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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1998
REGISTRATION NO. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EQUITY INNS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
TENNESSEE 62-1550848
<S> <C>
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
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
RIVERFRONT PLAZA
951 EAST BYRD STREET
RICHMOND, VIRGINIA 23219
(804) 788-8200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM
TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AS
DETERMINED BY 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]
<TABLE>
<CAPTION>
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PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED AMOUNT TO BE REGISTERED PER UNIT(1)(2) PRICE(1) FEE(2)
<S> <C> <C> <C> <C>
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COMMON STOCK,
$.01 PAR VALUE 696,304 $11.66 $8,118,905 $2,395
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) The registration fee has been calculated in accordance with Rule 457(c)
under the Securities Act of 1933, as amended, and based on the average of the
high and low sales prices of the Common Stock as reported on the New York Stock
Exchange on September 8, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THAT 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 SEPTEMBER 11, 1998
696,304 SHARES
EQUITY INNS, INC.
COMMON STOCK
This Prospectus relates to the offer and sale from time to time of up
to 696,304 shares (the "Secondary Shares") of common stock, $.01 par value (the
"Common Stock"), of Equity Inns, Inc. (the "Company") that may be issued to
certain selling shareholders named herein (the "Selling Shareholders"). See "The
Company" and "Plan of Distribution."
The Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "ENN." The closing price of the Common Stock on the NYSE on
September 8, 1998 was $11.625. To ensure that the Company maintains its
qualification as a real estate investment trust ("REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"), the Company's charter, as amended
and restated (the "Charter"), limits the number of shares 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 - Limitation on Acquisition and Change in Control" and
"Description of Capital Stock - Charter and Bylaw Provisions."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR CERTAIN FACTORS RELATING TO
AN INVESTMENT IN THE COMMON STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The Selling Shareholders from time to time may offer and sell the
Secondary Shares directly or through agents or broker-dealers on terms to be
determined at the time of sale. To the extent required, the names of any agent
or broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." The Selling
Shareholders reserve the sole right to accept or reject, in whole or in part,
any proposed purchase of the Secondary Shares to be made directly or through
agents.
The Company will not receive any cash proceeds from the sale of any
Secondary Shares. The Company has agreed to bear certain expenses of
registration of the sale of the Secondary Shares under federal and state
securities laws, but all selling and other expenses incurred by the Selling
Shareholders will be borne by the Selling Shareholders. None of the Secondary
Shares offered hereby have been registered prior to the filing of the
Registration Statement of which this Prospectus is a part.
The Selling Shareholders and any agents or broker-dealers that
participate with the Selling Shareholders in the distribution of Secondary
Shares may be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"), and any commissions received by
them and any profit on the resale of the Secondary Shares may be deemed to be
underwriting commissions or discounts under the Securities Act.
The date of this Prospectus is ________ __, 1998.
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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 (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants such as the
Company that file electronically with the Commission. The Common Stock is listed
on the NYSE and such reports, proxy statements and other information concerning
the Company can be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington D.C. 20549, a Registration Statement on Form S-3 under the Securities
Act, and the rules and regulations promulgated thereunder, with respect to the
Common Stock offered pursuant to this Prospectus. This Prospectus, which is part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement and the exhibits and financial schedules thereto.
For further information concerning the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed therewith, which may be examined without charge at, or copies
obtained upon payment of prescribed fees from, the Commission and its regional
offices at the locations listed above. Any statements contained in this
Prospectus concerning the provisions of any document referred to herein are not
necessarily complete, and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission. Each such statement is qualified in its entirety by such
reference.
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,
1997; (ii) the Company's Current Reports on Form 8-K dated January 20, 1998,
February 12, 1998, March 25, 1998, May 14, 1998, June 15, 1998, June 23, 1998
and June 30, 1998; (iii) the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1998 and June 30, 1998 and the Company's Amended
Quarterly Reports on Form 10-Q/A and Form 10-Q/A/A for the quarter ended March
31, 1998; and (iv) the description of the Common Stock contained in the
Company's Registration Statement on Form 8-A, filed with the Commission on
August 19, 1996. All documents filed by the Company pursuant to Section 13(a),
13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the securities shall
be deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing such documents.
The Company will provide without charge to each person to whom a copy
of this Prospectus 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: Donald H. Dempsey, 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 any other document subsequently filed with the Commission which also is
deemed to be incorporated by reference herein modified 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.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
descriptions and the financial information and statements appearing elsewhere
and incorporated by reference in this Prospectus. As used herein, the term
"Company" includes Equity Inns, Inc., Equity Inns Trust (the "Trust") and Equity
Inns Partnership, L.P. (the "Partnership") and the Company's and Partnership's
direct and indirect subsidiaries, unless the context indicates otherwise.
Certain matters discussed in this Prospectus and the information
incorporated by reference herein may constitute forward-looking statements for
purposes of the Securities Act and the Exchange Act and as such may involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed under the caption "Risk
Factors" in this Prospectus.
THE COMPANY
The Company is a self-administered REIT that currently owns 105 hotels
with an aggregate of 12,900 rooms located in 36 states (the "Current Hotels")
and has one hotel currently under development. The Current Hotels operate as
Hampton Inn(R) hotels (58), AmeriSuites(R) hotels (19), Residence Inn(R) hotels
(12), Homewood Suites(R) hotels (7), Holiday Inn(R) hotels (4), Comfort Inn(R)
hotels (3), one Hampton Inn & Suites(R) hotel, and one Holiday Inn Express(R)
hotel. The Company has entered into agreements to acquire three hotels with an
aggregate of 785 rooms located in two states (the "Acquisition Hotels"). The
Current Hotels and the Acquisition Hotels are herein referred to collectively as
the "Hotels."
In order to qualify as a REIT, neither the Company nor the Partnership
can operate hotels. Therefore, the Partnership leases 83 of the Current Hotels
to subsidiaries (collectively, the "Interstate Lessee") of Interstate Hotels
Company ("Interstate"), and its 19 AmeriSuites brand Current Hotels to a
subsidiary (the "Prime Lessee" and, together with the Interstate Lessee, the
"Lessee") of Prime Hospitality Corp. ("Prime"), pursuant to leases ("Percentage
Leases") that provide for annual rent equal to the greater of (i) a fixed annual
base rent ("Base Rent") or (ii) percentage rent based on the revenues of the
hotels ("Percentage Rent"). The remaining three Current Hotels are operated
pursuant to management agreements with Interstate and CapStar Hotel Co.
("CapStar"). On June 2, 1998, Interstate was acquired by Patriot American
Hospitality, Inc., a REIT.
The Company is a Tennessee corporation which has elected to be taxed as
a REIT for federal income tax purposes. The Company's executive offices are
located at 4735 Spottswood, Suite 102, Memphis, Tennessee 38117, and its
telephone number is (901) 761-9651.
RISK FACTORS
Prospective investors should carefully consider the matters discussed
under "Risk Factors" before making an investment decision regarding the shares
of Common Stock offered hereby.
TAX STATUS OF THE COMPANY
The Company elected to be taxed as a REIT under Sections 856 through
860 of the Code commencing with its taxable year ended December 31, 1994. As a
REIT, the Company generally is not subject to federal income tax on the taxable
income that it distributes to its shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income. Failure to
qualify as a REIT would render the Company subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates, and distributions to the shareholders in any such year would not be
deductible by the Company. Even if the Company qualifies for taxation as a REIT,
the Company may be subject to certain federal, state and local taxes on its
income and property. In connection with the Company's election to be taxed as a
REIT, the Charter imposes certain restrictions on the ownership and transfer of
shares of Common Stock. The Company has adopted the calendar year as its taxable
year. See "Description of Capital Stock" and "Federal Income Tax
Considerations."
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SECURITIES TO BE OFFERED
This Prospectus relates to the offer and sale from time to time of the
Secondary Shares that may be issued to the Selling Shareholders. The Partnership
has issued a total of 696,304 units of limited partnership interest of the
Partnership (the "Units") to the Selling Shareholders in private placements in
connection with the Partnership's acquisition of certain of the Current Hotels.
Pursuant to the terms of the agreement of limited partnership of the Partnership
(the "Partnership Agreement"), upon notice to the Partnership, each of the
696,304 Units issued to the Selling Shareholders may be tendered by each Selling
Shareholder to the Partnership for redemption. Each Unit may be redeemed by the
Company, at the Company's sole option, in exchange for one share of Common Stock
or for cash equal to the fair market value of one share of Common Stock at the
time of redemption (subject to certain adjustments). In addition, the Company
has, in its sole discretion, the right to elect to acquire directly any Units
tendered to the Partnership for redemption, rather than causing the Partnership
to redeem such Units. The Secondary Shares represent 696,304 shares of Common
Stock issuable by the Company to the Selling Shareholders upon such redemption.
The Company will not receive any cash proceeds from the sale of any
Secondary Shares. The registration of the Secondary Shares does not necessarily
mean that any of such shares will be offered or sold by the Selling
Shareholders.
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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 Common Stock
offered hereby.
EFFECT ON SHARE PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect the prevailing
market prices for such shares. Pursuant to this Prospectus or otherwise, a total
of up to 1,925,915 shares issuable upon redemption of Units ("Redemption
Shares"), including the 696,304 Secondary Shares, will be eligible to be sold in
the public market. See "Plan of Distribution." In addition, 700,000 shares of
Common Stock have been previously reserved for issuance pursuant to the
Company's grant of options under its 1994 Stock Incentive Plan (the "1994
Plan"). The Company has granted options for an aggregate of 700,000 shares under
the 1994 Plan, 90,000 of which have been exercised to date, which options vest
at the rate of 20% per year over five years. An additional 166,000 shares of
restricted stock (which vest as indicated below) and 66,279 performance shares
(which are fully vested) have been awarded to the Company's officers. Of such
restricted stock awards, 25,000 shares vest in installments beginning on the
third anniversary of the date of grant; 20,000 shares vest at the rate of 4,000
shares on the date of grant and an additional 4,000 shares vest on each of the
first through fourth anniversaries of the date of grant; 42,000 shares vest at
the rate of 14,000 shares on each of the first through third anniversaries of
the date of grant; and the balance vest at the rate of 20% per year over five
years.
The Company has reserved for issuance to its directors who are not
employees or officers of the Company (the "Independent Directors") an aggregate
of 130,000 shares of Common Stock for grants of restricted stock and stock
options under the Company's Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"). Under the Directors' Plan, each Independent Director
receives an option to purchase 1,000 shares annually beginning in 1995. An
additional option to purchase 5,000 shares annually over five years, beginning
in 1999, has been granted to each Independent Director, subject to approval of
the Company's shareholders at the next scheduled meeting of shareholders. The
Company also has issued an aggregate of 15,000 shares to the Independent
Directors, which shares vest as to each Independent Director over five years at
the rate of 1,000 shares per year beginning in 1994. In July 1998, the
Independent Directors have been awarded an additional aggregate 15,000 shares of
restricted stock, which vest over five years at the rate of 1,000 shares per
year beginning in 1999, subject to approval of the Company's shareholders at the
next scheduled meeting of shareholders. Upon exercise of options granted under
the 1994 Plan and the Directors' Plan, these shares will be available for sale
in the public markets from time to time pursuant to exemptions from registration
requirements or upon registration. No prediction can be made about the effect
that future sales of shares of Common Stock will have on the market price of the
Common Stock.
COMMON STOCK PRICE FLUCTUATIONS AND TRADING VOLUME
A number of factors may adversely influence the price of the 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 Common Stock is traded 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.
COMPANY'S RELIANCE UPON ITS LESSEES
In order for the Company to continue to qualify as a REIT, the Company
must lease its hotels to third parties. The Interstate Lessee leases 83 of the
Current Hotels and the Prime Lessee leases the 19 AmeriSuites brand Current
Hotels. The remaining three Current Hotels are operated by Interstate and
CapStar pursuant to management agreements. The Company's lessees control the
daily operations of the Company's hotels. The Company does not have the
authority to require any leased hotel to be operated in a particular manner or
to govern any particular aspect
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of the daily operations of any leased 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
under the Percentage Leases, the Company may not require a change to the method
of operation. The Company is dependent on lease payments from its lessees for
substantially all of its revenues.
DEBT LIMITATION
The Company intends to continue to pursue a growth strategy which
includes acquiring hotel properties. There is a risk that the Company will not
have access to sufficient equity capital to pursue its acquisition strategy.
Since, in order to qualify as a REIT, the Company generally must distribute at
least 95% of its taxable income annually and thus cannot retain most of its
earnings, and the Board of Directors has adopted a policy that currently limits
aggregate indebtedness to 45% of the Company's investment in hotel properties,
at its cost, the Company's ability to continue to make acquisitions will depend
primarily on its ability to obtain additional private or public equity
financing. There can be no assurance that such financing will be available. See
"Federal Income Tax Considerations--Requirements for Qualification--Distribution
Requirements."
DEVELOPMENT RISKS
As part of its growth strategy, the Company intends to develop
additional hotels. Development involves substantial risks, including the risk
that development costs will exceed budgeted or contracted amounts, the risk of
delays in completion of construction, the risk of failing to obtain all
necessary zoning and construction permits, the risk that financing might not be
available on favorable terms, the risk that developed properties will not
achieve desired revenue levels once opened, the risk of competition for suitable
development sites from competitors that may have greater financial resources
than the Company and the risks of incurring substantial costs in the event a
development project must be abandoned prior to completion. Although the Company
intends to manage development to minimize such risks, there can be no assurance
that present or future developments will perform in accordance with the
Company's expectations.
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
Interstate Lessee's or the Prime Lessee's ability to make lease payments and
therefore the Company's ability to make expected distributions to its
shareholders. Further, decreases in room revenues of the Hotels would result in
decreased revenues to the Company under the Percentage Leases and, therefore,
decreased amounts available for distribution to the Company's shareholders.
Competition
Competition for Guests; Operations. The hotel industry is highly
competitive. The Hotels compete with other hotel properties in their geographic
markets. Many of the Company's competitors have substantially greater marketing
and financial resources than the Company and its lessees.
Competition for Acquisitions. The Company competes for acquisitions
with entities that have substantially greater financial resources than the
Company. These entities generally may be able to accept more risk than the
Company can manage prudently. Competition generally may reduce the number of
suitable investment opportunities offered to the Company and may increase the
bargaining power of property owners seeking to sell. Further, the Company
believes that competition from entities organized for purposes substantially
similar to the Company's objectives has increased and will increase
significantly in the future.
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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 rent payments may be affected by factors
beyond the Company's control, including weather conditions and economic factors.
The Company may be required to enter into short-term borrowing in the first and
fourth in order to offset such fluctuations in revenues and to fund the
Company's anticipated obligations, including distributions to its shareholders.
Investment Concentration in Certain Segments of Single Industry
The Company's current investment strategy is to acquire interests in
limited service and extended stay hotel properties. Therefore, a downturn in the
hotel industry, in general, or an increased supply of new hotel rooms in 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 Certain Hotels Brands
Because 58 of the Current Hotels are operate as Hampton Inn hotels, 19
of the Current Hotels operate as AmeriSuites hotels and 12 of the Current Hotels
operate as Residence Inn hotels, the Company is subject to the risks inherent in
concentrating investments in certain franchise brands, such as a reduction in
business following adverse publicity related to the brand, which could have an
adverse effect on the Company's lease revenues and amounts available for
distribution to its shareholders.
Capital Expenditures
The Hotels have an ongoing need for renovations and other capital
improvements, including periodic replacement of furniture, fixtures and
equipment. The additional cost of such capital improvements could have an
adverse effect on the Company's financial condition. In addition, the Hotels may
require significant renovation in the future. Such renovations involve certain
risks, including the possibility of environmental 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
future cash from operations, present cash balances or available borrowing
capacity under the Unsecured Line of Credit (as hereinafter defined).
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 its lessees to operate the Hotels in a manner sufficient to maintain
or increase room revenues and to generate sufficient income in
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excess of operating expenses to make rent payments under the Percentage Leases.
Income from the Hotels may be adversely affected by adverse changes in national
economic conditions, changes in local market conditions due to changes in
general or local economic conditions and neighborhood characteristics,
competition from other hotel properties, changes in interest rates and in the
availability, cost and terms of mortgage funds, the impact of present or future
environmental legislation and compliance with environmental laws, the ongoing
need for capital improvements, particularly in older structures, changes in real
property tax rates and other operating expenses, changes in governmental rules
and fiscal policies, civil unrest, acts of God, including earthquakes, floods
and other natural disasters (which may result in uninsured losses), acts of war,
adverse changes in zoning laws and other factors beyond the control of the
Company.
Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions is limited. There can be no assurance that the market value of any of
the Hotels will not decrease in the future. There can be no assurance that the
Company will be able to dispose of an investment when it finds disposition
advantageous or necessary or that the sale price of any disposition will equal
or exceed the amount of the Company's investment.
Operational Risks of Rapid Growth
Since the Company's initial public offering in March 1994, the Company
has acquired 97 additional hotels, increasing the size and geographic dispersion
of the Company's hotel properties from seven states to 36 states and has
contracted to acquire the three Acquisition Hotels. 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 its 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.
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. The Company obtained Phase I environmental site assessments ("ESAs")
on each of the Current Hotels in connection with their acquisition or certain
financing transactions. The purpose of the ESAs is to identify potential
environmental contamination and conditions and regulatory compliance concerns
that are made apparent from historical reviews of the Current 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 did not reveal any environmental
contamination or conditions or compliance concerns that the Company believes
would have a material adverse effect on the Company's business,
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assets, results of operations or liquidity, nor is the Company aware of any such
liability or concerns. Nevertheless, the ESAs generally did not include invasive
procedures such as soil and groundwater sampling to detect contamination from
former operations on the Current Hotels or migrating from neighbors or caused by
other third parties. Furthermore, 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. The EPA proposed regulations in December
1997 to exempt non-industrial facilities from the permitting requirement. The
EPA expects to finalize the proposal during 1998. Until that time, it is
possible, though the Company believes it unlikely, that a court could determine
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 Current Hotels, including liability, fire and extended
coverage. Management believes such specified coverage is of the type and amount
customarily obtained for or by an owner of similar real property assets. The
Company intends to seek to include similar provisions in all leases for
subsequently acquired property. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes and floods, that may be
uninsurable or not economically insurable. The Board of Directors will use its
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.
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RISKS OF LEVERAGE
The Company recently amended the Charter to delete the Charter's
limitation on the amount of indebtedness which the Company may incur. In
connection with such amendment, the Board of Directors has implemented a policy
limiting the Company's consolidated indebtedness to an amount not in excess of
45% of the Company's investment in hotel properties, at its cost (the "Debt
Policy"). The Debt Policy may be amended, revised or terminated at any time
without the approval of the Company's shareholders. The Company currently has
mortgage debt financing and a $250 million unsecured line of credit (the
"Unsecured Line of Credit") with The First National Bank of Chicago. The Company
currently is negotiating to increase the Unsecured Line of Credit to
approximately $350 million. At July 31, 1998, the Company had total debt of
approximately $321.9 million, consisting of approximately $220.5 million of
outstanding debt under the Unsecured Line of Credit, outstanding letters of
credit in the aggregate amount of $5.6 million, $85.0 million of mortgage bond
borrowings, and $10.8 million of debt assumed in conjunction with the purchase
of two hotels in 1998. At such date, the Company had approximately $23.9 million
available for borrowings under the Unsecured Line of Credit and $10.0 million
available for borrowings under its revolving credit facility with National Bank
of Commerce. Approximately $220.5 million of the Company's current indebtedness
at July 31, 1998 bears interest at variable rates. Changes in economic
conditions could result in higher interest rates, thereby increasing the
Company's interest expense on its variable rate debt and reducing cash available
for distribution to shareholders. The Company may borrow additional amounts from
the same or other lenders in the future, or may issue corporate debt securities
in public or private offerings. Additional borrowings may be secured by
mortgages on properties owned by the Company or its subsidiaries.
There can be no assurance that the Company will be able to meet its
debt service obligations and, to the extent that it cannot, the Company risks
the loss of some or all of its hotel properties to foreclosure. Adverse economic
conditions could result in higher interest rates which could increase debt
service requirements on floating rate debt and could reduce the amounts
available for distribution to shareholders. The Company may obtain one or more
forms of interest rate protection (swap agreements, interest rate cap contracts,
etc.) to hedge against the possible adverse effects of interest rate
fluctuations. However, there can be no assurance that such hedging would be
effective in mitigating the adverse effects of interest rate fluctuations.
Adverse economic conditions could cause the terms on which borrowings become
available to be unfavorable. In such circumstances, if the Company is in need of
capital to repay indebtedness in accordance with its terms or otherwise, it
could be required to liquidate one or more investments in hotel properties at
times which may not permit realization of the maximum return on such
investments.
In February 1997, EQI Financing Partnership I, L.P., the Company's
indirect subsidiary, issued $88 million of fixed-rate, collateralized bonds (the
"Bonds") in three classes. The expected repayment dates for Classes A, B and C
of the Bonds are November 20, 2006, February 20, 2007 and February 20, 2007.
Upon maturity of the Class A Bonds, the Company is required to use substantially
all of its cash flow to amortize the remaining outstanding principal amount of
the Bonds. If the remaining principal amounts cannot be refinanced, the
Company's ability to make required distributions to its shareholders could be
adversely affected and its status as a REIT could be jeopardized. There can be
no assurance that such refinancing will be available or will be on terms
acceptable to the Company.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
Each of the Current Hotels is subject to franchise agreements. 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 Interstate Lessee
and the Prime Lessee. During the year ended December 31, 1997, the Company spent
approximately $18.0 million for capital improvements to the Current Hotels and
expects to spend approximately $25.0 million for total capital improvements
during 1998. The Company intends to fund such improvements out of cash from
operations, cash balances or available borrowing capacity under the Unsecured
Line of Credit. Failure to complete the improvements in a manner satisfactory to
the franchisors could result in the cancellation of the franchise agreements.
Generally, the continuation of hotel franchises is subject to specified
operating standards and other terms and conditions. Franchisors periodically
inspect their licensed properties to confirm adherence to operating standards.
The failure of the Company, the Interstate Lessee or the Prime Lessee to
maintain such standards at the Hotels or adhere to such other terms and
conditions could result in
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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 Company, the Interstate Lessee or the
Prime Lessee may seek to obtain a suitable replacement franchise, or to operate
the hotel independent of a franchise license. The loss of a franchise license
could have a material adverse effect upon the operations or the underlying value
of the hotel covered by the franchise because of the loss of associated name
recognition, marketing support and centralized reservation systems provided by
the franchisor.
COMMON STOCK PRICE FLUCTUATIONS AND TRADING VOLUME
A number of factors may adversely influence the price of the 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 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.
SERIES A PREFERRED STOCK SENIOR TO COMMON STOCK IN THE PAYMENT OF DIVIDENDS AND
ON LIQUIDATION
The Company's Series A Cumulative preferred stock, $.01 par value per
share ("Series A Preferred Stock"), ranks senior to the Common Stock with
respect to the payment of dividends and amounts distributable upon liquidation,
dissolution or winding up of the Company. The holders of the Company's
outstanding Series A Preferred Stock are entitled to receive dividends,
cumulative from the date of original issue and payable quarterly, when and as
declared, commencing on October 31, 1998, at the rate of 9<F189>% per annum of
the $25 liquidation preference (equivalent to an annual dividend rate of $2.375
per share). The Series A Preferred Stock is not redeemable prior to June 25,
2003, except in certain limited circumstances relating to the ownership
limitation necessary to preserve the Company's qualification as a REIT. On and
after June 25, 2003, the Series A Preferred Stock will be redeemable for cash at
the option of the Company, in whole or from time to time in part, at a
redemption price of $25 per share, plus accrued and unpaid dividends, if any, to
the redemption date. The Series A Preferred Stock ranks senior to the Common
Stock with respect to the payment of dividends and the distribution of amounts
upon liquidation, dissolution or winding up. In the event of a liquidation,
dissolution or winding up of the Company, holders of Series A Preferred Stock
are entitled to receive an amount per share equal to any accrued but unpaid
dividends thereon plus $25.00 before holders of Common Stock will be entitled to
any distribution on their shares.
ABILITY OF BOARD OF DIRECTORS TO CHANGE CERTAIN POLICIES
The major policies of the Company, including its policies with respect
to acquisitions, financing, growth, operations, debt capitalization and
distributions, will be determined by the Board of Directors. The Board of
Directors may amend or revise these and other policies from time to time
generally without a vote of the shareholders of the Company.
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LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
Ownership Limitation
The Ownership Limitation (as defined herein and as described under
"Description of Capital Stock Charter and Bylaws Provisions - Restrictions on
Ownership and Transfer"), 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 interest.
Staggered Board
The Board of Directors of the Company has three classes of directors,
each with staggered terms. The current terms of the Company's directors expire
in 1999, 2000 and 2001, 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 interest. 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 Charter authorizes the Board of Directors to issue up to 10,000,000
shares of the Company's preferred stock, $.01 par value per share (the
"Preferred Stock") and to establish the preferences and rights of any such
shares issued. See "Description of Capital Stock - Preferred Stock." 2,750,000
shares of Series A Preferred Stock are outstanding as of the date of this
Prospectus. Under certain circumstances, holders of Preferred Stock may have the
right to vote separately as a class with respect to transactions involving a
change in control of the Company. The issuance of Preferred Stock may have the
effect of delaying or preventing a change in control of the Company even if the
holders of Common Stock deemed such a change to be in their best interest.
Tennessee Anti-Takeover Statutes
As a Tennessee corporation, the Company is subject to various
legislative acts set forth in Chapter 103 of Title 48 of the Tennessee Code,
which impose certain restrictions and require certain procedures with respect to
certain takeover offers and business combinations, including, but not limited
to, combinations with interested shareholders and share repurchases from certain
shareholders. See "Description of Capital Stock - Tennessee Anti-Takeover
Statutes."
TAX RISKS
Failure to Qualify as a REIT
The Company operates and intends to continue to operate so as to
qualify as a REIT for federal income tax purposes. The Company has not
requested, and does not expect to request, a ruling from the Internal Revenue
Service (the "Service") that it qualifies as a REIT. The continued qualification
of the Company as a REIT will depend on the Company's continuing ability to meet
various requirements concerning, among other things, the ownership of its
outstanding stock, the nature of its assets, the sources of its income and the
amount of its distributions to the shareholders of the Company. See "Federal
Income Tax Considerations - Taxation of the Company."
If the Company were to fail to qualify as a REIT in any taxable year,
the Company would not be allowed a deduction for distributions to shareholders
in computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain provisions of
the Code, the Company also would be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As a result, the funds available for 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."
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REIT Minimum Distribution Requirements
In order to qualify as a REIT and 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 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. To the
extent that the Company elects to retain and pay income tax on its net capital
gain, such retained amounts will be treated as having been distributed for
purposes of the 4% excise tax. See "Federal Income Tax Considerations."
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 shareholder of the Trust, 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 partnerships for federal income
tax purposes. If the Service were to challenge successfully the tax status of
the Partnership (or a Subsidiary Partnership) as a partnership for federal
income tax purposes, the Partnership (or Subsidiary Partnership) would be
taxable as a corporation. In such event, the Company would cease to qualify as a
REIT for a variety of reasons. Furthermore, the imposition of a corporate income
tax on the Partnership or a Subsidiary Partnership would substantially reduce
the amount of cash available for distribution to the Company and its
shareholders. See "Federal Income Tax Considerations - Tax Aspects of the
Partnership and Subsidiary Partnerships."
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 interestholders in the Interstate Lessee or the Prime
Lessee owns, actually or constructively, 10% or more of the stock of the
Company, the Interstate Lessee or the Prime Lessee, as the case may be, could
become a related party tenant of the Company, which likely would result in loss
of REIT status for the Company. For the purpose of preserving the Company's REIT
qualification, the Company's Charter prohibits direct or indirect ownership of
more than 9.9% of the outstanding shares of any class of the Company's stock by
any person or group (the "Ownership Limitation"), subject to adjustment as
described below. Generally, the capital stock owned by affiliated owners will be
aggregated for purposes of the Ownership Limitation. See "Description of Capital
Stock - Charter and Bylaw Provisions - Restrictions on Ownership and Transfer."
RISKS RELATING TO YEAR 2000 ISSUE
Many existing computer programs were designed to use only two digits to
identify a year in the date field without considering the impact of the upcoming
change in the century. If not corrected, many computer applications could fail
or create erroneous results by or at the year 2000. The Company is addressing
the "Year 2000" issue with respect to its operations. Failure of the Company or
its lessees to properly or timely resolve the "Year 2000" issue could have a
material adverse effect on the Company's business.
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THE COMPANY
The Company is a self-administered REIT that currently owns the 105
Current Hotels with an aggregate of 12,900 rooms located in 36 states and has
one hotel currently under development. The Current Hotels operate as Hampton Inn
hotels (58), AmeriSuites hotels (19), Residence Inn hotels (12), Homewood Suites
hotels (7), Holiday Inn hotels (4), Comfort Inn hotels (3), one Hampton Inn &
Suites hotel, and one Holiday Inn Express hotel. The Company has entered into
agreements to acquire the three Acquisition Hotels with an aggregate of 785
rooms located in two states. The Partnership leases 83 of the Current Hotels to
the Interstate Lessee and its 19 AmeriSuites brand Current Hotels to the Prime
Lessee, pursuant to Percentage Leases providing for annual rent equal to the
greater of (i) fixed annual Base Rent or (ii) Percentage Rent based on the
revenues of the hotels. The remaining three Current Hotels are operated pursuant
to management agreements with Interstate and CapStar. On June 2, 1998,
Interstate was acquired by Patriot American Hospitality, Inc., a REIT.
The Company is a Tennessee corporation which 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.
THE LESSEE
The Partnership leases 83 of the Current Hotels to the Interstate
Lessee and leases all 19 of its AmeriSuites brand Current Hotels to the Prime
Lessee pursuant to similar Percentage Leases. The remaining three Current Hotels
are operated pursuant to management agreements with Interstate and CapStar.
Prior to November 15, 1996, all of the Company's hotels were leased to Trust
Leasing, Inc. (formerly known as McNeill Hotel Co., Inc.), and substantially all
of the equity interests of Trust Leasing, Inc. were owned by Philip H. McNeill,
Sr., the Company's Chairman of the Board and Chief Executive Officer. Effective
November 15, 1996, the Company's then-existing Percentage Leases were assigned
to the Interstate Lessee and were amended and restated in a Consolidated Lease
Agreement between the Partnership and the Interstate Lessee. Under the
Percentage Leases, each of the Interstate Lessee and the Prime Lessee generally
is required to perform all operational and management functions necessary to
operate the Hotels. Such functions include accounting, periodic reporting,
ordering, supplies, advertising and marketing, maid service, laundry, and
maintenance. The Company's lessees are entitled to all profits and cash flow
from the Hotels after payment of rent under the Percentage Leases and other
operating expenses.
The Company and the Partnership must rely on the Interstate Lessee and
the Prime Lessee to generate sufficient cash flow from the operation of the
Hotels to enable such lessees to meet their respective rent obligations under
the Percentage Leases.
THE PARTNERSHIP
The Company controls the Partnership through its wholly-owned
subsidiary, the Trust, which is the sole general partner of the Partnership (the
"General Partner") and is currently the holder of an approximate 95.0% interest
in the Partnership. The limited partners of the Partnership (the "Limited
Partners") have the right to require the redemption of their Units. At the sole
option of the Company, each unit of limited partnership interest held by the
Limited Partners may be redeemed by the Company for either one share of Common
Stock or cash equal to the fair market value thereof at the time of such
redemption. The Company presently anticipates that it will elect to issue shares
of Common Stock in connection with each redemption rather than cash. Units
acquired by the Company pursuant to a redemption will be contributed to the
Trust. With each redemption of outstanding units of limited partnership
interest, the Trust's percentage ownership interest in the Partnership, which is
based on the number of units of limited partnership interest owned by the Trust
in relation to all outstanding Units, will increase. In addition, whenever the
Company issues shares of Common Stock, the Company will contribute any net
proceeds therefrom to the Partnership through the Trust, and the Partnership
will issue an equivalent number of units of limited partnership interest to the
Trust.
As the General Partner, the Trust has the full, complete and exclusive
power under the Partnership Agreement to manage and control the business of the
Partnership. The Company owns all of the capital stock of the Trust, and the
Board of Directors of the Company manages the affairs of the Company by
directing the affairs of the Partnership through the Trust. The Partnership will
continue until December 31, 2053, or until sooner dissolved
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<PAGE> 16
upon (i) the bankruptcy, dissolution or withdrawal of the General Partner
(unless the Limited Partners elect to continue the Partnership), (ii) the sale
or other disposition of all or substantially all the assets of the Partnership,
(iii) the redemption of all limited partnership interests in the Partnership
(other than those held by the General Partner, if any), or (iv) the election by
the Trust as the General Partner. The Trust's current approximate 95.0% interest
in the Partnership entitles the Company, through the Trust, to share in cash
distributions from, and in the profits and losses of, the Partnership (including
payments under the Percentage Leases) and entitles the Company, through the
Trust, to vote on all matters requiring a vote of the Partners.
DESCRIPTION OF CAPITAL STOCK
Under the Charter, the total number of shares of all classes of stock
that the Company has authority to issue is 110,000,000, consisting of
100,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock.
2,750,000 shares of Series A Preferred Stock are outstanding as of the date of
this Prospectus.
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 (the "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 "- Charter
and Bylaw Provisions - Restrictions on Ownership and Transfer," the holders of
Common Stock are entitled to one vote per share on all matters voted on by the
Company's 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 such 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. All outstanding shares of Common Stock are
fully paid and nonassessable, and the holders thereof have no preemptive rights.
The transfer agent and registrar for the Common Stock is SunTrust Bank,
Atlanta. The Common Stock is traded on the NYSE under the symbol "ENN." The
Company has applied to the NYSE to list the Secondary Shares, 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 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. See "Risk Factors - Limitation on
Acquisition and Change in Control - Authority to Issue Preferred Stock."
SERIES A PREFERRED STOCK
The following summary of the terms and provisions of the Series A
Preferred Stock does not purport to be complete and is qualified in its entirety
by reference to the Charter and the articles of amendment to the Charter (the
"Designating Amendment") establishing the Series A Preferred Stock.
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General
In June 1998, the Company issued 2,750,000 shares of Series A Preferred
Stock. Upon the closing of the sale of the Series A Preferred Stock in June
1998, the Company transferred the net proceeds of the sale of the Series A
Preferred Stock to the Partnership in exchange for 91/2% Series A Preferred
Units in the Partnership, the economic terms of which are substantially
identical to the Series A Preferred Stock. The Partnership is required to make
all required distributions on the Series A Preferred Units (which mirror the
payments of distributions, including accrued and unpaid distributions upon
redemption, and of the liquidation preference amount of the Series A Preferred
Stock) prior to any distribution of cash or assets to the holders of the common
units of limited partnership interest or to the holders of any other interests
in the Partnership, except for any other series of preferred partnership units
ranking senior to or on a parity with the Series A Preferred Units as to
distributions and/or liquidation rights and except for distributions required to
enable the Company to maintain its qualification as a REIT.
Ranking
The Series A Preferred Stock ranks, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company, (a) prior or
senior to any class or series of Common Stock of the Company and any other class
or series of equity securities of the Company, if the holders of Series A
Preferred Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up in preference or
priority to the holders of shares of such class or series ("Junior Stock"); (b)
on a parity with any class or series of equity securities of the Company if,
pursuant to the specific terms of such class or series of equity securities, the
holders of such class or series of equity securities and the Series A Preferred
Stock shall be entitled to the receipt of dividends and of amounts distributable
upon liquidation, dissolution or winding up in proportion to their respective
amounts of accrued and unpaid dividends per share or liquidation preferences,
without. preference or priority one over the other ("Parity Stock"); (c) junior
to any class or series of equity securities of the Company if, pursuant to the
specific terms of such class or series, the holders of such class or series
shall be entitled to the receipt of dividends or amounts distributable upon
liquidation, dissolution or winding up in preference or priority to the holders
of the Series A Preferred Stock ("Senior Stock"); and (d) junior to all existing
and future indebtedness of the Company. The term "equity securities" does not
include convertible debt securities, which will rank senior to the Series A
Preferred Stock prior to conversion.
Dividends
Holders of Series A Preferred Stock are entitled to receive, when and
as declared by the Board of Directors, out of funds of the Company legally
available for payment, cash dividends at the rate of 91/2% per annum of the $25
liquidation preference (equivalent to $2.375 per annum per share). Such
dividends shall be cumulative from the date of original issue, whether or not in
any dividend period or periods (i) such dividends shall be declared. (ii) there
shall be funds of the Company legally available for the payment of such
dividends or (iii) any agreement of the Company prohibits payment of such
dividends, and shall be payable quarterly on or before the last day of January,
April, July and October of each year (or, if not a business day, the next
succeeding business day, each a "Dividend Payment Date"), commencing October 31,
1998. The first dividend will be prorated for more than a full quarter. Any
dividend payable on the Series A Preferred Stock for any partial dividend period
will be computed on the basis of twelve 30-day months and a 360 day year.
Dividends will be payable in arrears to holders of record as they appear on the
stock records of the Company at the close of business on the last business day
of each of March, June, September and December, as the case may be, immediately
preceding such Dividend Payment Date. Holders of Series A Preferred Stock shall
not be entitled to receive any dividends in excess of cumulative dividends on
the Series A Preferred Stock. No interest shall be paid in respect of any
dividend payment or payments on the Series A Preferred Stock that may be in
arrears.
When dividends are not paid in full upon the Series A Preferred Stock
or any other class or series of Parity Stock or a sum sufficient for such
payment is not set apart, all dividends declared upon the Series A Preferred
Stock and any other class or series of Parity Stock shall be declared ratably in
proportion to the respective amounts of dividends accumulated, accrued and
unpaid on the Series A Preferred Stock and accumulated, accrued and unpaid on
such Parity Stock. Except as set forth in the preceding sentence, unless
dividends on the Series A Preferred Stock equal to the full amount of
accumulated, accrued and unpaid dividends have been or contemporaneously are
declared and paid, or declared and a sum sufficient for the payment thereof set
apart for such payment for all past dividend
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periods, no dividends shall be declared or paid or set aside for payment by the
Company with respect to any class or series of Parity Stock. Unless full
cumulative dividends on the Series A Preferred Stock have been paid or declared
and set apart for payment for all past dividend periods, no dividends (other
than dividends paid in shares of Junior Stock or options, warrants or rights to
subscribe for or purchase shares of Junior Stock) shall be declared or paid or
set apart for payment by the Company with respect to any shares of Junior Stock,
nor shall any shares of Junior Stock be redeemed, purchased or otherwise
acquired (except for purposes of an employee benefit plan) for any consideration
(except by conversion or exchange for shares of Junior Stock, or options,
warrants or rights to subscribe for or purchase shares of Junior Stock), nor
shall any other cash or other property be paid or distributed to or for the
benefit of holders of shares of Junior Stock. Notwithstanding the above, the
Company shall not be prohibited from (i) declaring or paying or setting apart
for payment any dividend or distribution on any shares of Parity Stock or (ii)
redeeming, purchasing or otherwise acquiring any Parity Stock, in each case, if
such declaration, payment, redemption, purchase or other acquisition is
necessary to maintain the Company's qualification as a REIT.
The Unsecured Line of Credit contains restrictive covenants which
limit, among other things, the ability of the Company to pay dividends or make
other restricted payments. Such covenants provide that the Company will not
permit the aggregate amount of distributions paid for the four most current
fiscal quarters (i) on an unadjusted basis, to exceed 90% of FFO or (ii), after
deduction of distributions attributable to stock issued during the most recent
of such four quarters, to exceed 100% of certain cash flows, provided that, so
long as no event of default exists as a result of a breach of certain financial
ratios and tests that the Company is required to meet, the Company may pay the
minimum amount of distributions as may be necessary to maintain its REIT status
under the Code. A failure of the Company to comply with these or other
conditions and obligations contained in the Unsecured Line of Credit could
result in adverse consequences to holders of the Series A Preferred Stock, could
render the Company unable to pay required dividends or make redemptions, and
could result in an event of default under the Unsecured Line of Credit. Other
indebtedness of the Company that may be incurred in the future may contain
financial or other covenants more restrictive than those applicable to the
existing Unsecured Line of Credit.
No dividends on shares of Series A Preferred Stock shall be declared by
the Board of Directors or paid or set apart for payment by the Company at such
time as the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such declaration, payment or
setting apart for payment or provides that such declaration, payment or setting
apart for payment would constitute a breach thereof or a default thereunder, or
if such declaration or payment shall be restricted or prohibited by law.
If, for any taxable year, the Company elects to designate as "capital
gain dividends" (as defined in Section 857 of the Code) any portion (the
"Capital Gains Amount") of the dividends (as determined for federal income tax
purposes) paid or made available for the year to holders of all classes of stock
(the "Total Dividends"), then the portion of the Capital Gains Amount that shall
be allocable to the holders of Series A Preferred Stock shall be the amount that
the total dividends (as determined for federal income tax purposes) paid or made
available to the holders of the Series A Preferred Stock for the year bears to
the Total Dividends. The Company may elect to retain and pay income tax on its
net long-term capital gains. In such a case, the holders of Series A Preferred
Stock would include in income their proportionate share of the Company's
undistributed long-term capital gains, as designated by the Company.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the Company, before any payment or distribution by the Company shall be
made to or set apart for the holders of any shares of Junior Stock, the holders
of shares of Series A Preferred Stock shall be entitled to receive a liquidation
preference of $25 per share (the "Liquidation Preference"), plus an amount equal
to all accumulated, accrued and unpaid dividends (whether or not earned or
declared) to the date of final distribution to such holders; but such holders
shall not be entitled to any further payment. Until the holders of the Series A
Preferred Stock have been paid the Liquidation Preference in full, plus an
amount equal to all accumulated, accrued and unpaid dividends (whether or not
earned or declared) to the date of final distribution to such holders, no
payment shall be made to any holder of Junior Stock upon the liquidation,
dissolution or winding up of the Company. If upon any liquidation, dissolution
or winding up of the Company, the assets of the Company, or proceeds thereof,
distributable among the holders of Series A Preferred Stock shall be
insufficient to pay in full the above described preferential amount and
liquidating payments on any
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other shares of any class or series of Party Stock, then such assets, or the
proceeds thereof, shall be distributed among the holders of Series A Preferred
Stock and any such other Parity Stock ratably in the same proportion as the
respective amounts that would be payable on such Series A Preferred Stock and
any such other Parity Stock if all amounts payable thereon were paid in full. A
voluntary or involuntary liquidation, dissolution or winding up of the Company
shall not include a consolidation or merger of the Company with one or more
corporations, a sale or transfer of all or substantially all of the Company's
assets, or a statutory share exchange.
Upon any liquidation, dissolution or winding up of the Company, after
payment shall have been made in full to the holders of Series A Preferred Stock
and any Parity Stock, any other series or class or classes of Junior Stock shall
be entitled to receive any and all assets remaining to be paid or distributed,
and the holders of the Series A Preferred Stock and any Parity Stock shall not
be entitled to share therein.
Redemption
Shares of Series A Preferred Stock shall not be redeemable by the
Company prior to June 25, 2003 (except in certain limited circumstances relating
to the Company's maintenance of its ability to qualify as a REIT as described in
"- Charter and Bylaw Provisions - Restrictions on Transfer.") On and after
June 25, 2003, the Company may redeem shares of Series A Preferred Stock, in
whole or from time to time in part, at a cash redemption price equal to 100% of
the Liquidation Preference plus all accrued and unpaid dividends to the date
fixed for redemption (the "Redemption Date"). The Redemption Date shall be
selected by the Company and shall not be less than 30 days nor more than 60 days
after the date notice of redemption is sent by the Company. If full cumulative
dividends on all outstanding shares of Series A Preferred Stock have not been
paid or declared and set apart for payment, no shares of Series A Preferred
Stock may be redeemed unless all outstanding shares of Series A Preferred Stock
are simultaneously redeemed. The redemption price for the Series A Preferred
Stock (other than any portion thereof consisting of accrued and unpaid
dividends) shall be payable solely with the proceeds from the sale by the
Company or the Partnership of other capital shares of the Company or the
Partnership (whether or not such sale occurs concurrently with such redemption).
For purposes of the preceding sentence, "capital shares" means any common stock,
preferred stock, depositary shares, partnership or other interests,
participations or other ownership interests (however designated) and any rights
(other than debt securities convertible into or exchangeable at the option of
the holder for equity securities (unless and to the extent such debt securities
are subsequently converted into capital shares)) or options to purchase any of
the foregoing of or in the Company or the Partnership.
Notice of redemption of the Series A Preferred Stock shall be mailed by
the Company to each holder of record of the shares to be redeemed by first class
mail, postage prepaid at such holder's address as the same appears on the stock
records of the Company. Any notice which was mailed as described above shall be
conclusively presumed to have been duly given on the date mailed whether or not
the holder receives the notice. Each notice shall state: (i) the Redemption
Date; (ii) the number of shares of Series A Preferred Stock to be redeemed; and
(iii) the place or places where certificates for such shares of Series A
Preferred Stock are to be surrendered for cash. From and after the Redemption
Date, dividends on the shares of Series A Preferred Stock to be redeemed will
cease to accrue, such shares shall no longer be deemed to be outstanding and all
rights of the holders thereof shall cease (except the fight to receive the cash
payable upon such redemption).
The Series A Preferred Stock has no stated maturity and will not be
subject to any sinking fund or mandatory redemption provisions (except as
provided under "- Charter and Bylaw Provisions - Restrictions on Transfer").
Subject to applicable law and the limitation on purchases when
dividends on the Series A Preferred Stock are in arrears, the Company may, at
any time and from time to time, purchase any shares of Series A Preferred Stock
in the open market, by tender or by private agreement.
Voting Rights
Holders of the Series A Preferred Stock will not have any voting
rights, except as set forth below or as otherwise from time to time required by
law. Specifically, holders of the Series A Preferred Stock will be entitled, as
a result of Tennessee law, to notice regarding the Company's special meeting of
shareholders regarding approval of
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<PAGE> 20
the Merger and other matters to be considered at such special meeting but will
have no voting rights with regard to the Merger and such other matters.
If and whenever distributions on any shares of Series A Preferred Stock
or any series or class of Parity Stock shall be in arrears for six or more
quarterly periods (whether or not consecutive), the number of directors then
constituting the Board of Directors shall be increased by two and the holders of
such shares of Series A Preferred Stock (voting together as a single class with
all other shares of Parity Stock of any other class or series which is entitled
to similar voting rights (the "Voting Preferred Stock")) will be entitled to
vote for the election of the two additional directors of the Company at any
annual meeting of shareholders or at a special meeting of the holders of the
Series A Preferred Stock and of the Voting Preferred Stock called for that
purpose. The Company must call such special meeting upon the request of any
holder of record of shares of Series A Preferred Stock. Whenever dividends in
arrears on outstanding shares of the Series A Preferred Stock and the Voting
Preferred Stock shall have been paid and dividends thereon for the current
quarterly dividend period shall have been paid or declared and set apart for
payment, then the right of the holders of the Series A Preferred Stock to elect
such additional two directors shall cease and the terms of office of such
directors shall terminate and the number of directors constituting the Board of
Directors shall be reduced accordingly.
The affirmative vote or consent of at least 66 2/3% of the votes
entitled to be cast by the holders of the outstanding shares of Series A
Preferred Stock and the holders of all other classes or series of Preferred
Stock entitled to vote on such matters, voting as a single class, will be
required to (i) authorize the creation of, the increase in the authorized amount
of, or issuance of any shares of any class of Senior Stock or any security
convertible into shares of any class of Senior Stock or (ii) amend, alter or
repeal any provision of, or add any provision to, the Charter, including the
Designating Amendment, or the Company's bylaws, if such action would materially
adversely affect the voting powers, rights or preferences of the holders of the
Series A Preferred Stock. The amendment of the Charter to authorize, create, or
to increase the authorized amount of Junior Stock or any shares of any class of
Parity Stock, shall not be deemed to materially adversely affect the voting
powers, rights or preferences of the holders of Series A Preferred Stock. No
such vote of the holders Series A Preferred Stock as described above shall be
required if provision is made to redeem all shares of Series A Preferred Stock
at or prior to the time such amendment, alteration or repeal is to take effect,
or when the issuance of any such shares or convertible security is to be made,
as the case may be.
With respect to the exercise of the above described voting rights, each
share of Series A Preferred Stock shall have one (I) vote per share, except that
when any other class or series of Preferred Stock shall have the right to vote
with the Series A Preferred Stock as a single class, then the Series A Preferred
Stock and such other class or series shall have one quarter of one (0.25) vote
per $25 of stated Liquidation Preference.
In addition to the above, under Tennessee law, the Series A Preferred
Stock will be entitled to vote as a separate voting group if the Series A
Preferred Stock is affected by certain amendments to the Charter, whether made
by filing articles of amendment or by a merger or share exchange. In particular,
if a proposed amendment to the Charter requires shareholder action, a separate
class or series of shares will be entitled to vote as a separate voting group on
any amendment that would: (i) increase or decrease the aggregate number of
authorized shares of that class; (ii) effect an exchange or reclassification of
all or part of the shares of the class into shares of another class; (iii)
effect an exchange or reclassification, or create a right of exchange, of all or
part of the shares of another class into shares of the class; (iv) change the
designation, rights, preferences, or limitations of any shares of the class; (v)
change the shares of all or part of the class into a different number of shares
of the same class; (vi) create a new class or change a class with subordinate
and inferior rights into a class of shares, having rights or preferences with
respect to distributions or dissolution that are prior, superior, or
substantially equal to the shares of the class, or increase the rights,
preferences or number of authorized shares of any class having rights or
preferences with respect to distributions or to dissolution that are prior,
superior, or substantially equal to the shares of the class; (vii) limit or deny
an existing preemptive right of all or part of the shares of the class, if any;
(viii) authorize the issuance as a share dividend of shares of such class in
respect of shares of another class; (ix) cancel or otherwise affect rights to
distributions or dividends that have accumulated but not yet been declared on
any shares of that class; or (x) change the corporation into a non-profit
corporation or a cooperative organization. If a proposed amendment would affect
a series or class of shares in one or more of the ways described in this
paragraph, the shares of that series or class are entitled to vote as a separate
voting group on the proposed amendment. The above mandatory voting rights apply
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regardless of whether the change is favorable or unfavorable to the affected
series or class. A mandatory voting right also is given to class or series of
shares for approval of a share dividend payable in the shares of that class or
series on the shares of another class or series. Unless the Charter, the
Company's bylaws, or the Board of Directors requires a higher vote, the vote
required within each voting group will be a majority of shares actually cast at
a meeting at which a quorum is present, except that if the proposed amendment
creates dissenters' rights for any voting group, the vote required within that
voting group will be a majority of the total votes in that voting group entitled
to be cast on the amendment.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Series A Preferred Stock shall have
been redeemed or called for redemption upon proper notice and sufficient funds
shall have been deposited in trust to effect such redemption.
Conversion
The Series A Preferred Stock is not convertible into or exchangeable
for any other property or securities of the Company.
CHARTER AND BYLAW PROVISIONS
Restrictions on Ownership and Transfer
For the Company to qualify as a REIT under the Code, it must meet
certain requirements concerning the ownership of its outstanding stock.
Specifically, not more than 50% in value of the Company's outstanding stock may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year,
and the Company must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months or during a proportionate part
of a shorter taxable year. See "Federal Income Tax Considerations -
Requirements for Qualification." In addition, the Company must meet certain
requirements regarding the nature of its gross income in order to qualify as a
REIT. One such requirement is that at least 75% of the Company's gross income
for each year must consist of rents from real property and income from certain
other real property investments. The rents received by the Partnership from the
Lessee will not qualify as rents from real property, which likely would result
in loss of REIT status for the Company, if any interestholder or group of
interestholders in any Lessee owns, directly or constructively, 10% or more of
the stock of the Company. See "Federal Income Tax Considerations - Requirements
for Qualification - Income Tests." Because the Board of Directors believes it
is essential for the Company to continue to qualify as a REIT, the Charter
contains a provision limiting the ownership and transfer of shares of the
Company's stock (the "Ownership Limitation Provision").
The Ownership Limitation Provision 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 any class
of the outstanding stock of the Company (the "Ownership Limitation"). 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 such
ownership will not jeopardize the Company's status as a REIT. As a condition of
such waiver, the Board of Directors may require opinions of counsel satisfactory
to it and/or an undertaking from the applicant with respect to preserving the
REIT status of the Company.
Any transfer of shares of Common Stock or Preferred Stock that would
(i) result in any person owning, directly or indirectly, Common Stock or
Preferred Stock in excess of the Ownership Limitation, (ii) result in the shares
of Common Stock and Preferred Stock being owned by fewer than 100 persons
(determined without reference to any rules of attribution), (iii) result in the
Company being "closely held" within the meaning of Section 856(h) of the Code,
or (iv) cause the Company to own, directly or constructively, 10% or more of the
ownership interests in a tenant of the Company's or the Partnership's real
property, within the meaning of Section 856 (d) (2) (B) of the Code, shall be
void ab initio, and the intended transferee will acquire no rights in such
shares of Common Stock or Preferred Stock.
Subject to certain exceptions described below, if any purported
transfer of shares of Common Stock or Preferred Stock would (i) result in any
person owning, directly or indirectly, shares of Common Stock or Preferred
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Stock in excess of the Ownership Limitation, (ii) result in the shares of Common
Stock and Preferred Stock being owned by fewer than 100 persons (determined
without reference to any rules of attribution), (iii) result in the Company
being "closely held" within the meaning of Section 856(h) of the Code, or (iv)
cause the Company to own, directly or constructively, 10% or more of the
ownership interests in a tenant of the Company's or the Partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, the shares of
Common Stock or Preferred Stock will be designated as "Shares-in-Trust" and
transferred automatically to a Share Trust effective on the day before the
purported transfer of such shares of Common Stock or Preferred Stock. The
Prohibited Owner will be required to submit such number of shares of Common
Stock or Preferred Stock to the Company for registration in the name of the
Share Trust. The Share Trustee will be designated by the Company, but will not
be affiliated with the Company. The Beneficiary will be one or more charitable
organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding shares of Common
Stock or Preferred Stock and will be entitled to the same rights and privileges
as all other shares of the same class or series. The Share Trust will receive
all dividends and distributions on the Shares-in-Trust and will hold such
dividends and distributions in trust for the benefit of the Beneficiary. The
Share Trustee will vote all Shares-in-Trust. The Share Trustee will designate a
permitted transferee of the Shares-in-Trust, provided that the permitted
transferee (i) purchases such Shares-in-Trust for valuable consideration and
(ii) acquires such Shares-in-Trust without such acquisition resulting in a
transfer to another Share Trust and resulting in the redesignation of such
Common Stock or Preferred Stock as Shares-in-Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required
to repay to the Share Trust the amount of any dividends or distributions
received by the Prohibited Owner (i) that are attributable to any
Shares-in-Trust and (ii) the record date of which was on or after the date that
such shares became Shares-in-Trust. The Prohibited Owner generally will receive
from the Share Trustee the lesser of (i) the price per share such Prohibited
Owner paid for the shares of Common Stock or Preferred Stock that were
designated as Shares-in-Trust (or, in the case of a gift or devise, the Market
Price (as defined below) per share on the date of such transfer) and (ii) the
price per share received by the Share Trustee from the sale of such
Shares-in-Trust. Any amounts received by the Share Trustee in excess of the
amounts to be paid to the Prohibited Owner will be distributed to the
Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept such
offer for a period of ninety days after the later of (i) the date of the
purported transfer which resulted in such Shares-in-Trust and (ii) the date the
Company determines in good faith that a transfer resulting in such
Shares-in-Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price
(as defined below) for the five consecutive Trading Days (as defined below)
ending on such date. The "Closing Price" on any date shall mean the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the NYSE or, if the shares of
Common Stock or Preferred Stock are not listed or admitted to trading on the
NYSE, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the shares of Common Stock or Preferred Stock are listed or admitted to
trading or, if the shares of Common Stock or Preferred Stock are not listed or
admitted to trading on any national securities exchange, the last quoted price,
or if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or, if such system is no longer in use,
the principal automated quotations system that may then be in use or, if the
shares of Common Stock or Preferred Stock are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the shares of Common Stock or
Preferred Stock selected by the Board of Directors. "Trading Day" shall mean a
day on which the principal national securities exchange on which the shares of
Common Stock or Preferred Stock are listed or admitted to trading is open for
the transaction of business or, if the shares of Common Stock or Preferred Stock
are not listed or admitted to trading on any national securities exchange, shall
mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
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Any person who acquires or attempts to acquire shares of Common Stock
or Preferred Stock in violation, of the foregoing restrictions, or any person
who owned shares of Common Stock or Preferred Stock that were transferred to a
Share Trust, will be required (i) to give immediately written notice to the
Company of such event and (ii) to provide to the Company such other information
as the Company may request in order to determine the effect, if any, of such
transfer on the Company's status as a REIT.
The Charter requires all persons who own, directly or indirectly, more
than 5% (or such lower percentages as required pursuant to regulations under the
Code) of the outstanding shares of Common Stock and Preferred Stock, within 30
days after January 1 of each year, to provide to the Company a written statement
or affidavit stating the name and address of such direct or indirect owner, the
number of shares of the Company's stock (including both the Common Stock and any
outstanding series of Preferred Stock) owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
shareholder shall provide to the Company such additional information as the
Company may request in order to determine the effect, if any, of such ownership
on the Company's status as a REIT and to ensure compliance with the Ownership
Limitation.
The Ownership Limitation generally will not apply to the acquisition of
shares of Common Stock or Preferred Stock by an underwriter that participates in
a public offering of such shares. In addition, the Board of Directors, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Directors may direct, may exempt a person from
the Ownership Limitation under certain circumstances. The foregoing restrictions
will continue to apply until (i) the Board of Directors determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT and (ii) there is an affirmative vote of
two-thirds of the number of shares of Common Stock entitled to vote on such
matter at a special meeting of the shareholders of the Company.
The Ownership Limitation could delay, defer or prevent a transaction or
a change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interest of the shareholders of the
Company. See "Risk Factors - Limitation on Acquisition and Change in Control -
Ownership Limitation" and "Risk Factors - Ownership Limitation."
All certificates representing shares of Common Stock or any series of
Preferred Stock will bear a legend referring to the restrictions described
above.
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 and with the classes serving staggered three-year
terms. The classification of directors will have the effect of making it more
difficult for shareholders to change the composition of the Board of Directors.
The Company believes, however, that the longer time required to elect a majority
of a classified Board of Directors will help to ensure continuity and stability
of the Company's management and policies.
The classification provisions 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. See
"Risk Factors - Limitation on Acquisition and Change in Control."
Number of Directors; Removal; Filling Vacancies
The Charter and Bylaws provide that, subject to any rights of holders
of Preferred Stock to elect additional directors under specified circumstances,
the number of directors will consist of not less than three nor more than nine
persons, subject to increase or decrease by the affirmative vote of 80% of the
members of the entire Board of Directors. At all times a majority of the
directors shall be Independent Directors, except that upon the death, removal or
resignation of an Independent Director, such requirement shall not be applicable
for 60 days. There are four directors currently, three of whom are Independent
Directors. The holders of Common Stock shall be entitled to vote on the election
or removal of directors, with each share entitled to one vote. The Bylaws
provide that, subject
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<PAGE> 24
to any rights of holders of Preferred Stock, and unless the Board of Directors
otherwise determines, any vacancies will be filled by the affirmative vote of a
majority of the remaining directors, though less than a quorum, provided that
Independent Directors shall nominate and approve directors to fill vacancies
created by Independent Directors. Accordingly, the Board of Directors could
temporarily prevent any shareholder entitled to vote from enlarging the Board of
Directors and filling the new directorships with such shareholder's own
nominees. Any director so elected shall hold office until the next annual
meeting of shareholders.
A director may be removed with or without cause by the affirmative vote
of the holders of 75% of the outstanding shares entitled to vote in the election
of directors at a special meeting of the shareholders called for the purpose of
removing him.
Limitation of Liability; Indemnification
The Charter provides that, to the maximum extent that Tennessee law in
effect from time to time permits limitation of the liability of directors and
officers, no director or officer of the Company shall be liable to the Company
or its shareholders for money damages.
The Charter provides that the Company shall, to the fullest extent
permitted by Tennessee law, indemnify any director, officer, employee or agent
against any expense incurred by such person if the disinterested directors, the
shareholders or independent legal counsel determine that such person conducted
himself in good faith and (a) reasonably believed, in the case of conduct in his
official capacity with the Company, that his conduct was in the Company's best
interest and in all other cases, that his conduct was at least not opposed to
the Company's best interest and (b) in the case of any criminal proceeding, he
had no reasonable cause to believe his conduct was unlawful.
Any indemnification by the Company pursuant to the provisions of the
Charter described above shall be paid out of the assets of the Company and shall
not be recoverable from the shareholders. 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.
Amendment
The 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 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, however, 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 the Charter, the Company generally is prohibited from
engaging in certain activities, including 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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<PAGE> 25
TENNESSEE ANTI-TAKEOVER STATUTES
In addition to certain of the Company's Charter provisions discussed
above, Tennessee has adopted a series of statutes, set forth in Chapter 103 of
Title 48 of the Tennessee Code, 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 being
(i) any person that is the beneficial owner of 10% or more of the voting power
of any class or series of outstanding voting stock of the corporation or (ii) an
Affiliate or associate of the corporation who at any time within the five-year
period immediately prior to the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of any class or
series of the outstanding stock of the corporation.
The Tennessee Greenmail Act prohibits a Tennessee corporation from
purchasing, directly or indirectly, any of its shares at a price above the
market value of such shares (defined as the average of the highest and lowest
closing market price for such shares during the 30 trading days preceding the
purchase and sale or preceding the commencement or announcement of a tender
offer if the seller of such shares has commenced a tender offer or announced an
intention to seek control of the corporation) from any person who holds more
than 3% of the class of securities to be purchased if such person has held such
shares for less than two years, unless the purchase has been approved by the
affirmative vote of a majority of the outstanding shares of each class of voting
stock issued by such corporation or the corporation makes an offer, of at least
equal value per share, to all holders of shares of such class.
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<PAGE> 26
SHARES AVAILABLE FOR FUTURE SALE
As of September 1, 1998, the Company had outstanding (or reserved for
issuance upon redemption of Units) 38,349,337 shares of Common Stock and
2,750,000 shares of Series A Preferred Stock. All of the up to 696,304 Secondary
Shares that may be offered and sold from time to time by the Selling
Shareholders hereunder will be tradable without restriction under the Securities
Act pursuant to the Registration Statement of which this Prospectus is a part.
See "Registration Rights." Sales of a substantial number of shares of Common
Stock, or the perception that such sales could occur, could adversely affect the
prevailing market prices for such shares. Pursuant to this Prospectus or
otherwise, a total of up to 1,925,915 shares will be eligible to be sold in the
public market upon resales or upon redemptions of Units. See "Plan of
Distribution." In addition, 700,000 shares of Common Stock have been previously
reserved for issuance pursuant to the Company's grant of options under its 1994
Plan. The Company has granted options for an aggregate of 700,000 shares under
the 1994 Plan, 90,000 of which have been exercised to date. The outstanding
options vest at the rate of 20% per year over five years. An additional 166,000
shares of restricted stock (which vest as indicated below) and 66,279
performance shares (which are fully vested) have been awarded to the Company's
officers. Of the restricted stock awards, 25,000 shares become vested in
installments beginning on the third anniversary of the date of grant; 20,000
shares vest at the rate of 4,000 shares on the date of grant and an additional
4,000 shares vest on each of the first through fourth anniversaries of the date
of grant; 42,000 shares vest at the rate of 14,000 shares on each of the first
through third anniversaries of the date of grant; and the balance vest at the
rate of 20% per year over five years.
The Company has reserved for issuance to the Independent Directors an
aggregate of 130,000 shares of Common Stock for grants of restricted stock and
stock options under the Directors' Plan. Under the Directors' Plan, each
Independent Director receives an option to purchase 1,000 shares annually
beginning in 1995. An additional option to purchase 5,000 shares annually over
five years, beginning in 1999 has been granted to each Independent Director,
subject to approval of the Company's shareholders at the next scheduled meeting
of shareholders. The Company also has issued an aggregate of 15,000 shares to
the Independent Directors, which shares vest as to each Independent Director
over five years at the rate of 1,000 shares per year beginning in 1994. In July
1998, the Independent Directors have been awarded an additional aggregate 15,000
shares of restricted stock, which vest over five years at the rate of 1,000
shares per year beginning in 1999, subject to approval of the company's
shareholders at the next scheduled meeting of shareholders. Upon exercise of
options granted under the 1994 Plan and the Directors' Plan, these shares will
be available for sale in the public markets from time to time pursuant to
exemptions from registration requirements or upon registration. No prediction
can be made about the effect that future sales of shares of Common Stock will
have on the market price of the Common Stock.
Shares issued to executive officers and key employees pursuant to the
1994 Plan and shares issued to the Independent Directors directly by the Company
or pursuant to the Directors' Plan are "restricted" securities under the meaning
of Rule 144 and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including the
exemptions contained in Rule 144. In general, under Rule 144 as currently in
effect, a person who has beneficially owned his shares for at least two years is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then-outstanding Common Stock or of the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 also are subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. After shares are held for three years, any person
who is not deemed to be an "Affiliate" of the Company at any time during the 90
days preceding a sale is entitled to sell such shares in the public market under
Rule 144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements. Sales of shares by
affiliates will continue to be subject to the volume limitations.
No prediction can be made as to the effect, if any, that future sales
of shares, or the availability of shares for future sale, will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, may affect
adversely prevailing market prices of the Common Stock. See "Risk Factors -
Effect on Share Price of Shares Available for Future Sale."
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<PAGE> 27
THE SELLING SHAREHOLDERS
As described elsewhere herein, the "Selling Shareholders" are those
persons and entities that may receive up to 696,304 Secondary Shares upon their
redemption of Units. Because each Selling Shareholder may redeem all, some, or
none of his or its Units, and may receive, at the Company's sole option, cash
rather than shares of Common Stock upon such redemptions, all, some, or none of
the Secondary Shares may be offered and sold by the Selling Shareholders
pursuant to this Prospectus.
The table below sets forth the name and relationship (if any) with the
Company of each Selling Shareholder and (i) the number of shares of Common Stock
beneficially owned by each Selling Shareholder as of September 1, 1998, (ii) the
maximum number of shares of Common Stock which may be offered for the account of
each Selling Shareholder under this Prospectus and (iii) the number of and
percentage of Common Stock that would be owned by each Selling Shareholder after
completion of the sale of all of his or its Secondary Shares offered hereunder.
Except as otherwise noted below, none of the Selling Shareholders has, within
the past three years, had any position, office or other material relationship
with the Company. Unless otherwise indicated in the accompanying footnotes, all
such shares of Common Stock are owned directly, and each Selling Shareholder has
sole voting and investment power over such shares.
<TABLE>
<CAPTION>
NUMBER OF AND PERCENTAGE
SHARES OWNED NUMBER OF OF COMMON STOCK OWNED
PRIOR TO THIS SECONDARY AFTER SALE OF ALL SECONDARY
SELLING SHAREHOLDER OFFERING(1) SHARES SHARES HEREUNDER(2)
- ------------------- ----------- ------ --------------------
AMOUNT PERCENTAGE
------ ----------
<S> <C> <C> <C> <C>
Prime Hospitality Corp.(3) 572,847 572,847 0 *
Phillip H. McNeill, Sr.(4) 1,350,498 70,388 1,280,110 3.6%
John B. Peyton(5) 7,823 5,173 2,650 *
Ted A. Vaughan(6) 78,474 15,519 62,955 *
James W. Dugan 5,173 5,173 0 *
Norman H. Blake, III 3,339 1,339 2,000 *
Bruce C. Taylor(7) 38,663 5,173 33,490 *
Stan Ruffin 5,323 5,173 150 *
Clyde Patton, Jr.(8) 33,663 5,173 28,490 *
Mirabile Investment Corporation(9) 25,346 10,346 15,000 *
--------- ------- ---------
TOTAL................... 2,121,149 696,304 1,424,845 3.6%
========= ======= ========= ===
</TABLE>
- -------------------
* Represents less than one percent (1%) of the Common Stock.
(1) Represents beneficial ownership as of September 1, 1998, based upon
information provided by each of the Selling Shareholders.
(2) Assumes the sale of all Secondary Shares registered hereunder, although each
Selling Shareholder is under no obligation known to the Company to sell any
Secondary Shares at this time.
(3) A subsidiary of Prime Hospitality Corp. ("Prime"), the Prime Lessee,
has leased certain of the Current Hotels from the Company beginning in
December 1997. In connection with the Company's acquisition of ten
AmeriSuites hotels from Prime in December 1997, the Partnership issued
572,847 Units to Prime in a private placement.
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<PAGE> 28
(4) Mr. McNeill is the Company's Chairman of the Board and Chief Executive
Officer. Includes 764,867 Units held by Mr. McNeill or his affiliates, which
Units are redeemable at the option of Mr. McNeill at any time pursuant to
the exercise of 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.
Also includes: (a) 14,705 shares owned by Mr. McNeill's wife; (b) 7,029
shares owned by Mr. McNeill's children; (c) 15,218 shares owned by McNeill
Investment Company, Inc.; (d) 10,000 shares granted in December 1996 to Mr.
McNeill under the 1994 Plan and which are subject to certain vesting
requirements over a five-year period from the date of grant; and (e) an
additional 42,000 shares of restricted stock granted to Mr. McNeill in July
1998, which are subject to shareholder approval at the next scheduled
meeting of the Company's shareholders and which are subject to certain
vesting requirements over a three-year period from the date of grant.
Includes 312,000 shares issuable upon the exercise of vested options granted
under the 1994 Plan. Excludes 78,000 shares of Common Stock subject to
options granted to Mr. McNeill under the 1994 Plan, which options vest in
July 1999.
(5) Includes 2,650 shares of Common Stock held by Mr. Peyton's spouse.
(6) Includes (a) 11,724 shares of Common Stock held in Mr. Vaughan's individual
retirement account and 7,448 shares of Common Stock held in his spouse's
individual retirement account and (b) 38,590 Units owned by Mr. Vaughan
redeemable at any time pursuant to the exercise of the Redemption Rights.
(7) Includes 18,490 Units owned by Mr. Taylor redeemable at any time pursuant
to the exercise of the Redemption Rights.
(8) Includes 18,490 Units owned by Mr. Patton redeemable at any time pursuant
to the exercise of the Redemption Rights.
(9) Includes 15,000 shares of Common Stock held jointly by Mr. and Mrs. Joseph
Mirabile. Mr. Mirabile is the president of Mirabile Investment Corporation.
REGISTRATION RIGHTS
The Company is obligated (a) to file the Registration Statement with
respect to the Secondary Shares within thirty (30) days after written request by
the Selling Shareholders, (b) to use its best efforts to cause the Registration
Statement to be declared effective under the Securities Act as soon as
reasonably possible after such filing, and (c) to keep the Registration
Statement continuously effective for a period expiring on the earlier of (i) the
date when all of the Secondary Shares covered thereby have been resold pursuant
thereto, or (ii) the date on which the holder of Secondary Shares, pursuant to
Rule 144(k) under the Securities Act, may sell the Secondary Shares without
registration under the Securities Act. Any shares that have been sold pursuant
to this Registration Statement, or which have been otherwise transferred and new
certificates for them have been issued without legal restriction on further
transfer of such shares, will no longer be entitled to the benefits of the
Partnership Agreement.
Pursuant to the Partnership Agreement, the Company has agreed to pay
all expenses of effecting the registration of the Secondary Shares (other than
any underwriter or broker discounts or commissions or any fees and expenses
incurred by the Selling Shareholders in connection with such registration which,
according to the written instructions of any regulatory authority, the Company
may not pay) pursuant to the Registration Statement. The Company has also agreed
to indemnify the Selling Shareholders and their officers and directors and any
person who controls the holder against certain losses, claims, damages,
liabilities and expenses arising under the securities laws. In addition, the
Selling Shareholders have severally agreed to indemnify the Company and its
directors and officers (including each director and officer of the Company who
signed the Registration Statement), and any person who controls the Company
against other losses, claims, damages, liabilities and expenses arising under
the securities laws insofar as such loss, claim, damage or expense relates to
written information furnished to the Company by the Selling Shareholders
expressly for use in the Registration Statement or Prospectus or any amendment
or supplement thereto.
The Company has no obligation to retain any underwriter to effect the
sale of the shares of Common Stock covered thereby.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Stock is based on current
law, is for general information only, and is not tax advice. The discussion 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,
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<PAGE> 29
tax-exempt organizations (except as described below), financial institutions or
broker-dealers, and, except as described below, 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 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 elected to be taxed as a REIT under Sections 856 through
860 of the Code, commencing with its taxable year ended on 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
remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, 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 taxes 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 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 gross income attributable to the greater of the amount by which
the Company fails the 75% or 95% gross income test, multiplied by a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. To the extent that the
Company elects to retain and pay income tax on its net capital gain, such
retained amounts will be treated as having been distributed for purposes of the
4% excise tax. 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
26
<PAGE> 30
acquired by the Company, then to the extent of such asset's "built-in gain"
(i.e., the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such time),
such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in-gain" assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition. See "- Proposed Tax
Legislation."
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 stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (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. The Company believes it has issued
sufficient shares of 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 ownership and 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. Such transfer
restrictions are described in "Description of Capital Stock - Charter and Bylaw
Provisions - Restrictions on Ownership and Transfer."
For purposes of determining stock 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 is considered an individual, although a trust that is a qualified trust
under the Code section 401(a) is not considered an individual and the
beneficiaries of such trust are treated as holding stock of a REIT in proportion
to their actuarial interests in the trust for purposes of the 5/50 Rule.
The Company currently has three corporate subsidiaries and may have
additional corporate subsidiaries in the future. Each of the Company's corporate
subsidiaries has been wholly owned by the Company since the commencement of its
existence. Code Section 856(i) provides that a corporation that is a "qualified
REIT subsidiary" shall not be treated as a separate corporation, and all assets,
liabilities, and items of income, deduction, and credit of a "qualified REIT
subsidiary" shall be treated as assets, liabilities, and items of income,
deduction, and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which is owned by the REIT. 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
Company's corporate subsidiaries are "qualified REIT subsidiaries." Accordingly,
such subsidiaries are not subject to federal corporate income taxation, although
they may be subject to state and local taxation.
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 will be treated as assets and gross income of the Company for
purposes of applying the requirements described herein.
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Income Tests. In order for the Company to maintain its qualification as
a REIT, there are two 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. 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." In addition, the Company may furnish or render a de
minimis amount of "noncustomary services" to the tenants of a hotel other than
through an independent contractor as long as the amount that the Company
receives that is attributable to such services does not exceed 1% of its total
receipts from the hotel. For that purpose, the amount attributable to such
noncustomary services will be at least equal to 150% of the Company's cost of
providing the services.
Pursuant to the Percentage Leases, the Interstate Lessee and the Prime
Lessee (collectively, the "Lessee") lease from the Partnership the land,
buildings, improvements, furnishings and equipment comprising 102 of the Current
Hotels for a 10-year period. The Percentage Leases provide that the Lessee is
obligated to pay to the Partnership (i) the greater of the Base Rent or the
Percentage Rent (collectively, the "Rents") and (ii) certain other Additional
Charges. The Percentage Rent is calculated by multiplying fixed percentages by
the room revenues for each of the Current Hotels in excess of certain levels.
Both the Base Rent and the threshold room revenue amount in each Percentage Rent
formula are adjusted for inflation. The adjustment is calculated at the
beginning of each calendar year based on the change in the Consumer Price Index
("CPI") during the prior calendar year. 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. Three of the Current Hotels are operated pursuant to management
agreements. The Company's income from those three Current Hotels likely does not
constitute "rents from real property."
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).
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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 the Lessee intend for their
relationship to be that of a lessor and lessee and such relationship is
documented by lease agreements, (ii) the Lessee has the right to exclusive
possession and use and quiet enjoyment of the Current Hotels during the term of
the Percentage Leases, (iii) the Lessee bears the cost of, and is responsible
for, day-to-day maintenance and repair of the Current Hotels, other than the
cost of maintaining underground utilities and structural elements, and dictates
how the Current Hotels are operated, maintained, and improved, (iv) the Lessee
bears all of the costs and expenses of operating the Current Hotels (including
the cost of any inventory and supplies used in their operation) during the term
of the Percentage Leases (other than real and personal property taxes, and the
cost of replacement or refurbishment of furniture, fixtures and equipment, to
the extent such costs do not exceed the allowances for such costs provided by
the Partnership under each Percentage Lease), (v) the Lessee benefits from any
savings in the costs of operating the Current Hotels during the term of the
Percentage Leases, (vi) in the event of damage or destruction to a Current
Hotel, the Lessee will be at economic risk because it will be obligated either
(A) to restore the property to its prior condition, in which event it will bear
all costs of such restoration or (B) purchase the Current Hotel for an amount
generally equal to the Partnership's investment in the Current Hotel, (vii) the
Lessee will indemnify the Partnership against all liabilities imposed on the
Partnership during the term of the Percentage Leases by reason of (A) injury to
persons or damage to property occurring at the Current Hotels or (B) the
Lessee's use, management, maintenance or repair of the Current Hotels, (viii)
the Lessee is obligated to pay substantial fixed rent for the period of use of
the Current Hotels, and (ix) the Lessee stands to incur substantial losses (or
reap substantial gains) depending on how successfully it operates the Current
Hotels.
Investors should be aware that there are not controlling Treasury
Regulations, published rulings or judicial decisions involving leases with terms
substantially the same as the Percentage Leases that discuss whether such leases
constitute true leases for federal income tax purposes. If the Percentage Leases
are recharacterized as service contracts or partnership agreements, rather than
true leases, part or all of the payments that the Partnership receives from the
Lessee may not be considered rent or may not otherwise satisfy the various
requirements for qualification as "rents from real property." In that case, the
Company likely would not be able to satisfy either the 75% or 95% gross income
tests, and, as a result, would lose its REIT status.
In order for the Rents to constitute "rents from real property,"
several other requirements also must be satisfied. One requirement is that the
Rents attributable to personal property leased in connection with the lease of
the real property comprising a Current Hotel must not be greater than 15% of the
Rents received under the Percentage Lease. The Rents attributable to the
personal property in a Current Hotel is the amount that bears the same ratio to
total Rents for the taxable year as the average of the adjusted bases of the
personal property in the Current 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 Current Hotel at the beginning and at
the end of such taxable year (the "Adjusted Basis Ratio"). With respect to each
Current Hotel that the Partnership has acquired in exchange for Units, the
initial Adjusted Basis Ratio for such hotel was less than 15%. In addition, the
Company believes that the value of the personal property at each Current Hotel
acquired for cash was less than 15% of the purchase price of such hotel.
Further, in no event will the Partnership acquire additional personal property
for a hotel to the extent that such acquisition would cause the Adjusted Basis
Ratio for that hotel to exceed 15%. There can be no assurance, however, that the
Service would not assert that the personal property acquired by the Partnership
had a value in
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excess of the appraised value, or that a court would not uphold such assertion.
If such a challenge were successfully asserted, the Company could fail the
Adjusted Basis Ratio as to one or more of the Current Hotels, which in turn
potentially could cause it to fail to satisfy the 95% or 75% gross income test
and thus lose its REIT status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages (i) are fixed at the time the Percentage Leases are entered
into, (ii) are not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(iii) conform with normal business practice. More generally, the Percentage Rent
will not qualify as "rents from real property" if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means of basing the
Percentage Rent on income or profits. Since the Percentage Rent is based on
fixed percentages of the gross revenues from the Current Hotels that are
established in the Percentage Leases, and the Company has represented that the
percentages (i) will not be renegotiated during the terms of the Percentage
Leases in a manner that has the effect of basing the Percentage Rent on income
or profits and (ii) conform with normal business practice, the Percentage Rent
should not be considered based in whole or in part on the income or profits of
any person.
A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of the Lessee. The constructive ownership rules generally provide that, if
10% or more in value of the 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 or constructively, any ownership interests in the Lessee. In addition,
the Charter provides that no person may acquire Common Stock if such person's
acquisition of Common Stock would cause the Company to constructively own 10% or
more of the ownership interests in any lessee. Thus, the Company should never
own, actually or constructively, 10% of more of the Lessee.
A fourth requirement for qualification of the Rents as "rents from real
property" is that, within the 1% de minimis exception described above, the
Company cannot furnish or render non-customary services to the tenants of the
Current Hotels, or manage or operate the Current Hotels, other than through an
independent contractor who is adequately compensated and from whom the Company
itself does not derive or receive any income. Although the Company does not
satisfy this requirement with respect to the three Current Hotels that are
operated pursuant to management agreements (the "Managed Hotels"), the Company
believes that its nonqualifying income from those three Current Hotels will not
prevent it from qualifying as a REIT. In addition, provided that the Percentage
Leases are respected as true leases, the Company should satisfy that requirement
with respect to the other 102 Current Hotels because the Partnership is not
performing any services other than customary ones for the Lessee. 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 Current Hotels and to manage or operate
such hotels other than through an independent contractor who is adequately
compensated and from whom the Company derives or receives no income.
If the Rents do not qualify as "rents from real property" because the
Rents attributable to personal property exceed 15% of the total Rents for a
taxable year, the portion of the Rents that is attributable to personal property
will not be qualifying income for purposes of either the 75% or 95% gross income
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 the Lessee, (ii) the
Company owns, directly or constructively, 10% or more of the Lessee, or (iii)
the Company furnishes non-customary services to the tenants of the Current
Hotels (other than the Managed Hotels), or manages or operates the Current
Hotels (other than the Managed 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.
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In addition to the Rents, the Lessee is required to pay to the
Partnership the Additional Charges. To the extent that the Additional Charges
represent either (i) reimbursements of amounts that the Lessee is obligated to
pay to third parties or (ii) penalties for nonpayment or late payment of such
amounts, the Additional Charges should qualify as "rents from real property." To
the extent, however, that the Additional Charges represent interest that is
accrued on the late payment of the Rents or the Additional Charges, the
Additional Charges should not qualify as "rents from real property," but instead
should be treated as interest that qualifies for the 95% gross income test.
The 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.
The net income derived from any prohibited transaction is subject to a
100% tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. All
inventory required in the operation of the Current Hotels is purchased by the
Lessee or its designee as required by the terms of the Percentage Leases.
Accordingly, the Company and the Partnership believe that no asset owned by the
Company or the Partnership is held for sale to customers and that a sale of any
such asset will not be in the ordinary course of business of the Company or the
Partnership. Whether property is held "primarily for sale to customers in the
ordinary course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to 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 and the Partnership can
comply with the safe-harbor provisions of the Code or avoid owning property that
may be characterized as property held "primarily for sale to customers in the
ordinary course of a trade or business."
The Company is subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that is qualifying income
for purposes of 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 for purposes of 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 at the close of the third taxable year following the taxable year in which
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) that is more
than 90 days after the day on which such property was acquired by the REIT and
the property is used in a trade or business that is conducted by the REIT (other
than through an independent contractor from whom the REIT itself does not derive
or receive any income). As a result of the rules with respect to foreclosure
property, if the Lessee defaults on its obligations under a Percentage Lease for
a Hotel, the Company terminates the Lessee's leasehold interest, and the Company
is unable to find a replacement Lessee for such Hotel within 90 days of such
foreclosure, gross income from hotel operations conducted by the Company from
such Hotel would cease to qualify for the 75% and 95% gross income tests. In
such event, the Company likely would be unable to satisfy the 75% and 95% gross
income tests and, thus, would fail to qualify as a REIT.
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It is possible that, from time to time, the Company or the Partnership
will enter into hedging transactions with respect to one or more of its assets
or liabilities. Any such hedging transactions could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the Company or the
Partnership enters into an interest rate swap or cap contract, option, futures
contract, forward rate agreement, or similar financial instrument to reduce the
interest rate risks with respect to indebtedness incurred or to be 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. To the extent that the Company or the Partnership hedges with
other types of financial instruments or in other situations, it may not be
entirely clear how the income from those transactions will be treated for
purposes of the various income tests that apply to REITs under the Code. The
Company intends to structure any hedging transactions in a manner that does not
jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
Those relief provisions will be generally available if the Company's failure to
meet such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "- Taxation of the Company," even if those relief provisions
apply, a tax would be imposed with respect to the gross income attributable to
the greater of the amounts by which the Company failed the 75% and 95% gross
income tests, multiplied by a fraction intended to reflect the Company's
profitability.
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 stock
or long-term (at least five-year) debt offerings, temporary investments in stock
or debt instruments during the one-year period following the Company's receipt
of such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the mortgage
balance does not exceed the value of the associated real property, and shares of
other REITs. For purposes of the 75% asset 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 and any qualified REIT subsidiary). See "- Proposed
Tax Legislation."
If the Company should fail inadvertently to satisfy the asset tests at
the end of a calendar quarter, such a failure would not cause it to lose its
REIT status if (i) it satisfied all of the asset tests at the close of the
preceding calendar quarter and (ii) the discrepancy between the value of the
Company's assets and the standards imposed by the asset tests arose from changes
in the market values of its assets and was not wholly or partly caused by an
acquisition of nonqualifying assets. If the condition described in clause (ii)
of the preceding sentence were not satisfied, the Company still could avoid
disqualification by eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.
Distribution Requirements. The Company, in order to qualify as a REIT,
is required to distribute dividends (other than capital gain dividends and
retained capital gains) 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
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all of its net capital gain or distributes at least 95%, but less than 100%, of
its "REIT taxable income," as adjusted, it will be subject to tax thereon at
regular ordinary and capital gains corporate tax rates. Furthermore, if the
Company should fail to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed. The
Company may elect to retain and pay income tax on the net long-term capital gain
it receives in a taxable year. Any such retained amounts would be treated as
having been distributed by the Company for purposes of the 4% excise tax. The
Company intends to make timely distributions sufficient to satisfy all annual
distribution requirements.
It is possible that, from time to time, the Company may experience
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, under the
Percentage Leases, the Lessee may defer payment of the excess of the Percentage
Rent over the Base Rent for a period of up to 90 days after the end of the
calendar year in which such payment was due. In that case, the Partnership still
would be required to recognize as income the excess of the Percentage Rent over
the Base Rent in the calendar quarter to which it relates. Further, it is
possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciated property which exceeds its
allocable share of cash attributable to that sale. Therefore, the Company may
have less cash available for distribution than is necessary to meet its annual
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 requirement 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, 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 intends to comply with such
requirements.
PARTNERSHIP ANTI-ABUSE RULE
The U.S. Department of the Treasury has issued a final regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions"), that authorizes the Service, in certain "abusive"
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or availed of in
connection with a transaction (or series of related transactions), a principal
purpose of which is to reduce substantially the present value of the partners'
aggregate federal tax liability in a manner inconsistent with the intent of the
Partnership Provisions. The Anti-Abuse Rule states that the Partnership
Provisions are intended to permit taxpayers to conduct joint business (including
investment) activities through a flexible economic arrangement that accurately
reflects the partners' economic agreement and clearly reflects the partners'
income without incurring an entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains a example in which a corporation that
elects to be treated as a REIT is formed to be a general partner in a
partnership. The REIT contributes substantially all of the proceeds from a
public offering to the partnership. The limited partners of the partnership
contribute all of their real property assets to the partnership, subject to
liabilities that exceed their respective aggregate bases in the real property
contributed. In addition, the limited partners have the right, beginning two
years after the formation of the partnership, to require the redemption of their
limited partnership interests in exchange for cash or REIT stock (at the REIT's
option) equal to
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the fair market value of their respective interests in the partnership at the
time of the redemption. The example concludes that the use of the partnership is
not inconsistent the intent of the Partnership Provisions and, thus, cannot be
recast by the Service. However, because the Anti-Abuse Rule is extraordinarily
broad in scope and is applied based on an analysis of all of the facts and
circumstances, there can be no assurance that the Service will not attempt to
apply the Anti-Abuse Rule to the Company. If the conditions of the Anti-Abuse
Rule are met, the Service is authorized to take appropriate enforcement action,
including disregarding the Partnership for federal tax purposes or treating one
or more of its partners as non-partners. It is conceivable that the application
of the Anti-Abuse Rule could result in the loss of REIT status by the Company.
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 or retained capital gains)
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 Stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership, or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate whose income from sources without
the United States is includible in gross income for U.S. federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States, or (iv) any trust with respect to which (A) a U.S.
court is able to exercise primary supervision over the administration of such
trust and (B) one or more U.S. persons 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 Common Stock. However, corporate shareholders
may be required to treat up to 20% of certain capital gain dividends as ordinary
income. The Company may elect to retain and pay income tax on the net long-term
capital gain it receives in a taxable year. In that case, the Company's
shareholders would include in income their proportionate share of the Company's
undistributed long-term capital gains. In addition, the shareholders would be
deemed to have paid their proportionate share of the tax paid by the Company,
which would be credited or refunded to the shareholders. Each shareholder's
basis in his shares would be increased by the amount of the undistributed
long-term capital gain included in the shareholder's income, less the
shareholder's share of the tax paid by the Company.
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 shares of Common 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 shares of Common Stock, such distributions will be included
in income as long-term capital gain (or short-term capital gain if the shares of
Common Stock have been held for one year or less) assuming the shares of Common
Stock are a capital asset in the hands of the shareholder. In addition, any
distribution declared by the Company in October, November, or December of any
year and payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
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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 shares of Common Stock will not be treated as
passive activity income and, therefore, shareholders generally will not be able
to apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which the shareholder is a limited partner) against such
income. In addition, taxable distributions from the Company and gain from the
disposition of shares of Common Stock generally will be treated as investment
income for purposes of the investment interest limitations. 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 U.S. SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the shares of Common 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 Common 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 the Common Stock may be disallowed if other shares of Common
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%.
The maximum tax rate on net capital gains applicable to noncorporate taxpayers
is 20% for sales and exchanges of assets held for more than one year. The
maximum tax rate on long-term capital gain from the sale or exchange of "section
1250 property" (i.e., depreciable real property) is 25% to the extent that such
gain would have been treated as ordinary income if the property were "section
1245 property." With respect to distributions designated by the Company as
capital gain dividends and any retained capital gains that the Company is deemed
to distribute, the Company may designate (subject to certain limits) whether
such a distribution is taxable to its noncorporate stockholders at a 20% or 25%
rate. 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 deduction of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their non-foreign status to the Company. The Service has
issued final regulations regarding the backup withholding rules as applied to
Non-U.S. Shareholders. Those regulations alter the current system of backup
withholding compliance and are effective for distributions made after December
31, 1999. See "- Taxation of Non-U.S. Shareholders."
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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 the Common Stock with debt, a portion of its income
from the Company will constitute UBTI pursuant to the "debt-financed property"
rules. Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under paragraphs (7), (9), (17), and (20),
respectively, of Code Section 501(c) are subject to different UBTI rules, which
generally will require them to characterize distributions from the Company as
UBTI. In addition, 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") in certain circumstances. The UBTI Percentage is
the gross income derived from an unrelated trade or business (determined as if
the Company were a pension trust) divided by the gross income of the Company for
the year in which the dividends are paid. The UBTI rule applies to a pension
trust holding more than 10% of the Company's stock only if (i) the UBTI
Percentage is at least 5%, (ii) the Company qualifies as a REIT by reason of the
modification of the 5/50 Rule that allows the beneficiaries of the pension trust
to be treated as holding stock of the Company in proportion to their actuarial
interests in the pension trust, and (iii) either (A) one pension trust owns more
than 25% of the value of the Company's stock or (B) a group of pension trusts
individually holding more than 10% of the value of the Company's stock
collectively owns more than 50% of the value of the Company's stock.
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 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 or retained capital
gains will be treated as dividends of ordinary income to the extent that they
are made out of current or accumulated earnings and profits of the Company. Such
distributions ordinarily will be subject to a withholding tax equal to 30% of
the gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common 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 foreign
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 has issued final
regulations that modify the manner in which the Company complies with the
withholding requirements. Those regulations are effective for distributions made
after December 31, 1999.
Distributions in excess of current and accumulated earnings and profits
of the Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Common
Stock, but rather will reduce the adjusted basis of such 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 Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on any gain
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from the sale or disposition of his Common Stock, as described below. Because it
generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. However, amounts so withheld are
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company.
The Company is required to withhold 10% of any distribution in excess
of the Company's 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
by currently applicable Treasury Regulations to withhold 35% of any distribution
that could be 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 Common
Stock generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. However, because the Common Stock is publicly
traded, no assurance can be given that the Company will continue to be a
"domestically controlled REIT." Furthermore, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the Common Stock is
effectively connected with the Non-U.S. Shareholder's U.S. trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
U.S. shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. However, a Non-U.S. Shareholder that owned, actually
or constructively, 5% or less of the shares of Common Stock at all times during
a specified testing period will not be subject to tax under FIRPTA if the shares
of Common Stock are "regularly traded" on an established securities market. If
the gain on the sale of the Common 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 foreign corporations.
OTHER TAX CONSEQUENCES
The Company, the Partnership, 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.
PROPOSED TAX LEGISLATION
The Clinton administration's budget proposal for fiscal year 1999 (the
"Proposal") contains two provisions that could affect the Company if enacted in
final form. First, the Proposal would prohibit a REIT from owning, directly or
indirectly, more than 10% of the voting power or value of all classes of a C
corporation's stock (other than the stock of a qualified REIT subsidiary).
Currently, a REIT may own no more than 10% of the voting stock of
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a C corporation (other than a qualified REIT subsidiary), but its ownership of
the nonvoting stock of a C corporation is not limited (other than by the rule
that the value of a REIT's combined equity and debt interests in a C corporation
may not exceed 5% of the value of a REIT's total assets). That provision is
proposed to be effective with respect to stock in a C corporation acquired by a
REIT on or after the date of "first committee action." If enacted as presently
written, that provision would limit the Company's use of taxable subsidiaries to
conduct businesses the income from which would be nonqualifying income if
received directly by the Company. Second, the Proposal would require recognition
of any built-in gain associated with the assets of a "large" C corporation
(i.e., a C corporation whose stock has a fair market value of more than $5
million) upon its conversion to REIT status or merger into a REIT. That
provision is proposed to be effective for conversions to REIT status effective
for taxable years beginning after January 1, 1999 and mergers of C corporations
into REITs that occur after December 31, 1998. This provision would require
immediate recognition of gain if, at any time after December 31, 1998, a "large"
C corporation merges into 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. 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 the 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 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 and the
Subsidiary Partnerships (each, a "Hotel 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 of its members was notified in writing by a taxing authority
on or before May 8, 1996 that the classification of the entity was under
examination. Each Hotel Partnership in existence on January 1, 1997 reasonably
claimed partnership classification under the Treasury Regulations relating to
entity classification in effect prior to January 1, 1997, and such
classification should be respected for federal income tax purposes. In addition,
no Hotel Partnership was notified by a taxing authority on or before May 8, 1996
that its classification was under examination. The Hotel Partnerships intend to
continue to be classified as partnerships and the Company has represented that
no Hotel Partnership will elect to be treated as an association taxable as a
corporation for federal income tax purposes under the Check-the-Box Regulations.
A publicly traded partnership is a partnership whose interests are
traded on an established securities market or are readily tradeable on a
secondary market (or the substantial equivalent thereof). A publicly traded
partnership will be treated as a corporation for federal income tax purposes
unless at least 90% of such partnership's gross income for a taxable year
consists of "qualifying income" under section 7704(d) of the Code, which
generally includes any income that is qualifying income for purposes of the 95%
gross income test applicable to REITs (the "90% Passive-Type Income Exception").
See "--Requirements for Qualification--Income Tests." The U.S. Treasury
Department has issued regulations (the "PTP Regulations") that provide limited
safe harbors from the definition of a publicly traded partnership. Pursuant to
one of those safe harbors (the "Private Placement Exclusion"), interests in a
partnership will not be treated as readily tradable on a secondary market or the
substantial equivalent thereof if (i) all interests in the partnership were
issued in a transaction (or transactions) that was not required to be registered
under the Securities Act, and (ii) the partnership does not have more than 100
partners at any time during the partnership's taxable year. In determining the
number of partners in a partnership, a person
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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 Hotel Partnership qualifies for the
Private Placement Exclusion. If a Hotel Partnership is considered a publicly
traded partnership under the PTP Regulations because it is deemed to have more
than 100 partners, such Hotel Partnership should not be treated as a corporation
because it should be eligible for the 90% Passive-Type Income Exception.
If for any reason the Partnership was taxable as a corporation, rather
than as a partnership, for federal income tax purposes, the Company would not be
able to satisfy the income and asset requirements for REIT status. See
"- Requirements for Qualification - Income Tests" and " - Requirements for
Qualification - Asset Tests." In addition, any change in the Partnership's
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 PARTNERSHIP AND ITS PARTNERS
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of the Partnership's income, gains,
losses, deductions, and credits for any taxable year of the Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution 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. The Partnership's allocations of taxable income and loss
comply with the requirements of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department has issued
regulations requiring partnerships to use a "reasonable method" for allocating
items affected by Section 704(c) of the Code and outlining three reasonable
allocation methods.
Under the Partnership Agreement, depreciation or amortization
deductions of the Partnership generally are allocated among the partners in
accordance with their respective interests in the Partnership, except to the
extent that the Partnership is required under Code Section 704(c) to use a
method for allocating tax depreciation deductions attributable to the Current
Hotels that results in the Company receiving a disproportionately large share of
such deductions. In addition, gain on sale of a Current Hotel contributed by a
Limited Partner or Limited Partners will be specially allocated to such 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.
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Basis in Partnership Interest. The Company'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 Company's allocable share of the
Partnership's loss and (II) the amount of cash distributed to the Company, and
by constructive distributions resulting from a reduction in the Company's share
of indebtedness of the Partnership.
If the allocation of the Company's distributive share of the
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Partnership below zero, the recognition of such loss
will be deferred until such time as the recognition of such loss would not
reduce the Company's adjusted tax basis below zero. To the extent that the
Partnership's distributions, or any decrease in the Company's share of the
indebtedness of the Partnership (such decrease being considered a constructive
cash distribution to the partners), would reduce the Company's adjusted tax
basis below zero, such distributions (including such constructive distributions)
constitute taxable income to the Company. Such distributions and constructive
distributions normally will be characterized as capital gain, and, if the
Company's partnership interest in the Partnership has been held for longer than
the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain.
Depreciation Deductions Available to the Partnership. To the extent the
Partnership has acquired the Current Hotels for cash, the Partnership's initial
basis in such hotels for federal income tax purposes generally was 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
generally 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 generally 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 has acquired
the Current Hotels in exchange for Units, the Partnership's initial basis in
each Current Hotel for federal income tax purposes should be the same as the
transferor's basis in that Current Hotel on the date of acquisition. Although
the law is not entirely clear, the Partnership generally 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 Current Hotels
or other contributed properties that results in the Company 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 Current Hotels will be allocated first to the Limited Partners who
contributed those hotels under Section 704(c) of the Code to the extent of their
"built-in gain" on those hotels for federal income tax purposes. The Limited
Partners' "built-in gain" on the Current 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 Board of Directors has adopted a
policy that any decision to sell a hotel will be made by a majority of the
Independent Directors.
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%
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penalty tax. See "- Requirements for Qualification - Income Tests." Such
prohibited transaction income also may have an adverse effect upon the Company's
ability to satisfy the income tests for REIT status. See "- Requirements For
Qualification - Income Tests." The Company, however, does not presently intend
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
This Prospectus relates to the offer and sale from time to time of any
Secondary Shares by the Selling Shareholders. The Company is registering the
Secondary Shares pursuant to the registration statement of which this Prospectus
is a part to provide the Selling Shareholders with freely tradeable securities,
but registration of such shares does not necessarily mean that any of such
shares will be issued by the Company or offered or sold by the Selling
Shareholders.
The shares may be sold by the Selling Shareholders from time to time on
the NYSE through negotiated transactions.
The Company will not receive any proceeds from the sale of the
Secondary Shares by the Selling Shareholders. The Secondary Shares may be sold
from time to time to purchasers directly by any of the Selling Shareholders or
by their pledgees, donees, transferees or other successors in interest, in
transactions on the NYSE or such other national securities exchange or automated
interdealer quotation systems on which the Common Stock is then listed or in
negotiated transactions or otherwise at market prices prevailing at the time of
the sale or at negotiated prices. Alternatively, the Selling Shareholders may
from time to time offer the Secondary Shares through dealers or agents, who may
receive compensation in the form of commissions from the Selling Shareholders
and/or the purchasers of Secondary Shares for whom they may act as agent. The
Selling Shareholders and any dealers or agents that participate in the
distribution of Secondary Shares may be deemed to be "underwriters" within the
meaning of the Securities Act, and any profit on the sale of Secondary Shares by
them and any commissions received by any such dealers or agents may be deemed to
be underwriting commissions under the Securities Act.
At a time a particular offer of Secondary Shares is made, a Prospectus
Supplement, if required, will be distributed, which will set forth the names of
any broker-dealers or agents and any commissions and other terms constituting
compensation from the Selling Shareholders and any other required information.
In order to comply with the securities laws of certain states, if
applicable, the Secondary Shares may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the Secondary Shares may not
be sold unless they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement is available
and is complied with.
All expenses incident to the offering and sale of the Secondary Shares,
if any, other than commissions, discounts and fees of underwriters,
broker-dealers or agents, shall be paid by the Company, but all selling and
other expenses incurred by the Selling Shareholders will be borne by the Selling
Shareholders. None of the Secondary Shares offered pursuant to this Prospectus
have been registered prior to the filing of the Registration Statement of which
this Prospectus is a part.
EXPERTS
The consolidated financial statements and financial statement schedule
of Equity Inns, Inc. as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997, 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
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered
pursuant to this Prospectus will be passed upon for the Company by Hunton &
Williams.
41
<PAGE> 45
================================================================================
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SHAREHOLDER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK, IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH
IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION........................................i
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE..............................................i
PROSPECTUS SUMMARY...........................................1
RISK FACTORS.................................................3
THE COMPANY.................................................13
DESCRIPTION OF CAPITAL STOCK................................14
SHARES AVAILABLE FOR FUTURE SALE............................25
THE SELLING SHAREHOLDERS....................................26
REGISTRATION RIGHTS.........................................27
FEDERAL INCOME TAX CONSIDERATIONS...........................27
PLAN OF DISTRIBUTION........................................43
EXPERTS.................................................... 43
LEGAL MATTERS...............................................43
</TABLE>
----------------
EQUITY INNS, INC.
572,847 SHARES
COMMON STOCK
----------------
PROSPECTUS
----------------
___________, 1998
- --------------------------------------------------------------------------------
================================================================================
<PAGE> 46
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the offering are as follows:
<TABLE>
<S> <C> <C>
Securities and Exchange Commission registration fee............................ $ 2,395
Accounting fees and expenses................................................... 5,000
Legal fees and expenses........................................................ 10,000
Printing....................................................................... 2,000
Miscellaneous.................................................................. 2,000
-------
TOTAL.......................................................................... $21,395
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Charter generally limits the liability of the Company's directors
and officers to the Company or its shareholders for money damages to the fullest
extent permitted from time to time by the laws of Tennessee. The Charter also
provides, generally, for the indemnification of directors and officers, among
others, against judgments, settlements, penalties, fines, and reasonable expense
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities except in
connection with a proceeding by or in the right of the Company in which the
director was adjudged liable to the Company or in connection with any other
proceeding, whether or not involving action in his official capacity, in which
he was adjudged liable on the basis that personal benefit was improperly
received by him. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors and
officers of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
The Company currently purchases director and officer liability
insurance for the purpose of providing a source of funds to pay any
indemnification described above.
ITEM 16. EXHIBITS.
3.1(a) - Charter of the Company (incorporated by reference to Exhibit 3.1
to the Company's Registration Statement on Form S-11 (Registration
No. 33-73304))
3.1(b) - Articles of Amendment to the Charter of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Current Report on Form
8-K (Registration No. 0-23290) filed with the Securities and
Exchange Commission on April 27, 1995)
3.1(c) - Articles of Amendment to the Charter of the Company (incorporated
by reference to Exhibit 3.1 to the Company Current Report on Form
8-K (Registration No. 0-23290) filed with the Securities and
Exchange Commission on May 31, 1996)
3.1(d) - Second Amended and Restated Charter of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Current Report on Form
8-K dated October 15, 1997 (Registration No. 0-23290) filed with
the Securities and Exchange Commission on October 23, 1997)
3.1(e) Articles of Amendment to the Second Amended and Restated Charter of
the Company (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated May 14, 1998
(Registration No. 0-23290) filed with the Securities and Exchange
Commission on May 28, 1998).
II-1
<PAGE> 47
<TABLE>
<S> <C>
3.1(f) Articles of Amendment to the Second Amended and Restated Charter of
Equity Inns, Inc. (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated June 23, 1998
(Registration No. 0-23290) filed with the Securities and Exchange
Commission on June 24, 1998).
3.2 - Bylaws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-11 (Registration
No. 33-73304))
4.1 - Form of Share Certificate for the Company's Common Stock, $.01
par value (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-11 (Registration No.
33-73304))
5.1* - Opinion of Hunton & Williams
8.1* - Opinion of Hunton & Williams as to certain tax matters
23.1* - Consent of PricewaterhouseCoopers LLP
23.2* - Consent of Hunton & Williams (included in Exhibit 5.1)
24.1* - Power of Attorney (located on the signature page of this
Registration Statement)
</TABLE>
- --------------
* Filed herewith
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 volume of
securities offered [if the total dollar value of
securities offered would not exceed that which was
registered] and any deviation from the low or high and
of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective
registration statement); 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 registration statement is on Form S-3, Form
S-8 or Form F-3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in this
registration statement;
II-2
<PAGE> 48
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 15 above or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted against the registrant by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question as to whether such indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form S-3 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Memphis, State of Tennessee, on the 10th day of September, 1998.
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)
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Phillip H. McNeill, Sr. and Howard A. Silver, and each or either of
them, his true and lawful attorney-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to cause the same to be filed, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting to said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing whatsoever requisite or desirable to be done in and
about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all acts and things
that said attorneys-in-fact and agents, or either of them, or their substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed on the 10th day of September,
1998 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
Director
-----------------------------------
William W. Deupree, Jr.
/s/ Joseph W. McLeary Director
-----------------------------------
Joseph W. McLeary
/s/ Howard A. Silver President and Chief Operating Officer
-----------------------------------
Howard A. Silver
/s/ Donald H. Dempsey Executive Vice President, Secretary, Treasurer and
----------------------------------- Chief Financial Officer (Principal Accounting and
Donald H. Dempsey Financial Officer)
</TABLE>
II-4
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1(a) - Charter of the Company (incorporated by reference to Exhibit 3.1
to the Company's Registration Statement on Form S-11 (Registration
No. 33-73304))
3.1(b) - Articles of Amendment to the Charter of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Current Report on Form
8-K (Registration No. 0-23290) filed with the Securities and
Exchange Commission on April 27, 1995)
3.1(c) - Articles of Amendment to the Charter of the Company (incorporated
by reference to Exhibit 3.1 to the Company Current Report on Form
8-K (Registration No. 0-23290) filed with the Securities and
Exchange Commission on May 31, 1996)
3.1(d) - Second Amended and Restated Charter of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Current Report on Form
8-K dated October 15, 1997 (Registration No. 0-23290) filed with
the Securities and Exchange Commission on October 23, 1997)
3.1(e) Articles of Amendment to the Second Amended and Restated Charter of
the Company (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated May 14, 1998
(Registration No. 0-23290) filed with the Securities and Exchange
Commission on May 28, 1998).
3.1(f) Articles of Amendment to the Second Amended and Restated Charter of
Equity Inns, Inc. (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated June 23, 1998
(Registration No. 0-23290) filed with the Securities and Exchange
Commission on June 24, 1998).
3.2 - Bylaws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-11 (Registration
No. 33-73304))
4.1 - Form of Share Certificate for the Company's Common Stock, $.01
par value (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-11 (Registration No.
33-73304))
5.1* - Opinion of Hunton & Williams
8.1* - Opinion of Hunton & Williams as to certain tax matters
23.1* - Consent of PricewaterhouseCoopers LLP
23.2* - Consent of Hunton & Williams (included in Exhibit 5.1)
24.1* - Power of Attorney (located on the signature page of this
Registration Statement)
</TABLE>
- --------------
* Filed herewith
II-5
<PAGE> 1
EXHIBIT 5.1
September 11, 1998
Equity Inns, Inc.
4735 Spottswood, Suite 102
Memphis, Tennessee 38117
Gentlemen:
We have acted as counsel for Equity Inns, Inc., a Tennessee corporation
(the "Company"), in connection with the Registration Statement on Form S-3 (the
"Registration Statement"), under the Securities Act of 1933, as amended, with
respect to 696,304 shares of the Company's common stock, $.01 par value (the
"Shares"), which may be issued by the Company and may be offered from time to
time by certain selling shareholders as described in the Registration Statement.
In connection therewith, we have relied upon, among other things, our
examination of such documents, records of the Company, certificates of its
officers and public officials, as we have deemed necessary for purposes of the
opinion expressed below.
Based upon the foregoing, and having regard for such legal
considerations as we have deemed relevant, we are of the opinion that the
issuance of the Shares as described in the Registration Statement has been
validly authorized and, upon issuance of the Shares as described in the
Registration Statement, the Shares will be legally issued, fully paid and
nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" therein.
Very truly yours,
/s/ Hunton & Williams
<PAGE> 1
EXHIBIT 8.1
September 11, 1998
Equity Inns, Inc.
4735 Spottswood, Suite 102
Memphis, Tennessee 38117
EQUITY INNS, INC.
QUALIFICATION AS
REAL ESTATE INVESTMENT TRUST
Ladies and Gentlemen:
We have acted as counsel to Equity Inns, Inc., a Tennessee
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission ("SEC") on September 11, 1998 (the "Registration Statement") with
respect to the offer and sale from time to time of up to 696,304 shares (the
"Secondary Shares") of the common stock, par value $0.01 per share, of the
Company (the "Common Stock") that may be issued to certain selling shareholders
named in the prospectus contained as a part of the Registration Statement (the
"Prospectus"). You have requested our opinion regarding certain U.S. federal
income tax matters.
The Company, through Equity Inns Partnership, L.P., a
Tennessee limited partnership (the "Operating Partnership"), EQI Financing
Partnership I, L.P. (the "First Subsidiary Partnership"), and Equity Inns/West
Virginia Partnership, L.P. (the "Second Subsidiary Partnership" and, together
with the Operating Partnership and the First Subsidiary Partnership, the
"Partnerships"), currently owns 105 hotels and associated personal property (the
"Current Hotels"). EQI Financing Corporation, a wholly-owned subsidiary of the
Company ("Financing"), owns a 1% general partnership interest, and the Operating
Partnership owns a 99% limited partnership interest, in the First Subsidiary
<PAGE> 2
Equity Inns, Inc.
September 11, 1998
Page 2
Partnership. Equity Inns Services, Inc., a wholly-owned subsidiary of the
Company ("Services"), owns a 1% general partnership interest, and the Operating
Partnership owns a 99% limited partnership interest, in the Second Subsidiary
Partnership.
Prior to November 15, 1996, the Partnerships leased the
Current Hotels to Trust Leasing, Inc. (formerly named McNeill Hotel Co., Inc.)
pursuant to substantially similar operating leases. As of the date hereof, the
Partnerships lease 83 of the Current Hotels to subsidiaries of Interstate Hotels
Company ("Interstate") pursuant to substantially similar operating leases (the
"Interstate Leases"), and lease 19 of the Current Hotels to a subsidiary of
Prime Hospitality Corporation ("Prime" and, together with Interstate, the
"Lessee") pursuant to substantially similar operating leases (together with the
Interstate Leases, the "Leases"). Interstate operates certain of the 83 Current
Hotels that it leases from the Partnerships, and Promus Hotels, Inc. operates
certain of those Current Hotels pursuant to substantially similar management
agreements with Interstate (the "Management Agreements"). Prime operates the 19
Current Hotels that it leases from the Partnerships. The remaining three Current
Hotels are operated pursuant to management agreements, two with Interstate, and
one with CapStar Hotel Co.
In connection with the opinions rendered below, we have
examined the following:
1. the Company's Charter, as amended;
2. the Company's Bylaws;
3. the Prospectus;
4. the Third Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated June 25, 1997, among Equity Inns Trust, a Maryland
real estate investment trust (the "Trust"), as general partner, and several
limited partners, as amended by Amendment no. 1 to such agreement (the
"Operating Partnership Agreement");
5. the Limited Partnership Agreement of the First Subsidiary Partnership, dated
December 24, 1996, between Financing and the Operating Partnership;
<PAGE> 3
Equity Inns, Inc.
September 11, 1998
Page 3
6. the Limited Partnership Agreement of the Second Subsidiary Partnership, dated
November 25, 1996, between Services and the Operating Partnership, as amended on
December 31, 1996;
7. the Leases;
8. the Management Agreements; and
9. such other documents as we have deemed necessary or appropriate for purposes
of this opinion.
In connection with the opinions rendered below, we have
assumed generally that:
1. each of the documents referred to above has been duly authorized, executed,
and delivered; is authentic, if an original, or is accurate, if a copy; and has
not been amended;
2. during its taxable year ending December 31, 1998 and subsequent taxable
years, the Company has operated and will continue to operate in such a manner
that makes and will continue to make the representations contained in a
certificate, dated September 11, 1998 and executed by a duly appointed officer
of the Company (the "Officer's Certificate"), true for such years;
3. the Company will not make any amendments to its organizational documents, the
Trust's organizational documents, Financing's organizational documents,
Services' organizational documents, the Operating Partnership Agreement, or the
partnership agreements of the First or Second Subsidiary Partnership (together
with the Operating Partnership Agreement, the "Partnership Agreements") after
the date of this opinion that would affect its qualification as a real estate
investment trust (a "REIT") for any taxable year;
4. each partner of the Partnerships (a "Partner") that is a corporation or other
entity has a valid legal existence;
5. each Partner has full power, authority, and legal right to enter into and to
perform the terms of the applicable Partnership Agreement and the transactions
contemplated thereby; and
<PAGE> 4
Equity Inns, Inc.
September 11, 1998
Page 4
6. no action will be taken by the Company, the Trust, Financing, Services, the
Partnerships, or the Partners after the date hereof that would have the effect
of altering the facts upon which the opinions set forth below are based.
In connection with the opinions rendered below, we also have
relied upon the correctness of the representations contained in the Officer's
Certificate.
After reasonable inquiry, we are not aware of any facts
inconsistent with the representations set forth in the Officer's Certificate.
Furthermore, where such factual representations involve terms defined in the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
thereunder (the "Regulations"), published rulings of the Internal Revenue
Service (the "Service"), or other relevant authority, we have explained such
terms to the Company's representatives and are satisfied that such
representatives understand such terms and are capable of making such factual
representations.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussions in
the Prospectus under the caption "Federal Income Tax Considerations" (which are
incorporated herein by reference), we are of the opinion that:
(a) the Company qualified to be taxed as a REIT pursuant to
sections 856 through 860 of the Code for its taxable years ended
December 31, 1994 through December 31, 1997, and the Company's
organization and current and proposed method of operation will enable
it to continue to qualify as a REIT for its taxable year ending
December 31, 1998, and in the future; and
(b) the descriptions of the law and the legal conclusions
contained in the Prospectus under the caption "Federal Income Tax
Considerations" are correct in all material respects, and the
discussions thereunder fairly summarize the federal income tax
considerations that are likely to be material to a holder of the
Secondary Shares.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Company's
<PAGE> 5
Equity Inns, Inc.
September 11, 1998
Page 5
operations for its 1998 and subsequent taxable years will satisfy the
requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the
Code and the Regulations, published administrative interpretations thereof, and
published court decisions. The Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification. No assurance can be given that the law will not
change in a way that will prevent the Company from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement. In giving this consent, we do not admit that we
are in the category of persons whose consent is required by Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder by the SEC.
The foregoing opinions are limited to the U.S. federal income
tax matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country or any state or locality. We undertake no obligation to update the
opinions expressed herein after the date of this letter. This opinion letter is
solely for the information and use of the addressee, and it may not be
distributed, relied upon for any purpose by any other person, quoted in whole or
in part or otherwise reproduced in any document, or filed with any governmental
agency without our express written consent.
Very truly yours,
/s/ Hunton & Williams
---------------------
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Accountants
We consent to the incorporation by reference in this registration
statement of Equity Inns, Inc. on Form S-3 of our report dated January 22, 1998
on our audits of the consolidated financial statements and financial statement
schedule of Equity Inns, Inc. as of December 31, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997 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."
PRICEWATERHOUSECOOPERS LLP
/s/ PRICEWATERHOUSE COOPERS LLP
Memphis, Tennessee
September 9, 1998
