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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1997
REGISTRATION NO. 333-______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EQUITY INNS, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1550848
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4735 Spottswood, Suite 102
Memphis, Tennessee 38117
(901) 761-9651
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Phillip H. McNeill, Sr.
Equity Inns, Inc.
4735 Spottswood, Suite 102
Memphis, Tennessee 38117
(901) 761-9651
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copy to:
David C. Wright, Esq.
Hunton & Williams
2000 Riverview Tower, 900 S. Gay Street
Knoxville, Tennessee 37902
(423) 549-7700
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement in light of market
conditions and other factors.
If the only securities being registered on this form are being offered pursuant
to dividend 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 dividend 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. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
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Title of Each Class of Proposed Maximum Aggregate Offering
Securities to be Registered (1) Price(1) Amount of Registration Fee(4)
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<S> <C> <C>
Common Stock, $.01 par value(2)
Preferred Stock, $.01 par value(3) $200,000,000 $60,606
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Subject to Footnote (1), an indeterminate number of shares of Common
Stock, $.01 par value, is registered hereunder and may be sold from
time to time by the Registrant. There is also being registered
hereunder an indeterminate number of shares of Common Stock as shall be
issuable upon conversion of shares of Preferred Stock.
(3) Subject to Footnote (1), an indeterminate number of shares of Preferred
Stock, $.01 par value, is registered hereunder and may be sold from
time to time by the Registrant.
(4) The proposed maximum offering price per unit has been omitted
pursuant to General Instruction II.D of Form S-3 under the
Securities Act of 1933, as amended. The registration fee has been
calculated in accordance with Rule 457(o) under the Securities Act of
1933, as amended.
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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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 6, 1997
PROSPECTUS
EQUITY INNS, INC.
$200,000,000
COMMON STOCK AND PREFERRED STOCK
Equity Inns, Inc. (together with its subsidiaries, the "Company") may
from time to time offer and sell (i) shares of its Common Stock, $.01 par value
(the "Common Stock"), and (ii) in one or more series, shares of its Preferred
Stock, $.01 par value (the "Preferred Stock"), with an aggregate public offering
price of up to $200,000,000, on terms to be determined at the time of offering.
The Common Stock and Preferred Stock offered pursuant hereto (the "Offered
Securities") may be offered in amounts, at prices and on terms to be set forth
in one or more supplements to this Prospectus (each, a "Prospectus Supplement").
The Company's Common Stock is traded on the New York Stock Exchange
under the symbol "ENN." The Company's charter contains limitations on direct or
beneficial ownership and restrictions on transfer of the Common Stock to
preserve the status of the Company as a real estate investment trust ("REIT")
for United States federal income tax purposes. See "Restrictions on Ownership of
Common Stock."
The applicable Prospectus Supplement shall set forth (i) with respect
to Preferred Stock, the specific designation and stated value per share, any
dividend, liquidation, redemption, conversion, voting and other rights, and all
other specific terms of the Preferred Stock, and (ii) with respect to the Common
Stock, the specific number of shares and issuance price per share. The
applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered thereby.
The Offered Securities may be sold on a negotiated or competitive bid
basis to or through underwriters or dealers designated from time to time or by
the Company, directly or through agents, to other purchasers. Certain terms of
any offering and sale of the Offered Securities, including, where applicable,
the names of the underwriters, dealers or agents, if any, the principal amount
or number of shares to be purchased, the purchase price of the shares to be
purchased, any applicable commissions, discounts and other compensation to
underwriters, dealers and agents, and the proceeds to the Company from such
sale, will be set forth in, or will be calculable from information contained in,
a Prospectus Supplement. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN FACTORS RELATING TO
AN INVESTMENT IN THE OFFERED SECURITIES.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE OFFERED
SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May __, 1997.
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THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE
WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND WORDS OF SIMILAR IMPORT. SUCH
FORWARD-LOOKING STATEMENTS RELATE TO FUTURE EVENTS, THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY, AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY OR INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT FROM
ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD LOOKING STATEMENTS. PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER
THE VARIOUS FACTORS IDENTIFIED IN THE PROSPECTUS WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER, INCLUDING THOSE DISCUSSED IN THE SECTIONS ENTITLED
"PROSPECTUS SUMMARY" AND "RISK FACTORS."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission") pursuant to the
Exchange Act. Such reports, proxy statements and other information filed by the
Company may be examined without charge at, or copies obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a
World Wide Web site at http:/www.sec.gov, and reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission (including the Company) can be obtained from that site. The
Common Stock is listed on the New York Stock Exchange ("NYSE"), and such
reports, proxy and informational statements and other information concerning the
Company can be inspected and copied at the offices of the NYSE at 20 Broad
Street, New York, New York 10005.
This Prospectus is part of a registration statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act of
1933, as amended (the "Securities Act"). This Prospectus does not contain all of
the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the content of any
contract or other document 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 and the exhibits and schedules hereto. For
further information regarding the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Equity Inns, Inc. (the "Company") with
the Commission (File No. 0- 23290) are incorporated herein by reference and made
a part hereof: (i) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996; (ii) the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997; and (iii) the Company's Registration Statement
on Form 8-A, filed on August 19, 1996. All documents filed by the Company
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus and prior to the termination of the offering of the
Securities shall be deemed to be incorporated by reference into this Prospectus
and to be a part hereof from the date of filing such documents.
The Company will provide without charge to each person to whom a copy
of this Prospectus or any Prospectus Supplement is delivered, upon the written
or oral request of such person, a copy of any and all of the documents
incorporated by reference herein (not including the exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents). Requests for such copies should be directed to Equity Inns, Inc.,
4735 Spottswood, Suite 102, Memphis, Tennessee 38117, Attention: Howard A.
Silver, Corporate Secretary, telephone number (901) 761-9651.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other document
subsequently filed with the Commission which also is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus or any accompanying Prospectus
Supplement.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere or incorporated by
reference in this Prospectus. Unless the context indicates otherwise, the term
"Company" includes the Company's subsidiaries and controlled entities.
THE COMPANY
The Company is a self-administered equity real estate investment trust
("REIT") incorporated as a Tennessee corporation in November 1993 to acquire
equity interests in hotel properties. The Company completed its initial public
offering in March 1994. The Company, through Equity Inns Trust (the "Trust"), a
wholly-owned subsidiary of the Company, is the sole general partner of the
Equity Inns Partnership, L.P. (the "Partnership") and at May 1, 1997 owned
approximately a 96.1% general partnership interest in the Partnership. At May 1,
1997, the Partnership owned 56 hotels with an aggregate of 6,679 rooms located
in 29 states (the "Current Hotels") and had entered into contracts to acquire 28
additional hotels with an aggregate of 3,487 rooms in 14 states (the
"Acquisition Hotels" and, together with the Current Hotels, the "Hotels").
In order to qualify as a REIT under federal tax provisions, neither the
Company, the Partnership nor the Trust can operate hotels. Prior to November 15,
1996, the Company's hotels were leased to Trust Leasing, Inc. (formerly named
McNeill Hotel Co., Inc.) ("Trust Leasing"). Effective November 15, 1996, Trust
Leasing assigned all of the then existing leases for the Company's hotels,
together with its assets, to Crossroads/Memphis Partnership, L.P. (the "Lessee")
pursuant to a Contribution Agreement dated October 4, 1996 by and among Trust
Leasing, Trust Management, Inc., formerly named McNeill Hospitality Corporation,
which is wholly owned by Phillip H. McNeill, Sr., and the Lessee. Since November
15, 1996, the Company has acquired eight hotels which have been leased to
Crossroads/Future Company, L.L.C. ("Crossroads/Future" and, together with the
Lessee, the "Lessees") pursuant to percentage lease agreements which provide
for rent payments equal to the greater of (i) fixed base rent ("Base Rent") or
(ii) percentage rent ("Percentage Rent") based on the revenues of the hotels
(the "Percentage Leases"). The Lessees are wholly-owned subsidiaries of
Interstate Hotels Company, a publicly-owned hotel management company
("Interstate").
The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ended December 31, 1994. A REIT is subject to a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 95% of its taxable income. In connection
with the Company's election to be taxed as a REIT, the Company's Charter imposes
certain restrictions on the transfer and ownership of shares of Common Stock.
See "Restrictions on Ownership of Common Stock." The Company has adopted the
calendar year as its taxable year. The Company's Charter limits consolidated
indebtedness to 45% of the Company's investment in hotel properties, at its
cost.
The Company's principal executive offices are located at 4735
Spottswood, Suite 102, Memphis, Tennessee 38117 and its telephone number is
(901) 761-9651.
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RISK FACTORS
Prospective investors should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before making an investment decision regarding the Offered Securities
offered hereby.
HOTEL INDUSTRY RISKS
Operating Risks
The Hotels are subject to all operating risks common to the hotel
industry. These risks include, among other things, competition from other
hotels; over-building in the hotel industry, which adversely affects occupancy
and revenues; increases in operating costs due to inflation and other factors,
which increases have not been, and may not be, offset by increased room rates;
dependence on business and commercial travelers and tourism; increases in energy
costs and other expenses affecting travel; and adverse effects of general and
local economic conditions. These factors could adversely affect the Lessees'
ability to make lease payments and therefore the Company's ability to make
expected distributions to shareholders. Further, decreases in room revenues of
the Hotels would result in decreased revenues to the Partnership under the
Percentage Leases and, therefore, decreased amounts available for distribution
to the Company's shareholders.
Competition
Competition for Guests; Operations. The hotel industry is highly
competitive. The Hotels compete with other hotel properties in their geographic
markets. Many of the Company's competitors have substantially greater marketing
and financial resources than the Company.
Competition for Acquisitions. The Company will compete for investment
opportunities with entities which have substantially greater financial resources
than the Company. These entities generally may be able to accept more risk than
the Company can manage prudently. Competition generally may reduce the number of
suitable investment opportunities offered to the Company and may increase the
bargaining power of property owners seeking to sell. Further, the Company
believes that competition from entities organized for purposes substantially
similar to the Company's objectives has increased and will increase
significantly in the future.
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.
This seasonality can be expected to cause quarterly fluctuations in the
Company's lease revenues. Quarterly earnings may be adversely affected by
factors beyond the Company's control, including poor weather conditions and
economic factors. The Company may be required to enter into short-term borrowing
in the first and fourth quarters in order to offset such fluctuations in
revenues and to fund the Company's anticipated obligations, including
distributions to its shareholders.
Capital Expenditures
The Company's hotel properties have an ongoing need for renovations and
other capital improvements, including periodic replacement of furniture,
fixtures and equipment. Franchisors of the Hotels may also require periodic
capital improvements as a condition of retaining the franchise licenses. The
cost of such capital improvements could have an adverse effect on the Company's
financial condition. Such renovations involve certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
the possibility that the Company will not have available cash to fund
renovations or that financing for renovations will not be available on
favorable terms, uncertainties as to market demand or deterioration in market
demand after commencement of renovation and the emergence of unanticipated
competition from hotels. The Company intends to fund such improvements out of
cash from operations, cash balances or available borrowing capacity under its
bank line of credit.
Development Risks
In addition to its acquisition strategy, the Company intends to grow
by developing additional hotels. Development involves substantial risks,
including the risk that development costs will exceed budgeted or contracted
amounts, the risk of delays in completion of construction, the risk of failing
to obtain all necessary zoning and construction permits, the risk that
financing might not be available on favorable terms, the risk that developed
properties will not achieve desired revenue levels once opened, the risk of
competition for suitable development sites from competitors which may have
greater financial resources than the Company and the risks of incurring
substantial costs in the event a development project must be abandoned prior to
completion. Although the Company intends to manage development to minimize
such risks, there can be no assurance that present or future developments will
perform in accordance with the Company's expectations.
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REAL ESTATE INVESTMENT RISKS
General Risks of Investing in Real Estate
The Company's investments in the Hotels are subject to varying degrees
of risk generally incident to the ownership of real property. The underlying
value of the Company's real estate investments and the Company's income and
ability to make distributions to its shareholders are both dependent upon the
ability of the Lessees to operate the Hotels in a manner sufficient to maintain
or increase room revenues and to generate sufficient income in excess of
operating expenses to make rent payments under the Percentage Leases. Income
from the Hotels may be adversely affected by adverse changes in national
economic conditions, changes in local market conditions due to changes in
general or local economic conditions and neighborhood characteristics,
competition from other hotel properties, changes in interest rates and in the
availability, cost and terms of mortgage funds, the impact of present or future
environmental legislation and compliance with environmental laws, the ongoing
need for capital improvements, particularly in older structures, changes in real
property tax rates and other operating expenses, changes in governmental rules
and fiscal policies, civil unrest, acts of God, including earthquakes, floods
and other natural disasters (which may result in uninsured losses), acts of war,
adverse changes in zoning laws, and other 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 is limited. 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 of any disposition will recoup or exceed the amount of
the Company's investment.
Operational Risks of Rapid Growth
Since the Company's initial public offering in March 1994, the Company
has acquired 48 additional hotels, and has contracted to acquire an additional
28 hotels, increasing the size and geographic dispersion of the Company's hotel
properties. The Company's growth strategy also contemplates acquisitions of
additional hotels that meet the Company's investment criteria, further
increasing the size and geographic dispersion of its hotel properties. Failure
of the Company and the Lessees to effectively manage such expanded operations
could have a material adverse effect on the Hotels' operating results.
Deteriorating operations could negatively impact revenues at the Hotels and,
therefore, the lease payments under the Percentage Leases and amounts available
for distribution to shareholders.
Uninsured and Underinsured Losses
Each Percentage Lease specifies comprehensive insurance to be
maintained on each of the Hotels, including liability, fire and extended
coverage. Management believes such specified coverage is of the type and amount
customarily obtained for or by an owner or real property assets. Leases for
subsequently acquired hotels will contain similar provisions. However, there are
certain types of losses, generally of a catastrophic nature, such as earthquakes
and floods, that may be uninsurable or not economically insurable. The Company's
Board of Directors will use their discretion in determining amounts, coverage
limits and deductibility provisions of insurance, with a view to maintaining
appropriate insurance coverage on the Company's investments at a reasonable cost
and on
Emphasis on Hampton Inn Hotels
Because 37 of the Current Hotels and all of the Acquisition Hotels are
operated as Hampton Inn hotels and because the Company intends to place an
emphasis on Hampton Inn hotels in its acquisition and development strategy, the
Company is subject to risks inherent in concentrating investments in a single
franchise 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 distribution to shareholders.
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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 infeasible 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. In addition, the presence of contamination from
hazardous or toxic substances, or the failure to remediate such contaminated
property properly, may adversely affect the owner's ability to use or sell the
property or to borrow using such real property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
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 asbestos-containing materials ("ACMs"), into the
environment or a work place, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage associated
with exposure to released hazardous or toxic substances, including 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. In connection with the ownership of the Hotels, the Company or the
Partnership may be potentially liable for any such costs. The cost of defending
against claims of liability or remediating the contaminated property or
otherwise complying with environmental laws could materially adversely affect
amounts available for distribution to the Company's shareholders. Phase I
environmental audits have been obtained on each of the Hotels in connection with
their respective acquisitions by the Partnership. The purpose of Phase I audits
is to identify potential environmental contamination for which the Hotels may be
responsible and the potential for environmental regulatory compliance
liabilities. The Phase I audit reports on the Hotels did not reveal any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets, results of operating or liquidity, 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.
The Clean Water Act ("CWA") prohibited the Environmental Protection
Agency ("EPA") from requiring permits for all but a few (primarily industrial
and certain municipal) discharges of storm water prior to October 1, 1994. Even
though the moratorium ended, the EPA has not yet issued permitting regulations
for non-industrial and non-municipal discharges of storm water. In October 1994,
EPA officials indicated that all storm water discharges without permits were
technically in violation of the CWA. How the EPA will ultimately define the
universe of dischargers requiring a permit is unclear. Nevertheless, it is
possible that storm water drainage to a navigable waterway from one or more of
the Company's properties is a discharge in violation of the CWA since October
1, 1994. Penalties for non-compliance may be substantial. Although the EPA has
stated that it will not take enforcement action against those storm water
dischargers formerly subject to the moratorium and the Company is not aware of
any current or reasonably likely penalties to be imposed for its storm water
discharges, it is possible, given the uncertainty about the scope and timing of
EPA or state regulations on the subject, that liability may exist.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND OTHER CHANGES IN
GOVERNMENTAL RULES AND REGULATIONS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. While the Company believes that the
Hotels are substantially in compliance with these requirements, a determination
that the Company is not in compliance with the ADA could result in imposition of
fines or an award of damages to private litigants. In
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addition, changes in governmental rules and regulations or enforcement policies
affecting the use and operation of the Hotels, including changes to building
codes and fire and life safety codes, may occur. If the Company were required to
make substantial modifications at the Hotels to comply with the ADA or other
changes in governmental rules and regulations, the Company's ability to make
distributions to its shareholders could be adversely affected.
FLUCTUATIONS IN PROPERTY TAXES
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase or decrease as tax rates change and as the properties are assessed or
reassessed by taxing authorities. If property taxes increase, the Company's
ability to make distributions to its shareholders could be adversely affected.
RISKS OF LEVERAGE
The Board of Directors has the discretion to permit the Company to
incur consolidated indebtedness in an amount not to exceed 45% of the Company's
investment in hotel properties, at its cost, which cost includes the fair market
value of any equity securities issued in connection with the acquisition of
hotel properties, after giving effect to the Company's use of proceeds from any
indebtedness. The Company currently has a $130 million Line of Credit to
provide, as necessary, working capital, funds for investments in additional
hotel properties and cash to pay dividends. In addition, in January 1997, the
Company, through its indirect, wholly-owned subsidiary EQI Financing
Partnership I, L.P., issued $88 million of fixed-rate, collateralized mortgage
bonds in a private placement transaction.
There can be no assurances that the Company will be able to meet its
debt service obligations and, to the extent that it cannot, the Company risks
the loss of some or all of its assets, including the Hotels, to foreclosure.
Adverse economic conditions could result in higher interest rates which could
increase debt service requirements on floating rate debt and could reduce the
amounts available for distribution to shareholders. The Company may obtain one
or more forms of interest rate protection (swap agreements, interest rate caps
contracts, etc.) to hedge against the possible adverse effects of interest rate
fluctuations. However, there can be no assurances that such hedging would be
effective in mitigating the adverse effects of interest rate fluctuations.
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.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
All of the Hotels are subject to franchise agreements. The continuation
of the franchise licenses is subject to specified operating standards and other
terms and conditions. The franchisors periodically inspect their licensed
properties to confirm adherence to operating standards. The failure of a hotel,
the Partnership or a Lessee to maintain such standards or adhere to such other
terms and conditions could result in the loss or cancellation of the franchise
license. It is possible that a franchisor could condition the continuation of a
franchise license on the completion of capital improvements which the Board of
Directors determines are 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 any case, if a franchise is terminated, the
Partnership and the Lessee may seek to obtain a suitable replacement franchise,
or to operate the hotel independent of a franchise license. The loss of a
franchise license could have a material adverse effect upon the operations or
the underlying value of the hotel covered by the franchise because of the loss
of associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. Although the Percentage Leases require the
Lessees to maintain the franchise license for each Hotel, a Lessee's loss of a
franchise license for one or more of the Hotels could have a material adverse
effect on the Partnership's revenues under the Percentage Leases and the
Company's cash available for distribution to its shareholders.
8
<PAGE> 10
ABILITY OF BOARD OF DIRECTORS TO CHANGE CERTAIN POLICIES
The major policies of the Company, including its policies with respect
to acquisitions, financing, growth, operations and distributions, will be
determined by its Board of Directors. The Board of Directors may amend or revise
these and other policies from time to time without a vote of the shareholders of
the Company.
LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
Ownership Limitation
The Ownership Limitation (as defined herein and as described under
"Restrictions on Ownership of Common Stock"), which provides that no person may
own, directly or indirectly, more than 9.9% of any class of the outstanding
stock of the Company, may have the effect of precluding an acquisition of
control of the Company by a third party without the approval of the Board of
Directors, even if the change of control is in the shareholders' best
interests.
Staggered Board
The Board of Directors of the Company has three classes of directors.
The current terms of the Company's directors expire in 1998, 1999 and 2000,
respectively. Directors for each class will be elected for a three-year term
upon the expiration of that class' term. The staggered terms of directors may
affect the shareholders' ability to change control of the Company, even if such
a change were in the shareholders' best interests. See "Description of Capital
Stock -- Charter and Bylaw Provisions." The foregoing may also discourage offers
or other bids for the Common Stock at a premium over the market price.
Authority to Issue Preferred Stock
The Company's Charter authorizes the Board of Directors to issue up to
10,000,000 shares of preferred stock and to establish the preferences and rights
of any shares issued. See "Description of Capital Stock -- Preferred Stock." The
issuance of preferred stock may have the effect of delaying or preventing a
change in control of the Company even if a change in control were in the
shareholders' interests.
Tennessee Anti-Takeover Statutes
As a Tennessee corporation, the Company is subject to various
legislative acts set forth in Chapter 35 of Title 48 of the Tennessee Code,
which impose certain restrictions and require certain procedures with respect to
certain takeover offers and business combinations, including, but not limited
to, combinations with interested shareholders and share repurchases from certain
shareholders. See "Description of Capital Stock -- Tennessee Anti-Takeover
Statutes."
TAX RISKS
Failure to Qualify as a REIT
The Company operates and intends to continue to operate so as to
qualify as a REIT for federal income tax purposes. The Company has not
requested, and does not expect to request, a ruling from the Internal Revenue
Service (the "Service") that it qualifies as a REIT. 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."
9
<PAGE> 11
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 Code
provisions, 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 distribution to the shareholders would be
reduced for each of the years involved. Although the Company currently intends
to continue to operate in a manner designed 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 avoid corporate income taxation of the earnings it
distributes, 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 will be subject to a 4% nondeductible excise tax
on the amount, if any, by which certain distributions paid by it with respect to
any calendar year are less than the sum of (i) 85% of its ordinary income for
that year, (ii) 95% of its capital gain net income for that year and (iii) 100%
of its undistributed income from prior years.
The Company has made and intends to continue to make distributions to
its shareholders to comply with the 95% distribution requirement and to avoid
the nondeductible excise tax. The Company's income will consist primarily of the
Company's share of the income of the Partnership, and the Company's cash
available for distribution will consist primarily of the Company's share of cash
distributions from the Partnership. Differences in timing between the
recognition of taxable income and the receipt of 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.
Distributions by the Partnership will be determined by the Board of
Directors of the Company, as the sole general partner of the Partnership, and
will be dependent on a number of factors, including the amount of the
Partnership's cash available for distribution, the Partnership's financial
condition, any decision by the Board of Directors to reinvest funds rather than
to distribute such funds, the Partnership's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Distribution Requirements."
Failure of the Partnership to be Classified as a Partnership for Federal
Income Tax Purposes; Impact on REIT Status
The Company has not requested, and does not expect to request, a ruling
from the Service that the Partnership and its subsidiary partnerships (the
"Subsidiary Partnerships") will be classified as a partnership for federal
income tax purposes. If the Service were to challenge successfully the tax
status of the Partnership (or a Subsidiary Partnership) as a partnership for
federal income tax purposes, the Partnership (or Subsidiary Partnership) would
be taxable as a corporation. In such event, the Company would cease to qualify
as a REIT for a variety of reasons. Furthermore, the imposition of a corporate
income tax on the Partnership would substantially reduce the amount of cash
available for distribution and Subsidiary Partnerships to the Company and its
shareholders. See "Federal Income Tax Considerations -- Tax Aspects of the
Partnership."
OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, no
more than 50% in value of its outstanding stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to
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<PAGE> 12
include certain entities). Furthermore, if any shareholder or group of
shareholders of a Lessee owns, actually or constructively, 10% or more of the
stock of the Company, the Lessee could become a related party tenant, which
likely would result in loss of REIT status for the Company. For the purpose of
preserving the Company's REIT qualification, the Company's Charter prohibits
direct or indirect ownership of more than 9.9% of the outstanding shares of any
class of the Company's stock by any person or group (the "Ownership
Limitation"), subject to adjustment as described below. Generally, the capital
stock owned by affiliated owners will be aggregated for purposes of the
Ownership Limitation.
Any transfer of shares that would prevent the Company from continuing
to qualify as a REIT under the Code will be void ab initio, and the intended
transferee of such shares will be deemed never to have had an interest in such
shares. Further, if, in the opinion of the Board of Directors, (i) a transfer of
shares would result in any shareholder or group of shareholders acting together
owning shares in excess of the Ownership Limitation or (ii) a proposed transfer
of shares may jeopardize the qualification of the Company as a REIT under the
Code, the Board of Directors may, in its sole discretion, refuse to allow the
shares to be transferred to the proposed transferee. Finally, the Company may,
in the discretion of the Board of Directors, redeem any stock held of record by
any shareholder in excess of the Ownership Limitation.
The Company's Charter sets the redemption price of the stock to be
redeemed at the lesser of the market price on the date the Company provides
written notice of redemption or the date such stock was purchased, subject to
certain provisions of Tennessee law. Therefore, the record holder of stock in
excess of the Ownership Limitation may experience a financial loss when such
shares are redeemed, if the market price falls between the date of purchase and
the date of redemption. See "Restrictions on Ownership of Common Stock" and
"Federal Income Tax Considerations -- Requirements for Qualification."
11
<PAGE> 13
USE OF PROCEEDS
The Company will contribute the net proceeds of any sale of the Offered
Securities by the Company to the Partnership in exchange for limited
partnership units having characteristics similar to those of the Offered
Securities. Unless otherwise set forth in the applicable Prospectus Supplement,
the net proceeds from the sale of any Common Stock will be used by the Company
and the Partnership for general corporate purposes, which may include repayment
of indebtedness, making improvements to hotel properties and the acquisition of
additional hotel properties.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratio of
earnings to fixed charges and ratio of funds from operations to fixed charges
for the periods presented.
<TABLE>
<CAPTION>
1996 1995 1994(1) 1993(1) 1992(1)
---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges 3.51 3.01 7.70 1.35 1.19
</TABLE>
- --------------------
(1) Periods prior to March 1, 1994 (the date of the Company's initial
public offering) reflect data for the Company's predecessor entities.
The consolidated ratio of earnings to fixed charges was computed by
dividing earnings by fixed charges. To date, the Company has not issued any
Preferred Shares; therefore, the ratio of earnings to combined fixed charges and
preferred share dividends and the ratio of earnings to fixed charges are the
same. For purposes of computing the ratio, earnings have been calculated by
adding fixed charges to income before minority interest. Fixed charges consist
of interest expense and amortization of loan origination fees.
Prior to the completion of the Company's initial public offering
("IPO") in March 1994 and intent to qualify as a REIT, the Company's predecessor
entities operated in a manner so as to minimize net taxable income and were
capitalized primarily with debt.
DESCRIPTION OF CAPITAL STOCK
Under the Company's Charter, the total number of shares of all classes
of capital stock that the Company has authority to issue is 60,000,000,
consisting of 50,000,000 shares of Common Stock and 10,000,000 shares of
Preferred Stock. At May 1, 1997, there were 23,693,278 shares of Common Stock
outstanding and no shares of Preferred Stock outstanding.
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<PAGE> 14
The following information with respect to the capital stock of the
Company is subject to the detailed provisions of the Charter and the Company's
Bylaws, as currently in effect. These statements do not purport to be complete,
or to give full effect to the provisions of statutory or common law, and are
subject to, and are qualified in their entirety by reference to, the terms of
the Charter and Bylaws, which are exhibits to the Registration Statement.
COMMON STOCK
Subject to the provisions of the Charter described under "Restrictions
on Ownership of Capital Stock," the holders of Common Stock are entitled to one
vote per share on all matters voted on by the shareholders, including elections
of directors. Except as otherwise required by law or provided in any resolution
adopted by the Board of Directors with respect to any series of Preferred Stock,
the holders of shares of Common Stock exclusively possess all voting power of
the Company. The Charter does not provide for cumulative voting in the election
of directors. Subject to any preferential rights of any outstanding series of
Preferred Stock, the holders of Common Stock are entitled to such dividends as
may be declared from time to time by the Board of Directors from funds available
therefor, and upon liquidation are entitled to receive pro rata all assets of
the Company available for distribution to such holders. The holders of Common
Stock have no conversion, sinking fund, redemption rights or any other
preemptive rights to subscribe for any securities of the Company. Upon issuance
and delivery against payment therefor, all shares of Common Stock offered hereby
will be duly authorized, fully paid and non-assessable.
The Common Stock is traded on the New York Stock Exchange under the
symbol "ENN." The transfer agent and registrar for the Company's Common Stock is
SunTrust Bank, Atlanta, Georgia. The Company will apply to the NYSE to list the
additional Common Shares to be sold pursuant to any Prospectus Supplement, and
the Company anticipates that such shares will be so listed.
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of
shares of Preferred Stock from time to time, in one or more series, to establish
the number of shares in each series and to fix the designation, powers,
preferences and rights of each such series and the qualifications, limitations
or restrictions thereof. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred Stock,
the Board of Directors may afford the holders of any series or class of
Preferred Stock preferences, powers and rights, voting or otherwise, senior to
the rights of holders of Common Stock. The issuance of Preferred Stock could
have the effect of delaying or preventing a change in control of the Company.
The applicable Prospectus Supplement will describe each of the
following terms that may be applicable in respect of any Preferred Stock offered
and issued pursuant to this Prospectus: (1) the specific designation, number of
shares, seniority and purchase price; (2) any liquidation preference per share;
(3) any maturity date; (4) any mandatory or option redemption or repayment dates
and terms or sinking fund provisions; (5) any dividend rate or rates and the
dates on which any dividends will be payable (or the method by which such rates
or dates will be determined); (6) any voting rights; (7) any rights to convert
the Preferred Stock into other securities or rights, including a description of
the securities or rights into which such Preferred Stock is convertible (which
may include other Preferred Stock) and the terms and conditions upon which such
conversions will be effected, including, without limitation, conversion rates or
formulas, conversion periods and other related provisions; (8) the place or
places where dividends and other payments with respect to the Preferred Stock
will be payable; and (9) any additional voting, dividend, liquidation,
redemption and other rights, preferences, privileges, limitations and
restrictions, including restrictions imposed for the purpose of maintaining the
Company's qualification as a REIT under the Code. Upon issuance and delivery
against payment therefor, all shares of the Preferred Stock offered hereby will
be duly authorized, fully paid and non-assessable.
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<PAGE> 15
CHARTER AND BYLAW PROVISIONS
Staggered Board of Directors
The Charter provides that the Board of Directors is divided into three
classes of directors, each class constituting approximately one-third of the
total number of directors with the classes serving staggered three-year terms.
The classification of directors has the effect of making it more difficult for
shareholders to change the composition of the Board of Directors.
The classification provisions also could 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 market 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 directors of the Company who are not officers or employees of
the Company or Affiliates (as defined below) of (i) any advisor to the Company
under an advisory agreement, (ii) any lessee of any property of the Company,
(iii) any subsidiary of the Company or (iv) any partnership which is an
Affiliate of the Company (the "Independent Directors"), except that upon the
death, removal or resignation of an Independent Director, such requirement shall
not be applicable for 60 days. "Affiliate" is defined as being (i) any person
that, directly or indirectly, controls or is controlled by or is under common
control with such person, (ii) any other person that owns, beneficially,
directly or indirectly, five percent (5%) or more of the outstanding capital
stock, shares or equity interests of such person or (iii) any officer, director,
employee, partner or trustee of such person or any person controlling,
controlled by or under common control with such person (excluding trustees and
persons serving in similar capacities who are not otherwise an Affiliate of such
person). There are four directors currently, three of whom are Independent
Directors. The holders of Common Stock are entitled to vote on the election or
removal of directors, with each share entitled to one vote. The Bylaws provide
that, subject to any rights of holders of Preferred Stock, and unless the Board
of Directors otherwise determines, any vacancies will be filled by the
affirmative vote of a majority of the remaining directors, though less than a
quorum, provided that Independent Directors shall nominate and approve directors
to fill vacancies created by Independent Directors. Accordingly, the Board of
Directors could temporarily prevent any shareholder entitled to vote 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 or without cause by the affirmative vote
of the holders of 75% of the outstanding shares entitled to vote in the election
of directors at a special meeting of the shareholders called for the purpose of
removing him.
Limitation of Liability; Indemnification
The Company's Charter obligates the Company to indemnify and advance
expenses to present and former directors and officers to the maximum extent
permitted by Tennessee law. The Tennessee Business Corporation Act ("TBCA")
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, settlements, penalties, fines or
reasonable expenses incurred with respect to a proceeding to which they may be
made a party by reason of their service in those or other capacities if (i) such
persons conducted themselves in good faith, (ii) they reasonably believed, in
the case of conduct in their official capacities with the corporation, that
their conduct was in its best interests and, in all other cases, that their
conduct was at least not
14
<PAGE> 16
opposed to its best interests and (iii) in the case of any criminal proceeding,
they had no reasonable cause to believe that their conduct was unlawful.
Any indemnification by the Company pursuant to the provisions of the
Charter and the TBCA described above shall be paid out of the assets of the
Company and shall not be recoverable from the shareholders. The Company
currently purchases director and officer liability insurance for the purpose of
providing a source of funds to pay any indemnification described above. To the
extent that the foregoing indemnification provisions purport to include
indemnification for liabilities arising under the Securities Act, in the opinion
of the Commission such indemnification is contrary to public policy and is,
therefore, unenforceable.
The TBCA permits the charter of a Tennessee corporation to include a
provision eliminating or limiting the personal liability of its directors to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except that such provision cannot eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law
or (iii) for unlawful distributions that exceed what could have been distributed
without violating the TBCA or the corporation's charter. The Company's Charter
contains a provision eliminating the personal liability of its directors or
officers to the Company or its shareholders for money damages to the maximum
extent permitted by Tennessee law from time to time.
Amendment
The Company's Charter may be amended by the affirmative vote of the
holders of a majority of the shares of the Common Stock present at a meeting at
which a quorum is present, with the shareholders voting as a class with one vote
per share; provided, however, that (i) the Charter provision providing for the
classification of the 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 or the affirmative vote of holders of at least
75% of the outstanding shares of capital stock entitled to vote generally in the
election of directors, voting separately as a class; (ii) the provisions
relating to the limitation on indebtedness may not be amended without an
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock; and (iii) the Company cannot take any action intended to terminate
its qualification as a REIT without the approval of the holders of two-thirds of
the outstanding shares of Common Stock. The Company's Bylaws may be amended by
the Board of Directors or by vote of the holders of a majority of the
outstanding shares of Common Stock, provided that provisions with respect to the
staggered terms of the Board of Directors cannot be amended without the
affirmative vote of 80% of the members of the entire Board of Directors or the
holders of 75% of the outstanding shares of capital stock entitled to vote
generally in the election of directors, voting separately as a class.
Operations
Pursuant to its Charter, the Company generally is prohibited from
engaging in certain activities, including (i) incurring consolidated
indebtedness in excess of 45% of the Company's investment in hotel properties,
at cost, after giving effect to the Company's use of proceeds from any
indebtedness, and (ii) acquiring or holding property or engaging in any activity
that would cause the Company to fail to qualify as a REIT.
TENNESSEE ANTI-TAKEOVER STATUTES
In addition to certain of the Company's Charter provisions discussed
above, Tennessee has adopted a series of statutes which may deter takeover
attempts or tender offers, including offers or attempts that might result in the
payment of a premium over the market price for the Common Stock or that a
shareholder might otherwise consider in its best interest.
15
<PAGE> 17
Under the Tennessee Investor Protection Act, unless a company's board
of directors has recommended a takeover offer to shareholders, no offeror
beneficially owning 5% or more of any class of equity securities of the offeree
company, any of which was purchased within one year prior to the proposed
takeover offer, may offer to acquire any class of equity securities of an
offeree company pursuant to a tender offer if, after the acquisition thereof,
the offeror would be directly or indirectly a beneficial owner of more than 10%
of any class of outstanding equity securities of the offeree company (a
"Takeover Offer"). However, this prohibition does not apply if the offeror,
before making such purchase, has made a public announcement of his intention
with respect to changing or influencing the management or control of the offeree
company, has made a full, fair and effective disclosure of such intention to the
person from whom he intends to acquire such securities, and has filed with the
Tennessee Commissioner of Commerce and Insurance (the "Commissioner") and with
the offeree company a statement signifying such intentions and containing such
additional information as the Commissioner by rule prescribes. Such an offeror
must provide that any equity securities of an offeree company deposited or
tendered pursuant to a Takeover Offer may be withdrawn by or on behalf of an
offeree at any time within seven days from the date the Takeover Offer has
become effective following filing with the Commissioner and the offeree company
and public announcement of the terms or after 60 days from the date the Takeover
Offer has become effective. If an offeror makes a Takeover Offer for less than
all the outstanding equity securities of any class, and if the number of
securities tendered is greater than the number the offeror has offered to accept
and pay for, the securities shall be accepted pro rata. If an offeror varies the
terms of a Takeover Offer before its expiration date by increasing the
consideration offered to shareholders of the offeree company, the offeror shall
pay the increased consideration for all equity securities accepted, whether
accepted before or after the variation in the terms of the Takeover Offer.
Under the Tennessee Business Combination Act, subject to certain
exceptions, no Tennessee corporation may engage in any "business combination"
with an "interested shareholder" for a period of five years following the date
that such shareholder became an interested shareholder unless prior to such date
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the shareholder becoming an
interested shareholder. Consummation of a business combination that is subject
to the five-year moratorium is permitted after such period when the transaction
(a) (i) complies with all applicable charter and bylaw requirements and (ii) is
approved by the holders of two-thirds of the voting stock not beneficially owned
by the interested shareholder, and (b) meets certain fair price criteria.
"Business combination" is defined by the statute as being any (i) merger or
consolidation; (ii) share exchange; (iii) sale, lease, exchange, mortgage,
pledge or other transfer of assets representing 10% or more of (A) the aggregate
market value of the corporation's consolidated assets, (B) the aggregate market
value of the corporation's shares or (C) the corporation's consolidated net
income; (iv) issuance or transfer of shares from the corporation to the
interested shareholder; (v) plan of liquidation or dissolution proposed by the
interested shareholder; (vi) transaction or recapitalization which increases the
proportionate share of any outstanding voting securities owned or controlled by
the interested shareholder; or (vii) financing arrangement whereby any
interested shareholder receives, directly or indirectly, a benefit except
proportionately as a shareholder. "Interested shareholder" is defined as (i) any
person that is the beneficial owner of 10% or more of the voting power of class
or series of outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation who at any time within the five-year period
immediately prior to the date in question was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of any class or series of the
outstanding stock of the corporation.
The Tennessee Greenmail Act prohibits a Tennessee corporation from
purchasing, directly or indirectly, any of its shares at a price above the
market value of such shares (defined as the average of the highest and lowest
closing market price for such shares during the 30 trading days preceding the
purchase and sale or preceding the commencement or announcement of a tender
offer if the seller of such shares has commenced a tender offer or announced an
intention to seek control of the corporation) from any person who holds more
than 3% of the class of securities to be purchased if such person has held such
shares for less than two years, unless the purchase has been approved by the
affirmative vote of a majority of the outstanding shares of each class of voting
stock issued by such corporation or the corporation makes an offer, of at least
equal value per share, to all holders of shares of such class.
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<PAGE> 18
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK
For the Company to qualify as a REIT under the Code, shares of capital
stock must be held by a minimum of 100 persons for at least 335 days in each
taxable year or during a proportionate part of a shorter taxable year. In
addition, at all times during the second half of each taxable year, no more than
50% in value of the shares of beneficial interest of the Company may be owned,
directly or indirectly and by applying certain constructive ownership rules, by
five or fewer individuals (the "5/50 Rule"). Because the Board of Directors
believes it is essential for the Company to continue to qualify as a REIT, the
Charter restricts the acquisition of shares of Common Stock (the "Ownership
Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in the Charter, no shareholder may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.9% of the outstanding
shares of Common Stock. The Board of Directors may, but in no event is required
to, waive the Ownership Limitation if evidence satisfactory to the Board of
Directors is presented that ownership in excess of such amount will not
jeopardize the Company's status as a REIT. As a condition of such waiver, the
Board of Directors may require opinions of counsel satisfactory to it or an
undertaking from the applicant with respect to preserving the REIT status of the
Company. If shares in excess of the Ownership Limitation, or shares which would
cause the Company to be beneficially owned by fewer than 100 persons, are issued
or transferred to any person, such issuance or transfer shall be null and void
and the intended transferee will acquire no rights to the shares.
The Ownership Limitation will not be automatically removed even if the
REIT provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Any change in the Ownership Limitation would require an amendment to
the Charter. In addition to preserving the Company's status as a REIT, the
Ownership Limitation may have the effect of precluding an acquisition of control
of the Company without the approval of the Board of Directors. All certificates
representing shares of capital stock will bear a legend referring to the
restrictions described above.
All persons who own, directly or by virtue of the attribution
provisions of the Code, 5% or more of the outstanding Common Stock and any
shareholder requested by the Company must file an affidavit with the Company
containing the information specified in the Charter with respect to their
ownership of shares within 30 days after January 1 of each year. In addition,
each shareholder shall, upon demand, be required to disclose to the Company in
writing such information with respect to the direct, indirect and constructive
ownership of shares as the Board of Directors deems necessary to comply with the
provisions of the Code applicable to a REIT or to comply with the requirements
of any taxing authority or governmental agency.
Any transfer of shares which would prevent the Company from continuing
to qualify as a REIT under the Code will be void ab initio to the fullest extent
permitted under applicable law and the intended transferee of such shares will
be deemed never to have had an interest in such shares. Further, if, in the
opinion of the Board of Directors, (i) a transfer of shares would result in any
shareholder or group of shareholders acting together owning in excess of the
Ownership Limitation or (ii) a proposed transfer of shares may jeopardize the
qualification of the Company as a REIT under the Code, the Board of Directors
may, in its sole discretion, refuse to allow the shares to be transferred to the
proposed transferee. Finally, the Company may, in the discretion of the Board of
Directors, redeem any stock held of record by any shareholder in excess of the
Ownership Limitation, for a price equal to the lesser of (i) the market price on
the date of notice of redemption; (ii) the market price on the date of purchase;
or (iii) the maximum price allowed under the applicable provisions of the TBCA.
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<PAGE> 19
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
that may be relevant to a prospective holder of Common or Preferred Stock is
based on current law, is for general information only and is not tax advice. The
discussion contained herein does not purport to deal with all aspects of
taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of shareholders
(including insurance companies, tax-exempt organizations, financial institutions
or broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) subject to special treatment under the federal
income tax laws.
The statements in this discussion are based on current provisions of
the Code, existing, temporary and currently proposed Treasury regulations
promulgated under the Code ("Treasury Regulations"), the legislative history of
the Code, existing administrative rulings and practices of the Service and
judicial decisions. No assurance can be given that future legislative, judicial
or administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this Prospectus with respect to the
transactions entered into or contemplated prior to the effective date of such
changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND SALE OF THE
COMMON OR PREFERRED STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Code, effective for its taxable year ended December 31, 1994.
The Company believes that, commencing with such taxable year, it has been
organized and has operated in such a manner as to qualify for taxation as a REIT
under the Code, and the Company intends to continue to operate in such a manner,
but no assurance can be given that the Company will operate in a manner so as to
qualify or remain qualified as a REIT.
Hunton & Williams has acted as tax counsel to the Company. Prior to
issuing Common or Preferred Stock, the Company expects to obtain an opinion of
Hunton & Williams as to its REIT qualification. Continued qualification and
taxation as a REIT will depend upon the Company's ability to meet on a
continuing basis, through actual annual operating results, distribution levels,
and stock ownership, the various qualification tests imposed under the Code
discussed below. 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 "Federal Income Tax Considerations-Failure to Qualify."
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, Treasury Regulations promulgated
thereunder and administrative and judicial interpretations thereof, all of which
are subject to change prospectively or retrospectively.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is distributed
currently to its 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
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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 non-qualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if the Company has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year and (iii)
any undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if the Company acquires any asset from a
C corporation (i.e., a corporation generally subject to full corporate-level
tax) in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the disposition of
such asset during the 10-year period beginning on the date on which such asset
was acquired by the Company, then to the extent of such asset's "built-in gain"
(i.e., the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such time),
such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in-gain" assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that
is managed by one or more directors or trustees; (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 share 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 (the "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 with 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 shares of Common Stock that are intended to assist the
Company in continuing to satisfy the share ownership requirements described in
(v) and (vi) above.
For purposes of determining share ownership under the 5/50 Rule, a
supplemental 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. A trust that is a qualified
trust under Code section 401(a), however, generally is not considered an
individual and the beneficiaries of such trust are treated as holding shares of
a REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.
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The Company currently has three corporate subsidiaries (one of which is
the Trust) and may have additional corporate subsidiaries in the future. Code
Section 856(i) provides that a corporation that is a "qualified REIT subsidiary"
shall not be treated as a separate corporation, and all assets, liabilities and
items of income, deduction and credit of a "qualified REIT subsidiary" shall be
treated as assets, liabilities and items of income, deduction and credit of the
REIT. A "qualified REIT subsidiary" is a corporation, all of the capital stock
of which has been owned by the REIT from the commencement of such corporation's
existence. Thus, in applying the requirements described herein, the Company's
"qualified REIT subsidiaries" will be ignored, and all assets, liabilities and
items of income, deduction and credit of such subsidiaries will be treated as
assets, liabilities and items of income, deduction and credit of the Company.
The Trust and the Company's other corporate subsidiaries are "qualified REIT
subsidiaries."
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 Subsidiary Partnerships will be treated as assets and gross
income of the Company for purposes of applying the requirements described
herein.
Income Tests. In order for the Company to maintain its qualification as
a REIT, there are three requirements relating to the Company's gross income that
must be satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or temporary
investment income. Second, at least 95% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must be derived
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 that 30% of the
Company's gross income (including gross income from prohibited transactions) for
each taxable year may be gain from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) dealer property that is not
foreclosure property and (iii) certain real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property).
The specific application of these tests to the Company is discussed below.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or 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" who is adequately
compensated and 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 Lessees lease from the
Partnership (and Subsidiary Partnerships) the land, buildings, improvements,
furnishings and equipment comprising the Current Hotels for a 10-year period.
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The Percentage Leases provide that the Lessees are obligated to pay to the
Partnership (i) the greater of the Base Rent or the Percentage Rent
(collectively, the "Rents") and (ii) certain other charges, such as late fees
(the "Additional Charges"). The Percentage Rent is calculated by multiplying
fixed percentages by the room revenues and food and beverage revenues (where
applicable) for each of the Current Hotels in excess of certain levels. Both the
Base Rent and the threshold room revenue amount in each Percentage Rent formula
will be adjusted for inflation. The adjustment will be calculated at the
beginning of each lease year based on the change in the Consumer Price Index
("CPI") during the prior 24 months. The Base Rent accrues and is required to be
paid monthly and the Percentage Rent (if any) accrues and is required to be paid
quarterly. The Partnership plans to enter into leases with the Lessees with
respect to hotels acquired in the future that are substantially similar to the
Percentage Leases.
In order for the Base Rent, the Percentage Rent and the Additional
Charges to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement) and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property).
In addition, Code Section 7701(e) provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (i) the
service recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the property's operating costs
or the recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination whether a service
contract should be treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every case.
The Company believes that the Percentage Leases will be treated as true
leases for federal income tax purposes. Such belief is based, in part, on the
following facts: (i) the Partnership (and Subsidiary Partnerships) and the
Lessees intend for their relationship to be that of a lessor and lessee and such
relationship is documented by lease agreements, (ii) the Lessees have the right
to exclusive possession and use and quiet enjoyment of the Hotels during the
term of the Percentage Leases, (iii) the Lessees bear the cost of, and will be
responsible for, day-to-day maintenance and repair of the Hotels, other than the
cost of certain capital expenditures, and dictate how the Hotels are operated,
maintained, and improved, (iv) the Lessees bear all of the costs and expenses of
operating the Hotels (including the cost of any inventory used in their
operation) during the term of the Percentage Leases (other than real and
personal property taxes, ground lease rent (where applicable), property and
casualty insurance premiums, the cost of certain furniture, fixtures and
equipment, and certain capital expenditures), (v) the Lessees benefit from any
savings in the costs of operating the Hotels during the term of the Percentage
Leases, (vi) in the event of damage or destruction to a Hotel, the Lessees are
at economic risk because they will be obligated either (A) to restore the
property to its prior condition, in which event they will bear all costs of such
restoration in excess of any insurance proceeds or (B) to purchase the Hotel for
an amount generally equal to the fair market value of the
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Hotel, less any insurance proceeds, (vii) the Lessees have indemnified the
Partnership against all liabilities imposed on the Partnership during the term
of the Percentage Leases by reason of (A) injury to persons or damage to
property occurring at the Hotels, (B) the Lessees' use, management, maintenance
or repair of the Hotels, or (C) any failure on the part of the Lessees to
perform or comply with any of the terms of the Percentage Leases or the terms of
any sublease of the Hotels, (viii) the Lessees are obligated to pay substantial
fixed rent for the period of use of the Hotels, and (ix) the Lessees stand to
incur substantial losses (or reap substantial gains) depending on how
successfully they operate the Hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings or judicial decisions involving leases with terms
substantially the same as the Percentage Leases that discuss whether such leases
constitute true leases for federal income tax purposes. If the Percentage Leases
are recharacterized as service contracts or partnership agreements, rather than
true leases, part or all of the payments that the Partnership (and Subsidiary
Partnerships) receives from the Lessees 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 year 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 such taxable year (the
"Adjusted Basis Ratio"). With respect to each Hotel that the Partnership has
acquired or will acquire in exchange for Units, the initial adjusted basis of
the personal property in such Hotel was or will be less than 15% of the initial
adjusted bases of both the real and personal property comprising such Hotel. In
the event that the Adjusted Basis Ratio with respect to a Hotel exceeds
15%, a portion of the personal property at that Hotel will be acquired or
leased by the applicable Lessee and the lease payments under the Percentage
Lease will be adjusted appropriately. 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 challenge the
claimed valuation of personal property acquired by the Partnership or that a
court would not uphold such challenge. 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. The Percentage Rent is based on fixed
percentages of the gross revenues from the Hotels that are established in the
Percentage Leases, and the Company (i) has not negotiated and does not intend to
renegotiate the percentages 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) believes that the percentages conform with normal business practice.
Furthermore, with respect to other hotels that the Company acquires in the
future, the Company does not intend to charge rent for any property
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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 either Lessee. The constructive ownership rules generally provide that,
if 10% or more in value of the share of the Company is owned, directly or
indirectly, by or for any person, the Company is considered as owning the share
owned, directly or indirectly, by or for such person. The Company does not own
directly any stock of either Lessee or of Interstate. Furthermore, Charter
prohibits any person from owning, actually or constructively, 10% or more of the
Company. Thus, the Company should never own, actually or constructively, 10% of
more of either Lessee. In addition, with respect to other hotels that the
Company acquires in the future, the Company does not intend to 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 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 a 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 non-customary services to
the tenants of the Hotels, or manage or operate the Hotels, other than through
an independent contractor who is adequately compensated and 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 Lessees. Furthermore, with respect to other hotels that
the Company acquires in the future, the Company does not intend to perform
non-customary services with respect to the tenant of the property. As described
above, however, if the Percentage Leases are recharacterized as service
contracts or partnership agreements, the Rents likely would be disqualified as
"rents from real property" because the Company would be considered to furnish or
render services to the occupants of the Hotels and to manage or operate the
Hotels other than through an independent contractor who is adequately
compensated and from whom the Company derives or receives no income.
If a portion of the Rents from a particular Hotel do not qualify as
"rents from real property" because the amount attributable to personal property
exceeds 15% of the total Rents for a taxable year, the portion of the Rents that
is attributable to personal property will not be qualifying income for purposes
of either the 75% or 95% gross income tests. Thus, if the Rents attributable to
personal property, plus any other non-qualifying income, during a taxable year
exceed 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 a Lessee, (ii) the Company owns, directly or constructively, 10%
or more of a Lessee or (iii) the Company furnishes non-customary services to the
tenants of the Hotels, or manages or operates the Hotels, other than through a
qualifying independent contractor, none of the Rents would qualify as "rents
from real property." In that case, the Company likely would lose its REIT status
because it would be unable to satisfy either the 75% or 95% gross income tests.
The Company believes that the Rents will qualify as "rents from real
property" for purposes of the 75% and 95% gross income tests. In addition to the
Rents, the Lessees are required to pay to the Partnership the Additional
Charges. To the extent that the Additional Charges represent either (i)
reimbursements of amounts that the Lessees are obligated to pay to third parties
or (ii) penalties for nonpayment or late payment of such amounts, the Company
believes that 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 Company believes that the Additional Charges should not qualify as
"rents from real property," but instead should be treated as interest that
qualifies for the 95% gross income test.
The term "interest," as defined for purposes of the 75% gross income
test, generally does not include any amount received or accrued (directly or
indirectly) if the determination of such amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded
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from the term "interest" solely by reason of being based on a fixed percentage
or percentages of receipts or sales. Furthermore, to the extent that interest
from a loan that is based on the residual cash proceeds from sale of the
property securing the loan constitutes a "shared appreciation provision" (as
defined in the Code), income attributable to such participation feature will be
treated as gain from the sale of the secured property.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. All inventory required in the operation
of the Hotels will be purchased by the Lessees or their designee as required by
the terms of the Percentage Leases. Accordingly, the Company believes that no
asset owned by the Company or the Partnership (or any Subsidiary Partnership) is
held for sale to customers and that a sale of any such asset will not be in the
ordinary course of business of the Company or the Partnership. Whether property
is held "primarily for sale to customers in the ordinary course of a trade or
business" depends, however, on the facts and circumstances in effect from time
to time, including those related to a 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 can comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualified
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will be qualifying income 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 a 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 contract, and options.
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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, but not the 75% 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 a 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 "Federal Income Tax Considerations - 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" or, in cases where the Company raises new capital through share
or long-term (at least five-year) debt offerings, temporary investments in
shares 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 test, the term "interest in
real property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold in real
property and an option to acquire real property (or a leasehold in real
property). Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
interest in the 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 tests, the Company will be deemed to own the
Trust's proportionate share of the assets of the Partnership, rather than the
shares of the Trust or the Trust's general partnership interest in the
Partnership. The Company believes that, at all relevant times (including the
taxable periods preceding the Offering), (i) at least 75% of the value of its
total assets has been and will continue to be represented by real estate assets,
cash and cash items (including receivables) and government securities and (ii)
it has not owned and will not own any securities that do not satisfy the 75%
asset test. In addition, the Company does not intend to acquire or to dispose,
or cause the Partnership to acquire or to dispose, of assets in the future in a
way that would cause it to violate either asset test.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of nonqualifiying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could
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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 avoid corporate
income taxation of the earnings that it distributes, 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 distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration. To
the extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular 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 Lessees 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
95% distribution requirement or 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 common or preferred stock.
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 Requirements. 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 shares. The Company has complied and will continue to comply with
such requirements.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company also will be
disqualified from taxation as
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a REIT for the four taxable years following the year during which the Company
ceased to qualify as a REIT. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common or Preferred
Stock that for U.S. federal income tax purposes is (i) a citizen or resident of
the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate whose income from sources without the
United States is includible in gross income for U.S. federal income tax purposes
regardless of its connection with the conduct of a trade or business within the
United States or (iv) any trust with respect to which (A) a U.S. court is able
to exercise primary supervision over the administration of such trust and (B)
one or more U.S. fiduciaries have the authority to control all substantial
decisions of the trust. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held his stock. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's stock,
but rather will reduce the adjusted basis of such stock. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a shareholder's stock, such distributions will be included
in income as long-term capital gain (or short-term capital gain if the shares of
stock have been held for one year or less) assuming the shares of stock are
capital assets in the hands of the shareholder. In addition, any distribution
declared by the Company in October, November or December of any year and payable
to a shareholder of record on a specified date in any such month shall be
treated as both paid by the Company and received by the shareholder on December
31 of such year, provided that the distribution is actually paid by the Company
during January of the following calendar year.
Shareholders may not include in their individual income tax returns any
net operating losses or capital losses of the Company. Instead, such losses
would be carried over by the Company for potential offset against its future
income (subject to certain limitations). Taxable distributions from the Company
and gain from the disposition of the stock will not be treated as passive
activity income and, therefore, shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which the shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of stock (or distributions treated as such) will be
treated as investment income only if the shareholder so elects, in which case
such capital gains will be taxed at ordinary income rates. The Company will
notify shareholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income, return of capital and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON OR PREFERRED STOCK
In general, any gain or loss realized upon a taxable disposition of the
stock by a shareholder who is not a dealer in securities will be treated as
long-term capital gain or loss if the shares of stock have been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of shares of stock by a shareholder who has held
such shares for six months or less (after applying certain holding period
rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such shareholder as
long-term capital gain. All or a portion of any loss realized upon a taxable
disposition of shares of stock may be disallowed if other shares of stock are
purchased within 30 days before or after the disposition.
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CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order
for gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%,
and the tax rate on net capital gains applicable to individuals is 28%. Thus,
the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital or ordinary may affect the deductibility of capital losses. Capital
losses not offset by capital gains may be deducted against an individual's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their non-foreign status to the Company. The Service issued
proposed regulations in April 1996 regarding the backup withholding rules as
applied to Non-U.S. Shareholders. These proposed regulations would alter the
current system of backup withholding compliance and are proposed to be effective
for distributions made after December 31, 1997. See "Federal Income Tax
Considerations - Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions by a REIT to an exempt employee pension trust
do not constitute UBTI, provided that the shares of the REIT are not otherwise
used in an unrelated trade or business of the exempt employee pension trust.
Based on that ruling, amounts distributed by the Company to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of stock with debt, a portion of its income from the
Company will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17) and (20), respectively, of
Code Section 501(c) are subject to different UBTI rules, which generally will
require them to characterize distributions from the Company as UBTI. In
addition, in certain circumstances, a pension trust that owns more than 10% of
the Company's stock is required to treat a percentage of the dividends from the
Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income
derived by the Company from an unrelated trade or business (determined as if the
Company were a pension trust) divided by the gross income of the Company for the
year in which the dividends are paid. The UBTI rule applies to a pension trust
holding more than 10% of the Company's stock only if (i) the UBTI Percentage is
at least 5%, (ii) the Company qualifies as a REIT by reason of the modification
of the 5/50 Rule that allows the beneficiaries of the pension trust to be
treated as holding shares of the Company in proportion to their actuarial
interests in the pension trust and (iii) either (A) one pension trust owns more
than 25% of the value of the Company's shares or (B) a group
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of pension trusts individually holding more than 10% of the value of the
Company's shares collectively own more than 50% of the value of the Company's
shares.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON OR PREFERRED STOCK, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by the Company of U.S. real property interests and
are not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the stock is treated as effectively
connected with the Non-U.S. Shareholder's conduct of a U.S. trade or business,
the Non-U.S. Shareholder generally will be subject to federal income tax at
graduated rates, in the same manner as U.S. shareholders are taxed with respect
to such distributions (and also may be subject to the 30% branch profits tax in
the case of a Non-U.S. Shareholder that is a non-U.S. corporation). The Company
expects to withhold U.S. income tax at the rate of 30% on the gross amount of
any such distributions made to a Non-U.S. Shareholder unless (i) a lower treaty
rate applies and any required form evidencing eligibility for that reduced rate
is filed with the Company or (ii) the Non-U.S. Shareholder files an IRS Form
4224 with the Company claiming that the distribution is effectively connected
income. The Service issued proposed regulations is April 1996 that would modify
the manner in which the Company complies with the withholding requirements.
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's shares of
stock, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Shareholder's stock, such distributions
will give rise to tax liability if the Non-U.S. Shareholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares of stock,
as described below. Because it generally cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, a Non-U.S. Shareholder can file a claim for refund with the
Service for the overwithheld amount to the extent it is determined subsequently
that such distribution was, in fact, in excess of the current and accumulated
earnings and profits of the Company.
In August 1996, the U.S. Congress passed the Small Business Job
Protection Act of 1996, which requires the Company to withhold 10% of any
distribution in excess of its current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of U.S.
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S.
real property interests are taxed to a Non-U.S. Shareholder as if such gain were
effectively connected with a U.S. business. Non-U.S. Shareholders thus would be
taxed at the normal capital gain rates applicable to U.S. shareholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty relief
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or exemption. The Company is required to withhold 35% of any distribution that
is designated by the Company as a capital gains dividend. The amount withheld is
creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his shares of
stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. Because the stock is publicly
traded, no assurance can be given that the Company is or will be a
"domestically controlled REIT." In addition, a Non-U.S. Shareholder that owns,
actually and constructively, 5% or less of the Company's shares throughout a
specified "look-back" period will not recognize gain on the sale of his shares
taxable under FIRPTA if the shares are traded on an established securities
market. Finally, gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (i) investment in the stock is effectively connected with the
Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain, or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and certain other conditions apply, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's capital
gains. If the gain on the sale of the stock were to be subject to taxation
under FIRPTA, the Non-U.S. Shareholder will be subject to the same treatment as
U.S. shareholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations).
OTHER TAX CONSEQUENCES
The Company, the Partnership, the Subsidiary Partnerships or the
Company's shareholders 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 its shareholders may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT
IN THE COMPANY.
TAX ASPECTS OF THE PARTNERSHIP AND SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Partnership and
Subsidiary Partnerships (each, a "Partnership"). 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 will be entitled to include in its income its distributive
share of as Partnership's income and to deduct its distributive share of the
Partnership's losses only if the Partnership is classified for federal income
tax purposes as a partnership rather than as an association taxable as a
corporation. An entity will be classified as a partnership rather than as a
corporation or an association taxable as a corporation for federal income tax
purposes if the entity (i) is treated as a partnership under Treasury
regulations, effective January 1, 1997, relating to entity classification (the
"Check-the-Box Regulations") and (ii) is not a "publicly traded" partnership.
In general, under the Check-the-Box Regulations, an unincorporated
entity with at least two members may elect to be classified either as an
association taxable as a corporation 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, will be
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respected for all periods prior to January 1, 1997 if (i) the entity had a
reasonable basis for its claimed classifaction, (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 each Subsidiary Partnership in
existence prior to January 1, 1997 reasonably claimed partnership classification
under the Treasury regulations relating to entity classification in effect prior
to January 1, 1997 and such classification should be respected for federal
income tax purposes. The Partnerships intend to continue to be classified as
partnerships for federal income tax purposes and no 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 "Federal Income Tax Considerations -- Requirements for Qualification --
Income Tests." The U.S. Department of the Treasury 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 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. Each Partnership qualifies for the Private Placement Exclusion. If a
Partnership is considered a publicly traded partnership under the PTP
Regulations because it is deemed to have more than 100 partners, the partnership
should not be treated as a corporation because it should be eligible for the 90%
Passive-Type Income Exception.
Prior to issuing Common or Preferred Stock, the Company expects to
obtain an opinion of Hunton & Williams that each Partnership will be classified
as a partnership for federal income tax purposes and not as a corporation or an
association taxable as a corporation or as a publicly traded partnership. If
for any reason a Partnership were taxable as a corporation, rather than as a
partnership, for federal income tax purposes, the Company would not be able to
qualify as a REIT. See "Federal Income Tax Considerations - Requirements for
Qualification - Income Tests" and "- Requirements for Qualification - Asset
Tests." In addition, any change in a 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 "Federal Income Tax
Considerations - Requirements for Qualification - Distribution Requirements."
Further, items of income and deduction of the Partnership would not pass through
to its partners, and its partners would be treated as shareholders for tax
purposes. Consequently, the Partnership would be required to pay income tax at
corporate tax rates on its net income, and distributions to its partners would
constitute dividends that would not be deductible in computing the Partnership's
taxable income.
Income Taxation of the Partnerships and their Partners
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, its partners are
required to take into account their allocable share of the Partnership's income,
gains, losses, deductions and credits for any taxable year of the Partnership
ending within or with their taxable year without, regard to whether the partners
have received or will receive any distribution from the partnership.
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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.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department has issued
regulations requiring partnerships to use a "reasonable method" for allocating
items affected by Section 704(c) of the Code and outlining several reasonable
allocation methods. The Partnership generally has elected to use the traditional
method for allocating Code Section 704(c) items with respect to the Hotels it
acquires in exchange for partnership interests in the Partnership.
Under the Partnership Agreement, depreciation or amortization
deductions of the Partnership generally are allocated among the partners in
accordance with their respective interests in the Partnership, except to the
extent that the Partnership is required under Code Section 704(c) to use a
method for allocating tax depreciation deductions attributable to the Hotels or
other contributed properties that results in the Trust receiving 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.
Basis in Partnership Interest. The Trust's adjusted tax basis in its
partnership interest in the Partnership generally is equal to (i) the amount of
cash and the basis of any other property contributed to the Partnership by the
Company, (ii) increased by (A) its allocable share of the Partnership's income
and (B) its allocable share of indebtedness of the Partnership and (iii)
reduced, but not below zero, by (I) the Trust's allocable share of the
Partnership's loss and (II) the amount of cash distributed to the Trust, and by
constructive distributions resulting from a reduction in the Trust's share of
indebtedness of the Partnership.
If the allocation of the Trust's distributive share of the
Partnership's loss would reduce the adjusted tax basis of the Trust'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 Trust's adjusted tax basis below zero. To the extent that the
Partnership's distributions, or any decrease in the Trust's share of the
indebtedness of the Partnership (such decrease being considered a constructive
cash distribution to the partners), would reduce the Trust's adjusted tax basis
below zero, such distributions (including such constructive distributions)
constitute taxable income to the Trust. Such distributions and constructive
distributions normally will be characterized as capital gain, and, if the
Trust'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. To the extent
that the Partnership acquired or will acquire the Hotels for cash, the
Partnership's initial basis in such Hotels for federal income tax purposes
generally was or will be equal to the purchase price paid by the Partnership.
The Partnership generally depreciates such depreciable property for federal
income tax purposes under either the modified accelerated cost recovery system
of depreciation ("MACRS") or the alternative depreciation system of depreciation
("ADS"). The Partnership uses
32
<PAGE> 34
MACRS for furnishings and equipment. Under MACRS, the Partnership generally
depreciates such furnishings and equipment over a seven-year recovery period
using a 200% declining balance method and a half-year convention. If, however,
the Partnership places more than 40% of its furnishings and equipment in service
during the last three months of a taxable year, a mid-quarter depreciation
convention must be used for the furnishings and equipment placed in service
during that year. The Partnership uses ADS for buildings and improvements. Under
ADS, the Partnership generally depreciates such buildings and improvements over
a 40-year recovery period using a straight line method and a mid-month
convention. However, to the extent that the Partnership acquired or will acquire
the Hotels in exchange for limited partnership interests in the Partnership, the
Partnership's initial basis in each Hotel for federal income tax purposes should
be the same as the transferor's basis in that Hotel on the date of acquisition.
Although the law is not entirely clear, the Partnership depreciates such
depreciable property for federal income tax purposes over the same remaining
useful lives and under the same methods used by the transferors. The
Partnership's tax depreciation deductions are allocated among the partners in
accordance with their respective interests in the Partnership (except to the
extent that the Partnership is required under Code Section 704(c) to use a
method for allocating depreciation deductions attributable to the Hotels or
other contributed properties that results in the Trust receiving a
disproportionately large share of such deductions).
SALE OF THE PARTNERSHIP'S PROPERTY
Generally, any gain realized by the Partnership on the sale of property
by the Partnership 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 Hotels will be allocated first to the Limited Partners under Section 704(c)
of the Code to the extent of their "built-in gain" on those Hotels for federal
income tax purposes. The Limited Partners' "built-in gain" on the Hotels sold
will equal the excess of the Limited Partners' proportionate share of the book
value of those Hotels over the Limited Partners' tax basis allocable to those
Hotels at the time of the sale. Any remaining gain recognized by the Partnership
on the disposition of the Hotels will be allocated among the partners in
accordance with their respective percentage interests in the Partnership.
The Company's share of any gain realized by the Partnership on the sale
of any property held by the Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Such prohibited transaction income also may
have an adverse effect upon the Company's ability to satisfy the income tests
for REIT status. See "Federal Income Tax Considerations - Requirements For
Qualification - Income Tests" above. The Company, however, does not presently
intend to acquire or hold or allow the Partnership to acquire or hold any
property that represents inventory or other property held primarily for sale to
customers in the ordinary course of the Company's or the Partnership's trade or
business.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters
or dealers for public offering and sale by them or may sell the Offered
Securities to investors directly or through designated agents. Any such
underwriter, dealer or agent involved in the offer and sale of the Offered
Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price
or prices, which may be changed, or from time to time at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as agents to offer and sell the Offered Securities
upon the terms and conditions set forth in any Prospectus Supplement.
Underwriters may sell the Offered Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions (which may be changed from time to time) from the underwriters
and/or from the purchasers for whom they may act as agent.
33
<PAGE> 35
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of the Offered Securities and any
discounts, concessions or commissions allowed by underwriters to participating
dealers will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Offered Securities
may be deemed to be underwriters, and any discounts and commissions received by
them from the Company or from purchasers of the Offered Securities and any
profit realized by them on resale of the Offered Securities may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with the
Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
Offers to purchase the Offered Securities may be solicited by agents
designated by the Company from time to time. Any such agent involved in the
offer or sale of the Offered Securities will be named, and any commissions
payable by the Company to such agent will be set forth in the Prospectus
Supplement. Unless otherwise indicated in the Prospectus Supplement, any such
agent will be acting on a best-efforts basis for the period of its appointment.
Any such agent may be deemed to be an "underwriter," as that term is defined in
the Securities Act, of the Offered Securities so offered and sold.
If an underwriter or underwriters are utilized in the sale of the
Offered Securities, the Company will execute an underwriting agreement with such
underwriter or underwriters at the time an agreement for such sale is reached,
and the names of the specific managing underwriter or underwriters, as well as
any other underwriters, and the terms of the transactions, including
compensation of the underwriters and dealers, if any, will be set forth in the
applicable Prospectus Supplement.
If a dealer is utilized in the sale of the Offered Securities, the
Company will sell such Offered Securities to the dealer, as principal. The
dealer may then resell such Offered Securities to the public at varying prices
to be determined by such dealer at the time of resale. The name of the dealer
and the terms of the transactions will be set forth in the applicable Prospectus
Supplement.
Offers to purchase the Offered Securities may be solicited directly by
the Company and sales thereof may be made by the Company directly to
institutional investors or others. The terms of any such sales, including the
terms of any bidding or auction prices, if utilized, will be described in the
applicable Prospectus Supplement.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company in the ordinary
course of business.
LEGAL MATTERS
The validity of the Common Stock will be passed upon for the Company by
Hunton & Williams. The description of federal income tax considerations under
the caption "Federal Income Tax Considerations" is based on the opinion of
Hunton & Williams.
EXPERTS
The consolidated financial statements and financial statement schedule
of Equity Inns, Inc. as of December 31, 1996 and 1995 and for the years ended
December 31, 1996 and 1995 and for the period March 1, 1994 (inception of
operations) through December 31, 1994, are incorporated in this Prospectus by
reference to the Company's Annual Report on Form 10-K. The above said financial
statements have been so incorporated in reliance on the reports of Coopers &
Lybrand, L.L.P., independent accountants, given on the authority of said firm as
experts in auditing and accounting.
34
<PAGE> 36
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON STOCK BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information ..................................................... 2
Incorporation of Certain Documents by Reference ........................... 3
The Company ............................................................... 4
Risk Factors .............................................................. 5
Price Range of Common Stock and Distributions ............................. 12
Use of Proceeds ........................................................... 12
Ratio of Earnings to Combined Fixed Changes ............................... 12
Description of Capital Stock .............................................. 12
Restrictions on Ownership of Common Stock ................................. 17
Federal Income Tax Considerations ......................................... 18
Plan of Distribution ...................................................... 33
Legal Matters ............................................................. 34
Experts ................................................................... 34
</TABLE>
EQUITY INNS, INC.
COMMON STOCK
PREFERRED STOCK
PROSPECTUS
MAY __, 1997
<PAGE> 37
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ....... $ 60,606
Accounting fees and expenses .............................. 100,000
--------
Legal fees and expenses ................................... 150,000
--------
Printing .................................................. 100,000
--------
Miscellaneous ............................................. 10,000
--------
TOTAL ............................................ $420,606
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Charter obligates the Company to indemnify and advance
expenses to present and former directors and officers to the maximum extent
permitted by Tennessee law. The Tennessee Business Corporation Act ("TBCA")
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, settlements, penalties, fines or
reasonable expenses incurred with respect to a proceeding to which they may be
made a party by reason of their service in those or other capacities if (i) such
persons conducted themselves in good faith, (ii) they reasonably believed, in
the case of conduct in their official capacities with the corporation, that
their conduct was in its best interests and, in all other cases, that their
conduct was at least not opposed to its best interests and (iii) in the case of
any criminal proceeding, they had no reasonable cause to believe that their
conduct was unlawful.
Any indemnification by the Company pursuant to the provisions of the
Charter described above shall be paid out of the assets of the Company and shall
not be recoverable from the shareholders. To the extent that the foregoing
indemnification provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, in the opinion of the Securities and
Exchange Commission such indemnification is contrary to public policy and is,
therefore, unenforceable. The Company currently purchases director and officer
liability insurance for the purpose of providing a source of funds to pay any
indemnification described above.
The TCBA permits the charter of a Tennessee corporation to include a
provision eliminating or limiting the personal liability of its directors to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except that such provision cannot eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law
or (iii) for unlawful distributions that exceed what could have been distributed
without violating the TBCA or the corporation's charter. The Company's Charter
contains a provision eliminating the personal liability of its directors or
officers to the Company or its shareholders for money damages to the maximum
extent permitted by Tennessee law from time to time.
II-1
<PAGE> 38
ITEM 16. EXHIBITS.
*4.1 - Specimen Common Stock Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-11 (Registration
No. 33-73304), and incorporated by reference herein)
*4.2 - Charter (filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-11 (Registration No. 33-73304), and
incorporated by reference herein)
*4.2(a) - Articles of Amendment to the Charter of the Registrant (filed
as Exhibit 3.1 to the Company's Current Report on Form 8-K
(Registration No. 34-0-23290) filed with the Commission on
April 27, 1995 and incorporated by reference herein)
*4.2(b) - Articles of Amendment to the Charter of the Registrant (filed
as Exhibit 3.1 to the Company's Current Report on Form 8-K
(Registration No. 34-0-23290) filed with the Commission on May
31, 1996 and incorporated by reference herein)
*4.3 - Bylaws (filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-11 (Registration No. 33-73304) and
incorporated by reference herein)
**5.1 - Opinion of Hunton & Williams
***8.1 - Opinion of Hunton & Williams regarding certain tax matters.
**12.1 - Statement regarding computation of ratios.
**23.1 - Consent of Coopers & Lybrand L.L.P.
**23.2 - Consent of Hunton & Williams (included in Exhibit 5.1)
24.1 - Power of Attorney (located on the signature page of this
Registration Statement)
- ---------------------
* Previously filed or incorporated by reference hereto.
** Filed herewith.
*** To be filed as an Exhibit to Form 8-K in connection with the offering of
Offered Securities, as applicable.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
registration statement (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement (Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the lower or higher and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement); and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; provided,
however, that the undertakings set forth in subparagraphs (i) and (ii) above do
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic
II-2
<PAGE> 39
reports filed with or furnished to the Commission by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in this 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 offered 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 of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this 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; and
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 described under Item 15 above or
otherwise, the registrant has been advised that the 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 against the registrant 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 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.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
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.
II-3
<PAGE> 40
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 Memphis, State of Tennessee, on the 6th day of
May, 1997.
EQUITY INNS, INC.
a Tennessee corporation
(Registrant)
By /s/ Phillip H. McNeill, Sr.
----------------------------------------------------
Phillip H. McNeill, Sr.
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
By /s/ Howard S. Silver
----------------------------------------------------
Howard A. Silver
Vice President of Finance, Secretary, Treasurer
and Chief Financial Officer
(Principal Accounting Officer and Financial Officer)
II-4
<PAGE> 41
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Phillip H. McNeill, Sr. and Howard A. Silver, and each or either of
them, his true and lawful attorney-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to cause the same to be filed, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting to said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing whatsoever requisite or desirable to be done in and
about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all acts and things
that said attorneys-in-fact and agents, or either of them, or their 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 on the 6th day of May, 1997 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Phillip H. McNeill, Sr. Chairman of the Board and Chief Executive Officer
- ------------------------------ (Principal Executive Officer)
Phillip H. McNeill, Sr.
/s/ James A. Thomas, III Director
- ------------------------------
James A. Thomas, III
/s/ William W. Deupree, Jr. Director
- ------------------------------
William W. Deupree, Jr.
/s/ Joseph W. McLeary Director
- ------------------------------
Joseph W. McLeary
/s/ Howard A. Silver Vice President of Finance, Secretary,
- ------------------------------ Treasurer and Chief Financial Officer
Howard A. Silver (Principal Accounting Officer and Financial Officer)
</TABLE>
II-5
<PAGE> 1
EXHIBIT 5.1
May 5, 1997
Board of Directors
Equity Inns, Inc.
4735 Spottswood, Suite 102
Memphis, Tennessee 38117
Registration Statement on Form S-3
$200,000,000 of Common Stock and Preferred Stock
Gentlemen:
We have acted as counsel for Equity Inns, Inc., a Tennessee corporation
(the "Company"), in connection with the Registration Statement on Form S-3 (the
"Registration Statement"), filed under the Securities Act of 1933, as amended,
with respect to the issuance and sale of shares of Common Stock, $.01 par value,
of the Company ("Common Stock") and, in one or more series, shares of Preferred
Stock, $.01 par value, of the Company ("Preferred Stock" and, together with the
Common Stock, the "Offered Securities") to be offered from time to time by the
Company, having an aggregate maximum public offering price not to exceed
$200,000,000, as described in the Registration Statement and on terms to be
determined at the time of offering.
In connection therewith, we have relied upon, among other things, our
examination of such documents, records of the Company and certificates of its
officers and public officials, as we have deemed necessary for purposes of the
opinion expressed below.
Based upon the foregoing, and having regard for such legal
considerations as we have deemed relevant, we are of the opinion that:
1. The Company is duly incorporated, validly existing and in good
standing under the laws of the State of Tennessee.
2. When the terms of any Offered Securities have been authorized by
appropriate action of the Company and have been issued and sold as described in
the Registration Statement,
<PAGE> 2
Board of Directors
May 5, 1997
Page 2
the Prospectus and the applicable Prospectus Supplement, then the Offered
Securities will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" therein.
Very truly yours,
/s/ Hunton & Williams
<PAGE> 1
Exhibit 12.1
STATEMENT OF COMPUTATION OF RATIOS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, 1992(1) December 31, 1993(1) December 31, 1994(1) December 31, 1995 December 31, 1996
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Earnings:
Net income before
minority interest $ 168 $ 361 $ 4,620 $ 8,511 $ 14,473
Minority Interest - - 481 502 460
Fixed charges 889 1,036 761 4,494 5,947
--------- ---------- --------- --------- ----------
Earnings $ 1,057 $ 1,397 $ 5,862 $ 13,507 $ 20,880
========= ========== ========= ========= ==========
Fixed Charges:
Interest expense $ 889 $ 1,036 $ 608 $ 3,701 $ 4,382
Amortization of loan cost - - 153 793 1,565
--------- ---------- --------- --------- ----------
Fixed Charges $ 889 $ 1,036 $ 761 $ 4,494 $ 5,947
========= ========== ========= ========= ==========
Ratio of Earnings to Fixed
Charges (2) 1.19x 1.35x 7.70x 3.01x 3.51x
========= ========== ========= ========= ==========
</TABLE>
(1) Periods prior to March 1, 1994 (the date of the Company's initial public
offering) reflect data for the Company's predecessor entity.
(2) Computed as Earnings divided by Fixed Charges.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Equity Inns, Inc. on Form S-3 of our report dated January 23, 1997, except as
to Note 10 for which the date is February 10, 1997, on our audits of the
consolidated financial statements and financial statement schedule of Equity
Inns, Inc. as of December 31, 1996 and 1995, and for the years ended December
31, 1996 and 1995 and for the period from March 1, 1994 (inception of
operations) through December 31, 1994, which report is included in Equity Inns'
Annual Report on Form 10-K. We also consent to the reference to our firm under
the caption "experts."
COOPERS & LYBRAND, L.L.P.
Memphis, Tennessee
May 5, 1997
