<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-26559
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 12, 1997)
2,600,000 SHARES
EQUITY INNS, INC.
COMMON STOCK
------------------
Equity Inns, Inc. (the "Company") is a self-administered equity real estate
investment trust ("REIT") that, through a wholly-owned subsidiary, owns an
approximate 96.2% general partnership interest in Equity Inns Partnership, L.P.
(the "Partnership"). The Company currently owns 79 hotels with an aggregate of
9,539 rooms in 30 states and has one hotel under development. The Company has
entered into agreements to acquire twelve hotels with an aggregate of 1,585
rooms in seven states and intends to use the net proceeds from the Common Stock
offered hereby (the "Offering") to fund a portion of the purchase price for
certain of such hotels.
All of the Common Stock offered hereby is being offered by the Company.
Since the Company's initial public offering in February 1994, the Company has
paid regular quarterly dividends to holders of its outstanding shares of Common
Stock. The Common Stock is traded on The New York Stock Exchange ("NYSE") under
the symbol "ENN." On November 24, 1997, the last reported sale price of the
Common Stock on the NYSE was $15.125 per share. The Company's Charter limits
aggregate indebtedness to 45% of the Company's investment in hotel properties,
at its cost. To ensure compliance with certain requirements related to the
Company's qualification as a REIT, the Company's Charter limits the amount of
Common Stock that may be owned by any single person or affiliated group to 9.9%
of the outstanding Common Stock and restricts the transferability of shares of
Common Stock if the purported transfer would prevent the Company from qualifying
as a REIT.
SEE "RISK FACTORS" BEGINNING ON PAGE S-7 OF THIS PROSPECTUS SUPPLEMENT AND
PAGE 5 OF THE ACCOMPANYING PROSPECTUS FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $15.125 $.76 $14.365
- -----------------------------------------------------------------------------------------------------------
Total(3) $39,325,000 $1,976,000 $37,349,000
===========================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at approximately $200,000, which are
payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 390,000 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised
in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $45,223,750, $2,272,400 and
$42,951,350, respectively.
------------------
The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the shares of Common
Stock offered hereby will be available for delivery on or about December 1, 1997
at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.
------------------
SMITH BARNEY INC. J.C. BRADFORD & CO.
The date of this Prospectus Supplement is November 25, 1997.
<PAGE> 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission (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 Reports on Form 10-Q for the quarters ended March 31, 1997, June 30,
1997 and September 30, 1997; (iii) the Company's Current Reports on Form 8-K
dated May 14, 1997, May 22, 1997, June 24, 1997, July 11, 1997, September 22,
1997 and October 23, 1997 and the Company's amended Current Report on Form 8-K/A
dated July 11, 1997; and (iv) the description of the Company's Common Stock
contained in the Company's Registration Statement on Form 8-A, filed with the
Commission on August 19, 1996. All documents filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the securities shall
be deemed to be incorporated by reference into this Prospectus Supplement 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 Supplement and the accompanying Prospectus 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 Supplement to the extent that a statement
contained herein (or in the accompanying Prospectus) 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 Supplement or the accompanying
Prospectus.
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENTS, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT 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 Supplement and the accompanying Prospectus. As used
herein, the term "Company" includes Equity Inns Partnership, L.P. (the
"Partnership"), Equity Inns Trust (the "Trust"), and the Company's direct and
indirect subsidiaries. Unless otherwise indicated, all information contained in
this Prospectus Supplement assumes that the Underwriters' over-allotment option
is not exercised.
Certain matters discussed in this Prospectus Supplement, the accompanying
Prospectus, and the information incorporated by reference herein and therein,
may constitute forward-looking statements for purposes of the Securities Act of
1933, as amended, and the Exchange Act and as such may involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from
future results, performance or achievements expressed or implied by such
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under the caption "Risk Factors" in this
Prospectus Supplement and the accompanying Prospectus.
THE COMPANY
The Company is a self-administered real estate investment trust ("REIT")
that currently owns 79 hotel properties (the "Current Hotels") with an aggregate
of 9,539 rooms located in 30 states and has one hotel under development. The
Current Hotels operate as Hampton Inn(R) hotels (57), Residence Inn(R) hotels
(9), Homewood Suites(R) hotels (5), Holiday Inn(R) hotels (4), Comfort Inn(R)
hotels (3), and one Holiday Inn Express(R) hotel. The Partnership leases its
hotels to subsidiaries (collectively, the "Lessee") of Interstate Hotels Company
("Interstate") pursuant to leases ("Percentage Leases") that provide for annual
rent equal to the greater of (i) a fixed annual base rent ("Base Rent") or (ii)
percentage rent based on the revenues of the hotels ("Percentage Rent").
The Company owns limited service, extended stay and full service hotels. Of
the 9,539 rooms in the Current Hotels, approximately 76.6% are limited service,
approximately 16.5% are extended stay and approximately 6.9% are full service.
Limited service hotels generally do not contain restaurants or lounges and
generally contain little non-revenue-producing space. Extended stay hotels
generally contain guest suites with a kitchen and living area separate from the
bedroom but vary with respect to providing on-site restaurant facilities. Full
service hotels generally provide on-site food and beverage services and may have
banquet and meeting facilities.
The Company has agreed to acquire (i) ten AmeriSuites(R) hotels (the
"AmeriSuites Hotels") with an aggregate of 1,239 rooms in six states from Prime
Hospitality Corporation ("Prime") for a purchase price of approximately $87.0
million, ten percent of which will be paid through the issuance of units of
limited partnership interest ("Units") in the Partnership, and (ii) two Homewood
Suites hotels presently under development (the "Homewood Hotels" and together
with the AmeriSuites Hotels, the "Acquisition Hotels") with an aggregate of 346
rooms for a total aggregate purchase price of $31.1 million. The Acquisition
Hotels are located in Florida (four hotels), Ohio (three hotels) and Alabama,
Arizona, Indiana, Kansas and Virginia (one hotel each). Upon the completion of
the purchase of the Acquisition Hotels, the Company will own 91 hotels (the
"Hotels") with an aggregate of 11,124 rooms in 30 states.
The Company's Charter limits aggregate indebtedness to 45% of the Company's
investment in hotel properties, at its cost. Following completion of the
Offering and application of the net proceeds as described in "Use of Proceeds"
and the purchase of the Acquisition Hotels, the Company will have approximately
$238.9 million of indebtedness, representing approximately 36.2% of the
Company's investment in hotel properties, at its cost. Therefore, the Company
will have the capacity to borrow up to approximately $106 million under its
Charter debt limitation, assuming all additional borrowings are used to fund
investments in hotel properties. The Company will have the capacity to borrow
approximately $95.4 million under its existing line of credit. See "-- Recent
Developments -- New Unsecured Line of Credit."
S-3
<PAGE> 4
The Company is a Tennessee corporation. The Company has elected to be taxed
as a REIT for federal income tax purposes. Its executive offices are located at
4735 Spottswood, Suite 102, Memphis, Tennessee 38117, and its telephone number
is (901) 761-9651.
RECENT DEVELOPMENTS
SALE OF NINE GHI HOTELS
In June 1997, the Partnership, of which the Trust serves as the sole
general partner and currently owns an approximate 96.2% general partnership
interest, acquired 28 Hampton Inn hotels (the "GHI Hotels") with an aggregate of
3,479 rooms in 14 states from a series of partnerships controlled by Growth
Hotel Investors and Growth Hotel Investors II (collectively, "GHI"). On October
31, 1997, the Company sold nine of the GHI Hotels to HH Properties-II, Inc., a
subsidiary of Hudson Hotels Corporation, for an aggregate sales price of
approximately $46.3 million, $3.9 million of which was in the form of a two-year
note bearing an annual interest rate of 10%. The note is secured by a pledge of
2,000,000 shares of common stock of Hudson Hotels Corporation. Upon consummation
of such sale, the leases with the Lessee with respect to such nine hotels were
terminated. The remaining GHI Hotels are leased to the Lessee pursuant to a
Percentage Lease which has a ten-year term. Pursuant to such Percentage Lease,
the Lessee paid the Partnership $2.25 million as an inducement to enter into
such lease. The Percentage Lease also provides for the payment by the
Partnership to the Lessee, upon the sale of such nine GHI Hotels, of a lease
termination fee equal to 50% of the Partnership's net book gain on the sale of
such nine hotels. Such amount will be payable by the Partnership to the Lessee
upon payment of the two-year note.
POTENTIAL DISPOSITION OF CERTAIN CURRENT HOTELS
The Company periodically evaluates its hotel portfolio with respect to the
potential sale of certain of its hotel properties if it believes it can reinvest
the proceeds of a sale at a more attractive rate of return. As part of its
evaluation process, the Company may consider the sale of smaller hotels, hotels
located in tertiary markets or brands that no longer represent the primary focus
of the Company's acquisition strategy. The Company has determined to sell the
five Hampton Inn hotels located in Arlington, Texas; Cleveland, Tennessee;
Traverse City, Michigan; Little Rock, Arkansas; and Shelby, North Carolina; the
two Holiday Inn hotels located in Bluefield, West Virginia and Oak Hill, West
Virginia; the Holiday Inn Express hotel located in Wilkesboro, North Carolina;
and the Comfort Inn hotel located in Enterprise, Alabama. The Company has
entered into an agreement regarding the sale of these hotels to a single buyer
for approximately $41.2 million. However, the buyer has until November 30, 1997
to terminate the agreement without penalty and has indicated that it may
exercise such termination right. There can be no assurance that any such sale
will occur. If the buyer terminates the agreement, the Company plans to market
the properties individually or in one or more groups during the first quarter of
1998. The Company has no other commitment, letter of intent or other agreement
outstanding with respect to the sale of any Current Hotel. See "Risk
Factors -- Risk That Potential Transactions Will Not Close."
NEW UNSECURED LINE OF CREDIT
On October 10, 1997, the Company repaid its prior one-year $75 million term
loan and all outstanding borrowings under the Company's prior $130 million
secured line of credit with borrowings under a new three-year $250 million
unsecured line of credit (the "Unsecured Line of Credit"), administered by The
First National Bank of Chicago. The Unsecured Line of Credit bears interest at a
variable rate of LIBOR plus a percentage ranging from 1.4% to 1.75% depending on
the Company's percentage of total debt to total value of the Company's
investment in hotel properties, as defined in the loan agreement (the
"Percentage"). The Percentage is reviewed quarterly and the interest rate is
adjusted as necessary. Currently, the interest rate on the Unsecured Line of
Credit is LIBOR plus 1.625%. At November 24, 1997, the Company had outstanding
debt on the Unsecured Line of Credit of approximately $114.6 million, an
outstanding letter of credit in the amount of $2.3 million and approximately
$133.1 million available for borrowings under the Unsecured Line of Credit.
S-4
<PAGE> 5
AMERISUITES ACQUISITION
The Company has entered into an agreement to acquire the ten AmeriSuites
Hotels with an aggregate of 1,239 rooms in six states from Prime for a purchase
price of approximately $87.0 million, ten percent of which will be paid through
the issuance of Units in the Partnership. The AmeriSuites Hotels are located
principally in the southeastern and midwestern United States in major urban and
suburban markets. The purchase of the AmeriSuites Hotels is subject to customary
real estate closing conditions, and the Company expects to close the acquisition
of the AmeriSuites Hotels by mid-December 1997. The AmeriSuites Hotels will be
leased to a subsidiary of Prime (the "Prime Lessee") upon consummation of the
acquisition. As part of the Company's agreement with Prime, Prime has (a) agreed
to offer to sell to the Company not less than five AmeriSuites hotels per year
during the three-year period commencing on the closing of the AmeriSuites
Hotels' acquisition and (b) granted the Company a right of first offer to
purchase all portfolios of five or more AmeriSuites hotels that Prime decides to
sell during such three-year period (provided, however, that Prime need not offer
more than 20 hotels per year of such three-year period). See "Risk
Factors -- Risk That Potential Transactions Will Not Close."
HOMEWOOD SUITES ACQUISITIONS
As part of its ongoing business, the Company continuously seeks
opportunities to acquire additional hotel properties on favorable terms. The
Company has entered into agreements to purchase two Homewood Hotels presently
under development with an aggregate of 346 rooms, for an aggregate purchase
price of approximately $31.1 million. See "Risk Factors -- Risk That Potential
Transactions Will Not Close."
THE ACQUISITION HOTELS
The following table sets forth certain information with respect to the
Acquisition Hotels:
<TABLE>
<CAPTION>
NUMBER
OF
ROOMS TYPE OF HOTEL
------ -------------
<S> <C> <C>
AMERISUITES HOTELS:(1)
Flagstaff, AZ............................................. 118 Extended stay
Jacksonville, FL.......................................... 112 Extended stay
Miami, FL................................................. 126 Extended stay
Tampa, FL................................................. 126 Extended stay
Indianapolis (Keystone), IN............................... 126 Extended stay
Kansas City (Overland Park), KS........................... 126 Extended stay
Cincinnati (Blue Ash), OH................................. 127 Extended stay
Cincinnati (Forest Park), OH.............................. 126 Extended stay
Columbus, OH.............................................. 126 Extended stay
Richmond, VA.............................................. 126 Extended stay
-----
Total for AmeriSuites Hotels...................... 1,239
-----
HOMEWOOD HOTELS:(2)
Mobile, AL................................................ 96 Extended stay
Orlando, FL............................................... 250 Extended stay
-----
Total for Homewood Hotels......................... 346
-----
Consolidated total for Acquisition Hotels......... 1,585
=====
</TABLE>
- ---------------
(1) Information with respect to the AmeriSuites Hotels was obtained from Prime,
the current owner of such hotels.
(2) The Homewood Hotels are presently under development.
S-5
<PAGE> 6
RISK FACTORS
An investment in the Common Stock involves various risks. Investors should
carefully consider the matters discussed under "Risk Factors" beginning on page
S-7 of this Prospectus Supplement and on page 5 of the accompanying Prospectus.
DISTRIBUTIONS
The Company has made and intends to continue to make regular quarterly cash
distributions to its shareholders. The Company's current annualized distribution
rate is $1.16 per share. Future distributions will depend upon the Company's
actual cash available for distribution to its shareholders, financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
receipt, through the Trust, of distributions from the Partnership and such other
factors as the Board of Directors deems relevant. During the year ended December
31, 1996, approximately 29% of the Company's aggregate distributions to
shareholders was considered a return of capital for federal income tax purposes.
See "Price Range of Common Stock and Distributions."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,600,000 Shares
Common Stock and Units to be outstanding
after the Offering......................... 35,785,251 Shares(1)
Use of Proceeds.............................. To fund a portion of the purchase price of
the acquisition of the AmeriSuites Hotels.
Pending closing of the purchase of the
AmeriSuites Hotels, the Company will use all
of the net proceeds to repay borrowings under
the Unsecured Line of Credit.
New York Stock Exchange symbol............... ENN
</TABLE>
- ---------------
(1) Includes, as of October 31, 1997, an aggregate of 1,269,673 Units issued in
connection with the Company's initial public offering in February 1994 (the
"IPO") and in connection with the acquisition of certain of the Current
Hotels. Each Unit is redeemable, at the option of the holder, for cash or,
at the Company's sole option, one share of Common Stock. All of the Units
currently are redeemable. Also includes an aggregate of 28,000 unvested
restricted shares of Common Stock issued to the Company's executive officers
and directors, which vest over a multi-year period (any unvested shares
being subject to forfeiture if the officer or director ceases to be an
officer or director, as applicable, prior to vesting). Excludes (a) an
aggregate of 519,000 shares issuable upon the exercise of outstanding
options granted to executive officers and directors under the Company's 1994
Stock Incentive Plan (the "1994 Plan") and the Company's Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"), which vest over a
multi-year period, and (b) an aggregate of 572,847 Units to be issued to
Prime as a portion of the purchase price for the AmeriSuites Hotels.
S-6
<PAGE> 7
RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained or incorporated by reference
in this Prospectus Supplement and in the accompanying Prospectus before
purchasing shares of Common Stock in the Offering.
RISK THAT POTENTIAL TRANSACTIONS WILL NOT CLOSE
The Partnership has entered into agreements to acquire the Acquisition
Hotels. However, the agreements contain customary and other closing conditions
and the closing of the purchase of the Acquisition Hotels is not scheduled to
occur until after the consummation of the Offering. There can be no assurance
that the Company will complete the acquisition of the Acquisition Hotels. In
addition, the Company is seeking to sell nine of the Current Hotels. The Company
has entered into an agreement regarding the sale of these hotels to a single
buyer. However, the buyer has until November 30, 1997 to terminate the agreement
without penalty and has indicated that it may exercise such termination right.
There can be no assurance that such sale will be consummated. See "Prospectus
Supplement Summary -- Recent Developments -- Potential Disposition of Certain
Current Hotels."
COMPANY'S RELIANCE UPON ITS LESSEES
In order for the Company to continue to qualify as a REIT, neither the
Company nor the Partnership can operate any hotel or participate in the
decisions affecting the daily operations of any hotel. The Lessee leases all of
the Current Hotels and, following the acquisition of the AmeriSuites Hotels, the
Prime Lessee will lease the AmeriSuites Hotels. The Company's lessees control
(or will control, as the case may be) the daily operations of the Company's
hotels. Neither the Company nor the Partnership has the authority to require any
hotel to be operated in a particular manner or to govern any particular aspect
of the daily operations of any hotel. Even if the Company's management believes
the Hotels are being operated inefficiently or in a manner that does not result
in an appropriate level of Percentage Rent payments to the Company or the
Partnership under the Percentage Leases, neither the Company nor the Partnership
may require a change to the method of operation. The Company is dependent on
lease payments from its lessees for substantially all of its revenues.
DEBT LIMITATION
The Company intends to continue to pursue a growth strategy which includes
acquiring hotel properties. There is a risk that the Company will not have
access to sufficient equity capital to pursue its acquisition strategy. Since,
in order to qualify as a REIT, the Company generally must distribute at least
95% of its taxable income annually and thus cannot retain earnings and the
Company's Charter limits outstanding indebtedness to 45% of the Company's
investment in hotel properties at cost, the Company's ability to continue to
make acquisitions will depend primarily on its ability to obtain additional
private or public equity financing. There can be no assurance that such
financing will be available. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Distribution Requirements"
in the accompanying Prospectus.
DEVELOPMENT RISKS
As part of its growth strategy, the Company intends to develop 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 that 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.
S-7
<PAGE> 8
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 could adversely affect 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 Lessee's or
the Prime Lessee's 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 and its lessees.
Competition for Acquisitions. The Company competes for acquisitions with
entities that 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 Industry
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.
Investment Concentration in Certain Segments of Single Industry
The Company's current investment strategy is to acquire interests in
limited service and extended stay hotel properties. Therefore, a downturn in the
hotel industry, in general, and the limited service and extended stay segments,
in particular, will have a material adverse effect on the Company's lease
revenue and amounts available for distribution to its shareholders.
Emphasis on Hampton Inn Hotels
Because 57 of the Current Hotels are operated as Hampton Inn hotels, 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 its shareholders.
Capital Expenditures
The Hotels have an ongoing need for renovations and other capital
improvements, including periodic replacement of furniture, fixtures and
equipment. The additional cost of such capital improvements could have an
adverse effect on the Company's financial condition. In addition, the Hotels may
require significant renovation in the future. Such renovations involve certain
risks, including the possibility of environmental
S-8
<PAGE> 9
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. During the year ended
December 31, 1996 and the nine months ended September 30, 1997, the Company
spent approximately $19.4 million and $11.1 million, respectively, for capital
improvements to the Current Hotels and expects to spend an additional $6.9
million for total capital improvements during the fourth quarter of 1997. The
Company intends to fund such improvements out of future cash from operations,
present cash balances or available borrowing capacity under the Unsecured Line
of Credit.
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 Lessee and, in the future, the Prime Lessee 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 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 market value of any of the Hotels
will not decrease in the future. There can be no assurance that the Company will
be able to dispose of an investment when it finds disposition advantageous or
necessary or that the sale price of any disposition will equal or exceed the
amount of the Company's investment.
Environmental Matters
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of compliance with future legislation. 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 sell, use or 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 releases of hazardous materials, including asbestos-containing
materials ("ACMs"), into the environment or 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 ACMs or other hazardous
materials. Environmental laws also may impose restrictions on the manner in
which property may be used or transferred or in which businesses may be
operated, and these restrictions
S-9
<PAGE> 10
may require expenditures. In connection with the ownership of the Hotels, the
Company may be potentially liable for any such costs. The cost of defending
against claims of liability or remediating contaminated property or the cost of
complying with environmental laws could materially adversely affect the
Company's results of operations and financial condition. The Company obtained
Phase I environmental site assessments ("ESAs") on each of the Current Hotels in
connection with their acquisition or certain financing transactions. The purpose
of the ESAs is to identify potential environmental contamination and conditions
and regulatory compliance concerns that are made apparent from historical
reviews of the Hotels, reviews of certain public records, preliminary
investigations of the sites and surrounding properties, and screening for the
presence of hazardous substances, toxic substances, and storage tanks. The ESAs
have not revealed any environmental contamination or conditions or compliance
concerns that the Company believes would have a material adverse effect on the
Company's business, assets, results of operations or liquidity, nor is the
Company aware of any such liability or concerns. Nevertheless, it is possible
that these ESAs do not reveal all environmental liabilities or conditions or
compliance concerns or that there are material environmental liabilities or
compliance concerns 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.
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 of similar real property assets. The Company intends to seek
to include similar provisions in all leases for subsequently acquired property.
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
investment at a reasonable cost and on suitable terms. This may result in
insurance coverage that, in the event of a substantial loss, would not be
sufficient to pay the full current market value or current replacement cost of
the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations, and other factors also might make it
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.
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 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
S-10
<PAGE> 11
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 expected
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 expected distributions to its shareholders could be adversely
affected.
RISKS OF LEVERAGE
The Company's Charter provides that the Company may not incur consolidated
indebtedness in an amount in excess of 45% of the Company's investment in hotel
properties, at its cost. The Company currently has mortgage debt financing of
approximately $86.6 million and has available the Unsecured Line of Credit to
provide, as necessary, working capital, funds for investments in additional
hotel properties and cash to pay dividends. At November 24, 1997, the Company
had outstanding debt on the Unsecured Line of Credit of approximately $114.6
million, an outstanding letter of credit in the amount of $2.3 million and
approximately $133.1 million available for borrowings under the Unsecured Line
of Credit. Following completion of the Offering and application of the net
proceeds as described in "Use of Proceeds" and the purchase of the Acquisition
Hotels, the Company will have approximately $238.9 million of consolidated
indebtedness, representing 36.2% of the Company's investment in hotel
properties, at its cost, and, without additional equity financing, will have the
capacity to borrow up to approximately $106 million under its Charter debt
limitation, assuming all additional borrowings are used to fund investments in
hotel properties. The Company will have the capacity to borrow approximately
$95.4 million under the Unsecured Line of Credit. Subject to the Charter
limitation described above and the Unsecured Line of Credit, the Company may
borrow additional amounts from the same or other lenders in the future, or may
issue corporate debt securities in public or private offerings. Additional
borrowings may be secured by mortgages on properties owned by the Company.
There can be no assurance 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 hotel properties 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 cap contracts,
etc.) to hedge against the possible adverse effects of interest rate
fluctuations. However, there can be no assurance 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.
In February 1997, EQI Financing Partnership I, L.P., the Company's indirect
subsidiary, issued $88 million of fixed-rate, collateralized bonds in three
classes. The expected repayment dates for Classes A, B and C of the Bonds are
November 20, 2006, February 20, 2007 and February 20, 2007. Upon maturity of the
Class A Bonds, the Company is required to use substantially all of its cash flow
to amortize the remaining outstanding principal amount of the Bonds. If the
remaining principal amounts cannot be refinanced, the Company's ability to make
required distributions to its shareholders could be adversely affected and its
status as a REIT could be jeopardized. There can be no assurance that such
refinancing will be available or will be on terms acceptable to the Company.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
The 57 Current Hotels which operate as Hampton Inn hotels and the five
Current Hotels which operate as Homewood Suites hotels are subject to franchise
agreements with Promus Hotels, Inc. ("Promus"). The
S-11
<PAGE> 12
nine Current Hotels which operate as Residence Inn hotels are subject to
franchise agreements with Marriott Corporation ("Marriott"). The five Current
Hotels which operate as Holiday Inn and Holiday Inn Express hotels are subject
to franchise agreements with Holiday Inn, Inc. ("Holiday Inn"). The three
Current Hotels which operate as Comfort Inn hotels are subject to franchise
agreements with Choice Hotels International, Inc. ("Choice"). The ten
AmeriSuites Hotels will be operated pursuant to franchise agreements with
AmeriSuites Hospitality, Inc., an affiliate of Prime. The two Homewood Hotels
will be operated as Homewood Suites hotels pursuant to franchise agreements with
Promus. Each of the Company's franchisors has required or will require the
Partnership to complete certain capital improvements to the Hotels as a
condition to the transfer of the franchise agreements for those hotels to the
Lessee. During the year ended December 31, 1996 and the nine months ended
September 30, 1997, the Company spent approximately $19.4 million and $11.1
million, respectively, for capital improvements to the Current Hotels and
expects to spend an additional $6.9 million for total capital improvements to
such hotels during the fourth quarter of 1997. The Company intends to fund such
improvements out of cash from operations, cash balances or available borrowing
capacity under the Unsecured Line of Credit. Promus, Choice, Marriott and
Holiday Inn will permit the operation of the Hotels under conditional licenses
until the improvements required by such franchisors have been completed. Failure
to complete the improvements in a manner satisfactory to the franchisors could
result in the cancellation of the franchise agreements. Generally, the
continuation of hotel franchises is subject to specified operating standards and
other terms and conditions. Franchisors periodically inspect their licensed
properties to confirm adherence to operating standards. The failure of a hotel,
the Partnership, the Lessee or the Prime 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, the Lessee or the Prime 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.
COMMON STOCK PRICE FLUCTUATIONS AND TRADING VOLUME
A number of factors may adversely influence the price of the Company's
Common Stock in public markets, many of which are beyond the control of the
Company. In particular, an increase in market interest rates will result in
higher yields on other financial instruments and may lead purchasers of shares
of Common Stock to demand a higher annual distribution rate on the price paid
for shares from distributions by the Company, which could adversely affect the
market price of the shares of Common Stock. Although the Company's Common Stock
is listed on the NYSE, the daily trading volume of REITs in general and the
Company's shares in particular may be lower than the trading volume of certain
other industries. As a result, investors in the Company who desire to liquidate
substantial holdings at a single point in time may find that they are unable to
dispose of such shares in the market without causing a substantial decline in
the market value of such shares.
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, debt capitalization and
distributions, will be determined by the Board of Directors. The Board of
Directors may amend or revise these and other policies from time to time
generally without a vote of the shareholders of the Company.
OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of its outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to
S-12
<PAGE> 13
include certain entities) during the last half of any taxable year. Furthermore,
if any interestholder or group of interestholders in the Lessee or the Prime
Lessee owns, actually or constructively, 10% or more of the stock of the
Company, the Lessee or the Prime Lessee, as the case may be, could become a
related party tenant of the Company, 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 stock 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 would, 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 market price on 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 will experience a financial loss
when the excess shares are redeemed, if the market price falls between the date
of purchase and the date of redemption. See "Federal Income Tax
Considerations -- Requirements for Qualification" in the accompanying
Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are expected to be approximately $37.1 million ($42.8 million if the
Underwriters' over-allotment option is exercised in full). The Company will
contribute the net proceeds of the Offering to the Partnership and after such
contribution (and after purchase of the AmeriSuites Hotels) will own an
approximate 94.9% interest in the Partnership (95.0% if the Underwriters'
over-allotment option is exercised in full). The Partnership intends to use the
net proceeds to fund a portion of the purchase price for the AmeriSuites Hotels.
Pending closing of the purchase of the AmeriSuites Hotels, the Partnership will
apply all of the net proceeds of the Offering to repay indebtedness borrowed
under the Unsecured Line of Credit. Indebtedness under the Unsecured Line of
Credit bears interest at LIBOR (5.8675% per annum on November 20, 1997) plus
1.625% and was incurred by the Company primarily to fund hotel acquisitions and
development.
S-13
<PAGE> 14
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock is listed on the NYSE under the symbol "ENN." From the IPO
until September 9, 1996, the Common Stock was traded on The Nasdaq Stock Market.
The following table sets forth for the indicated periods the high and low sales
prices for the Common Stock and the cash distributions declared per share:
<TABLE>
<CAPTION>
CASH
PRICE RANGE DISTRIBUTIONS
------------ DECLARED
HIGH LOW PER SHARE
---- --- -------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
First Quarter........................................... $11 1/8 $ 9 1/2 $.24
Second Quarter.......................................... 12 10 3/8 .24
Third Quarter........................................... 12 1/2 10 3/8 .26
Fourth Quarter.......................................... 12 10 3/4 .26
YEAR ENDED DECEMBER 31, 1996
First Quarter........................................... 13 1/4 11 1/2 .28
Second Quarter.......................................... 12 3/4 11 1/4 .28
Third Quarter........................................... 13 11 .28
Fourth Quarter.......................................... 13 1/8 11 1/8 .28
YEAR ENDING DECEMBER 31, 1997
First Quarter........................................... 14 1/2 12 1/2 .28
Second Quarter.......................................... 14 1/8 12 7/8 .28
Third Quarter........................................... 15 13/16 13 1/4 .29
Fourth Quarter (through November 24, 1997).............. 16 9/16 14 1/8
</TABLE>
On November 24, 1997, the last reported sale price of the Common Stock on
the NYSE was $15 1/8 per share. On November 24, 1997, the Company had
approximately 990 shareholders of record.
The Company intends to make regular quarterly distributions to its
shareholders. The Company's ability to make distributions is dependent on the
receipt of distributions from the Partnership. In order to qualify as a REIT for
federal income tax purposes, the Company must distribute to shareholders
annually at least 95% of its taxable income. The Company, as general partner of
the Partnership through the Trust, intends to cause the Partnership to
distribute to its partners sufficient amounts to permit the Company to make
regular quarterly distributions to its shareholders. The Partnership's primary
source of funds to pay distributions is rent payments from the Lessee under the
Percentage Leases.
Future distributions paid by the Company will be at the discretion of the
Board of Directors of the Company and will depend on the actual cash flow of the
Company, its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code and such other factors as the
Board of Directors of the Company deem relevant.
S-14
<PAGE> 15
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
September 30, 1997 on a historical basis, (ii) the pro forma capitalization of
the Company as of September 30, 1997 giving effect to the sale of nine GHI
Hotels on October 31, 1997 as described herein, and (iii) the pro forma
capitalization of the Company as of September 30, 1997, as adjusted to give
effect to the issuance and sale of the 2,600,000 shares of Common Stock in the
Offering, and the application of the net proceeds therefrom as described under
"Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
-------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt...................................................... $240,293 $198,659 $239,779
Minority Interest......................................... 12,808 12,808 19,326
Shareholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding.........
Common Stock, $.01 par value, 50,000,000 shares
authorized, 31,915,578 shares issued and outstanding,
actual and pro forma, and 34,515,578 shares issued
and outstanding, pro forma as adjusted(2)............ 319 319 345
Additional paid-in capital.............................. 342,827 342,827 382,128
Unearned directors' compensation........................ (297) (297) (297)
Predecessor basis assumed............................... (1,264) (1,264) (1,264)
Distributions in excess of earnings..................... (19,056) (18,339) (18,339)
-------- -------- --------
Total shareholders' equity...................... 322,529 323,246 362,573
-------- -------- --------
Total capitalization............................ $575,630 $534,713 $621,678
======== ======== ========
</TABLE>
- ---------------
(1) Does not reflect the potential acquisition of the AmeriSuites Hotels or the
potential sale of nine of the Current Hotels.
(2) Excludes an aggregate of 1,269,673 shares issuable upon redemption of Units
issued in connection with the IPO and in connection with the acquisition of
certain of the Current Hotels. Each Unit is redeemable, at the option of the
holder, for cash or, at the Company's sole option, one share of Common
Stock. All of the Units currently are redeemable. Also excludes (a) an
aggregate of 519,000 shares issuable upon the exercise of outstanding
options granted to executive officers and directors under the 1994 Plan and
the Directors' Plan, which vest over a multi-year period, and (b) an
aggregate of 572,847 Units to be issued to Prime as a portion of the
purchase price for the AmeriSuites Hotels.
FEDERAL INCOME TAX CONSIDERATIONS
This discussion supplements the discussion set forth in the accompanying
Prospectus under the heading "Federal Income Tax Considerations." Hunton &
Williams has acted as counsel to the Company in connection with the Offering and
the Company's election to be taxed as a REIT. In the opinion of Hunton &
Williams, the Company qualified to be taxed as a REIT pursuant to sections 856
through 860 of the Code for its taxable years ended December 31, 1994 through
December 31, 1996, and the Company's organization and current and proposed
method of operation will enable it to qualify to be taxed as a REIT for its
taxable year ending December 31, 1997 and future taxable years. In addition,
Hunton & Williams is of the opinion that, based on certain factual assumptions
and representations, the Partnership and each Subsidiary Partnership will be
classified as partnerships for federal income tax purposes and not as
corporations or associations taxable as corporations or as publicly traded
partnerships. Investors should be aware, however, that opinions of counsel are
not binding upon the Internal Revenue Service (the "Service") or any court. It
must be emphasized that Hunton & Williams' opinion is based on various
assumptions and is conditioned upon certain representations
S-15
<PAGE> 16
regarding the nature of the Company's properties and the future conduct of its
business. Such factual assumptions and representations are set out in the
federal income tax opinion that will be delivered by Hunton & Williams at the
closing of the Offering. Moreover, such qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis, through actual
annual operating results, distribution levels and stock ownership, the various
qualification tests imposed under the Code. Hunton & Williams will not review
the Company's compliance with those tests on a continuing basis. Accordingly, no
assurance can be given that the actual results of the Company's operations 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" in the accompanying Prospectus.
On August 5, 1997, the President signed into law the Taxpayer Relief Act of
1997 (the "Act"), which contains provisions affecting the qualification and
taxation of REITs and which provisions will apply to the Company beginning with
its 1998 taxable year. The relevant provisions of the Act are summarized in this
paragraph. First, the Act repeals the 30% gross income test. Second, the Act
expands the class of hedging instruments that produce qualifying income for
purposes of the 95% gross income test. Income and gain from interest rate swap
and cap agreements, options, futures and forward contracts, and similar
financial instruments entered into by a REIT to hedge liabilities incurred or to
be incurred to acquire or carry "real estate assets" will be qualifying income
for purposes of the 95% (but not the 75%) gross income test. Third, a REIT may
elect to treat all or a part of its undistributed net capital gain as if it had
been distributed to its shareholders. If a REIT so elects, each shareholder will
take into income his share of the retained capital gain as long-term capital
gain and will receive a credit or refund for his share of the tax paid by the
REIT. The shareholder will increase the basis of his shares of the REIT's stock
by an amount equal to the excess of the retained capital gain included in his
income over the tax deemed paid by him. Fourth, under the Act, a REIT may,
without using an independent contractor, render a minimal amount of
impermissible "noncustomary" services to tenants and still treat the rent
received from that property as "rents from real property," provided that the
amount received for the services during any taxable year does not exceed one
percent of the REIT's total receipts from the property during that year. For
purposes of the foregoing, the amount treated as attributable to any
impermissible service will not be less than 150% of the REIT's direct cost for
performing the service. Fifth, under the Act, a REIT no longer loses its REIT
status for failing to send out shareholder demand letters in any year. Instead,
the REIT will incur a $25,000 penalty for such failure ($50,000 for intentional
violations). Sixth, a REIT that complies with the requirements for ascertaining
the ownership of its outstanding shares (including sending out shareholder
demand letters) and does not know or have reason to know that it has violated
the 5/50 rule (i.e., the rule that no more than 50% in value of the REIT's
outstanding shares may be owned, directly or indirectly, by five or fewer
individuals during the last half of any taxable year), will be treated as
satisfying the 5/50 rule. Seventh, under the Act, a REIT may treat any
wholly-owned corporation as a "qualified REIT subsidiary" regardless of whether
the REIT always has owned 100% of the stock of the corporation. Eighth, the Act
lengthens the grace period for foreclosure property to the last day of the third
full taxable year following the foreclosure property election, and allows the
Service to extend the grace period for an additional three years.
The Act also changed the capital gains tax rates applicable to
non-corporate taxpayers. Effective for gains recognized after July 28, 1997, the
maximum tax rate on a non-corporate taxpayer's capital gains is generally 28%
for sales and exchanges of assets held for more than one year, but not more than
18 months, and generally 20% for sales and exchanges of assets held for more
than 18 months. The maximum tax rate on gain from the sale or exchange of
"section 1250 property" (i.e., depreciable real estate) held for more then 18
months is 25%, to the extent that such gain would have been recaptured and
treated as ordinary income if the section 1250 property were personal property.
With respect to distributions designated by a REIT as capital gain
dividends, the REIT may designate (subject to certain limits) whether the
dividend is taxable to shareholders as a 20% rate distribution, an unrecaptured
section 1250 gain distribution taxed at 25% or a 28% rate distribution.
S-16
<PAGE> 17
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter, the
number of shares of Common Stock set forth opposite the name of such
Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Smith Barney Inc............................................ 1,733,330
J.C. Bradford & Co.......................................... 866,670
---------
2,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all of the shares of Common
Stock offered hereby (other than those covered by the Underwriters'
over-allotment option described below) if any such shares are taken.
The Underwriters propose to offer part of the shares directly to the public
at the public offering price set forth on the cover page of this Prospectus
Supplement and part of the shares to certain dealers at a price which represents
a concession not in excess of $.46 per share under the public offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $.10 per share to certain other dealers. After the offering of the
shares to the public, the public offering price and such concessions may be
changed by the Underwriters.
The Company and its officers and directors have agreed that, for a period
of 90 days from the date of this Prospectus Supplement, they will not, without
the prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock of the Company or any securities
convertible into, or exercisable or exchangeable for, Common Stock of the
Company.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to 390,000
additional shares of Common Stock at the price to public set forth on the cover
page of this Prospectus Supplement minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with the offering of the shares
of Common Stock offered hereby. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriter's name in the preceding table bears
to the total number of shares issued in such table.
In connection with this Offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations that appears above) and may
effect transactions that stabilize, maintain or otherwise affect the market
price of the Common Stock at levels above those that might otherwise prevail in
the open market. Such transactions may include placing bids for the Common Stock
or effecting purchases of the Common Stock for the purpose of pegging, fixing or
maintaining the price of the Common Stock or for the purpose of reducing a
syndicate short position created in connection with the Offering. A syndicate
short position may be covered by exercise of the option described above in lieu
of or in addition to open market purchases. In addition, the contractual
arrangements among the Underwriters include a provision whereby, if the
Underwriters purchase Common Stock in the open market for the account of the
underwriting syndicate and the securities purchased can be traced to a
particular Underwriter or member of the selling group, the underwriting
syndicate may require the Underwriter or selling group member in question to
purchase the Common Stock in question at the cost price to the syndicate or may
recover from (or decline to pay to) the Underwriter or selling group member in
question the selling concession applicable to the securities in question. The
Underwriters are not required to engage in any of these activities and any such
activities, if commenced, may be discontinued at any time.
S-17
<PAGE> 18
The Company and the Partnership and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
Smith Barney Inc. performs investment banking and other services for the
Company from time to time, for which it receives customary fees.
EXPERTS
The consolidated financial statements of each of Growth Hotel Investors and
Growth Hotel Investors II as of December 31, 1996 and 1995 and for the three
years ended December 31, 1996 are incorporated into this Prospectus Supplement
by reference to the Company's Current Report on Form 8-K dated June 24, 1997.
The above said financial statements have been so incorporated in reliance upon
the reports of Imowitz, Koenig & Co., LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hunton & Williams. In addition, the description of
federal income tax consequences contained in the section of this Prospectus
Supplement and the accompanying Prospectus entitled "Federal Income Tax
Considerations" is based on the opinion of Hunton & Williams. The validity of
the shares of Common Stock offered hereby will be passed upon for the
Underwriters by King & Spalding, Atlanta, Georgia. In rendering such opinion,
King & Spalding will rely upon the opinion of Hunton & Williams as to certain
matters of Tennessee law.
S-18
<PAGE> 19
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 12, 1997.
<PAGE> 20
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.
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
2
<PAGE> 21
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.
3
<PAGE> 22
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.
4
<PAGE> 23
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.
5
<PAGE> 24
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.
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
6
<PAGE> 25
deductibility provisions of insurance, with a view to maintaining appropriate
insurance coverage on the Company's investments at a reasonable cost and on
suitable terms. This may result in insurance coverage that, in the event of a
substantial loss, would not be sufficient to pay the full current market value
or current replacement cost of the Company's lost investment. Inflation, changes
in building codes and ordinances, environmental considerations and other factors
also might make it 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.
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.
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
7
<PAGE> 26
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 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
8
<PAGE> 27
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.
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."
9
<PAGE> 28
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."
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
10
<PAGE> 29
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 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."
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
11
<PAGE> 30
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.
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
12
<PAGE> 31
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.
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.
13
<PAGE> 32
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 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.
14
<PAGE> 33
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.
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
15
<PAGE> 34
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.
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.
16
<PAGE> 35
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 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
17
<PAGE> 36
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.
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
18
<PAGE> 37
"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. 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
19
<PAGE> 38
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 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
20
<PAGE> 39
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 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
21
<PAGE> 40
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 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
22
<PAGE> 41
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. 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
23
<PAGE> 42
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 nonqualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
Distribution Requirements. The Company, in order to 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
24
<PAGE> 43
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 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
25
<PAGE> 44
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.
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.
26
<PAGE> 45
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 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
27
<PAGE> 46
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 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
28
<PAGE> 47
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 respected
for all periods prior to January 1, 1997 if (i) the entity had a reasonable
basis for its claimed classification, (ii) the entity and all members of the
entity recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (iii) neither
the entity nor any member of the entity was notified in writing by a taxing
authority on or before May 8, 1996 that the classification of the entity was
under examination. The Partnership and 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
29
<PAGE> 48
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.
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.
30
<PAGE> 49
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 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"
31
<PAGE> 50
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.
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
32
<PAGE> 51
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.
33
<PAGE> 52
======================================================
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 SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO 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
SUPPLEMENT AND THE PROSPECTUS, NOR DO THEY 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 SUPPLEMENT OR THE 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.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference........................... S-2
Prospectus Supplement Summary......... S-3
Risk Factors.......................... S-7
Use of Proceeds....................... S-13
Price Range of Common Stock and
Distributions....................... S-14
Capitalization........................ S-15
Federal Income Tax Considerations..... S-15
Underwriting.......................... S-17
Experts............................... S-18
Legal Matters......................... S-18
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 11
Ratio of Earnings to Fixed Charges.... 11
Description of Capital Stock.......... 12
Restrictions on Ownership of Common
Stock............................... 16
Federal Income Tax Considerations..... 17
Plan of Distribution.................. 32
Legal Matters......................... 33
Experts............................... 33
</TABLE>
======================================================
======================================================
2,600,000 SHARES
EQUITY INNS, INC.
COMMON STOCK
------------
PROSPECTUS
NOVEMBER 25, 1997
------------
SMITH BARNEY INC.
J.C. BRADFORD & CO.
======================================================
