<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1997
REGISTRATION NO. 333-26559
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
EQUITY INNS, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1550848
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4735 Spottswood, Suite 102
Memphis, Tennessee 38117
(901) 761-9651
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Phillip H. McNeill, Sr.
Equity Inns, Inc.
4735 Spottswood, Suite 102
Memphis, Tennessee 38117
(901) 761-9651
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copy to:
David C. Wright, Esq.
Hunton & Williams
2000 Riverview Tower, 900 S. Gay Street
Knoxville, Tennessee 37902
(423) 549-7700
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement in light of market
conditions and other factors.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================
Title of Each Class of Proposed Maximum Aggregate Offering
Securities to be Registered (1) Price(1) Amount of Registration Fee(4)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value(2)
Preferred Stock, $.01 par value(3) $200,000,000 $60,606
===================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Subject to Footnote (1), an indeterminate number of shares of Common
Stock, $.01 par value, is registered hereunder and may be sold from
time to time by the Registrant. There is also being registered
hereunder an indeterminate number of shares of Common Stock as shall be
issuable upon conversion of shares of Preferred Stock.
(3) Subject to Footnote (1), an indeterminate number of shares of Preferred
Stock, $.01 par value, is registered hereunder and may be sold from
time to time by the Registrant.
(4) The proposed maximum offering price per unit has been omitted
pursuant to General Instruction II.D of Form S-3 under the
Securities Act of 1933, as amended. The registration fee has been
calculated in accordance with Rule 457(o) under the Securities Act of
1933, as amended.
- --------------------------------------------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 9, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus dated May , 1997)
7,500,000 SHARES
(EQUITY INNS, INC. LOGO)
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 96.1% general partnership interest in Equity Inns Partnership, L.P.
(the "Partnership"). The Company currently owns 56 hotels with an aggregate of
6,679 rooms in 29 states and has one hotel under development. The Company's
hotels operate as Hampton Inn(R) hotels (37), Residence Inn(R) hotels (8),
Holiday Inn(R) hotels (4), Comfort Inn(R) hotels (3), Homewood Suites(R) hotels
(3) and a Holiday Inn Express(R) hotel(1). The Company has entered into
agreements to acquire a portfolio of 28 Hampton Inn hotels with an aggregate of
3,479 rooms in 14 states and intends to use the net proceeds from the Common
Stock offered hereby (the "Offering") to fund a portion of the purchase price of
such hotels. The Partnership leases its hotels to subsidiaries of Interstate
Hotels Company ("Interstate"), the nation's largest independent hotel management
company pursuant to leases providing for the payment of rent based, in part, on
the revenues from the 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 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 May 8, 1997, the last reported sale price of the Common Stock on the
NYSE was $13.25 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-14 AND PAGE 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>
<S> <C> <C> <C>
==================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
Per Share $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3) $ $ $
==================================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at approximately $500,000, which are
payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 1,125,000 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 $ , $ and $ ,
respectively.
------------------
The shares of Common Stock are being offered by the several 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 May
, 1997 at the offices of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
SMITH BARNEY INC.
MORGAN KEEGAN & COMPANY, INC.
PRUDENTIAL SECURITIES INCORPORATED
J.C. BRADFORD & CO.
The date of this Prospectus Supplement is May , 1997
<PAGE> 3
[PORTFOLIO MAP]
<TABLE>
<S> <C>
ALABAMA
* Hampton Inn-Birmingham
(Vestavia Hills)
* Hampton Inn-Birmingham
(Mountain Brook)
Comfort Inn-Enterprise
ARIZONA
Hampton Inn-Scottsdale
Residence Inn-Tucson
Homewood Suites-Camelback
(Phoenix)
ARKANSAS
Hampton Inn-Little Rock
* Hampton Inn-North Little Rock
COLORADO
* Hampton Inn-Aurora (Denver)
* Hampton Inn-Colorado Springs
Residence Inn-Colorado Springs
CONNECTICUT
Hampton Inn-Meriden
Hampton Inn-Milford
Homewood Suites-Windsor Locks
(Hartford)
FLORIDA
Hampton Inn-Jacksonville
Hampton Inn-Sarasota
Comfort Inn-Jacksonville Beach
GEORGIA
Hampton Inn-Columbus
Hampton Inn-Savannah
* Hampton Inn-Atlanta
(Northlake)
* Hampton Inn-Roswell
(Atlanta)
ILLINOIS
Hampton Inn-Gurnee (Chicago)
Hampton Inn-Naperville
(Chicago)
INDIANA
Hampton Inn-Indianapolis
KANSAS
Hampton Inn-Overland Park
(Kansas City)
KENTUCKY
Hampton Inn-Louisville
MARYLAND
Hampton Inn-Glen Burnie
(Baltimore)
MICHIGAN
Hampton Inn-Ann Arbor
Hampton Inn-Traverse City
Hampton Inn-Northville
(Detroit)
* Hampton Inn-Madison Heights
(Detroit)
MINNESOTA
* Hampton Inn-Eden Prairie
(Minneapolis)
Residence Inn-Eagan
(Minneapolis)
MISSISSIPPI
Hampton Inn-Southaven
(Memphis)
MISSOURI
* Hampton Inn-Kansas City
* Hampton Inn-Maryland Heights
(St. Louis)
NEBRASKA
Residence Inn-Omaha
NEW JERSEY
Residence Inn-Tinton Falls
NEW MEXICO
* Hampton Inn-Albuquerque
NEW YORK
Hampton Inn-Albany
* Hampton Inn-Syracuse
NORTH CAROLINA
Hampton Inn-Shelby
Hampton Inn-Gastonia
Hampton Inn-Fayetteville
* Hampton Inn-Chapel Hill
* Hampton Inn-Greensboro
Holiday Inn-Winston-Salem
Holiday Inn Express-Wilkesboro
OHIO
Hampton Inn-Cleveland
* Hampton Inn-Dublin (Columbus)
OKLAHOMA
Residence Inn-Oklahoma City
PENNSYLVANIA
Hampton Inn-Scranton
Hampton Inn-State College
SOUTH CAROLINA
* Hampton Inn-Charleston
* Hampton Inn-Columbia
* Hampton Inn-Greenville
* Hampton Inn-Spartanburg
Holiday Inn-Mt. Pleasant
(Charleston)
TENNESSEE
Hampton Inn-Cleveland
Hampton Inn-Alcoa (Knoxville)
Hampton Inn-Chattanooga
Hampton Inn-Pickwick
* Hampton Inn-Brentwood
(Nashville)
* Hampton Inn-Memphis (Poplar)
* Hampton Inn-Memphis
(Sycamore)
* Hampton Inn-Nashville
M Hampton Inn & Suites-
Bartlett (Memphis)
TEXAS
Hampton Inn-College Station
Hampton Inn-Fort Worth
Hampton Inn-Arlington (Dallas)
Hampton Inn-Austin
Hampton Inn-Garland (Dallas)
* Hampton Inn-Addison (Dallas)
* Hampton Inn-Amarillo
* Hampton Inn-Richardson
(Dallas)
* Hampton Inn-San Antonio
Homewood Suites-San Antonio
VERMONT
Residence Inn-Burlington
Comfort Inn-Rutland
VIRGINIA
Hampton Inn-Norfolk
WEST VIRGINIA
Hampton Inn-Beckley
Hampton Inn-Morgantown
Holiday Inn-Bluefield
Holiday Inn-Oak Hill
WISCONSIN
Residence Inn-Madison
</TABLE>
- ---------------
* Acquisition Hotels
M Under Development
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
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. Unless
the context indicates otherwise, the information herein assumes (i) an offering
price of $13.25 per share, the last reported sale price of the Common Stock on
May 8, 1997, and (ii) the Underwriters' over-allotment option is not exercised.
Unless the context indicates otherwise, the term "Company" includes the
Partnership and the Company's subsidiaries. See "Glossary" for the definitions
of certain terms used in this Prospectus Supplement and the accompanying
Prospectus.
THE COMPANY
The Company is a self-administered real estate investment trust ("REIT")
that currently owns 56 hotel properties (the "Current Hotels") with an aggregate
of 6,679 rooms located in 29 states and has one hotel under development. The
Current Hotels operate as Hampton Inn(R) hotels (37), Residence Inn(R) hotels
(8), Holiday Inn(R) hotels (4), Comfort Inn(R) hotels (3), Homewood Suites(R)
hotels (3) and a Holiday Inn Express(R) hotel(1). According to Promus Hotels,
Inc. ("Promus"), the franchisor of Hampton Inn hotels, the Company owns more
Hampton Inn hotels than any other owner in the Hampton Inn system. In order for
the Company to qualify as a REIT, neither the Company nor the Partnership can
operate hotels. Consequently, the Partnership leases its hotels to subsidiaries
(collectively, the "Lessee") of Interstate Hotels Company ("Interstate"), the
nation's largest independent hotel management company, pursuant to leases
("Percentage Leases") that provide for the greater of (i) a fixed annual base
rent ("Base Rent") or (ii) percentage rent based on the revenues of the hotels
("Percentage Rent"). As of April 1, 1997, Interstate managed or leased 211
hotels with 43,215 rooms, including all of the Company's Current Hotels, and
owned or had a controlling interest in 29 hotels. Interstate has guaranteed the
Lessee's obligations under the Percentage Leases.
The Company focuses on maximizing shareholder value by increasing Cash
Available for Distribution (as herein defined) on a per share basis by (i)
acquiring equity interests in hotels that meet the Company's investment
criteria, (ii) selectively developing hotels and (iii) participating in revenue
growth at the Hotels through the Percentage Leases which provide for rent
payments based, in part, on the revenues from the Hotels.
The Company has agreed to acquire 28 Hampton Inn hotels (the "Acquisition
Hotels") with an aggregate of 3,479 rooms in 14 states from a series of
partnerships controlled by Growth Hotel Investors ("GHI") and Growth Hotel
Investors II ("GHI II") for purchase prices aggregating approximately $169
million, including franchise agreements but excluding approximately $5.5 million
of franchisor-required renovations that the Company expects to undertake in the
next twelve months. The Acquisition Hotels are located in South Carolina (4
hotels), Tennessee (4 hotels), Texas (4 hotels), Alabama (2 hotels), Colorado (2
hotels), Georgia (2 hotels), Missouri (2 hotels), North Carolina (2 hotels) and
Arkansas, Michigan, Minnesota, New Mexico, New York and Ohio (1 hotel each).
Upon the completion of the purchase of the Acquisition Hotels, the Company will
own 84 hotels (the "Hotels") with an aggregate of 10,158 rooms and will own
approximately 10% of all hotels in the Hampton Inn system.
Since the Company's initial public offering ("IPO") in March 1994, the
Company has:
- completed the acquisition of 48 Hotels for purchase prices aggregating
approximately $314 million, increasing its total number of hotel rooms
from 995 rooms at the time of the IPO to 6,679 hotel rooms;
- entered into agreements to acquire the 28 Acquisition Hotels with an
aggregate of 3,479 rooms;
- entered into a strategic alliance with Interstate, the nation's largest
independent hotel management company, pursuant to which (i) the Lessee
became the lessee of all the Company's hotels,(ii) Interstate granted the
Company the right to acquire certain hotels that may be developed or sold
by Interstate and (iii) the Company granted the Lessee a right of first
refusal to lease hotels acquired by the Company prior to November 2001;
S-3
<PAGE> 5
- entered into a strategic alliance with Promus providing for (i) Promus'
purchase of up to $15 million in newly issued shares of Common Stock from
the Company (of which approximately $7.1 million has been invested to
date); (ii) the Company's agreement to purchase certain Homewood Suites
hotels to be developed by Promus (two of which have been acquired to
date); (iii) the Company's development of a Hampton Inn & Suites Hotel in
Bartlett (Memphis), Tennessee, which the Company expects to complete in
the third quarter of 1997; and (iv) Promus' management of each of the
hotels acquired from Promus and two other hotels owned by the Company
pursuant to management agreements with the Lessee;
- increased its Funds From Operations (as defined herein) from $7.6 million
for the ten-month period ended December 31, 1994 to $26.4 million for the
year ended December 31, 1996;
- increased its annual dividend rate per share four times for a total
increase of 40% from the initial annual rate of $.80 per share to the
current annual rate of $1.12 per share;
- raised approximately $246 million of additional equity capital through
three follow-on offerings of Common Stock;
- obtained a $130 million revolving line of credit (the "Line of Credit");
- issued $88 million of fixed-rate, collateralized mortgage bonds at a
weighted average interest rate of 7.22% and a weighted average maturity
of approximately ten years; and
- listed its Common Stock on The New York Stock Exchange (the "NYSE")
effective September 1996.
The Company operates limited service, extended stay and full service
hotels. Of the 6,679 rooms in the Current Hotels, approximately 74% are limited
service, approximately 18% are extended stay and approximately 8% 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 continually 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. Following completion
of the purchase of the Acquisition Hotels, the Company may consider the sale of
certain of the Acquisition Hotels. The Company has no commitment, letter of
intent or other agreement with any potential buyer of any Acquisition Hotel or
Current Hotel and there can be no assurance that any such sale will occur.
Pursuant to an agreement between Interstate and the Partnership, Interstate has
agreed to pay the Partnership $2.25 million in exchange for 50% of the
Partnership's net book gain on the sale of certain Acquisition Hotels.
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
$213.8 million of indebtedness, representing 37.7% of the Company's investment
in hotel properties, at its cost, and the Company will have the capacity to
borrow up to approximately $74.7 million under its Charter debt limitation,
assuming all additional borrowings are used to fund investments in hotel
properties.
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.
S-4
<PAGE> 6
RECENT DEVELOPMENTS
GHI ACQUISITIONS
The Partnership has entered into agreements to acquire the 28 Acquisition
Hotels with an aggregate of 3,479 rooms in 14 states from a series of
partnerships controlled by GHI and GHI II for purchase prices aggregating
approximately $169 million, including franchise agreements but excluding
approximately $5.5 million of franchisor-required renovations that the Company
expects to undertake in the next twelve months. The Company intends to fund the
purchase of the Acquisition Hotels through a combination of the net proceeds of
the Offering, borrowings under the Line of Credit and a one-year term loan. See
"Business -- Financing Strategy -- First Chicago Term Loan." The GHI and GHI II
hotels are located principally in major urban and suburban markets. The sale of
the Acquisition Hotels is subject to the approval of a majority in interest of
the partners of GHI and GHI II, which approvals must be obtained through a proxy
solicitation, as well as customary real estate closing conditions. The
Partnership has obtained the agreement of the holders of approximately 39% and
34% of GHI and GHI II, respectively, to vote in favor of the sale of the
Acquisition Hotels to the Partnership. The Company expects to close the purchase
of the Acquisition Hotels prior to June 30, 1997; however, there can be no
assurance that the purchase of the Acquisition Hotels will be consummated. See
"Risk Factors -- Risk that Pending Acquisitions Will Not Close."
STRATEGIC ALLIANCE WITH INTERSTATE
In November 1996, Trust Leasing, Inc. ("Trust Leasing"), the former lessee
of all of the Company's hotels, which was wholly owned by Phillip H. McNeill,
Sr., assigned its rights under each of the then-existing Percentage Leases to
the Lessee in exchange for limited partnership interests in the Lessee. The
Partnership and the Lessee amended and restated the Percentage Leases in a
Consolidated Lease Amendment that increased the term of each then-existing
Percentage Lease from 10 years to 15 years. The Company, the Partnership and the
Lessee also entered into an agreement that provides for, among other things, (i)
Interstate's agreement to offer to sell to the Company not less than five hotels
to be developed by Interstate or its affiliates prior to November 2001 and to
provide the Company a right of first refusal to purchase certain hotels offered
for sale by Interstate prior to November 2001, and (ii) a right of first refusal
for the Lessee to lease hotel properties acquired by the Company through
November 2001.
The Lessee leases all of the Current Hotels, and will lease all of the
Acquisition Hotels. The Lessee or an affiliate of the Lessee manages 52 of the
Current Hotels and will manage the Acquisition Hotels. Promus manages four of
the Current Hotels under management agreements with the Lessee, and receives a
management fee from the Lessee. As of April 1, 1997, Interstate managed or
leased 211 hotels, with 43,215 rooms, including all of the Current Hotels, and
owned or had a controlling interest in 29 hotels. Interstate has guaranteed the
Lessee's obligations under the Percentage Leases. At December 31, 1996,
Interstate had shareholders' equity of approximately $409.3 million.
OTHER RECENT ACQUISITIONS
Since January 1, 1997, the Company has acquired the following hotel
properties:
<TABLE>
<CAPTION>
DATE OF NUMBER OF COST
ACQUISITION HOTEL LOCATION ROOMS (IN MILLIONS)
----------- ----- -------- ---------- -------------
<S> <C> <C> <C> <C>
Jan. 10, 1997 Residence Inn Colorado Springs, CO 96 $ 9.7
Jan. 10, 1997 Residence Inn Oklahoma City, OK 135 8.6
Jan. 10, 1997 Residence Inn Tucson, AZ 128 11.2
Feb. 14, 1997 Hampton Inn Savannah, GA 129 5.0
Mar. 5, 1997 Hampton Inn Norfolk, VA 119 5.6
Mar. 11, 1997 Hampton Inn Pickwick, TN 50 2.1
Mar. 11, 1997 Hampton Inn Southaven (Memphis), MS 86 4.3
Apr. 23, 1997 Hampton Inn Overland Park (Kansas City), KS 134 7.1
--- -----
Total 877 $53.6
=== =====
</TABLE>
S-5
<PAGE> 7
SECURITIZED MORTGAGE DEBT
In February 1997, the Company issued $88 million of fixed-rate,
collateralized Commercial Mortgage Bonds (the "Bonds") through EQI Financing
Partnership I, L.P., an indirect, wholly-owned subsidiary of the Company ("EQI
Finance"), in a private placement transaction as follows:
<TABLE>
<CAPTION>
INITIAL
PRINCIPAL INTEREST EXPECTED STATED
CLASS AMOUNT RATE REPAYMENT DATE MATURITY RATING (FITCH)
- ----- --------- -------- -------------- -------- --------------
<C> <C> <C> <C> <C> <C>
A $27.4 million 6.825% Nov. 20, 2006 Nov. 20, 2006 AA
B $50.6 million 7.370% Feb. 20, 2007 Dec. 20, 2015 A
C $10.0 million 7.580% Feb. 20, 2007 Feb. 20, 2017 BBB
</TABLE>
The weighted average interest rate for all three issues of Bonds is 7.22%.
Proceeds from the issuance of the Bonds were used to repay existing debt under
the Line of Credit. Principal payments are to be applied to each class of Bonds
in order of their respective maturities with no principal payment on any Bond
until all Bonds in a bond class with an earlier stated maturity have been paid
in full. In connection with these transactions, the Partnership transferred 23
of its hotel properties (the "Mortgaged Properties") and their respective leases
to EQI Finance. The Mortgaged Properties serve as collateral for the Bonds.
EXTENSION OF LINE OF CREDIT
In December 1996, the Company entered into an agreement with Smith Barney
Mortgage Capital Group, Inc. and a syndicate of eight banks to extend the Line
of Credit under the same terms through November 1998, with an option for another
one-year extension. The Line of Credit is currently administered by The First
National Bank of Chicago ("First Chicago").
FIRST QUARTER 1997 FINANCIAL RESULTS
For the first quarter of 1997, the Company's lease revenue increased 69.5%
from $6.9 million to $11.8 million, net income per share increased 44.4% from
$.09 to $.13 and Funds From Operations per share increased 20.8% from $.24 to
$.29. Funds From Operations should not be considered as an alternative to net
income or other measurements under generally accepted accounting principles as
an indicator of operating performance or to cash flows from operating, investing
or financing activities as a measure of liquidity.
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-14 and on page of the accompanying Prospectus.
S-6
<PAGE> 8
GROWTH STRATEGY
Acquisitions. The Company intends to acquire well-located limited service
and extended stay hotels, that typically attract both business and leisure
travelers. In addition, the Company targets hotels with nationally-recognized
franchise brands or hotels that can be repositioned and reflagged as nationally-
recognized brands. Management believes that a strong nationally-recognized brand
name attracts guests and allows the Company's hotels to realize higher
occupancies and ADRs. Management believes that a number of hotels that meet its
investment criteria are available at attractive prices primarily from the
following sources: (i) hotel operators who are unable to pay for renovations
necessary to maintain franchise obligations or otherwise meet ongoing financial
obligations; (ii) franchisors with whom the Company has an existing
relationship; and (iii) hotel owners who wish to liquidate all or a portion of
their investments in hotels. In accordance with this strategy, the Company
entered into agreements in March 1997 to acquire the Acquisition Hotels from a
series of partnerships controlled by GHI and GHI II and has acquired eight
additional hotels since January 1, 1997. In addition, pursuant to its strategic
alliance with Interstate, Interstate has agreed to offer to sell to the Company
not less than five hotels that may be developed by Interstate or its affiliates
prior to November 2001 and to provide the Company a right of first refusal to
purchase certain hotels that may be offered for sale by Interstate prior to
November 2001. The Company may also consider, from time to time as opportunities
arise, additional multi-property acquisitions including extended stay or limited
service portfolio acquisitions that the Company believes can be reflagged under
nationally-recognized franchise brands. See "Business -- Growth
Strategy -- Acquisition Strategy."
Development. The Company may selectively develop certain limited service
or extended stay hotels where it expects to receive an attractive return on its
investment. The Company currently is developing a Hampton Inn & Suites hotel in
Bartlett (Memphis), Tennessee. See "Promus Strategic Alliance."
Internal Growth. Management believes that internal growth may be
positively impacted by the (i) continuation of favorable industry-wide increases
in REVPAR; (ii) completion of a renovation plan for certain of the Hotels; (iii)
continuation of aggressive sales and marketing programs; and (iv) maintenance of
franchises with demonstrated market acceptance and national reservation systems.
For the year ended December 31, 1996, the Current Hotels had occupancy, ADR and
REVPAR of 71.0%, $65.46 and $46.43, respectively, compared to 70.65%, $56.70 and
$42.65 for the year ended December 31, 1995, and for the quarter ended March 31,
1997, the Current Hotels had occupancy, ADR and REVPA of 67.7%, $61.22 and
$45.72, respectively, compared to 64.7%, $60.20 and $41.02 for the comparable
period in 1996. Management believes that a regular program of capital
improvements, including replacement and refurbishment of furniture, fixtures and
equipment ("FF&E") at the Hotels, as well as periodic renovation, will maintain
the competitive position of the Hotels and result in long-term revenue growth.
During the year ended December 31, 1996, the Company spent approximately $19
million for capital improvements to the Current Hotels and has committed to
spend an additional $11 million for total capital improvements to such hotels in
1997. In addition, the Company intends to spend approximately $5.5 million for
capital improvements to the Acquisition Hotels in the next twelve months.
S-7
<PAGE> 9
THE HOTEL INDUSTRY
REVPAR for U.S. hotels has increased in each of the last five years.
Revenue per available room or "REVPAR" is a frequently used measure of a hotel's
ability to manage its room inventory to achieve optimal sales, and is calculated
for a period by dividing room revenue by available rooms for the applicable
period. REVPAR in each of the segments of the hotel industry in which the
Company owns hotels has increased during each of the last five years as well.
Smith Travel Research classifies Hampton Inn, Comfort Inn and Holiday Inn
Express (69 of the 84 Hotels) as "Midscale without Food and Beverage." REVPAR
for "Midscale without Food and Beverage" hotels increased by 4.3% from 1995 to
1996 and by 5.1% from the first quarter of 1996 to the first quarter of 1997.
Smith Travel Research classifies Residence Inn and Homewood Suites (11 of the
Hotels) as "Upscale." REVPAR for "Upscale" hotels increased by 7.7% from 1995 to
1996 and by 7.1% from the first quarter of 1996 to the first quarter of 1997. In
addition to REVPAR, a measure of a hotel's competitiveness and ability to
attract customers is its occupancy percentage, which is calculated for a period
by dividing the (i) the number of rooms rented in such period by (ii) the number
of rooms available to be rented for each night in such period. Another measure
of a hotel's competitiveness is its average daily room rate or "ADR," which is
calculated for a period by dividing the (i) total room revenue for such period
by (ii) the number of rooms occupied in such period.
The table below sets forth occupancy, ADR and REVPAR for (i) the Hotels,
(ii) the "Midscale without Food and Beverage" segment of the lodging industry,
(iii) the "Upscale" segment of the lodging industry and (iv) all U.S. hotels for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- ------------------------
% %
1992 1993 1994 1995 1996 CHANGE 1996 1997 CHANGE
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OCCUPANCY
The Hotels (1)............................. 68.7% 70.4% 73.0% 73.1% 72.1% (1.4)% 66.3% 67.3% (1.5)%
Midscale w/o Food and Beverage (2)......... 67.2% 68.4% 70.2% 69.9% 68.3% (2.3)% 62.9% 61.8% (1.7)%
Upscale (3)................................ 68.1% 70.2% 72.4% 72.4% 72.6% 0.3% 70.1% 70.0% (0.1)%
U.S. Hotels (4)............................ 62.6% 63.5% 64.7% 65.1% 65.1% 0.0% 60.4% 60.2% (0.3)%
ADR
The Hotels (1)............................. $46.54 $48.76 $52.18 $56.41 $63.69 12.9% $59.56 $61.03 2.5%
Midscale w/o Food and Beverage (2)......... $46.47 $48.03 $49.98 $53.25 $56.85 6.8% $54.44 $58.14 6.8%
Upscale (3)................................ $69.47 $71.08 $74.21 $78.11 $83.87 7.4% $83.02 $89.07 7.3%
U.S. Hotels (4)............................ $58.97 $60.61 $62.96 $65.94 $70.08 6.3% $69.99 $74.73 6.8%
REVPAR
The Hotels (1)............................. $34.29 $36.72 $40.04 $42.95 $45.87 6.8% $40.87 $43.94 7.5%
Midscale w/o Food and Beverage (2)......... $31.24 $32.84 $35.07 $37.22 $38.83 4.3% $34.22 $35.95 5.1%
Upscale (3)................................ $47.28 $49.94 $53.71 $56.52 $60.88 7.7% $58.22 $62.37 7.1%
U.S. Hotels (4)............................ $36.92 $38.48 $40.76 $42.90 $45.62 6.3% $42.27 $45.02 6.5%
</TABLE>
- ---------------
(1) Information with respect to certain of the Hotels, including the Acquisition
Hotels, for periods prior to their acquisition by the Company, was obtained
from the previous owners.
(2) Source -- Smith Travel Research. Smith Travel Research's "Midscale without
Food and Beverage" category represents 22 hotel chains, including Hampton
Inn hotels, Comfort Inn hotels and Holiday Inn Express hotels.
(3) Source -- Smith Travel Research. Smith Travel Research's "Upscale" category
represents 22 hotel chains, including Homewood Suites hotels and Residence
Inn hotels.
(4) Source -- Smith Travel Research.
S-8
<PAGE> 10
THE HOTELS
The following table sets forth certain information with respect to the
Hotels:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------
NUMBER PRO FORMA
YEAR DATE OF ROOM LEASE
OPENED ACQUIRED ROOMS REVENUE PAYMENT(2) OCCUPANCY ADR REVPAR(3)
------ ---------- ------ -------------- -------------- --------- ------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS:(1)
HAMPTON INN:
Albany, NY..................... 1986 Mar. 1994 154 $ 3,004 $ 1,419 73.9% $72.15 $53.30
College Station, TX............ 1986 Mar. 1994 135 1,933 869 70.3 55.62 39.12
Louisville, KY................. 1986 Mar. 1994 119 1,766 794 71.0 57.09 40.55
Columbus, GA................... 1986 Mar. 1994 119 1,934 934 82.6 53.78 44.42
Cleveland, OH.................. 1987 Mar. 1994 123 1,895 937 71.7 58.45 41.90
Sarasota, FL................... 1987 Mar. 1994 97 1,495 594 70.0 60.20 42.12
Fort Worth, TX................. 1987 Mar. 1994 125 1,801 742 70.4 55.94 39.38
Little Rock, AR................ 1985 Mar. 1994 122 1,363 454 57.4 53.16 30.52
Ann Arbor, MI.................. 1986 Apr. 1994 150 2,501 1,128 70.6 64.53 45.55
Traverse City, MI.............. 1987 June 1994 127 1,855 834 55.3 72.22 39.91
Gurnee (Chicago), IL........... 1988 June 1994 134 2,197 981 68.0 65.87 44.79
Arlington (Dallas), TX......... 1985 July 1994 141 2,075 875 62.9 63.94 40.22
Milford, CT.................... 1986 Sept. 1994 148 2,615 1,236 77.7 62.16 48.28
Meriden, CT.................... 1988 Sept. 1994 125 1,702 772 63.5 58.56 37.21
Beckley, WV.................... 1992 Nov. 1994 108 2,156 1,168 86.3 63.19 54.54
Gastonia, NC................... 1989 Nov. 1994 109 1,961 1,040 80.9 60.75 49.16
Morgantown, WV................. 1991 Nov. 1994 108 1,809 896 75.1 60.91 45.76
Shelby, NC..................... 1989 Nov. 1994 78 935 412 65.4 50.12 32.76
Naperville (Chicago), IL....... 1987 Dec. 1994 130 2,172 975 73.2 62.37 45.64
State College, PA.............. 1987 Jan. 1995 120 2,149 1,053 73.6 65.94 48.53
Cleveland, TN(4)............... 1993 July 1995 60 889 367 73.7 54.86 40.45
Jacksonville, FL............... 1986 Sept. 1995 122 1,645 629 69.7 52.86 36.83
Fayetteville, NC............... 1986 Sept. 1995 122 1,574 656 69.7 50.58 35.25
Indianapolis, IN............... 1987 Sept. 1995 129 2,056 924 66.3 65.64 43.55
Scranton, PA................... 1994 Sept. 1995 129 2,675 1,314 85.6 66.23 56.66
Austin, TX..................... 1987 Dec. 1995 122 2,136 1,033 73.0 65.49 47.83
Garland (Dallas), TX........... 1987 Dec. 1995 125 1,598 660 63.6 54.79 34.85
Alcoa (Knoxville), TN.......... 1991 Feb. 1996 118 1,561 580 65.7 54.99 36.15
Glen Burnie (Baltimore), MD.... 1989 Mar. 1996 116 2,120 907 77.9 64.09 49.93
Northville (Detroit), MI....... 1989 May 1996 125 2,255 1,078 80.3 61.39 49.30
Scottsdale, AZ................. 1996 July 1996 126 1,701 780 48.7 80.78 39.34
Chattanooga, TN................ 1988 July 1996 168 2,438 928 74.0 60.68 44.90
Savannah, GA................... 1986 Feb. 1997 129 1,877 870 77.0 51.66 39.78
Norfolk, VA.................... 1990 Mar. 1997 119 2,038 985 81.4 57.50 46.81
Southaven (Memphis), MS........ 1995 Mar. 1997 86 1,368 570 74.1 56.25 41.68
Pickwick, TN................... 1995 Mar. 1997 50 799 280 72.1 60.52 43.64
Overland Park (Kansas City),
KS........................... 1991 Apr. 1997 134 2,355 1,118 77.6 62.08 48.17
----- -------- ------- ----- ------- ------
Subtotal/Weighted Average.... 4,452 $ 70,403 $31,792 71.6% $60.85 $43.43
----- -------- ------- ----- ------- ------
RESIDENCE INN:
Eagan (Minneapolis), MN........ 1988 Sept. 1994 120 $ 2,746 $ 1,333 76.3% $81.93 $62.52
Tinton Falls, NJ............... 1988 Sept. 1994 96 2,645 1,229 83.3 89.91 74.90
Omaha, NE...................... 1981 Dec. 1995 80 1,834 724 78.6 79.70 62.62
Madison, WI.................... 1988 June 1996 80 1,377 364 66.2 71.07 47.05
Burlington, VT................. 1988 Oct. 1996 96 2,582 1,282 87.9 83.62 73.47
Oklahoma City, OK.............. 1982 Jan. 1997 135 3,159 1,550 83.4 76.66 63.93
Tucson, AZ..................... 1985 Jan. 1997 128 3,087 1,482 80.4 81.97 65.90
Colorado Springs, CO........... 1984 Jan. 1997 96 2,702 1,472 85.2 90.31 76.94
----- -------- ------- ----- ------- ------
Subtotal/Weighted Average.... 831 $ 20,132 $ 9,436 80.5% $81.91 $66.15
----- -------- ------- ----- ------- ------
HOLIDAY INN:
Bluefield, WV.................. 1980 Nov. 1994 120 $ 1,974 $ 1,111 70.9% $64.50 $45.70
Oak Hill, WV................... 1983 Nov. 1994 119 1,204 550 43.8 63.12 27.65
Mt. Pleasant (Charleston),
SC........................... 1988 Sept. 1995 158 3,122 1,665 73.0 74.01 53.99
Winston-Salem, NC.............. 1969 June 1996 160 2,152 913 67.3 54.65 36.75
----- -------- ------- ----- ------- ------
Subtotal/Weighted Average.... 557 $ 8,452 $ 4,239 64.7% $64.07 $41.62
----- -------- ------- ----- ------- ------
COMFORT INN:
Enterprise, AL................. 1987 June 1994 78 $ 950 $ 402 74.0% $44.97 $33.29
Rutland, VT.................... 1985 June 1995 104 1,618 678 73.1 58.18 42.51
Jacksonville Beach, FL......... 1973 Nov. 1995 177 3,273 1,536 69.1 73.11 50.53
----- -------- ------- ----- ------- ------
Subtotal/Weighted Average.... 359 $ 5,841 $ 2,616 71.3% $62.67 $44.46
----- -------- ------- ----- ------- ------
</TABLE>
S-9
<PAGE> 11
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
HOMEWOOD SUITES:
Windsor Locks (Hartford), CT.... 1990 May 1996 132 $ 3,231 $ 1,477 78.0% $85.74
San Antonio, TX................. 1996 Sept. 1996 123 419 854 36.1 74.98
Camelback (Phoenix), AZ......... 1996 Nov. 1996 124 425 1,032 51.4 109.24
--------- ---------- --------- --------- ---------
Subtotal/Weighted Average..... 379 $ 4,075 $ 3,363 55.7% $89.94
--------- ---------- --------- --------- ---------
HOLIDAY INN EXPRESS:
Wilkesboro, NC.................. 1985 Nov. 1994 101 $ 1,285 $ 661 58.7% $59.25
---------
Total/Weighted Average for
Current Hotels................ 6,679 $ 110,188 $ 52,107 71.0% $65.46
========= ========== ========= ========= =========
<CAPTION>
HOMEWOOD SUITES:
<S> <C>
Windsor Locks (Hartford), CT.... $ 66.88
San Antonio, TX................. 27.07
Camelback (Phoenix), AZ......... 56.15
---------
Subtotal/Weighted Average..... $ 50.45
---------
HOLIDAY INN EXPRESS:
Wilkesboro, NC.................. $ 34.75
Total/Weighted Average for
Current Hotels................ $ 46.43
=========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
NUMBER ------------------------------------------------
YEAR OF ROOM
OPENED ROOMS REVENUE OCCUPANCY ADR REVPAR(2)
------ ------ -------------- --------- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ACQUISITION HOTELS:(1)
HAMPTON INN:
Birmingham (Vestavia Hills), AL............................ 1986 123 $ 2,086 76% $61.12 $46.45
Birmingham (Mountain Brook), AL............................ 1987 131 2,365 78 63.02 49.16
North Little Rock, AK...................................... 1986 123 1,841 78 52.59 41.02
Aurora (Denver), CO........................................ 1985 132 2,045 71 59.24 42.06
Colorado Springs, CO....................................... 1985 128 2,228 79 58.25 46.02
Atlanta (Northlake), GA.................................... 1988 130 2,167 74 61.84 45.76
Roswell (Atlanta), GA...................................... 1987 129 2,296 73 66.70 48.69
Madison Heights (Detroit), MI.............................. 1987 124 1,962 73 59.58 43.49
Kansas City, MO............................................ 1987 120 2,045 76 61.60 46.82
Maryland Heights (St. Louis), MO........................... 1987 122 1,859 75 56.57 42.43
Eden Prairie (Minneapolis), MN............................. 1987 122 1,888 71 58.80 41.75
Albuquerque, NM............................................ 1987 125 1,897 73 57.26 41.80
East Syracuse, NY.......................................... 1985 117 1,468 57 59.99 34.19
Chapel Hill, NC............................................ 1987 122 2,370 85 62.30 52.96
Greensboro, NC............................................. 1986 121 2,264 80 64.12 51.30
Dublin (Columbus), OH...................................... 1988 123 1,862 70 58.68 41.08
Brentwood (Nashville), TN.................................. 1985 114 2,253 78 69.09 53.89
Memphis (Poplar), TN....................................... 1985 126 2,582 83 67.46 55.99
Memphis (Sycamore), TN..................................... 1984 117 1,790 77 54.40 41.89
Nashville, TN.............................................. 1987 120 2,393 81 67.33 54.54
Addison (Dallas), TX....................................... 1985 160 2,850 76 64.29 48.86
Amarillo, TX............................................... 1985 116 1,499 66 53.39 35.24
Richardson (Dallas), TX.................................... 1987 130 2,062 76 57.15 43.43
San Antonio, TX............................................ 1987 123 1,647 63 57.87 36.46
Charleston, SC............................................. 1985 125 1,932 75 56.14 42.11
Columbia, SC............................................... 1985 121 1,986 76 59.13 44.94
Greenville, SC............................................. 1985 123 2,052 77 59.19 45.58
Spartanburg, SC............................................ 1984 112 1,399 63 54.15 34.11
------ -------- --- ------ ------
Total/weighted average for Acquisition Hotels.............. 3,479 $ 57,088 74.1% $60.28 $44.79
------ -------- --- ------ ------
Consolidated total/weighted average of Hotels.............. 10,158 $167,276 72.1% $63.69 $45.87
====== ======== === ====== ======
</TABLE>
- ---------------
(1) Information with respect to certain of the Hotels, including the Acquisition
Hotels, for periods prior to their acquisition by the Company, was obtained
from the previous owners.
(2) Represents pro forma lease payments from the Lessee to the Partnership
calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases to the historical room revenues of the Current Hotels as
if January 1, 1996 was the beginning of the lease year.
(3) REVPAR is determined by dividing room revenue by available rooms.
(4) The Company has signed an agreement to sell this hotel, subject to customary
closing conditions, including satisfaction of the buyer's due diligence.
There can be no assurance that such sale will be consummated.
S-10
<PAGE> 12
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 $1.12 per share. Future distributions will depend upon the Company's
actual Cash Available for Distribution (as defined herein), 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 28% 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
Common Stock offered by the
Company............................ 7,500,000 Shares
Common Stock and Partnership Units
to be outstanding after the
Offering......................... 32,147,995 Shares(1)
Use of Proceeds.................... To fund a portion of the purchase price
of the Acquisition Hotels. Pending
closing of the purchase of the
Acquisition Hotels, the Company will
use a portion of the net proceeds to
repay borrowings under the Line of
Credit.
New York Stock Exchange symbol..... ENN
- ---------------
(1) Includes, as of March 31, 1997, an aggregate of 954,717 shares issuable upon
redemption of units of limited partnership interest of the Partnership
("Units"). Each Unit is redeemable, at the option of the holder, for cash
or, at the Company's option, one share of Common Stock. All of the Units
currently are redeemable. Also includes an aggregate of 31,000 unvested
restricted shares of Common Stock issued to the Company's executive officers
and directors, which shares 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 609,000
shares issuable upon the exercise of outstanding options granted to
executive officers and directors under the Company's 1994 Stock Option Plan
(the "1994 Plan") and the Company's 1994 Directors' Stock Option Plan (the
"Directors' Plan"), respectively, which options vest over a multi-year
period.
SUMMARY FINANCIAL DATA
The following tables set forth summary historical and pro forma financial
information for the Company and should be read in conjunction with the
consolidated financial statements and the notes thereto that are incorporated by
reference in the accompanying Prospectus. The pro forma financial information is
presented as if the acquisition of all the Current Hotels, the consummation of
the follow-on public offering of Common Stock consummated in April 1996 (the
"Follow-On Offering"), the purchase in a private placement of 250,000 Units by
Trust Leasing in April 1996 (the "Private Placement") and the purchase of
approximately $7.1 million of Common Stock by Promus (the "Promus Investment")
had occurred as of January 1, 1996 and, therefore, incorporates certain
assumptions that are included in the notes to the Pro Forma Consolidated
Statements of Operations included elsewhere in this Prospectus Supplement. The
pro forma financial information, as adjusted, additionally assumes the
completion of the Offering and the purchase of the Acquisition Hotels, including
borrowings required to fund such purchase, had occurred as of January 1, 1996.
The pro forma balance sheet data is presented as if the acquisition of the
Current Hotel purchased in April 1997 occurred on March 31, 1997. The pro forma
balance sheet data, as adjusted, is presented as if the purchase of the
Acquisition Hotels, including borrowings required to fund such purchase, and the
consummation of the Offering occurred on March 31, 1997.
S-11
<PAGE> 13
EQUITY INNS, INC.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
HISTORICAL
------------
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
-------------------------------------------- YEAR ENDED DECEMBER 31, 1996
PRO FORMA PRO HISTORICAL -------------------------------------- YEAR ENDED
AS ADJUSTED FORMA ------------------- PRO FORMA PRO DECEMBER 31,
1997(1) 1997(1) 1997 1996 AS ADJUSTED(1) FORMA(1) HISTORICAL 1995
----------- -------- -------- -------- -------------- -------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage lease
revenue(2)............. $ 18,307 $ 12,407 $ 11,778 $ 6,948 $78,653 $52,107 $ 38,314 $ 24,101
Other income............. 17 17 17 36 116 116 116 44
-------- -------- -------- -------- ------- ------- -------- --------
Total revenue...... 18,324 12,424 11,795 6,984 78,769 52,223 38,430 24,145
-------- -------- -------- -------- ------- ------- -------- --------
Real estate and personal
property taxes......... 2,011 1,392 1,310 771 7,467 5,035 3,693 2,158
Depreciation and
amortization........... 5,711 4,086 3,846 2,328 21,833 15,334 11,631 6,904
Advisory fees............
Interest................. 3,930 2,568 2,145 1,591 14,559 9,162 4,382 3,701
Amortization of loan
costs.................. 189 189 189 341 1,565 1,565 1,565 793
General and
administrative......... 1,030 935 935 550 2,407 2,027 1,975 1,438
Amortization of unearned
directors' and
officers'
compensation........... 23 23 23 8 33 33 33 31
Rental expense........... 81 81 61 36 335 335 218 107
-------- -------- -------- -------- ------- ------- -------- --------
Total expenses..... 12,975 9,274 8,509 5,625 48,199 33,491 23,497 15,132
-------- -------- -------- -------- ------- ------- -------- --------
Income before minority
interest............... 5,349 3,150 3,286 1,359 30,570 18,732 14,933 9,013
Minority interest........ 160 123 119 47 917 731 460 502
-------- -------- -------- -------- ------- ------- -------- --------
Net income applicable to
common shareholders.... $ 5,189 $ 3,027 $ 3,167 $ 1,312 $29,653 $18,001 $ 14,473 $ 8,511
======== ======== ======== ======== ======= ======= ======== ========
Net income per common
share(3)............... $ .17 $ .13 $ .13 $ .09 $ .95 $ .76 $ .69 $ .70
======== ======== ======== ======== ======= ======= ======== ========
Weighted average number
of common shares
outstanding(4)......... 31,193 23,693 23,693 15,045 31,193 23,693 20,957 12,227
======== ======== ======== ======== ======= ======= ======== ========
BALANCE SHEET DATA:
Investment in hotel
properties, net........ $529,595 $362,160 $355,060 $232,737 $309,202 $218,429
Total assets............. 543,262 384,262 377,162 239,826 317,880 225,067
Minority interest in
Partnership............ 9,669 8,866 8,866 4,578 7,728 6,073
Debt..................... 211,329 145,741 138,641 91,688 77,399 74,939
Shareholders' equity..... 312,637 220,028 220,028 136,284 222,951 137,493
CASH FLOW DATA:
Cash flows provided by
operating
activities(5).......... $ 11,272 $ 7,448 $ 6,440 $ 4,187 $54,001 $35,664 $ 26,200 $ 17,517
Cash flows used in
investing
activities(6).......... (3,092) (3,092) (58,191) (16,707) (19,440) (19,440) (101,175) (84,731)
Cash flows provided by
(used in) financing
activities(7).......... 7,343 9,443 51,745 12,410 (14,933) (8,533) 74,971 66,261
OTHER DATA:
Funds From
Operations(8).......... $ 10,954 $ 7,169 $ 7,071 $ 3,665 $52,025 $33,844 $ 26,397 $ 15,804
Cash Available for
Distribution(9)........ 9,348 6,071 6,034 3,029 45,333 29,436 23,037 13,814
Weighted average number
of common shares and
Units
outstanding(10)........ 32,148 24,648 24,553 15,589 32,148 24,648 21,652 12,920
<CAPTION>
HISTORICAL
------------
MARCH 1,
1994
(INCEPTION)
THROUGH
DECEMBER 31,
1994
------------
<S> <C>
OPERATING DATA:
Percentage lease
revenue(2)............. $ 9,505
Other income............. 293
--------
Total revenue...... 9,798
--------
Real estate and personal
property taxes......... 983
Depreciation and
amortization........... 2,546
Advisory fees............ 164
Interest................. 390
Amortization of loan
costs.................. 153
General and
administrative......... 407
Amortization of unearned
directors' and
officers'
compensation........... 26
Rental expense........... 28
--------
Total expenses..... 4,697
--------
Income before minority
interest............... 5,101
Minority interest........ 481
--------
Net income applicable to
common shareholders.... $ 4,620
========
Net income per common
share(3)............... $ .60
========
Weighted average number
of common shares
outstanding(4)......... 7,745
========
BALANCE SHEET DATA:
Investment in hotel
properties, net........ $140,970
Total assets............. 145,555
Minority interest in
Partnership............ 6,081
Debt..................... 45,838
Shareholders' equity..... 89,802
CASH FLOW DATA:
Cash flows provided by
operating
activities(5).......... $ 6,958
Cash flows used in
investing
activities(6).......... (145,613)
Cash flows provided by
(used in) financing
activities(7).......... 139,740
OTHER DATA:
Funds From
Operations(8).......... $ 7,611
Cash Available for
Distribution(9)........ 6,797
Weighted average number
of common shares and
Units
outstanding(10)........ 8,551
</TABLE>
S-12
<PAGE> 14
- ---------------
(1) The pro forma and pro forma, as adjusted, information does not purport to
represent what the Company's financial position or results of operations
actually would have been had the acquisitions of the Current Hotels and the
Acquisition Hotels, the consummation of the Follow-On Offering, the
Offering, the Private Placement and the Promus Investment had, in fact,
occurred prior to the commencement of the periods, or to project the
Company's financial position results of operations at any future date or
for any future period.
(2) The pro forma information assumes the Partnership owned and leased the
Current Hotels throughout the periods. The pro forma, as adjusted,
information assumes the Partnership owned and leased the Current Hotels and
the Acquisition Hotels throughout the periods. Amounts represent pro forma
lease revenue from the Lessee to the Partnership calculated by applying the
rent provisions of the Percentage Leases to the historical revenue of the
Hotels. The pro forma lease payments for the Acquisition Hotels are based
on management's estimate of the Percentage Lease rent provisions for the
Acquisition Hotels. Upon completion of management's due diligence
investigation of the Acquisition Hotels, the actual rent provisions in the
Percentage Leases may vary from the estimates used in developing the pro
forma lease payments.
(3) Net income per common share is computed by dividing net income applicable
to common shareholders by the weighted average number of common shares and
equivalents outstanding. Common share equivalents that have a dilutive
effect represent the restricted shares issued to the officers and
independent directors and are included in the computation.
(4) The pro forma information, as adjusted, includes the weighted average
number of common shares outstanding after the Offering.
(5) Pro forma cash provided by operating activities represents net income plus
minority interest, depreciation and amortization, amortization of loan
costs and amortization of unearned directors' compensation. There are no
pro forma adjustments for changes in working capital items.
(6) Pro forma cash used in investing activities assumes the acquisition of all
Hotels acquired after January 1, 1996 had occurred on January 1, 1996 and
includes funds used for capital improvements required by franchisors and
the greater of funds used for additional capital expenditures or the FF&E
Reserve.
(7) Pro forma cash provided by financing activities is based on distributions
per share and per Unit of $.28 for the first quarter of 1997 and $1.12 for
the year ended December 31, 1996. Pro forma cash used in financing
activities assumes the Follow-On Offering, the Private Placement, the
Promus Investment and borrowings in connection with the acquisitions of the
Current Hotels had occurred on January 1, 1996. Pro forma, as adjusted,
assumes (i) the purchase of the Acquisition Hotels and (ii) application of
the Offering had occurred on January 1, 1996.
(8) The following table computes Funds From Operations under the National
Association of Real Estate Investment Trusts ("NAREIT") definition. Funds
From Operations under the NAREIT definition consists of net income,
computed in accordance with generally accepted accounting principles,
excluding gains or losses from debt restructurings and sales of property,
plus depreciation of real property (including furniture and equipment) and
after adjustments for unconsolidated partnerships and joint ventures.
<TABLE>
<CAPTION>
HISTORICAL
----------
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, 1996
---------------------------------------- ------------------------------------
PRO FORMA PRO HISTORICAL PRO FORMA YEAR ENDED
AS ADJUSTED FORMA --------------- AS PRO DECEMBER
1997(1) 1997(1) 1997 1996 ADJUSTED(1) FORMA(1) HISTORICAL 31, 1995
----------- -------- ------ ------ ------------ -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income before
minority
interest........... $ 5,349 $3,150 $3,286 $1,359 $30,570 $18,732 $14,933 $ 9,013
Depreciation of
buildings,
furniture and
fixtures........... 5,605 4,019 3,785 2,306 21,455 15,112 11,464 6,791
------- ------ ------ ------ ------- ------- ------- -------
Funds From
Operations......... $10,954 $7,169 $7,071 $3,665 $52,025 $33,844 $26,397 $15,804
======= ====== ====== ====== ======= ======= ======= =======
<CAPTION>
HISTORICAL
-----------
MARCH 1,
1994
(INCEPTION)
THROUGH
DECEMBER
31, 1994
-----------
(IN THOUSANDS)
<S> <C>
Income before
minority
interest........... $5,101
Depreciation of
buildings,
furniture and
fixtures........... 2,510
------
Funds From
Operations......... $7,611
======
</TABLE>
Industry analysts generally consider Funds From Operations to be an
appropriate measure of the performance of an equity REIT. Funds From
Operations should not be considered as an alternative to net income or
other measurements under generally accepted accounting principles as an
indicator of operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. Funds From
Operations does not reflect cash expenditures for capital improvements or
principal repayment of debt.
(9) Represents Funds from Operations less an amount equal to the FF&E Reserve
which is required to be set aside by the Partnership for refurbishment and
replacement of FF&E, capitalized expenditures and other non-routine items.
(10) Pro forma, as adjusted, reflects the sale of 7,500,000 shares of Common
Stock in the Offering.
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<PAGE> 15
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 PENDING ACQUISITIONS 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. If the Partnership does not
complete the acquisition of the Acquisition Hotels, for whatever reason,
following the completion of the Offering, a substantial portion of the net
proceeds from the Offering will have no specific designated use. In such event,
there can be no assurance that the Company would be able to locate additional
available acquisitions which meet the Company's acquisition criteria and the
Company's per share Funds From Operations and Cash Available for Distribution
may be adversely affected.
The Partnership has deposited $10 million with the sellers of the
Acquisition Hotels. Such deposits could be forfeited by the Company in certain
circumstances if the acquisitions do not close. The Partnership has also
incurred approximately $50,000 in due diligence expenses in connection with
investigating the Acquisition Hotels.
COMPANY'S RELIANCE UPON LESSEE
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 controls and
will control the daily operations of the Current Hotels and Acquisition Hotels,
respectively. 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.
CONSTRAINTS ON ACQUISITIONS
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. The
Company generally is limited in its ability to retain cash generated by
operating activities. To qualify as a REIT, the Company must distribute at least
95% of its taxable income annually. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Distribution Requirements"
in the accompanying Prospectus. Also, the Company's Charter limits the amount of
debt the Company may have outstanding to 45% of its investment in hotel
properties, at its cost. Following completion of the Offering and the purchase
of the Acquisition Hotels, the Company will have approximately $213.8 million of
debt outstanding and, without additional equity financing, will have the
capacity to borrow up to approximately $74.7 million under its Charter debt
limitation, assuming all additional borrowings are used to fund investments in
hotel properties. Since, in order to qualify as a REIT, the Company generally
cannot retain earnings and the amount of debt that it can have outstanding is
limited by the Charter, the Company's ability to continue to make acquisitions
will depend primarily on its ability to obtain additional private or public
equity financing. There is no assurance that such financing will be available.
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
S-14
<PAGE> 16
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.
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
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 competes for acquisitions 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 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.
OPERATIONAL RISKS OF RAPID GROWTH
Since the IPO, the Partnership has acquired 48 Hotels and has contracted to
acquire the 28 Acquisition Hotels. The number and geographic dispersion of the
Hotels have increased substantially. However, there can be no assurance that the
Lessee will be able to retain the services of existing employees of the Hotels
or hire additional accounting and marketing personnel. To the extent the Lessee
is unable to retain or hire experienced personnel to operate the Hotels, the
operations of the Hotels could be adversely affected. Deteriorating operations
could negatively impact revenue at the Hotels and, therefore, the lease payments
under the Percentage Leases and Cash Available for Distribution to shareholders.
Further, deteriorating operations could negatively impact the Lessee's operating
results and jeopardize the Lessee's ability to make lease payments under the
Percentage Leases.
S-15
<PAGE> 17
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 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.
Capital Expenditures
The Company's hotel properties will have an ongoing need for renovations
and other capital improvements, including periodic replacement of FF&E. The
additional cost of such capital improvements could have an adverse effect on the
Company's financial condition. In addition, the Company's hotel properties may
require significant renovation in the future. 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. During the year ended December 31, 1996, the Company
spent approximately $19 million for capital improvements to the Current Hotels
and has committed to spend an additional $11 million for total capital
improvements to such hotels in 1997. In addition, the Company intends to spend
approximately $5.5 million for capital improvements to the Acquisition Hotels in
the next twelve months. The Company intends to fund such improvements out of
future cash from operations, present cash balances or available borrowing
capacity under the 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 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. Further, although the Hotels have been recently appraised, no
assurances can be given that such appraised values reflect market value. Also,
no assurances can be given that the market value of any of the Hotels will not
decrease in the future. There can be no assurance
S-16
<PAGE> 18
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.
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 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. Recent Phase I environmental site assessments ("ESAs") have been
obtained on each of the Current Hotels. 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
S-17
<PAGE> 19
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
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 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. The Company currently has the Line
of Credit to provide, as necessary, working capital, funds for investments in
additional hotel properties and cash to pay dividends. 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 $213.8 million of indebtedness, representing 37.7% of the
Company's investment in hotel properties, at its cost. Generally, the Company's
borrowings are secured by mortgages on the Company's Hotels. Subject to the
Charter limitation described above and the 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 properties owned by the Company or the Partnership.
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 cap 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.
S-18
<PAGE> 20
In addition, in February 1997, EQI Finance, the Company's indirect,
wholly-owned 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, 1996, 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.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
The 37 Current Hotels which operate as Hampton Inn hotels and the three
Current Hotels which operate as Homewood Suites hotels are subject to franchise
agreements with Promus. The eight 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"). Each of the Acquisition Hotels will be operated pursuant to a
franchise agreement 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, the Company spent
approximately $19 million for capital improvements to the Current Hotels and has
committed to spend an additional $11 million for total capital improvements to
such hotels in 1997. In addition, the Company intends to spend approximately
$5.5 million for capital improvements to the Acquisition Hotels in the next
twelve months. The Company intends to fund such improvements out of cash from
operations, cash balances or available borrowing capacity under the 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. In addition, hotels in which the Company invests
subsequently may be operated pursuant to Hampton Inn or other 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 or the Lessee to maintain
such standards or adhere to such other terms and conditions could result in the
loss or cancellation of the franchise license. It is possible that a franchisor
could condition the continuation of a franchise license on the completion of
capital improvements which the Board of Directors determines are too expensive
or otherwise unwarranted in light of general economic conditions or the
operating results or prospects of the affected hotel. In that event, the Board
of Directors may elect to allow the franchise license to lapse. In any case, if
a franchise is terminated, the Partnership and the Lessee may seek to obtain a
suitable replacement franchise, or to operate the hotel independent of a
franchise license. The loss of a franchise license could have a material adverse
effect upon the operations or the underlying value of the hotel covered by the
franchise because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchisor.
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.
S-19
<PAGE> 21
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 without
a vote of the shareholders of the Company. The Company cannot change its Charter
provision limiting indebtedness to 45% of its investment in hotel properties, at
its cost, without the approval of the holders of a majority of the outstanding
shares of Common Stock or change its Charter provision regarding maintenance of
its qualifications as a REIT without the approval of the holders of two-thirds
of the outstanding shares of Common Stock.
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" in the accompanying Prospectus),
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
terms of the Company's four current directors will 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. The foregoing may also
discourage offers or other bids for the Common Stock at a premium over the
market price thereof.
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. Although the Company has no current intention to issue
shares of preferred stock in the foreseeable future, the issuance of preferred
stock could have the effect of delaying or preventing a change in control of the
Company even if a change in control were in the shareholders' best interests. No
shares of preferred stock will be issued or outstanding as of the date of this
Prospectus Supplement and immediately thereafter.
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.
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. Although the Company has not requested,
and does not expect to request, a ruling from the Service that it qualifies as a
REIT, it will receive at the closing of the Offering an opinion of counsel that,
based on certain assumptions and representations, it so qualifies. Investors
should be aware, however, that opinions of counsel are not binding on the
Internal Revenue Service (the "Service") or any court. The REIT qualification
opinion only represents the view of counsel to the Company based on counsel's
review and analysis of existing law, which includes no controlling precedent.
Furthermore, both the validity of the opinion and the continued qualification of
the Company as a REIT will depend on the Company's continuing ability to meet
various requirements concerning, among other things, the ownership of its
outstanding stock, the nature
S-20
<PAGE> 22
of its assets, the sources of its income and the amount of its distributions to
its shareholders. See "Federal Income Tax Considerations -- Taxation of the
Company" in the accompanying Prospectus.
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, Cash Available for Distribution would be reduced for each of the
years involved. Although the Company currently operates and 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" in this Prospectus
Supplement and the accompanying Prospectus.
REIT Minimum Distribution Requirements
In order to qualify as a REIT, the Company generally is required each year
to distribute to its shareholders at least 95% of its net taxable income
(excluding any net capital gain). In addition, the Company 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 such year, (ii) 95% of its capital gain
net income for such year and (iii) 100% of any 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 consists primarily of its
proportionate share of the income of the Partnership, and the Company's Cash
Available for Distribution consists primarily of its proportionate 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. For federal
income tax purposes, distributions paid to shareholders may consist of ordinary
income, capital gains, nontaxable return of capital or a combination thereof.
The Company will provide its shareholders with an annual statement as to its
designation of the tax characterization of distributions.
Distributions by the Partnership will be determined by the Company's Board
of Directors and will be dependent on a number of factors, including the amount
of the Partnership's cash available for distribution, the Partnership's
financial condition, any decision by the Board of Directors to reinvest funds
rather than to distribute such funds, the Partnership's capital expenditures,
the annual distribution requirements under the REIT provisions of the Code and
such other factors as the Board of Directors deems relevant. See "Federal Income
Tax Considerations -- Requirements for Qualification -- Distribution
Requirements" in the accompanying Prospectus.
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 each subsidiary of the Partnership (a
"Subsidiary Partnership")) will be classified as a partnership for federal
income tax purposes. However, the Company will receive at the closing of the
Offering an opinion of counsel that 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. 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 would be taxable as a corporation.
In such event, the Company would cease to qualify as a REIT. Furthermore, the
imposition of a corporate tax on the Partnership would substantially reduce the
amount available for distribution to the
S-21
<PAGE> 23
Company and its shareholders. See "Federal Income Tax Considerations -- Tax
Aspects of the Partnership and Subsidiary Partnerships" in the accompanying
Prospectus.
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 include certain
entities) during the last half of any taxable year. Furthermore, if any
interestholder or group of interestholders in the Lessee owns, actually or
constructively, 10% or more of the stock of the Company, the Lessee 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.
S-22
<PAGE> 24
PROMUS STRATEGIC ALLIANCE
In May 1996, the Company and Trust Leasing, the former lessee of the
Company's hotels, entered into agreements with Promus (the "Promus Agreements"),
the franchisor of the Embassy Suites,(R) Hampton Inn, Homewood Suites and the
Hampton Inn & Suites hotel brands, which management believes will enhance its
strategy of acquiring and developing quality brand hotels in the midscale and
upscale segments of the market and strengthen its relationship with the leading
franchisor in its market segment. Pursuant to the Promus Agreements, Promus
agreed to purchase up to $15 million in newly issued shares of Common Stock from
the Company in connection with the Company's acquisition of certain Homewood
Suites hotels to be developed by Promus. The Company has purchased two Homewood
Suites hotels from Promus, and Promus has purchased an aggregate of 606,232
shares of Common Stock from the Company for an aggregate of approximately $7.1
million. Promus has the right to manage the Homewood Suites hotels acquired by
the Company pursuant to the Promus Agreements and currently manages three
Homewood Suites hotels and one Hampton Inn hotel owned by the Company under
management agreements with the Lessee.
STRATEGIC ALLIANCE WITH INTERSTATE
In November 1996, Trust Leasing which was wholly-owned by Phillip H.
McNeill, Sr., assigned its rights under each of the then-existing Percentage
Leases to the Lessee in exchange for limited partnership interests in the
Lessee. At that time, the Partnership and the Lessee amended and restated the
Percentage Leases in a Consolidated Lease Amendment which increased the term of
each then-existing Percentage Lease to 15 years from the date of the amendment.
The Company, the Partnership and the Lessee also entered into an agreement which
provides for, among other things, (i) Interstate's agreement to offer to sell to
the Company not less than five hotels that may be developed by Interstate or its
affiliates prior to November 2001 and to provide the Company with a right of
first refusal to purchase certain hotels offered for sale by Interstate prior to
November 2001 and (ii) a right of first refusal for the Lessee to lease hotel
properties acquired by the Company through November 2001.
Also, in November 1996, Trust Management, a hotel management company which
was wholly owned by Mr. McNeill, Sr., assigned to the Lessee all of Trust
Management's hotel management contracts (all of which were unrelated to the
Company). The Lessee leases all of the Current Hotels and will lease all of the
Acquisition Hotels. The Lessee or an affiliate of the Lessee manages 52 of the
Current Hotels and will manage the Acquisition Hotels. The sole general partner
of the Lessee is a wholly-owned subsidiary of Interstate, and Trust Leasing and
Trust Management are the only limited partners of the Lessee. With limited
exceptions, the sole general partner of the Lessee exercises full, complete and
exclusive discretion in management and control of the Lessee, with Trust Leasing
and Trust Management having no participation or control over the business of the
Lessee. Trust Leasing's and Trust Management's interests in the Lessee are not
entitled to distributions of income from the Lessee. The partnership interests
of the Lessee received by Trust Leasing and Trust Management, which are equal in
the aggregate to an approximate 50% limited partnership interest in the Lessee,
are redeemable and exchangeable after July 1997, at the option of Trust Leasing
and Trust Management, for an aggregate of 1,957,684 shares of Common Stock of
Interstate which currently would represent approximately 5.5% of the outstanding
common stock of Interstate. Currently Trust Management is wholly owned by Mr.
McNeill, Sr. and Trust Leasing is majority owned by Mr. McNeill, Sr.; David L.
Levine, Howard A. Silver and Phillip H. McNeill, Jr. (the Company's President
and Chief Operating Officer, Vice President of Finance, Secretary and Treasurer
and Vice President of Development, respectively) own minority interests in Trust
Leasing.
The Company believes the assignment of the Percentage Leases to the Lessee
provides the Company with a strategic alliance with Interstate, the nation's
largest independent hotel management company, and reduces the perceived conflict
of interest in Mr. McNeill, Sr.'s ownership of the former lessee. As of April 1,
1997, Interstate managed or leased 211 hotels, with 43,215 rooms, including all
of the Current Hotels, and owned or had a controlling interest in 29 hotels.
Interstate has guaranteed the Lessee's obligations under the Percentage Leases.
At December 31, 1996, Interstate had shareholders' equity of approximately
$409.3 million.
S-23
<PAGE> 25
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are expected to be approximately $93.4 million ($107.4 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 will own an approximate 97.0% interest in the Partnership (97.1% if
the underwriters' over-allotment option is fully exercised). The Partnership
intends to use the net proceeds to fund a portion of the purchase price of the
Acquisition Hotels. Pending closing of the purchase of the Acquisition Hotels,
the Partnership will apply a portion of the net proceeds of the Offering to
repay borrowings under the Line of Credit. At the closing of the purchase of the
Acquisition Hotels, the Company will use the remainder of the proceeds of the
Offering and borrowings to fund a portion of the purchase price of the
Acquisition Hotels. Indebtedness under the Line of Credit bears interest at the
30, 60 or 90-day LIBOR rate (5.75%, 5.81% and 5.89% per annum, respectively, on
May 7, 1997) plus 175 basis points and was incurred by the Company primarily to
fund hotel acquisitions and development.
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 (through May 7, 1997)................. 14 1/8 12 7/8 --
</TABLE>
On May 5, 1997, there were 878 record holders of the Company's Common
Stock, including shares held in "street name" by nominees who are record
holders, and approximately 18,000 beneficial owners.
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 a wholly-owned subsidiary, 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 revenue consists of 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
directors of the Company deem relevant.
S-24
<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997, and as adjusted to give effect to (i) the issuance and sale of
the 7,500,000 shares of Common Stock in the Offering, and the application of the
net proceeds therefrom as described under "Use of Proceeds", (ii) the purchase
of the Acquisition Hotels (including debt incurred to fund such purchase) and
(iii) the purchase of one Current Hotel in April 1997:
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt........................................................ $138,641 $211,329
-------- --------
Minority interest........................................... 8,866 9,669
-------- --------
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,
23,693,278 shares issued and outstanding and 31,193,278
shares issued and outstanding, as adjusted(2)............. 237 312
Additional paid-in capital.................................. 239,268 331,802
Unearned directors' compensation............................ (342) (342)
Predecessor basis assumed................................... (1,264) (1,264)
Distributions in excess of earnings......................... (17,871) (17,871)
-------- --------
Total shareholders' equity........................... 220,028 312,637
-------- --------
Total capitalization.............................. $367,535 $533,635
======== ========
</TABLE>
- ---------------
(1) See Notes to Pro Forma Condensed Consolidated Balance Sheet.
(2) Excludes 954,717 shares issuable upon redemption of Units issued in
connection with the IPO and in connection with the acquisition of certain of
the Current Hotels, 600,000 shares reserved for issuance pursuant to the
exercise of options granted under the 1994 Plan and an aggregate of 9,000
shares reserved for issuance pursuant to the exercise of options granted to
each Independent Director to purchase 1,000 shares each year beginning in
1995 under the Directors' Plan. See "Management -- Compensation of
Directors."
S-25
<PAGE> 27
SELECTED FINANCIAL INFORMATION
The following tables set forth selected historical and pro forma financial
information for the Company.
With respect to the Company, the following table sets forth (i) selected
historical operating and other financial information for the three months ended
March 31, 1997 and 1996 and the years ended December 31, 1996 and 1995 and the
period from March 1, 1994 (inception) to December 31, 1994, (ii) selected
historical balance sheet data as of March 31, 1997 and 1996, and December 31,
1996, 1995 and 1994, (iii) selected pro forma operating and other financial
information for the three months ended March 31, 1997 and the year ended
December 31, 1996 and (iv) selected pro forma balance data as of March 31, 1997.
The selected historical financial information for the Company as of and for
the years ended December 31, 1996 and 1995 and the period from March 1, 1994
(inception) to December 31, 1994 has been derived from the historical financial
statements of the Company audited by Coopers & Lybrand L.L.P., independent
accountants, whose reports with respect thereto are incorporated by reference in
the Prospectus. The selected historical financial data as of and for the three
months ended March 31, 1997 and 1996 have been derived from the unaudited
financial statements of the Company, which have been prepared by management on
the same basis as the audited financial statements, and, in the opinion of
management, include all adjustments consisting of normal recurring accruals that
the Company considers necessary for a fair presentation of the results for such
periods. Such results of operations for the three months ended March 31, 1997
are not necessarily indicative of results to be anticipated for the entire year.
The pro forma operating and other information is presented as if the
acquisition of all the Current Hotels and the consummation of the Follow-On
Offering, the Offering, the Private Placement and the Promus Investment had
occurred as of January 1, 1996 and, therefore, incorporates certain assumptions
that are included in the notes to the pro forma financial statements included
elsewhere in this Prospectus Supplement. The pro forma financial information, as
adjusted, additionally assumes the completion of the Offering and the purchase
of the Acquisition Hotels, including borrowings required to fund such purchase,
had occurred as of January 1, 1996. The pro forma balance sheet data is
presented as if the acquisition of the Current Hotel purchased in April 1997
occurred on March 31, 1997. The pro forma balance sheet data, as adjusted, is
presented as if the purchase of the Acquisition Hotels, including borrowings
required to fund such purchase, and the consummation of the Offering occurred on
March 31, 1997.
S-26
<PAGE> 28
EQUITY INNS, INC.
HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
HISTORICAL
------------
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
-------------------------------------------- YEAR ENDED DECEMBER 31, 1996
PRO FORMA PRO HISTORICAL -------------------------------------- YEAR ENDED
AS ADJUSTED FORMA ------------------- PRO FORMA PRO DECEMBER 31,
1997(1) 1997(1) 1997 1996 AS ADJUSTED(1) FORMA(1) HISTORICAL 1995
----------- -------- -------- -------- -------------- -------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage lease
revenue(2)............. $ 18,307 $ 12,407 $ 11,778 $ 6,948 $78,653 $52,107 $ 38,314 $ 24,101
Other income............. 17 17 17 36 116 116 116 44
-------- -------- -------- -------- ------- ------- -------- --------
Total revenue...... 18,324 12,424 11,795 6,984 78,769 52,223 38,430 24,145
-------- -------- -------- -------- ------- ------- -------- --------
Real estate and personal
property taxes......... 2,011 1,392 1,310 771 7,467 5,035 3,693 2,158
Depreciation and
amortization........... 5,711 4,086 3,846 2,328 21,833 15,334 11,631 6,904
Advisory fees............
Interest................. 3,930 2,568 2,145 1,591 14,559 9,162 4,382 3,701
Amortization of loan
costs.................. 189 189 189 341 1,565 1,565 1,565 793
General and
administrative......... 1,030 935 935 550 2,407 2,027 1,975 1,438
Amortization of unearned
directors' and
officers'
compensation........... 23 23 23 8 33 33 33 31
Rental expense........... 81 81 61 36 335 335 218 107
-------- -------- -------- -------- ------- ------- -------- --------
Total expenses..... 12,975 9,274 8,509 5,625 48,199 33,491 23,497 15,132
-------- -------- -------- -------- ------- ------- -------- --------
Income before minority
interest............... 5,349 3,150 3,286 1,359 30,570 18,732 14,933 9,013
Minority interest........ 160 123 119 47 917 731 460 502
-------- -------- -------- -------- ------- ------- -------- --------
Net income applicable to
common shareholders.... $ 5,189 $ 3,027 $ 3,167 $ 1,312 $29,653 $18,001 $ 14,473 $ 8,511
======== ======== ======== ======== ======= ======= ======== ========
Net income per common
share(3)............... $ .17 $ .13 $ .13 $ .09 $ .95 $ .76 $ .69 $ .70
======== ======== ======== ======== ======= ======= ======== ========
Weighted average number
of common shares
outstanding(4)......... 31,193 23,693 23,693 15,045 31,193 23,693 20,957 12,227
======== ======== ======== ======== ======= ======= ======== ========
BALANCE SHEET DATA:
Investment in hotel
properties, net........ $529,595 $362,160 $355,060 $232,737 $309,202 $218,429
Total assets............. 543,262 384,262 377,162 239,826 317,880 225,067
Minority interest in
Partnership............ 9,669 8,866 8,866 4,578 7,728 6,073
Debt..................... 211,329 145,741 138,641 91,688 77,399 74,939
Shareholders' equity..... 312,637 220,028 220,028 136,284 222,951 137,493
CASH FLOW DATA:
Cash flows provided by
operating
activities(5).......... $ 11,272 $ 7,448 $ 6,440 $ 4,187 $54,001 $35,664 $ 26,200 $ 17,517
Cash flows used in
investing
activities(6).......... (3,092) (3,092) (58,191) (16,707) (19,440) (19,440) (101,175) (84,731)
Cash flows provided by
(used in) financing
activities(7).......... 7,343 9,443 51,745 12,410 (14,933) (8,533) 74,971 66,261
OTHER DATA:
Funds From
Operations(8).......... $ 10,954 $ 7,169 $ 7,071 $ 3,665 $52,025 $33,844 $ 26,397 $ 15,804
Cash Available for
Distribution(9)........ 9,348 6,071 6,034 3,029 45,333 29,436 23,037 13,814
Weighted average number
of common shares and
Units
outstanding(10)........ 32,148 24,648 24,553 15,589 32,148 24,648 21,652 12,920
<CAPTION>
HISTORICAL
------------
MARCH 1,
1994
(INCEPTION)
THROUGH
DECEMBER 31,
1994
------------
<S> <C>
OPERATING DATA:
Percentage lease
revenue(2)............. $ 9,505
Other income............. 293
--------
Total revenue...... 9,798
--------
Real estate and personal
property taxes......... 983
Depreciation and
amortization........... 2,546
Advisory fees............ 164
Interest................. 390
Amortization of loan
costs.................. 153
General and
administrative......... 407
Amortization of unearned
directors' and
officers'
compensation........... 26
Rental expense........... 28
--------
Total expenses..... 4,697
--------
Income before minority
interest............... 5,101
Minority interest........ 481
--------
Net income applicable to
common shareholders.... $ 4,620
========
Net income per common
share(3)............... $ .60
========
Weighted average number
of common shares
outstanding(4)......... 7,745
========
BALANCE SHEET DATA:
Investment in hotel
properties, net........ $140,970
Total assets............. 145,555
Minority interest in
Partnership............ 6,081
Debt..................... 45,838
Shareholders' equity..... 89,802
CASH FLOW DATA:
Cash flows provided by
operating
activities(5).......... $ 6,958
Cash flows used in
investing
activities(6).......... (145,613)
Cash flows provided by
(used in) financing
activities(7).......... 139,740
OTHER DATA:
Funds From
Operations(8).......... $ 7,611
Cash Available for
Distribution(9)........ 6,797
Weighted average number
of common shares and
Units
outstanding(10)........ 8,551
</TABLE>
(Notes on following page)
S-27
<PAGE> 29
- ---------------
(1) The pro forma and pro forma, as adjusted, information does not purport to
represent what the Company's financial position or results of operations
actually would have been had the acquisitions of the Current Hotels and the
Acquisition Hotels, the consummation of the Follow-On Offering, the
Offering, the Private Placement and the Promus Investment had, in fact,
occurred prior to the commencement of the periods, or to project the
Company's financial position results of operations at any future date or
for any future period.
(2) The pro forma information assumes the Partnership owned and leased the
Current Hotels throughout the periods. The pro forma, as adjusted,
information assumes the Partnership owned and leased the Current Hotels and
the Acquisition Hotels throughout the periods. Amounts represent pro forma
lease revenue from the Lessee to the Partnership calculated by applying the
rent provisions of the Percentage Leases to the historical revenue of the
Hotels. The pro forma lease payments for the Acquisition Hotels are based
on management's estimate of the Percentage Lease rent provisions for the
Acquisition Hotels. Upon completion of management's due diligence
investigation of the Acquisition Hotels, the actual rent provisions in the
Percentage Leases may vary from the estimates used in developing the pro
forma lease payments.
(3) Net income per common share is computed by dividing net income applicable
to common shareholders by the weighted average number of common shares and
equivalents outstanding. Common share equivalents that have a dilutive
effect represent the restricted shares issued to the officers and
independent directors and are included in the computation.
(4) The pro forma information, as adjusted, includes the weighted average
number of common shares outstanding after the Offering.
(5) Pro forma cash provided by operating activities represents net income plus
minority interest, depreciation and amortization, amortization of loan
costs and amortization of unearned directors' compensation. There are no
pro forma adjustments for changes in working capital items.
(6) Pro forma cash used in investing activities assumes the acquisition of all
Hotels acquired after January 1, 1996 had occurred on January 1, 1996 and
includes funds used for capital improvements required by franchisors and
the greater of funds used for additional capital expenditures or the FF&E
Reserve.
(7) Pro forma cash provided by financing activities is based on distributions
per share and per Unit of $.28 for the first quarter of 1997 and $1.12 for
the year ended December 31, 1996. Pro forma cash used in financing
activities assumes the Follow-On Offering, the Private Placement, the
Promus Investment and borrowings in connection with the acquisitions of the
Current Hotels had occurred on January 1, 1996. Pro forma, as adjusted,
assumes (i) the purchase of the Acquisition Hotels and (ii) application of
the Offering had occurred on January 1, 1996.
(8) The following table computes Funds From Operations under the NAREIT
definition. Funds From Operations under the NAREIT definition consists of
net income, computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructurings and sales of
property, plus depreciation of real property (including furniture and
equipment) and after adjustments for unconsolidated partnerships and joint
ventures.
<TABLE>
<CAPTION>
HISTORICAL
----------
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, 1996
--------------------------------------- -----------------------------------
PRO FORMA PRO HISTORICAL PRO FORMA YEAR ENDED
AS ADJUSTED FORMA --------------- AS PRO DECEMBER
1997(1) 1997(1) 1997 1996 ADJUSTED(1) FORMA(1) HISTORICAL 31, 1995
----------- ------- ------ ------ ----------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income before
minority interest.. $ 5,349 $3,150 $3,286 $1,359 $30,570 $18,732 $14,933 $ 9,013
Depreciation of
buildings,
furniture and
fixtures........... 5,605 4,019 3,785 2,306 21,455 15,112 11,464 6,791
------- ------ ------ ------ ------- ------- ------- -------
Funds From
Operations......... $10,954 $7,169 $7,071 $3,665 $52,025 $33,844 $26,397 $15,804
======= ====== ====== ====== ======= ======= ======= =======
<CAPTION>
HISTORICAL
-----------
MARCH 1,
1994
(INCEPTION)
THROUGH
DECEMBER
31, 1994
-----------
(IN THOUSANDS)
<S> <C>
Income before
minority interest.. $5,101
Depreciation of
buildings,
furniture and
fixtures........... 2,510
------
Funds From
Operations......... $7,611
======
</TABLE>
Industry analysts generally consider Funds From Operations to be an
appropriate measure of the performance of an equity REIT. Funds From
Operations should not be considered as an alternative to net income or
other measurements under generally accepted accounting principles as an
indicator of operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. Funds From
Operations does not reflect cash expenditures for capital improvements or
principal repayment of debt.
(9) Represents Funds from Operations less an amount equal to the FF&E Reserve
which is required to be set aside by the Partnership for refurbishment and
replacement of FF&E, capitalized expenditures and other non-routine items.
(10) Pro forma, as adjusted, reflects the sale of 7,500,000 shares of Common
Stock in the Offering.
S-28
<PAGE> 30
BUSINESS
GROWTH STRATEGY
Acquisition Strategy
The Company intends to acquire well-located limited service and extended
stay hotels which typically attract both business and leisure travelers. In
addition, the Company targets hotels with nationally-recognized franchise brands
or hotels that can be repositioned and reflagged with nationally-recognized
brand names. Management believes that a strong nationally-recognized brand name
attracts guests and allows the Company to realize higher occupancies and ADRs.
Management believes that a number of hotels that meet its investment criteria
are available at attractive prices primarily from the following sources: (i)
hotel operators who are unable to pay for renovations necessary to maintain
franchise obligations or otherwise meet ongoing financial obligations; (ii)
franchisors with whom the Company has an existing relationship; and (iii) hotel
owners who wish to liquidate all or a portion of their investments in hotels. In
accordance with this strategy, the Company entered into agreements in March 1997
to acquire the Acquisition Hotels from a series of partnerships controlled by
GHI and GHI II and has acquired eight additional hotels since January 1, 1997.
In addition, Interstate has agreed to offer to sell to the Company not less than
five hotels developed by Interstate or its affiliates prior to November 2001 and
to provide the Company a right of first refusal to purchase certain hotels
offered for sale by Interstate prior to November 2001. The Company may also
consider, from time to time as opportunities arise, additional multi-property
acquisitions including extended stay or limited service portfolio acquisitions
which the Company believes can be reflagged under nationally-recognized
franchise brands.
The Company considers investment in hotel properties which meet some or all
of the following criteria:
- Properties in attractive locations which may be underperforming due to
poor management, weak franchise affiliation or a need for renovation;
- Properties in attractive locations that the Company believes could
benefit significantly by changing franchise affiliations to a brand the
Company believes will strengthen the acquired hotel's competitive position
or by converting hotel properties from full service to limited service;
- Particular emphasis is given to limited service hotels in the midscale
segment, such as Hampton Inn, Comfort Inn, Holiday Inn Express and upscale
selected extended stay properties such as Residence Inn and Homewood
Suites;
- Properties with relatively stable operating histories; and
- Properties with purchase prices which may allow the Company to realize a
favorable return on its investment.
The Company may selectively pursue the development of certain limited
service or extended stay hotels where it expects to receive an attractive return
on its investment. See "Promus Strategic Alliance."
Internal Growth Strategy
Management believes that internal growth may be positively impacted by the
(i) continuation of favorable industry-wide conditions in REVPAR; (ii)
completion of a renovation plan for certain of the Hotels; (iii) continuation of
aggressive sales and marketing programs; and (iv) maintenance of franchises with
demonstrated market acceptance and national reservation systems. For the year
ended December 31, 1996, the Current Hotels had occupancy, ADR and REVPAR of
71.0%, $65.46 and $46.43, respectively, compared to 70.65%, $56.70 and $42.65
for the year ended December 31, 1995, and for the quarter ended March 31, 1997,
the Current Hotels had occupancy, ADR and REVPAR of 67.7%, $61.22 and $45.72,
respectively, compared to 64.7%, $60.20 and $41.02 for the comparable period in
1996. Management believes that a regular program of capital improvements,
including replacement and refurbishment of FF&E at the Hotels, as well as
periodic renovation, will maintain the competitive position of the Hotels and
result in long-term revenue growth. During the year ended December 31, 1996, the
Company spent approximately $19 million for capital
S-29
<PAGE> 31
improvements to the Current Hotels and has committed to spend an additional $11
million for total capital improvements to such hotels in 1997. In addition, the
Company intends to spend approximately $5.5 million for capital improvements to
the Acquisition Hotels in the next twelve months. The Company has agreed with
its Line of Credit lenders to reserve and make available for periodic
replacement of FF&E, on a cumulative basis, an amount equal to 4% of the gross
room revenue of the Hotels (the "FF&E Reserve").
GHI Acquisitions
The Partnership has entered into agreements to acquire the 28 Acquisition
Hotels with an aggregate of 3,479 rooms in 14 states from a series of
partnerships controlled by GHI and GHI II for purchase prices aggregating
approximately $169 million, including franchise fees but excluding approximately
$5.5 million of franchisor-required renovations that the Company expects to
undertake in the next twelve months. The Company intends to fund the purchase of
the Acquisition Hotels through a combination of the net proceeds of the
Offering, borrowings under the Line of Credit and a one-year term loan. The
Company may form one or more wholly-owned subsidiary partnerships which will
obtain the Term Loan and acquire some or all of the Acquisition Hotels. See
"-- Financing Strategy -- First Chicago Term Loan." The Acquisition Hotels are
located in South Carolina (4 hotels), Tennessee (4 hotels), Texas (4 hotels),
Alabama (2 hotels), Colorado (2 hotels), Georgia (2 hotels), Missouri (2
hotels), North Carolina (2 hotels) and Arkansas, Michigan, Minnesota, New
Mexico, New York and Ohio (1 hotel each), principally in major urban and
suburban markets. Upon the completion of the purchase of the Acquisition Hotels,
the Company will own 84 hotels (the "Hotels") with an aggregate of 10,158 rooms
and will own approximately 10% of all hotels in the Hampton Inn system. The sale
of the Acquisition Hotels is subject to the approval of a majority in interest
of the partners of GHI and GHI II, which approvals must be obtained through a
proxy solicitation, as well as customary real estate closing conditions. The
Partnership has obtained the agreement of the holders of approximately 39% and
34% of GHI and GHI II, respectively, to vote in favor of the sale of the
Acquisition Hotels to the Partnership. The Company expects to close the purchase
of the Acquisition Hotels prior to June 30, 1997; however, there can be no
assurance that the purchase of the Acquisition Hotels will be consummated. See
"Risk Factors -- Risk that Pending Acquisitions Will Not Close."
The Company continually evaluates its hotel portfolio with respect to the
potential sale of certain of its hotel properties if its believes it can
reinvest the proceeds of a sale at a more attractive rate of return. Following
completion of the purchase of the Acquisition Hotels, the Company may consider
the sale of certain of the Acquisition Hotels. The Company has no commitment,
letter of intent or other agreement with any potential buyer of any Acquisition
Hotel or Current Hotel and there can be no assurance that any such sale will
occur. Pursuant to an agreement between Interstate and the Partnership,
Interstate has agreed to pay the Partnership $2.25 million in exchange for 50%
of the Partnership's net book gain on the sale of certain Acquisition Hotels, if
sold.
FINANCING STRATEGY
The Company's Charter limits the amount of debt the Company may have
outstanding to 45% of its investment in hotel properties, at its cost. Following
completion of the Offering and the purchase of the Acquisition Hotels, the
Company will have approximately $213.8 million of debt outstanding and, without
additional equity financing, will have the capacity to borrow up to
approximately $74.7 million under its Charter debt limitation, assuming all
additional borrowings are used to fund investments in hotel properties.
S-30
<PAGE> 32
Securitized Mortgage Debt
In February 1997, the Company issued the Bonds through EQI Finance in a
private placement transaction as follows:
<TABLE>
<CAPTION>
INITIAL
PRINCIPAL INTEREST EXPECTED STATED
CLASS AMOUNT RATE REPAYMENT DATE MATURITY RATING (FITCH)
- ----- ------------- -------- -------------- ------------- --------------
<C> <C> <C> <C> <C> <C>
A $27.4 million 6.825% Nov. 20, 2006 Nov. 20, 2006 AA
B $50.6 million 7.370% Feb. 20, 2007 Dec. 20, 2015 A
C $10.0 million 7.580% Feb. 20, 2007 Feb. 20, 2017 BBB
</TABLE>
The weighted average interest rate for all three issues of Bonds is 7.22%.
Proceeds from the issuance of the Bonds were used to repay existing debt under
the Line of Credit. Principal payments are to be applied to each class of Bonds
in order of their respective maturities with no principal payment on any Bond
until all Bonds in a bond class with an earlier stated maturity have been paid
in full. In connection with these transactions, the Partnership transferred the
Mortgaged Properties and their respective leases to EQI Finance as a capital
contribution in return for a 99% limited partnership interest. A 1% general
partnership interest in EQI Finance is owned by EQI Financing Corporation, a
wholly-owned subsidiary of the Company. The Mortgaged Properties serve as
collateral for the Bonds. Upon maturity of the Class A Bonds, the Company is
required to use 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.
First Chicago Term Loan
The Company expects to obtain from First Chicago a one-year term loan of
approximately $75 million (the "Term Loan") to fund a portion of the purchase
price for the Acquisition Hotels. The Company may form one or more wholly-owned
subsidiary partnerships that will obtain the Term Loan and acquire some or all
of the Acquisition Hotels. Based on a preliminary term sheet from First Chicago,
the Company anticipates that the Term Loan will bear interest at a variable rate
equal to, at the Company's option, (i) First Chicago's corporate base rate as in
effect from time to time, or (ii) the 30-day LIBOR rate (6.13% at May 8, 1997)
plus 1.625% for the first six months of the Term Loan and the 30-day LIBOR rate
plus 1.875% for the second six months of the Term Loan. In addition, the Company
expects to pay First Chicago an underwriting fee of 0.375% of the Term Loan and
an administrative fee of $10,000 per quarter. The Term Loan will be guaranteed
by the Partnership. The Term Loan will be secured by first mortgages on the
Acquisition Hotels. The Term Loan is conditioned on the negotiation of
definitive agreements and on First Chicago receiving satisfactory engineering
and environmental reports, surveys, title and other customary insurance with
respect to the Acquisition Hotels and other customary closing conditions.
Interest on the Term Loan will be payable monthly and the outstanding principal
balance plus any accrued but unpaid interest will be due and payable one year
after the date of the Term Loan. The Company expects to repay the Term Loan with
proceeds of issuance of equity securities or other borrowings.
Extension of Line of Credit
In November 1995, the Company entered into an agreement with Smith Barney
Mortgage Capital Group, Inc. and a syndicate of eight banks for the Line of
Credit. In December 1996, the Company and Smith Barney Mortgage Capital Group,
Inc. and the syndicate of eight banks agreed to extend the Line of Credit under
the same terms as the original Line of Credit through November 1998, with an
option for another one-year extension. The Line of Credit is currently
administered by First Chicago.
S-31
<PAGE> 33
THE HOTELS
The Hotels consist of limited service hotels (69), extended stay hotels
(11) and full service hotels (4). The average number of rooms of the Hotels
range from 50 to 180, with the average Hotel having 120 rooms. The 37 Current
Hotels that operate as Hampton Inn hotels and the three Current Hotels that
operate as Homewood Suites hotels are subject to franchise agreements with
Promus. The eight Current Hotels that operate as Residence Inn hotels are
subject to franchise agreements with Marriott. The five Current Hotels that
operate as Holiday Inn and Holiday Inn Express hotels are subject to franchise
agreements with Holiday Inn. The three Current Hotels that operate as Comfort
Inn hotels are subject to franchise agreements with Choice.
Hampton Inn, Holiday Inn Express and Comfort Inn hotels are limited service
hotels designed for business and leisure travelers, which generally do not
include restaurants or lounges and generally contain little non-revenue
producing space. Extended stay hotels, such as Residence Inn hotels and Homewood
Suites 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, such as Holiday Inn hotels, generally provide
on-site food and beverage services and may have banquet and meeting facilities.
Promus, Marriott, Holiday Inn and Choice provide national marketing and
reservation systems to their franchisees.
The following table sets forth occupancy and ADR (the principal
determinants of room revenue) and REVPAR for the Hotels for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
HAMPTON INN HOTELS:
ALBANY, NEW YORK
Occupancy........................ 81.1% 78.7% 77.3% 75.8% 73.9% 69.4% 68.4%
ADR.............................. $ 60.90 $ 65.12 $ 66.13 $ 69.85 $ 72.15 $ 70.36 $ 73.84
REVPAR........................... $ 49.39 $ 51.25 $ 51.12 $ 52.98 $ 53.30 $ 48.83 $ 50.51
COLLEGE STATION, TEXAS
Occupancy........................ 71.4% 72.8% 72.8% 71.7% 70.3% 69.7% 72.6%
ADR.............................. $ 45.03 $ 45.96 $ 49.35 $ 51.95 $ 55.62 $ 52.52 $ 55.19
REVPAR........................... $ 32.15 $ 33.46 $ 35.91 $ 37.26 $ 39.12 $ 36.61 $ 40.07
LOUISVILLE, KENTUCKY
Occupancy........................ 79.1% 79.5% 82.6% 73.2% 71.0% 57.5% 60.3%
ADR.............................. $ 43.69 $ 45.36 $ 47.64 $ 52.33 $ 57.09 $ 55.32 $ 57.64
REVPAR........................... $ 34.55 $ 36.06 $ 39.33 $ 38.30 $ 40.55 $ 31.81 $ 34.76
COLUMBUS, GEORGIA
Occupancy........................ 81.5% 80.9% 83.5% 81.3% 82.6% 79.8% 71.3%
ADR.............................. $ 43.18 $ 44.00 $ 46.20 $ 48.72 $ 53.78 $ 50.08 $ 55.94
REVPAR........................... $ 35.19 $ 35.58 $ 38.55 $ 39.62 $ 44.42 $ 39.96 $ 39.89
CLEVELAND, OHIO
Occupancy........................ 64.8% 65.9% 68.3% 73.8% 71.7% 62.8% 67.0%
ADR.............................. $ 48.50 $ 50.38 $ 52.59 $ 54.11 $ 58.45 $ 56.19 $ 62.11
REVPAR........................... $ 31.42 $ 33.21 $ 35.90 $ 39.92 $ 41.90 $ 35.29 $ 41.61
SARASOTA, FLORIDA
Occupancy........................ 75.5% 76.2% 76.5% 73.5% 70.0% 90.9% 89.4%
ADR.............................. $ 55.64 $ 54.18 $ 56.21 $ 56.40 $ 60.20 $ 76.31 $ 80.09
REVPAR........................... $ 42.01 $ 41.26 $ 42.98 $ 41.48 $ 42.12 $ 69.37 $ 71.60
FORT WORTH, TEXAS
Occupancy........................ 71.3% 72.6% 69.2% 74.6% 70.4% 65.4% 64.7%
ADR.............................. $ 44.39 $ 44.66 $ 47.39 $ 51.80 $ 55.94 $ 54.44 $ 56.22
REVPAR........................... $ 31.65 $ 32.43 $ 32.80 $ 38.63 $ 39.38 $ 35.60 $ 36.37
LITTLE ROCK, ARKANSAS
Occupancy........................ 67.7% 68.1% 68.6% 66.9% 57.4% 47.4% 55.0%
ADR.............................. $ 40.60 $ 42.78 $ 44.68 $ 48.23 $ 53.16 $ 50.59 $ 53.24
REVPAR........................... $ 27.48 $ 29.14 $ 30.64 $ 32.29 $ 30.52 $ 23.98 $ 29.28
ANN ARBOR, MICHIGAN
Occupancy........................ 63.6% 68.3% 70.6% 68.0% 70.6% 61.6% 65.7%
ADR.............................. $ 49.77 $ 51.08 $ 53.38 $ 60.30 $ 64.53 $ 59.37 $ 61.21
REVPAR........................... $ 31.65 $ 34.89 $ 37.66 $ 41.01 $ 45.55 $ 36.57 $ 40.21
</TABLE>
S-32
<PAGE> 34
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
HAMPTON INN HOTELS (CONTINUED):
TRAVERSE CITY, MICHIGAN
Occupancy........................ 69.6% 66.9% 66.9% 58.2% 55.3% 34.4% 35.5%
ADR.............................. $ 60.52 $ 61.87 $ 63.79 $ 69.15 $ 72.22 $ 55.89 $ 53.97
REVPAR........................... $ 42.12 $ 41.39 $ 42.70 $ 40.23 $ 39.91 $ 19.23 $ 19.16
GURNEE (CHICAGO), ILLINOIS
Occupancy........................ 61.0% 60.1% 58.6% 64.3% 68.0% 40.6% 57.6%
ADR.............................. $ 55.19 $ 56.33 $ 59.22 $ 60.11 $ 65.87 $ 50.62 $ 50.32
REVPAR........................... $ 33.67 $ 33.95 $ 34.69 $ 38.65 $ 44.79 $ 20.55 $ 28.98
ARLINGTON (DALLAS), TEXAS
Occupancy........................ 75.6% 72.0% 80.4% 72.5% 62.9% 55.9% 55.8%
ADR.............................. $ 55.17 $ 59.16 $ 58.60 $ 63.47 $ 63.94 $ 62.28 $ 63.21
REVPAR........................... $ 41.71 $ 42.59 $ 47.10 $ 46.03 $ 40.22 $ 34.81 $ 35.27
MILFORD, CONNECTICUT
Occupancy........................ 69.4% 76.8% 79.5% 72.9% 77.7% 63.7% 70.5%
ADR.............................. $ 46.58 $ 48.22 $ 49.93 $ 57.53 $ 62.16 $ 60.57 $ 64.29
REVPAR........................... $ 32.33 $ 37.03 $ 39.71 $ 41.92 $ 48.28 $ 38.58 $ 45.32
MERIDEN, CONNECTICUT
Occupancy........................ 51.3% 53.1% 59.0% 63.1% 63.5% 48.4% 51.1%
ADR.............................. $ 45.28 $ 45.57 $ 48.87 $ 53.85 $ 58.56 $ 55.84 $ 60.26
REVPAR........................... $ 23.23 $ 24.20 $ 28.83 $ 33.96 $ 37.21 $ 27.03 $ 30.79
BECKLEY, WEST VIRGINIA
Occupancy........................ 82.0%(1) 85.0% 87.9% 89.4% 86.3% 73.4% 80.5%
ADR.............................. $ 46.82(1) $ 49.60 $ 51.60 $ 56.27 $ 63.19 $ 60.84 $ 61.57
REVPAR........................... $ 38.39(1) $ 42.16 $ 45.34 $ 50.31 $ 54.54 $ 44.66 $ 49.56
GASTONIA, NORTH CAROLINA
Occupancy........................ 80.5% 81.2% 80.2% 84.7% 80.9% 70.8% 65.3%
ADR.............................. $ 45.24 $ 47.66 $ 51.67 $ 52.88 $ 60.75 $ 58.12 $ 62.16
REVPAR........................... $ 36.42 $ 38.70 $ 41.43 $ 44.78 $ 49.16 $ 41.13 $ 40.59
MORGANTOWN, WEST VIRGINIA
Occupancy........................ 72.3% 77.6% 83.5% 78.7% 75.1% 67.6% 70.7%
ADR.............................. $ 45.18 $ 46.31 $ 47.92 $ 54.24 $ 60.91 $ 57.50 $ 61.34
REVPAR........................... $ 32.67 $ 35.94 $ 40.02 $ 42.70 $ 45.76 $ 38.87 $ 43.37
SHELBY, NORTH CAROLINA
Occupancy........................ 63.7% 64.8% 68.4% 70.5% 65.4% 57.7% 67.7%
ADR.............................. $ 39.70 $ 41.10 $ 43.01 $ 46.38 $ 50.12 $ 49.28 $ 49.67
REVPAR........................... $ 25.29 $ 26.63 $ 29.42 $ 32.69 $ 32.76 $ 28.43 $ 33.63
NAPERVILLE (CHICAGO), ILLINOIS
Occupancy........................ 74.0% 78.6% 78.2% 73.3% 73.2% 55.4% 66.5%
ADR.............................. $ 49.38 $ 51.30 $ 55.02 $ 59.14 $ 62.37 $ 61.13 $ 64.32
REVPAR........................... $ 36.54 $ 40.32 $ 43.02 $ 43.37 $ 45.64 $ 33.87 $ 42.77
STATE COLLEGE, PENNSYLVANIA
Occupancy........................ 80.0% 83.2% 80.0% 76.7% 73.6% 67.7% 56.8%
ADR.............................. $ 55.32 $ 56.58 $ 60.47 $ 61.89 $ 65.94 $ 58.85 $ 63.47
REVPAR........................... $ 44.26 $ 47.07 $ 48.38 $ 47.51 $ 48.53 $ 39.84 $ 36.05
CLEVELAND, TENNESSEE(2)
Occupancy........................ -- 61.5%(1) 63.4% 68.4% 73.7% 69.7% 73.6%
ADR.............................. -- $ 45.65(1) $ 47.76 $ 49.07 $ 54.86 $ 51.50 $ 54.77
REVPAR........................... -- $ 28.08(1) $ 30.28 $ 33.58 $ 40.45 $ 35.90 $ 40.31
JACKSONVILLE, FLORIDA
Occupancy........................ 70.5% 73.9% 74.3% 75.3% 69.7% 79.1% 84.7%
ADR.............................. $ 41.16 $ 43.93 $ 45.72 $ 49.01 $ 52.86 $ 51.58 $ 53.67
REVPAR........................... $ 29.01 $ 32.48 $ 33.98 $ 36.90 $ 36.83 $ 40.80 $ 45.46
FAYETTEVILLE, NORTH CAROLINA
Occupancy........................ 74.2% 72.5% 71.3% 74.3% 69.7% 58.5% 72.8%
ADR.............................. $ 41.39 $ 42.38 $ 44.87 $ 46.73 $ 50.58 $ 50.21 $ 51.94
REVPAR........................... $ 30.73 $ 30.73 $ 31.99 $ 34.70 $ 35.25 $ 29.37 $ 37.81
INDIANAPOLIS, INDIANA
Occupancy........................ 75.4% 72.2% 74.9% 73.6% 66.3% 57.1% 66.2%
ADR.............................. $ 50.60 $ 53.23 $ 56.31 $ 62.38 $ 65.64 $ 62.51 $ 67.60
REVPAR........................... $ 38.17 $ 38.45 $ 42.20 $ 45.89 $ 43.55 $ 35.69 $ 44.75
</TABLE>
S-33
<PAGE> 35
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
HAMPTON INN HOTELS (CONTINUED):
SCRANTON, PENNSYLVANIA
Occupancy........................ -- -- 78.4%(1) 87.6% 85.6% 87.0% 75.7%
ADR.............................. -- -- $ 58.09(1) $ 61.95 $ 66.23 $ 65.45 $ 69.53
REVPAR........................... -- -- $ 45.52(1) $ 54.28 $ 56.66 $ 56.94 $ 52.63
AUSTIN, TEXAS
Occupancy........................ 81.0% 81.6% 84.0% 81.6% 73.0% 76.9% 75.8%
ADR.............................. $ 47.99 $ 50.69 $ 54.07 $ 61.53 $ 65.49 $ 65.90 $ 62.77
REVPAR........................... $ 38.87 $ 41.39 $ 45.39 $ 50.22 $ 47.83 $ 50.68 $ 47.58
GARLAND (DALLAS), TEXAS
Occupancy........................ 59.7% 61.1% 72.9% 75.6% 63.6% 69.1% 54.8%
ADR.............................. $ 43.47 $ 43.42 $ 46.10 $ 51.17 $ 54.79 $ 55.34 $ 54.13
REVPAR........................... $ 25.95 $ 26.55 $ 33.62 $ 38.66 $ 34.85 $ 38.24 $ 29.64
ALCOA (KNOXVILLE), TENNESSEE
Occupancy........................ 66.2% 67.6% 72.6% 68.0% 65.7% 58.5% 63.3%
ADR.............................. $ 48.67 $ 51.87 $ 52.87 $ 54.21 $ 54.99 $ 54.98 $ 54.25
REVPAR........................... $ 32.21 $ 35.09 $ 38.37 $ 36.84 $ 36.15 $ 32.16 $ 34.34
GLEN BURNIE (BALTIMORE), MARYLAND
Occupancy........................ 68.5% 71.8% 75.2% 78.5% 77.9% 68.9% 61.7%
ADR.............................. $ 55.76 $ 56.22 $ 58.42 $ 61.27 $ 64.09 $ 62.27 $ 69.54
REVPAR........................... $ 38.18 $ 40.37 $ 43.91 $ 48.13 $ 49.93 $ 42.90 $ 42.91
NORTHVILLE (DETROIT), MICHIGAN
Occupancy........................ 61.5% 66.2% 73.6% 78.7% 80.3% 76.7% 76.1%
ADR.............................. $ 50.59 $ 51.22 $ 52.53 $ 55.84 $ 61.39 $ 59.48 $ 65.47
REVPAR........................... $ 31.10 $ 33.88 $ 38.67 $ 43.92 $ 49.30 $ 45.62 $ 49.82
SCOTTSDALE, ARIZONA
Occupancy........................ -- -- -- -- 48.7%(1) 64.9% 79.0%
ADR.............................. -- -- -- -- $ 80.78(1) $117.80 $110.08
REVPAR........................... -- -- -- -- $ 39.34(1) $ 76.45 $ 86.96
CHATTANOOGA, TENNESSEE
Occupancy........................ 90.60% 89.70% 84.00% 82.50% 74.0% 83.7% 59.7%
ADR.............................. $ 43.61 $ 47.19 $ 53.87 $ 58.34 $ 60.68 $ 58.99 $ 57.97
REVPAR........................... $ 39.51 $ 42.33 $ 45.45 $ 48.13 $ 44.90 $ 49.37 $ 34.61
SAVANNAH, GEORGIA
Occupancy........................ 76.70% 72.10% 74.50% 77.60% 77.0% 75.8% 69.6%
ADR.............................. $ 43.19 $ 43.77 $ 45.64 $ 48.71 $ 51.66 $ 48.95 $ 53.69
REVPAR........................... $ 33.13 $ 31.56 $ 34.00 $ 37.80 $ 39.78 $ 37.01 $ 37.37
NORFOLK, VIRGINIA
Occupancy........................ 89.80% 86.80% 88.10% 85.80% 81.4% 81.2% 50.9%
ADR.............................. $ 49.34 $ 51.37 $ 53.78 $ 55.54 $ 57.50 $ 56.48 $ 61.73
REVPAR........................... $ 44.31 $ 44.59 $ 47.38 $ 47.65 $ 46.81 $ 45.86 $ 31.42
SOUTHAVEN (MEMPHIS), MISSISSIPPI
Occupancy........................ -- -- -- 56.30%(1) 74.1% 58.5% 74.6%
ADR.............................. -- -- -- $ 58.48(1) $ 56.25 $ 53.98 $ 54.74
REVPAR........................... -- -- -- $ 32.92(1) $ 41.68 $ 31.58 $ 40.84
PICKWICK, TENNESSEE
Occupancy........................ -- -- 71.10%(1) 71.10% 72.1% 71.3% 48.9%
ADR.............................. -- -- $ 53.98(1) $ 53.98 $ 60.52 $ 53.40 $ 55.90
REVPAR........................... -- -- $ 38.38(1) $ 38.38 $ 43.64 $ 38.07 $ 27.34
OVERLAND PARK (KANSAS CITY), KANSAS
Occupancy........................ 72.20% 76.80% 76.70% 77.50% 77.6% 71.4% 72.6%
ADR.............................. $ 50.38 $ 52.03 $ 54.27 $ 57.71 $ 62.08 $ 60.36 $ 63.07
REVPAR........................... $ 36.37 $ 39.96 $ 41.63 $ 44.73 $ 48.17 $ 43.10 $ 45.79
RESIDENCE INN HOTELS:
EAGAN (MINNEAPOLIS), MINNESOTA
Occupancy........................ 86.5% 84.3% 85.5% 82.4% 76.3% 63.4% 78.5%
ADR.............................. $ 70.40 $ 70.83 $ 75.74 $ 80.34 $ 81.93 $ 80.85 $ 82.03
REVPAR........................... $ 60.90 $ 59.71 $ 64.75 $ 66.22 $ 62.52 $ 51.26 $ 64.39
TINTON FALLS, NEW JERSEY
Occupancy........................ 83.8% 86.7% 83.9% 84.1% 83.3% 72.9% 78.7%
ADR.............................. $ 79.22 $ 81.46 $ 86.16 $ 88.83 $ 89.91 $ 86.07 $ 86.13
REVPAR........................... $ 66.38 $ 70.62 $ 72.29 $ 74.73 $ 74.90 $ 62.75 $ 67.78
</TABLE>
S-34
<PAGE> 36
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
RESIDENCE INN HOTELS (CONTINUED):
OMAHA, NEBRASKA
Occupancy........................ 78.4% 80.5% 85.0% 85.9% 78.6% 75.5% 71.8%
ADR.............................. $ 69.23 $ 68.04 $ 69.85 $ 76.72 $ 79.70 $ 77.35 $ 79.15
REVPAR........................... $ 54.25 $ 54.78 $ 59.39 $ 65.85 $ 62.62 $ 58.40 $ 56.83
MADISON, WISCONSIN
Occupancy........................ 64.00% 62.70% 68.30% 70.10% 66.2% 59.4% 67.5%
ADR.............................. $ 69.42 $ 66.03 $ 69.69 $ 68.43 $ 71.07 $ 71.67 $ 69.91
REVPAR........................... $ 44.43 $ 41.40 $ 46.92 $ 47.97 $ 47.05 $ 42.57 $ 47.19
BURLINGTON, VERMONT
Occupancy........................ 76.10% 80.50% 83.60% 92.50% 87.9% 89.3% 82.4%
ADR.............................. $ 70.51 $ 71.89 $ 72.62 $ 73.94 $ 83.62 $ 75.41 $ 82.89
REVPAR........................... $ 53.66 $ 57.87 $ 60.71 $ 68.39 $ 73.47 $ 67.34 $ 68.30
OKLAHOMA CITY, OKLAHOMA
Occupancy........................ 82.10% 81.50% 80.20% 86.90% 83.4% 83.1% 81.2%
ADR.............................. $ 62.38 $ 64.36 $ 67.47 $ 70.50 $ 76.66 $ 72.98 $ 78.18
REVPAR........................... $ 51.21 $ 52.45 $ 54.11 $ 61.26 $ 63.93 $ 60.65 $ 63.48
TUCSON, ARIZONA
Occupancy........................ 84.20% 85.90% 83.80% 83.10% 80.4% 88.3% 84.5%
ADR.............................. $ 69.22 $ 70.13 $ 74.00 $ 77.07 $ 81.97 $101.74 $106.19
REVPAR........................... $ 58.28 $ 60.24 $ 62.01 $ 64.05 $ 65.90 $ 89.64 $ 89.73
COLORADO SPRINGS, COLORADO
Occupancy........................ 82.60% 85.90% 87.50% 84.90% 85.2% 82.4% 80.3%
ADR.............................. $ 62.49 $ 64.72 $ 68.25 $ 78.03 $ 90.31 $ 73.33 $ 77.08
REVPAR........................... $ 51.62 $ 55.59 $ 59.72 $ 66.25 $ 76.94 $ 60.42 $ 61.90
HOLIDAY INN HOTELS:
BLUEFIELD, WEST VIRGINIA
Occupancy........................ 78.1% 82.9% 81.1% 79.4% 70.9% 64.6% 64.2%
ADR.............................. $ 52.97 $ 53.87 $ 55.91 $ 58.37 $ 64.50 $ 61.28 $ 67.54
REVPAR........................... $ 41.37 $ 44.66 $ 45.34 $ 46.34 $ 45.70 $ 39.59 $ 43.36
OAK HILL, WEST VIRGINIA
Occupancy........................ 63.0% 54.3% 51.8% 46.4% 43.8% 26.7% 37.9%
ADR.............................. $ 42.58 $ 45.09 $ 47.36 $ 55.00 $ 63.12 $ 50.85 $ 54.89
REVPAR........................... $ 26.82 $ 24.49 $ 24.53 $ 25.53 $ 27.65 $ 13.58 $ 20.80
MT. PLEASANT (CHARLESTON), SOUTH
CAROLINA
Occupancy........................ 63.0% 62.9% 66.1% 67.0% 73.0% 61.0% 67.1%
ADR.............................. $ 59.76 $ 63.70 $ 66.55 $ 71.24 $ 74.01 $ 70.17 $ 72.99
REVPAR........................... $ 37.66 $ 40.07 $ 44.01 $ 47.68 $ 53.99 $ 42.80 $ 48.98
WINSTON-SALEM, NORTH CAROLINA
Occupancy........................ 61.80% 62.30% 59.10% 62.80% 67.3% 64.1% 53.0%
ADR.............................. $ 50.24 $ 52.36 $ 53.66 $ 54.94 $ 54.65 $ 52.03 $ 54.40
REVPAR........................... $ 31.05 $ 32.62 $ 31.71 $ 34.50 $ 36.75 $ 33.35 $ 28.83
COMFORT INN HOTELS:
ENTERPRISE, ALABAMA
Occupancy........................ 75.9% 82.6% 82.2% 76.9% 74.0% 70.3% 70.6%
ADR.............................. $ 39.07 $ 40.01 $ 42.80 $ 44.50 $ 44.97 $ 44.23 $ 48.72
REVPAR........................... $ 29.65 $ 33.07 $ 35.18 $ 34.20 $ 33.29 $ 31.09 $ 34.40
RUTLAND, VERMONT
Occupancy........................ 72.9% 77.8% 78.7% 80.2% 73.1% 76.9% 80.1%
ADR.............................. $ 51.51 $ 52.25 $ 54.29 $ 54.91 $ 58.18 $ 59.15 $ 58.46
REVPAR........................... $ 37.55 $ 40.64 $ 43.49 $ 44.06 $ 42.51 $ 45.49 $ 46.83
JACKSONVILLE BEACH, FLORIDA
Occupancy........................ 69.8% 69.8% 77.6% 74.3% 69.1% 77.5% 72.8%
ADR.............................. $ 57.64 $ 59.40 $ 58.67 $ 69.70 $ 73.11 $ 67.33 $ 73.36
REVPAR........................... $ 40.25 $ 41.47 $ 45.51 $ 51.77 $ 50.53 $ 52.18 $ 53.41
HOMEWOOD SUITES HOTELS:
WINDSOR LOCKS (HARTFORD),
CONNECTICUT
Occupancy........................ 65.4% 78.1% 73.6% 80.3% 78.0% 77.2% 70.0%
ADR.............................. $ 71.04 $ 72.73 $ 76.69 $ 78.24 $ 85.74 $ 82.01 $ 89.10
REVPAR........................... $ 46.48 $ 56.82 $ 56.45 $ 62.81 $ 66.88 $ 63.31 $ 62.37
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HOMEWOOD SUITES HOTELS (CONTINUED):
SAN ANTONIO, TEXAS
Occupancy........................ -- -- -- -- 36.1%(1) -- 81.7%
ADR.............................. -- -- -- -- $ 74.98(1) -- $ 77.58
REVPAR........................... -- -- -- -- $ 27.07(1) -- $ 47.87
CAMELBACK (PHOENIX), ARIZONA
Occupancy........................ -- -- -- -- 51.4%(1) -- 79.6%
ADR.............................. $ -- $ -- $ -- -- $109.24(1) -- $130.12
REVPAR........................... $ -- $ -- $ -- -- $ 56.15(1) -- $103.58
HOLIDAY INN EXPRESS HOTEL:
WILKESBORO, NORTH CAROLINA
Occupancy........................ 53.1% 51.7% 53.6% 56.4% 58.7% 53.9% 50.2%
ADR.............................. $ 40.56 $ 45.74 $ 48.21 $ 54.72 $ 59.25 $ 52.71 $ 57.80
REVPAR........................... $ 21.54 $ 23.65 $ 25.84 $ 30.87 $ 34.75 $ 28.41 $ 29.02
SUBTOTAL/WEIGHTED AVERAGE FOR CURRENT
HOTELS
Occupancy........................ 65.03% 66.8% 69.85% 70.65% 71.0% 64.69% 67.71%
ADR.............................. $ 46.67 $ 48.57 $ 52.31 $ 56.70 $ 65.46 $ 60.20 $ 61.22
REVPAR........................... $ 34.06 $ 36.02 $ 39.44 $ 42.65 $ 46.43 $ 41.02 $ 45.72
ACQUISITION HOTELS:
HAMPTON INN:
BIRMINGHAM (VESTAVIA HILLS),
ALABAMA
Occupancy...................... 85% 85% 83% 82% 76% 70.5% 74.8%
ADR............................ $ 46.47 $ 50.71 $ 55.01 $ 58.65 $ 61.12 $ 60.51 $ 61.57
REVPAR......................... $ 39.50 $ 43.10 $ 45.66 $ 48.09 $ 46.45 $ 42.60 $ 45.90
BIRMINGHAM (MOUNTAIN BROOK),
ALABAMA
Occupancy...................... 81% 83% 80% 79% 78% 76.9% 74.5%
ADR............................ $ 47.80 $ 51.08 $ 54.92 $ 58.17 $ 63.02 $ 60.78 $ 64.30
REVPAR......................... $ 38.72 $ 42.40 $ 43.94 $ 45.95 $ 49.16 $ 46.75 $ 47.88
NORTH LITTLE ROCK, ARKANSAS
Occupancy...................... 78% 77% 78% 79% 78% 63.7% 67.5%
ADR............................ $ 41.24 $ 43.20 $ 45.52 $ 48.79 $ 52.59 $ 51.37 $ 54.97
REVPAR......................... $ 32.17 $ 33.26 $ 35.51 $ 38.54 $ 41.02 $ 32.70 $ 37.09
AURORA (DENVER), COLORADO
Occupancy...................... 71% 74% 78% 79% 71% 63.3% 68.5%
ADR............................ $ 47.56 $ 50.55 $ 52.00 $ 56.04 $ 59.24 $ 65.01 $ 60.04
REVPAR......................... $ 33.77 $ 37.41 $ 40.56 $ 44.27 $ 42.06 $ 41.18 $ 41.15
COLORADO SPRINGS, COLORADO
Occupancy...................... 64% 69% 75% 77% 79% 74.5% 74.2%
ADR............................ $ 43.49 $ 45.97 $ 47.45 $ 53.07 $ 58.25 $ 45.27 $ 49.78
REVPAR......................... $ 27.83 $ 31.72 $ 35.59 $ 40.86 $ 46.02 $ 33.72 $ 36.94
ATLANTA (NORTHLAKE), GEORGIA
Occupancy...................... 68% 73% 76% 81% 74% 77.9% 66.4%
ADR............................ $ 44.22 $ 48.68 $ 52.33 $ 54.86 $ 61.84 $ 60.22 $ 61.63
REVPAR......................... $ 30.07 $ 35.54 $ 39.77 $ 44.44 $ 45.76 $ 46.89 $ 40.89
ROSWELL (ATLANTA), GEORGIA
Occupancy...................... 75% 77% 82% 82% 73% 75.2% 59.0%
ADR............................ $ 44.72 $ 50.39 $ 54.17 $ 58.54 $ 66.70 $ 63.36 $ 63.34
REVPAR......................... $ 33.54 $ 38.80 $ 44.42 $ 48.00 $ 48.69 $ 47.66 $ 37.39
MADISON HEIGHTS (DETROIT),
MICHIGAN
Occupancy...................... 62% 67% 72% 71% 73% 69.2% 68.1%
ADR............................ $ 47.86 $ 49.68 $ 51.21 $ 54.04 $ 59.58 $ 57.38 $ 63.88
REVPAR......................... $ 29.67 $ 33.29 $ 36.87 $ 38.37 $ 43.49 $ 39.71 $ 43.48
KANSAS CITY, MISSOURI
Occupancy...................... 70% 75% 83% 82% 76% 75.3% 68.1%
ADR............................ $ 47.15 $ 50.21 $ 51.87 $ 55.41 $ 61.60 $ 57.24 $ 68.19
REVPAR......................... $ 33.01 $ 37.66 $ 43.05 $ 45.44 $ 46.82 $ 42.12 $ 46.40
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ACQUISITION HOTELS (CONTINUED):
MARYLAND HEIGHTS (ST. LOUIS),
MISSOURI
Occupancy...................... 68% 72% 75% 71% 68% 61.4% 56.6%
ADR............................ $ 53.44 $ 55.43 $ 56.57 $ 58.12 $ 61.36 $ 59.40 $ 61.71
REVPAR......................... $ 36.34 $ 39.91 $ 42.43 $ 41.27 $ 41.72 $ 36.47 $ 34.94
EDEN PRAIRIE (MINNEAPOLIS),
MINNESOTA
Occupancy...................... 72% 74% 76% 75% 71% 68.0% 56.3%
ADR............................ $ 45.53 $ 50.25 $ 54.33 $ 56.96 $ 58.80 $ 57.59 $ 57.25
REVPAR......................... $ 32.78 $ 37.19 $ 41.29 $ 42.72 $ 41.75 $ 39.15 $ 32.24
ALBUQUERQUE, NEW MEXICO
Occupancy...................... 83% 84% 85% 80% 73% 55.1% 66.6%
ADR............................ $ 45.13 $ 49.70 $ 52.37 $ 54.97 $ 57.26 $ 55.78 $ 54.34
REVPAR......................... $ 37.46 $ 41.75 $ 44.51 $ 43.98 $ 41.80 $ 30.75 $ 36.18
EAST SYRACUSE, NEW YORK
Occupancy...................... 78% 76% 71% 60% 57% 44.3% 42.6%
ADR............................ $ 44.31 $ 48.32 $ 50.61 $ 54.76 $ 59.99 $ 57.23 $ 59.75
REVPAR......................... $ 34.56 $ 36.72 $ 35.93 $ 32.86 $ 34.19 $ 25.33 $ 25.46
CHAPEL HILL, NORTH CAROLINA
Occupancy...................... 75% 79% 82% 87% 85% 81.4% 78.6%
ADR............................ $ 44.49 $ 46.39 $ 50.95 $ 56.14 $ 62.30 $ 60.29 $ 64.93
REVPAR......................... $ 33.37 $ 36.65 $ 41.78 $ 48.84 $ 52.96 $ 49.10 $ 51.02
GREENSBORO, NORTH CAROLINA
Occupancy...................... 84% 84% 87% 86% 80% 77.2% 70.4%
ADR............................ $ 43.76 $ 47.11 $ 51.50 $ 57.99 $ 64.12 $ 63.42 $ 64.49
REVPAR......................... $ 36.76 $ 39.57 $ 44.81 $ 49.87 $ 51.30 $ 48.96 $ 45.43
DUBLIN (COLUMBUS), OHIO
Occupancy...................... 76% 73% 72% 72% 70% 63.0% 63.8%
ADR............................ $ 47.53 $ 48.00 $ 49.05 $ 53.91 $ 58.68 $ 55.73 $ 64.34
REVPAR......................... $ 36.12 $ 35.04 $ 35.32 $ 38.82 $ 41.08 $ 35.09 $ 40.39
BRENTWOOD (NASHVILLE), TENNESSEE
Occupancy...................... 78% 83% 86% 82% 78% 76.2% 66.3%
ADR............................ $ 48.46 $ 50.51 $ 54.42 $ 62.26 $ 69.09 $ 66.24 $ 68.35
REVPAR......................... $ 37.80 $ 41.92 $ 46.80 $ 51.05 $ 53.89 $ 50.50 $ 45.28
MEMPHIS (POPLAR), TENNESSEE
Occupancy...................... 87% 88% 87% 84% 83% 79.0% 78.4%
ADR............................ $ 52.40 $ 56.12 $ 60.18 $ 64.64 $ 67.46 $ 67.95 $ 69.34
REVPAR......................... $ 45.59 $ 49.39 $ 52.36 $ 54.30 $ 55.99 $ 53.64 $ 54.39
MEMPHIS (SYCAMORE), TENNESSEE
Occupancy...................... 81% 80% 82% 80% 77% 64.5% 68.0%
ADR............................ $ 46.04 $ 48.59 $ 50.32 $ 53.49 $ 54.40 $ 53.20 $ 56.26
REVPAR......................... $ 37.29 $ 38.87 $ 41.26 $ 42.79 $ 41.89 $ 34.31 $ 38.24
NASHVILLE, TENNESSEE
Occupancy...................... 86% 86% 88% 87% 81% 67.2% 71.1%
ADR............................ $ 48.39 $ 52.69 $ 56.98 $ 62.03 $ 67.33 $ 64.66 $ 66.65
REVPAR......................... $ 41.62 $ 45.31 $ 50.14 $ 53.97 $ 54.54 $ 43.48 $ 47.38
ADDISON (DALLAS), TEXAS
Occupancy...................... 71% 75% 79% 78% 76% 81.2% 76.6%
ADR............................ $ 51.74 $ 53.74 $ 56.83 $ 61.89 $ 64.29 $ 64.94 $ 66.65
REVPAR......................... $ 36.74 $ 40.31 $ 44.90 $ 48.27 $ 48.86 $ 52.74 $ 51.01
AMARILLO, TEXAS
Occupancy...................... 80% 79% 77% 75% 66% 58.5% 55.4%
ADR............................ $ 40.98 $ 44.31 $ 47.12 $ 50.55 $ 53.39 $ 49.70 $ 49.12
REVPAR......................... $ 32.78 $ 35.00 $ 36.28 $ 37.91 $ 35.24 $ 29.09 $ 27.22
RICHARDSON (DALLAS), TEXAS
Occupancy...................... 60% 67% 76% 78% 76% 77.8% 72.6%
ADR............................ $ 46.51 $ 45.77 $ 46.63 $ 50.82 $ 57.15 $ 55.60 $ 59.60
REVPAR......................... $ 27.91 $ 30.67 $ 35.44 $ 39.64 $ 43.43 $ 43.23 $ 43.26
SAN ANTONIO, TEXAS
Occupancy...................... 80% 78% 72% 62% 63% 54.3% 53.9%
ADR............................ $ 52.43 $ 55.11 $ 57.19 $ 57.67 $ 57.87 $ 55.87 $ 56.03
REVPAR......................... $ 33.56 $ 42.99 $ 41.18 $ 35.76 $ 36.46 $ 30.32 $ 30.21
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ACQUISITION HOTELS (CONTINUED):
CHARLESTON, SOUTH CAROLINA
Occupancy...................... 79% 79% 80% 76% 75% 74.3% 66.4%
ADR............................ $ 45.41 $ 47.35 $ 50.16 $ 53.48 $ 56.14 $ 53.57 $ 58.35
REVPAR......................... $ 35.87 $ 37.41 $ 40.13 $ 40.64 $ 42.11 $ 39.84 $ 38.74
COLUMBIA, SOUTH CAROLINA
Occupancy...................... 84% 84% 84% 81% 76% 72.9% 67.8%
ADR............................ $ 44.34 $ 47.32 $ 51.17 $ 54.42 $ 59.13 $ 58.96 $ 59.50
REVPAR......................... $ 37.25 $ 39.75 $ 42.98 $ 44.08 $ 44.94 $ 43.98 $ 40.36
GREENVILLE, SOUTH CAROLINA
Occupancy...................... 80% 79% 80% 81% 77% 76.1% 71.9%
ADR............................ $ 43.29 $ 44.99 $ 47.62 $ 52.30 $ 59.19 $ 57.79 $ 59.85
REVPAR......................... $ 34.63 $ 35.54 $ 38.10 $ 42.36 $ 45.58 $ 43.98 $ 43.04
SPARTANBURG, SOUTH CAROLINA
Occupancy...................... 64% 68% 70% 69% 63% 54.1% 51.1%
ADR............................ $ 38.75 $ 40.36 $ 42.89 $ 47.83 $ 54.15 $ 51.61 $ 52.00
REVPAR......................... $ 24.80 $ 27.44 $ 30.02 $ 33.00 $ 34.11 $ 27.92 $ 26.58
SUBTOTAL/WEIGHTED AVERAGE FOR
ACQUISITION HOTELS.................
Occupancy...................... 75.7% 77.4% 78.9% 77.7% 74.3% 69.0% 65.7%
ADR............................ $ 46.19 $ 49.02 $ 52.01 $ 55.78 $ 60.04 $ 58.13 $ 60.67
REVPAR......................... $ 34.70 $ 38.02 $ 41.08 $ 43.43 $ 44.72 $ 40.32 $ 40.05
CONSOLIDATED TOTAL/WEIGHTED AVERAGE
OF HOTELS..........................
Occupancy...................... 73.8% 75.2% 76.3% 75.9% 72.2% 67.9% 67.2%
ADR............................ $ 50.05 $ 51.99 $ 54.65 $ 58.42 $ 63.52 $ 60.88 $ 64.48
REVPAR......................... $ 36.94 $ 39.20 $ 41.85 $ 44.51 $ 45.87 $ 41.79 $ 43.81
</TABLE>
- ---------------
(1) Reflects partial year results.
(2) The Company has signed an agreement to sell this hotel, subject to customary
closing conditions, including satisfaction of the buyer's due diligence.
There can be no assurance that such sale will be consummated.
Information with respect to certain of the Hotels, including the
Acquisition Hotels, in the foregoing table, for periods prior to their
acquisition by the Company, was obtained from the previous owners.
RECENTLY ACQUIRED CURRENT HOTELS AND THE ACQUISITION HOTELS
The following briefly describes each of the Current Hotels acquired since
January 1, 1997 and each of the Acquisition Hotels.
RECENTLY ACQUIRED CURRENT HOTELS
Hampton Inn -- 201 Stephenson Avenue, Savannah, Georgia. This
two-building, exterior corridor hotel is located on an approximately 3.4 acre
site in the Midtown section of Savannah, Georgia approximately 18 miles from
Savannah International Airport and in proximity to Hunter Army Airfield. The
hotel has 129 guest rooms and features an outdoor swimming pool, a
lobby/breakfast area, free in-room movies and cable television.
Hampton Inn -- 8501 Hampton Boulevard, Norfolk, Virginia. This
three-story, interior corridor hotel is located on an approximately 1.7 acre
site in Norfolk, Virginia approximately one-half mile from the Norfolk Naval
Base and ten miles from the Norfolk International Airport. The hotel has 119
guest rooms and has an indoor pool and hot tub and four whirlpool rooms.
Hampton Inn -- 390 Goodman Road, Southaven (Memphis), Mississippi. This
three-story, interior corridor hotel is located on an approximately 2.9 acre
site in Southaven, Mississippi approximately 12 miles south of downtown Memphis,
Tennessee and approximately seven miles southwest of Memphis International
Airport. The hotel has 86 guest rooms and features a meeting room, an outdoor
swimming pool, a lobby/breakfast area and free in-room movies.
Hampton Inn -- 90 Old South Road, Pickwick, Tennessee. This three-story,
interior corridor hotel is located on an approximately 3.5 acre site in
Pickwick, Tennessee on the corner of Highway 57 and Old South
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Road at Shiloh Falls and is conveniently located in proximity to Pickwick
Landing State Park and Shiloh National Military Park and Battlefield. The hotel
has 50 guest rooms and features two meeting rooms.
Hampton Inn -- 10591 Metcalf Frontage Road, Overland Park (Kansas City),
Kansas. This five-story, interior corridor hotel is located on an approximately
3.0 acre site in an upscale section of Kansas City in proximity to the home
office of US Sprint and the NCAA headquarters. The hotel has 134 guest rooms and
has an outdoor pool and a two-bay meeting room.
Residence Inn -- 4361 West Reno Avenue, Oklahoma City, Oklahoma. This
17-building, extended stay hotel is located on an approximately 4.8 acre site in
a commercial district of Oklahoma City approximately 20 minutes from the Will
Rogers Airport, with free airport shuttle transportation available, and
approximately ten minutes from downtown Oklahoma City. The hotel has 135 guest
suites and features an outdoor swimming pool, meeting rooms and complimentary
breakfast and afternoon beer, wine and appetizers.
Residence Inn -- 6477 East Speedway Boulevard, Tucson, Arizona. The
17-building, extended stay hotel is located on an approximately 3.9 acre site in
east Tucson approximately six miles from the University of Arizona campus. The
hotel has 128 guest suites and features an outdoor swimming pool, meeting rooms
and complimentary breakfast and afternoon beer, wine and appetizers.
Residence Inn -- 3880 North Academy Boulevard, Colorado Springs,
Colorado. This 13-building, extended stay hotel is located on an approximately
3.1 acre site in North Colorado Springs, in proximity to the U.S. Air Force
Academy. The hotel has 96 guest suites and features an outdoor swimming pool,
meeting rooms and complimentary breakfast and afternoon beer, wine and
appetizers.
THE ACQUISITION HOTELS
Hampton Inn -- 1466 Montgomery Highway, Birmingham (Vestavia Hills),
Alabama. This three-story, exterior corridor hotel is located on an
approximately 3.26 acre site in Birmingham, Alabama at the northwest quadrant of
the intersection of Interstate 65 and Route 31 and approximately 18 miles from
Birmingham Airport. The hotel has 123 guest rooms and features an outdoor
swimming pool, a lobby/breakfast area, free in-room movies and cable television.
Hampton Inn -- 2731 US Highway 280, Birmingham (Mountain Brook),
Alabama. This five-story, interior corridor hotel is located on an
approximately two acre site in Birmingham, Alabama on the east side of US
Highway 280 and three miles southeast of downtown Birmingham. The hotel has 131
guest rooms and features an outdoor swimming pool and a lobby/breakfast area.
The hotel is subject to a ground lease for a term of 9.5 years, with 10
five-year options, that provides for a minimum annual rent of $87,120, subject
to fixed periodic escalations.
Hampton Inn -- 500 West 29th Street, North Little Rock, Arkansas. This
four-story, interior corridor hotel is located on an approximately 1.9 acre site
in Little Rock, Arkansas approximately one mile from the interchange of
Interstate 40 and Interstate 30, one mile from downtown North Little Rock, five
miles from downtown Little Rock and 10 miles from Little Rock Airport. The hotel
has 123 guest rooms and features an outdoor swimming pool, a lobby/breakfast
area, free in-room movies and cable television.
Hampton Inn -- 1500 South Abilene Street, Aurora (Denver), Colorado. This
four-story, interior corridor hotel is located on an approximately 2.26 acre
site in Aurora, Colorado on the east side of Interstate 225 in the southeast
quadrant of the intersection of East Florida Avenue and South Abilene Street
approximately five miles from Interstate 70. The hotel has 132 guest rooms and
features an outdoor swimming pool, a lobby/breakfast area, free in-room movies
and cable television.
Hampton Inn -- 7245 Commerce Center Drive, Colorado Springs,
Colorado. This four-story, interior corridor hotel is located on an
approximately 1.83 acre site in Colorado Springs, Colorado at the northwest
quadrant of the intersection of Interstate 25 and Woodmen Road. The hotel has
128 guest rooms and features an outdoor swimming pool, a lobby/breakfast area,
free in-room movies and cable television.
Hampton Inn -- 3400 Northlake Parkway, Atlanta (Northlake), Georgia. This
five-story, interior corridor hotel is located on an approximately 1.98 acre
site in Atlanta, Georgia at the intersection of Northlake
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Parkway and Parklake Drive and approximately one tenth of a mile from Interstate
285. The hotel has 130 guest rooms and features an outdoor swimming pool and a
lobby/breakfast area. The hotel is subject to a ground lease for a term of 11
years, with four ten-year options, that provides for a minimum annual rent of
$99,060 and contains an option to purchase.
Hampton Inn -- 9995 Old Dogwood Road, Roswell (Atlanta), Georgia. This
three-story, exterior corridor hotel is located on an approximately 2.92 acre
site in Atlanta, Georgia approximately one half mile from the Georgia 400 access
ramps and 2.5 miles from the new North Point Mall. The hotel has 129 guest rooms
and features an outdoor swimming pool, a lobby/breakfast area, free in-room
movies and cable television.
Hampton Inn -- 32420 Stevenson Highway, Madison Heights (Detroit),
Michigan. This four-story, interior corridor hotel is located on an
approximately 3.54 acre site in Madison Heights, Michigan on the east side of
Stevenson Highway approximately one quarter mile from the intersection of
Fourteen Mile Road and Stevenson Highway and one mile from the Interstate 75
access ramps. The hotel has 124 guest rooms and features an outdoor swimming
pool, a lobby/breakfast area, free in-room movies and cable television.
Hampton Inn -- 11212 North Newark Circle, Kansas City, Missouri. This
four-story, interior corridor hotel is located on an approximately 2.64 acre
site in Kansas City, Missouri on the east side of Interstate 29 north of the
Northwest 112th Street exit and approximately five miles from Kansas City
International Airport and 18 miles from downtown Kansas City. The hotel has 120
guest rooms and features an outdoor swimming pool, a lobby/breakfast area, free
in-room movies and cable television.
Hampton Inn -- 2454 Old Dorsett Road, Maryland Heights (St. Louis),
Missouri. This four and one half story, interior corridor hotel is located on
an approximately 1.63 acre site in Maryland Heights, Missouri in the northeast
quadrant of the intersection of Interstate 270 and Dorsett Road and
approximately midway between Lambert International Airport and the
Chesterfield/Interstate 64 Corridor and 15 miles from downtown St. Louis. The
hotel has 122 guest rooms and features an outdoor swimming pool, a
lobby/breakfast area, free in-room movies and cable television.
Hampton Inn -- 7740 Flying Cloud Drive, Eden Prairie (Minneapolis),
Minnesota. This three-story, interior corridor hotel is located on an
approximately 3.20 acre site in Eden Prairie, Minnesota on the eastern quadrant
of the intersection of Interstate 494 and US Highway 169/212 and approximately
12 miles from Minneapolis/St. Paul International Airport, 14 miles from downtown
Minneapolis and 19 miles from downtown St. Paul. The hotel has 122 guest rooms
and features an outdoor swimming pool, a lobby/breakfast area, free in-room
movies and cable television.
Hampton Inn -- 5101 Ellison Road, Albuquerque, New Mexico. This
five-story, interior corridor hotel is located on an approximately 2.18 acre
site in Albuquerque, New Mexico at the northwest quadrant of the intersection of
Interstate 25 and San Antonio Drive/Ellison Road and approximately ten miles
from Albuquerque International Airport and five miles from downtown Albuquerque.
The hotel has 125 guest rooms and features an outdoor swimming pool, a
lobby/breakfast area, free in-room movies and cable television.
Hampton Inn -- 6605 Old Collamer Road, East Syracuse, New York. This
two-story, interior corridor hotel is located on an approximately 4.12 acre site
in East Syracuse, New York approximately one half mile from the New York State
Thruway and proximate to downtown Syracuse and Hancock International Airport.
The hotel has 117 guest rooms and features a lobby/breakfast area, free in-room
movies and cable television.
Hampton Inn -- 1740 Highway 15-501, Chapel Hill, North Carolina. This
two-story, exterior corridor hotel is located on an approximately 4.49 acre site
in Chapel Hill, North Carolina approximately one quarter mile north of the
intersection of US 15-501 and US 15-501 Bypass and 16 miles from the
Raleigh-Durham Airport. The hotel has 122 guest rooms and features an outdoor
swimming pool, a lobby/breakfast area, free in-room movies and cable television.
Hampton Inn -- 2004 Veasly Street, Greensboro, North Carolina. This
two-story, exterior corridor hotel is located on an approximately 2.55 acre site
in Greensboro, North Carolina approximately three miles from downtown
Greensboro, two miles from the Greensboro Coliseum and eight miles from the
regional
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airport. The hotel has 121 guest rooms and features an outdoor swimming pool, a
lobby/breakfast area, free in-room movies and cable television.
Hampton Inn -- 3920 Tuller Road, Dublin (Columbus), Ohio. This five-story,
interior corridor hotel is located on an approximately 2.61 acre site in Dublin,
Ohio on the southwest corner of the intersection of Interstate 270 and Sawmill
Road and approximately 17 miles from Port Columbus International Airport and 20
miles from downtown Columbus. The hotel has 123 guest rooms and features an
outdoor swimming pool, a lobby/breakfast area, free in-room movies and cable
television.
Hampton Inn -- 5630 Franklin Pike Circle, Brentwood (Nashville),
Tennessee. This four-story, interior corridor hotel is located on an
approximately 1.96 acre site in Brentwood, Tennessee at the northwest quadrant
of the intersection of Old Hickory Boulevard and Interstate 65. The hotel has
114 guest rooms and features an outdoor swimming pool, a lobby/breakfast area,
free in-room movies and cable television.
Hampton Inn -- 5320 Poplar Avenue, Memphis, Tennessee. This four-story,
interior corridor hotel is located on an approximately 2.04 acre site in
Memphis, Tennessee approximately one mile from Interstate 240 and 10 miles from
Memphis International Airport. The hotel has 126 guest rooms and features an
outdoor swimming pool, a lobby/breakfast area, free in-room movies and cable
television.
Hampton Inn -- 1585 Sycamore View Road, Memphis, Tennessee. This
two-story, exterior corridor hotel is located on an approximately 2.54 acre site
in Memphis, Tennessee at the intersection of Sycamore View Road and Shelby Oaks
Drive and approximately one fifth of a mile from Interstate 40 and 16 miles from
Memphis International Airport. The hotel has 117 guest rooms and features an
outdoor swimming pool, a lobby/breakfast area, free in-room movies and cable
television. The hotel is subject to a ground lease for a term of seven years,
with four ten-year options, that provides for a minimum annual rent of $69,720,
subject to fixed periodic escalations.
Hampton Inn -- 2350 Elm Hill Pike, Nashville, Tennessee. This three-story,
exterior corridor hotel is located on an approximately 2.75 acre site in
Nashville, Tennessee approximately 1.5 miles from Nashville Airport and 3.5
miles from Opryland Entertainment Center. The hotel has 120 guest rooms and
features an outdoor swimming pool, a lobby/breakfast area, free in-room movies
and cable television. The hotel is subject to a ground lease for a term of nine
years, with four ten-year options, that provides for a minimum annual rent of
$115,284, subject to fixed periodic escalations, and contains an option to
purchase.
Hampton Inn -- 4555 Beltway, Addison (Dallas), Texas. This four-story
interior corridor hotel is located on an approximately 2.59 acre site in
Addison, Texas one block south of Beltline Road and one block east of Midway
Road approximately 20 miles from Dallas/Forth Worth International Airport and
convenient to downtown Dallas. The hotel has 160 guest rooms and features an
outdoor swimming pool, a lobby/breakfast area, free in-room movies and cable
television.
Hampton Inn -- 1700 Interstate 40 East, Amarillo, Texas. This two-story,
interior corridor hotel is located on an approximately 3.15 acre site in
Amarillo, Texas approximately eight miles from Amarillo International Airport
and two miles from downtown Amarillo. The hotel has 116 guest rooms and features
an outdoor swimming pool, a lobby/breakfast area, free in-room movies and cable
television.
Hampton Inn -- 1577 Gateway Boulevard, Richardson (Dallas), Texas. This
four-story, interior corridor hotel is located on an approximately 2.1 acre site
in Richardson, Texas approximately one half mile from the intersection of
Campbell Road and US Interstate 75 and 19 miles from Dallas/Fort Worth
International Airport. The hotel has 130 guest rooms and features an outdoor
swimming pool, a lobby/breakfast area, free in-room movies and cable television.
Hampton Inn -- 4803 Manitou Avenue, San Antonio, Texas. This five-story,
interior corridor hotel is located on an approximately 1.63 acre site in San
Antonio, Texas approximately one tenth of a mile from Interstate 410, two miles
from San Antonio Medical Center and seven miles from Sea World. The hotel has
123 guest rooms and features an outdoor swimming pool, a lobby/breakfast area,
free in-room movies and cable television.
Hampton Inn -- 4701 Saul White Boulevard, Charleston, South Carolina. This
four-story, interior corridor hotel is located on an approximately 2.2 acre site
in Charleston, South Carolina at the Montague Avenue exit off of Interstate 26
and approximately 5.5 miles from Charleston International Airport. The hotel
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has 125 guest rooms and features an outdoor swimming pool, a lobby/breakfast
area, free in-room movies and cable television.
Hampton Inn -- 1094 Chris Drive, Columbia, South Carolina. This
four-story, interior corridor hotel is located on an approximately 2.7 acre site
in Columbia, South Carolina on the southeast quadrant of the intersection of
Interstate 26 and Highway 378. The hotel has 121 guest rooms and features an
outdoor swimming pool, a lobby/breakfast area, free in-room movies and cable
television.
Hampton Inn -- 246 Congaree Road, Greenville, South Carolina. This
four-story, interior corridor hotel is located on an approximately 2.18 acre
site in Greenville, South Carolina at the Haywood Road exit off of Interstate
385 and approximately 10 miles from Greenville--Spartanburg Airport. The hotel
has 123 guest rooms and features an outdoor swimming pool, a lobby/breakfast
area, free in-room movies and cable television.
Hampton Inn -- 4930 College Drive, Spartanburg, South Carolina. This
two-story, exterior corridor hotel is located on an approximately 9.47 acre site
in Spartanburg, South Carolina on the northwest quadrant of the intersection of
Interstate 85 and Interstate 26 and approximately 13 miles from
Greenville/Spartanburg Airport. The hotel has 112 guest rooms and features an
outdoor swimming pool, a lobby/breakfast area, free in-room movies and cable
television.
THE PERCENTAGE LEASES
Effective November 15, 1996, each of the existing Percentage Leases was
amended and restated in a Consolidated Lease Amendment between the Partnership
and the Lessee (the "Consolidated Lease Amendment"). The principal amendments
were as follows: (i) the term of each Percentage Lease was increased to 15 years
from the date of closing, with rent for the final five years of the term to be
re-negotiated after ten years, and, if the parties cannot agree to new rent
terms, the new rent terms will be determined by arbitration; (ii) the
non-compete provision precluding the Lessee or its affiliates from owning,
leasing, operating, managing or franchising any hotel or motel within a 20-mile
radius of any hotel in which the Partnership or an affiliate of the Partnership
has an interest, was deleted; (iii) events of default shall include, among
others, (a) the failure of the Lessee to make Base Rent or Percentage Rent
payments when due and payable and continuing for a 10-day period after receipt
of notice from the Partnership, as compared to the previous 90-day period for
non-payment of Percentage Rent and (b) occurrence of a breach of any
representation or warranty under the Lease Guaranties; (iv) the Lessee shall be
required, not later than 30 days prior to the commencement or each lease year,
to prepare and submit to the Partnership for its approval a capital budget; (v)
prohibitions on payment of fees to any affiliate of the Lessee were deleted;
(vi) the Partnership has the right to approve any manager of its hotels that is
not an affiliate of the Lessee; (vii) the Lessee will have an extended period
(up to 30 days) to cure defaults under the franchise agreements; (viii) certain
amendments were made in the casualty restoration and condemnation provisions;
(ix) the respective obligations of the parties relating to franchise agreements,
capital expenditures and repairs and maintenance were amended; (x) the
Partnership has the right to terminate the lease (a) upon a sale of the
property, provided that the Partnership either (1) offers the Lessee a
substitute lease or leases creating for the Lessee a leasehold estate having
substantially the same fair market value as the Percentage Lease for the
property being sold or (2) pays the Lessee a termination payment equal to the
net present value of the property's cash flow to the Lessee, and (b) in the
event that the Company terminates its REIT status and the Partnership makes the
applicable lease termination payment; and (xi) the Lessee has a right of first
offer to acquire hotels subject to the Percentage Leases. Future leases between
the Partnership and the Lessee will contain provisions substantially similar to
the Consolidated Lease Amendment.
Each Percentage Lease has a non-cancelable initial term of fifteen (15)
years, subject to earlier termination upon the occurrence of certain
contingencies described in the Percentage Leases. During the term of each
Percentage Lease, the Lessee is obligated to pay (i) the greater of Base Rent or
Percentage Rent and (ii) certain other amounts, including interest accrued on
any late payments or charges. Base Rent accrues and is required to be paid
monthly. Percentage Rent is based on percentages of room revenues and to a
lesser extent, food and beverage revenues, if any, for each of the Hotels. Both
the Base Rent and the threshold room
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revenue amount in each Percentage Rent formula will be adjusted for changes in
the CPI. The adjustment is calculated at the beginning of each lease year based
upon the average change in the CPI during the prior 24 months. The adjustment in
any lease year may not exceed 7% of the Base Rent and threshold room revenue
amounts for the prior fiscal year. Percentage Rent is payable quarterly, on or
before the 30th day following the end of each of the calendar quarters in each
fiscal year.
The following table summarizes the percentages of room revenues in excess
of certain levels payable as Percentage Rent under the Percentage Leases as of
January 1, 1997:
<TABLE>
<CAPTION>
RANGE OF PERCENTAGES OF
ROOM REVENUE
------------------------
FIRST TIER TOP TIER
---------- ----------
<S> <C> <C>
Full Service(1)................................... 28% to 38% 65% to 77%
Extended Stay..................................... 27% to 37% 65% to 75%
Limited Service................................... 22% to 37% 62% to 74%
</TABLE>
- ---------------
(1) Percentage Rent formula also includes 15%-30% of beverage revenue and 5%-15%
of food revenue.
Other than real estate and personal property taxes and maintenance of
underground utilities and structural elements, which are obligations of the
Partnership, the Percentage Leases require the Lessee to pay insurance,
utilities and all other costs and expenses incurred in the operation of the
Hotels. The Percentage Leases also provide for rent reductions and abatements in
the event of damage or destruction or a partial taking of any Hotel.
Maintenance and Modifications. Under the Percentage Leases, the
Partnership is required to maintain the underground utilities and the structural
elements of the improvements, including exterior and interior load bearing walls
(excluding plate glass) and the roof of each Hotel. In addition, the Percentage
Leases obligate the Partnership to fund certain capital expenditures in the
Hotels pursuant to the capital budgets approved by the Partnership, when and as
deemed necessary by the Lessee, up to an amount equal to 4% of annual room
revenue, net of amounts actually expended for capital expenditures for each
Hotel during any fiscal year. The Partnership's obligation will be carried
forward to the extent that the Lessee has not expended such amount, and any
unexpended amounts will remain the property of the Partnership upon termination
of the Percentage Leases. Otherwise, the Lessee is required, at its expense, to
maintain the Hotels in good order and repair, except for ordinary wear and tear,
and to make non-structural, foreseen and unforeseen, and ordinary and
extraordinary, repairs that may be necessary and appropriate to keep the Hotels
in good order and repair.
The Lessee, at its expense and with the Partnership's approval, may make
non-capital and capital additions, modifications or improvements to the Hotels,
provided that such action does not significantly alter the character or purposes
of the Hotels or significantly detract from the value or operating efficiencies
of the Hotels. All such alterations, replacements and improvements shall be
subject to all the terms and provisions of the Percentage Leases and will become
the property of the Partnership upon termination of the Percentage Leases. The
Partnership owns substantially all personal property (other than inventory,
linens and other nondepreciable personal property) not affixed to, or deemed a
part of, the real estate or improvements thereon, except to the extent that
ownership of such personal property would cause the rents under a Percentage
Lease not to qualify as "rents from real property" for REIT income test
purposes.
Insurance and Property Taxes. The Partnership is responsible for paying
real estate and personal property taxes on the Hotels (except to the extent that
personal property associated with the Hotels is owned by the Lessee). The Lessee
is required to keep in force and pay or reimburse the Partnership for all
insurance on the Hotels, with extended coverage, including casualty,
comprehensive general public liability, workers' compensation, earthquake, flood
and other insurance appropriate and customary for properties similar to the
Hotels and naming the Partnership as an additional named insured.
Indemnification. Under each of the Percentage Leases, the Lessee is
obligated to indemnify, and is obligated to hold harmless, the Partnership from
and against liabilities, costs and expenses (including reasonable attorneys'
fees and expenses) incurred by, imposed upon or asserted against the Partnership
on
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<PAGE> 45
account of, among other things, (i) any accident or injury to person or property
on or about the Hotels, (ii) any misuse by the Lessee or any of its agents of
the leased property, (iii) any environmental liability resulting from any action
or negligence of the Lessee, (iv) taxes and assessments in respect of the Hotels
(other than real estate and personal property taxes and income taxes of the
Partnership on income attributable to the Hotels), (v) the sale or consumption
of alcoholic beverages on or in the real property or improvements thereon or
(vi) any breach of the Percentage Leases by Lessee; provided, however, that such
indemnification will not be construed to require the Lessee to indemnify the
Partnership against the Partnership's own grossly negligent acts or omissions or
willful misconduct or third-party contractual liabilities arising from
termination of the Percentage Leases due to an event of default by the
Partnership thereunder.
Assignment and Subleasing. The Lessee is not permitted to sublet all or
any part of the Hotels or assign its interest under any of the Percentage
Leases, other than to an Affiliate of the Lessee, without the prior written
consent of the Partnership. No assignment or subletting will release the Lessee
from any of its obligations under the Percentage Leases.
Damage to Hotels. In the event of damage to or destruction of any hotel
covered by insurance which renders the Hotel unsuitable for the Lessee's use and
occupancy, the Lessee, at its option, will be obligated to (i) repair, rebuild
or restore the Hotel or (ii) offer to acquire the Hotel on the terms set forth
in the applicable Percentage Lease. If the Lessee rebuilds the Hotel, the
Partnership is obligated to disburse to the Lessee, from time to time and upon
satisfaction of certain conditions, any insurance proceeds actually received by
the Partnership as a result of such damage or destruction, and any excess costs
of repair or restoration will be paid by the Lessee. If the Lessee decides not
to rebuild and the Partnership exercises its right to reject the Lessee's
mandatory offer to purchase the Hotel on the terms set forth in the Percentage
Lease, the Percentage Lease will terminate and the insurance proceeds will be
retained by the Partnership. If the Partnership accepts the Lessee's offer to
purchase the Hotel, the Percentage Lease will terminate and the Lessee will be
entitled to the insurance proceeds. In the event that damage to or destruction
of a Hotel which is covered by insurance does not render the Hotel wholly
unsuitable for the Lessee's use and occupancy, the Lessee generally will be
obligated to repair or restore the Hotel. In the event of damage to or
destruction of any Hotel which is not covered by insurance, the Lessee will be
obligated to either repair, rebuild or restore the Hotel or offer to purchase
the Hotel on the terms and conditions set forth in the Percentage Lease. The
Percentage Lease shall remain in full force and effect during the period
required for repair or restoration of any damaged or destroyed Hotel, with the
Lessee to receive a credit against rental payments and other charges in an
amount equal to any loss-of-income insurance proceeds actually received by the
Partnership.
Condemnation of Hotel. In the event of a total condemnation of a Hotel,
the relevant Percentage Lease will terminate with respect to such Hotel as of
the date of taking, and the Partnership and the Lessee will be entitled to their
shares of the condemnation award in accordance with the provisions of the
Percentage Lease. In the event of a partial taking that does not render the
Hotel unsuitable for the Lessee's use, the Lessee shall restore the untaken
portion of the Hotel to a complete architectural unit and the Partnership shall
contribute to the cost of such restoration that part of the condemnation award
specified for restoration, provided that if the condemnation awards are
inadequate to restore the affected Hotel to a complete architectural unit,
either the Partnership or the Lessee shall have the right to terminate the
applicable Percentage Lease.
Events of Default. Events of Default under the Percentage Leases include,
among others, the following:
(i) the occurrence of an Event of Default under any other lease
between the Partnership and the Lessee or any Affiliate of the Lessee
(including the Consolidated Lease Amendment);
(ii) the failure by the Lessee to pay Base Rent, Percentage Rent or
any additional charges within 10 days after written notice from the
Partnership that such has become due and payable;
(iii) the failure by the Lessee to observe or perform any other term
of a Percentage Lease and the continuation of such failure for a period of
30 days after receipt by the Lessee of notice from the Partnership thereof,
unless such failure cannot be cured within such period and the Lessee
commences appropriate action to cure such failure within said 30 days and
thereafter acts, with diligence, to correct such failure within such time
as is necessary;
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<PAGE> 46
(iv) if the Lessee or a guarantor of the Percentage Leases shall file
a petition in bankruptcy or reorganization pursuant to any federal or state
bankruptcy law or any similar federal or state law, or shall be adjudicated
a bankrupt or shall make an assignment for the benefit of creditors or
shall admit in writing its inability to pay its debts generally as they
become due, or if a petition or answer proposing the adjudication of the
Lessee or a guarantor of the Percentage Leases as bankrupt or its
reorganization pursuant to any federal or state bankruptcy law or any
similar federal or state law shall be filed in any court and the Lessee or
a guarantor of the Percentage Leases shall be adjudicated a bankrupt and
such adjudication shall not be vacated or set aside or stayed within 60
days after the entry of an order in respect thereof, or if a receiver of
the Lessee or a guarantor of the Percentage Leases or of the whole or
substantially all of the assets of the Lessee shall be appointed in any
proceeding brought by the Lessee or a guarantor of the Percentage Leases or
if any such receiver, trustee or liquidator shall be appointed in any
proceeding brought against the Lessee or any guarantor of the Percentage
Leases and shall not be vacated or set aside or stayed within 60 days after
such appointment;
(v) if the Lessee voluntarily discontinues operations of a Hotel for
more than 30 days, except as a result of damage, destruction or
condemnation;
(vi) if the franchise agreement with respect to a Hotel is terminated
as a result of any action or failure to act by the Lessee or its agents
(other than a failure to complete a capital improvement required by the
franchisor resulting from the Partnership's failure to fund such capital
improvements); or
(vii) the occurrence of an event of default under either of the Lease
Guaranties.
If an Event of Default occurs and continues beyond any curative period, the
Partnership will have the option of terminating the Percentage Lease or any or
all other Percentage Leases between the Partnership and the Lessee and the
Consolidated Lease Amendment and, unless such Event of Default is cured, the
Percentage Leases shall terminate and the Lessee will be required to surrender
possession of the affected Hotels.
Right of First Offer. In the event that the Partnership desires to sell
its interest in a Hotel, the Partnership shall first offer to Lessee by written
notice the opportunity to acquire the Hotel at the price at which the
partnership intends to offer the Hotel (the "Offer Price"). In the event that
the Lessee elects within 15 days after receipt of such notice to acquire the
Hotel at the Offer Price, the Partnership will be obligated to sell the Hotel to
the Lessee or its nominee at the Offer Price, and upon such sale, the applicable
Percentage Lease shall terminate with respect to the Hotel. Such provisions
shall not apply to any sale, transfer or conveyance by the Partnership of any
interest in the Hotels to any affiliate of the Partnership.
Termination of Percentage Leases on Disposition of the Hotels. In the
event the Partnership enters into an agreement to sell or otherwise transfer a
Hotel and the Lessee does not elect to acquire the Hotel in accordance with the
right of first offer described above, the Partnership shall be permitted to sell
the Hotel to a third party at a price equal to or greater than 95% of the Offer
Price. As compensation for the early termination of the Lessee's leasehold
estate, the Partnership will have the right to terminate the Percentage Lease
with respect to such Hotel upon either (i) paying the Lessee the net present
value of the Lessee's leasehold interest in the remaining term of the Percentage
Lease to be terminated or (ii) offering to lease to the Lessee one or more
substitute hotels on terms that would create a leasehold interest in such hotels
with a fair market value equal to or exceeding the fair market value of the
Lessee's remaining leasehold interest under the Percentage Lease to be
terminated.
Termination of Percentage Leases on Company's Termination of REIT
Status. In the event that the Company terminates its REIT status or the Code
provisions are amended so that REITs are permitted to operate hotels, the
Partnership may elect to terminate the Percentage Leases. In such event, the
Partnership shall be obligated to pay to the Lessee the termination payment
calculated as set forth in "-- The Percentage Leases -- Termination of
Percentage Leases on Disposition of the Hotels."
Other Lease Covenants. The Lessee has agreed that it will not make any
payments to any Affiliate of the Lessee in connection with the Hotels as gross
operating expenses unless expressly set forth in the operating budget or an
approved capital budget or otherwise agreed to by the Partnership. The Lessee
shall be permitted
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<PAGE> 47
to contract with its Affiliates for management and other services and pay fees
for such services, provided that such contracts and fees (i) are disclosed in
writing to the Partnership and (ii) shall not be included in gross operating
expenses. The Lessee's obligation to pay such fees shall be subordinated to its
obligation to pay Base Rent, Percentage Rent and additional charges to the
Partnership pursuant to the Percentage Leases.
Approval of Management Agreement. The Partnership shall have the right in
its sole and absolute discretion to approve in advance any manager or proposed
manager of a Hotel that is not an Affiliate of the Lessee or is not controlled
by Interstate or its senior management, as well as any agreement relating to the
management or operation of the Hotel (a "Management Agreement") by a manager
that is not an Affiliate of the Lessee, and the Lessee will provide the
Partnership with an executed copy of any Management Agreement so approved by the
Partnership. Any Management Agreement (whether or not with a manager that is an
Affiliate of the Lessee) must provide that (i) upon termination of the
applicable Percentage Lease or termination of the Partnership's or the Lessee's
right to possession of the Hotel for any reason, the Management Agreement may be
terminated by the Partnership without liability for any payment due or to become
due to the manager thereunder; (ii) any management fees shall be subordinated to
payments of rent to the Partnership; and (iii) in the event that the Lessee is
in default, the manager shall, at the election of the Partnership and provided
the manager continues to be paid, continue to perform under the terms of the
Management Agreement for a period not to exceed 90 days. No fees or other
amounts payable by the Lessee to any manager shall excuse the Lessee from its
obligations to pay rent and other amounts payable by Lessee to the Partnership
under the applicable Percentage Lease.
Breach by Partnership. If the Partnership fails to cure a breach by it
under a Percentage Lease, the Lessee may purchase the relevant Hotel from the
Partnership for a purchase price equal to that Hotel's then fair market value.
Upon notice from Lessee that the Partnership has breached the Lease, the
Partnership has 30 days to cure the breach or proceed to cure the breach, which
period may be extended in the event of certain specified, unavoidable delays
with such extension not to exceed 90 days after the notice of breach from the
Lessee.
Inventory. All inventory required in the operation of the Hotels is
purchased and owned by the Lessee at its expense. The Company has the option to
purchase all inventory related to a particular hotel at fair market value upon
termination of the related Percentage Lease.
FRANCHISE AGREEMENTS
The Lessee holds the franchise licenses for the Current Hotels. Of the 56
Current Hotels, 37 are licensed as Hampton Inn hotels. Hampton Inn is a
registered trademark of Promus. Eight Current Hotels are licensed as Residence
Inn hotels. Residence Inn is a registered trademark of Marriott. Four Current
Hotels are licensed as Holiday Inn or Holiday Inn Express hotels. Holiday Inn
and Holiday Inn Express are registered trademarks of Holiday Inn. Three Current
Hotels are licensed as Comfort Inn hotels. Comfort Inn is a registered trademark
of Choice. Three Current Hotels are licensed as Homewood Suites hotels. Homewood
Suites is a registered trademark of Promus. The Acquisition Hotels are operated
as Hampton Inn hotels under franchise licenses from Promus, which has agreed to
approve the transfer or issuance of franchise licenses to the Lessee upon the
Company's acquisition of the Acquisition Hotels. Promus is requiring that the
Acquisition Hotels be operated under conditional franchise licenses, subject to
completion of certain improvements, prior to issuance of a permanent license.
Also, until the issuance of permanent franchise licenses, certain of the Current
Hotels are being operated under conditional franchise licenses. The Company
intends to maintain the existing franchise affiliations of all the Hotels.
The Company anticipates that most of the additional hotel properties in
which it invests will be operated under franchise licenses. The Company believes
that the public's perception of quality associated with a franchisor is an
important feature in the operation of the hotel. Franchisors provide a variety
of benefits for franchisees, which include national advertising, publicity and
other marketing programs designed to increase brand awareness, training of
personnel, continuous review of quality standards and centralized reservation
systems.
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The Hampton Inn, Homewood Suites, Holiday Inn, Residence Inn and Comfort
Inn franchise licenses generally specify certain management, operational,
recordkeeping, accounting, reporting and marketing standards and procedures with
which the Lessee must comply. Such franchise licenses obligate the Lessee to
comply with the franchisor's standards and requirements with respect to training
of operation personnel, safety, maintaining specified insurance, the types of
services and products ancillary to guest room services that may be provided by
the Lessee, display of signage and the type, quality and age of FF&E included in
guest rooms, lobbies and other common areas.
The franchise licenses give the Lessee the right to operate the particular
Hotel under a franchise license for periods ranging from 2 to 20 years. The
franchise agreements provide for termination at the franchisor's option upon the
occurrence of certain events, including the Lessee's failure to pay royalties
and fees or perform its other covenants under the license agreement, bankruptcy,
abandonment of the franchise, commission of a felony, assignment of the license
without the consent of the franchisor or failure to comply with applicable law
in the operation of the relevant Hotel. The Lessee will be entitled to terminate
the franchise license only by giving at least 12 months notice and paying a
specific amount of liquidated damages. If the franchise license terminates as a
result of the Company's failure to fund a capital improvement required by a
franchisor, the Company may be obligated to pay the liquidated damages. The
license agreements will not renew automatically upon expiration. During the year
ended December 31, 1996, the Company spent approximately $19 million for capital
improvements to the Current Hotels and has committed to spend an additional $11
million for total capital improvements in 1997. In addition, the Company intends
to spend approximately $5.5 million for capital improvements to the Acquisition
Hotels. The Lessee is responsible for making royalty payments under the
franchise agreements to the franchisors.
HAMPTON INN(R) AND HOMEWOOD SUITES(R) ARE REGISTERED TRADEMARKS OF PROMUS,
HOLIDAY INN(R) AND HOLIDAY INN EXPRESS(R) ARE REGISTERED TRADEMARKS OF HOLIDAY
INN, RESIDENCE INN(R) IS A REGISTERED TRADEMARK OF MARRIOTT AND COMFORT INN(R)
IS A REGISTERED TRADEMARK OF CHOICE. PROMUS, HOLIDAY INN, MARRIOTT AND CHOICE
HAVE NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF A HAMPTON INN, HOMEWOOD
SUITES, HOLIDAY INN, HOLIDAY INN EXPRESS, RESIDENCE INN OR COMFORT INN FRANCHISE
LICENSE FOR ANY HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY PROMUS, HOLIDAY INN, MARRIOTT OR
CHOICE (OR ANY OF THEIR AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR
THE PARTNERSHIP OR THE COMMON STOCK OFFERED HEREBY.
LEGAL PROCEEDINGS
Neither the Company nor the Partnership currently is involved in any
material litigation nor, to the Company's knowledge, is any material litigation
currently threatened against the Company or the Partnership. The Lessee has
advised the Company that it currently is not involved in any litigation, other
than routine litigation arising in the ordinary course of business. The Lessee
has advised the Company that none of such litigation is material and
substantially all of any liability is expected to be covered by liability
insurance. The current owners of the Acquisition Hotels have represented to the
Partnership that there is no material litigation threatened against or affecting
the Acquisition Hotels.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors consists of four members, three of whom are
Independent Directors. The Board of Directors is divided into three classes. The
Company has six executive officers. Certain information regarding the directors
and executive officers of the Company is set forth below.
<TABLE>
<CAPTION>
TERM
NAME POSITION CLASS EXPIRES
---- -------- ----- -------
<S> <C> <C> <C>
Phillip H. McNeill, Sr. ............. Chairman of the Board, Chief Executive Officer and Class I 1998
Director
David L. Levine...................... President and Chief Operating Officer -- --
Howard A. Silver..................... Vice President of Finance, Secretary, Treasurer -- --
and Chief Financial Officer
Phillip H. McNeill, Jr. ............. Vice President of Development -- --
J. Ronald Cooper..................... Assistant Secretary and Controller -- --
Connie O. Parker..................... Assistant Secretary -- --
James A. Thomas, III................. Independent Director Class II 1999
William W. Deupree, Jr. ............. Independent Director Class II 1999
Joseph W. McLeary.................... Independent Director Class III 1997
</TABLE>
Phillip H. McNeill, Sr. (age 58) is Chief Executive Officer of the Company
and has been President of McNeill Investment Company, Inc. since 1977, Chairman
of Trust Leasing since 1994 and Chairman of McNeill Hospitality Corporation
since 1984. From 1963 to 1977, he served in various capacities, including
President and Chief Executive Officer, with Schumacher Mortgage Company, Inc., a
mortgage banking firm and a subsidiary of Time, Inc. Mr. McNeill has served as
President and Director of the Memphis Mortgage Bankers Association and the
Tennessee State Mortgage Bankers Association. He has served as a member of the
Board of Trustees of the Memphis State University Foundation and a Director of
First Commercial Bank of Memphis. Mr. McNeill holds a B.S. and a J.D. degree
from Memphis State University and is a graduate of the Northwestern School of
Mortgage Banking. Mr. McNeill has been a director of the Company since February
1994.
David L. Levine (age 49) is President and Chief Operating Officer of the
Company and joined the Company in June 1994. Mr. Levine entered the hospitality
industry in 1969 with The E.F. McDonald Incentive Travel Company, an incentive
and corporate travel arrangement company. In 1974 Mr. Levine was made Director
of the Corporate Travel Division of The E.F. McDonald Incentive Travel Company.
In 1975 Mr. Levine joined Intercontinental Hotels Corporation to direct its
Midwest Travel Industry Sales Department. From 1977 to 1981, Mr. Levine held
various positions with Holiday Inns, Inc., including Director of Worldwide
Sales -- USA and Canada, and National Sales Director and in 1982 became the
Director of Corporate and Franchise Hotel Operations for its Chicago district.
From 1984 to 1985, Mr. Levine was Vice President of Operations of a regional
Holiday Inn hotel operator. In 1985, Mr. Levine formed North American
Hospitality, Inc. and served as President before joining the Company. North
American Hospitality, Inc. operates Hampton Inn hotels and other properties for
financial institutions and private developers.
Howard A. Silver (age 42) is Vice President of Finance, Secretary,
Treasurer and Chief Financial Officer of the Company and has been a certified
public accountant since 1980. Mr. Silver joined the Company in May 1994. From
1992 until joining the Company, Mr. Silver served as Chief Financial Officer of
Alabaster Originals, L.P., Memphis, Tennessee, a fashion jewelry wholesaler.
From 1978 to 1985, Mr. Silver was employed as a certified public accountant with
the national accounting firm of Ernst & Young. Mr. Silver holds a B.S. in
Accounting from Memphis State University.
Phillip H. McNeill, Jr. (age 35) is Vice President of Development of the
Company. From 1994 to 1996, he served as President of Trust Leasing and from
1984 to 1996 served as Vice President of Trust Management, formerly McNeill
Hospitality Corporation, an Affiliate of Trust Leasing. Mr. McNeill is the son
of Phillip H.
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<PAGE> 50
McNeill, Sr. and holds a B.B.A. from the University of Memphis and is a graduate
of the Northwestern School of Mortgage Banking.
J. Ronald Cooper (age 48) is Assistant Secretary and Controller of the
Company. From 1994 to 1996, he was Controller and Director of Financial
Reporting for Trust Leasing and joined Trust Leasing in October 1994. Mr. Cooper
has been a certified public accountant since 1972. From 1978 until joining the
Former Lessee, Mr. Cooper was employed as Secretary, Treasurer and Controller of
Wall Street Deli, Inc., a publicly-owned delicatessen company. Prior to that,
Mr. Cooper was a certified public accountant with the national accounting firm
of Coopers & Lybrand L.L.P. from 1970 to 1976. Mr. Cooper holds a B.S. degree in
accounting from Murray State University.
Connie O. Parker (age 56) is Assistant Secretary of the Company and has
been Secretary and Treasurer of McNeill Investment Company, Inc. since 1977 and
Secretary and Treasurer of McNeill Hospitality Corporation, an Affiliate of
McNeill Investment Company, Inc. and Mr. McNeill, since 1984. Prior to that
time, Ms. Parker served as Secretary and Treasurer of McNeill Investment
Company, Inc. From 1963 to 1977, she held various positions including Assistant
Treasurer of Schumacher Mortgage Company, a mortgage banking firm.
James A. Thomas, III (age 56) is Chairman of the Board of NewSouth Capital
Management, Inc., an investment advisory firm in Memphis, Tennessee that manages
approximately $1.6 billion in investment assets, a position he has held since
January 1985. He is a director of First Commercial Bank of Memphis and a trustee
of the Board of Trustees of Rhodes College. Mr. Thomas is a graduate of Rhodes
College. Mr. Thomas has been a director of the Company since February 1994.
William W. Deupree, Jr. (age 55) is a director of Morgan Keegan & Company,
Inc. and its parent company, Morgan Keegan, Inc., a New York Stock Exchange
listed company and was President of such corporations from 1985 until 1996. Mr.
Deupree joined Morgan Keegan & Company, Inc. in 1972. He is a director of NSA
International, Inc., a provider of water filtration devices. He is also a member
of the Regional Firms Advisory Committee of the New York Stock Exchange, as well
as a member of the Board of Directors for the Securities Industry Association.
Mr. Deupree is a graduate of the University of the South. Mr. Deupree has been a
director of the Company since February 1994.
Joseph W. McLeary (age 57) is Chairman and Chief Executive Officer of
Midland Financial Group, Inc., a publicly-owned automobile insurance company,
positions he has held since 1987. From 1984 to 1987 he was President of McLeary
& Co., a company organized to manage a privately held investment fund engaged in
the acquisition of small local businesses in the Memphis, Tennessee area. From
1969 to 1983 he was President, Chief Financial Officer and a director of Cook
International, Inc., a publicly-owned agricultural commodities firm. Prior to
that he was employed by the Federal Reserve Bank of Atlanta. Mr. McLeary holds a
B.S. from Lambuth College and an M.S. and Ph.D from the University of Tennessee.
Mr. McLeary has been a director of the Company since February 1994.
1994 STOCK INCENTIVE PLAN
The Board of Directors has adopted the 1994 Plan to provide incentives to
attract and retain executive officers and key employees. The 1994 Plan was
approved by the shareholders of the Company at the 1995 annual meeting of
shareholders held on April 18, 1995. The 1994 Plan is administered by the
Compensation Committee. The Compensation Committee may delegate its authority to
administer the 1994 Plan to one or more officers of the Company. The
Compensation Committee may not, however, delegate its authority with respect to
grants and awards to individuals subject to Section 16 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Compensation
Committee or its delegate, as appropriate, generally has the authority, within
limitations described in the 1994 Plan, (i) to establish rules and policies
concerning the 1994 Plan, (ii) to determine the persons to whom stock options,
stock appreciation rights and awards of restricted stock and performance shares
may be granted, (iii) to fix the number of shares of Common Stock to be covered
by each award and (iv) to set the terms and provisions of each award.
The Board of Directors adopted, and at the annual meeting of shareholders
on May 7, 1996, the shareholders of the Company subsequently approved, an
amendment to the 1994 Plan to increase the maximum aggregate number of shares of
Common Stock issuable under the 1994 Plan from 700,000 to
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<PAGE> 51
2,300,000. Also, the Board of Directors adopted, and at the annual meeting of
shareholders on April 29, 1997, the shareholders of the Company subsequently
approved, an increase in the maximum number of shares of Common Stock that may
be issued under the 1994 Plan pursuant to awards of restricted stock and in full
or partial settlement of awards of performance shares from 100,000 to 350,000.
The Compensation Committee approved the grant of options to acquire 600,000
shares of Common Stock to the following persons on July 6, 1994: Phillip H.
McNeill, Sr. (390,000 shares); David L. Levine (150,000) shares; Howard A.
Silver (45,000 shares); and Connie O. Parker (15,000 shares). Messrs. McNeill,
Levine and Silver each received an incentive stock option ("ISO") covering
37,500 shares of Common Stock and Ms. Parker received an ISO covering 15,000
shares of Common Stock. All other options so granted were granted as
nonqualified options. The exercise price per share for each such option is
$12.50, the closing price of the Common Stock on The Nasdaq Stock Market on July
6, 1994, the effective date of grant. All such options (both ISOs and
nonqualified options) are exercisable for 20% of the shares covered by such
option on the first anniversary of the Offering and with respect to an
additional 20% of the shares on each of the second through fifth anniversaries
of the Offering. All options are exercisable for eight years from the date of
grant at a price per share equal to the fair market value of a share of Common
Stock on the date of grant.
As of December 11, 1996 (the "Date of Grant"), the Compensation Committee
approved the award under the 1994 Plan of restricted shares of Common Stock to
Messrs. Phillip H. McNeill, Sr. (10,000 shares), David L. Levine (7,500 shares)
and Howard A. Silver (7,500 shares), subject to vesting. The awards vest with
respect to 60% of the shares on the third anniversary of the Date of Grant and
at the rate of an additional 20% per year on each of the fourth and fifth
anniversaries of the Date of Grant; provided, however, that (i) if the total
assets of the Company 30 days prior to the first anniversary of the Date of
Grant equal or exceed the total assets as of the Date of Grant, the shares shall
vest at the rate of 20% per year on each of the first through fifth
anniversaries of the Date of Grant, and (ii) if the average fair market value
(defined as being the highest closing price of the Common Stock on the NYSE,
determined 30 days prior to the second anniversary of the Date of Grant, equals
or exceeds such fair market value as of the first anniversary of the Date of
Grant, the shares shall vest at the rate of 40% per year on the second
anniversary of the Date of Grant and at 20% on each of the third through fifth
anniversaries of the Date of Grant. Prior to vesting, the recipients will have
the right to receive dividends with respect to such shares.
COMPENSATION OF DIRECTORS
The Company currently pays no cash compensation to its directors. Each
non-employee director receives, upon being elected as a director, 5,000 shares
of Common Stock subject to certain restrictions. Such shares vest with each
director at the rate of 1,000 shares per year of service, beginning with the
commencement of service as a director. Each non-employee director is entitled to
vote and receive dividends paid with respect to the restricted shares of Common
Stock prior to vesting. Any non-employee director who ceases to be a director
will forfeit any restricted shares not previously vested. Messrs. Thomas,
Deupree and McLeary each has received 5,000 restricted shares of Common Stock.
In addition, under the Directors' Plan, each non-employee director received on
April 18, 1995 an option to purchase 1,000 shares of Common Stock at an exercise
price of $11.25 per share, the fair market value on the date of grant. Pursuant
to the Directors' Plan, each non-employee director will receive an option for
1,000 shares of Common Stock on the date of the first meeting of the Board of
Directors following each annual meeting of the Company's shareholders. The
option price will be the fair market value of the Common Stock on the effective
date of grant. The exercise price must be paid in a single sum, in cash. Options
issued under the Directors' Plan are exercisable for ten years from the date of
grant. The maximum number of shares of Common Stock for which options can be
granted under the Directors' Plan is 50,000. The share authorization, the terms
of outstanding options and the number of shares for which options will
thereafter be awarded shall be subject to adjustment in the event of a stock
dividend, stock split, combination, reclassification, recapitalization or other
similar event. No director who is an employee of the Company or an affiliate is
eligible to participate in the Directors' Plan. The Company reimburses directors
for their out-of-pocket expenses in connection with their service on the Board
of Directors.
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<PAGE> 52
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock, as of March 31, 1997, by (i) each director, (ii) each executive
officer and (iii) all directors and executive officers as a group. Unless
otherwise indicated, such shares of Common Stock are owned directly and the
indicated person has sole voting and investment power.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE
OF BENEFICIAL
NAME OF BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
------------------------ -------------- ----------------
<S> <C> <C>
Phillip H. McNeill, Sr............................... 967,215(1)(2) 4.0%(1)
James A. Thomas, III................................. 112,575(3)(4) *
William W. Deupree, Jr............................... 22,000(3) *
Joseph W. McLeary.................................... 9,500(3) *
David L. Levine...................................... 84,311(5)(6) *
Howard A. Silver..................................... 35,607(7)(8) *
Phillip H. McNeill, Jr............................... 8,034(9) *
J. Ronald Cooper..................................... 6,070(10) *
Connie O. Parker..................................... 1,500(11) *
All directors and executive officers as a group (9
persons)........................................... 1,246,812(1)(2)(3)(4)
(5)(6)(7)(8)(9)(10) 5.2%(1)
</TABLE>
- ---------------
* Represents less than 1% of the outstanding Common Stock.
(1) Includes 678,540 Units held by Mr. McNeill or his affiliates, which Units
are redeemable at the option of Mr. McNeill at any time pursuant to
redemption rights ("Redemption Rights"). The Units are redeemable on a
one-for-one basis for shares of Common Stock or, at the Company's option,
an equivalent amount of cash. The total number of shares outstanding used
in calculating the percentage of class assumes that none of the Units held
by other persons are redeemed for shares of Common Stock.
(2) Includes: (a) 4,400 shares owned by Mr. McNeill's wife; (b) 6,600 shares
owned by Mr. McNeill's children; (c) 15,218 shares owned by McNeill
Investment Company, Inc.; (d) 10,000 shares issued in December 1996 to Mr.
McNeill under the 1994 Plan that are subject to certain vesting
requirements over a five-year period from the date of grant; and (e)
409,330 shares issuable to Mr. McNeill, 189,495 shares issuable to W/S,
Inc. and 79,715 shares issuable to McNeill-Sullivan Hospitality Corporation
upon the exercise of Redemption Rights. Mr. McNeill owns 90% of the capital
stock of W/S, Inc. and 100% of the capital stock of McNeill Investment
Company, Inc. and McNeill Sullivan Hospitality Corporation. Includes
156,000 shares issuable upon the exercise of vested options granted under
the 1994 Plan. Excludes 234,000 shares of Common Stock subject to options
granted to Mr. McNeill under the 1994 Plan, which options vest with respect
to 78,000 shares in each of July 1997, 1998 and 1999.
(3) Includes an aggregate of 5,000 shares issued to each Independent Director
in March 1994 subject to certain restrictions. Such shares began vesting
with each Independent Director at the rate of 1,000 shares per year
beginning in 1994. Any restricted shares not vested when an Independent
Director ceases to be a director will be forfeited. Each Independent
Director will be entitled to vote and receive the dividends paid on such
shares prior to vesting. Includes 2,000 shares issuable upon the exercise
of vested options granted to each director under the Directors' Plan. Does
not include 1,000 shares of Common Stock subject to options granted to each
Independent Director under the Directors' Plan in each of April 1997, 1998
and 1999.
(4) Includes (a) 1,200 shares owned by Mr. Thomas' wife, as to which shares Mr.
Thomas disclaims beneficial ownership; (b) 7,375 shares owned by Mr.
Thomas' daughters, as to which shares Mr. Thomas disclaims beneficial
ownership; and (c) 11,030 shares in investment accounts over which Mr.
Thomas has or shares voting power and dispositive power.
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<PAGE> 53
(5) Includes (a) 7,500 shares issued in December 1996 to Mr. Levine under the
1994 Plan that are subject to certain vesting requirements over a five-year
period from the date of grant, and (b) 344 shares owned by Mr. Levine's
wife.
(6) Includes 60,000 shares issuable upon the exercise of vested options granted
under the 1994 Plan. Excludes 90,000 shares of Common Stock subject to
options granted to Mr. Levine under the 1994 Plan, which options vest with
respect to 30,000 shares in each of July 1997, 1998 and 1999.
(7) Includes (a) 7,500 shares issued in December 1996 to Mr. Silver under the
1994 Plan that are subject to certain vesting requirements over a five-year
period from the date of grant, and (b) 1,640 shares owned by Mr. Silver's
wife.
(8) Includes 18,000 shares issuable upon the exercise of vested options granted
under the 1994 Plan. Excludes 27,000 shares of Common Stock subject to
options granted to Mr. Silver under the 1994 Plan, which options vest with
respect to 9,000 shares in each of July 1997, 1998 and 1999.
(9) Includes 6,701 shares issuable upon the exercise of Redemption Rights.
(10) Includes 3,070 shares owned by Mr. Cooper' s adult children, as to which
shares Mr. Cooper disclaims beneficial ownership.
(11) Includes 6,000 shares issuable upon the exercise of vested options granted
under the 1994 Plan. Excludes 9,000 shares of Common Stock subject to
options granted to Ms. Parker under the 1994 Plan, which options vest with
respect to 3,000 shares in each of July 1997, 1998 and 1999.
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<PAGE> 54
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 Internal Revenue Code of 1986, as amended (the "Code"), for
its taxable years ended December 31, 1994 through December 31, 1996, and the
Company's organization 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 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 depends upon the Company's ability to meet on a continuing
basis, through actual annual operating results, distribution levels and stock
ownership, the various qualification tests imposed under the Code. 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.
The Company may determine to sell certain of the Hotels. In that event, if
the Company determines with the advice of council that any gain recognized in
such a sale could be subject to a prohibited transactions tax, the Company
either will not sell such Hotel or will convey such Hotel to a taxable corporate
subsidiary of the Partnership prior to commencing any sale negotiations. The
corporate subsidiary would then commence such a sale. The corporate subsidiary
will pay federal, state and local income taxes on the gain recognized upon the
sale of the Acquisition Hotels at normal corporate rates, which taxes will
reduce the Company's Cash Available for Distribution.
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<PAGE> 55
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. ..........................................
Morgan Keegan & Company, Inc. ..............................
Prudential Securities Incorporated..........................
J.C. Bradford & Co. ........................................
---------
7,500,000
=========
</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 shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Morgan Keegan & Company,
Inc., Prudential Securities Incorporated and J.C. Bradford & Co. are acting as
the Representatives, 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 $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers.
The Company, 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
thirty days from the date of this Prospectus Supplement, to purchase up to
1,125,000 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 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
Representatives 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.
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<PAGE> 56
The Company, the Partnership and the Underwriters have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
William W. Deupree, Jr., who is a director of Morgan Keegan & Company, Inc.
and of Morgan Keegan, Inc. (the parent company of Morgan Keegan & Company, Inc.)
is a director of the Company. See "Management."
Smith Barney Mortgage Capital Group, Inc., an affiliate of Smith Barney
Inc., is a participating lender in the Line of Credit. In connection with the
closing of the Line of Credit, the Company paid Smith Barney Mortgage Capital
Group, Inc. a fee of $100,000. In addition, Smith Barney Mortgage Capital Group,
Inc. is entitled to receive its pro rata portion of a 1/4% fee on the unused
portion of the Line of Credit. The total amount of such fees received by Smith
Barney Mortgage Capital Group, Inc. since the inception of the Line of Credit
has not exceeded $15,000.
Smith Barney Inc. will receive a fee equal to 1/4% of the gross proceeds
of the Offering for advisory services rendered to the Company in connection with
the acquisition of the Acquisition Hotels.
Prudential-Bache Properties, Inc., an affiliate of Prudential Securities
Incorporated is a limited partner in one of the general partners of GHI II one
of the sellers of the Acquisition Hotels. Upon the sale by GHI II,
Prudential-Bache Properties, Inc. may be entitled to receive a partnership
distribution from GHI II unrelated to its affiliate's participation in the
distribution.
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
Supplement 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.
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 included in this Prospectus Supplement have been
included herein in reliance on the reports of Imowitz, Koenig & Co., LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by 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 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.
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<PAGE> 57
GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus
Supplement.
"ADR" means average daily room rate.
"Acquisition Hotels" means the 28 hotels the Partnership has agreed to
acquire from partnerships controlled by GHI and GHI II.
"Affiliate" means (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). The term "person" means and includes
individuals, corporations, general and limited partnerships, stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other entities and governments and
agencies and political subdivisions thereof. For the purposes of this
definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
through the ownership of voting securities, partnership interests or other
equity interests.
"Base Rent" means the fixed obligation of the Lessee to pay a sum certain
in monthly Rent under each of the Percentage Leases.
"Board of Directors" means the Board of Directors of the Company.
"Bonds" means $88 million of fixed-rate, collateralized mortgage bonds
issued by EQI Finance in February 1997.
"Bylaws" means the Bylaws of the Company.
"Cash Available for Distribution" means Funds From Operations less an
amount equal to the FF&E Reserve which is required to be set aside by the
Partnership for refurbishment and replacement of FF&E, capitalized expenditures
and other non-routine items.
"Charter" means the Amended and Restated Charter of the Company.
"Choice" means Choice Hotels International, Inc.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the Common Stock, par value $.01 per share, of the
Company.
"Company" means Equity Inns, Inc., a Tennessee corporation.
"Current Hotels" means the Hotels owned by the Partnership at the date of
this Prospectus Supplement.
"Directors' Plan" means the Company's Non-Employee Directors' Stock
Incentive Plan.
"EPA" means the Environmental Protection Agency.
"EQI Finance" means EQI Financing Partnership I, L.P., an indirect,
wholly-owned subsidiary of the Company.
"ESA" means environmental site assessment.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
S-56
<PAGE> 58
"Exempt Organizations" means entities that generally are exempt from
federal income tax (other than the tax on unrelated business taxable income
under Section 511 of the Code).
"FF&E" means furniture, fixtures and equipment.
"FF&E Reserve" means an amount equal to 4% of the gross room revenue of the
Hotels, which the Company has agreed with its Line of Credit lenders to reserve
and make available for periodic replacement of FF&E.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"First Chicago" means The First National Bank of Chicago.
"Follow-On Offering" means the follow-on offering of the Company's Common
Stock completed in April 1996. Unless otherwise indicated, references to the
Follow-On Offering include the exercise of the over-allotment option by the
underwriters of the Follow-On Offering.
"Funds From Operations" means, under the most recently adopted NAREIT
definition, net income, computed in accordance with generally accepted
accounting principles, excluding gains or losses from debt restructurings and
sales of property, plus depreciation of real property (including furniture and
equipment) and after adjustments for unconsolidated partnerships and joint
ventures. Under the prior NAREIT definition of Funds From Operations,
adjustments to net income also included amortization of unearned directors'
compensation and amortization of loan costs.
"GHI" means Growth Hotel Investors, a California limited partnership.
"GHI II" means Growth Hotel Investors II, a California limited partnership.
"Holiday Inn" means Holiday Inns, Inc.
"Hotels" means the Current Hotels and the Acquisition Hotels.
"Independent Director" means a Director of the Company who is not an
officer or employee of the Company or an Affiliate 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 that is an
Affiliate of the Company.
"Interstate" means Interstate Hotels Company.
"IPO" means the initial public offering of the Company's Common Stock
completed in March 1994. Unless otherwise indicated, references to the IPO
include the exercise of the over-allotment option by the underwriters of the
IPO.
"ISO" means incentive stock option.
"Lessee" means, collectively, the subsidiaries of Interstate that lease the
Current Hotels and will lease the Acquisition Hotels from the Partnership
pursuant to the Percentage Leases.
"LIBOR" means the London Interbank Offered Rate.
"Line of Credit" means the $130 million line of credit facility between the
Partnership and First Chicago, as administrative agent, and a syndicate of eight
banks that extends through November 1998.
"Marriott" means Marriott Corporation.
"Mortgaged Properties" means the 23 hotel properties owned by EQI Finance
that serve as collateral for the Bonds.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NYSE" means The New York Stock Exchange.
"Offering" means the offering of 7,500,000 shares of Common Stock hereby.
S-57
<PAGE> 59
"Ownership Limitation" means the ownership (or deemed ownership by virtue
of the attribution provisions of the Code) of more than 9.9% of any class of the
outstanding stock of the Company.
"Ownership Limitation Provision" means a provision of the Charter
restricting the ownership of shares of Common Stock to the Ownership Limitation.
"Partnership" means Equity Inns Partnership, L.P., a limited partnership
organized under the laws of the State of Tennessee.
"Partnership Agreement" means the Second Amended and Restated Agreement of
Limited Partnership of the Partnership.
"Percentage Leases" mean the operating leases between the Lessee and the
Partnership pursuant to which the Lessee leases the Current Hotels from the
Partnership.
"Percentage Rent" means rent based on percentages of room revenue and, if
applicable, food and beverage revenue from the Hotels payable by the Lessee
pursuant to the Percentage Leases.
"Preferred Stock" means the preferred stock, par value $.01 per share, of
the Company.
"Private Placement" means the purchase of 250,000 Units by Trust Leasing in
a private placement in April 1996.
"Promus" means Promus Hotels, Inc., a wholly-owned subsidiary of Promus
Hotel Corporation.
"Promus Investment" means Promus' direct purchases of approximately $7
million of newly issued shares of Common Stock from the Company.
"Redemption Right" means the right of the limited partners of the
Partnership to cause the redemption of their Units in exchange for shares of
Common Stock of the Company or, at the Company's option, cash.
"REIT" means real estate investment trust as defined in Section 856 of the
Code.
"Rent" means rent paid by the Lessee to the Partnership under the
Percentage Leases.
"Representatives" means Smith Barney Inc., Morgan Keegan & Company, Inc.,
Prudential Securities Incorporated and J. C. Bradford & Co.
"Rule 144" means the rule promulgated under the Securities Act that permits
holders of restricted securities as well as Affiliates of an issuer of the
securities, pursuant to certain conditions and subject to certain restrictions,
to sell their securities publicly without registration under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the U.S. Internal Revenue Service.
"Term Loan" means the one-year term loan of approximately $75 million the
Company expects to obtain from First Chicago.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"Trust" means Equity Inns Trust, a Maryland real estate investment trust
and a wholly-owned subsidiary of the Company, that as sole general partner of
the Partnership currently holds approximately 96.1% of the partnership interests
in the Partnership.
"Trust Leasing" means Trust Leasing, Inc., a Tennessee corporation.
"Trust Management" means Trust Management, Inc. a Tennessee corporation.
"Underwriters" means the Underwriters named in this Prospectus Supplement.
"Units" means units of limited partnership interest in the Partnership.
S-58
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
EQUITY INNS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and the Year Ended
December 31, 1996 (unaudited)............................. F-2
Notes to Pro Forma Consolidated Statements of Operations.... F-4
Pro Forma Consolidated Balance Sheet -- March 31, 1997
(unaudited)............................................... F-6
Notes to Pro Forma Consolidated Balance Sheet............... F-7
ACQUISITION HOTELS
GROWTH HOTEL INVESTORS:
Independent Auditors' Report................................ F-8
Consolidated Balance Sheets -- December 31, 1996 and 1995... F-9
Consolidated Statements of Operations for the Three Years
Ended December 31, 1996................................... F-10
Consolidated Statements of Changes in Partners' Capital
(Deficit) for the Three Years Ended December 31, 1996..... F-11
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1996................................... F-12
Notes to Consolidated Financial Statements.................. F-13
GROWTH HOTEL INVESTORS II:
Independent Auditors' Report................................ F-25
Consolidated Balance Sheets -- December 31, 1996 and 1995... F-26
Consolidated Statements of Operations for the Three Years
Ended December 31, 1996................................... F-27
Consolidated Statements of Changes in Partners' Capital
(Deficit) for the Three Years Ended December 31, 1996..... F-28
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1996................................... F-29
Notes to Consolidated Financial Statements.................. F-30
</TABLE>
F-1
<PAGE> 61
EQUITY INNS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
The following unaudited Pro Forma Consolidated Statements of Operations of
Equity Inns, Inc. (the "Company") are presented as if the acquisition of all of
the Current Hotels acquired subsequent to January 1, 1996, the acquisition of
the Acquisition Hotels, the consummation of the Follow-On Offering, the
Offering, the Private Placement and the Promus Investment and the application of
the net proceeds therefrom had occurred as of January 1, 1996 and all of the
Hotels had been leased to the Lessee pursuant to the Percentage Leases. Such pro
forma information is based in part upon the Consolidated Statements of
Operations of the Company. Such information should be read in conjunction with
the Financial Statements contained herein or incorporated by reference in this
Prospectus Supplement. In management's opinion, all adjustments necessary to
reflect the effects of these transactions have been made.
The following unaudited Pro Forma Consolidated Statements of Operations for
the periods presented are not necessarily indicative of what actual results of
operations of the Company would have been assuming such transactions had been
completed as of January 1, 1996, nor does it purport to represent the results of
operations for future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------------------
CURRENT HOTELS
----------------------------------
ADJUSTMENTS
FOR PERIODS
PRIOR TO
ACQUISITION ACQUISITION
HISTORICAL BY THE PRO HOTELS PRO FORMA,
COMPANY COMPANY(A) FORMA ADJUSTMENTS(B) AS ADJUSTED
---------- ----------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Percentage lease revenues.............................. 11,778 629 12,407 5,900 18,307
Other income........................................... 17 17 17
------- ------- ------- ------ -------
Total revenue.................................. 11,795 629 12,424 5,900 18,324
Expenses:
Real estate and personal property taxes(C)............. 1,310 82 1,392 619 2,011
Depreciation and amortization(D)....................... 3,846 240 4,086 1,625 5,711
Interest(E)............................................ 2,145 423 2,568 1,362 3,931
Amortization of loan costs............................. 189 189 189
General and administrative(F).......................... 935 935 95 1,030
Amortization of unearned directors' and officers'
compensation........................................ 23 23 23
Rental expense(C)...................................... 61 20 81 81
------- ------- ------- ------ -------
Income before minority interest........................ 3,286 (136) 3,150 2,199 5,349
Minority interest(G)................................... 119 123 160
------- ------- -------
Net income applicable to common shareholders........... 3,167 3,027 5,189
======= ======= =======
Net income per common share............................ 0.13 0.13 0.17
======= ======= =======
Weighted average number of common shares outstanding... 23,693 23,693 31,193
======= ======= =======
</TABLE>
F-2
<PAGE> 62
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
CURRENT HOTELS
----------------------------------
ADJUSTMENTS
FOR PERIODS
PRIOR TO
ACQUISITION ACQUISITION
HISTORICAL BY THE PRO HOTELS PRO FORMA,
COMPANY COMPANY(A) FORMA ADJUSTMENTS(B) AS ADJUSTED
---------- ----------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Percentage lease revenues.............................. $38,314 $13,793 $52,107 $26,546 $78,653
Other income........................................... 116 116 116
------- ------- ------- ------- -------
Total revenue.................................. 38,430 13,793 52,223 26,546 78,769
Expenses:
Real estate and personal property taxes(C)............. 3,693 1,342 5,035 2,432 7,467
Depreciation and amortization(D)....................... 11,631 3,703 15,334 6,499 21,833
Interest(E)............................................ 4,382 4,780 9,162 5,397 14,559
Amortization of loan costs............................. 1,565 1,565 1,565
General and administrative(F).......................... 1,975 52 2,027 380 2,407
Amortization of unearned directors' and officers'
compensation........................................ 33 33 33
Rental expense(C)...................................... 218 117 335 335
------- ------- ------- ------- -------
Income before minority interest........................ 14,933 3,799 18,732 11,838 30,570
Minority interest(G)................................... 460 731 917
------- ------- -------
Net income applicable to common shareholders........... $14,473 $18,001 $29,653
======= ======= =======
Net income per common share............................ $ 0.69 $ 0.76 $ 0.95
======= ======= =======
Weighted average number of common shares outstanding... 20,957 23,693 31,193
======= ======= =======
</TABLE>
F-3
<PAGE> 63
EQUITY INNS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents historical results of operations of the Current Hotels acquired
by the Company during and subsequent to the periods presented for the
periods prior to their acquisition. Reflects pro forma lease revenue from
the Lessee to the Partnership calculated by applying the rent provisions of
the Percentage Leases to the historical revenue of all the Current Hotels.
The Current Hotels acquired during 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
ACQUISITION
HOTEL LOCATION DATE
----- -------- -----------
<S> <C> <C>
Hampton Inn.......................... Alcoa (Knoxville), TN Feb. 1996
Hampton Inn.......................... Glen Burnie (Baltimore), MD Mar. 1996
Hampton Inn.......................... Northville (Detroit), MI May 1996
Homewood Suites...................... Windsor Locks (Hartford), CT May 1996
Residence Inn........................ Madison, WI June 1996
Holiday Inn.......................... Winston-Salem, NC June 1996
Hampton Inn.......................... Scottsdale, AZ July 1996
Hampton Inn.......................... Chattanooga, TN July 1996
Homewood Suites...................... San Antonio, TX Sept. 1996
Residence Inn........................ Burlington, VT Oct. 1996
Homewood Suites...................... Camelback (Phoenix), AZ Nov. 1996
Residence Inn........................ Oklahoma City, OK Jan. 1997
Residence Inn........................ Colorado Springs, CO Jan. 1997
Residence Inn........................ Tucson, AZ Jan. 1997
Hampton Inn.......................... Savannah, GA Feb. 1997
Hampton Inn.......................... Norfolk, VA Mar. 1997
Hampton Inn.......................... Pickwick, TN Mar. 1997
Hampton Inn.......................... Southaven, MS Mar. 1997
Hampton Inn.......................... Overland Park (Kansas City), KS Apr. 1997
</TABLE>
(B) Represents pro forma results of ownership of the Acquisition Hotels based
upon assumed provisions of lease agreements to be entered into with the
Lessee. Upon completion of management's due diligence investigation of the
Acquisition Hotels, the actual rent provisions in the Percentage Leases may
vary from the assumed provisions.
(C) Pro forma real estate and personal property tax and rental expense
represent expenses to be paid by the Partnership. Such amounts were derived
from historical amounts paid with respect to the Hotels. With respect to
the Current Hotels amounts included in the "Adjustments for Periods Prior
to Acquisition by the Company," represent historical real estate and
personal property taxes of the Current Hotels incurred during the periods
presented prior to their respective dates of acquisition by the Company.
(D) The pro forma adjustment for depreciation related to the Current Hotel
reflects depreciation of buildings and improvements and furniture, fixtures
and equipment of Current Hotels acquired by the Company during and
subsequent to the periods presented for the periods prior to their
acquisition, based on their acquisition costs. The pro forma adjustment for
depreciation and amortization related to the Acquisition Hotels reflects
the aggregate purchase price of $169,000 and an assumed allocation of
$16,743 to land, $137,297 to buildings and improvements, $13,395 to
furniture, fixtures and equipment and $1,565 to franchise agreements.
Depreciation is computed on a straight-line basis over assumed estimated
useful lives of 31 years for buildings and improvements, 7 years for
furniture, fixtures and equipment and 10 years for franchise agreements.
(E) The pro forma adjustment for interest expense related to the Current Hotels
acquired by the Company during and subsequent to the periods presented
reflects the interest related to their acquisition costs as if they had
been acquired as of January 1, 1996, based on the Company's borrowing
rates. This increase in interest expense has been reduced by the decrease
in borrowing levels caused by the assumption that the Follow-On Offering,
the Private Placement and the Promus Investment had occurred as of January
1,
F-4
<PAGE> 64
EQUITY INNS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
1996. The pro forma adjustment for interest expense related to the
Acquisition Hotels reflects the interest on the aggregate purchase price of
$169,000, based on the Company's borrowing rate of LIBOR plus 1.75%,
reduced by the impact of the assumption that the Offering had occurred as
of January 1, 1996. An increase or decrease in the variable interest rate
of 1/8% would cause pro forma, as adjusted, interest expense to increase
or decrease and, therefore, income before minority interest to decrease or
increase, by $67 and $248 for the three months ended March 31, 1997 and the
year ended December 31, 1996, respectively.
(F) The adjustment for general and administrative expenses related to the
Current Hotels acquired by the Company during and subsequent to the periods
presented represents franchise taxes of $52 for the periods prior to their
acquisition. The pro forma adjustment for general and administrative
expenses related to the Acquisition Hotels represents franchise taxes
($180) and other expenses ($200). These amounts are based on historical
levels of general and administrative expenses.
(G) Pro forma results reflect 3.9% of income before minority interest. Pro
forma, as adjusted, results reflect 3.0% of income before minority
interest.
F-5
<PAGE> 65
EQUITY INNS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED, AMOUNTS IN THOUSANDS)
The following unaudited Pro Forma Consolidated Balance Sheet is presented
as if the purchase of one Current Hotel acquired in April, 1997, the purchase of
the Acquisition Hotels, the borrowings to fund such acquisitions and the
consummation of the Offering and the application of the proceeds therefrom had
occurred on March 31, 1997. Such information is based upon the consolidated
balance sheet of the Company and it should be read in conjunction with the
Financial Statements contained herein or incorporated by reference in this
Prospectus Supplement. In management's opinion, all adjustments necessary to
reflect the effects of these transactions have been made.
The following unaudited Pro Forma Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been
assuming such transactions had been completed as of March 31, 1997, nor does it
purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA,
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in hotel properties, net.................... $355,060 $7,100(A) $362,160 $167,435(A) $529,595
Cash and cash equivalents.............................. 123 123 123
Due from Lessee........................................ 4,897 4,897 4,897
Deferred expenses, net................................. 6,524 6,524 1,565(B) 8,089
Deposits and other assets.............................. 10,558 10,558 (10,000)(C) 558
-------- ------ -------- -------- --------
Total assets................................... $377,162 $7,100 $384,262 $159,000 $543,262
======== ====== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt................................................... $138,641 $7,100(D) $145,741 $ 65,588(D) $211,329
Accounts payable and accrued expenses.................. 2,726 2,726 2,726
Distributions payable.................................. 6,901 6,901 6,901
Minority interest in Partnership....................... 8,866 8,866 803(E) 9,669
-------- ------ -------- -------- --------
Total liabilities.............................. 157,134 7,100 164,234 66,391 230,625
-------- ------ -------- -------- --------
Shareholders' Equity:
Common stock......................................... 237 237 75(F) 312
Additional paid-in capital........................... 239,268 239,268 92,534(G) 331,802
Unearned officers' and directors' compensation....... (342) (342) (342)
Predecessor basis assumed............................ (1,264) (1,264) (1,264)
Distributions in excess of net earnings.............. (17,871) (17,871) (17,871)
-------- ------ -------- -------- --------
Total shareholders' equity..................... 220,028 220,028 92,609 312,637
-------- ------ -------- -------- --------
Total liabilities and shareholders' equity......... $377,162 $7,100 $384,262 $159,000 $543,262
======== ====== ======== ======== ========
</TABLE>
See Notes to Pro Forma Consolidated Balance Sheet
F-6
<PAGE> 66
EQUITY INNS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS AMOUNTS IN THOUSANDS)
(A) Increase represents the purchase of one Current Hotel in April, 1997
($7,100) and the purchase of the Acquisition Hotels ($167,435).
(B) Increase represents the payment for franchise agreements ($1,565) relating
to the Acquisition Hotels which will be amortized over the remaining life
of the agreements.
(C) Decrease represents application of refundable escrow deposit ($10,000) to
the purchase of the Acquisition Hotels.
(D) Increase represents borrowings to complete the purchase of one Current
Hotel in April, 1997 ($7,100) and the purchase of the Acquisition Hotels
($65,588).
(E) Net increase represents allocation ($803) of additional paid in capital to
minority interest due to the Offering.
(F) Increase represents the par value ($75) of the Common Stock expected to be
sold in the Offering.
(G) Net increase in additional paid in capital is computed as follows:
<TABLE>
<S> <C>
Gross proceeds of the Offering.............................. $ 99,375
Par value of Common Stock issued............................ (75)
Underwriters' discount and expenses of the Offering......... (5,963)
--------
Net proceeds of the Offering................................ 93,337
Allocation minority interest for the Offering............... (803)
--------
$ 92,534
========
</TABLE>
F-7
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
To the Partners
Growth Hotel Investors,
a California Limited Partnership
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of Growth
Hotel Investors, a California Limited Partnership, (the "Partnership") as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, partners' equity and cash flows for each of the three years in the
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Growth Hotel Investors, a California Limited Partnership, as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
IMOWITZ KOENIG & CO., LLP
--------------------------------------
Certified Public Accountants
New York, N.Y.
February 28, 1997 except for Note N,
which is dated March 14, 1997.
F-8
<PAGE> 68
GROWTH HOTEL INVESTORS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 4,644 $ 3,600
Restricted cash............................................. 268 189
Deferred costs.............................................. 652 739
Accounts receivables and other assets....................... 189 231
Investment in unconsolidated joint venture.................. 7,767 8,153
Investment properties:
Land...................................................... 3,098 3,098
Buildings and related personal property................... 21,479 20,234
------- -------
24,577 23,332
Less accumulated depreciation............................... (9,675) (8,734)
------- -------
14,902 14,598
------- -------
Total assets...................................... $28,422 $27,510
======= =======
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Accounts payable and other liabilities.................... $ 523 $ 562
Notes payable............................................. 5,412 5,433
Minority interest in joint ventures......................... 42 76
Partners' Equity (Deficit):
General partner........................................... (965) (1,034)
Limited partners' (36,932 units outstanding at December
31, 1996 and 1995)..................................... 23,410 22,473
------- -------
Total partners' equity.................................... 22,445 21,439
------- -------
Total liabilities and partners' equity............ $28,422 $27,510
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-9
<PAGE> 69
GROWTH HOTEL INVESTORS
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Revenues:
Hotel operations.......................................... $7,830 $ 8,091 $ 7,868
Equity in unconsolidated joint venture operations......... 1,851 2,021 1,970
Interest revenue.......................................... 150 229 211
------ ------- -------
Total revenues.................................... 9,831 10,341 10,049
------ ------- -------
Expenses (including $201, $140, and $171 paid to the general
partner and affiliates in 1996, 1995 and 1994):
Hotel operations.......................................... 5,107 4,839 4,930
Interest.................................................. 594 798 960
Depreciation.............................................. 941 750 634
General and administrative................................ 631 398 605
------ ------- -------
Total expenses.................................... 7,273 6,785 7,129
------ ------- -------
Net income before minority interest in joint ventures'
operations and extraordinary item......................... 2,558 3,556 2,920
Minority interest in joint ventures' operations............. 35 (28) (36)
------ ------- -------
Income before extraordinary item............................ 2,593 3,528 2,884
Extraordinary item:
Gain on extinguishment of debt.............................. -- -- 606
------ ------- -------
Net income.................................................. $2,593 $ 3,528 $ 3,490
====== ======= =======
Net income allocated to general partners.................... $ 179 $ 247 $ 241
Net income allocated to limited partners.................... 2,414 3,281 3,249
------ ------- -------
Net income.................................................. $2,593 $ 3,528 $ 3,490
====== ======= =======
Net income per limited partnership unit:
Income before extraordinary item.......................... $65.36 $ 88.84 $ 72.70
Extraordinary item -- gain on extinguishment of debt...... -- -- 15.27
------ ------- -------
Net income per limited partnership unit..................... $65.36 $ 88.84 $ 87.97
====== ======= =======
Cash distributions per limited partnership unit............. $39.99 $ 39.99 $ 39.99
====== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-10
<PAGE> 70
GROWTH HOTEL INVESTORS
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
LIMITED GENERAL LIMITED
PARTNERSHIP PARTNERS' PARTNERS' TOTAL
UNITS DEFICIT EQUITY EQUITY
----------- --------- --------- -------
<S> <C> <C> <C> <C>
Original capital contributions.......................... 36,932 $ -- $36,932 $36,932
====== ======= ======= =======
Partners' (deficit) capital at December 31, 1993........ 36,932 $(1,302) $18,897 $17,595
======
Net income for the year ended December 31, 1994......... 241 3,249 3,490
Distributions........................................... (110) (1,477) (1,587)
------- ------- -------
Partners' (deficit) capital at December 31, 1994........ 36,932 (1,171) 20,669 19,498
======
Net income for the year ended December 31, 1995......... 247 3,281 3,528
Distributions........................................... (110) (1,477) (1,587)
------- ------- -------
Partners' (deficit) capital at December 31, 1995........ 36,932 (1,034) 22,473 21,439
======
Net income for the year ended December 31, 1996......... 179 2,414 2,593
Distributions........................................... (110) (1,477) (1,587)
------- ------- -------
Partners' (deficit) capital at December 31, 1996........ 36,932 $ (965) $23,410 $22,445
====== ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-11
<PAGE> 71
GROWTH HOTEL INVESTORS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................................ $ 2,593 $ 3,528 $ 3,490
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,028 838 651
Equity in unconsolidated joint venture operations...... (1,851) (2,021) (1,970)
Minority interest in joint ventures' operations........ (35) 28 36
Deferred income........................................ -- (40) (55)
Deferred costs paid.................................... -- (775) --
Extraordinary gain on extinguishment of debt........... -- -- (606)
Change in accounts:
Accounts receivable and other assets................. 43 (26) (6)
Accounts payable and other liabilities............... (39) (95) (65)
------- ------- -------
Net cash provided by operating activities......... 1,739 1,437 1,475
------- ------- -------
Cash Flows From Investing Activities:
Cash surrendered upon foreclosure of Elk Grove............ -- -- (33)
Property improvements and replacements.................... (1,245) (1,428) (411)
Unconsolidated joint venture distributions................ 2,237 2,355 2,182
Restricted cash (increase) decrease....................... (79) 146 43
Proceeds from maturity of cash investments................ -- -- 3,169
------- ------- -------
Net cash provided by investing activities......... 913 1,073 4,950
------- ------- -------
Cash Flows From Financing Activities:
Cash distributions to partners............................ (1,587) (1,587) (1,587)
Notes payable principal payments.......................... (21) (36) (31)
Satisfaction of note payable.............................. -- (2,186) (2,030)
------- ------- -------
Net cash used in financing activities............. (1,608) (3,809) (3,648)
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents............ 1,044 (1,299) 2,777
Cash and Cash Equivalents at Beginning of Year.............. 3,600 4,899 2,122
------- ------- -------
Cash and Cash Equivalents at End of Year.................... $ 4,644 $ 3,600 $ 4,899
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid in cash during the year..................... $ 556 $ 813 $ 997
======= ======= =======
Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
Gain on Extinguishment of Debt in 1994 -- Note G.
</TABLE>
See Notes to Consolidated Financial Statements
F-12
<PAGE> 72
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Growth Hotel Investors, (the "Partnership"), is a limited partnership
organized in 1984 under the laws of the State of California to acquire,
primarily through joint ventures, hold for investment, and ultimately sell
limited service hotels which are franchised by Hampton Inns, Inc. ("Hampton"), a
wholly owned subsidiary of the Promus Companies, Inc. ("Promus"). The
Partnership owns properties in Albuquerque, New Mexico, and Nashville,
Tennessee, and has 50 percent joint venture interests in two partnerships which
own properties in Syracuse, New York, and Aurora, Colorado, respectively. The
Partnership also has an investment in another joint venture in which the
Partnership does not have a controlling interest. The properties owned by this
joint venture are located in Alabama, Arkansas, Georgia, Michigan, North
Carolina, South Carolina, Tennessee and Texas. The general partner is Montgomery
Realty Company-85 ("MRC-85"), a California general partnership. The general
partners of MRC-85 are Fox Realty Investors ("FRI"), a California general
partnership, and NPI Realty Management Corp. ("NPI Realty"), a Florida
corporation. On February 13, 1996 NPI Realty, which acquired its interest in
MRC-85 from Montgomery Realty Corporation on November 15, 1995 became the
managing general partner of MRC-85. Capital contributions of $36,932,000 ($1,000
per unit) were made by the limited partners.
On December 6, 1993, NPI Equity Investments II, Inc. ("NPI Equity" or the
"Managing General Partner") became the managing partner of FRI and assumed
operational control over Fox Capital Management Corporation ("FCMC"), an
affiliate of FRI. As a result, NPI Equity became responsible for the operation
and management of the business and affairs of the Partnership and the other
investment partnerships sponsored by FRI and/or FCMC. The individuals who had
served previously as partners of FRI and as officers and directors of FCMC
contributed their general partnership interest in FRI to a newly formed limited
partnership, Portfolio Realty Associates, L.P. ("PRA"), in exchange for limited
partnership interests in PRA. In the foregoing capacity, such partners continue
to hold indirectly certain economic interest in the Partnership and such other
investment partnerships, but ceased to be responsible for the operation and
management of the Partnership and such other partnerships. NPI Equity and NPI
Realty are wholly-owned subsidiaries of National Property Investors, Inc. ("NPI
or NPI Inc.").
On January 19, 1996, the stockholders of NPI, Inc., the sole shareholder of
NPI Equity, sold all of the issued and outstanding stock of NPI, Inc. to an
affiliate of Insignia Financial Group Inc. ("Insignia").
On February 15, 1996, Devon Associates, a New York general partnership,
commenced a tender offer (the "Offer") for up to 15,000 of the outstanding Units
at a purchase price of $705.00 per Unit. An affiliate of the Managing General
Partner has an interest in Devon Associates. Devon Associates acquired 13,395
Units with respect to this offer.
Principles of Consolidation
The consolidated financial statements include the Partnership and the three
joint ventures in which the Partnership has or has had a controlling interest.
In April 1994, the Hampton Inn -- Elk Grove Village was disposed of through
foreclosure, see "Note G." All significant intercompany transactions and
balances have been eliminated.
The investment in another joint venture in which the Partnership does not
have a controlling interest is accounted for under the equity method of
accounting (see "Note H").
F-13
<PAGE> 73
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Advertising
The Partnership expenses the costs of advertising as incurred. Advertising
expense, included in operating expenses, was approximately $400,000 and $530,000
for the years ended December 31, 1996 and 1995, respectively.
Fair Value
In 1995, the Partnership implemented "Statement of Financial Accounting
Standards No. 107, Disclosure about Fair Value of Financial Instruments," as
amended by "SFAS No. 119, Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments," which requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
fair value. The carrying amount of the Partnership's cash and cash equivalents
approximates fair value due to short-term maturities. The Partnership estimates
the fair value of its fixed rate mortgage by discounted cash flow analysis,
based on estimated borrowing rates currently available to the Partnership.
Investment Properties
In 1995 the Partnership adopted "FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The impairment loss is measured by comparing the fair value of
the asset to its carrying amount. The effect of adoption had no effect on the
Partnerships financial statements.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity,
when purchased, of three months or less to be cash equivalents. At certain
times, the amount of cash deposited at a bank may exceed the limit on insured
deposits.
Depreciation
Depreciation is computed using the straight-line method based on estimated
useful lives ranging from 5 to 39 years.
Deferred Costs
Deferred costs represent the buyout of a services agreement, deferred
financing costs and deferred franchise fees. The buyout of the services
agreement is being amortized over the remaining term of the services agreement
which is 8 years. Financing costs are deferred and amortized, as interest
expense, over the lives of the related loans, or expensed, if financing is not
obtained. Franchise fees paid in connection with the acquisition of the hotels
are deferred and are amortized over the lives of the franchise agreements, which
range from ten to twenty years. Land lease costs paid in connection with
acquisition of certain hotels are deferred and amortized over the lives of the
lease agreements.
F-14
<PAGE> 74
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income (Loss) Per Limited Partnership Assignee Unit
Net income (loss) per limited partnership assignee unit is computed by
dividing net income (loss) allocated to the limited partners by 36,932 assignee
units outstanding.
Income Taxes
Taxable income or loss of the Partnership is reported in the income tax
returns of its partners. Accordingly, no provision for income taxes is made in
the financial statements of the Partnership.
Reclassification
Certain reclassifications have been made to the 1995 and 1994 balances to
conform to the 1996 presentation.
NOTE B -- TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the administration of all partnership activities.
The Partnership Agreement provides for payments to affiliates for services and
as reimbursement of certain expenses incurred by affiliates on behalf of the
Partnership.
The following transactions with affiliates of the Managing General Partner
were charged to expense in 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Reimbursement for services of affiliates (primarily included
in general and administrative expenses)................... $201 $140 $166
</TABLE>
Reimbursed expenses are primarily included in general and administrative
expenses. In addition, an affiliate of Managing General Partner was paid $5,000
relating to a successful real estate tax appeal on a Partnership property during
1994.
In accordance with the partnership agreement, the general partner receives
cash distributions as follows: (a) a partnership management incentive not to
exceed ten percent, determined on a cumulative, noncompounded basis, of cash
from operations available for distribution (as defined in the partnership
agreement) distributed to partners, and (b) a continuing interest representing a
two percent share of cash distributions, after allocation of the partnership
management incentive. A portion of the partnership management incentive is
subordinated to certain cash distributions to the limited partners. Cash
distributions to the general partner for the years ended December 31, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Partnership management incentive............................ $ 79 $ 79 $ 79
Continuing interest......................................... 31 31 31
---- ---- ----
Total............................................. $110 $110 $110
==== ==== ====
</TABLE>
In accordance with the partnership agreement, the general partner received
an allocation of net income and taxable income of seven percent and net losses
of twelve percent.
F-15
<PAGE> 75
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- RELATED PARTY TRANSACTIONS
In addition to the fees paid to the general partner and affiliates as set
forth above, the Partnership has agreements with affiliates of its joint venture
partners, which provide for the management and operations of the joint venture
properties and services provided under each property's franchise agreement. Fees
paid pursuant to these agreements are generally based on a percentage of gross
revenues from operations of the property and for the years ended December 31,
1996, 1995 and 1994 were approximately $40,000, $76,000 and $75,000,
respectively.
NOTE D -- RESTRICTED CASH
Restricted cash at December 31, 1996, represents funds provided for and
maintained by certain properties, pursuant to the related notes payable
agreements, to meet future capital requirements and debt service payments.
NOTE E -- DEFERRED COSTS
The Partnership paid $775,000 in January 1995 to Metric Management, Inc.
("MMI") amending their services agreement to provide for a reduction in the
monthly asset management fee from $29,750 to $5,500. This amendment eliminated
fees payable to MMI for its assistance in refinancings and sales of properties
owned by the Partnership and provides the Partnership with the ability to
terminate MMI's services at will.
The cost of the amendment is being amortized over the remaining term of the
service agreement of 8 years. For the year ended December 31, 1996 and 1995,
approximately $78,000 and $77,000, respectively, has been amortized and is
included in general and administrative expenses.
At December 31, 1996 and 1995, accumulated amortization of the service
agreement's deferred costs totaled approximately $155,000 and $77,000,
respectively.
At December 31, 1996 and 1995, accumulated amortization of the franchise
fees deferred costs totaled approximately $30,000 and $74,000, respectively. The
fully amortized cost have been written off during 1996.
NOTE F -- NOTES PAYABLE
Two of the Partnership's properties are pledged as collateral for related
notes payable. The notes bear interest at 10 and 10.50 percent. The note
encumbering the Partnership's consolidated Hampton Inn -- Syracuse (50% owned
joint venture) property was satisfied on May 31, 1994, with the proceeds of a
$2,048,000 loan from the Partnership. The loan's interest rate was at prime plus
2% and was due on demand. Approximately $2,352,000 and $2,048,000 at December
31, 1996 and 1995, respectively, of loan and accrued interest were eliminated in
consolidation. On December 1, 1995, the Partnership satisfied the first mortgage
encumbering its Hampton Inn -- Brentwood property in the amount of $2,186,000.
The note was due to mature in January 1996. At December 31, 1996 and 1995,
accumulated amortization of deferred financing costs totaled approximately
$49,000 and $59,000, respectively. The fully amortized cost have been written
off during 1996.
The estimated fair values of the Partnership's aggregate debt is
approximately $5,412,000. This estimate is not necessarily indicative of the
amounts the Partnership may pay in actual market transactions.
Scheduled principal payments subsequent to December 31, 1996, are as
follows (in thousands):
<TABLE>
<S> <C>
1997 $2,401
1998 3,011
------
Total $5,412
======
</TABLE>
F-16
<PAGE> 76
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The mortgage on Partnership's Hampton Inn -- Aurora property matured in
January 1997. The Managing General Partner has obtained a one year extension.
The mortgage on the Partnership's Hampton Inn -- Albuquerque property matures in
May 1997. The Managing General Partnership will try to sell the property or
refinance the debt of the property if the property is not sold.
NOTE G -- EXTRAORDINARY ITEM -- GAIN ON EXTINGUISHMENT OF DEBT
On April 4, 1994, the Hampton Inn -- Elk Grove Village was disposed of
through foreclosure for $3,550,000 to the holder of the deed of trust on the
property. The disposition value is comprised of the note payable of $2,772,000,
plus $778,000 of net liabilities, consisting of $260,000 of accrued interest,
$444,000 of accrued property taxes and $74,000 of other liabilities. As a result
of the disposition of this property through foreclosure, the Partnership
recognized an extraordinary gain on extinguishment of debt of $606,000 in the
second quarter of 1994. The results of operations for Elk Grove included in the
financial statements are through February 4, 1994.
NOTE H -- INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
On December 9, 1986, the Partnership acquired an ownership interest in
Growth Hotel Investors Combined Fund No. 1, a California Limited Partnership,
("Combined Fund"), a joint venture with Growth Hotel Investors II, a California
Limited Partnership, ("GHI II") affiliated with the Partnership's general
partner. The Partnership's ownership interest in the Combined Fund is
approximately 32 percent.
The Combined Fund acquired an 80% interest in a separate joint venture,
Hampton/GHI Associates No. 1, which was formed to acquire and has acquired
eighteen Hampton Inn hotels. Hampton Inns owns a 20% subordinated interest. The
Partnership's interest in the Combined Fund is reported under the equity method
of accounting.
Summary financial information for Growth Hotel Investors Combined Fund No.
1 Joint Venture is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Total assets................................................ $ 62,199 $ 65,414
Total liabilities........................................... (37,081) (39,107)
-------- --------
Total ventures' equity............................ $ 25,118 $ 26,307
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Total revenues.............................................. $ 38,327 $ 37,156
Total expenses.............................................. (32,858) (30,710)
-------- --------
Minority interest........................................... 393 (76)
-------- --------
Net income........................................ $ 5,862 $ 6,370
======== ========
Allocation of income:
GHI....................................................... $ 1,851 $ 2,021
GHI II.................................................... 4,011 4,349
-------- --------
Net income........................................ $ 5,862 $ 6,370
======== ========
</TABLE>
In 1996 and 1995 the Partnership received distributions of approximately
$2,237,000 and $2,355,000, respectively, from the Joint Venture.
F-17
<PAGE> 77
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING
The differences between the method of accounting for income tax reporting
and the accrual method of accounting used in the consolidated financial
statements are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS, EXCEPT UNIT
DATA)
<S> <C> <C> <C>
Net income -- financial statements........................ $ 2,593 $ 3,528 $ 3,490
Differences resulted from:
Deferred costs.......................................... -- (775) --
Depreciation and amortization........................... (120) (141) (266)
Equity in unconsolidated joint venture operations....... (180) (200) (178)
Minority interest....................................... 21 8 (130)
Other................................................... 15 30 (36)
Loss of property disposition............................ -- -- (1,216)
------- ------- -------
Net income -- income tax method................. $ 2,329 $ 2,450 $ 1,664
======= ======= =======
Taxable income per limited partnership assignee unit after
giving effect to the allocation to the general
partner................................................. $ 59 $ 62 $ 42
======= ======= =======
Partner's equity-financial statements..................... $22,445 $21,439 $19,498
Differences resulted from:
Deferred sales commissions and organization costs....... 4,946 4,946 4,946
Commission reduction reimbursed to investors............ 43 43 43
Depreciation and amortization........................... (1,744) (1,624) (1,483)
Deferred costs.......................................... (775) (775) --
Equity in unconsolidated joint venture operations....... (1,019) (839) (639)
Minority interest....................................... 1,455 1,434 1,426
Other................................................... (295) (310) (340)
------- ------- -------
Partners' equity -- income tax method........... $25,056 $24,314 $23,451
======= ======= =======
</TABLE>
NOTE J -- COMMITMENT AND CONTINGENCIES
William Wallace, Mildred Wallace, Edith G. Martin, Paul Allemang and Gwen
Allemang, on behalf of themselves and all others similarly situated, and
derivatively on behalf of Growth Hotel Investors, a California limited
partnership and Growth Hotel Investors II, a California limited partnership
("GHI II"), Plaintiff v. Devon Associates, Montgomery Realty-85, GHI Associates,
Cayuga Associates L.P., Cayuga Capital Corp., Insignia Financial Group, Inc.,
L.P., and Fleetwood Corp., Defendants and Growth Hotel Investors, a California
limited partnership, and Growth Hotel Investors II, a California limited
partnership, Nominal Defendant, Supreme Court of the State of New York, County
of New York, Case No. 9600866.
On February 21, 1996, William and Mildred Wallace, holders of Units of the
Partnership and Edith G. Martin and Paul and Gwen Allemang, holders of Units of
GHI II, commenced an action on behalf of themselves and others similarly
situated, and derivatively on behalf of the Partnership and GHI II, in the
Supreme Court of the State of New York, County of New York, against, among
others, MRC-85 and certain of its affiliates pertaining to the tender offer for
up to 15,000 partnership Units of the Partnership and up to 21,000 partnership
Units of GHI II which commenced February 15, 1996. The action alleged, among
other things, that the tender offers constitute (a) a breach of fiduciary duty
owed to limited partners of the partnerships, and (b) a breach of the provisions
of the partnership agreements of such partnerships. The action, which sought to
be brought as a class action on behalf of all limited partners, sought to enjoin
the
F-18
<PAGE> 78
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tender offers as well as monetary damages in an unspecified amount. In
connection with the settlement discussed below, this action has been
discontinued.
R&S Asset Partners, a Florida general partnership, and Jessie B. Small, on
their own behalves, on behalf of all others similarly situated, and derivatively
on behalf of the Nominal Defendants, Plaintiffs, v. Devon Associates, Cayuga
Associates, L.P., Cayuga Capital Corp., Fleetwood Corp., Carl C. Icahn, Michael
L. Ashner, Martin Lifton, Arthur N. Queler, Insignia Financial Group, Inc.,
IFGP, Corp., National Properties Investors, Inc., NPI Equity Investments II,
Inc., Fox Realty Investors, Portfolio Realty Associates, L.P., Emmet J. Cashin,
Jr., Jarold A. Evans, W. Patrick McDowell, Apollo Real Estate Advisors, L.P.,
and Montgomery Realty Company-85, Defendants, and Growth Hotel Investors, a
California Limited Partnership, and Growth Hotel Investors II, a California
Limited Partnership, Nominal Defendants, Superior Court of the State of
California, County of Los Angeles, Case No. BC145220.
On February 28, 1996, R&S Asset Partners, holders of Units of the
Partnership, and Jesse B. Small, holder of Units of GHI II, commenced an action
on behalf of themselves and others similarly situated, and derivatively on
behalf of the Partnership and GHI II, in the Superior Court of the State of
California, County of Los Angeles, against, among others, MRC-85 and certain of
its affiliates pertaining to the tender offer for up to 15,000 partnership Units
of the Partnership and up to 21,000 partnership Units of GHI II which commenced
February 15, 1996. The action alleges, among other things, that the tender
offers constitute (a) a breach of fiduciary duty owed to limited partners of the
partnerships, (b) negligent misrepresentation pertaining to the disclosure set
forth in the offer to purchase, (c) common law fraud, and (d) a breach of the
provisions of the partnership agreements of such partnerships. The action, which
is sought to brought as a class action on behalf of all limited partners, seeks
to enjoin the tender offers as well as monetary damages in an unspecified
amount.
On March 15, 1996, counsel for the plaintiffs and defendants in the Wallace
and the R&S Partners Actions agreed in principle to settle these actions, which
settlement has subsequently received final court approval. In connection with
the settlement MRC-85 agreed to take such actions as are reasonably necessary
and consistent with its fiduciary duties to procure offers for the purchase of
the Partnership's and GHI II's assets which maximize the value of the limited
partner assignee units. MRC-85 further agreed to deal fairly and in good faith
with persons expressing an interest in making a bona fide offer to purchase such
assets and, subject to its fiduciary duty, provide such bona fide offers with
access to the Partnership's and GHI II's books and records for due diligence
purposes. MRC-85 also agreed that if it determined that an offer to purchase its
assets is acceptable, MRC-85 will prepare a plan of liquidation and submit such
plan to the Partnership's partners for approval. Also in connection with the
settlement, the plaintiffs will release all claims they may have arising out of
the tender offers. As required by the settlement, the Partnership and GHI II are
coordinating with class counsel with respect to the sale of such assets and
consent of limited partners.
F-19
<PAGE> 79
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
INITIAL COST TO PARTNERSHIP
<TABLE>
<CAPTION>
COST
BUILDINGS (REMOVED)
AND RELATED SUBSEQUENT TO
DESCRIPTION ENCUMBRANCES LAND PROPERTY ACQUISITION
- ----------- ------------ ------- ----------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Growth Hotel Investors:
Hampton Inn -- Albuquerque North Albuquerque,
New Mexico.................................. $ 2,375 $ 824 $ 4,140 $ 969
Hampton Inn -- Brentwood Nashville,
Tennessee................................... -- 514 4,236 1,129
Hampton Inn -- Syracuse East Syracuse, New
York........................................ -- 388 3,723 1,196
Hampton Inn -- Aurora Aurora, Colorado......... 3,037 1,392 5,053 1,013
------- ------- ------- ------
Total.................................. $ 5,412 $ 3,118 $17,152 $4,307
======= ======= ======= ======
Growth Hotel Investors Combined Fund No. 1:
Hampton Inn -- Memphis I40 East Memphis,
Tennessee................................... $ 1,771 $ -- $ 3,838 $ 541
Hampton Inn -- Columbia-West West Columbia,
South Carolina.............................. 2,062 350 4,133 324
Hampton Inn -- Spartanburg Spartanburg, South
Carolina.................................... 1,767 275 3,545 357
Hampton Inn -- Little Rock-North North Little
Rock, Arkansas.............................. 2,015 524 3,862 315
Hampton Inn -- Amarillo Amarillo, Texas........ 1,120 501 1,810 396
Hampton Inn -- Greenville Greenville, South
Carolina.................................... 2,054 539 3,942 106
Hampton Inn -- Charleston Airport North
Charleston, South Carolina.................. 2,144 495 4,205 323
Hampton Inn -- Memphis-Poplar Memphis,
Tennessee................................... 2,798 1,236 4,993 71
Hampton Inn -- Greensboro Greensboro, North
Carolina.................................... 1,982 439 3,866 254
Hampton Inn -- Birmingham Birmingham, Alabama.. 2,426 758 4,447 64
Hampton Inn -- Atlanta-Roswell Roswell,
Georgia..................................... 2,643 1,207 4,668 (141)
Hampton Inn -- Chapel Hill Chapel Hill, North
Carolina.................................... 2,257 930 3,926 (5)
Hampton Inn -- Dallas-Richardson Richardson,
Texas....................................... 2,769 1,371 4,766 (311)
Hampton Inn -- Nashville-Briley Parkway
Nashville, Tennessee........................ 2,183 -- 4,796 (23)
Hampton Inn -- San Antonio-Northwest San
Antonio, Texas.............................. 2,451 781 4,475 (58)
</TABLE>
F-20
<PAGE> 80
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COST
BUILDINGS (REMOVED)
AND RELATED SUBSEQUENT TO
DESCRIPTION ENCUMBRANCES LAND PROPERTY ACQUISITION
- ----------- ------------ ------- ----------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Hampton Inn -- Madison Heights Madison Heights,
Michigan.................................... 2,834 963 5,323 653
Hampton Inn -- Mountain Brook Birmingham,
Alabama..................................... 2,543 -- 4,782 699
Hampton Inn -- Northlake Atlanta, Georgia...... 2,366 -- 4,439 510
------- ------- ------- ------
Total.................................. $40,185 $10,369 $75,816 $4,075
======= ======= ======= ======
</TABLE>
F-21
<PAGE> 81
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
BUILDING AND ACCUMULATED YEAR OF DATE OF DEPRECIABLE
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUISITION LIFE-YEARS
- ----------- ------- ------------ ------- ------------ ------------ ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Growth Hotel Investors:
Hampton Inn --
Albuquerque-North
Albuquerque, New
Mexico................ $ 824 $ 5,109 $ 5,933 $ 2,041 1987 04/24/87 5-39 Yrs
Hampton Inn -- Brentwood
Nashville, Tennessee.... 514 5,365 5,879 2,270 1985 12/23/85 5-39 Yrs
Hampton Inn -- Syracuse
East Syracuse, New
York.................. 368 4,939 5,307 2,127 1985 12/20/85 5-39 Yrs
Hampton Inn -- Aurora
Aurora, Colorado........ 1,392 6,066 7,458 3,237 1985 12/11/86 5-39 Yrs
------- ------- ------- ------- ---- -------- --------
Total.............. $ 3,098 $21,479 $24,577 $ 9,675
Growth Hotel Investors
Combined Fund No. 1:
Hampton Inn -- Memphis I40
East
Memphis, Tennessee...... $ -- $ 4,379 $ 4,379 $ 1,769 1984 12/19/86 5-30 Yrs
Hampton Inn -- Columbia-
West
West Columbia, South
Carolina.............. 350 4,457 4,807 1,845 1985 12/19/86 5-30 Yrs
Hampton Inn -- Spartanburg
Spartanburg, South
Carolina.............. 275 3,902 4,177 1,616 1984 12/19/86 5-39 Yrs
Hampton Inn -- Little
Rock-North
North Little Rock,
Arkansas.............. 524 4,177 4,701 1,600 1985 12/19/86 5-39 Yrs
Hampton Inn -- Amarillo
Amarillo, Texas......... 501 2,206 2,707 919 1985 12/19/86 5-39 Yrs
Hampton Inn -- Greenville
Greenville, South
Carolina.............. 539 4,048 4,587 1,608 1985 12/19/86 5-30 Yrs
Hampton Inn -- Charleston
Airport
North Charleston, South
Carolina.............. 495 4,528 5,023 1,808 1985 12/19/86 5-39 Yrs
Hampton Inn -- Memphis-
Poplar
Memphis, Tennessee...... 1,236 5,064 6,300 2,006 1985 12/19/86 5-30 Yrs
Hampton Inn -- Greensboro
Greensboro, North
Carolina.............. 439 4,120 4,559 1,600 1986 12/19/86 5-39 Yrs
Hampton Inn -- Birmingham
Birmingham, Alabama..... 758 4,511 5,269 1,757 1987 12/19/86 5-30 Yrs
Hampton Inn -- Atlanta-
Roswell
Roswell, Georgia........ 1,207 4,527 5,734 1,621 1987 03/04/87 5-30 Yrs
Hampton Inn -- Chapel Hill
Chapel Hill, North
Carolina.............. 930 3,921 4,851 1,445 1987 03/04/87 5-30 Yrs
</TABLE>
F-22
<PAGE> 82
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BUILDING AND ACCUMULATED YEAR OF DATE OF DEPRECIABLE
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUISITION LIFE-YEARS
- ----------- --------- ------------ --------- ------------ ------------ ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Hampton Inn -- Dallas-
Richardson
Richardson, Texas.......... 1,371 4,455 5,826 1,542 1987 03/04/87 5-30 Yrs
Hampton Inn -- Nashville-
Briley Parkway
Nashville, Tennessee....... -- 4,773 4,773 1,728 1987 03/04/87 5-30 Yrs
Hampton Inn -- San
Antonio-Northwest
San Antonio, Texas......... 781 4,417 5,198 1,523 1987 06/23/87 5-30 Yrs
Hampton Inn -- Madison
Heights
Madison Heights,
Michigan................. 963 5,976 6,939 2,454 1987 12/29/87 5-30 Yrs
Hampton Inn -- Mountain Brook
Birmingham, Alabama........ -- 5,481 5,481 2,380 1988 12/19/87 5-30 Yrs
Hampton Inn -- Northlake
Atlanta, Georgia........... -- 4,949 4,949 2,179 1988 09/15/88 5-30 Yrs
--------- --------- --------- ---------
$ 10,369 $ 79,891 $ 90,260 $ 31,400
========= ========= ========= =========
</TABLE>
Reconciliation of Investment Properties and Accumulated Depreciation:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year.............................. $23,332 $21,904 $27,471
Property improvements..................................... 1,245 1,428 411
Retirement of assets...................................... -- -- (5,978)
------- ------- -------
Balance at end of year.................................... $24,577 $23,332 $21,904
======= ======= =======
Accumulated Depreciation
Balance at beginning of year............................ $ 8,734 $ 7,984 $10,498
Additions charged to expense............................ 941 750 634
Retirement of assets.................................... -- -- (3,148)
------- ------- -------
$ 9,675 $ 8,734 $ 7,984
======= ======= =======
</TABLE>
The aggregate cost of the real estate for Federal income tax purposes at
December 31, 1996, 1995 and 1994 respectively is approximately $23,742,000,
$22,482,000 and approximately $21,809,000. The accumulated depreciation taken
for Federal income tax purposes at December 31, 1996, 1995, and 1994,
respectively is approximately $11,316,000, $10,165,000 and $9,187,000.
NOTE L -- OPTION TO ACQUIRE JOINT VENTURE PARTNER'S INTEREST
On October 2, 1995, the Partnership was granted the option to acquire its
joint venture partner's interest in Aurora/GHI Associates No. 1, the joint
venture which owns the Hampton Inn-Aurora for $150,000. The Partnership has not
yet acquired such interest. It is expected that such interest will be acquired
prior to the sale of the Partnership's properties.
F-23
<PAGE> 83
GROWTH HOTEL INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- TENDER OFFERS
On February 15, 1996, Devon Associates ("Devon") offered to purchase up to
21,000 and 15,000 limited partnership outstanding units (the "Units") of GHI II,
and the Partnership, respectively. Devon Associates acquired 17,287 and 13,396
units, with respect to these offers, respectively. The offer for the
Partnerships Units was at a purchase price of $750 and $705, respectively, per
unit, net to the seller in cash, without interest, upon the terms and conditions
set forth in the offer to purchase. Certain beneficial owners of Devon are
affiliated with the general partners of GHI II and the Partnership. In addition,
an affiliate of Insignia is both a shareholder in the general partner of Cayuga
Associates, LP, the controlling general partner in Devon, and a limited partner
in Devon.
NOTE N -- SUBSEQUENT EVENT
As required by the settlement of the class action brought in connection
with the tender offer made by Devon Associates discussed in "Note M", the
Partnership and GHI II, the Partnership's joint venture partner in the Combined
Fund properties, marketed all of their properties for sale. In this regard, the
Partnership and GHI II retained Bear, Stearns & Co. Inc. to assist in the
marketing of such properties. As of March 14, 1997, the Partnership, the
Combined Fund, the joint ventures in which the Partnership has a controlling
interest, GHI II, and the joint ventures in which GHI II has a controlling
interest, and Equity Inns Partnership, L.P. (the "Buyer") entered into certain
purchase and sale agreements pursuant to which the Buyer agreed to purchase from
these entities the twenty-two hotels described herein as well as six additional
hotels owned directly or indirectly by GHI II for an aggregate purchase price of
$182 million, subject to adjustment. The closing of these sales, which is
anticipated to occur during the second quarter of 1997, is subject to many
conditions including, favorable completion by the Buyer of its due diligence
review and the Partnership and GHI II receiving consent to the sale from their
respective limited partners holding a majority of the outstanding limited
partnership interests in the Partnership and GHI II. Accordingly, there can be
no assurance that the sale will be consummated with the Buyer or any other
potential buyer.
F-24
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
To the Partners
Growth Hotel Investors II,
a California Limited Partnership
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of Growth
Hotel Investors II, a California Limited Partnership, (the "Partnership") as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, partners' equity and cash flows for each of the three years in the
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Growth Hotel Investors II, a California Limited Partnership, as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Imowitz Koenig & Co., LLP
--------------------------------------
New York, N.Y.
February 28, 1997, except for Note N,
which is dated March 14, 1997
F-25
<PAGE> 85
GROWTH HOTEL INVESTORS II
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 8,302 $ 7,105
Restricted cash............................................. 208 902
Deferred costs.............................................. 1,692 2,008
Accounts receivable and other assets........................ 1,104 1,376
Investment properties:
Land...................................................... 15,725 15,640
Buildings and related personal property................... 111,335 106,243
-------- --------
127,060 121,883
Less accumulated depreciation............................... (43,677) (38,136)
-------- --------
83,383 83,747
-------- --------
Total assets...................................... $ 94,689 $ 95,138
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable and other liabilities...................... $ 2,271 $ 2,303
Due to affiliate of the joint venture partner............... 827 819
Notes payable............................................... 49,215 50,139
Minority interest in joint ventures......................... 2,374 3,902
Partners' Capital (Deficit):
General partners'......................................... (227) (268)
Limited partners' (58,982 units outstanding).............. 40,229 38,243
-------- --------
40,002 37,975
-------- --------
Total liabilities and partners' capital........... $ 94,689 $ 95,138
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-26
<PAGE> 86
GROWTH HOTEL INVESTORS II
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues:
Hotel operations.......................................... $51,456 $50,046 $46,698
Interest income........................................... 334 495 466
------- ------- -------
Total revenues.................................... 51,790 50,541 47,164
------- ------- -------
Expenses (including $627, $598 and $584 paid to the general
partner and affiliates in 1996, 1995 and 1994):
Hotel operations.......................................... 32,594 31,041 29,219
Interest.................................................. 4,983 5,461 5,520
Depreciation.............................................. 5,541 5,103 4,717
General and administrative................................ 1,580 988 1,360
------- ------- -------
Total expenses.................................... 44,698 42,593 40,816
------- ------- -------
Income before minority interest in joint ventures' operation
and extraordinary item.................................... 7,092 7,948 6,348
Minority interest in joint ventures' operations............. (1,603) (2,236) (1,417)
------- ------- -------
Income before extraordinary item............................ 5,489 5,712 4,931
Extraordinary item:
Gain on extinguishment of debt.............................. -- -- 98
------- ------- -------
Net income.................................................. $ 5,489 $ 5,712 $ 5,029
======= ======= =======
Net income allocated to general partners (2%)............... $ 110 $ 114 $ 101
Net income allocated to limited partners (98%).............. 5,379 5,598 4,928
------- ------- -------
$ 5,489 $ 5,712 $ 5,029
======= ======= =======
Net income per limited partnership unit:
Income before extraordinary item.......................... $ 91.19 $ 94.91 $ 81.92
Extraordinary item -- gain on extinguishment of debt...... -- -- 1.63
------- ------- -------
Net income................................................ $ 91.19 $ 94.91 $ 83.55
======= ======= =======
Cash distribution per limited partnership unit.............. $ 57.53 $ 57.53 $ 57.53
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-27
<PAGE> 87
GROWTH HOTEL INVESTORS II
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
LIMITED GENERAL LIMITED
PARTNERSHIP PARTNERS' PARTNERS' TOTAL
UNITS (DEFICIT) EQUITY EQUITY
----------- --------- --------- -------
<S> <C> <C> <C> <C>
Original capital contributions........................... 58,982 $ -- $58,982 $58,982
====== ===== ======= =======
Partners' (deficit) equity at December 31, 1993.......... 58,982 $(345) $34,503 $34,158
======
Net income for the year ended December 31, 1994.......... 101 4,928 5,029
Distributions paid to partners........................... (69) (3,393) (3,462)
----- ------- -------
Partners' (deficit) equity at December 31, 1994.......... 58,982 (313) 36,038 35,725
======
Net income for the year ended December 31, 1995.......... 114 5,598 5,712
Distributions paid to partners........................... (69) (3,393) (3,462)
----- ------- -------
Partners' (deficit) equity at December 31, 1995.......... 58,982 (268) 38,243 37,975
======
Net income for the year ended December 31, 1996.......... 110 5,379 5,489
Distributions paid to partners........................... (69) (3,393) (3,462)
----- ------- -------
Partners' (deficit) capital at December 31, 1996......... 58,982 $(227) $40,229 $40,002
====== ===== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-28
<PAGE> 88
GROWTH HOTEL INVESTORS II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................................ $ 5,489 $ 5,712 $ 5,029
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 5,857 5,463 4,932
Minority interest in joint ventures' operations........ 1,603 2,236 1,417
Deferred costs paid.................................... -- (1,425) --
Gain on extinguishment of debt......................... -- -- (98)
Change in accounts:
Accounts receivable and other assets................... (103) (533) 39
Accounts payable and other liabilities................. (24) 366 (86)
------- ------- -------
Net cash provided by operating activities......... 12,822 11,819 11,233
------- ------- -------
Cash Flows From Investing Activities
Property and improvement and replacements................. (4,677) (4,264) (2,205)
Purchase of minority interest in joint ventures........... -- (375) --
Proceeds from maturity of cash investments................ -- -- 2,376
Restricted cash decrease (increase)....................... 694 1,339 (333)
------- ------- -------
Net cash used in investing activities............. (3,983) (3,300) (162)
Cash Flows From Financing Activities
Satisfaction of note payable.............................. -- (5,975) (150)
Notes payable principal payments.......................... (924) (771) (655)
Joint venture partner distributions....................... (3,256) (2,982) (2,275)
Cash distributions to partners............................ (3,462) (3,462) (3,462)
------- ------- -------
Net cash used in financing activities............. (7,642) (13,190) (6,542)
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents............ 1,197 (4,671) 4,529
Cash and Cash Equivalents at Beginning of Year.............. 7,105 11,776 7,247
------- ------- -------
Cash and Cash Equivalents at End of Year.................... $ 8,302 $ 7,105 $11,776
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 4,957 $ 4,996 $ 5,345
======= ======= =======
Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
Purchase of joint venture partners' interests -- Note E.
Gain on extinguishment of debt in 1994 -- Note I.
</TABLE>
See Notes to Consolidated Financial Statements
F-29
<PAGE> 89
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Growth Hotel Investors II (the "Partnership") limited partnership organized
in 1984 under the laws of the State of California to invest in, acquire, manage
and ultimately sell limited service hotels which are franchised by Hampton Inns,
Inc. ("Hampton"), a wholly owned subsidiary of the Promus Companies, Inc. The
Partnership owns properties in Colorado, Minnesota, Missouri and Ohio and has
joint venture interests in partnerships which own properties in Alabama,
Arkansas, Georgia, Michigan, North Carolina, South Carolina, Tennessee and
Texas. The general partner is Montgomery Realty Company-85 ("MRC-85"), a
California general partnership. The general partners of MRC-85 are Fox Realty
Investors ("FRI"), a California general partnership, and NPI Realty Management
Corp. ("NPI Realty"), a Florida corporation. On February 13, 1996 NPI Realty,
which acquired its interest in MRC-85 from Montgomery Realty Corporation on
November 15, 1995, became the managing general partner of MRC-85. The associate
general partner is GHI Associates of which FRI is the general partner and
Prudential-Bache Properties, Inc. is the limited partner. Capital contributions
of $58,982,000 ($1,000 per unit) were made by the limited partners.
On December 6, 1993, NPI Equity Investment II, Inc. ("NPI Equity" or the
"Managing General Partner") became the managing partner of FRI and assumed
operational control over Fox Capital Management Corporation ("FCMC"), an
affiliate of FRI. As a result, NPI Equity became responsible for the operation
and management of the business and affairs of the Partnership and the other
investment partnerships sponsored by FRI and/or FCMC. The individuals who had
served previously as partners of FRI and as officers and directors of FCMC
contributed their general partnership interests in FRI to a newly formed limited
partnership, Portfolio Realty Associates, L.P. ("PRA"), in exchange for limited
partnership interests in PRA. In the forgoing capacity, such partners continue
to hold indirectly certain economic interests in the Partnership and such other
investment partnerships, but ceased to be responsible for the operation and
management of the Partnership and such other partnerships. NPI Equity and NPI
Realty are wholly-owned subsidiaries of National Property Investors, Inc. ("NPI
Inc.").
On January 19, 1996, the stockholders of NPI, Inc., the sole shareholder of
NPI, Inc. sold all of the issued and outstanding stock of NPI, Inc. to an
affiliate of Insignia Financial Group, Inc. ("Insignia").
On February 15, 1996, Devon Associates ("Devon") offered to purchase up to
21,000 limited partnership outstanding units of the Partnership. Devon
Associates acquired 17,287 units, with respect to these offers. An affiliate of
the Managing General Partner has an interest in Devon Associates.
Principles of Consolidation
The consolidated financial statements include the Partnership and joint
ventures in which the Partnership has or had a controlling interest, including
Growth Hotel Investors Combined Fund No. 1, a California Limited Partnership
(the "Combined Fund"), in which the Partnership has a majority (approximately
68%) interest. The general partners are the Partnership and Growth Hotel
Investors, Ltd. ("GHI") which are affiliated through their general partners. The
Combined Fund was organized to acquire a majority interest in a joint venture,
Hampton/GHI Associates No. 1., which was formed to acquire, manage and
ultimately sell eighteen hotels which are a franchise of Hampton. Cash is
distributed first to the Partnership as a priority return on its invested
capital prior to distributions to Hampton. Income before depreciation and
amortization is allocated between the Combined Fund and Hampton in the same
ratio as their respective cash distributions. Depreciation and amortization are
allocated on he basis of residual interests except for the expenses related to
acquisition and loan fees paid by the Combined Fund which are allocated 100
percent to the Combined Fund. The residual interests in Hampton/GHI Associates
No. 1 are 80 percent for the Combined Fund and 20 percent for Hampton.
All significant intercompany transactions and balances have been
eliminated.
F-30
<PAGE> 90
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Advertising
The Partnership expenses the costs of advertising as incurred. Advertising
expense, included in operating expenses, was approximately $2,764,000 and
approximately $2,827,000 for the years ended December 31, 1996 and 1995,
respectively.
Fair Value
In 1995, the Partnership implemented "Statement of Financial Accounting
Standards No. 107, Disclosure about Fair Value of Financial Instruments," as
amended by "SFAS No. 119, Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments," which requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
that value. The carrying amount of the Partnership's cash and cash equivalents
approximates fair value due to short-term maturities. The Partnership estimates
the fair value of its fixed rate mortgage by discounted cash flow analysis,
based on estimated borrowing rates currently available to the Partnership.
Investment Properties
In 1995, the Partnership adopted "FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. The impairment loss is measured by comparing the fair value of
the asset to its carrying amount. The effect of adoption was not material.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity,
when purchased, of three months or less to be cash equivalents. At certain
times, the amount of cash deposited at a bank may exceed the limit on insured
deposits.
Depreciation
Depreciation is computed using the straight-line method based on estimated
useful lives ranging from 3 to 39 years.
Deferred Costs
Deferred costs represent the buyout of a services agreement, deferred
financing costs and deferred franchise fees. The buyout of the services
agreement is being amortized over the remaining term of the services agreement
which is 8 years. Financing costs are deferred and amortized, as interest
expense, over the lives of the related loans, or expensed, if financing is not
obtained. Franchise fees paid in connection with the acquisition of the hotels
are deferred and are amortized over the lives of the franchise agreements, which
range from ten to twenty years. Land lease costs paid in connection with
acquisition of certain hotels are deferred and amortized over the lives of the
lease agreements.
F-31
<PAGE> 91
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Allocation
In accordance with the partnership agreement the general partner was
allocated its two percent continuing interest in the Partnership's net income or
loss, taxable income or loss and cash distributions.
Net Income Per Limited Partnership Assignee Unit
Net income per limited partnership assignee unit is computed by dividing
net income allocated to the limited partners by 58,982 assignee units
outstanding.
Income Taxes
Taxable income or loss of the Partnership is reported in the income tax
returns of its partners. Accordingly, no provision for income taxes is made in
the financial statements of the Partnership.
Reclassification
Certain reclassifications have been made to the 1995 and 1994 balances to
conform to the 1996 presentation.
NOTE B -- TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
partnership activities. The Partnership Agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership.
Balances and other transactions with affiliates of Managing General Partner
in 1996, 1995, and 1994 are (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Reimbursement for services of affiliates (primarily included
in general and administrative expenses)................... $242 $213 $199
</TABLE>
In accordance with the partnership agreement, the general partner and
affiliates received a partnership management fee in the amount of 10 percent of
cash from operations available for distribution (as defined in the partnership
agreement). Fees paid pursuant to this agreement in 1996, 1995 and 1994 were
$385,000 for each year, and are included in general and administrative expenses.
In addition, an affiliate of the Managing General Partner was paid fees of
$10,000 relating to successful real estate tax appeals on certain of the
Partnership's properties during the year ended December 31, 1994.
NOTE C -- RELATED PARTY TRANSACTIONS
In addition to the fees paid to the general partner and affiliates as set
forth above, the Partnership has agreements with affiliates of its joint venture
partners, which provide for the management and operations of the joint venture
properties and services provided under each property's franchise agreement. Fees
paid pursuant to these agreements are generally based on a percentage of gross
revenues from operations of the property and for the years ended December 31,
1996, 1995 and 1994 were $6,034,000, $6,058,000, and $5,753,000, respectively.
In addition, affiliates of the joint venture partners received reimbursement of
expenses during the years ended December 31, 1996, 1995, and 1994 of $863,000,
$986,000 and $971,000, respectively. These expenses are included in operating
expenses.
F-32
<PAGE> 92
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- RESTRICTED CASH
Restricted cash at December 31, 1996, represents funds provided for and
maintained by certain properties pursuant to the related notes payable
agreements, to meet future capital requirements and debt service payments.
NOTE E -- PURCHASE OF JOINT VENTURE PARTNERS' INTERESTS
On May 1, 1995, the Partnership acquired the 25% minority interest in the
joint venture which owned the Hampton Inn -- Kansas City hotel property for
$300,000. The carrying value of the property was increased by $293,000, which
reflects the purchase price of $300,000, offset by the $7,000 payable to the
joint venture partner on May 1, 1995.
On October 1, 1995, the Partnership acquired the 30% minority interest in
the joint venture which owned the Hampton Inn -- Dublin hotel property for
$75,000. The carrying value of the property was increased by $123,000, which
reflects the purchase price of $75,000, and the $48,000 receivable from the
joint venture partner on October 1, 1995.
On December 7, 1995, the Partnership acquired all of the economic rights of
its joint venture partner in GHI II Big River Associates, a California
partnership. This purchase was effective January 1, 1996, at a cost of $375,000.
The Partnership had an 80% ownership interest in GHI-II Big River Associates,
which in turn, owned the Hampton Inn -- St. Louis property. The carrying value
of the property was increased by $500,000 which reflects the purchase of
$375,000 and $125,000 receivable from the joint venture partner.
NOTE F -- DEFERRED COSTS
The Partnership paid $1,425,000 in January 1995, to Metric Management, Inc.
("MMI") amending their services agreement to provide for a reduction in the
monthly asset management fee from $54,500 to $7,000. This amendment eliminates
fees payable to MMI for its assistance in refinancings and sales of properties
owned by the Partnership and provides the Partnership with the ability to
terminate MMI's services at will.
The cost of the amendment is being amortized over the remaining term of the
service agreement of 8 years. For each of the years ended December 31, 1996 and
1995, approximately $143,000 has been amortized and is included in general and
administrative expenses.
At December 31, 1996 and 1995, accumulated amortization of deferred costs
relating to the service agreement totaled approximately $286,000 and
approximately $143,000, respectively.
At December 31, 1996 and 1995, accumulated amortization of deferred costs
relating to franchise fees totaled approximately $350,000 and $312,000,
respectively.
NOTE G -- NOTES PAYABLE
Individual properties and improvements are pledged as collateral for the
related notes payable. The mortgages encumbering sixteen of the eighteen hotels
owned by the Combined Fund are cross collateralized. The notes currently bear
interest of approximately 12 percent, except for, the mortgage encumbering the
Partnership's St. Louis, Missouri property which is financed by a private
activity revenue bond. Interest is established monthly as provided in the
agreement. The average monthly interest rate on this note was 6.01 percent and
6.40 percent in 1996 and 1995, respectively.
On May 4, 1994, the Partnership paid approximately $150,000 in full
satisfaction, at a discount, the contingent purchase money note on the
Partnership's Hampton Inn -- Colorado Springs property.
F-33
<PAGE> 93
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 1, 1995, the Partnership satisfied the mortgage encumbering its
Hampton Inn -- Dublin property in the amount of $3,257,000. The mortgage was due
to mature in April 1996.
On December 1, 1995, the Partnership satisfied the mortgage encumbering its
Hampton Inn -- Kansas City property in the amount of $2,718,000. The mortgage
was due to mature in January 1996.
The estimated fair value of the Partnership's aggregate debt is
approximately $49,215,000. This estimate is not necessarily indicative of the
amounts the Partnership might pay in actual market transactions.
The Partnership had balloon payments due in 1996 of approximately
$43,202,000. The Managing General Partner has obtained extensions on these
mortgages until July 1, 1997.
At December 31, 1996 and 1995, accumulated amortization of deferred
financing costs totaled approximately $74,000 and $1,319,000, respectively.
Fully amortized costs have been written off.
Principal payments subsequent to December 31, 1996 are required as follows
(in thousands):
<TABLE>
<S> <C>
1997........................................................ $43,142
1998........................................................ 2,573
1999........................................................ --
2000........................................................ --
2001........................................................ --
Thereafter.................................................. 3,500
-------
Total............................................. $49,215
=======
</TABLE>
NOTE H -- MINIMUM FUTURE RENTAL COMMITMENTS
Minimum future rental commitments on operating leases (including four land
leases) at December 31, 1996 are payable as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 380
1998........................................................ 380
1999........................................................ 384
2000........................................................ 390
2001........................................................ 399
Thereafter.................................................. 1,887
------
Total....................................................... $3,820
======
</TABLE>
The land leases extend through 2004, 2006, 2007 and 2008, and contain
options to extend the lease periods 20, 20, 50 and 40 years, respectively.
Rental expense for these leases was $448,000, $478,000 and $481,000 in 1996,
1995 and 1994.
NOTE I -- EXTRAORDINARY ITEM -- GAIN ON EXTINGUISHMENT OF DEBT
On May 4, 1994, the Partnership paid approximately $150,000 in full
satisfaction, at a discount, the contingent purchase money note on the
Partnership's Hampton Inn -- Colorado Springs property. The Partnership recorded
an extraordinary gain on the extinguishment of debt of $98,000, representing
$50,000 of notes payable and $48,000 of accrued interest.
F-34
<PAGE> 94
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING
The differences between the method of accounting for income tax reporting
and the accrual method of accounting used in the financial statements are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS, EXCEPT UNIT DATA)
<S> <C> <C> <C>
Net income -- financial statements.......................... $ 5,489 $ 5,712 $ 5,029
Differences resulted from:
Minority interest in joint ventures' operations........... 390 353 296
Depreciation and other amortization....................... (985) (777) (882)
Deferred costs............................................ -- (1,425) --
Other..................................................... 24 (5) 53
------- ------- -------
Net income -- income tax method................... $ 4,918 $ 3,858 $ 4,496
======= ======= =======
Taxable income per limited partnership assignee unit after
giving effect to the allocation to the general partner.... $ 82 $ 64 $ 75
======= ======= =======
Partner's equity-financial statements....................... $40,002 $37,975 $35,725
Differences resulted from:
Deferred sales commissions and organization costs......... 2,078 2,078 2,078
Capital account adjustment................................ 7 7 7
Minority interest in joint ventures' operations........... 7,890 7,500 7,147
Deferred costs............................................ (1,425) (1,425) --
Depreciation and other amortization....................... (9,392) (8,407) (7,630)
Other..................................................... 149 122 127
------- ------- -------
Partners' equity-income tax method.......................... $39,309 $37,850 $37,454
======= ======= =======
</TABLE>
F-35
<PAGE> 95
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
INITIAL COST TO PARTNERSHIP
<TABLE>
<CAPTION>
COST
BUILDINGS CAPITALIZED
AND (REMOVED)
RELATED SUBSEQUENT TO
DESCRIPTION ENCUMBRANCES LAND PROPERTY ACQUISITION
- ----------- ------------ ------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Growth Hotel Investors II:
Hampton Inn -- Kansas City.................... $ -- $ 589 $ 4,545 $1,326
Hampton Inn -- Eden Prairie................... 2,603 880 4,426 836
Hampton Inn -- Dublin......................... -- 818 4,641 854
Hampton Inn -- North Dallas................... 2,927 1,667 4,119 941
Hampton Inn -- St. Louis...................... 3,500 812 5,074 1,238
Hampton Inn -- Colorado Springs............... -- 538 3,040 456
Growth Hotel Investors Combined Fund No. 1:
Hampton Inn -- Memphis I40 East............... 1,771 -- 3,838 541
Hampton Inn -- Columbia-West.................. 2,062 350 4,133 324
Hampton Inn -- Spartanburg.................... 1,767 275 3,545 357
Hampton Inn -- Little Rock-North.............. 2,015 524 3,862 315
Hampton Inn -- Amarillo....................... 1,120 501 1,810 396
Hampton Inn -- Greenville..................... 2,054 539 3,942 106
Hampton Inn -- Charleston Airport............. 2,144 495 4,205 323
Hampton Inn -- Memphis-Poplar................. 2,798 1,236 4,993 71
Hampton Inn -- Greensboro..................... 1,982 439 3,866 254
Hampton Inn -- Birmingham..................... 2,426 758 4,447 64
Hampton Inn -- Atlanta-Roswell................ 2,643 1,207 4,668 (141)
Hampton Inn -- Chapel Hill.................... 2,257 930 3,926 (5)
Hampton Inn -- Dallas-Richardson.............. 2,769 1,371 4,766 (311)
Hampton Inn -- Nashville-Briley............... 2,183 -- 4,796 (23)
Hampton Inn -- San Antonio-Northwest.......... 2,451 781 4,475 (58)
Hampton Inn -- Madison Heights................ 2,834 963 5,323 653
Hampton Inn -- Mountain Brook................. 2,543 -- 4,782 699
Hampton Inn -- Northlake...................... 2,366 -- 4,439 510
------- ------- -------- ------
Total................................. $49,215 $15,673 $101,661 $9,726
======= ======= ======== ======
</TABLE>
F-36
<PAGE> 96
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GROSS AMOUNT AT WHICH CARRIED
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
BUILDING
AND ACCUMULATED YEAR OF DATE OF DEPRECIABLE
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUISITION LIFE-YEARS
- ----------- ------- ------------ -------- ------------ ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Growth Hotel
Investors II:
Hampton Inn --
Kansas City..... $ 618 $ 5,842 $ 6,460 $ 2,196 1987 12/09/87 5-39 Yrs
Hampton Inn -- Eden
Prairie......... 853 5,289 6,142 1,947 1987 12/30/87 5-39 Yrs
Hampton Inn --
Dublin.......... 831 5,482 6,313 2,307 1988 04/07/88 5-39 Yrs
Hampton Inn --
North Dallas.... 1,667 5,060 6,727 2,175 1985 07/18/88 5-30 Yrs
Hampton Inn -- St.
Louis........... 897 6,227 7,124 2,204 1987 07/27/89 5-30 Yrs
Hampton Inn --
Colorado
Springs......... 490 3,544 4,034 1,448 1985 12/29/89 5-39 Yrs
Growth Hotel
Investors Combined
Fund No. 1:
Hampton Inn --
Memphis I40
East............ -- 4,379 4,379 1,769 1984 12/19/86 5-30 Yrs
Hampton Inn --
Columbia-West... 350 4,457 4,807 1,845 1985 12/19/86 5-30 Yrs
Hampton Inn --
Spartanburg..... 275 3,902 4,177 1,616 1984 12/19/86 5-39 Yrs
Hampton Inn --
Little
Rock-North...... 524 4,177 4,701 1,600 1985 12/19/86 5-39 Yrs
Hampton Inn --
Amarillo........ 501 2,206 2,707 919 1985 12/19/86 5-39 Yrs
Hampton Inn --
Greenville...... 539 4,048 4,587 1,608 1985 12/19/86 5-30 Yrs
Hampton Inn --
Charleston
Airport......... 495 4,528 5,023 1,808 1985 12/19/86 5-39 Yrs
Hampton Inn --
Memphis-Poplar... 1,236 5,064 6,300 2,006 1985 12/19/86 5-30 Yrs
Hampton Inn --
Greensboro...... 439 4,120 4,559 1,600 1986 12/19/86 5-39 Yrs
Hampton Inn --
Birmingham...... 758 4,511 5,269 1,757 1987 12/19/86 5-30 Yrs
Hampton Inn --
Atlanta-Roswell... 1,207 4,527 5,734 1,621 1987 03/04/87 5-30 Yrs
Hampton Inn --
Chapel Hill..... 930 3,921 4,851 1,445 1987 03/04/87 5-30 Yrs
Hampton Inn --
Dallas-Richardson.. 1,371 4,455 5,826 1,542 1987 03/04/87 5-30 Yrs
</TABLE>
F-37
<PAGE> 97
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BUILDING
AND ACCUMULATED YEAR OF DATE OF DEPRECIABLE
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUISITION LIFE-YEARS
- ----------- ------- ------------ -------- ------------ ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Hampton Inn --
Nashville Briley
Parkway......... -- 4,773 4,773 1,728 1987 03/04/87 5-30 Yrs
Hampton Inn -- San
Antonio-Northwest.. 781 4,417 5,198 1,523 1987 06/23/87 5-30 Yrs
Hampton Inn --
Madison
Heights......... 963 5,976 6,939 2,454 1987 12/29/87 5-30 Yrs
Hampton Inn --
Mountain
Brook........... -- 5,481 5,481 2,380 1988 12/29/87 5-30 Yrs
Hampton Inn --
Northlake....... -- 4,949 4,949 2,179 1988 09/15/88 5-30 Yrs
------- -------- -------- -------
$15,725 $111,335 $127,060 $43,677
======= ======== ======== =======
</TABLE>
Reconciliation of Investment Properties and Accumulated Depreciation:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year........................... $121,883 $127,768 $125,563
Property improvements.................................. 4,677 4,264 2,205
Purchase of joint venture interests.................... 500 415 --
Retirement of assets................................... -- (10,564) --
-------- -------- --------
Balance at end of year................................. $127,060 $121,883 $127,768
======== ======== ========
Accumulated Depreciation
Balance at beginning of year......................... $ 38,136 $ 43,597 $ 38,880
Additions charged to expense......................... 5,541 5,103 4,717
Retirement of assets................................. -- (10,564) --
-------- -------- --------
$ 43,677 $ 38,136 $ 43,597
======== ======== ========
</TABLE>
The aggregate cost of the real estate for Federal income tax purposes at
December 31, 1996 and 1995, is approximately $137,705,000 and $133,013,000. The
accumulated depreciation taken for Federal income tax purposes at December 31,
1996 and 1995, is approximately $61,140,000, and $54,466,000.
NOTE L -- COMMITMENT AND CONTINGENCIES
William Wallace, Mildred Wallace, Edith G. Martin, Paul Allemang and Gwen
Allemang, on behalf of themselves and all others similarly situated, and
derivatively on behalf of Growth Hotel Investors ("GHI"), a California limited
partnership and the Partnership, Plaintiff v. Devon Associates, Montgomery
Realty-85, GHI Associates, Cayuga Associates L.P., Cayuga Capital Corp.,
Insignia Financial Group, Inc., L.P., and Fleetwood Corp., Defendants and Growth
Hotel Investors, a California limited partnership, and Growth Hotel Investors
II, a California limited partnership, Nominal Defendant, Supreme Court of the
State of New York, County of New York, Case No. 9600866.
On February 21, 1996, William and Mildred Wallace, holders of Units of GHI
and Edith G. Martin and Paul and Gwen Allemang, holders of Units of the
Partnership, commenced an action on behalf of themselves and others similarly
situated, and derivatively on behalf of the Partnership and GHI, in the Supreme
Court of the State of New York, County of New York, against, among others,
MRC-85 and certain of its affiliates
F-38
<PAGE> 98
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pertaining to the tender offer for up to 21,000 partnership Units of the
Partnership and up to 15,000 partnership Units of GHI which commenced February
15, 1996. The action alleges, among other things, that the tender offers
constitute (a) a breach of fiduciary duty owed to limited partners of the
partnerships, and (b) a breach of the provisions of the partnership agreements
of such partnerships. The action, which is sought to brought as a class action
on behalf of all limited partners, seeks to enjoin the tender offers as well as
monetary damages in an unspecified amount.
R&S Asset Partners, a Florida general partnership, and Jessie B. Small, on
their own behalfs, on behalf of all others similarly situated, and derivatively
on behalf of the Nominal Defendants, Plaintiffs, v. Devon Associates, Cayuga
Associates, L.P., Cayuga Capital Corp., Fleetwood Corp., Carl C. Icahn, Michael
L. Ashner, Martin Lifton, Arthur N. Queler, Insignia Financial Group, Inc.,
IFGP, Corp., National Properties Investors, Inc., NPI Equity Investments II,
Inc., Fox Realty Investors, Portfolio Realty Associates, L.P., Emmet J. Cashin,
Jr., Jarold A. Evans, W. Patrick McDowell, Apollo Real Estate Advisors, L.P.,
and Montgomery Realty Company-85, Defendants, and Growth Hotel Investors, a
California Limited Partnership, and Growth Hotel Investors II, a California
Limited Partnership, Nominal Defendants, Superior Court of the State of
California, County of Los Angeles, Case No. BC145220.
On February 28, 1996, R&S Asset Partners, holders of Units of GHI, and
Jesse B. Small, holder of Units of the Partnership, commenced an action on
behalf of themselves and others similarly situated, and derivatively on behalf
of the Partnership and GHI, in the Superior Court of the State of California,
County of Los Angeles, against, among others, MRC-85 and certain of its
affiliates pertaining to the tender offer for up to 21,000 partnership Units of
the Partnership and up to 15,000 partnership Units of GHI which commenced
February 15, 1996. The action alleges, among other things, that the tender
offers constitute (a) a breach of fiduciary duty owed to limited partners of the
partnerships, (b) negligent misrepresentation pertaining to the disclosure set
forth in the offer to purchase, (c) common law fraud, and (d) a breach of the
provisions of the partnership agreements of such partnerships. The action, which
is sought to brought as a class action on behalf of all limited partners, seeks
to enjoin the tender offers as well as monetary damages in an unspecified
amount.
On March 15, 1996, counsel for the plaintiffs and defendants in the Wallace
and the R&S Partners Actions agreed in principle to settle these actions, which
settlement has subsequently received final court approval. In connection with
the settlement MRC-85 agreed to take such actions as are reasonably necessary
and consistent with its fiduciary duties to procure offers for the purchase of
the Partnership's and GHI's assets which maximize the value of the limited
partner assignee units. MRC-85 further agreed to deal fairly and in good faith
with persons expressing an interest in making a bona fide offer to purchase such
assets and, subject to its fiduciary duty, provide such bona fide offers with
access to the Partnership's and GHI's books and records for due diligence
purposes. MRC-85 also agreed that if it determined that an offer to purchase its
assets is acceptable, MRC-85 will prepare a plan of liquidation and submit such
plan to the Partnership's partners for approval. Also in connection with the
settlement, the plaintiffs will release all claims they may have arising out of
the tender offers. As required by the settlement, the Partnership and GHI are
coordinating with class counsel with respect to the sale of such assets and
consent of limited partners.
NOTE M -- TENDER OFFERS
On February 15, 1996, Devon Associates ("Devon") offered to purchase up to
21,000 and 15,000 limited partnership outstanding units (the "Units") of the
Partnership, and GHI, respectively. Devon Associates acquired 17,287 and 13,396
units, with respect to these offers, respectively. The offer for the
Partnerships Units was at a purchase price of $750 and $705, respectively, per
unit, net to the seller in cash, without interest, upon the terms and conditions
set forth in the offer to purchase. Certain beneficial owners of Devon are
affiliated with the general partners of the Partnership and GHI. In addition, an
affiliate of Insignia is both a shareholder in the general partner of Cayuga
Associates, LP, the controlling general partner in Devon, and a limited partner
in Devon.
F-39
<PAGE> 99
GROWTH HOTEL INVESTORS II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- SUBSEQUENT EVENT
As required by the settlement of the class action brought in connection
with the tender offer made by Devon Associates discussed in "Note M", the
Partnership and GHI, the Partnership's joint venture partner in the Combined
Fund properties, marketed all of their properties for sale. In this regard, the
Partnership and GHI retained Bear, Stearns & Co. Inc. to assist in the marketing
of such properties. As of March 14, 1997, the Partnership, the Combined Fund,
the joint ventures in which the Partnership has a controlling interest, GHI II,
and the joint ventures in which the Partnership has a controlling interest, and
Equity Inns Partnership, L.P. (the "Buyer") entered into certain purchase and
sale agreements pursuant to which the Buyer agreed to purchase from these
entities the twenty-four hotels described herein as well as four additional
hotels owned directly or indirectly by the Partnership for an aggregate purchase
price of $182 million, subject to adjustment. The closing of these sales, which
is anticipated to occur during the second quarter of 1997, is subject to many
conditions including, favorable completion by the Buyer of its due diligence
review and the Partnership and GHI receiving consent to the sale from their
respective limited partners holding a majority of the outstanding limited
partnership interests in the Partnership and GHI. Accordingly, there can be no
assurance that the sale will be consummated with the Buyer or any other
potential buyer.
F-40
<PAGE> 100
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 9, 1997
PROSPECTUS
EQUITY INNS, INC.
$200,000,000
COMMON STOCK AND PREFERRED STOCK
Equity Inns, Inc. (together with its subsidiaries, the "Company") may
from time to time offer and sell (i) shares of its Common Stock, $.01 par value
(the "Common Stock"), and (ii) in one or more series, shares of its Preferred
Stock, $.01 par value (the "Preferred Stock"), with an aggregate public offering
price of up to $200,000,000, on terms to be determined at the time of offering.
The Common Stock and Preferred Stock offered pursuant hereto (the "Offered
Securities") may be offered in amounts, at prices and on terms to be set forth
in one or more supplements to this Prospectus (each, a "Prospectus Supplement").
The Company's Common Stock is traded on the New York Stock Exchange
under the symbol "ENN." The Company's charter contains limitations on direct or
beneficial ownership and restrictions on transfer of the Common Stock to
preserve the status of the Company as a real estate investment trust ("REIT")
for United States federal income tax purposes. See "Restrictions on Ownership of
Common Stock."
The applicable Prospectus Supplement shall set forth (i) with respect
to Preferred Stock, the specific designation and stated value per share, any
dividend, liquidation, redemption, conversion, voting and other rights, and all
other specific terms of the Preferred Stock, and (ii) with respect to the Common
Stock, the specific number of shares and issuance price per share. The
applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered thereby.
The Offered Securities may be sold on a negotiated or competitive bid
basis to or through underwriters or dealers designated from time to time or by
the Company, directly or through agents, to other purchasers. Certain terms of
any offering and sale of the Offered Securities, including, where applicable,
the names of the underwriters, dealers or agents, if any, the principal amount
or number of shares to be purchased, the purchase price of the shares to be
purchased, any applicable commissions, discounts and other compensation to
underwriters, dealers and agents, and the proceeds to the Company from such
sale, will be set forth in, or will be calculable from information contained in,
a Prospectus Supplement. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN FACTORS RELATING TO
AN INVESTMENT IN THE OFFERED SECURITIES.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE OFFERED
SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May __, 1997.
<PAGE> 101
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> 102
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> 103
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere or incorporated by
reference in this Prospectus. Unless the context indicates otherwise, the term
"Company" includes the Company's subsidiaries and controlled entities.
THE COMPANY
The Company is a self-administered equity real estate investment trust
("REIT") incorporated as a Tennessee corporation in November 1993 to acquire
equity interests in hotel properties. The Company completed its initial public
offering in March 1994. The Company, through Equity Inns Trust (the "Trust"), a
wholly-owned subsidiary of the Company, is the sole general partner of the
Equity Inns Partnership, L.P. (the "Partnership") and at May 1, 1997 owned
approximately a 96.1% general partnership interest in the Partnership. At May 1,
1997, the Partnership owned 56 hotels with an aggregate of 6,679 rooms located
in 29 states (the "Current Hotels") and had entered into contracts to acquire 28
additional hotels with an aggregate of 3,487 rooms in 14 states (the
"Acquisition Hotels" and, together with the Current Hotels, the "Hotels").
In order to qualify as a REIT under federal tax provisions, neither the
Company, the Partnership nor the Trust can operate hotels. Prior to November 15,
1996, the Company's hotels were leased to Trust Leasing, Inc. (formerly named
McNeill Hotel Co., Inc.) ("Trust Leasing"). Effective November 15, 1996, Trust
Leasing assigned all of the then existing leases for the Company's hotels,
together with its assets, to Crossroads/Memphis Partnership, L.P. (the "Lessee")
pursuant to a Contribution Agreement dated October 4, 1996 by and among Trust
Leasing, Trust Management, Inc., formerly named McNeill Hospitality Corporation,
which is wholly owned by Phillip H. McNeill, Sr., and the Lessee. Since November
15, 1996, the Company has acquired eight hotels which have been leased to
Crossroads/Future Company, L.L.C. ("Crossroads/Future" and, together with the
Lessee, the "Lessees") pursuant to percentage lease agreements which provide for
rent payments equal to the greater of (i) fixed base rent ("Base Rent") or (ii)
percentage rent ("Percentage Rent") based on the revenues of the hotels (the
"Percentage Leases"). The Lessees are wholly-owned subsidiaries of Interstate
Hotels Company, a publicly-owned hotel management company ("Interstate").
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its taxable year ended December 31, 1994. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its taxable income. In connection with the
Company's election to be taxed as a REIT, the Company's Charter imposes certain
restrictions on the transfer and ownership of shares of Common Stock. See
"Restrictions on Ownership of Common Stock." The Company has adopted the
calendar year as its taxable year. The Company's Charter limits consolidated
indebtedness to 45% of the Company's investment in hotel properties, at its
cost.
The Company's principal executive offices are located at 4735 Spottswood,
Suite 102, Memphis, Tennessee 38117 and its telephone number is (901) 761-9651.
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RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
making an investment decision regarding the Offered Securities offered hereby.
HOTEL INDUSTRY RISKS
Operating Risks
The Hotels are subject to all operating risks common to the hotel industry.
These risks include, among other things, competition from other hotels;
over-building in the hotel industry, which adversely affects occupancy and
revenues; increases in operating costs due to inflation and other factors, which
increases have not been, and may not be, offset by increased room rates;
dependence on business and commercial travelers and tourism; increases in energy
costs and other expenses affecting travel; and adverse effects of general and
local economic conditions. These factors could adversely affect the Lessees'
ability to make lease payments and therefore the Company's ability to make
expected distributions to shareholders. Further, decreases in room revenues of
the Hotels would result in decreased revenues to the Partnership under the
Percentage Leases and, therefore, decreased amounts available for distribution
to the Company's shareholders.
Competition
Competition for Guests; Operations. The hotel industry is highly
competitive. The Hotels compete with other hotel properties in their geographic
markets. Many of the Company's competitors have substantially greater marketing
and financial resources than the Company.
Competition for Acquisitions. The Company will compete for investment
opportunities with entities which have substantially greater financial resources
than the Company. These entities generally may be able to accept more risk than
the Company can manage prudently. Competition generally may reduce the number of
suitable investment opportunities offered to the Company and may increase the
bargaining power of property owners seeking to sell. Further, the Company
believes that competition from entities organized for purposes substantially
similar to the Company's objectives has increased and will increase
significantly in the future.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
This seasonality can be expected to cause quarterly fluctuations in the
Company's lease revenues. Quarterly earnings may be adversely affected by
factors beyond the Company's control, including poor weather conditions and
economic factors. The Company may be required to enter into short-term borrowing
in the first and fourth quarters in order to offset such fluctuations in
revenues and to fund the Company's anticipated obligations, including
distributions to its shareholders.
Capital Expenditures
The Company's hotel properties have an ongoing need for renovations and
other capital improvements, including periodic replacement of furniture,
fixtures and equipment. Franchisors of the Hotels may also require periodic
capital improvements as a condition of retaining the franchise licenses. The
cost of such capital improvements could have an adverse effect on the Company's
financial condition. Such renovations involve certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
the possibility that the Company will not have available cash to fund
renovations or that financing for renovations will not be available on favorable
terms, uncertainties as to market demand or deterioration in market demand after
commencement of renovation and the emergence of unanticipated competition from
hotels. The Company intends to fund such improvements out of cash from
operations, cash balances or available borrowing capacity under its bank line of
credit.
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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
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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
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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
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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."
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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
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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
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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
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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.
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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.
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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
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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.
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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
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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
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"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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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<PAGE> 130
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"
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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
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<PAGE> 132
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.
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======================================================
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 ANY OF 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
Prospectus Supplement Summary.............. S-3
Risk Factors............................... S-14
Promus Strategic Alliance.................. S-23
Strategic Alliance with Interstate......... S-23
Use of Proceeds............................ S-24
Price Range of Common Stock and
Distributions............................ S-24
Capitalization............................. S-25
Selected Financial Information............. S-26
Business................................... S-29
The Hotels................................. S-32
Management................................. S-48
Security Ownership of Management........... S-51
Federal Income Tax Considerations.......... S-53
Underwriting............................... S-54
Experts.................................... S-55
Incorporation of Certain Documents by
Reference................................ S-55
Glossary................................... S-56
Index to Financial Statements.............. F-1
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>
======================================================
======================================================
7,500,000 SHARES
LOGO
COMMON STOCK
-------------------------
PROSPECTUS
MAY 9, 1997
-------------------------
SMITH BARNEY INC.
MORGAN KEEGAN &
COMPANY, INC.
PRUDENTIAL SECURITIES INCORPORATED
J.C. BRADFORD & CO.
======================================================
<PAGE> 134
ITEM 16. EXHIBITS.
*4.1 - Specimen Common Stock Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-11 (Registration
No. 33-73304), and incorporated by reference herein)
*4.2 - Charter (filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-11 (Registration No. 33-73304), and
incorporated by reference herein)
*4.2(a)- Articles of Amendment to the Charter of the Registrant (filed
as Exhibit 3.1 to the Company's Current Report on Form 8-K
(Registration No. 34-0-23290) filed with the Commission on
April 27, 1995 and incorporated by reference herein)
*4.2(b)- Articles of Amendment to the Charter of the Registrant (filed
as Exhibit 3.1 to the Company's Current Report on Form 8-K
(Registration No. 34-0-23290) filed with the Commission on May
31, 1996 and incorporated by reference herein)
*4.3 - Bylaws (filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-11 (Registration No. 33-73304) and
incorporated by reference herein)
*5.1 - Opinion of Hunton & Williams
***8.1 - Opinion of Hunton & Williams regarding certain tax matters.
*12.1 - Statement regarding computation of ratios.
**23.1 - Consent of Coopers & Lybrand L.L.P.
*23.2 - Consent of Hunton & Williams (included in Exhibit 5.1)
**23.3 - Consent of Imowitz Koenig & Co., L.L.P.
**24.1 - Power of Attorney (located on the signature page of this
Registration Statement)
- ---------------------
* Previously filed or incorporated by reference hereto.
** Filed herewith.
*** To be filed as an Exhibit to Form 8-K in connection with the offering of
Offered Securities, as applicable.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
registration statement (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement (Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the lower or higher and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement); and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; provided,
however, that the undertakings set forth in subparagraphs (i) and (ii) above do
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic
II-2
<PAGE> 135
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Memphis, State of Tennessee, on the
9th day of May, 1997.
EQUITY INNS, INC.
a Tennessee corporation
(Registrant)
By /s/ Phillip H. McNeill, Sr.
----------------------------------------------------
Phillip H. McNeill, Sr.
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
By /s/ Howard S. Silver
----------------------------------------------------
Howard A. Silver
Vice President of Finance, Secretary, Treasurer
and Chief Financial Officer
(Principal Accounting Officer and Financial Officer)
II-4
<PAGE> 136
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the 9th day of May, 1997 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Phillip H. McNeill, Sr. Chairman of the Board and Chief Executive Officer
- ------------------------------ (Principal Executive Officer)
Phillip H. McNeill, Sr.
/s/ James A. Thomas, III Director
- ------------------------------
James A. Thomas, III
/s/ William W. Deupree, Jr. Director
- ------------------------------
William W. Deupree, Jr.
/s/ Joseph W. McLeary Director
- ------------------------------
Joseph W. McLeary
/s/ Howard A. Silver Vice President of Finance, Secretary,
- ------------------------------ Treasurer and Chief Financial Officer
Howard A. Silver (Principal Accounting Officer and Financial Officer)
</TABLE>
II-5
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Equity Inns, Inc. on Form S-3 of our report dated January 23, 1997, except as
to Note 10 for which the date is February 10, 1997, on our audits of the
consolidated financial statements and financial statement schedule of Equity
Inns, Inc. as of December 31, 1996 and 1995, and for the years ended December
31, 1996 and 1995 and for the period from March 1, 1994 (inception of
operations) through December 31, 1994, which report is included in Equity Inns'
Annual Report on Form 10-K. We also consent to the reference to our firm under
the caption "experts."
COOPERS & LYBRAND, L.L.P.
Memphis, Tennessee
May 9, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of Equity Inns, Inc.
on Form S-3 of our reports dated February 28, 1997, except for Note N, which is
dated March 14, 1997 on our audits of the consolidated financial statements of
Growth Hotel Investors and Growth Hotel Investors II as of December 31, 1996
and 1995, and for each of the three years in the period ended December 31,
1996. We also consent to the reference to our firm under the caption "experts."
/s/ Imowitz Koenig & Co., L.L.P.
New York, N.Y.
May 9, 1997
