under
the Securities Act of 1933, as amended ("Securities Act"), with respect to the
Securities. This Prospectus, which constitutes part of the Registration
Statement, omits certain of the information contained in the Registration
Statement and the exhibits thereto on file with the SEC pursuant to the
Securities Act and the rules and regulations of the SEC thereunder. The
Registration Statement, including exhibits thereto, may be inspected and copied
at the public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the SEC's Regional Offices at 7
World Trade Center, 13th Floor, New York, New York 10048, and Northwestern
Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and
copies may be obtained at the prescribed rates from the public reference
Section of the SEC at its principal office in Washington, D.C. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and in accordance
therewith files reports and proxy statements and other information with the
SEC. Such reports, proxy statements and other information can be inspected and
copied at the locations described above. Copies of such materials can be
obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. In
addition, certain of such materials can be inspected at The New York Stock
Exchange, Inc., 20 Broad Street, New York, New York.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been previously filed by the
Company with the SEC, under the Exchange Act (File No. 0-24250) are
incorporated herein by reference:
(i) Annual Report on Form 10-K for the year ended December 31,
1996, filed on March 31, 1997;
(ii) Description of the Company's Common Stock contained in the
Company's registration statement on Form 8-A, including any
amendments or reports filed for the purpose of updating such
descriptions; and
(iii) 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.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Securities made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents.
Any statement contained herein, or in any document incorporated or
deemed to be incorporated by reference herein, shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide, without charge, to each person, including
any beneficial owner, to whom a copy of this Prospectus is delivered, on the
written request of any such person, a copy of any or all of the documents
incorporated herein by reference, except the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to the Company at 545 E. John
Carpenter Frwy., Suite 1300, Irving, Texas 75062, Attention: Investor
Relations.
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THE COMPANY
FelCor Suite Hotels, Inc. is a self-administered equity REIT that, at
March 31, 1997, owned an approximately 90.6% general partner interest in FelCor
Suites Limited Partnership ("Partnership"), which at such date owned directly,
or through consolidated subsidiaries, 58 hotels with an aggregate of 13,642
suites in 24 states (collectively, "Current Hotels"). Forty-nine of the Current
Hotels are operated as, or are in the process of being converted to, Embassy
Suites(R) hotels, eight are operated as, or are in the process of being
converted to, Doubletree Guest Suites(R) hotels and one is operated as a Hilton
Suite(R) hotel. Forty-seven of the Current Hotels are managed by a subsidiary
of Promus Hotel Corporation ("Promus"), which is the largest operator of
full-service, all-suite hotels in the United States, eight are managed by an
affiliate of Doubletree Hotels Corporation ("Doubletree") and three are managed
by independent management companies. At March 31, 1997, the Company was the
largest owner of Embassy Suites hotels in the United States.
The Company will (i) contribute all of the net proceeds from the sale
of Common Stock and/or Preferred Stock offered hereby to the Partnership in
exchange for units of partnership interest ("Units") and (ii) loan all of the
net proceeds from the sale of Debt Securities offered hereby to the
Partnership. The specific terms of the Units to be so issued by the Partnership
and of any such loan to the Partnership, to the extent such terms are not
described herein, will be set forth in the Prospectus Supplement relating to
such offering. Unless the context otherwise requires, all references herein to
the business and assets of the Company refer to FelCor Suite Hotels, Inc., the
Partnership and their respective subsidiaries, on a consolidated basis.
To enable the Company to qualify as a REIT, the Partnership leases the
Current Hotels, and will lease any other 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
revenues of such hotels ("Percentage Leases"). The Lessee pays rent to the
Company under the Percentage Leases and, in addition, pays all franchise fees,
management fees and other operating expenses of the hotels leased by it. The
Lessee, which provides its audited financial statements to the Company, is
controlled by Hervey A. Feldman, the Chairman of the Board of the Company, and
Thomas J. Corcoran, Jr., the President and Chief Executive Officer of the
Company. Messrs. Feldman and Corcoran beneficially own an aggregate 50% equity
interest in the Lessee and have entered into an agreement with the Company to
utilize any amounts distributed to them from the Lessee, in excess of their tax
liability for the earnings of the Lessee, to purchase from the Company
additional shares of Common Stock, or Units, at then current market prices. A
corporation owned by the children of Charles N. Mathewson, a director of the
Company, owns the remaining 50% equity interest in the Lessee. Messrs. Feldman
and Corcoran, together with other executive officers and directors of the
Company, beneficially owned an aggregate of approximately 4.4% of the Common
Stock and limited partner Units outstanding at March 31, 1997.
The Company's growth strategy is to utilize management's expertise and
knowledge of the hotel industry to acquire hotel assets and oversee the
management of such assets. Mr. Feldman has been engaged in the hotel business
for approximately 30 years, including serving as the founding President and
Chief Executive Officer of Embassy Suites 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.
The Company seeks to increase operating cash flow and enhance
shareholder value through both acquisitions and internal growth. 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 its leases, in any growth in revenues at its hotels.
Consistent with this strategy, the Company undertook a major renovation and
conversion program during 1996 under which substantially all guest suites and
some of the public areas of the 18 Crown Sterling Suites(R) hotels ("CSS
Hotels") acquired by it in late 1995 and early 1996, as well as the guest
suites at a number of subsequently acquired hotels, were extensively
refurbished. The Company committed approximately $64 million to this renovation
and conversion program during 1996. Sixteen of the CSS Hotels have been
converted to the Embassy Suites brand and two have been converted to the
Doubletree
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Guest Suites brand. In addition to the CSS Hotels, between late 1995 and March
31, 1997, the Company has acquired one Hilton Suites hotel, interests in 17
existing Embassy Suites hotels, three non-Embassy Suites hotels that have been
or are being converted to the Embassy Suites brand, three existing Doubletree
Guest Suites hotels, and three other hotels that are being converted to the
Doubletree Guest Suites brand.
The Company's acquisition growth strategy is to acquire additional
existing hotels that meet the Company's investment criteria. At present, the
Company intends to continue to focus its acquisition strategy primarily upon
the acquisition of hotels that may be converted to, or that are, Embassy Suites
hotels or hotels with another nationally recognized all-suite brand, such as
Doubletree Guest Suites hotels, although it may consider the acquisition of a
limited number of newly developed all-suite hotels or other up-scale or
mid-scale hotel properties in the future. In addition, the Company may expand
certain of its hotel properties by constructing additional suites and/or
meeting space, if market and other conditions warrant. The Company has
completed the construction of 17 additional suites at its Flagstaff hotel and
31 additional suites at its New Orleans hotel and is in the process of
constructing a net of 129 additional suites at its Boston-Marlborough hotel
(with completion currently scheduled for mid-1997) at an estimated aggregate
cost of approximately $19.1 million. During 1997, the Company also plans to
begin the construction of an aggregate of 134 additional suites at its
Jacksonville and Orlando (North), Florida Embassy Suites hotels, at an
estimated aggregate cost of approximately $10.2 million.
The Company was formed as a Delaware corporation on May 16, 1994 and
was reincorporated as a Maryland corporation on June 23, 1995, primarily to
eliminate the franchise tax liability it incurred as a Delaware corporation.
The reincorporation did not result in any change in the business, properties or
management of the Company. The Company's executive offices are located at 545
E. John Carpenter Frwy., Suite 1300, Irving, Texas 75062 and its telephone
number is (972) 444-4900.
RISK FACTORS
In addition to the other information contained in, or incorporated by
reference into, this Prospectus and in any Prospectus Supplement, prospective
investors should carefully consider the following factors in evaluating an
investment in the Securities offered hereby.
OPERATIONAL RISKS OF RAPID GROWTH
The Company's acquisition of interests in 27 hotels between late 1995
and March 31, 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, resulting in the Company's addition of five senior management personnel
as well as additional accounting and administrative personnel between mid-1995
and March 31, 1997. To the extent the Company is unable to retain or hire
experienced personnel to manage its business and assets, its operations could
be adversely affected. Continued growth may result in increased demands upon,
or 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.
HOTEL INDUSTRY RISKS
Operating Risks
The Company's hotels are subject to all operating risks common to the
hotel industry. These risks include, among other things, intense competition
from other hotels; over-building in the hotel industry which has adversely
affected occupancy, average daily rate ("ADR") and revenue per available room
or suite ("REVPAR") in the past; increases in operating costs due to inflation
and other factors, which increases have not always been, and may not
necessarily in the future be, offset by increased suite rates; dependence on
business and commercial travelers and tourism; increases in energy costs and
other expenses of travel; and adverse effects of general and local economic
conditions. Such factors could adversely affect the Lessee's ability to make
lease payments and, consequently, the Company's ability to make any required
payments of principal and interest on indebtedness and to make distributions
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to shareholders. Further, annual adjustments to the base rent and the
thresholds for computation of percentage rent, based upon a formula taking into
account changes in the U.S. Consumer Price Index ("CPI"), would (in the absence
of offsetting increases in suite revenue and in the event of any decrease in
suite revenues) result in decreased revenues to the Partnership under the
Percentage Leases and decreased amounts available for required payments of
principal and interest on indebtedness and to make distributions to the
Company's shareholders.
Competition
Competition for Guests; Operations. The hotel industry is highly
competitive. Each of the Company's hotels experiences competition primarily
from other upscale hotels in its immediate vicinity, but also competes with
other hotel properties in its geographic market. Some of the competitors of the
Company's hotels have substantially greater marketing and financial resources
than the Company and the Lessee. A number of additional hotel rooms are in
development, have been announced or have recently been completed in a number of
the Company's markets, and additional hotel rooms may be developed in the
future. Such additional hotel rooms could have an adverse effect on the
revenues of the Company's hotels in such markets.
Competition for Acquisitions. The Company may be competing for
investment opportunities with entities which have substantially greater
financial resources than the Company. These entities may generally be able to
accept more risk than the Company prudently can manage. Competition may
generally reduce the number of suitable investment opportunities offered to the
Company and increase the bargaining power of property owners seeking to sell.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues
are greater in the second and third quarters than in the first and fourth
quarters. Through diversity in the geographic location and in the primary
customer base of the Company's hotels, the Company may be able to lessen, but
not eliminate, the effects of seasonality. Accordingly, seasonality can be
expected to cause quarterly fluctuations in the Company's lease revenue, to the
extent it receives percentage rent.
Investment Concentration in Single Industry
The Company's current strategy is to acquire interests exclusively in
hotel properties. The Company will not seek to invest in assets selected to
reduce the risks associated with investments in the hotel industry, and will be
subject to risks inherent in concentrating investments in a single industry.
Therefore, the adverse effect on the Company's lease revenue and amounts
available for required payments of principal and interest on indebtedness and
to make distribution to shareholders resulting from a downturn in the hotel
industry will be more pronounced than if the Company had diversified its
investments outside of the hotel industry.
Emphasis on Embassy Suites Hotels; Market Concentration
Forty-eight of the Company's 58 Current 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 have an
adverse effect on the Company's lease revenues and amounts available for
required payments of principal and interest on indebtedness and to make
distributions to shareholders.
The Current Hotels are located in 24 states; however, over one-third
of such hotels are located in two states, with nine hotels located in Florida
and 11 hotels located in California. Therefore, adverse events or conditions
which affect those areas particularly (such as natural disasters or adverse
changes in local economic conditions) could have a more pronounced negative
impact on the operations of the Company and amounts available for required
payments of principal and interest on indebtedness and on the Company's ability
to make distributions to the Company's shareholders than events affecting other
areas.
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CONSTRAINTS ON ACQUISITIONS AND IMPROVEMENTS
The Company intends to continue to pursue its current growth strategy,
which includes acquiring and improving hotel properties. There is a risk that
the Company will not have access to sufficient equity or debt capital to pursue
its acquisition strategies indefinitely. The Company generally cannot retain
cash generated by operating activities. To qualify as a REIT, the Company must
distribute at least 95% of its taxable income annually. The Company has a $400
million line of credit ("Line of Credit") which, as of March 31, 1997, had
approximately $157 million available thereunder. The Company's Charter (as
herein defined) currently limits the Company's indebtedness to 40% of its
investment in hotel properties, at cost. Although the Company has proposed an
amendment to its Charter to eliminate such limitation on indebtedness, and has
submitted such amendment to its shareholders for approval at the 1997 Annual
Meeting of Shareholders to be held May 22, 1997, even if such amendment is
approved, the Board of Directors has expressed its intent to adopt a policy to
maintain such limitation and the terms of the Line of Credit impose the same
limitation upon the Company. Since the Company generally cannot retain earnings
and the term and amount available under the Company's Line of Credit are
limited, the Company's ability to continue to make hotel acquisitions following
the expiration or utilization of such facility 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
Current Hotels. The terms of the Percentage Leases are believed by management
of the Company to be typical of provisions found in other leases entered into
in similar transactions. Management believes that the initial compensation
arrangements for Messrs. Feldman and Corcoran provide incentives for them to
seek to maximize shareholder value, by tying incentive compensation to
increases in the market value of the Common Stock. The Percentage Leases and
the initial employee compensation plans were approved by the Company's
"Independent Directors," being those directors who are not officers or
employees of the Company or affiliates of any subsidiary or lessee thereof. The
Company does not own any interest in the Lessee. All of the voting Class A
membership interest in the Lessee (representing a 50% equity interest) is owned
by Messrs. Feldman and Corcoran and all of the non-voting Class B membership
interest in the Lessee (representing the remaining 50% equity interest) is held
by RGC Leasing, Inc., a Nevada corporation owned by the children of Mr.
Mathewson, a director of the Company. As a result, such persons may have a
conflict of interest with the Company in the performance of their management
services to the Company in connection with the Percentage Leases.
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Continuing Hotel Operation, Development and Investment by FelCor Affiliates
Messrs. Feldman and Corcoran, or entities controlled by them ("FelCor
Affiliates"), may (i) continue to own, develop and operate their respective
existing interests in the 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 March 31, 1997, the Company's outstanding debt consisted of
approximately $366.2 million in principal amount outstanding, including
approximately $243.0 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 net income to maintain its REIT status, it may borrow
additional funds to make investments or distributions. The Board of Directors
has the discretion to permit the Company to incur debt, currently subject to a
limitation of not more than 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 the Company's floating rate debt bears interest at the 30-day
London Interbank Offered Rate ("LIBOR") (5.6875% at March 31, 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 circumstances, if the
Company is in need of capital to repay indebtedness in accordance with its
terms or otherwise, it could be required to liquidate one or more investments
in hotel properties at times which may not permit realization of the maximum
return on such investments.
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<PAGE> 9
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 the shareholders of the
Company. See "Federal Income Tax Considerations -- Taxation of the Company."
If the Company were to fail to qualify as a REIT in any taxable year,
the Company would not be allowed a deduction for distributions to shareholders
in computing its taxable income and would be subject to federal income tax
(including any applicable 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 net taxable income
(excluding any net capital gain). In addition, the Company is subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85%
of its ordinary income, (ii) 95% of its capital gain net income for that year,
and (iii) any undistributed taxable income from prior periods.
The Company intends to 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."
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. If the Service
were to challenge successfully the tax status of the Partnership as a
partnership for federal income tax purposes, the Partnership would be taxable
as a corporation. In such event, since the value of the Company's ownership
interest in the Partnership constitutes more than 10% of the Partnership's
voting securities and exceeds 5% of the Company's assets, the Company likely
would cease to qualify as a REIT. Furthermore, the imposition
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<PAGE> 10
of a corporate tax on the Partnership would substantially reduce the amount of
cash available for distribution to the Company and its shareholders.
EFFECT OF MARKET INTEREST RATES ON PRICE OF CAPITAL STOCK
One of the factors that may influence the price of the Company's
Common Stock and any Preferred Stock in public trading markets is the annual
yield from distributions by the Company on the Common Stock and any Preferred
Stock, as compared to yields on other financial instruments. Thus, an increase
in market interest rates will result in higher yields on other financial
instruments, which could adversely affect the market price of the shares of
Common Stock and any Preferred Stock.
RECENTLY ORGANIZED ENTITIES; LIMITED ASSETS AND OPERATING HISTORY
The Company, the Partnership and the Lessee 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 Current Hotels to enable the Lessee to meet its rent obligations under
the Percentage Leases. Forty-seven of the 58 Current Hotels are managed on
behalf of the Lessee by Promus and eight of the Current Hotels are managed on
behalf of the Lessee by Doubletree. The three remaining Current Hotels are
managed on behalf of the Lessee by other independent professional hotel
management companies. Generally, all management contracts extend for a term of
10 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 Current Hotels, the
franchise licenses for the Current 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. At December 31, 1996, the
Lessee had a deficit in total shareholders' equity of approximately $6.4
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.
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 Current 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.
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<PAGE> 11
Uninsured and Underinsured Losses
Each of the Current Hotels is covered by comprehensive policies of
insurance, including liability, fire and extended coverage. Management believes
such specified coverage is of the type and amount customarily obtained by
owners of real property assets. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, hurricanes and floods,
that may be uninsurable or not economically insurable. Eleven of the Current
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 Current Hotels are located in the coastal areas of Florida, Georgia,
Louisiana, North Carolina or Texas and may, therefore, be particularly
susceptible to potential damage from hurricanes or high- wind activity. The
Company presently maintains and intends to continue to maintain earthquake
insurance on each of the Current Hotels located in California and wind damage
insurance on such Florida, Georgia, Louisiana, North Carolina and Texas hotels,
to the extent practicable. The Company's Board of Directors may exercise
discretion in determining amounts, coverage limits and the deductibility
provisions of insurance, with a view to maintaining appropriate insurance
coverage on the Company's investments at a reasonable cost and on suitable
terms. This may result in insurance coverage that, in the event of a
substantial loss, would not be sufficient to pay the full current market value
or current replacement cost of the Company's lost investment. Inflation,
changes in building codes and ordinances, environmental considerations, and
other factors also might make it impractical to use insurance proceeds to
replace the property after such property has been damaged or destroyed. Under
such circumstances, the insurance proceeds received by the Company might not be
adequate to restore its economic position with respect to such property.
Environmental Matters
Under various federal, state, and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may
be liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Liability also may extend to
persons holding a security interest in the property, under certain limited
circumstances. In addition, the presence of contamination from hazardous or
toxic substances, or the failure to properly remediate such contaminated
property, may adversely affect the owner's ability to dispose of such property,
to fully utilize such property without restriction or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether
or not such facility is or ever was owned or operated by such person. Certain
environmental laws and common law principles could be used to impose liability
for release of hazardous or toxic substances, including the release of
asbestos-containing materials ("ACMs") into the air, and third parties may seek
recovery from owners or operators of real properties for personal injury or
property damage associated with such releases, including exposure to released
ACMs. Environmental laws also may impose restrictions on the manner in which
property may be used or businesses may be operated, and these restrictions may
require expenditures. Environmental laws provide for sanctions in the event of
noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. In connection with the ownership of the
Current Hotels and any subsequently acquired hotels, the Company may be
potentially liable for such costs. The cost of defending against claims of
liability, of compliance with environmental regulatory requirements or of
remediating a contaminated property could materially adversely affect the
business, assets or results of operations of the Company and the Partnership
and, consequently, amounts available for required payments of principal and
interest on indebtedness and to make distributions to the Company's
shareholders.
Phase I environmental audits from independent environmental engineers
were obtained with respect to each of the Current Hotels prior to the
acquisition thereof by the Company. The principal purpose of Phase I audits is
to identify indications of potential environmental contamination for which the
Current Hotels may be responsible and, secondarily, to assess, to a limited
extent, the potential for environmental regulatory compliance liabilities. The
Phase I audits of the Current Hotels were designed to meet the requirements of
the then current industry standards governing Phase I audits, and consistent
with those requirements, none of the audits involved testing of groundwater,
soil or air.
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<PAGE> 12
Accordingly, they do not represent evaluations of conditions at the studied
sites that would be revealed only through such testing. In addition, their
assessment of environmental regulatory compliance issues was general in scope
and was not a detailed determination of the Current Hotels' complete compliance
status. Similarly, the audits did not involve comprehensive analysis of
potential off-site liability. The Phase I audit reports have not revealed any
environmental liability that management believes would have a material adverse
effect on the Company's business, assets or results of operations, nor is the
Company aware of any such liability. Nevertheless, it is possible that these
reports do not reveal all environmental liabilities or that there are material
environmental liabilities of which the Company is unaware.
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 ("ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While management of the Company believes
that, based upon an examination thereof and consultation with professionals,
the Current Hotels are substantially in compliance with these requirements, a
determination that the Company is not in compliance with the ADA could result
in the imposition of fines or an award of damages to private litigants. If the
Company were required to make substantial modifications at the Current Hotels
to comply with the ADA, the Company's ability to make required payments of
principal and interest on indebtedness and to make distributions to its
shareholders could be adversely affected.
Increases in Property Taxes
Each Current Hotel is subject to real and personal property taxes. The
real and personal property taxes on hotel properties in which the Company
invests may increase as property tax rates change and as the properties are
assessed or reassessed by taxing authorities. If property taxes increase, the
Company's ability to make required payments of principal and interest on
indebtedness and to make distributions to its shareholders could be adversely
affected.
OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, not
more than 50% in value of its outstanding stock may be owned, actually and
constructively under the applicable attribution provisions of the Code, by five
or fewer individuals (as defined in the Code to include certain entities). For
the purpose of preserving the Company's REIT qualification, the Company's
articles of incorporation, as amended and restated ("Charter"), prohibit
ownership (taking into account applicable constructive ownership provisions of
the Code) of more than 9.9% of the number of outstanding shares of any class of
the Company's capital stock by any person ("Ownership Limit"), and, subject to
certain exceptions, prohibits any transfer that would result in (i) any person
owning shares in excess of the Ownership Limit, (ii) the Company's shares being
beneficially owned by fewer than 100 persons (determined without reference to
any constructive ownership rules), (iii) the Company being "closely held"
within the meaning of the Code or otherwise failing to qualify as a REIT under
the Code, or (iv) the Company owning, actually and constructively under the
applicable constructive ownership provisions of the Code, 10% or more of the
ownership interests in the Lessee or any sublessee. Any attempted transfer of
shares that would violate any one or more of such prohibitions will be void and
of no force or effect whatsoever with respect to any shares in excess of such
limits (and, in the case of the prohibition against the Company having fewer
than 100 shareholders, will be entirely void), and the attempted transferee
will not acquire any right or interest in such excess shares. The Company may
take any lawful action deemed necessary or advisable to ensure compliance with
the Ownership Limit provisions and to preserve its status as a REIT, including
without limitation refusing to recognize or record any prohibited transfer.
Should any person at any time hold any shares in violation of the
Ownership Limit (other than a violation of the requirement that a REIT have at
least 100 shareholders), then that number of shares in excess of the number
such person could hold without violating the Ownership Limit will be
immediately designated as "Shares-in-Trust" and transferred automatically and
by operation of law to, and be held in, a trust for the benefit of such
beneficiaries as may be designated by the trustee of such trust (which trustee
shall be designated by the Company and be a person that is unaffiliated with
the Company or any prohibited owner). The trustee will be entitled to receive
all distributions and distributions on, and to exercise all voting rights of,
any Shares-in-Trust. The record holder of any shares so designated
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<PAGE> 13
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 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 in control
were to be in the shareholders' interests.
Maryland Anti-Takeover Statutes
As a Maryland corporation, the Company is subject to various
legislative acts set forth under the Maryland General Corporation Law ("MGCL"),
including (i) the Maryland Business Combination Statute, which imposes certain
restrictions upon, and mandates that certain procedures be followed in
connection with, certain takeovers and business combinations, and (ii) the
Maryland Control Share Statute, which denies voting rights with respect to
shares acquired in certain transactions involving the acquisition of one-fifth
or more of the voting control of the subject company. Although the Company's
Charter contains a provision exempting any and all acquisitions from the
provisions of the Maryland Control Share Statute, if such provision is
subsequently amended or eliminated, it may deter any stockholder from acquiring
any substantial amount of the outstanding stock of the Company. In addition, to
the extent that the foregoing statutes discourage or make more difficult a
proxy contest or the assumption of control by a holder of a
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<PAGE> 14
substantial block of the Company's stock, they could increase the likelihood
that incumbent directors of the Company would retain their positions, and may
also have the effect of discouraging a tender offer or other attempts to obtain
control of the Company even though such attempts might be beneficial to the
Company and its shareholders. See "Certain Charter, Bylaw and Statutory
Provisions -- Maryland Anti-Takeover Statutes."
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
Forty-eight of the Current Hotels are being operated under, and one is
in the process of being converted to, the Embassy Suites brand. Of the nine
remaining Current Hotels, eight are operated as, or are in the process of being
converted to, Doubletree Guest Suites hotels, under management contracts with
Doubletree, 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 additional improvements to
the Current Hotels in the future to obtain or maintain its franchise licenses.
Failure to complete improvements, when required, in a manner satisfactory to
the franchisor could result in the failure to issue, or the cancellation, of
one or more franchise licenses. In addition, the Company may desire to operate
additional hotels acquired by it under franchise licenses from Promus or
another franchisor, and such franchisors may require that significant capital
expenditures be made to such additional hotels as a condition of granting such
franchise licenses.
The continuation of franchise licenses for the Current Hotels is
subject to the maintenance of specified operating standards and other terms and
conditions. Promus periodically inspects its licensed properties to confirm
adherence to its maintenance and operating standards. Under each Percentage
Lease, the Company is obligated, among other things, to pay the costs of
maintaining the structural elements of each hotel and to set aside as a reserve
4% of hotel suite revenues per month, on a cumulative basis, and to fund from
the reserve or from other sources capital expenditures (subject to approval by
the Company's Board of Directors) for the periodic replacement or refurbishment
of furniture, fixtures and equipment required for the retention of such
franchise licenses. During the period from the closing of the Company's initial
public offering to December 31, 1996, the Company made, and in the future may
be obligated or deem it advisable to make, capital investments in the Current
Hotels of more than 4% of the suite revenues thereof. Should the Company be
required or elect to do so in the future, such investments may necessitate the
use of borrowed funds or the reduction of distributions. The Lessee is
responsible for routine maintenance and repair expenditures with respect to the
Current Hotels. The failure to maintain the standards or adhere to the other
terms and conditions of the Embassy Suites or other franchise licenses could
result in the loss or cancellation of such franchise licenses. It is possible
that a franchisor could condition the continuation of a franchise license upon
the completion of substantial capital improvements, which the Board of
Directors may determine to be too expensive or otherwise unwarranted in light
of general economic conditions or the operating results or prospects of the
affected hotel. In that event, the Board of Directors may elect to allow the
franchise license to lapse, in which event the Company will be obligated to
indemnify the Lessee against any loss or liability incurred by it as a
consequence of such decision. In any case, if a franchise is terminated, the
Company and the Lessee may seek to obtain a suitable replacement franchise, or
to operate the affected hotel independent of a franchise license. The loss of
any franchise license could have a material adverse effect upon the operations
or the underlying value of the hotel covered by such license because of the
loss of associated name recognition, marketing support and centralized
reservation systems provided by the franchisor. The loss of a number of the
franchise licenses for the Current Hotels could have a material adverse effect
on the Company's revenues under the Percentage Leases and the Company's cash
available to make required payments of principal and interest on indebtedness
and to make distributions to its shareholders.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement,
the Company will contribute the net proceeds from the sale of the Securities to
the Partnership, in exchange for comparable securities thereof, and the
Partnership expects to use such net proceeds for various purposes, which may
include the acquisition of additional hotel assets, the repayment of
outstanding indebtedness, the improvement and/or expansion of one or more of
its hotel properties or for working capital purposes. Pending such uses, the
net proceeds of any offering of Securities may be invested in short-term,
investment grade securities or instruments, interest-bearing bank accounts,
certificates of deposit,
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<PAGE> 15
mortgage participations or similar securities, to the extent consistent with
the Company's qualification as a REIT, the Company's Charter, and the Company's
agreements with its lenders.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratios of earnings to
fixed charges and of earnings to fixed charges and preferred stock dividends
for the periods indicated:
<TABLE>
<CAPTION>
JULY 28, 1994 YEAR ENDED
(INCEPTION OF DECEMBER 31,
OPERATIONS) THROUGH ------------
DECEMBER 31, 1994 1995 1996
------------------- ---- ----
<S> <C> <C> <C>
Ratio of Earnings to Fixed Charges 32.4x 8.6x 5.3x
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 32.4x 8.6x 3.1x
</TABLE>
For purposes of computing this ratio, earnings have been calculated by
adding income from continuing operations plus fixed charges and minority
interest, and deducting capitalized interest. Fixed charges consist of interest
(including capitalized interest) and amortization of deferred financing costs.
Preferred stock dividends represent the amount required to meet the dividend
requirements of the Series A Preferred Stock, which was initially issued in May
1996.
DISTRIBUTION POLICY
In order to maintain its qualification as a REIT, the Company must
distribute to its shareholders of at least 95% of its annual taxable income
(which does not include net capital gains). While future distributions paid by
the Company will be at the discretion of the Board of Directors of the Company
and will depend on the actual cash flow of the Company, its financial
condition, capital requirements, the annual distribution requirements under the
REIT provisions of the Code, and such other factors as the directors of the
Company deem relevant, it is the present intention of the Company to pay
regular quarterly distributions.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct unsecured obligations of the
Company. The Debt Securities will be issued under one or more indentures
("Indentures"), each dated as of a date prior to the issuance of the Debt
Securities to which it relates, in each case between the Company and a trustee
("Trustee") meeting the requirements of the Trust Indenture Act of 1939, as
amended ("TIA"), and in the form that has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part, subject to such
amendments or supplements as may be adopted from time to time. The Indentures
will be subject to and governed by the TIA. The statements made under this
heading relating to the Debt Securities and the Indentures are summaries of the
anticipated provisions thereof, do not purport to be complete and are qualified
in their entirety by reference to the description of such Debt Securities
contained in the applicable Prospectus Supplement and to the Indentures
relating to such Debt Securities.
Capitalized terms used, but not defined, under this caption shall have
the meanings assigned to them in the applicable Indentures.
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TERMS
The indebtedness represented by the Debt Securities will rank equally
with all other unsecured and unsubordinated indebtedness of the Company. The
particular terms of the Debt Securities offered by a Prospectus Supplement will
be described in the applicable Prospectus Supplement, along with any applicable
modifications of or additions to the general terms of the Debt Securities as
described herein and in the applicable Indenture and any applicable federal
income tax considerations. Accordingly, for a description of the terms of any
series of Debt Securities, reference must be made to both the Prospectus
Supplement relating thereto and the description of the Debt Securities set
forth in this Prospectus.
Except as set forth in any Prospectus Supplement, the Debt Securities
may be issued without limit as to aggregate principal amount, in one or more
series, in each case as established from time to time by the Company or as set
forth in the applicable Indenture or in one or more indentures supplemental to
such Indenture. All Debt Securities of one series need not be issued at the
same time, and, unless otherwise provided in the applicable Prospectus
Supplement, a series may be reopened, without the consent of the holders of the
Debt Securities of such series, for the issuance of additional Debt Securities
of such series.
Each Indenture will designate one or more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
an Indenture may resign or be removed with respect to one or more series of
Debt Securities and a successor Trustee may be appointed to act with respect to
such series. In the event that two or more persons are acting as Trustee with
respect to different series of Debt Securities, each such Trustee shall be a
Trustee of a trust under the applicable Indenture separate and apart from the
trust administered by any other Trustee, and, except as otherwise indicated
herein, any action described herein to be taken by each Trustee may be taken by
each such Trustee with respect to, and only with respect to, the one or more
series of Debt Securities for which it is trustee under the applicable
Indenture.
The following summaries set forth certain general terms and provisions
of the Debt Securities and the Indentures. The Prospectus Supplement relating
to the series of Debt Securities being offered will contain further terms of
such Debt Securities, including the following specific terms:
(1) The title of such Debt Securities and whether such Debt
Securities are senior securities or subordinated securities;
(2) The aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
(3) The price (expressed as a percentage of the principal amount
thereof) at which such Debt Securities will be issued and, if
other than the principal amount thereof, the portion of the
principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the
portion of the principal amount of such Debt Securities that is
convertible into Common Stock, Preferred Stock or Debt
Securities of another series, or the method by which any such
portion shall be determined;
(4) If convertible, the terms on which such Debt Securities are
convertible into Common Stock, Preferred Stock or Debt
Securities of another series, including the terms and conditions
upon which such conversion will be effected, the initial
conversion price or rate, the conversion period or periods and
any applicable limitations on the ownership or transferability
of any Common Stock or Preferred Stock receivable on conversion;
(5) The date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be
payable;
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(6) The rate or rates (which may be fixed or variable), or the
method by which such rate or rates shall be determined, at which
such Debt Securities will bear interest, if any;
(7) The date or dates, or the method for determining such date or
dates, from which any such interest will accrue, the date or
dates on which any such interest will be payable, the regular
record dates for such interest payment dates, or the method by
which such dates shall be determined, the persons to whom such
interest shall be payable, and the basis upon which interest
shall be calculated if other than that of a 360-day year of
twelve 30-day months;
(8) The place or places where the principal of (and premium, if any)
and interest, if any, on such Debt Securities will be payable,
where such Debt Securities may be surrendered for conversion or
registration of transfer or exchange and where notices or
demands to or upon the Company in respect of such Debt
Securities and the applicable Indenture may be served;
(9) The period or periods, if any, within which, the price or prices
at which and the other terms and conditions upon which such Debt
Securities may, pursuant to any optional or mandatory redemption
provisions, be redeemed, as a whole or in part, at the option of
the Company;
(10) The obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or
analogous provision or at the option of a holder thereof and the
period or periods within which, the price or prices at which,
and the other terms and conditions upon which, such Debt
Securities will be redeemed, repaid or purchased, as a whole or
in part, pursuant to such obligation;
(11) If other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a
foreign currency or units of two or more foreign currencies or a
composite currency or currencies, and the terms and conditions
relating thereto;
(12) Whether the amount of payments of principal of (premium, if any)
or interest, if any, on such Debt Securities may be determined
with reference to an index, formula or other method (which
index, formula or method may, but need not, be based on a
currency, currencies, currency unit or units, or composite
currency or currencies) and the manner in which such amounts
shall be determined;
(13) Whether such Debt Securities will be issued in certificated
and/or book-entry form and, if so, the identity of the
depository for such Debt Securities;
(14) Whether such Debt Securities will be in registered or bearer
form and, if in registered form, the denominations thereof if
other than $1,000 and any integral multiple thereof and, if in
bearer form, the denominations thereof and terms and conditions
relating thereto;
(15) The applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the
applicable Indenture, or any modification thereof;
(16) Whether and under what circumstances the Company will pay any
additional amounts on such Debt Securities in respect of any
tax, assessment or governmental charge and, if so, whether the
Company will have the option to redeem such Debt Securities in
lieu of making such payment;
(17) Any deletions from, modifications of or additions to the events
of default or covenants of the Company, to the extent different
from those described herein or set forth in the applicable
Indenture with respect to such Debt Securities, and any change
in the right of any Trustee or any of the holders to declare the
principal amount of any such Debt Securities due and payable;
and
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(18) Any other terms of such Debt Securities not inconsistent with
the provisions of the applicable Indenture.
If so provided in the applicable Prospectus Supplement, the Debt
Securities may be issued at a discount below their principal amount and provide
for less than the entire principal amount thereof to be payable upon
declaration of acceleration of the maturity thereof ("Original Issue Discount
Securities"). In such cases, any special U.S. federal income tax, accounting
and other considerations applicable to Original Issue Discount Securities will
be described in the applicable Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, the Debt
Securities and Indentures will not prohibit, restrict, or require the Company
to obtain the consent of the holders of any Debt Securities, or to redeem or
permit holders to cause a redemption of Debt Securities, in the event of, (i) a
consolidation, merger, sale of assets or other similar transaction that may
adversely affect the creditworthiness of the Company or the successor or
combined entity, (ii) a change in control of the Company or (iii) the
incurrence of unsecured debt, whether or not in a highly leveraged transaction,
involving the Company whether or not involving a change in control.
Accordingly, the holders of the Debt Securities would not have protection in
the event of a highly leveraged transaction, reorganization, restructuring,
merger or similar transaction involving the Company that may adversely affect
the holders of the Debt Securities. The existing protective covenants
applicable to the Debt Securities would continue to apply to the Company in the
event of a leveraged buyout initiated or supported by the Company, the
management of the Company, or any affiliate of the Company or its management,
but may not prevent such a transaction from taking place. However, the
Company's Charter currently prohibits it from incurring indebtedness in excess
of 40% of the Company's investment in hotel properties, at cost, on a
consolidated basis, after giving effect to the Company's use of proceeds from
any indebtedness. Restrictions set forth in the Company's Charter with respect
to the ownership and transfer of Common Stock and Preferred Stock, which are
designed to preserve the Company's status as a REIT, may also act to prevent or
hinder a change of control. See "Certain Charter, Bylaw and Statutory
Provisions -- Charter and Bylaw Provisions -- Restrictions on Ownership and
Transfer." Reference is made to the applicable Prospectus Supplement for
information with respect to any deletions from, modifications of or additions
to the events of default or covenants of the Company that are described below,
including any addition of a covenant or other provision providing event risk or
similar protection.
If any Debt Securities are to be offered that provide for the optional
redemption, prepayment or conversion of such Debt Securities upon the
occurrence of the events described in the foregoing paragraph, the Prospectus
Supplement relating to such Debt Securities will provide information with
respect to the following:
(a) the effects that such provisions may have in deterring
certain mergers, tender offers or other takeover attempts, as well as
any possible adverse effect on the market price of the Company's
securities or the Company's ability to obtain additional financing in
the future as a result of such provisions;
(b) certain specific risk factors associated with the
occurrence of the specified events, including, if applicable, that the
occurrence of such events may give rise to cross-defaults on other
indebtedness such that the payment on the Debt Securities may be
effectively subordinated, that there may be no assurance that
sufficient funds will be available at the time of the occurrence of an
event to make any required repurchases and that there may be
limitations on the Company's financial or legal ability to repurchase
the Debt Securities upon the occurrence of an event requiring such a
repurchase or offer to repurchase;
(c) the Company's compliance, if necessary, with the
requirements of Rule 13e-4 and Rule 14e-1 under the Exchange Act and
any other applicable securities laws in connection with any repurchase
of such Debt Securities;
(d) the impact, if any, under the Indenture of the failure to
make the required repurchase, including whether, and under what
circumstances, such failure would be an event of default under the
Indenture; and
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(e) if the Debt Securities are to be subordinated to other
obligations of the Company that would be accelerated upon the
occurrence of one of the specified events, the material effects of
such an acceleration upon the specified events and the Debt
Securities.
In addition, the Indenture under which any such Debt Securities will be issued
will contain, and the applicable Prospectus Supplement will include, if
applicable, a definition of "change in control" for purposes of such Debt
Securities, including sufficient information to enable a holder of Debt
Securities to determine when a change in control has occurred.
DENOMINATION, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement,
the Debt Securities of any series will be issuable in denominations of $1,000
and integral multiples thereof.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt
Securities at the corporate trust office of the applicable Trustee or at the
office of any transfer agent designated by the Company for such purpose. In
addition, subject to certain limitations imposed upon Debt Securities issued in
book-entry form, Debt Securities of any series may be surrendered for
conversion or registration of transfer or exchange thereof at the corporate
trust office of the applicable Trustee or at the office of any transfer agent
designated by the Company for such purpose. Debt Securities surrendered for
conversion, registration of transfer or exchange must be duly endorsed or
accompanied by a written instrument of transfer, and the person requesting such
action must provide evidence of title and identity satisfactory to the
applicable Trustee or transfer agent. No service charge will be made for any
registration of transfer or exchange of any Debt Securities, but the Company
may require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. If the applicable Prospectus Supplement
refers to any transfer agent (in addition to the applicable Trustee) initially
designated by the Company with respect to any series of Debt Securities, the
Company may at any time rescind the designation of any such transfer agent or
approve a change in the location through which any such transfer agent acts,
except that the Company will be required to maintain a transfer agent in each
place of payment for such series. The Company may at any time designate
additional transfer agents with respect to any series of Debt Securities.
Neither the Company nor any Trustee or transfer agent shall be
required (i) to issue, register the transfer of or exchange Debt Securities of
any series during a period beginning at the opening of business 15 days before
the date of mailing of a notice of redemption of any Debt Securities that may
be selected for redemption and ending at the close of business on the date of
such mailing; (ii) to register the transfer of or exchange any Debt Securities,
or portion thereof, so selected for redemption, in whole or in part, except the
unredeemed portion of any Debt Securities being redeemed in part; or (iii) to
issue, register the transfer of or exchange any Debt Securities that have been
surrendered for repayment at the option of the holder, except the portion, if
any, of such Debt Securities not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indentures will provide that Company may, without the consent of
the holders of any outstanding Debt Securities, lease all or any portion of its
assets to the Lessee, or any other entity, to the extent required to maintain
the Company's status as a REIT, and neither the Lessee nor any such other
entity shall be required to assume any obligation or liability of the Company
with respect to the Debt Securities. In addition, the Indentures are expected
to provide that the Company may, without the consent of the holders of any
outstanding Debt Securities, otherwise sell, transfer or convey all or
substantially all of its assets to, or consolidate with or merge with or into,
any other entity; provided that (a) either the Company shall be the continuing
entity, or the successor entity (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received
the transfer of such assets is organized under the laws of any domestic
jurisdiction and assumes the Company's obligations to pay principal of
(premium, if any) and interest, if any, on all of the Debt Securities and the
due and punctual performance and observance of all of the
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covenants and conditions contained in each Indenture; (b) immediately after
giving effect to such transaction and treating any indebtedness that becomes an
obligation of the Company or any subsidiary as a result thereof as having been
incurred by the Company or such subsidiary at the time of such transaction, no
event of default under the Indentures, and no event which, after notice or the
lapse of time, or both, would become such an event of default, shall have
occurred and be continuing; and (c) an officers' certificate and legal opinion
covering such conditions shall be delivered to each Trustee.
CERTAIN COVENANTS
Existence. Except as permitted under "-- Merger, Consolidation or Sale
of Assets," the Indentures will require the Company to do or cause to be done
all things necessary to preserve and keep in full force and effect its
corporate existence.
Maintenance of Properties. The Indentures will require the Company to
cause all of its material properties used or useful in the conduct of its
business or the business of any subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment,
and will make or cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that the Company and its subsidiaries shall not be prevented from
selling, leasing or otherwise disposing of their properties for value in the
ordinary course of business.
Limitations on Liens. The Indenture will provide that the Company may
not, nor may it permit any subsidiary to, issue, assume or guarantee evidences
of indebtedness for money borrowed which are secured by any mortgage, security
interest, pledge or lien ("mortgage") of or upon any principal property or of
or upon any shares of stock or evidences of indebtedness for borrowed money
issued by any subsidiary that owns principal property and owned by the Company
or any subsidiary, whether owned at the date of the Indenture or thereafter
acquired, without effectively providing that the principal amount of the Debt
Securities from time to time outstanding shall be secured equally and ratably
by (or at the option of the Company, prior to) such mortgage, except that this
restriction will not apply to (i) mortgages for taxes or other governmental
charges either not yet delinquent or the nonpayment of which is being contested
in good faith by appropriate proceedings; mortgages comprising landlord's liens
or liens of carriers, warehousemen, mechanics or materialmen incurred in the
ordinary course of business for sums not yet due and payable or which are being
contested in good faith by appropriate proceedings; and any other mortgages
incurred or created in the ordinary course of business not arising in
connection with indebtedness that do not materially impair the use or value of
the assets of the Company and its subsidiaries; (ii) mortgages existing on the
date of the Indenture; (iii) mortgages on any property existing at the time of
its acquisition; (iv) mortgages on property of a corporation existing at the
time such corporation is merged into or consolidated with, or disposes of
substantially all its properties (or those of a division) to, the Company or a
subsidiary; (v) mortgages on property of a corporation, shares of capital stock
or debt of any corporation existing at the time such corporation first becomes
a subsidiary; (vi) mortgages securing indebtedness of a subsidiary to the
Company or to another subsidiary; (vii) mortgages to secure the cost of
acquisition, construction, development or substantial repair, alteration or
improvement of property if the commitment to extend the credit secured by any
such mortgage is obtained within 12 months after the later of the completion or
the placing in operation of the acquired, constructed, developed or
substantially repaired, altered or improved property; (viii) mortgages securing
current indebtedness; (ix) any extension, renewal or replacement (or successive
extensions, renewals or replacements), in whole or in part, of any mortgage
referred to in clauses (i) through (viii), provided, however, that the
principal amount of indebtedness secured thereby and not otherwise authorized
by said clauses (i) to (viii), inclusive, shall not exceed the principal amount
of indebtedness, plus any premium or fee payable in connection with any such
extension, renewal or replacement, so secured at the time of such extension,
renewal or replacement; (x) mortgages in favor of the United States or any
State thereof, or any department, agency or instrumentality or political
subdivision of the United States or any State thereof, to secure partial
progress, advance or other payments pursuant to any contract or statute or to
secure any indebtedness incurred for the purpose of financing all or any part
of the purchase price or the cost of constructing or improving the property
subject to such mortgages; (xi) mortgages arising out of a final judgment for
the payment of money aggregating not in excess of $10,000,000 or mortgages
related to any legal proceeding being contested in good
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faith by appropriate proceedings, provided that the enforcement of any lien has
been stayed; and (xii) easements or similar encumbrances, the existence of
which do not materially impair the use of the property subject thereto.
However, the Company or any subsidiary may issue, assume or guarantee
indebtedness secured by mortgages which would otherwise be subject to the
foregoing restriction in an aggregate amount which, together with all other
such indebtedness outstanding does not at the time exceed the limitations set
forth in the Company's Charter.
Additional Covenants. Any additional covenants of the Company with
respect to any series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture will provide that if an Event of Default shall have
occurred and be continuing with respect to a series of Debt Securities or if
certain indebtedness in excess of $25,000,000 for money borrowed by the Company
shall have been accelerated, then either the Trustee or the holders of not less
than 25% in outstanding principal amount of the Debt Securities of such series
may declare to be due and payable immediately the principal amount of such Debt
Securities, together with interest, if any, accrued thereon.
Under the Indenture, an Event of Default with respect to each series
of Debt Securities will be any one of the following events: (a) default for 30
days in payment of any interest due with respect to any Debt Security of such
series; (b) default in payment of principal of any Debt Security of such series
when due; (c) default for 90 days after notice to the Company by the Trustee or
by holders of not less than 25% in principal amount of the Debt Securities then
outstanding of such series in the performance of any other covenant for the
benefit of such Debt Securities of such series; and (d) certain events of
bankruptcy, insolvency and reorganization.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of a default with respect to a series of Debt Securities, give to
the holders of the Debt Securities of such series notice of such default known
to it, unless cured or waived; provided that, except in the case of default in
the payment of principal or interest, if any, in respect of any of the Debt
Securities of such series, the Trustee will be protected in withholding such
notice if it in good faith determines that the withholding of such notice is in
the interests of the holders of the Debt Securities of such series. The term
"default" for the purpose of this provision means any event which is, or after
notice or lapse of time, or both, would become, an Event of Default.
The Indenture contains a provision entitling the Trustee, subject to
the duty of the Trustee during the continuance of an Event of Default to act
with the required standard of care, to be indemnified by the holders of the
Debt Securities of such series before proceeding to exercise any right or power
under the Indenture at the request of such holders. The Indenture provides that
the holders of a majority in outstanding principal amount of the Debt
Securities of such series may, subject to certain exceptions, on behalf of the
holders of the Debt Securities of such series direct the time, method and place
of conducting proceedings for remedies available to the Trustee, or exercising
any trust or power conferred on the Trustee.
The Indenture includes a covenant that the Company will file annually
with the Trustee a certificate of no default, or specifying any default that
exists.
In certain cases, the holders of a majority in outstanding principal
amount of the Debt Securities of a given series may on behalf of the holders of
the Debt Securities of such series rescind a declaration of acceleration or
waive, as to the Debt Securities of such series, any past default or Event of
Default relating to the Debt Securities of such series, except a default not
theretofore cured in payment of the principal of or interest, if any, on any of
such Debt Securities of such series or in respect of a provision which under
the Indenture cannot be modified or amended without the consent of the holder
of each Debt Security of such series.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES OR STOCKHOLDERS
No director, officer, employee or stockholder of the Company, as such,
shall have any liability for any obligations of the Company under any Debt
Securities, under any Indenture relating thereto or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder of
Debt Securities by accepting the same, waives and releases all such liability.
This waiver and release is part of the consideration for the issuance of such
Debt Securities. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the SEC that such a waiver is
against public policy.
MODIFICATION OF THE INDENTURE
Modifications and amendments of an Indenture will be permitted to be
made only with the consent of the holders of not less than a majority in
principal amount of all outstanding Debt Securities issued under such Indenture
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the holder of each of the
Debt Securities affected thereby, (a) change the stated maturity of any
installment of the principal of (premium, if any) or interest, if any, on any
such Debt Securities; (b) reduce the principal amount of, the amount of any
premium payable on the redemption of, or the rate or amount of any interest on,
any such Debt Securities, or reduce the amount of principal of any Original
Issue Discount Securities that would be due and payable upon declaration of
acceleration of the maturity thereof or would be provable in bankruptcy, or
adversely affect any right of repayment of the holder of any such Debt
Securities; (c) change the place of payment, or the coin or currency, for
payment of principal of (premium, if any) or interest on any such Debt
Securities; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Securities; (e) reduce the
above-stated percentage of outstanding Debt Securities of any series necessary
to modify or amend the applicable Indenture, to waive compliance with certain
provisions thereof or certain defaults and consequences thereunder or to reduce
the quorum or voting requirements set forth in the applicable Indenture; or (f)
modify any of the foregoing provisions or any of the provisions relating to the
waiver of certain past defaults or certain covenants, except to increase the
required percentage to effect such action or to provide that certain other
provisions may not be modified or waived without the consent of the holders of
such Debt Securities.
The holders of a majority in aggregate principal amount of the
outstanding Debt Securities of each series may, on behalf of all holders of
Debt Securities of that series, waive, insofar as that series is concerned,
compliance by the Company with certain affirmative or restrictive covenants of
the applicable Indenture.
Modifications and amendments of an Indenture will be permitted to be
made by the Company and the respective Trustee thereunder without the consent
of any holder of Debt Securities for any of the following purposes: (i) to
evidence the succession of another person to the Company, and the assumption by
any such successor of the covenants of the Company herein and in the
Securities; (ii) to add to the covenants of the Company, for the benefit of the
holders of the Securities of any one or more series of Securities (and if such
covenants are to be for the benefit of less than all series of Securities,
stating that such covenants are expressly being included solely for the benefit
of such series), or to surrender any right or power herein conferred upon the
Company; (iii) to add any additional Events of Default for the benefit of the
holders of all or any series of Securities (and if such Events of Default are
to be for the benefit of less than all series of Securities, stating that such
Events of Default are expressly being included solely for the benefit of such
series); (iv) to add to or change any of the provisions of this Indenture to
such extent as shall be necessary to permit or facilitate the issuance of
Securities in bearer form, registrable or not registrable as to principal and
with or without interest coupons, or to permit or facilitate the issuance of
Securities in uncertificated form; (v) to cure any ambiguity, to correct or
supplement any provision herein which may be defective or inconsistent with any
other provision herein, or to make any other provisions with respect to matters
or questions arising under this Indenture, provided that such action shall not
adversely affect the interests of the holders of the Securities of any series
in any material respect; (vi) to modify, eliminate or add to the provisions of
this Indenture to such extent as shall be necessary to effect the qualification
of this Indenture under TIA, or under any similar federal statute hereafter
enacted, and to add to this Indenture such other provisions as may be expressly
permitted by TIA, excluding, however, the provisions referred to in Section
316(a)(2) of TIA or any corresponding provision in any similar federal statute
hereafter enacted;
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(vii) to provide for the issuance under this Indenture of Securities in the
form only of an entry or entries in the Security Register and without delivery
thereof in any form (including all appropriate notification and publication and
other provisions), and to provide for exchangeability of such Securities with
the Securities of the same series issued hereunder; (viii) to set forth the
forms and terms (including, without limitation, additional covenants and
changes in or eliminations of covenants previously set forth in this Indenture)
of any one or more series of Securities not previously issued; (ix) to add to,
change or eliminate any of the provisions of this Indenture in respect of one
or more series of Securities, provided, however, that any such addition, change
or elimination shall become effective only when there is no Security
outstanding of any series authorized prior to the execution of such
supplemental indenture which is entitled to the benefit of such provision; (x)
to evidence and provide for the acceptance of appointment hereunder by a
successor Trustee with respect to the Securities of one or more series and to
add to or change any of the provisions of this Indenture as shall be necessary
to provide for or facilitate the administration of the trusts hereunder by more
than one Trustee; or (xi) to supplement any of the provisions of this Indenture
to such extent as shall be necessary to permit or facilitate the defeasance and
discharge of any series of Securities; provided, however, that any such action
shall not adversely affect the interests of the holders of Securities of such
series or any other series of Securities in any material respect.
The Indentures will provide that in determining whether the holders of
the requisite principal amount of outstanding Debt Securities of a series have
given any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Securities
that shall be deemed to be outstanding shall be the amount of the principal
thereof that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of any Debt Securities denominated in a foreign currency that shall be deemed
Outstanding shall be the U.S. dollar equivalent, determined as of the issue
date of such Debt Securities, of the principal amount thereof (or, in the case
of an Original Issue Discount Securities, the U.S. dollar equivalent on the
issue date of such Debt Securities of the amount determined as provided in (i)
above), (iii) the principal amount of an indexed security that shall be deemed
outstanding shall be the principal face amount of such indexed security at
original issuance, unless otherwise provided with respect to such indexed
security pursuant such Indenture, and (iv) Debt Securities owned by the Company
or any other obligor upon the Debt Securities or any affiliate of the Company
or of such other obligor shall be disregarded.
The Indentures will contain provisions for convening meetings of the
holders of Debt Securities of a series. A meeting will be permitted to be
called at any time by the applicable Trustee, and also, upon request, by the
Company or the holders of at least 10% in principal amount of the outstanding
Debt Securities of such series, in any such case upon notice given as provided
in such Indenture. Except for any consent that must be given by the holder of
each of the Debt Securities affected by certain modifications and amendments of
an Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present may be adopted by the affirmative vote
of the holders of a majority in principal amount of the outstanding Debt
Securities of that series; provided, however, that, except as referred to
above, any resolution with respect to any request, demand, authorization,
direction, notice, consent, waiver or other action that may be made, given or
taken by the holders of a specified percentage, which is less than a majority,
in principal amount of the outstanding Debt Securities of a series may be
adopted at a meeting or adjourned meeting duly reconvened at which a quorum is
present by the affirmative vote of the holders of such specified percentage in
principal amount of the outstanding Debt Securities of that series. Any
resolution passed or decision taken at any meeting of holders of Debt
Securities of any series duly held in accordance with an Indenture will be
binding on all holders of Debt Securities of that series. The quorum at any
meeting called to adopt a resolution, and at any reconvened meeting, will be
persons holding or representing a majority in principal amount of the
outstanding Debt Securities of a series; provided, however, that if any action
is to be taken at such meeting with respect to a consent or waiver which may be
given by the holders of not less than a specified percentage in principal
amount of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, the Indentures will provide
that if any action is to be taken at a meeting of holders of Debt Securities of
any series with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that such Indenture expressly provides
may be made, given or taken by the holders of
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a specified percentage in principal amount of all outstanding Debt Securities
affected thereby, or by the holders of such series and one or more additional
series: (i) there shall be no minimum quorum requirement for such meeting, (ii)
the principal amount of the outstanding Debt Securities of such series that
vote in favor of such request, demand, authorization, direction, notice,
consent, waiver or other action shall be taken into account in determining
whether such request, demand, authorization, direction, notice, consent, waiver
or other action has been made, given or taken under such Indenture and (iii)
any such action may be taken by the written consent, without a meeting, of the
holders of the requisite percentage in principal amount of the outstanding Debt
Securities.
DEFEASANCE
The Company will be discharged from any and all obligations in respect
of Debt Securities of a series (except for certain obligations to register the
transfer or exchange of Debt Securities, to replace stolen, lost or mutilated
Debt Securities, to maintain paying agencies and hold monies for payment in
trust and to pay the principal of and interest, if any, on Debt Securities),
upon the irrevocable deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations which through the payment of interest and principal
thereof in accordance with their terms will provide money in an amount
sufficient to pay any installment of principal and interest, if any, in respect
of Debt Securities of such series on the dates on which such payments are due
in accordance with the terms of the Indenture and such Debt Securities. Such a
trust may only be established if establishment of the trust would not cause any
Debt Securities of such series listed on any nationally recognized securities
exchange to be de-listed as a result thereof. Also, such establishment of such
a trust will be conditioned on the delivery by the Company to the Trustee of an
Opinion of Counsel (who may be counsel to the Company) to the effect that,
based upon applicable U.S. federal income tax law or a ruling published by the
United States Internal Revenue Service, such a defeasance and discharge will
not be deemed, or result in, a taxable event with respect to holders of Debt
Securities of such series.
The Company may also omit to comply with the restrictive covenants
described under "Limitation on Liens" above (together with certain other
covenants set forth in the Indenture) and any such omission shall not be an
Event of Default with respect to Debt Securities of a series, upon the deposit
with the Trustee, in trust, of money and/or U.S. Government Obligations which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay any
installment of principal and interest in respect of the Debt Securities of such
series on the dates on which such payments are due in accordance with the terms
of the Indenture and such Debt Securities. The obligations of the Company under
the Indenture and such Debt Securities other than with respect to such
covenants shall remain in full force and effect. Such a trust may only be
established if establishment of the trust would not cause any Debt Securities
of such series listed on any nationally recognized securities exchange to be
de-listed as a result thereof. Also, such establishment of such a trust will be
conditioned on the delivery by the Company to the Trustee of an Opinion of
Counsel (who may be counsel to the Company) to the effect that such a
defeasance and discharge will not be deemed, or result in, a taxable event with
respect to holders of Debt Securities of such series.
In the event the Company exercises its option to omit compliance with
certain covenants as described in the preceding paragraph with respect to Debt
Securities of a series and such Debt Securities are declared due and payable
because of the occurrence of any Event of Default, then the amount of money and
U.S. Government Obligations on deposit with the Trustee will be sufficient to
pay amounts due on such Debt Securities at the time of the acceleration
resulting from such Event of Default. The Company shall in any event remain
liable for such payments as provided in such Debt Securities.
The applicable Prospectus Supplement may further describe the
provisions, if any, permitting such defeasance or covenant defeasance,
including any modifications to the provisions described above, with respect to
the Debt Securities of or within a particular series.
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CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock, Preferred Stock or Debt Securities of another
series will be set forth in the applicable Prospectus Supplement relating
thereto. Such terms will include whether such Debt Securities are convertible
into shares of Common Stock, Preferred Stock or Debt Securities of another
series, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the
holders or the Company, the events requiring an adjustment of the conversion
price and provisions affecting conversion in the event of the redemption of
such Debt Securities and any restrictions on conversion, including restrictions
directed at maintaining the Company's REIT status.
PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement,
the principal of (premium, if any) and interest, if any, on any series of Debt
Securities will be payable at the corporate trust office of the Trustee, the
address of which will be stated in the applicable Prospectus Supplement;
provided that, at the option of the Company, payments of interest may be made
by check mailed to the address of the person entitled thereto as it appears in
the applicable register for such Debt Securities or by wire transfer of funds
to such person at an account maintained within the United States.
All moneys paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Securities
which remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Securities thereafter may look only to the Company for the
payment thereof.
GLOBAL SECURITIES
Each series of Debt Securities may be represented by one or more
global securities (collectively with respect to each series, a "Global
Security") registered in the name of The Depository Trust Company (the
"Depository"). Except as set forth below, a Global Security may be transferred
in whole and not in part, only to the Depository or another nominee of the
Depository or to a successor of the Depository or its nominee.
Upon the issuance of a Global Security, the Depository will credit, on
its book-entry registration and transfer system, the respective principal
amounts of the Debt Securities represented by such Global Security to the
accounts of institutions that have accounts with the Depository or its nominee
("Participants"). The accounts to be credited will be designated by the
Underwriters, dealers or agents. Ownership of beneficial interests in a Global
Security will be limited to Participants or persons that may hold interests
through participants. Ownership of interests in such Global Security will be
shown on, and the transfer of those ownership interests will be effected only
through, records maintained by the Depository (with respect to Participants'
interests) and such Participants (with respect to the owners of beneficial
interests in such Global Security). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in a Global Security.
So long as the Depository, or its nominee, is the registered holder
and owner of such Global Security, the Depository or such nominee, as the case
may be, will be considered the sole owner and holder of the related Debt
Securities for all purposes of such Debt Securities and for all purposes under
the Indenture. Except as set forth below, owners of beneficial interests in a
Global Security will not be entitled to have the Debt Securities represented by
such Global Security registered in their names, will not receive or be entitled
to receive physical delivery of Debt Securities in definitive form and will not
be considered to be the owners or holders of any Debt Securities under the
Indenture or such Global Security.
Accordingly, each person owning a beneficial interest in a Global
Security must rely on the procedures of the Depository and, if such person is
not a Participant, on the procedures of the Participant through which such
person owns
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its interest, to exercise all rights of a holder of Debt Securities of a series
under the Indenture or such Global Security. The Company understands that under
existing industry practice, in the event the Company requests any action of
holders of Debt Securities of a series or an owner of a beneficial interest in
a Global Security desires to take any action that the Depository, as the holder
of such Global Security, is entitled to take, the Depository would authorize
the Participants to take such action, and that the Participants would authorize
beneficial owners owning through such Participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
The Prospectus Supplement relating to any Global Security will disclose the
terms under which any Depository may or shall take any action permitted or
required to be taken by it as the owner and holder of record of any such Global
Security.
Payment of principal and interest on notes represented by a Global
Security will be made to the Depository or its nominee, as the case may be, as
the registered owner and holder of such Global Security.
The Company expects that the Depository, upon receipt of any payment
of principal or interest, will immediately credit the accounts of the
Participants with such payment in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Security as
shown in the records of the Depository. Payments by Participants to owners of
beneficial interests in a Global Security held through such Participants will
be governed by standing instructions and customary practices, as is now the
case with securities held for the accounts of customers registered in "street
name", and will be the responsibility of such Participants. The Company and the
Trustee will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in a Global Security for any Debt Securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between the Depository
and its Participants or the relationship between such Participants and the
owners of beneficial interests in such Global Security owned through such
Participants.
Unless and until it is exchanged in whole or in part for Debt
Securities in definitive form, a Global Security may not be transferred except
as a whole by the Depository to a nominee of such Depository, by a nominee of
such Depository to such Depository or another nominee of such Depository, or to
a successor of the Depository or its nominee.
Debt Securities represented by a Global Security will be exchangeable
for Debt Securities in definitive form of like tenor as such Global Security in
denominations of $1,000 and in any greater amount that is an integral multiple
thereof if (i) the Depository notifies the Company that it is unwilling or
unable to continue as Depository for such Global Security or the Depository
ceases to be a clearing agency registered under the Exchange Act, (ii) the
Company executes and delivers to the Trustee a Company Order that such Global
Security shall be so transferable, registrable and exchangeable and such
transfers shall be registrable or (iii) there shall have occurred and be
continuing an Event of Default with respect to the Debt Securities evidenced by
such Global Security. Any Global Security that is exchangeable pursuant to the
preceding sentence is exchangeable for Debt Securities issuable in authorized
denominations and registered in such names as the Depository shall direct and
an owner of a beneficial interest in a Global Security will be entitled to
physical delivery of such Security in definitive form. Subject to the forgoing,
a Global Security is not exchangeable except for a Global Security or Global
Securities of the same aggregate denominations to be registered in the name of
the Depository or its nominee.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. The Depository
was created to hold securities of Participants and to facilitate the clearance
and settlement of securities transactions among the Participants, thereby
eliminating the need for physical delivery of securities and certificates.
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations, some of which (and/or
their representatives) own the Depository. Access to the Depository's
book-entry system is also available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with Participants, either directly or indirectly ("Indirect Participants").
Persons who are not
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Participants may beneficially own securities held by the Depository only
through Participants or Indirect Participants. The rules applicable to the
Depository and the Participants are on file with the SEC. The Depository
currently accepts only notes denominated and payable in U.S. dollars.
DESCRIPTION OF PREFERRED STOCK
GENERAL
Under the Charter, the Company has authority to issue up to 10,000,000
shares of Preferred Stock, of which 6,050,000 shares designated as the Series A
Preferred Stock were outstanding as of the date of this Prospectus.
Accordingly, up to 3,950,000 additional shares of Preferred Stock may be issued
from time to time, in one or more series, as authorized by the Board of
Directors of the Company, subject to the rights of the holders of the
outstanding Series A Preferred Stock. See "Description of Series A Preferred
Stock." Prior to issuance of shares of each series, the Board of Directors is
required by the Maryland General Corporation Law ("MGCL") and the Company's
Charter to fix for each series, subject to the Ownership Limitation Provisions
(as hereinafter defined) of the Company's Charter, the designation, powers,
preferences, conversion, dividend, redemption, voting or other rights, and the
qualifications, limitations or restrictions thereon, as are permitted by
Maryland law (a "Designating Amendment"). The Preferred Stock, when issued,
will be fully paid and nonassessable and will have no preemptive rights. The
Board of Directors could authorize the issuance of shares of Preferred Stock
with terms and conditions that could have the effect of delaying or preventing
a change of control or other transaction that holders of Common Stock might
believe to be in their best interests or in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their
shares over the then market price of such shares of Common Stock.
TERMS
The following description of the Preferred Stock sets forth certain
general terms and provisions of the Preferred Stock to which any Prospectus
Supplement may relate. The statements below describing the Preferred Stock are
in all respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Charter (including the applicable
Designating Amendment) and its bylaws, as amended and restated ("Bylaws"). See
"Certain Charter, Bylaw and Statutory Provisions -- Charter and Bylaw
Provisions."
Reference is made to the Prospectus Supplement relating to the
Preferred Stock offered thereby for specific terms, including, without
limitation:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such
Preferred Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred
Stock;
(4) The date from which dividends on such Preferred Stock shall
accumulate, if applicable;
(5) The provision for a sinking fund, if any, for such Preferred
Stock;
(6) The provisions for redemption, if applicable, of such Preferred
Stock;
(7) Any listing of such Preferred Stock on any securities exchange;
(8) The terms and conditions, if applicable, upon which such
Preferred Stock will be convertible into Common Stock, Preferred
Stock of another series or Debt Securities, including the
conversion price (or manner of calculation thereof);
(9) A discussion of certain federal income tax considerations
relevant to a holder of such Preferred Stock;
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(10) The relative ranking and preferences of such Preferred Stock as
to dividend rights and rights upon liquidation, dissolution or
winding up of the affairs of the Company;
(11) Any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred
Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company;
(12) Any limitations on direct or beneficial ownership and
restrictions on transfer, in each case as may be appropriate to
preserve the status of the Company as a REIT; and
(13) Any other specific terms, preferences, rights, qualifications,
limitations or restrictions applicable to such Preferred Stock.
RANKING
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, rank (i) senior to all classes or
series of Common Stock of the Company, and to all equity securities ranking
junior to such Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; (ii) on a parity with
all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank on a parity with the Preferred Stock
with respect to dividend rights or rights upon liquidation, dissolution or
winding up of the Company; and (iii) junior to all equity securities issued by
the Company the terms of which specifically provide that such equity securities
rank senior to the Preferred Stock with respect to dividend rights or rights
upon liquidation, dissolution or winding up of the Company. The term "equity
securities" does not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to
receive, when, as and if declared by the Board of Directors of the Company, out
of assets of the Company legally available for the payment thereof, cash
dividends at such rates and on such dates as will be set forth in the
applicable Prospectus Supplement. Each such dividend shall be payable to
holders of record as they appear on the stock transfer books of the Company on
such record dates as shall be fixed by the Board of Directors of the Company.
Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors of the Company
fails to declare a dividend payable on a dividend payment date on any series of
the Preferred Stock for which dividends are non-cumulative, then the holders of
such series of the Preferred Stock will have no right to receive a dividend in
respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to declare or pay the dividend accrued for such
period, whether or not dividends on such series are declared and paid on any
future dividend payment date.
If Preferred Stock of any series is outstanding, no dividends will be
declared or paid or set apart for payment on any capital stock of the Company
of any other series ranking, as to dividends, on a parity with or junior to the
Preferred Stock of such series, for any period, unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends have been
or contemporaneously are declared and paid, or declared and a sum sufficient
for the payment thereof is set apart for such payment, on the Preferred Stock
of such series for all past dividend periods and the then current dividend
period or (ii) if such series of Preferred Stock does not have a cumulative
dividend, full dividends for the then current dividend period have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof is set apart for such payment, on the Preferred Stock of
such series.
When dividends are not paid in full (or a sum sufficient for the full
payment thereof is not so set apart) upon Preferred Stock of any series and the
shares of any other series of Preferred Stock ranking on a parity as to
dividends
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with the Preferred Stock of such series, all dividends declared upon Preferred
Stock of such series and any other series of Preferred Stock ranking on a
parity as to dividends with such Preferred Stock shall be declared pro rata so
that the amount of dividends declared per share of Preferred Stock of such
series and of each other series of Preferred Stock ranking on a parity as to
dividends with such Preferred Stock shall in all cases bear to each other the
same ratio that accrued dividends per share on the Preferred Stock of such
series (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such Preferred Stock does not have a cumulative
dividend) and such other series of Preferred Stock bear to each other. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on Preferred Stock of any series which may be
in arrears.
Unless all dividends then required to be paid on Preferred Stock of
any series shall have been or contemporaneously are so declared and paid, or
declared and a sum sufficient for the payment thereof is set apart for payment,
no dividends or other distributions (other than in shares of Common Stock or
other shares of capital stock ranking junior to the Preferred Stock of such
series as to dividends and upon liquidation) shall be declared or paid or set
aside for payment, upon the Common Stock or any other capital stock ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation, nor shall any shares of Common Stock or any other shares of
capital stock of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation be redeemed,
purchased or otherwise acquired for any consideration (or any moneys to be paid
to or made available for a sinking fund for the redemption of any such stock)
by the Company (except by conversion into or exchange for other capital stock
of the Company ranking junior to the Preferred Stock of such series as to
dividends and upon liquidation); provided, however, that the foregoing shall
not prevent the Company from the purchase or other acquisition of any of its
capital stock for the purpose of preserving its status as a REIT.
Any dividend payment made on shares of a series of Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred
Stock will be subject to mandatory redemption or redemption at the option of
the Company, as a whole or in part, in each case upon the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that
is subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon
(which shall not, if such Preferred Stock does not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in cash
or other property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of shares of capital stock of the Company, the terms
of such Preferred Stock may provide that, if no such shares of capital stock
shall have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Stock shall automatically and mandatorily be converted into the
applicable shares of capital stock of the Company pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless all dividends then required to
be paid on Preferred Stock of any series shall have been or contemporaneously
are declared and paid, or declared and a sum sufficient for the payment thereof
set apart for payment, (i) no shares of such series of Preferred Stock shall be
redeemed unless all outstanding shares of Preferred Stock of such series are
simultaneously redeemed and (ii); provided, however, that the foregoing shall
not prevent the Company from the purchase or acquisition of any Preferred Stock
of such series which is made pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of Preferred Stock of such
series or made for the purpose of preserving the Company's status as a REIT. In
addition, unless (i) if such series of Preferred Stock has a cumulative
dividend, full cumulative dividends on all outstanding shares of such series of
Preferred Stock have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment
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thereof set apart for payment for all past dividend periods and the then
current dividend period, and (ii) the Company shall not purchase or otherwise
acquire directly or indirectly any shares of Preferred Stock of such series
(except by conversion into or exchange for capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of shares of Preferred Stock of such series to preserve
the REIT status of the Company or pursuant to a purchase or exchange offer made
on the same terms to holders of all outstanding shares of Preferred Stock of
such series.
If fewer than all of the outstanding shares of Preferred Stock of any
series are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares
held or for which redemption is requested by such holder (with adjustments to
avoid redemption of fractional shares) or in any other equitable manner
determined by the Company that will not result in a violation of the Ownership
Limitation Provisions of the Company's Charter.
Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of record of Preferred Stock
of any series to be redeemed at the address shown on the stock transfer books
of the Company. Each notice shall state: (i) the redemption date; (ii) the
number of shares and series of the Preferred Stock to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such
Preferred Stock are to be surrendered for payment of the redemption price; (v)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (vi) the date upon which the holder's conversion rights,
if any, as to such shares shall terminate. If fewer than all the shares of
Preferred Stock of any series are to be redeemed, the notice mailed to each
such holder thereof shall also specify the number of shares of Preferred Stock
to be redeemed from each such holder. If notice of redemption of any Preferred
Stock has been given and if the funds necessary for such redemption have been
set aside by the Company in trust for the benefit of the holders of any
Preferred Stock so called for redemption, then from and after the redemption
date dividends will cease to accrue on such shares of Preferred Stock, such
shares of Preferred Stock shall no longer be deemed to be outstanding and all
rights of the holders of such shares of Preferred Stock will terminate, except
the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Company, then, before any distribution or payment
shall be made to the holders of any Common Stock or any other capital stock of
the Company ranking junior to the Preferred Stock of any series in the
distribution of assets upon any liquidation, dissolution or winding up of the
Company, the holders of each series of Preferred Stock shall be entitled to
receive, out of assets of the Company legally available for distribution to
stockholders, liquidating distributions in the amount of the liquidation
preference per share, if any, set forth in the applicable Prospectus
Supplement, plus an amount equal to all dividends accrued and unpaid thereon
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods if such Preferred Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
legally available assets of the Company are insufficient to pay the amount of
the liquidating distributions on all outstanding shares of Preferred Stock and
the corresponding amounts payable on all shares of other capital stock of the
Company ranking on a parity with the Preferred Stock in the distribution of
assets upon any liquidation, dissolution or winding up of the Company, then the
holders of the Preferred Stock and all of such other capital stock shall share
ratably in any such distribution of assets, in direct proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all
holders of Preferred Stock, the remaining assets of the Company shall be
distributed among the holders of any other shares of capital stock ranking
junior to the Preferred Stock upon liquidation, dissolution or winding up of
the Company, according to their respective rights and preferences and in each
case according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other corporation,
trust or entity, or the sale, lease or conveyance of all or
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substantially all of the property or business of the Company, shall not be
deemed to constitute a liquidation, dissolution or winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except
(i) as set forth below, (ii) as from time to time required by law or (iii) as
expressly provided in the Designating Amendment for any series of Preferred
Stock and described in the applicable Prospectus Supplement.
Unless otherwise expressly provided in the Designating Amendment for
any series of Preferred Stock and described in the applicable Prospectus
Supplement, so long as any shares of Preferred Stock of a series remain
outstanding, the Company will not, without the affirmative vote of the holders
of at least two-thirds of the shares of such series of Preferred Stock
outstanding (such series voting separately as a class), amend, alter or repeal
the provisions of the Designating Amendment for such series of Preferred Stock,
whether by merger, consolidation or otherwise (an "Event"), so as to materially
and adversely affect any right, preference, privilege or voting power of such
series of Preferred Stock or the holders thereof; provided, however, with
respect to the occurrence of any Event set forth above, so long as the
Preferred Stock remains outstanding with the terms thereof materially unchanged
(whether or not as a consequence of such Event the Company is the surviving
entity), the occurrence of any such Event shall not be deemed to materially and
adversely affect the rights, preferences, privileges or voting powers of such
series of preferred Stock or the holders thereof; and provided further that (x)
any increase in the amount of the authorized Preferred Stock or the creation or
issuance of any other series of Preferred Stock, or (y) any increase in the
amount of authorized shares of such series or of any other series of Preferred
Stock, in each case whether ranking senior to, on a parity with or junior to
the Preferred Stock of such series with respect to the payment of dividends or
the distribution of assets upon the liquidation, dissolution or winding up of
the Company, shall not be deemed to materially and adversely affect such
rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the
time when the Event with respect to which such vote otherwise would be required
shall be effected, all outstanding shares of such series of Preferred Stock
shall have been redeemed or called for redemption and sufficient funds shall
have been deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred
Stock is convertible into Common Stock, Preferred Stock of another series or
Debt Securities will be set forth in the applicable Prospectus Supplement
relating thereto. Such terms will include the number of shares of Common Stock
or Preferred Stock of another series or the amount of Debt Securities into
which shares of such series of Preferred Stock are convertible, the conversion
price (or manner of calculation thereof), the conversion period, provisions as
to whether conversion will be at the option of the holders of the Preferred
Stock or the Company, the events requiring an adjustment of the conversion
price and provisions affecting conversion in the event of the redemption of
such series of Preferred Stock.
RESTRICTIONS ON OWNERSHIP AND TRANSFERS
The Preferred Stock, including the Series A Preferred Stock, is
subject to certain restrictions upon the ownership and transfer thereof which
were adopted for the purpose of enabling the Company to preserve its status as
a REIT. For a description of such restrictions, see "Certain Charter, Bylaw and
Statutory Provisions -- Charter and Bylaw Provisions -- Restrictions on
Ownership and Transfer."
TRANSFER AGENT
The transfer agent and registrar for the Preferred Stock will be set
forth in the applicable Prospectus Supplement.
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DESCRIPTION OF SERIES A PREFERRED STOCK
The summary of certain terms and provisions of the Series A Preferred
Stock set forth below 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").
No series of Preferred Stock (other than the Series A Preferred Stock)
have been authorized or issued. The Preferred Stock may be issued from time to
time in one or more series, without shareholder approval, with such voting
powers (full or limited), designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof as shall be established by the Board of
Directors. See "Description of the Preferred Stock." 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.
GENERAL
In April 1996, the Board of Directors authorized the Company to
classify and issue the Series A Preferred Stock as part of the 10,000,000
shares of the Company's authorized Preferred Stock.
The Series A Preferred Stock is validly issued, fully paid and
nonassessable. The holders of the Series A Preferred Stock 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 will have a perpetual term, with no
maturity.
RANKING
The Series A Preferred Stock ranks senior to the Common Stock with
respect to the payment of dividends and amounts upon liquidation, dissolution
or winding up of the Company.
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 junior to or 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 distributions declared or
paid for the corresponding period 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, commencing July 31, 1996 (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
is payable to holders of record as they appear on the stock records of the
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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 accrued from May 6, 1996, the date of
original issuance of the Series A Preferred Stock. Dividends will be 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 will 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 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 may, at any time, acquire shares of its capital stock,
without regard to rank, for the purpose of preserving its status as a REIT or
for purposes of an employee benefit plan of the Company.
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 and (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.
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 as specified
by the Company in the notice of redemption. 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 New York Stock Exchange ("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.
Notice of redemption will be given by mail or by publication (with
subsequent prompt notice by mail) to the holders of the Series A Preferred
Stock not more than four business days after the Company issues the press
release. The redemption date will be a date selected by the Company not less
than 30 nor more than 60 days after the date on which the Company issues the
press release announcing its intention to redeem the Series A Preferred Stock.
If fewer
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than all of the shares of Series A Preferred Stock are to be redeemed, the
shares shall be selected by lot or pro rata or in some other equitable manner
determined by the Company.
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. In the case
of a redemption date falling after a dividend payment record date and prior to
the related payment date, the holders of the Series A Preferred Stock at the
close of business on such record date will be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date,
notwithstanding the redemption of such shares prior to such dividend payment
date. Except as provided for in the preceding sentence, no payment or allowance
will be made for accrued dividends on any shares of Series A Preferred Stock
called for redemption or on the shares of Common Stock issuable upon such
redemption.
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 set
apart for payment, the Series A Preferred Stock may not be redeemed in whole or
in part and the Company may not, except as set forth in the following sentence,
redeem, purchase or otherwise acquire for consideration any shares of Series A
Preferred Stock, otherwise than pursuant to a purchase or exchange offer made
on the same terms to all holders of shares of Series A Preferred Stock.
Notwithstanding the foregoing limitations, the Company may, at any time,
acquire shares of its capital stock, without regard to rank, for the purpose of
preserving its status as a REIT or for purposes of an employee benefit plan of
the Company.
On and after the date fixed for redemption, provided that the Company
has made available at the office of the registrar and transfer agent a
sufficient number of shares of Common Stock and/or an amount of cash to effect
the redemption, dividends will cease to accrue on the Series A Preferred Stock
called for redemption (except that, in the case of a redemption date after a
dividend payment record date and prior to the related dividend payment date,
holders of Series A Preferred Stock on the dividend payment record date will be
entitled on such dividend payment date to receive the dividend payable on such
shares), such shares shall no longer be deemed to be outstanding and all rights
of the holders of such shares of Series A Preferred Stock shall cease, except
for the right to receive the shares of Common Stock and/or any cash payable
upon such redemption, without interest from the date of such redemption. At the
close of business on the redemption date, each holder of Series A Preferred
Stock (unless the Company defaults in the delivery of the shares of Common
Stock or cash) will be, without any further action, (i) deemed a holder of the
number of shares of Common Stock for which such Series A Preferred Stock is
redeemable or (ii) be entitled to receive the cash amount applicable to such
shares.
Fractional shares of Common Stock are not to be issued upon redemption
of the Series A Preferred Stock, but, in lieu thereof, the Company will pay a
cash adjustment based on the current market price of the Common Stock on the
day prior to the redemption date.
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
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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 or 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.
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, is 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 are
not 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.
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.
For information as to notices of redemption, see "--Redemption" above.
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.
Each conversion will be deemed to have been effected immediately prior
to the close of business on the date on which the certificates for shares of
Series A Preferred Stock shall have been surrendered and notice shall have been
received by the Company as aforesaid (and if applicable, payment of an amount
equal to the dividend payable on such shares shall have been received by the
Company as described below) and the conversion shall be at the Conversion Price
in effect at such time and on such date.
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Holders of shares of Series A Preferred Stock at the close of business
on a dividend payment record date will be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date,
notwithstanding the conversion of such shares following such dividend payment
record date and prior to such dividend payment date. However, shares of Series
A Preferred Stock surrendered for conversion during the period between the
close of business on any dividend payment record date and the opening of
business on the corresponding dividend payment date (except shares converted
after the issuance by the Company of a notice of redemption providing for a
redemption date during such period, which shares will be entitled to such
dividend) must be accompanied by payment of an amount equal to the dividend
payable on such shares on such dividend payment date. A holder of shares of
Series A Preferred Stock on a dividend payment record date who (or whose
transferee) tenders any such shares for conversion into shares of Common Stock
on such dividend payment date will receive the dividend payable by the Company
on such shares of Series A Preferred Stock on such date, and the converting
holder need not include payment of the amount of such dividend upon surrender
of shares of Series A Preferred Stock for conversion. Except as provided above,
the Company will make no payment or allowance for unpaid dividends, whether or
not in arrears, on converted shares or for dividends on the shares of Common
Stock issued upon such conversion.
Fractional shares of Common Stock are not to be issued upon conversion
but, in lieu thereof, the Company will pay a cash adjustment based on the
current market price of the Common Stock on the day prior to the conversion
date.
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 for which an adjustment
previously has been made 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.
In case the Company shall be a party to any transaction (including
without limitation a merger, consolidation, statutory share exchange, tender
offer for all or substantially all of the shares of Common Stock or sale of all
or substantially all of the Company's assets), in each case as a result of
which shares of Common Stock will be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
share of Series A Preferred Stock, if convertible after the consummation of the
transaction, will thereafter be convertible into the kind and amount of shares
of stock and other securities and property receivable (including cash or any
combination thereof) upon the consummation of such transaction by a holder of
that number of shares or fraction thereof of Common Stock into which one share
of Series A Preferred Stock was convertible immediately prior to such
transaction (assuming such holder of Common Stock failed to exercise any rights
of election and received per share the kind and amount received per share by a
plurality of non-electing shares). The Company may not become a party to any
such transaction unless the terms thereof are consistent with the foregoing.
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No adjustment of the Conversion Price will be required to be made in
any case until cumulative adjustments amount to 1% or more of the Conversion
Price. Any adjustments not so required to be made will be carried forward and
taken into account in subsequent adjustments.
EXCHANGE LISTING
The Series A Preferred Stock is listed on the NYSE under the symbol
"FCHpA".
TRANSFER AGENT
The transfer agent and registrar for the Series A Preferred Stock is
SunTrust Bank, Atlanta, Georgia.
DESCRIPTION OF COMMON STOCK
The description of the Company's Common Stock set forth below
describes certain general terms and provisions of the Common Stock to which any
Prospectus Supplement may relate, including a Prospectus Supplement providing
that Common Stock will be issuable upon conversion of Debt Securities or
Preferred Stock of the Company or upon the exercise of Common Stock Warrants
issued by the Company. The following description does not purport to be
complete and is qualified in its entirety by reference to the Company's Charter
and Bylaws. See "Certain Charter, Bylaw and Statutory Provisions -- Charter and
Bylaw Provisions."
GENERAL
Under the Charter, the Company has authority to issue up to 50,000,000
shares of Common Stock. Under Maryland law, stockholders generally are not
responsible for the corporation's debts or obligations. At March 18, 1997, the
Company had outstanding 26,539,676 shares of Common Stock.
TERMS
Subject to the preferential rights of any series of Preferred Stock
outstanding, the holders of Common Stock are entitled to one vote per share on
all matters voted on by stockholders, including in the election of directors.
The Company's Charter does not provide for cumulative voting in the election of
directors. Except as otherwise required by law or provided in a Designating
Amendment relating to Preferred Stock of any series, the holders of Common
Stock exclusively possess all voting power. See "Certain Charter, Bylaw and
Statutory Provisions -- Charter and Bylaw Provisions."
Subject to any preferential rights of any series of Preferred Stock
outstanding, the holders of Common Stock are entitled to such dividends, if
any, as may be declared from time to time by the Board of Directors from funds
legally available therefor and, upon liquidation, are entitled to receive, pro
rata, all assets of the Company available for distribution to such holders. All
shares of Common Stock will, when issued, be fully paid and nonassessable and
will have no preemptive rights.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Common Stock is subject to certain restrictions upon the ownership
and transfer thereof which were adopted for the purpose of enabling the Company
to preserve its status as a REIT. For a description of such restrictions and
the Maryland Anti-Takeover Statutes, see "Certain Charter, Bylaw and Statutory
Provisions -- Charter and Bylaw Provisions -- Restrictions on Ownership and
Transfer" and "-- Maryland Anti-Takeover Statutes.
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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.
DESCRIPTION OF COMMON STOCK WARRANTS
The following description of Common Stock Warrants does not purport to
be complete and is qualified in its entirety by reference to the description of
a particular series of Common Stock Warrants contained in an applicable
Prospectus Supplement. For information relating to the Common Stock which may
be purchased pursuant to Common Stock Warrants, see "Description of Common
Stock."
The Company may issue one or more series of Common Stock Warrants for
the purchase of Common Stock. Common Stock Warrants of any series may be issued
independently of, or together with, any Securities offered pursuant to any
Prospectus Supplement. If offered together with other Securities, Common Stock
Warrants may be attached to, or separate from, such Securities. Each series of
Common Stock Warrants will be issued under a separate warrant agreement (each a
"Warrant Agreement") to be entered into between the Company and the holder of
such Common Stock Warrants or, if the holders are expected to be numerous, a
warrant agent identified in the applicable Prospectus Supplement ("Warrant
Agent"). Any Warrant Agent, if engaged, will act solely as an agent of the
Company in connection with the Common Stock Warrants of the series specified in
the Warrant Agreement relating thereto and such Warrant Agent will not assume
any relationship or obligation of agency or trust for or with any holders or
beneficial owners of Common Stock Warrants. Further terms of the Common Stock
Warrants and the related Warrant Agreements will be set forth in the applicable
Prospectus Supplement.
The Common Stock Warrants will be subject to certain restrictions upon
the exercise, ownership and transfer thereof which were adopted for the purpose
of enabling the Company to preserve its status as a REIT. For a description of
such restrictions and the Maryland Anti-Takeover Statutes, see "Certain
Charter, Bylaw and Statutory Provisions -- Charter and Bylaw Provisions --
Restrictions on Ownership and Transfer" and "-- Maryland Anti-Takeover
Statutes.
CERTAIN CHARTER, BYLAW AND STATUTORY PROVISIONS
CHARTER AND BYLAW PROVISIONS
Restrictions on Ownership and Transfer
For the Company to qualify as a REIT under the Code, it must meet
certain requirements concerning the ownership of its outstanding stock.
Specifically, not more than 50% in value of the Company's outstanding stock may
be owned, actually and constructively under the applicable attribution
provisions of the Code, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year (other than
the first year) or during a proportionate part of a shorter taxable year, and
the Company must be beneficially owned by 100 or more persons during at least
335 days of a taxable year (other than the first year) or during a
proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations -- Requirements for Qualification." For the purpose of
preserving the Company's REIT qualification, the Company's Charter contains the
Ownership Limitation Provisions, which restrict the ownership and transfer of
the Company's capital stock under certain circumstances.
The "Ownership Limitation Provisions" provide that, subject to certain
exceptions specified in the Charter, no person may own, or be deemed to own by
virtue of the applicable attribution provisions of the Code, more than 9.9% of
the outstanding shares of any class of the Company's 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
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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 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.
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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.
Number of Directors; Removal; Filling Vacancies
The Charter and Bylaws provide that, subject to any rights of holders
of Preferred Stock to elect additional directors under specified circumstances,
the number of directors will consist of not less than three nor more than nine
persons, subject to increase or decrease by the affirmative vote of 80% of the
members of the entire Board of Directors. At all times a majority of the
directors shall be Independent Directors, except that upon the death, removal
or resignation of an Independent Director, such requirement shall not be
applicable for 60 days. As of March 31, 1997, there were seven directors, four
of whom are Independent Directors. The holders of Common Stock shall be
entitled to vote on the election or removal of directors, with each share
entitled to one vote. The Charter provides that, subject to any rights of
holders of Preferred Stock, and unless the Board of Directors otherwise
determines, any vacancies will be filled by the affirmative vote of a majority
of the remaining directors, though less than a quorum. Any director so elected
may qualify as an Independent Director only if he has received the affirmative
vote of at least a majority of the remaining Independent Directors, if any.
Accordingly, the Board of Directors could temporarily prevent any holder of
Common Stock from enlarging the Board of Directors and filling the new
directorships with such shareholder's own nominees. Any director so elected
shall hold office until the next annual meeting of shareholders.
A director may be removed with cause by the vote of the holders of a
majority of the outstanding shares of Common Stock at a special meeting of the
shareholders called for the purpose of removing him.
Limitation of Liability
The Charter provides that to the maximum extent that Maryland law in
effect from time to time permits limitation of liability of directors and
officers, no director or officer of the Company shall be liable to the Company
or its shareholders for money damages.
Indemnification of Directors and Officers
The Charter and Bylaws require the Company to indemnify its directors,
officers, employees and agents to the fullest extent permitted from time to
time by Maryland law. Maryland law permits a corporation to indemnify its
directors, officers, employees and agents against judgments, penalties, fines,
settlements and reasonable expenses (including attorneys fees) actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service to or at the request of the corporation,
unless it is established that (i) the act or omission of the indemnified party
was material to the matter giving rise to the proceeding and the act or
omission was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the indemnified party actually received an improper personal
benefit in money, property or services, or (iii) in the case of any criminal
proceeding, the indemnified party had reasonable cause to believe that the act
or omission was unlawful. Indemnification is mandatory if the indemnified
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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, with the shareholders
voting as a class with one vote per share; provided, that the Charter provision
providing for the classification of the Company's Board of Directors into three
classes may not be amended, altered, changed or repealed without the
affirmative vote of at least 80% of the members of the Board of Directors and
the affirmative vote of holders of 75% of the outstanding shares of capital
stock entitled to vote generally in the election of directors voting as a
class. The provisions relating to restrictions on transfer, designation of
shares-in-trust, shares-in- trust and ownership of the Lessee may not be
amended, altered, changed or repealed without the affirmative vote of a
majority of the members of the Board of Directors and adopted by an affirmative
vote of the holders of not less than 66 2/3% of the outstanding shares of
capital stock of the Company entitled to vote generally in the election of
directors, voting together as a class.
Operations
The Company generally is prohibited from engaging in certain
activities, including incurring indebtedness, in the aggregate, in excess of
40% of the Company's investment in hotel properties, at its cost, on a
consolidated basis, after giving effect to the Company's use of proceeds from
any indebtedness, and acquiring or holding property or engaging in any activity
that would cause the Company to fail to qualify as a REIT. With respect to the
limitation on indebtedness, the Company has proposed an amendment to its
Charter to eliminate such limitation and has submitted such amendment to its
shareholders for approval at the 1997 Annual Meeting of Shareholders to be held
May 22, 1997. Even if such amendment is approved, however, the Board of
Directors has expressed its intent to adopt a policy to maintain such
limitation and the terms of the Line of Credit impose the same limitation upon
the Company.
MARYLAND ANTI-TAKEOVER STATUTES
Under Sections 3-601 et seq. of the Maryland General Corporation Law,
certain "business combinations" (including a merger, consolidation, share
exchange, or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland corporation and any
person who beneficially owns 10% or more of the voting power of the
corporation's shares or an affiliate of the corporation who, at any time within
the two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then outstanding voting stock of the
corporation (an "Interested Shareholder") or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Shareholder became an Interested Shareholder. Thereafter, any "business
combination" must be recommended by the board of directors of the corporation
and approved by the affirmative vote of at least (a) 80% of the votes entitled
to cast by holders of outstanding voting shares of the corporation and (b) 66
2/3% of the votes entitled to be cast by holders of outstanding voting shares
of the corporation other than shares held by the Interested Shareholder with
whom the business combination is to be effected, unless, among other
conditions, the corporation's shareholders receive a minimum price (as defined
under Maryland law) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Shareholder for its
shares. These provisions of Maryland law do not apply, however, to business
combinations that are (i) with respect to specifically identified or
unidentified existing or future Interested Shareholders, approved or exempted
by the board of directors of the corporation prior to the time that the
Interested Shareholder becomes an Interested Shareholder, or (ii) if the
original articles of incorporation of the corporation contain a provision
expressly electing not to be governed by Section 602 of the Maryland Business
Combination Statute or the shareholders of the corporation adopt a charter
amendment by a vote of at least 80% of the votes entitled to be cast by
outstanding shares of voting stock of the corporation, voting together in a
single group, and 66 2/3% of the votes entitled to be cast by persons (if any)
who are
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not Interested Shareholders. The Board of Directors 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 Maryland General Corporation Law (the
"Control Share Statute") provides that "control shares" of a Maryland
corporation acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of 66 2/3% of the votes entitled to be
case on the matter, excluding shares of stock as to which the acquiring person,
officers of the corporation and directors of the corporation who are employees
of the corporation are entitled to direct or exercise the voting power in the
election of directors. "Control shares" are voting shares of stock that, if
aggregated with all other shares of stock previously acquired by that person,
would entitle the acquiror to exercise voting power in electing directors
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority, or (iii)
a majority or more of all voting power. Control shares do not include shares
the acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions. Voting rights
will not be denied to "control shares" if the acquisition of such shares, as to
specifically identified or unidentified future or existing shareholders or
their affiliates, has been approved by the charter or bylaws of the corporation
prior to the acquisition of such shares.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any shareholders' meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without regard
to voting rights, as of the date of the last control share acquisition or of
any meeting of shareholders at which the voting rights of such shares are
considered and not approved. If voting rights for control shares are approved
at a shareholders meeting and the acquiror becomes entitled to vote a majority
of the shares entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of the
appraisal rights may not be less than the highest price per share paid in the
control share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context of
a control share acquisition.
The Maryland Control Share Statute does not apply to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction, or to acquisitions approved or exempted by a corporation's
articles of incorporation or bylaws.
The Charter and Bylaws contain a provision exempting any and all
acquisitions of the Company's shares of capital stock from the control shares
provision of Maryland law. There can be no assurance that this provision will
not be amended or eliminated in the future.
PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement of the Partnership
("Partnership Agreement"), and the descriptions of certain provisions thereof
set forth herein, are qualified in their entirety by reference to the
Partnership Agreement, which is an exhibit to the Registration Statement of
which this Prospectus is a part.
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
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("General Partner"), has full, exclusive and complete responsibility and
discretion in the management and control of the Partnership, and the limited
partners of the Partnership ("Limited Partners") have no authority to transact
business for, or participate in the management activities or decisions of, the
Partnership. However, any amendment to the Partnership Agreement that would (i)
affect the Redemption Rights described under "-- Redemption Rights" below, (ii)
adversely affect the Limited Partners' rights to receive cash distributions,
(iii) alter the Partnership's allocations of income, or (iv) impose on the
Limited Partners any obligations to make additional contributions to the
capital of the Partnership, requires the consent of Limited Partners holding at
least a majority of the Units.
TRANSFERABILITY OF INTERESTS
The Company may not voluntarily withdraw from the Partnership or
transfer or assign its interest in the Partnership unless the transaction in
which such withdrawal or transfer occurs results in the Limited Partners
receiving property in an amount equal to the amount they would have received
had they exercised their Redemption Rights immediately prior to such
transaction, or unless the successor to the Company contributes substantially
all of its assets to the Partnership in return for an interest in the
Partnership. The Limited Partners may not transfer their interests in the
Partnership without the consent of the Company, which the Company may withhold
in its sole discretion. The Company may not consent to any transfer that would
cause the Partnership to be treated as a separate corporation for federal
income tax purposes.
CAPITAL CONTRIBUTIONS
The Company and the original Limited Partners contributed cash and
certain interests in the Company's six initial hotels to the Partnership in
connection with the Company's initial public offering of Common Stock in 1994
("IPO"). Subsequently, the Partnership issued additional Units in exchange for
cash contributions from Promus and for interests in two additional hotels. The
Company will contribute all of the net proceeds from the sale of capital stock
to the Partnership in exchange for additional Units having distribution,
liquidation and conversion provisions substantially identical to the capital
stock so offered by the Company. As required by the Partnership Agreement,
immediately prior to a capital contribution by the Company, the Partners'
capital accounts and the Carrying Value (as that term is defined in the
Partnership Agreement) of the Partnership property shall be adjusted to reflect
the unrealized gain or unrealized loss attributable to the Partnership property
as if such items had actually been recognized immediately prior to such
issuance and had been allocated to the Partners at such time.
The Partnership Agreement provides that if the Partnership requires
additional funds at any time or from time to time in excess of funds available
to the Partnership from borrowing or capital contributions, the Company may
borrow such funds from a financial institution or other lender and lend such
funds to the Partnership on the same terms and conditions as are applicable to
the Company's borrowing of such funds. As an alternative to borrowing funds
required by the Partnership, the Company may contribute the amount of such
required funds as an additional capital contribution to the Partnership. If the
Company so contributes additional capital to the Partnership, the Company will
receive additional Units.
REDEMPTION RIGHTS
Pursuant to the Partnership Agreement, the Limited Partners are
entitled to certain rights of redemption ("Redemption Rights"), which enable
them to cause the Partnership to redeem their interests in the Partnership
(subject to certain restrictions) in exchange for shares of Common 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,
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subject to the above restrictions), at any time or from time to time, following
the satisfaction of any applicable holding period requirements. At March 31,
1997, the aggregate number of shares of Common Stock issuable upon exercise of
the Redemption Rights by the Limited Partners was 2,765,205. The number of
shares issuable upon the exercise of the Redemption Rights will be adjusted
upon the occurrence of stock splits, mergers, consolidations or similar pro
rata share transactions, which otherwise would have the effect of diluting the
ownership interests of the Limited Partners or the shareholders of the Company.
REGISTRATION RIGHTS
The Limited Partners have, or will have, certain rights to the
registration for resale of any shares of Common Stock held by them or received
by them upon redemption of their Units. Such rights include piggyback rights
and the right to include such shares in a registration statement. In connection
therewith, the Company has filed and caused to become effective a registration
statement relating to the resale of shares issued upon redemption of
outstanding Units. The Company is required to bear the costs of such
registration statements, exclusive of underwriting discounts, commissions and
certain other costs attributable to, and to be borne by, the selling
stockholders.
TAX MATTERS
Pursuant to the Partnership Agreement, the Company is the tax matters
partner of the Partnership and, as such, has authority to make tax elections
under the Code on behalf of the Partnership.
Profit and loss of the Partnership generally are allocated among the
partners in accordance with their respective interests in the Partnership based
on the number of Units held by the partners.
OPERATIONS
The Partnership Agreement requires that the Partnership be operated in
a manner that enables the Company to satisfy the requirements for being
classified as a REIT and to avoid any federal income tax liability.
DISTRIBUTIONS
The Partnership Agreement provides that the Partnership will
distribute cash from operations (including net sale or refinancing proceeds,
but excluding net proceeds from the sale of the Partnership's property in
connection with the liquidation of the Partnership) quarterly, in amounts
determined by the Company in its sole discretion, to the partners in accordance
with their respective percentage interests in the Partnership. Upon liquidation
of the Partnership, after payment of, or adequate provision for, debts and
obligations of the Partnership, including any partner loans, any remaining
assets of the Partnership will be distributed to all partners with positive
capital accounts in accordance with their respective positive capital account
balances. If any partner, including the Company, has a negative balance in its
capital account following a liquidation of the Partnership, it will be
obligated to contribute cash to the Partnership equal to the negative balance
in its capital account.
TERM
The Partnership will continue until December 31, 2044, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the Company as
General Partner (unless the Limited Partners elect to continue the
Partnership), (ii) the sale or other disposition of all or substantially all
the assets of the Partnership, (iii) the redemption of all limited partnership
interests in the Partnership (other than those held by the Company, if any), or
(iv) the election by the General Partner.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal tax income tax
considerations relevant to a prospective holder of Securities. The discussion
does not purport to deal with all aspects of taxation that may be relevant to a
holder of Securities in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and
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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 OF THE PURCHASE, OWNERSHIP, AND SALE OF
THE SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
The Company has made an election to be taxed as a REIT under Sections
856 through 860 of the Code, commencing with its initial taxable year ended
December 31, 1994. The Company currently is qualified as a REIT and intends to
continue to operate in such manner, but no assurance can be given that the
Company will operate in a manner so as to remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof, all of which are subject to change prospectively or
retrospectively. Hunton & Williams has acted as special tax counsel to the
Company in connection with the Offering.
The Company believes that it qualified to be taxed as a REIT for its
taxable years ended December 31, 1994 and December 31, 1995, and that its
organization and current and proposed method of operation will enable it to
continue to qualify as a REIT for its taxable year ended December 31, 1996 and
in the future. Prior to issuing Securities, the Company expects to obtain an
opinion of Hunton & Williams as to its REIT qualification. Continued
qualification and taxation as a REIT depends upon the Company's ability to meet
on a continuing basis, through actual annual operating results, distribution
levels, and stock ownership, the various qualification tests imposed under the
Code discussed below. No assurance can be given that the actual results of the
Company's operation for any particular taxable year will satisfy such
requirements. For a discussion of the tax consequences of failure to qualify as
a REIT, see "-- Failure to Qualify."
If the Company continues to qualify for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on its net
income that is distributed currently to the shareholders. That treatment
substantially eliminates the "double taxation" (i.e., taxation at both the
corporate and shareholder levels) that generally results from investment in a
corporation. However, the Company will be subject to federal income tax in the
following circumstances. First, the Company will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains. Second, under certain circumstances, the Company may be subject
to the "alternative minimum tax" on its 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 the net income attributable to the greater of
the amount by which the Company fails the 75% or 95% gross income test. Sixth,
if the Company should fail to distribute during each calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually distributed.
Seventh, if the Company acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a transaction in
which the basis of the asset in the Company's hands is determined by reference
to the basis of the asset (or any other asset) in the hands of the C
corporation and the Company recognizes gain on the disposition of such asset
during the 10-year period beginning on the date on which such asset was
acquired by
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the Company, then to the extent of such asset's "built-in gain" (i.e., the
excess of the fair market value of such asset at the time of acquisition by the
Company over the adjusted basis in such asset at such time), such gain will be
subject to tax at the highest regular corporate rate applicable (as provided in
Treasury Regulations that have not yet been promulgated). The results described
above with respect to the recognition of "built-in gain" assume that the
Company would make an election pursuant to IRS Notice 88-19 if it were to make
any such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i)
that is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (iii) that would be taxable as a domestic
corporation, but for Sections 856 through 860 of the Code; (iv) that is neither
a financial institution nor an insurance company subject to certain provisions
of the Code; (v) the beneficial ownership of which is held by 100 or more
persons; (vi) not more than 50% in value of the outstanding stock of which is
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of each taxable year
("5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Service that must be met
in order to elect and to maintain REIT status; (viii) that uses a calendar year
for federal income tax purposes and complies with the recordkeeping
requirements of the Code and Treasury Regulations promulgated thereunder; and
(ix) that meets certain other tests, described below, regarding the nature of
its income and assets. The Code provides that conditions (i) to (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during
a proportionate part of a taxable year of less than 12 months. Conditions (v)
and (vi) will not apply until after the first taxable year for which an
election is made by the Company to be taxed as a REIT. The Company has issued
and will issue sufficient common stock in sufficient diversity of ownership to
allow it to satisfy requirements (v) and (vi). In addition, the Company's
Charter provides for restrictions regarding transfer of the Securities that are
intended to assist the Company in continuing to satisfy the share ownership
requirements described in (v) and (vi) above.
For purposes of determining stock ownership under the 5/50 Rule, a (i)
supplement unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual, and (ii) stock held by a trust
that is a qualified trust under Code section 401(a) is treated as held by the
trust's beneficiaries in proportion to their actuarial interests in the pension
trust for purposes of the 5/50 Rule.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership will retain the
same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income and asset tests, described below.
Thus, the Company's proportionate share of the assets, liabilities and items of
income of the Partnership (and any lower tier partnership) will be treated as
assets and gross income of the Company for purposes of applying the
requirements described herein.
Income Tests
In order for the Company to maintain its qualification as a REIT,
there are three requirements relating to the Company's gross income that must
be satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or
temporary investment income. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property or temporary investments, and from
dividends, other types of interest, and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. Third, not more
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year may be gain from
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the sale or other disposition of (i) stock or securities held for less than one
year, (ii) dealer property that is not foreclosure property, and (iii) certain
real property held for less than four years (apart from involuntary conversions
and sales of foreclosure property). The specific application of these tests to
the Company is discussed below.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described
above only if several conditions are met. First, the amount of rent must not be
based in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term "rents
from real property" solely by reason of being based on a fixed percentage or
percentages of receipts of sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the Company, or an owner of 10% or more of the Company,
directly or constructively owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to such
personal property will not qualify as "rents from real property." Finally, for
rents received to qualify as "rents from real property," the Company generally
must not operate or manage the property or furnish or render services to the
tenants of such property, other than through an "independent contractor" from
whom the Company derives no revenue. The "independent contractor" requirement,
however, does not apply to the extent the services provided by the Company are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant."
Pursuant to the Percentage Leases, the Lessee leases from the
Partnership and the Subsidiary Partnerships (as defined below) the land,
buildings, improvements, furnishings, and equipment comprising the Current
Hotels for a 10- year period. The Percentage Leases provide that the Lessee is
obligated to pay to the Partnership or the Subsidiary Partnership (i) the
greater of a fixed rent ("Base Rent") or a percentage rent ("Percentage Rent")
(collectively, "Rents") and (ii) certain other amounts, including interest
accrued on any late payments or charges ("Additional Charges"). The Percentage
Rent is calculated by multiplying fixed percentages by the gross suite revenues
and food and beverage revenues or food and beverage rent revenues for each of
the Hotels in excess of certain levels. The Base Rent accrues and is required
to be paid monthly. Although Percentage Rent is due quarterly, the Lessee will
not be in default for non-payment of Percentage Rent due in any calendar year
if the Lessee pays, within 90 days of the end of the calendar year, the excess
of Percentage Rent due and unpaid over the Base Rent with respect to such year.
The Partnership and the Subsidiary Partnerships will enter into leases with the
Lessee with respect to any additional hotels acquired by them that are
substantially similar to the Percentage Leases with respect to the Current
Hotels. For purposes of this section, the term "Percentage Leases" includes the
Acquisition Leases and the term "Partnership" includes the Subsidiary
Partnerships when the context requires.
In order for the Base Rent, the Percentage Rent, and the Additional
Charges to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the
risk of damage to the property).
In addition, Code Section 7701(e) provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (i) the
service recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of
the useful life of the property, the recipient shares the risk that the
property will decline in value, the recipient shares in any appreciation in the
value of the property, the recipient shares in savings in the property's
operating costs, or the recipient
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bears the risk of damage to or loss of the property), (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract, (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient, and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
The Company believes that the Percentage Leases will be treated as
true leases for federal income tax purposes. 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 Current 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 Current Hotels, other
than the cost of maintaining underground utilities and structural elements, and
will dictate how the Current Hotels are operated, maintained, and improved, (iv)
the Lessee bears all of the costs and expenses of operating the Current 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 Current Hotels during
the term of the Percentage Leases, (vi) in the event of damage or destruction to
a Current 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 Current
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
Current Hotels or (B) the Lessee's use, management, maintenance or repair of the
Current Hotels, (viii) the Lessee is obligated to pay substantial fixed rent for
the period of use of the Current Hotels, and (ix) the Lessee stands to incur
substantial losses (or reap substantial gains) depending on how successfully
it operates the Current 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. There can be no
complete assurance that the Service will not assert successfully a contrary
position. If the Percentage Leases are recharacterized as service contracts or
partnership agreements, rather than true leases, part or all of the payments
that the Partnership receives from the Lessee may not be considered rent or may
not otherwise satisfy the various requirements for qualification as "rents from
real property." In that case, the Company likely would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status.
In order for the Rents to constitute "rents from real property,"
several other requirements also must be satisfied. One requirement is that the
Rents attributable to personal property leased in connection with the lease of
the real property comprising a hotel must not be greater than 15% of the Rents
received under the Percentage Lease. The Rents attributable to the personal
property in a hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the adjusted bases of the personal property
in the hotel at the beginning and at the end of the taxable bears to the average
of the aggregate adjusted bases of both the real and personal property
comprising the hotel at the beginning and at the end of the such taxable year
("Adjusted Basis Ratio"). The initial adjusted basis of the personal property in
each Current Hotel was less than 15% of the initial adjusted bases of both the
real and personal property comprising such Current Hotel. The basis of personal
property contained in the Current Hotels acquired for cash was determined
either by appraisals performed by a professional appraiser, with respect to
nine of the Current Hotels acquired in connection with the initial and
secondary public offerings of the Common Stock, or by internal appraisals
performed by the Company using the same methodology employed by professional
appraisers, with respect to other Current Hotels acquired for cash. The initial
adjusted basis of personal property contained in Current Hotels acquired in
exchange for Units generally was the same as the basis of the transferor of the
hotel at the time of the transfer. The Company expects that the value of the
personal property at each hotel to be acquired for cash will be less than 15%
of the expected purchase price of such hotel
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and expects to perform internal appraisals of such property using the same
methodology employed by professional appraisers that are expected to confirm
such expectation. However, in the event that appraisals show that the Adjusted
Basis Ratio with respect to any hotel to be acquired for cash would exceed 15%
for the taxable year of any acquisition, a portion of the personal property of
that hotel will be purchased or leased by the Lessee and the lease payments
under the Percentage Leases will be adjusted appropriately. In addition, the
Company expects that its initial adjusted basis in the personal property
contained in each hotel to be acquired in exchange for Units will be less than
15% of its initial adjusted basis in such hotel. The Company anticipates that
any additional personal property that the Partnership acquires with a portion
of the proceeds of the Offering likewise will not cause the Adjusted Basis
Ratio under any Percentage Lease to exceed 15%. Further, in no event will the
Partnership acquire additional personal property for a Hotel to the extent that
such acquisition would cause the Adjusted Basis Ratio for that hotel to exceed
15%. There can be no assurance, however, that the Service would not assert that
the personal property originally acquired by the Partnership had a value in
excess of the appraised value, or that a court would not uphold such assertion.
If such a challenge were successfully asserted, the Company could fail the 15%
Adjusted Basis Ratio as to one or more of the Percentage Leases, which in turn
potentially could cause it to fail to satisfy the 95% or 75% gross income test
and thus lose its REIT status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or
sales and the percentages (i) are fixed at the time the Percentage Leases are
entered into, (ii) are not renegotiated during the term of the Percentage
Leases in a manner that has the effect of basing Percentage Rent on income or
profits, and (iii) conform with normal business practice. More generally, the
Percentage Rent will not qualify as "rents from real property" if, considering
the Percentage Leases and all the surrounding circumstances, the arrangement
does not conform with normal business practice, but is in reality used as a
means of basing the Percentage Rent on income or profits. Since the Percentage
Rent is based on fixed percentages of the gross revenues from the Current
Hotels that are established in the Percentage Leases, and the Company has
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 has 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
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the hotels other than through an independent contractor who is adequately
compensated and from whom the Company derives or receives no income.
If the Rents do not qualify as "rents from real property" because the
rents attributable to personal property exceed 15% of the total Rents for a
taxable year, the portion of the Rents that is attributable to personal
property will not be qualifying income for purposes of either the 75% or 95%
gross income test. Thus, if the Rents attributable to personal property, plus
any other nonqualifying income, during a taxable year exceeds 5% of the
Company's gross income during the year, the Company would lose its REIT status.
If, however, the Rents do not qualify as "rents from real property" because
either (i) the Percentage Rent is considered based on income or profits of the
Lessee, (ii) the Company owns, directly or constructively, 10% or more of the
Lessee, or (iii) the Company furnishes noncustomary services to the Lessee
(other than through a qualified independent contractor) or manages or operates
the hotels, none of the Rents would qualify as "rents from real property." In
that case, the Company likely would lose its REIT status because it would be
unable to satisfy either the 75% or 95% gross income test.
In addition to the Rents, the Lessee is required to pay to the
Partnership the Additional Charges. To the extent that the Additional Charges
represent either (i) reimbursements of amounts that the Lessee is obligated to
pay to third parties or (ii) penalties for nonpayment or late payment of such
amounts, the Additional Charges should qualify as "rents from real property."
To the extent, however, that the Additional Charges represent interest that is
accrued on the late payment of the Rents or the Additional Charges, the
Additional Charges should not qualify as "rents from real property," but
instead should be treated as interest that qualifies for the 95% gross income
test.
The Company believes that the Rents and the Additional Charges will
qualify as "rents from real property" for purposes of the 75% and 95% gross
income tests, except to the extent that the Additional Charges represent
interest that is accrued on the late payment of the Rents or the Additional
Charges (which will be qualifying gross income for the 95% test but not the 75%
test). However, there can be no complete assurance that the Service will not
assert successfully a contrary position and, therefore, prevent the Company from
qualifying as a REIT.
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 has been and will continue to 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 or will be 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
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with the production of such income. However, gross income from such foreclosure
property will qualify under the 75% and 95% gross income tests. "Foreclosure
property" is defined as any real property (including interests in real
property) and any personal property incident to such real property (i) that is
acquired by a REIT as the result of such REIT having bid in such property at
foreclosure, or having otherwise reduced such property to ownership or
possession by agreement or process of law, after there was a default (or
default was imminent) on a lease of such property or on an indebtedness that
such property secured and (ii) for which such REIT makes a proper election to
treat such property as foreclosure property. However, a REIT will not be
considered to have foreclosed on a property where such REIT takes control of
the property as a mortgagee-in-possession and cannot receive any profit or
sustain any loss except as a creditor of the mortgagor. Under the Code,
property generally ceases to be foreclosure property with respect to a REIT on
the date that is two years after the date such REIT acquired such property (or
longer if an extension is granted by the Secretary of the Treasury). The
foregoing grace period is terminated and foreclosure property ceases to be
foreclosure property on the first day (i) on which a lease is entered into with
respect to such property that, by its terms, will give rise to income that does
not qualify under the 75% gross income test or any amount is received or
accrued, directly or indirectly, pursuant to a lease entered into on or after
such day that will give rise to income that does not qualify under the 75%
gross income test, (ii) on which any construction takes place on such property
(other than completion of a building, or any other improvement, where more than
10% of the construction of such building or other improvement was completed
before default became imminent) or (iii) which is more than 90 days after the
day on which such property was acquired by the REIT and the property is used in
a trade or business that is conducted by the REIT (other than through an
independent contractor from whom the REIT itself does not derive or receive any
income). As a result of the rules with respect to foreclosure property, if the
Lessee defaults on its obligations under a Percentage Lease for a hotel, the
Company terminates the Lessee's leasehold interest, and the Company is unable
to find a replacement Lessee for such hotel within 90 days of such foreclosure,
gross income from hotel operations conducted by the Company from such hotel
would cease to qualify for the 75% and 95% gross income tests. In such event,
the Company likely would be unable to satisfy the 75% and 95% gross income
tests and, thus, would fail to qualify as a REIT.
It is possible that, from time to time, the Company or the Partnership
will enter into hedging transactions with respect to one or more of its assets
or liabilities. Any such hedging transactions could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the Company or
the Partnership enters into an interest rate swap or cap contract to hedge any
variable rate indebtedness incurred to acquire or carry real estate assets, any
periodic income or gain from the disposition of such contract should be
qualifying income for purposes of the 95% gross income test. Furthermore, any
such contract would be considered a "security" for purposes of applying the 30%
gross income test. To the extent that the Company or the Partnership hedges
with other types of financial instruments or in other situations, it may not be
entirely clear how the income from those transactions will be treated for
purposes of the various income tests that apply to REITs under the Code. The
Company intends to structure any hedging transactions in a manner that does not
jeopardize its status as REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
Those relief provisions will be generally available if the Company's failure to
meet such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "-- Taxation of the Company," even if those relief
provisions apply, a tax would be imposed with respect to the net income
attributable to the excess of 75% or 95% of the Company's gross income over its
qualifying income in the relevant category, whichever is greater. No such
relief is available for violations of the 30% income test.
Asset Tests
The Company, at the close of each quarter of its taxable year, also
must satisfy two tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by cash or
cash items (including certain receivables), government securities, "real estate
assets," and, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock
or debt instruments during the one-year period following the Company's receipt
of such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the mortgage
balance does not exceed the value of the associated real property, and shares
of other REITs. For purposes of the 75% asset requirement, the term
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"interest in real property" includes an interest in land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold in real property, and an option to acquire real property (or a
leasehold in real property). Second, of the investments not included in the 75%
asset class (the "25% asset test"), the value of any one issuer's securities
owned by the Company may not exceed 5% of the value of the Company's total
assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities (except for its ownership interest in the
Partnership and Subsidiary Partnership or the stock of a subsidiary with
respect to which it has held 100% of the stock at all times during the
subsidiary's existence).
For purposes of the asset requirements, the Company will be deemed to
own its proportionate share of the assets of the Partnership (and any
Subsidiary Partnership), rather than its general 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 will be represented by real estate
assets, cash and cash items (including receivables), and government securities
and (ii) it will not own any securities that do not satisfy the 25% asset 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 requirement. The Company believes that it
satisfies both asset requirements for REIT status.
If the Company should fail inadvertently to satisfy the asset
requirements at the end of a calendar quarter, such a failure would not cause
it to lose its REIT status if (i) it satisfied all of the asset tests at the
close of the preceding calendar quarter and (ii) the discrepancy between the
value of the Company's assets and the standards imposed by the asset
requirements 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 intends
to comply with such requirements.
Partnership Anti-Abuse Rule
The Treasury Department has issued a final regulation ("Anti-Abuse
Rule"), under the partnership provisions of the Code ("Partnership
Provisions"), that would authorize the Service, in certain abusive transactions
involving partnerships, to disregard the form of the transaction and recast it
for federal tax purposes as the Service deems appropriate. The Anti-Abuse Rule
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 believe that the Anti-Abuse Rule will not have any adverse
impact on its ability to qualify as a REIT, and prior to issuing Securities,
the Company expects to obtain an opinion of Hunton & Williams that, based on
the foregoing, the Anti-Abuse Rule will not have any adverse impact on the
Company's ability to qualify as a REIT. However, because the Anti-Abuse Rule is
extraordinarily broad in scope and is applied based on an analysis of all of
the facts and circumstances, there can be no assurance that the Service will
not attempt to apply the Anti-Abuse Rule to the Company. If the conditions of
the Anti-Abuse Rule are met, the Service is authorized to take appropriate
enforcement action, including disregarding the Partnership for federal tax
purposes or treating one or more of its partners as nonpartners. Any such
action potentially could jeopardize the Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Dividends to the shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current and accumulated
earnings and profits, all dividends to shareholders will be taxable as ordinary
income and, subject to certain limitations of the Code, corporate distributees
may be eligible for the dividends received deduction. Unless entitled to relief
under specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
the Company ceased to qualify as a REIT. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief.
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OTHER TAX CONSEQUENCES
The Company and Securities holders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they own property, transact business or reside. The state and local tax
treatment of the Company and Securities holders may not conform to the federal
income tax consequences discussed above. CONSEQUENTLY, PROSPECTIVE HOLDERS OF
SECURITIES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE
AND LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY.
TAX ASPECTS OF THE PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Partnership and
the Partnership's investment in certain "Subsidiary Partnerships." The
discussion does not cover state or local tax laws or any federal tax laws other
than income tax laws.
Classification as a Partnership
The Company is entitled to include in its income its distributive
share of the Partnership's income (including the Partnership's distributive
share of income of a Subsidiary Partnership) and to deduct its distributive
share of the Partnership's losses (including the Partnership's distributive
share of losses of a Subsidiary Partnership) only if the Partnership (and each
Subsidiary Partnership) is classified for federal income tax purposes as a
partnership rather than as a corporation or an association taxable as a
corporation. An organization will be classified as a partnership rather than as
a corporation for federal income tax purposes if the entity (i) is treated as a
partnership under Treasury regulations, effective January 1, 1997, relating to
entity classification (the "Check-the-Box Regulations") and (ii) is not a
"publicly traded" partnership. Pursuant to the Check-the-Box Regulations, an
unincorporated organization with at least two members may elect to be
classified either as an association or as a partnership. If such an entity
fails to make an election, it generally will be treated as a partnership for
federal income tax purposes. The federal income tax classification of an entity
that was in existence prior to January 1, 1997, such as the Partnership (and
Subsidiary Partnerships), will be respected for all periods prior to January 1,
1997 if (i) the entity had a reasonable basis for its claimed classification,
(ii) the entity and all members of the entity recognized the federal tax
consequences of any changes in the entity's classification within the 60 months
prior to January 1, 1997, and (iii) neither the entity nor any member of the
entity was notified in writing by a taxing authority on or before May 8, 1996
that the classification of the entity was under examination. The Partnership
and Subsidiary Partnerships in existence on January 1, 1997 reasonably claimed
partnership classification under the Treasury Regulations relating to entity
classification in effect prior to January 1, 1997. 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 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 "--Requirements for Qualification -- Income Tests." The U.S.
Treasury Department has issued regulations effective for taxable years
beginning after December 31, 1995 (the "PTP Regulations") that provide limited
safe harbors from the definition of a publicly traded partnership. Pursuant to
one of those safe harbors (the "Private Placement Exclusion"), interests in a
partnership will not be treated as readily tradable on a secondary market or
the substantial equivalent thereof if (i) all interests in the partnership were
issued in a transaction (or transactions) that was not required to be
registered under the Securities Act of 1933, as amended, and (ii) the
partnership does not have more than 100 partners at any time during the
partnership's taxable year. In determining the number of partners in a
partnership, a person owning an interest in a flow-through entity (i.e., a
partnership, grantor trust, or S corporation) that owns an interest in the
partnership is treated as a partner in such partnership only if (a)
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (b) a principal purpose of the use of the
flow- through entity is to permit the partnership to satisfy the 100-partner
limitation. The Partnership and each Subsidiary Partnership qualify for the
Private Placement Exclusion. If the Partnership or a Subsidiary Partnership is
considered a publicly traded partnership under the PTP Regulations
53
<PAGE> 55
because it is deemed to have more than 100 partners, the Partnership or
Subsidiary Partnership should not be treated as a corporation because it should
be eligible for the 90% Passive-Type Income Exception.
The Company believes that the Partnership and each Subsidiary
Partnership will be treated as partnerships for federal income tax purposes and
not as corporations or associations taxable as corporations. The Partnership
has not requested, and does not intend to request, a ruling from the Service
that it or any Subsidiary Partnership will be classified as a partnership for
federal income tax purposes. However, prior to issuing Securities, the Company
expects to obtain an opinion of Hunton & Williams that, based on the provisions
of the Partnership Agreement, the partnership agreements of each Subsidiary
Partnership, certain factual assumptions, and certain representations, the
Partnership and each Subsidiary Partnership will be treated for federal income
tax purposes as partnerships and not as corporations or associations taxable as
corporations. 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 satisfy the income and asset
requirements for REIT status. See "-- Requirements for Qualification -- Income
Tests" and "-- Requirements for Qualification -- Asset Tests." In addition, any
change in the Partnership's or a Subsidiary Partnership's status for tax
purposes might be treated as a taxable event, in which case the Company might
incur a tax liability without any related cash distribution. See "--
Requirements for Qualification -- Distribution Requirements." Further, items of
income and deduction of the Partnership and the Subsidiary Partnership would
not pass through to its partners, and its partners would be treated as
shareholders for tax purposes. Consequently, the Partnership or a Subsidiary
Partnership would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute distributions
that would not be deductible in computing the Partnership's or a Subsidiary
Partnership's taxable income.
Income Taxation of the Partnership, the Subsidiary Partnerships and their
Partners
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of the Partnership's income, gains,
losses, deductions, and credits for any taxable year of the Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution of the Partnership. Such
items will include the Partnership's available share of income, gain, loss,
deductions and credits of the Subsidiary Partnerships.
Partnership Allocations. Although a partnership agreement generally
will determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes under Section 704(b) of the
Code if they do not comply with the provisions of Section 704(b) of the Code
and the Treasury Regulations promulgated thereunder. If an allocation is not
recognized for federal income tax purposes, the item subject to the allocation
will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. The Partnership's allocations of taxable income and loss
of the Partnership and the Subsidiary Partnerships are intended to comply with
the requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal
income tax purposes in a manner such that the contributor is charged with, or
benefits from the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of the contributed property at the time of contribution and the adjusted
tax basis of such property at the time of contribution. The Treasury Department
recently issued regulations requiring partnerships to use a "reasonable
54
<PAGE> 56
method" for allocating items affected by Section 704(c) of the Code and
outlining certain two reasonable allocation methods.
Under the Partnership Agreement, depreciation or amortization
deductions of the Partnership generally will be allocated among the partners in
accordance with their respective interests in the Partnership, except to the
extent that Section 704(c) of the Code requires that the Company receive a
disproportionately large share of such deductions. In addition, gain on sale of
a Hotel will be specially allocated to the Limited Partners to the extent of
any "built-in" gain with respect to such Hotel for federal income tax purposes.
The application of Section 704(c) to the Partnership is not entirely clear,
however, and may be affected by Treasury Regulations promulgated in the future.
Similar provisions are included in the partnership agreements of the Subsidiary
Partnerships.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally (i) equals the amount of cash
and the basis of any other property contributed to the Partnership by the
Company, (ii) is increased by (A) its allocable share of the Partnership's
income and (B) its allocable share of indebtedness of the Partnership and (iii)
is reduced, but not below zero, by the Company's allocable share of (A) the
Partnership's loss and (B) the amount of cash distributed to the Company and by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Partnership. Similar rules apply to the Partnership's tax
basis in the Subsidiary Partnerships.
If the allocation of the Company's distributive share of the
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Partnership below zero, the recognition of such
loss will be deferred until such time as the recognition of such loss would not
reduce the Company's adjusted tax basis below zero. To the extent that the
Partnership's distributions, or any decrease in the Company's share of the
indebtedness of the Partnership (such decrease being considered a constructive
cash distribution to the partners), would reduce the Company's adjusted tax
basis below zero, such distributions (including such constructive
distributions) 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 hotels acquired in exchange for Units for
federal income tax purposes generally is a carryover of the basis of the
transferors of the hotels on the date of such merger. Although the law is not
entirely clear, the Partnership has depreciated, and intends to continue to
depreciate, such depreciable hotel property for federal income tax purposes
under the same methods used by the transferors. The Partnership's tax
depreciation deductions will be allocated among the partners in accordance with
their respective interests in the Partnership, except to the extent that
Section 704(c) of the Code requires that the Company receive a dispropor-
tionately large share of such deductions. The Partnership's initial basis for
federal income tax purposes in hotels acquired for cash generally is equal to
the purchase price. The Partnership has depreciated, and intends to continue
to depreciate, for federal income tax purposes, such depreciable hotel property
under either the modified accelerated cost recovery system of depreciation
("MACRS") or the alternative depreciation system of depreciation ("ADS"). The
Partnership plans to use MACRS for subsequently acquired furnishings and
equipment. Under MACRS, the Partnership generally will depreciate such
furnishings and equipment over a seven-year recovery period using a 200%
declining balance method and a half-year convention. If, however, the
Partnership places more than 40% of its furnishings and equipment in service
during the last three months of a taxable year, a mid-quarter depreciation
convention must be used for the furnishings and equipment placed in service
during that year. The Partnership plans to use ADS for the depreciation of
subsequently acquired buildings and improvements. Under ADS, the Partnership
generally will depreciate such buildings and improvements over a 40-year
recovery period using a straight line method and a mid-month convention.
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 70(c) of the Code to the extent of their "built-in
gain" on those Initial Hotels. The
55
<PAGE> 57
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.
PLAN OF DISTRIBUTION
The Company may sell Securities in or outside the United States
through underwriters or dealers, directly to one or more purchasers, through
agents or through a combination of any such methods of sale. The Prospectus
Supplement with respect to the Securities will set forth the terms of the
offering of the Securities, including the name or names of any underwriters,
dealers or agents, the initial public offering price, any underwriting
discounts and other items constituting underwriters compensation, any discounts
or concessions allowed or reallowed or paid to dealers, and any securities
exchanges on which the Securities may be listed.
Securities may be sold directly by the Company through agents
designated by the Company from time to time at fixed prices, which may be
changed, or at varying prices determined at the time of sale. Any agent
involved in the offer or sale of the Securities will be named, and any
commissions payable by the Company to such agent will be set forth, in the
Prospectus Supplement relating thereto. Unless otherwise indicated in the
Prospectus Supplement, any such agent will be acting on a best efforts basis
for the period of its appointment.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities, for
whom they may act as agents, in the form of discounts, concessions or
commissions. Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers, and agents that participate
in the distribution of Securities may be deemed to be underwriters under the
Securities Act, and any discounts or commissions they receive from the Company
and any profit on the resale of Securities they realize may be deemed to be
underwriting discounts and commissions under the Securities Act. Any such
underwriter or agent will be identified, and any such compensation received
from the Company will be described, in the applicable Prospectus Supplement.
Unless otherwise set forth in the Prospectus Supplement relating thereto, the
obligations of the underwriters or agents to purchase the Securities will be
subject to conditions precedent and the underwriters will be obligated to
purchase all the Securities if any are purchased. The initial public offering
price and any discounts or concessions allowed or reallowed or paid to dealers
may be changed from time to time.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock which is traded on the NYSE under the symbol "FCH".
Any shares of Common Stock sold pursuant to a Prospectus Supplement will be
approved for trading, upon notice of issuance, on the NYSE. The Company may
elect to list any series of Debt Securities or Preferred Stock on an exchange,
but is not obligated to do so. It is possible that one or more underwriters may
make a market in a series of Securities, but will not be obligated to do so and
may discontinue any market making at any time without notice. Therefore, no
assurance can be given as to the liquidity of, or the trading market for, the
Securities.
Under agreements into which the Company may enter, underwriters,
dealers and agents who participate in the distribution of Securities may be
entitled to indemnification by the Company against certain liabilities,
including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, the Company in the ordinary course of business.
56
<PAGE> 58
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states Securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and complied with.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Bracewell & Patterson, L.L.P., Dallas, Texas. Lawrence D. Robinson, the Senior
Vice President, General Counsel and Secretary of the Company, maintains an "of
counsel" relationship with Bracewell & Patterson, L.L.P. In addition, the
description of federal income tax consequences contained in the Prospectus
under the caption "Federal Income Tax Considerations" is based upon the opinion
of Hunton & Williams, Richmond, Virginia. The validity of the Securities will
be passed upon for any underwriter by King & Spalding, Atlanta, Georgia.
Bracewell & Patterson, L.L.P., King & Spalding and Hunton & Williams will rely
upon the opinion of Miles & Stockbridge, a Professional Corporation, Baltimore,
Maryland, with respect to all matters involving Maryland law.
EXPERTS
The Consolidated Financial Statements of FelCor Suite Hotels, Inc. as
of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995
and the period from 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, 1995 and
the period from July 28, 1994 (inception of operations) through December 31,
1994 have been incorporated by reference herein in reliance on the reports of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
57
<PAGE> 59
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees
and expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the Shares.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee ... $151,516
NASD filing fee ........................................ 30,500
The New York Stock Exchange Listing Fee ................ *
Printing and mailing ................................... *
Accountant's fees and expenses ......................... *
Blue Sky fees and expenses ............................. 10,000
Counsel fees and expenses .............................. *
Miscellaneous .......................................... *
--------
Total ......................................... $ *
--------
</TABLE>
-----------
* To be provided by amendment.
ITEM 15. 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 ("Securities Act") may be permitted to directors and officers of
the Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable.
The Company may purchase director and officer liability insurance for
the purpose of providing a source of funds to pay any indemnification described
above.
The Underwriting Agreement may contain provisions pursuant to which
certain officers, directors and controlling persons may be entitled to be
indemnified by the underwriters named therein.
ITEM 16. EXHIBITS
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 Indenture(s) with respect to Debt Securities
(filed as Exhibit 4.2 to the Registrant's Registration
Statement on Form S-3 (File No. 333-3170) and incorporated
herein by reference).
4.3 -- 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).
*4.4 -- Form of Common Stock Warrant Agreement.
II-1
<PAGE> 60
*5.1 -- Opinion of Bracewell & Patterson, L.L.P.
*5.2 -- Opinion of Miles & Stockbridge, a Professional
Corporation.
*8.1 -- Opinion of Hunton & Williams as to Tax Matters.
12.1 -- Statement Regarding Computation of Ratios.
*23.1 -- Consent of Bracewell & Patterson, L.L.P. (included in
Exhibit 5.1).
*23.2 -- Consent of Miles & Stockbridge (included in Exhibit 5.2).
*23.3 -- Consent of Hunton & Williams (included in Exhibit 8.1).
23.4 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (set forth on signature page).
25.1 -- Statement of Eligibility of Sun Trust Bank - Atlanta, as
Trustee (filed as Exhibit 25.1 to the Registrant's
Registration Statement on Form S-3 (File No. 333-3170) and
incorporated herein by reference).
- --------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement 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.
(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.
II-2
<PAGE> 61
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Dallas, State of Texas, on the 22nd day of
April, 1997.
FELCOR SUITE HOTELS, INC.,
a Maryland corporation (Registrant)
By: /s/ Thomas J. Corcoran, Jr.
-----------------------------------
Thomas J. Corcoran, Jr., President
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>
/s/ Hervey A. Feldman Chairman of the Board and Director April 22, 1997
- ----------------------------
Hervey A. Feldman
/s/ Thomas J. Corcoran, Jr. President and Chief Executive April 22, 1997
- ---------------------------- Officer and Director
Thomas J. Corcoran, Jr.
/s/ William S. McCalmont Senior Vice President, Chief April 22, 1997
- ---------------------------- Financial Officer and Treasurer
William S. McCalmont
/s/ Lester C. Johnson Vice President and Controller April 22, 1997
- ---------------------------- (Principal Accounting Officer)
Lester C. Johnson
/s/ Charles N. Mathewson Director April 22, 1997
- ----------------------------
Charles N. Mathewson
/s/ Donald J. McNamara Director April 22, 1997
- ----------------------------
Donald J. McNamara
/s/ Richard S. Ellwood Director April 22, 1997
- ----------------------------
Richard S. Ellwood
/s/ Richard O. Jacobson Director April 22, 1997
- ----------------------------
Richard O. Jacobson
/s/ Thomas A. McChristy Director April 22, 1997
- ----------------------------
Thomas A. McChristy
</TABLE>
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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 Indenture(s) with respect to Debt Securities (filed as Exhibit
4.2 to the Registrant's Registration Statement on Form S-3 (File No.
333-3170) and incorporated herein by reference).
4.3 -- 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).
*4.4 -- Form of Common Stock Warrant Agreement.
*5.1 -- Opinion of Bracewell & Patterson, L.L.P.
*5.2 -- Opinion of Miles & Stockbridge, a Professional Corporation.
*8.1 -- Opinion of Hunton & Williams as to Tax Matters.
12.1 -- Statement Regarding Computation of Ratios.
*23.1 -- Consent of Bracewell & Patterson, L.L.P. (included in Exhibit 5.1).
*23.2 -- Consent of Miles & Stockbridge (included in Exhibit 5.2).
*23.3 -- Consent of Hunton & Williams (included in Exhibit 8.1).
23.4 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (set forth on signature page).
25.1 -- Statement of Eligibility of Sun Trust Bank - Atlanta, as Trustee
(filed as Exhibit 25.1 to the Registrant's Registration Statement on
Form S-3 (File No. 333-3170) and incorporated herein by reference).
</TABLE>
- --------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 12.1
STATEMENT OF COMPUTATION OF RATIOS
(In thousands)
<TABLE>
<CAPTION>
Period from July
28, 1994 (inception
of operations) Year ended Year ended
through December December 31, December 31,
31, 1994 1995 1996
------------------- ------------ ------------
<S> <C> <C> <C>
Earnings:
Net income before extraordinary expenses $ 2,511 $ 12,191 $ 43,291
Capitalized interest (1,330)
Minority interest 907 3,131 5,590
Fixed charges 109 2,004 11,133
------- -------- --------
Earnings $ 3,527 $ 17,326 $ 58,684
======= ======== ========
Fixed Charges:
Interest expense $ 109 $ 2,004 $ 9,803
Capitalized interest -- -- 1,330
------- -------- --------
Fixed Charges $ 109 $ 2,004 $ 11,133
======= ======== ========
Preferred dividends $ -- $ -- $ 7,734
======= ======== ========
Ratio of Earnings to Fixed Charges(1) 32.4x 8.6x 5.3x
======= ======== ========
Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends(2) 32.4x 8.6x 3.1x
======= ======== ========
</TABLE>
(1) Computed as Earnings divided by Fixed Charges
(2) Computed as Earnings divided by Fixed Charges and Preferred Dividends
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
FelCor Suites Hotels, Inc.
We consent to the incorporation by reference in this registration statement of
FelCor Suite Hotels, Inc. on Form S-3 (File No. _____) 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 reference to our firm under the caption "Experts".
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
April 22, 1997
