<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-48169
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE
BY THE SECURITIES AND EXCHANGE COMMISSION. A FINAL PROSPECTUS SUPPLEMENT AND
ACCOMPANYING PROSPECTUS WILL BE DELIVERED TO PURCHASERS. THIS PRELIMINARY
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE
OF THESE SECURITIES IN ANY JURISDICTION
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
SUBJECT TO COMPLETION, DATED JUNE 15, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 21, 1998)
4,000,000 SHARES
EQUITY INNS, INC.
% SERIES A CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
------------------
The shares of % Series A Cumulative Preferred Stock, $.01 par value per
share (the "Series A Preferred Stock"), are being offered by Equity Inns, Inc.
(the "Company"), a Tennessee corporation that has elected to be taxed for
federal income tax purposes as a real estate investment trust (a "REIT").
Dividends on the Series A Preferred Stock are cumulative from the date of
original issue and are payable quarterly, commencing on October 31, 1998, at the
rate of % per annum of the $25 liquidation preference (equivalent to an
annual dividend rate of $ per share).
The Series A Preferred Stock is not redeemable prior to , 2003,
except in certain limited circumstances relating to the ownership limitation
necessary to preserve the Company's qualification as a REIT. On and after
, 2003, the Series A Preferred Stock may be redeemed 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 accumulated and unpaid dividends, if any, to the
redemption date. The Series A Preferred Stock has no stated maturity and will
not be subject to any sinking fund or mandatory redemption and will not be
convertible into or exchangeable for any other securities of the Company. The
Series A Preferred Stock will rank senior to the Common Stock (as defined
herein) with respect to the payment of dividends and the distribution of amounts
upon liquidation, dissolution or winding up of the Company. The Series A
Preferred Stock is subject to certain restrictions on ownership and transfer
designed to preserve the Company's status as a REIT for federal income tax
purposes. See "Description of Series A Preferred Stock."
The Company intends to apply to list the Series A Preferred Stock on the New
York Stock Exchange, Inc. (the "NYSE") under the symbol "ENNPrA." If approved
for listing, trading of the Series A Preferred Stock on the NYSE is expected to
commence within the 30-day period after the initial delivery of the Series A
Preferred Stock. While the Underwriters (as defined herein) have advised the
Company that they intend to make a market in the Series A Preferred Stock prior
to the commencement of trading on the NYSE, they are under no obligation to do
so and may discontinue market making at any time without notice. No assurance
can be given that a market for the Series A Preferred Stock will exist prior to
commencement of trading on the NYSE or at any other time. See "Underwriting."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-12 OF THIS PROSPECTUS SUPPLEMENT AND
PAGE 2 OF THE ACCOMPANYING PROSPECTUS FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SERIES A PREFERRED STOCK.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(4) $ $ $
==================================================================================================================
</TABLE>
(1) Plus accumulated dividends, if any, from the date of original issuance.
(2) For information regarding indemnification of the Underwriters, see
"Underwriting."
(3) Before deducting estimated expenses of $350,000 payable by the Company.
(4) The Company has granted the Underwriters a 30-day option to purchase up
to 600,000 additional shares of Series A Preferred Stock on the same
terms set forth above, to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $ , $ and $ , respectively. See
"Underwriting."
------------------
The shares of Series A Preferred Stock are offered by the several
Underwriters named herein, subject to prior sale, when, as and if issued to and
accepted by them and subject to certain conditions. It is expected that delivery
of the shares of Series A Preferred Stock offered hereby will be made on or
about , 1998, at the office of Smith Barney Inc., 333 West 34th
Street, New York, New York 10001, or through the facilities of The Depository
Trust Company.
------------------
SALOMON SMITH BARNEY
J.C. BRADFORD & CO.
CIBC OPPENHEIMER
MORGAN KEEGAN & COMPANY, INC.
PRUDENTIAL SECURITIES INCORPORATED
RONEY CAPITAL MARKETS
A DIVISION OF FIRST CHICAGO CAPITAL MARKETS, INC.
June , 1998
<PAGE> 2
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SERIES A
PREFERRED STOCK, INCLUDING OVER-ALLOTMENTS, ENTERING STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING" ELSEWHERE HEREIN AND "PLAN OF DISTRIBUTION"
IN THE ACCOMPANYING PROSPECTUS.
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere or incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus. As used herein, the term "Company" includes Equity Inns
Partnership, L.P. (the "Partnership") and the Company's and the Partnership's
direct and indirect subsidiaries. Unless otherwise indicated, all information in
this Prospectus Supplement assumes that the Underwriters' over-allotment option
is not exercised.
THE COMPANY
The Company is a self-advised and self-administered REIT that, through
subsidiaries, currently owns 95 hotels (the "Current Hotels") with an aggregate
of 11,571 rooms located in 32 states. The Current Hotels operate as Hampton
Inn(R) hotels (58), Residence Inn(R) hotels (12), AmeriSuites(R) hotels (10),
Homewood Suites(R) hotels (6), 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 nine AmeriSuites hotels with an
aggregate of 1,165 rooms in eight states (the "AmeriSuites Acquisition Hotels,"
and, together with the Current Hotels, the "Hotels"). The Company, through the
Partnership, leases 82 of the Current Hotels to subsidiaries (collectively, the
"Interstate Lessee") of Interstate Hotels Company ("Interstate"), and its ten
AmeriSuites brand Current Hotels to a subsidiary (the "Prime 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, two by Interstate and one by CapStar Hotel Co. On June 2,
1998, Interstate was acquired by Patriot American Hospitality, Inc., a REIT.
The Company's executive offices are located at 4735 Spottswood, Suite 102,
Memphis, Tennessee 38117, and its telephone number is (901) 761-9651.
RECENT DEVELOPMENTS
PENDING MERGER WITH RFS
On April 21, 1998, a newly formed, wholly-owned subsidiary of the Company
("Merger Sub"), the Company and the Partnership entered into an Asset Sale
Agreement and Plans of Mergers (the "Merger Agreement") with RFS Hotel
Investors, Inc. ("RFS") and its operating partnership, RFS Partnership, L.P.
("RFS Partnership"), pursuant to which RFS will be merged into Merger Sub and
RFS Partnership will be merged into the Partnership (collectively, the
"Merger"). RFS, a REIT, owns through its subsidiaries a diversified portfolio of
63 full service, extended stay and premium limited service hotels (the "RFS
Hotels") with an aggregate of 9,017 rooms located in 24 states. Pursuant to the
Merger Agreement, each outstanding share of RFS common stock and RFS preferred
stock will be exchanged for a number of shares of the Company's common stock,
$.01 par value (the "Common Stock") determined as follows (the "Exchange
Ratio"): (i) if the average price of the Common Stock during a 20-day
measurement period prior to the closing of the Merger (the "Average Price") is
less than $17.00, 1.5 shares of Common Stock or (ii) if the Average Price is
greater than $17.00, the number of shares of Common Stock determined by dividing
$25.50 by the Average Price. Furthermore, if the Average Price is less than
$14.00, then either the Company or RFS may terminate the Merger Agreement. The
Merger Agreement also contemplates that, among other things, simultaneously with
the effective time of the Merger, RFS Partnership, L.P. ("RFS OP") will sell to
the Partnership all of the real and personal property of RFS OP, which asset
sale will be consummated by means of a merger of RFS OP with and into the
Partnership. In addition, the Company will assume or incur approximately $350
million of debt (including a $95.5 million lease termination payment) in
connection with the Merger.
S-3
<PAGE> 4
Upon payment of certain lease termination amounts to the current lessees of
57 of the RFS Hotels, RFS expects to terminate the existing leases for such RFS
Hotels as a condition to closing of the Merger. The Company intends to enter
into new leases for such hotels, plus three additional RFS hotels currently
owned by a taxable subsidiary of RFS, effective upon closing of the Merger. It
is a condition to closing of the Merger that the Company has entered into
leases, with terms acceptable to the Company, with respect to such RFS Hotels.
The Company has received a non-binding proposal letter from a potential lessee
proposing general terms for the lease of such RFS Hotels (the "Lease Proposal").
The Lease Proposal is subject to the negotiation and execution of definitive
lease agreements, including Percentage Lease formulas for each hotel, consents
and approvals of franchisors and other third parties, receipts of all requisite
approvals by government agencies and regulatory authorities, and satisfaction of
due diligence matters. The Company currently has no definitive agreements with
respect to new leases for these hotels, and there can be no assurance that the
Company will enter into such agreements. See "Summary Financial Data" and "Risk
Factors -- Risks Associated with the Merger."
The Merger is subject to approval of the shareholders of the Company and
RFS, the execution of new leases for certain RFS Hotels, as described above, and
other customary closing conditions. On May 21, 1998, the Company filed a
Registration Statement on Form S-4 relating to the Merger. The Company expects
the Merger to be completed in the third quarter of 1998, although there can be
no assurance that the Merger will be consummated during such period or at all.
Upon completion of the Merger, current RFS directors Robert M. Solmson (RFS'
Chairman of the Board, President and Chief Executive Officer) and Bruce E.
Campbell, Jr. (a current RFS independent director) will be appointed directors
of the Company, and the Company's board of directors (the "Board of Directors")
will designate an executive committee consisting of Phillip H. McNeill, Sr., the
Company's Chairman, President and Chief Executive Officer, Mr. Solmson and
William W. Deupree, Jr., one of the Company's current independent directors. The
executive committee will be responsible for routine corporate decisions and will
have only such powers and authority as the Board of Directors may grant. The
current executive officers of the Company will remain as the Company's executive
officers following consummation of the Merger. See "Risk Factors -- Risks
Associated with the Merger."
RECENT ACQUISITIONS
Since March 31, 1998, the Company has acquired five Current Hotels and has
opened a recently developed Current Hotel for purchase prices and development
costs aggregating approximately $66.5 million. These recently acquired Current
Hotels are a 104-room Residence Inn in Boise, Idaho (acquired in April 1998); a
168-room Residence Inn in Portland, Oregon (acquired in April 1998); a 111-room
Homewood Suites in Cincinnati (Sharonville), Ohio (acquired in April 1998); a
169-room Hampton Inn in San Antonio, Texas (acquired in April 1998); a newly
developed 125-room Hampton Inn & Suites in Memphis (Bartlett), Tennessee (opened
in May 1998); and a 119-room Residence Inn in Atlantic City (Somers Point), New
Jersey (acquired in May 1998). The purchase prices and development costs for
these Current Hotels were funded with borrowings under the Unsecured Line of
Credit (as defined below) and available cash.
AMERISUITES ACQUISITION
The Company has entered into agreements to acquire the nine AmeriSuites
Acquisition Hotels from Prime for purchase prices aggregating approximately
$97.0 million. The Company expects to complete the acquisition of the
AmeriSuites Acquisition Hotels on or about June 30, 1998. The consummation of
the acquisition of the AmeriSuites Acquisition Hotels is subject to the
satisfaction of customary closing conditions and the negotiation of satisfactory
Percentage Lease terms. Upon their acquisition by the Company, the AmeriSuites
Acquisition Hotels will be leased to the Prime Lessee pursuant to Percentage
Leases. The Company intends to use the net proceeds from the sale of the Series
A Preferred Stock to pay substantially all of the purchase prices of the
AmeriSuites Acquisition Hotels. See "Use of Proceeds."
S-4
<PAGE> 5
Certain information regarding the AmeriSuites Acquisition Hotels is set
forth below:
<TABLE>
<CAPTION>
DATE NUMBER
LOCATION OPENED OF ROOMS
- -------- ------ --------
<S> <C> <C>
Miami, Florida(1)........................................... 3/96 67
Memphis (Wolfchase), Tennessee(1)........................... 12/96 128
Baltimore, Maryland(1)...................................... 10/96 128
Albuquerque, New Mexico..................................... 7/97 128
Baton Rouge, Louisiana...................................... 7/97 128
Birmingham, Alabama......................................... 9/97 128
Minneapolis, Minnesota...................................... 6/97 128
Nashville, Tennessee........................................ 9/97 128
Las Vegas, Nevada........................................... 1/98 202
-----
1,165
=====
</TABLE>
- ---------------
(1) For the three AmeriSuites Acquisition Hotels open for the entire year ended
December 31, 1997, room revenue, occupancy, average daily rate ("ADR") and
revenue per available room ("REVPAR") for 1997 were as follows: Miami,
Florida ($1,966,490, 88.2%, $91.20 and $80.41); Memphis (Wolfchase),
Tennessee ($2,217,420, 65.7%, $72.25 and $47.46); and Baltimore, Maryland
($2,646,830, 73.8%, $76.79 and $56.65). All other AmeriSuites Acquisition
Hotels were not open for the entire year in 1997.
OTHER POTENTIAL TRANSACTIONS
The Company routinely evaluates hotel acquisition, development and
disposition opportunities and is in various stages of evaluation and negotiation
with respect to a number of hotel transactions. In addition to the AmeriSuites
Acquisition Hotels and the RFS Hotels to be acquired through the Merger, the
Company has entered into agreements to buy three hotels currently under
development: a 161-room Homewood Suites hotel in Seattle, Washington, expected
to be completed in late summer 1998, a 250-room Homewood Suites hotel in
Orlando, Florida, expected to be completed in late spring 1999, and a 100-room
Hawthorn Suites hotel in Arlington, Massachusetts, expected to be completed in
autumn 1999.
The Company has entered into agreements to sell the Hampton Inn hotels
located in Cleveland, Tennessee and Shelby, North Carolina for an aggregate
sales price of approximately $5.8 million, the consummation of which is subject
to satisfactory completion of due diligence and other customary conditions. The
Company also is currently considering the sale of seven additional Current
Hotels and, following completion of the Merger, may consider the sale of one or
more of the RFS Hotels. The Company has no other commitment, letter of intent or
agreement with any potential buyer of any of these hotels and the Company is
unable to predict when or if any such sales will occur.
UNSECURED LINE OF CREDIT
The Company currently is negotiating to increase its current unsecured $250
million line of credit (the "Unsecured Line of Credit") to approximately $600
million and to extend the term for three additional years effective upon closing
of the Merger. There can be no assurance that the Unsecured Line of Credit will
be so increased or extended. The Company expects to use borrowings under the
increased line of credit to repay a portion of RFS' indebtedness assumed in the
Merger.
DEBT POLICY
At the annual meeting of shareholders of the Company held on May 14, 1998,
the Company's shareholders approved an amendment to the Company's charter (the
"Charter") deleting the Charter's limitation on the amount of indebtedness which
the Company may incur. In connection with the Charter amendment, the Board of
Directors adopted a policy, subject to change from time to time by the Board of
Directors without approval of shareholders, limiting the Company's consolidated
indebtedness to approximately 45% of the Company's investments in hotel
properties, at its cost.
S-5
<PAGE> 6
MANAGEMENT
On April 23, 1998, the Company announced that David L. Levine, the
Company's President and Chief Operating Officer, had resigned to become
president of a newly formed company providing vacation condominiums and home
rentals in destination resorts throughout the United States. On June 11, 1998,
the Board of Directors appointed Howard A. Silver, the Company's Executive Vice
President, Secretary and Treasurer, to serve as President and Chief Operating
Officer of the Company. Mr. Silver will continue to serve as the Company's Chief
Financial Officer and Treasurer for an interim period until a new Chief
Financial Officer and Treasurer is named. The Company has initiated a search and
expects to name a new Chief Financial Officer and Treasurer within the next
several months. See "Management." Following the consummation of the Merger, the
Company anticipates that approximately seven current RFS employees will join the
Company's staff in the areas of asset management, capital expenditures and
renovations, accounting and information systems.
S-6
<PAGE> 7
THE OFFERING
Securities Offered......... 4,000,000 shares of % Series A Cumulative
Preferred Stock (the "Offering").
Dividends.................. Dividends on the Series A Preferred Stock are
cumulative from the date of original issue and are
payable quarterly, when and as declared, commencing
on October 31, 1998, at the rate of % per
annum of the $25 liquidation preference (equivalent
to an annual dividend rate of $ per share).
Liquidation Preference..... $25 per share of Series A Preferred Stock, plus an
amount equal to accumulated, accrued and unpaid
dividends (whether or not earned or declared).
Redemption................. The Series A Preferred Stock is not redeemable
prior to , 2003, except in certain
limited circumstances relating to the ownership
limitation necessary to preserve the Company's
qualification as a REIT. On and after ,
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 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).
Ranking.................... The Series A Preferred Stock will rank senior to
the Common Stock with respect to the payment of
dividends and the distribution of amounts upon
liquidation, dissolution or winding up.
Voting Rights.............. Holders of Series A Preferred Stock generally will
have no voting rights. However, whenever dividends
on the shares of Series A Preferred Stock are in
arrears for six or more quarterly periods (whether
or not consecutive), the holders of such shares
(voting together as a single class with all other
shares of any class or series of stock ranking on a
parity with the Series A Preferred Stock which are
entitled to similar voting rights, if any) will be
entitled to vote for the election of two additional
directors of the Company until all dividends in
arrears on outstanding shares of Series A Preferred
Stock have been paid or declared and set apart for
payment. In addition, certain changes to the terms
of the Series A Preferred Stock that would be
materially adverse to the rights of holders of
Series A Preferred Stock cannot be made without the
affirmative vote of holders of at least 66 2/3% of
the outstanding shares of Series A Preferred Stock
and shares of any class or series of stock ranking
on a parity with the Series A Preferred Stock which
are entitled to similar voting rights, if any,
voting as a single class. Holders of Series A
Preferred Stock will have certain other voting
rights under Tennessee law. See "Description of
Series A Preferred Stock -- Voting Rights."
Ownership Limit............ Subject to certain exceptions, no person may own,
directly or indirectly, more than 9.9% of the
number of outstanding shares of Series A Preferred
Stock. See "Description of Series A Preferred
Stock -- Restrictions on Ownership."
S-7
<PAGE> 8
Listing.................... The Company intends to apply to list the Series A
Preferred Stock on the NYSE under the symbol
"ENNPrA." If approved for listing, trading of the
Series A Preferred Stock on the NYSE is expected to
commence within the 30-day period after the initial
delivery of the Series A Preferred Stock.
Use of Proceeds............ The Company intends to contribute the net proceeds
from the sale of the Series A Preferred Stock
(estimated to be $96.5 million ($111.0 million if
the Underwriters' over-allotment option is
exercised in full)) to the Partnership in exchange
for preferred partnership interests in the
Partnership having economic terms substantially
similar to the Series A Preferred Stock. The
Partnership intends to use the amounts received
from the Company to pay substantially all of the
purchase prices of the AmeriSuites Acquisition
Hotels. See "Use of Proceeds."
SUMMARY FINANCIAL DATA
The following table sets forth summary financial information on a
historical, historical, as adjusted and pro forma basis for the Company. The
following information should be read in conjunction with all of the financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998 and the Annual Report on Form
10-K for the year ended December 31, 1997, which are incorporated by reference
in the accompanying Prospectus. The historical, as adjusted and pro forma
financial data are not necessarily indicative of what the actual financial
position or results of operations of the Company would have been as of the date
or for the periods indicated, nor do they purport to represent the results of
operations or financial position for future periods.
The Equity Inns historical, as adjusted, financial and other data is
presented as if the following occurred on January 1, 1997: (i) the acquisition
of 41 hotels acquired by the Company in 1997 (the "1997 Hotel Acquisitions") and
the leasing of such hotels pursuant to Percentage Leases; (ii) the consummation
of the Company's May and November 1997 offerings of Common Stock (the "1997
Offerings") and the Company's February and March 1998 offerings of Common Stock
(the "1998 Offerings"), and the application of the net proceeds therefrom; (iii)
the consummation of the Offering; and (iv) the acquisition of the AmeriSuites
Acquisition Hotels and the leasing of such hotels pursuant to Percentage Leases.
The pro forma financial and other data is presented as if the
aforementioned transactions and the Merger had occurred on January 1, 1997 and
incorporates certain assumptions that are included in the notes to the unaudited
pro forma financial statements included elsewhere herein. See "Unaudited Pro
Forma Financial Information."
S-8
<PAGE> 9
EQUITY INNS, INC.
SUMMARY HISTORICAL, HISTORICAL, AS ADJUSTED AND PRO FORMA FINANCIAL AND OTHER
DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED HISTORICAL
MARCH 31, (UNAUDITED) -----------------
------------------------------------ YEAR ENDED
DECEMBER 31, 1997
EQUITY INNS -------------------------------------- YEAR ENDED
HISTORICAL, HISTORICAL EQUITY INNS DECEMBER 31,
PRO FORMA AS ADJUSTED ----------------- HISTORICAL, -----------------
1998 1998 1998 1997 PRO FORMA AS ADJUSTED HISTORICAL 1996 1995
----------- ------------ ------- ------- ----------- ----------- ---------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Percentage lease
revenues(1)....... $48,724 $23,819 $21,407 $11,778 $202,752 $105,213 $70,590 $38,314 $24,101
Gain on sale of
hotel
properties........ 523 -- -- -- 666 666 666 -- --
Other income........ 256 170 170 17 625 505 505 116 44
------- ------- ------- ------- -------- -------- ------- ------- -------
Total
revenue..... 49,503 23,989 21,577 11,795 204,043 106,384 71,761 38,430 24,145
Expenses:
Real estate and
personal property
taxes............. 5,635 2,709 2,433 1,310 21,004 10,026 6,688 3,693 2,158
Depreciation and
amortization...... 16,217 7,607 6,682 3,846 63,170 30,535 20,214 11,631 6,904
Advisory fees....... -- -- -- -- -- -- -- -- --
Interest............ 9,781 4,023 4,291 2,145 39,743 17,568 12,601 4,382 3,701
Amortization of loan
costs............. 339 213 213 189 1,540 1,040 1,013 1,565 793
General and
administrative.... 1,666 1,410 1,410 935 5,167 4,142 4,142 1,975 1,438
Amortization of
unearned
directors' and
officers'
compensation...... 23 23 23 23 92 92 92 33 31
Rental expense...... 255 219 207 61 1,041 861 566 218 107
Loss on sale of
hotel
properties........ -- -- -- -- 1,164 -- -- -- --
------- ------- ------- ------- -------- -------- ------- ------- -------
Total
expenses.... 33,916 16,204 15,259 8,509 132,921 64,264 45,316 23,497 15,132
Income before
extraordinary item
and minority
interest.......... 15,587 7,785 6,318 3,286 71,122 42,120 26,445 14,933 9,013
Extraordinary charge
from write-off of
deferred financing
fees.............. -- -- -- -- -- -- 1,984 -- --
------- ------- ------- ------- -------- -------- ------- ------- -------
Income before
minority
interest.......... 15,587 7,785 6,318 3,286 71,122 42,120 24,461 14,933 9,013
Minority interest... 935 263 314 119 4,363 1,588 918 460 502
------- ------- ------- ------- -------- -------- ------- ------- -------
Net income........... 14,652 7,522 6,004 3,167 66,759 40,532 23,543 14,473 8,511
Preferred stock
dividends........... 2,344 2,344 -- -- 9,375 9,375 -- -- --
------- ------- ------- ------- -------- -------- ------- ------- -------
Net income
applicable to
common
shareholders...... $12,308 $ 5,178 $ 6,004 $ 3,167 $ 57,384 $ 31,157 $23,543 $14,473 $ 8,511
======= ======= ======= ======= ======== ======== ======= ======= =======
Net income per
common share:(2)
Basic............... $ .16 $ .14 $ .17 $ .13 $ .77 $ .86 $ .82 $ .69 $ .70
======= ======= ======= ======= ======== ======== ======= ======= =======
Diluted............. $ .16 $ .14 $ .17 $ .13 $ .76 $ .86 $ .82 $ .69 $ .70
======= ======= ======= ======= ======== ======== ======= ======= =======
Weighted average
number of common
shares
outstanding:(3)
Basic............... 75,004 36,231 35,221 23,693 74,926 36,152 28,773 20,957 12,227
======= ======= ======= ======= ======== ======== ======= ======= =======
Diluted............. 80,847 38,170 37,160 24,595 80,769 38,056 29,963 21,657 12,920
======= ======= ======= ======= ======== ======== ======= ======= =======
<CAPTION>
HISTORICAL
-------------
MARCH 1, 1994
(INCEPTION)
THROUGH
DECEMBER 31,
1994
-------------
<S> <C>
Operating Data:
Percentage lease
revenues(1)....... $9,505
Gain on sale of
hotel
properties........ --
Other income........ 293
------
Total
revenue..... 9,798
Expenses:
Real estate and
personal property
taxes............. 983
Depreciation and
amortization...... 2,546
Advisory fees....... 164
Interest............ 390
Amortization of loan
costs............. 153
General and
administrative.... 407
Amortization of
unearned
directors' and
officers'
compensation...... 26
Rental expense...... 28
Loss on sale of
hotel
properties........ --
------
Total
expenses.... 4,697
Income before
extraordinary item
and minority
interest.......... 5,101
Extraordinary charge
from write-off of
deferred financing
fees.............. --
------
Income before
minority
interest.......... 5,101
Minority interest... 481
------
Net income........... 4,620
Preferred stock
dividends........... --
------
Net income
applicable to
common
shareholders...... $4,620
======
Net income per
common share:(2)
Basic............... $ .60
======
Diluted............. $ .60
======
Weighted average
number of common
shares
outstanding:(3)
Basic............... 7,745
======
Diluted............. 8,551
======
</TABLE>
(Continued on following page)
S-9
<PAGE> 10
SUMMARY HISTORICAL, HISTORICAL, AS ADJUSTED AND PRO FORMA FINANCIAL AND OTHER
DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, (UNAUDITED) DECEMBER 31, 1997
----------------------------------------------- --------------------------------------
EQUITY INNS
HISTORICAL, HISTORICAL EQUITY INNS
PRO FORMA AS ADJUSTED ------------------- HISTORICAL,
1998 1998 1998 1997 PRO FORMA AS ADJUSTED HISTORICAL
---------- ------------ -------- -------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:(4)
Investment in hotel
properties, net.......... $1,679,366 $716,603 $619,606 $355,059 $1,668,656 $714,069 $ 617,072
Total assets............... 1,761,493 744,581 647,584 377,162 1,728,350 732,522 635,525
Minority interest in
partnership.............. 77,035 19,084 19,084 8,866 77,400 19,318 19,035
Debt....................... 579,766 231,368 230,871 138,641 539,787 214,601 233,206
Shareholders' equity....... 1,074,424 471,647 375,147 220,028 1,078,138 475,491 360,172
Cash Flow Data:
Cash flows provided by
operating
activities(5)............ 32,166 15,628 9,090 6,440 135,924 73,787 50,402
Cash flows provided by
(used in) investing
activities(6)............ (9,483) (9,146) (9,146) (58,191) 8,415 25,124 (314,089)
Cash flows provided by
(used in) financing
activities(7)............ 3,596 3,890 6,189 51,745 (228,317) (122,663) 263,748
Other Data:
Funds from operations(8)... 28,799 12,977 12,930 7,071 124,826 62,324 45,748
Ratio of earnings to
combined fixed charges
and preferred
dividends(9)............. 2.06x 1.83x 2.40x 2.41x 2.22x 2.17x 2.94x
<CAPTION>
HISTORICAL
----------------------------------------
YEAR ENDED MARCH 1, 1994
DECEMBER 31, (INCEPTION)
-------------------- THROUGH
1996 1995 DECEMBER 31, 1994
--------- -------- -----------------
<S> <C> <C> <C>
Balance Sheet Data:(4)
Investment in hotel
properties, net.......... $ 309,202 $218,429 $140,970
Total assets............... 317,880 225,067 145,555
Minority interest in
partnership.............. 7,728 6,073 6,081
Debt....................... 77,399 74,939 45,838
Shareholders' equity....... 222,951 137,493 89,802
Cash Flow Data:
Cash flows provided by
operating
activities(5)............ 26,200 17,517 6,958
Cash flows provided by
(used in) investing
activities(6)............ (101,175) (84,731) (145,613)
Cash flows provided by
(used in) financing
activities(7)............ 74,971 66,261 139,740
Other Data:
Funds from operations(8)... 26,397 15,804 7,611
Ratio of earnings to
combined fixed charges
and preferred
dividends(9)............. 3.51x 3.01x 10.39x
</TABLE>
- ---------------
(1) The pro forma information assumes the Company owned and leased the Current
Hotels, excluding those hotels acquired or opened by the Company after March
31, 1998, the AmeriSuites Acquisition Hotels, and the RFS Hotels, excluding
those hotels acquired or opened by RFS after March 31, 1998, throughout the
periods presented. The historical, as adjusted information assumes the
Company owned and leased only the Current Hotels, excluding those hotels
acquired or opened by the Company after March 31, 1998, and the AmeriSuites
Acquisition Hotels throughout the periods presented. Amounts represent pro
forma lease revenue from the Company's lessees, calculated by applying the
rent provisions of the Percentage Leases to the historical revenue of the
1997 Hotel Acquisitions, the AmeriSuites Acquisition Hotels, and the RFS
Hotels, excluding those hotels acquired or opened by RFS after March 31,
1998, as applicable. The pro forma lease payments for the AmeriSuites
Acquisition Hotels and the RFS Hotels, excluding those hotels acquired or
opened by RFS after March 31, 1998, are based on the Company's estimates of
the Percentage Lease rent provisions for new hotel leases for both the
AmeriSuites Acquisition Hotels and the RFS Hotels, excluding those hotels
acquired or opened by RFS after March 31, 1998, expected to be entered into
upon completion of the purchase of the AmeriSuites Acquisition Hotels and
the Merger, respectively. See "Risk Factors -- Risks Associated With the
Merger" and "-- Risk That Pending Hotel Acquisitions Will Not Close." For
hotels that began operations in the periods presented, an estimate for Base
Rent payments has been assumed for the period prior to their opening. The
actual rent provisions in the Percentage Leases for the AmeriSuites
Acquisition Hotels and RFS Hotels may vary from the estimates used in
developing the pro forma lease payments. The Company currently does not have
definitive rent terms for the new leases for the AmeriSuites Acquisition
Hotels and the RFS Hotels.
(2) Net income per common share -- basic, is computed by dividing net income by
the weighted average number of common shares outstanding. Net income per
common share -- diluted, is computed by dividing net income applicable to
common shareholders plus minority interest by the weighted average number of
common shares and equivalents outstanding. Common share equivalents that
have a dilutive effect represent stock options issued to officers and key
employees and units of limited partnership interest in the Partnership
("Units").
(3) The pro forma weighted average number of common shares outstanding, basic
and diluted, includes the common shares outstanding after the consummation
of the Merger, the 1997 Offerings, the 1998 Offerings, and the RFS March
1998 common stock offering. The Equity Inns historical, as adjusted weighted
average number of common shares outstanding, basic and diluted, includes the
common shares outstanding after the consummation of the 1997 Offerings and
the 1998 Offerings. See "Unaudited Pro Forma Financial Information."
S-10
<PAGE> 11
(4) Information given as of the end of the periods indicated.
(5) Pro forma and Equity Inns historical, as adjusted cash provided by operating
activities represents net income plus minority interest, depreciation and
amortization, amortization of loan costs, and amortization of unearned
directors' compensation. There are no adjustments for changes in working
capital items.
(6) Pro forma and Equity Inns historical, as adjusted cash provided by (used in)
investing activities assumes the acquisition of the Current Hotels acquired
after January 1, 1997, excluding those hotels acquired or opened by the
Company after March 31, 1998, and the acquisition of the AmeriSuites
Acquisition Hotels and the RFS Hotels, as applicable, had occurred prior to
January 1, 1997, and includes funds used for capital improvements required
by franchisors and the greater of funds used for additional capital
expenditures or the amounts required by the Percentage Leases and the
Unsecured Line of Credit to be made available for capital improvements.
Amount also includes proceeds from the sales of hotel properties.
(7) Pro forma and Equity Inns historical, as adjusted cash provided by (used in)
financing activities is based on distributions per common share and per Unit
of $.31 for the first quarter of 1998 and $1.14 for the year ended December
31, 1997. Amount also includes pro forma dividends on the Series A Preferred
Stock. Additionally, pro forma and Equity Inns historical, as adjusted cash
provided by financing activities assumes the Merger, the 1997 Offerings, the
1998 Offerings, the RFS March 1998 common stock offering, the Offering, and
borrowings in connection with the acquisitions of the 1997 Hotel
Acquisitions and the AmeriSuites Acquisition Hotels, as applicable, had
occurred prior to January 1, 1997. See "Unaudited Pro Forma Financial
Information."
(8) The following table computes Funds From Operations ("FFO") under the
National Association of Real Estate Investment Trusts ("NAREIT") definition.
FFO under the NAREIT definition consists of net income, (computed in
accordance with generally accepted accounting principles), excluding gains
(or losses) from debt restructurings and sales of property, plus
depreciation, and after adjustments for unconsolidated partnerships and
joint ventures.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, (UNAUDITED) YEAR ENDED DECEMBER 31, 1997 HISTORICAL
------------------------------------------ -------------------------------------- -----------------
EQUITY INNS YEAR ENDED
HISTORICAL, HISTORICAL EQUITY INNS DECEMBER 31,
PRO FORMA AS ADJUSTED ---------------- HISTORICAL, -----------------
1998 1998 1998 1997 PRO FORMA AS ADJUSTED HISTORICAL 1996 1995
--------- ----------- ------- ------ ----------- ----------- ---------- ------- -------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before
extraordinary item
and minority
interest............ $15,587 $ 7,785 $ 6,318 $3,286 $ 71,122 $42,120 $26,445 $14,933 $ 9,013
Less:
Gain on sale of
hotel
properties........ (523) -- -- -- (666) (666) (666) -- --
Preferred Stock
Dividends......... (2,344) (2,344) -- -- (9,375) (9,375) -- -- --
Add:
Depreciation of
buildings,
furniture and
fixtures.......... 16,079 7,536 6,612 3,785 62,601 30,245 19,969 11,464 6,791
Loss on sale of
hotel
properties........ -- -- -- -- 1,164 -- -- -- --
------- ------- ------- ------ -------- ------- ------- ------- -------
Funds from
operations.......... $28,799 $12,977 $12,930 $7,071 $124,826 $62,324 $45,748 $26,397 $15,804
======= ======= ======= ====== ======== ======= ======= ======= =======
<CAPTION>
HISTORICAL
-----------------
MARCH 31, 1994
(INCEPTION)
THROUGH
DECEMBER 31, 1994
-----------------
<S> <C>
Income before
extraordinary item
and minority
interest............ $5,101
Less:
Gain on sale of
hotel
properties........ --
Preferred Stock
Dividends......... --
Add:
Depreciation of
buildings,
furniture and
fixtures.......... 2,510
Loss on sale of
hotel
properties........ --
------
Funds from
operations.......... $7,611
======
</TABLE>
Industry analysts generally consider FFO to be an appropriate measure of
the performance of an equity REIT. FFO should not be considered as an
alternative to net income or other measurements under generally accepted
accounting principles as an indicator of operating performance, or to cash
flows from operating, investing, or financing activities as a measure of
liquidity. FFO does not reflect working capital changes, cash expenditures
for capital improvements, or principal repayment of debt.
(9) For purposes of computing the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings consist of net income plus minority
interest, extraordinary charge from write-off of deferred financing fees,
and fixed charges, and fixed charges consist of interest and amortization of
loan costs.
S-11
<PAGE> 12
RISK FACTORS
An investment in the Series A Preferred Stock involves various risks,
including those described below and in the accompanying Prospectus under "Risk
Factors" beginning on page 2. Prospective investors should carefully consider
such risk factors, together with all of the information contained in or
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus, in determining whether to purchase shares of the Series A Preferred
Stock offered hereby.
Certain matters discussed in this Prospectus Supplement, the accompanying
Prospectus, and the information incorporated by reference herein and therein may
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as
such may involve known and unknown risks, uncertainties and other factors which
may cause the actual results, performance or achievements of the Company to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed under the caption
"Risk Factors" in this Prospectus Supplement and in the accompanying Prospectus
and in "Management's Discussion and Analysis of Results of Operation and
Financial Condition" included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 and Quarterly Reports on Form 10-Q and Form
10-Q/A for the quarter ended March 31, 1998, which are incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus.
RISKS ASSOCIATED WITH THE MERGER
Termination/Replacement of Certain Leases. Upon payment of a $95.5 million
lease termination fee to the current lessees of 57 of the RFS Hotels, RFS
expects to terminate the existing leases for such hotels as a condition to
closing of the Merger. It is a condition to closing of the Merger that the
Company enter into new leases, with terms acceptable to the Company, with
respect to such RFS Hotels. The Company intends to enter into new leases for
such RFS Hotels, plus three additional RFS Hotels currently owned by a taxable
subsidiary of RFS, with one or more new lessees effective as of the closing of
the Merger. The Company has received the non-binding Lease Proposal, which
proposes general terms for the lease of such RFS Hotels. There can be no
assurance that the Company will succeed in entering into such new leases and,
thus, there can be no assurance that the Merger will be consummated. The pro
forma financial information herein assumes the termination of the existing
leases with respect to these RFS Hotels and the effectiveness of new leases with
rent terms based on the general terms described in the Lease Proposal. The pro
forma percentage lease revenue to the Company, based on the assumed rent terms
for the new leases, is substantially greater than the historical lease revenue
to RFS from these RFS Hotels under RFS' existing leases. Although the Company
has received the Lease Proposal, the Lease Proposal is subject to the
negotiation and execution of definitive lease agreements, including Percentage
Lease formulas for each hotel, consents and approvals of franchisors and other
third parties, receipts of all requisite approvals by governmental agencies and
regulatory authorities, and satisfaction of due diligence matters. The Company
currently has no definitive agreement with any new lessee to lease any of these
RFS Hotels on the rent terms assumed in the pro forma financial information. As
a result, there can be no assurance that the Company will be able to enter into
new leases with rent terms as favorable to the Company as those assumed in the
pro forma financial information herein. In the event the Company is unable to
reach agreement with new lessees for these RFS Hotels and enter into new leases
with rent terms substantially similar to those assumed in the preparation of the
pro forma financial information herein, the actual financial results of the
Company following the Merger could vary materially and adversely from the pro
forma financial information contained herein.
Possible Adverse Effect of Failure to Consummate the Merger. The
consummation of the Merger is subject to, among other things, approval of the
shareholders of the Company and RFS. No assurance can be given that the Merger
will be consummated. If the Merger is not consummated, the Company will not
acquire the RFS Hotels and will be required to write off, for financial
accounting purposes, all costs (including legal and accounting fees and payments
to financial advisors) incurred to date in connection with the transaction. Any
such write-off could have a material adverse effect on the Company's net income.
S-12
<PAGE> 13
Substantial Termination Payments if the Merger Fails to Occur. The Merger
Agreement provides for the payment by the Company of either (i) a termination
fee of $20 million if the Company terminates the Merger Agreement and
subsequently enters into an agreement and consummates a merger or similar
transaction with a third party within certain time periods, or (ii)
reimbursement of expenses of up to $5 million if the Merger Agreement is
terminated by either company under other circumstances. The obligation to make
either of such termination payments may adversely affect the ability of the
Company to engage in another similar transaction in the event that the Merger is
not consummated and may have an adverse impact on the financial condition of the
Company.
DILUTION TO PRO FORMA EARNINGS CAUSED BY THE MERGER
The Merger will have a dilutive effect on the Company's net income per
common share, basic and dilutive, on a pro forma combined basis for the year
ended December 31, 1997 when compared to the Company on a historical, as
adjusted basis without giving effect to the Merger. On a pro forma combined
basis, assuming consummation of the Merger and the other pro forma adjustments
described at "Unaudited Pro Forma Financial Information," the Company's
historical, as adjusted net income per common share, both basic and dilutive,
would be $.86 for the year ended December 31, 1997 without giving effect to the
Merger as compared to $.77 and $.76, basic and dilutive, respectively, on a pro
forma basis giving effect to the Merger.
RISKS ASSOCIATED WITH DEBT
The Company recently amended its Charter to delete the Charter limitation
on the amount of indebtedness which the Company may incur. In connection with
such amendment, the Company's Board of Directors has implemented a policy
limiting the Company's consolidated indebtedness to an amount not in excess of
approximately 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 the $250 million Unsecured Line of
Credit with The First National Bank of Chicago ("First Chicago"). The Company
currently is negotiating to increase the Unsecured Line of Credit to
approximately $600 million and to extend the term for an additional three years
effective upon closing of the Merger. At May 31, 1998, the Company had total
debt of approximately $288.5 million, consisting of approximately $190.0 million
of outstanding debt under the Unsecured Line of Credit, an outstanding letter of
credit in the amount of $2.3 million, $85.4 million of mortgage bond borrowing,
and $10.8 million of debt assumed in conjunction with the purchase of two hotels
in 1998. At such date, the Company had approximately $57.7 million available for
borrowings under the Unsecured Line of Credit and $5.0 million available for
borrowings under its $5 million revolving credit facility (the "NBC Credit
Line") with National Bank of Commerce. At March 31, 1998 on a (i) historical, as
adjusted and (ii) pro forma combined basis, assuming completion of the Merger,
the consummation of the Offering, and the acquisition of the AmeriSuites
Acquisition Hotels, as applicable, the Company would have had outstanding
indebtedness of approximately $231.4 million and $579.8 million, respectively,
representing approximately 32.3% and 34.5% of the Company's historical, as
adjusted, and pro forma investment in hotels, at cost, respectively.
Approximately $190.0 million of the Company's current indebtedness at May 31,
1998, approximately $190.5 million of historical, as adjusted indebtedness at
March 31, 1998 and approximately $409.7 million of pro forma indebtedness at
March 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 assets, including the Hotels, to foreclosure. Adverse
economic conditions could result in higher interest rates which could increase
debt service requirements on floating rate debt and could reduce the amounts
available for distribution to shareholders. The Company may obtain one or more
forms of interest rate protection (swap agreements,
S-13
<PAGE> 14
interest rate caps contracts, etc.) to hedge against the possible adverse
effects of interest rate fluctuations. However, there can be no assurances that
such hedging would be effective in mitigating the adverse effects of interest
rate fluctuations. Adverse economic conditions could cause the terms on which
borrowings become available to be unfavorable. In such circumstances, if the
Company is in need of capital to repay indebtedness in accordance with its terms
or otherwise, it could be required to liquidate one or more investments in hotel
properties at times which may not permit realization of the maximum return on
such investments.
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 RELATED TO ISSUANCE OF ADDITIONAL PREFERRED STOCK
The Charter does not limit the issuance of additional series of preferred
stock ranking in parity with or superior to the Series A Preferred Stock. The
issuance of additional preferred stock in parity with or superior to the Series
A Preferred Stock could have the effect of diluting the interests of holders of
the Series A Preferred Stock. None of the provisions relating to the Series A
Preferred Stock contains any provisions affording the holders of the Series A
Preferred Stock protection in the event of a highly leveraged or other
transaction that might adversely affect the holders of the Series A Preferred
Stock.
RISK THAT PENDING HOTEL ACQUISITIONS WILL NOT CLOSE
The Company has entered into agreements to acquire the nine AmeriSuites
Acquisition Hotels. While the Company has substantially completed its due
diligence with respect to such AmeriSuites Acquisition Hotels, the closings of
the purchases of AmeriSuites Acquisition Hotels are not scheduled to occur until
after the Offering. The purchase contracts relating to the AmeriSuites
Acquisition Hotels are subject to customary closing conditions and the
negotiation and execution of Percentage Leases with respect thereto. There can
be no assurance that the acquisitions of the AmeriSuites Acquisition Hotels will
be completed.
SERIES A PREFERRED STOCK PRICE FLUCTUATIONS AND TRADING VOLUME
A number of factors may adversely influence the price of the Series A
Preferred 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 Series A Preferred 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 Series A Preferred Stock. Although the
Company intends to list the Series A Preferred Stock on the NYSE, the daily
trading volume of REITs in general and the Series A Preferred Stock in
particular may be lower than the trading volume of certain other industries. As
a result, investors in the Company who desire to liquidate substantial holdings
at a single point in time may find that they are unable to dispose of such
shares in the market without causing a substantial decline in the market value
of such shares.
S-14
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series A Preferred
Stock offered hereby (after deducting underwriting discounts and commissions and
estimated offering expenses) are estimated to be approximately $96.5 million
($111.0 million if the Underwriters' over-allotment option is exercised in
full). The Company will contribute all of the net proceeds from the Offering to
the Partnership, in which it presently has a 94.9% interest, in exchange for
4,000,000 % Series A Cumulative Preferred limited partnership interests
(the "Series A Preferred Units") having distribution, liquidation, redemption
and other features substantially identical to the terms of the Series A
Preferred Stock. The Partnership intends to use the net proceeds to pay
substantially all of the purchase prices for the AmeriSuites Acquisition Hotels.
Pending the use of proceeds as described above, the net proceeds will be
invested in interest-bearing, short-term, investment grade securities or money
market accounts.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 on a historical, historical as adjusted, and pro forma basis. The
Company's historical, as adjusted capitalization data gives effect to (a) the
consummation of the Offering and (b) the acquisition of the AmeriSuites
Acquisition Hotels. The Company's pro forma capitalization data gives effect to
the aforementioned transactions as well as the consummation of the Merger, and
therefore incorporates certain assumptions that are included in the notes to the
unaudited pro forma financial statements included elsewhere herein. See
"Unaudited Pro Forma Financial Information."
<TABLE>
<CAPTION>
MARCH 31, 1998 (UNAUDITED)
-------------------------------------
HISTORICAL,
HISTORICAL AS ADJUSTED PRO FORMA
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long term debt.............................................. $230,871 $231,368 $ 579,766
Minority interest in Partnership............................ 19,084 19,084 77,035
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding, 4,000,000
shares % Series A Cumulative Preferred Stock,
issued and outstanding, as adjusted and pro forma(1)... 0 100,000 100,000
Common stock, $.01 par value per share, 100,000,000 shares
authorized, 36,231,000 shares issued and outstanding,
historical, and historical, as adjusted, and 75,004,000
shares issued and outstanding, pro forma(2)............ 362 362 750
Additional paid-in capital................................ 407,099 403,599 1,005,988
Unearned directors' compensation.......................... (250) (250) (250)
Predecessor basis assumed................................. (1,264) (1,264) (1,264)
Distributions in excess of earnings....................... (30,800) (30,800) (30,800)
-------- -------- ----------
Total shareholders' equity........................ 375,147 471,647 1,074,424
-------- -------- ----------
Total capitalization.............................. $625,102 $722,099 $1,731,225
======== ======== ==========
</TABLE>
- ---------------
(1) Assumes an offering price of $25 per share for the Series A Preferred Stock.
(2) Excludes an aggregate of 1,842,520 shares issuable upon redemption of Units
and an aggregate of 3,851,414 Units issuable in the Merger, as applicable.
Each Unit is redeemable, at the option of the holder, for cash or, at the
Company's sole option, one share of Common Stock. Also excludes an aggregate
of 510,000 shares issuable upon the exercise of outstanding options granted
to executive officers and directors under the Company's 1994 Stock Incentive
Plan and the Company's Non-Employee Directors' Stock Option Plan, which vest
over multi-year periods and an aggregate of 300,000 shares issuable to an
officer of RFS upon the exercise of outstanding options granted to such
officer which will be exchanged for options for the Common Stock in
connection with the Merger.
S-15
<PAGE> 16
BUSINESS AND PROPERTIES
GENERAL
The Company is a self-advised and self-administered REIT that, through
subsidiaries, currently owns the Current Hotels with an aggregate of 11,571
rooms located in 32 states. The Current Hotels operate as Hampton Inn hotels
(58), Residence Inn hotels (12), AmeriSuites hotels (10), Homewood Suites hotels
(6), 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 nine AmeriSuites Acquisition Hotels.
Of the 11,571 rooms in the Current Hotels, approximately 65.0% are premium
limited service, approximately 18.0% are upscale extended stay, approximately
10.7% are all-suite, and approximately 6.3% are full service. Of the Company's
21,753 rooms after the consummation of the Merger and the purchase of the
AmeriSuites Acquisition Hotels, approximately 53.4% will be premium limited
service, approximately 19.6% will be upscale extended stay, approximately 16.0%
will be full service and approximately 11.0% will be all-suites. There can be no
assurance that the Merger or the acquisition of the AmeriSuites Acquisition
Hotels will be consummated. Premium limited service hotels generally do not
contain restaurants or lounges and generally contain little
non-revenue-producing space. Extended stay/all-suite hotels generally contain
guest suites with a kitchen and living area separate from the bedroom but vary
with respect to providing on-site restaurant facilities. Full service hotels
generally provide on-site food and beverage services and may have banquet and
meeting facilities.
The Partnership leases 82 of the Current Hotels to the Interstate Lessee
and its ten AmeriSuites brand Current Hotels to the Prime Lessee pursuant to
Percentage Leases that provide for annual rent equal to the greater of (i) Base
Rent or (ii) Percentage Rent. The remaining three Current Hotels are operated
pursuant to management agreements, two by Interstate and one by CapStar Hotel
Co. On June 2, 1998, Interstate was acquired by Patriot American Hospitality,
Inc., a REIT.
Following the Merger and the acquisition of the AmeriSuites Acquisition
Hotels, the Company will own a diversified portfolio of 167 hotels with an
aggregate of 21,753 rooms located in 36 states representing 13 franchise brands,
as set forth in the following table.
<TABLE>
<CAPTION>
COMBINED HOTEL PORTFOLIO COMPOSITION
--------------------------------------------------
EQUITY INNS
HOTELS(1) RFS HOTELS COMBINED HOTELS
--------------- -------------- ---------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Full Service:
Holiday Inn................................ 4 557 6 1,208 10 1,765
Comfort Inn................................ 1 177 -- -- 1 177
Doubletree................................. -- -- 1 220 1 220
Sheraton Four Points....................... -- -- 3 585 3 585
Sheraton................................... -- -- 2 434 2 434
Independent................................ -- -- 2 290 2 290
Subtotal........................... 5 734 14 2,737 19 3,471
--- ------ -- ----- --- ------
Upscale Extended Stay:
Residence Inn.............................. 12 1,430 14 1,815 26 3,245
Homewood Suites............................ 6 647 1 83 7 730
Hawthorn Suites............................ -- -- 1 280 1 280
Subtotal........................... 18 2,077 16 2,178 34 4,255
--- ------ -- ----- --- ------
All Suites:
AmeriSuites................................ 19 2,403 -- -- 19 2,403
(Continued on following page)
</TABLE>
S-16
<PAGE> 17
<TABLE>
<CAPTION>
COMBINED HOTEL PORTFOLIO COMPOSITION
--------------------------------------------------
EQUITY INNS
HOTELS(1) RFS HOTELS COMBINED HOTELS
--------------- -------------- ---------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Premium Limited Service:
Hampton Inn................................ 58 7,114 20 2,476 78 9,590
Holiday Inn Express........................ 1 101 6 737 7 838
Comfort Inn................................ 2 182 6 787 8 969
Courtyard by Marriott...................... -- -- 1 102 1 102
Hampton Inn & Suites....................... 1 125 -- -- 1 125
Subtotal.............................. 62 7,522 33 4,102 95 11,624
--- ------ -- ----- --- ------
Total.............................. 104 12,736 63 9,017 167 21,753
=== ====== == ===== === ======
</TABLE>
- ---------------
(1) Includes the AmeriSuites Acquisition Hotels.
THE HOTELS
The following table sets forth certain unaudited information with respect
to the Current Hotels, the AmeriSuites Acquisition Hotels and the RFS Hotels
(dollar amounts except for ADR and REVPAR are in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
REVENUE
DATE NUMBER ROOM AVERAGE PER AVAILABLE
CURRENT HOTELS OPENED OF ROOMS REVENUE OCCUPANCY DAILY RATE ROOM(1)
- -------------- ------ -------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
HAMPTON INN:
Albany, New York............... 1986 154 $ 3,205 71.5% $ 79.76 $ 57.02
Ann Arbor, Michigan............ 1986 150 2,718 72.1 68.87 49.65
Atlanta (Northlake), Georgia... 1988 130 1,993 68.0 61.78 42.00
Austin, Texas.................. 1987 121 2,143 75.9 63.80 48.42
Baltimore (Glen Burnie),
Maryland..................... 1989 115 2,211 73.9 70.78 52.29
Beckley, West Virginia......... 1992 108 2,127 83.1 64.91 53.96
Birmingham (Mountain Brook),
Alabama...................... 1987 131 2,381 74.7 66.63 49.79
Birmingham (Vestavia),
Alabama...................... 1986 123 2,105 73.8 63.52 46.88
Chapel Hill, North Carolina.... 1986 122 2,483 82.7 67.41 55.75
Charleston, South Carolina..... 1985 125 1,993 71.6 61.02 43.68
Chattanooga, Tennessee......... 1988 168 2,490 65.4 62.07 40.61
Chicago (Gurnee), Illinois..... 1988 134 2,421 71.1 69.58 49.50
Chicago (Naperville),
Illinois..................... 1987 130 2,382 75.5 66.49 50.19
Cleveland, Ohio................ 1987 123 2,257 75.0 67.05 50.27
Cleveland, Tennessee........... 1993 60 959 78.1 56.07 43.78
College Station, Texas......... 1986 135 2,130 74.6 57.94 43.22
Colorado Springs, Colorado..... 1985 128 2,402 82.2 62.55 51.42
Columbia, South Carolina....... 1985 121 1,821 68.1 60.54 41.23
Columbus, Georgia.............. 1986 119 1,934 78.2 56.96 44.52
Columbus (Dublin), Ohio........ 1988 123 2,053 68.6 66.69 45.73
Dallas (Addison), Texas........ 1985 160 2,908 73.8 67.48 49.80
Dallas (Arlington), Texas...... 1985 141 2,014 61.1 64.09 39.14
Dallas (Garland), Texas........ 1987 125 1,545 60.5 56.02 33.86
Dallas (Richardson), Texas..... 1987 130 1,966 67.4 61.52 41.44
Denver (Aurora), Colorado...... 1985 132 2,094 72.1 60.24 43.45
Destin, Florida................ 1994 104 1,765 65.6 80.63 52.86
Detroit (Northfield),
Michigan..................... 1989 125 2,457 80.7 66.70 53.86
Detroit (Madison Heights),
Michigan..................... 1987 124 2,129 72.7 64.74 47.04
Fayetteville, North Carolina... 1986 122 1,573 66.8 52.89 35.33
Ft. Worth, Texas............... 1987 125 1,732 64.8 58.58 37.97
</TABLE>
(Continued on following page)
S-17
<PAGE> 18
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
REVENUE
DATE NUMBER ROOM AVERAGE PER AVAILABLE
CURRENT HOTELS OPENED OF ROOMS REVENUE OCCUPANCY DAILY RATE ROOM(1)
- -------------- ------ -------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gastonia, North Carolina....... 1989 109 $ 1,689 68.7% $ 61.82 $ 42.46
Indianapolis, Indiana.......... 1987 129 2,457 73.6 70.86 52.18
Jacksonville, Florida.......... 1986 122 1,788 72.3 55.51 40.16
Kansas City (Overland Park),
Kansas....................... 1991 134 2,417 74.1 66.83 49.51
Kansas City, Missouri.......... 1987 120 2,243 72.3 70.88 51.22
Knoxville, Tennessee........... 1991 118 1,755 73.4 55.55 40.75
Little Rock (North),
Arkansas..................... 1985 123 1,709 68.8 55.32 38.07
Little Rock (South),
Arkansas..................... 1985 122 1,271 53.8 53.02 28.54
Louisville, Kentucky........... 1986 119 1,841 68.9 61.54 42.38
Memphis (Poplar), Tennessee.... 1985 126 2,672 81.9 70.94 58.09
Memphis (Sycamore View),
Tennessee.................... 1984 117 1,845 76.6 56.42 43.22
Meriden, Connecticut........... 1988 125 1,914 65.1 64.46 41.94
Milford, Connecticut........... 1986 148 2,922 80.2 67.47 54.09
Morgantown, West Virginia...... 1991 108 1,922 75.7 64.40 48.77
Nashville (Brentwood),
Tennessee.................... 1985 114 2,269 76.5 71.24 54.52
Nashville (Briley Parkway),
Tennessee.................... 1987 120 2,495 81.4 70.00 56.96
Norfolk, Virginia.............. 1990 119 1,930 62.9 70.43 44.32
Pickwick, Tennessee............ 1994 50 748 64.4 63.58 40.97
San Antonio, Texas............. 1995 169 3,562 71.8 80.40 57.75
Sarasota, Florida.............. 1987 97 1,451 62.5 65.59 40.98
Savannah, Georgia.............. 1986 129 1,744 66.6 55.64 37.05
Scottsdale, Arizona............ 1996 126 2,140 54.3 85.69 46.53
Scranton, Pennsylvania......... 1994 129 2,507 77.0 69.16 53.25
Shelby, North Carolina......... 1989 78 992 68.5 50.86 34.84
Southhaven (Memphis),
Mississippi.................. 1995 86 1,471 78.8 59.44 46.86
St. Louis (Westport),
Missouri..................... 1987 122 1,938 65.8 66.13 43.52
State College, Pennsylvania.... 1987 120 2,279 74.3 69.96 52.00
Traverse City, Michigan........ 1987 127 1,960 57.7 73.35 42.29
HAMPTON INN & SUITES:
Memphis (Bartlett),
Tennessee(2)................. 1998 125 -- -- -- --
COMFORT INN:
Enterprise, Alabama............ 1987 78 981 70.7 48.74 34.45
Jacksonville Beach, Florida.... 1973 177 3,389 65.2 80.42 52.46
Rutland, Vermont............... 1985 104 1,710 77.0 58.52 45.06
RESIDENCE INN:
Atlantic City (Somers Point),
New Jersey................... 1988 119 3,362 77.9 99.43 77.41
Boise, Idaho................... 1986 104 2,452 81.8 78.97 64.60
Burlington, Vermont............ 1988 96 2,643 84.6 89.14 75.44
Colorado Springs, Colorado..... 1984 96 2,563 81.0 90.35 73.15
Madison, Wisconsin............. 1988 80 1,607 73.9 74.47 55.04
Minneapolis (Eagan),
Minnesota.................... 1988 120 3,214 84.2 87.11 73.38
Oklahoma City, Oklahoma........ 1982 135 3,270 82.8 80.16 66.37
Omaha, Nebraska................ 1981 80 1,906 79.8 81.78 65.27
Portland, Oregon............... 1990 168 5,519 86.6 103.91 90.00
Princeton, New Jersey.......... 1988 208 5,992 81.5 96.89 78.92
Tinton Falls, New Jersey....... 1988 96 2,831 85.6 94.43 80.80
Tucson, Arizona................ 1985 128 3,015 75.7 85.26 64.53
</TABLE>
(Continued on following page)
S-18
<PAGE> 19
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
REVENUE
DATE NUMBER ROOM AVERAGE PER AVAILABLE
CURRENT HOTELS OPENED OF ROOMS REVENUE OCCUPANCY DAILY RATE ROOM(1)
- -------------- ------ -------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
HOLIDAY INN:
Bluefield, West Virginia....... 1980 120 $ 2,060 67.4% $ 69.79 $ 47.03
Charleston (Mt. Pleasant),
South Carolina............... 1988 158 3,177 75.0 73.41 55.09
Oak Hill, West Virginia........ 1983 119 1,251 44.6 64.58 28.81
Winston-Salem, North
Carolina..................... 1969 160 2,146 63.8 57.62 36.75
HOLIDAY INN EXPRESS:
Wilkesboro, North Carolina..... 1985 101 1,405 62.0 61.52 38.13
HOMEWOOD SUITES:
Augusta, Georgia(3)............ 1997 65 739 49.1 86.13 42.29
Hartford, Connecticut.......... 1990 132 3,433 80.3 88.77 71.26
Memphis (Germantown),
Tennessee.................... 1996 92 2,002 68.2 87.35 59.61
Phoenix, Arizona............... 1996 124 3,296 70.9 102.68 72.81
San Antonio, Texas............. 1996 123 2,453 70.8 77.17 54.64
Sharonville (Cincinnati),
Ohio......................... 1990 111 2,227 72.3 76.06 54.97
AMERISUITES:
Cincinnati (Blue Ash), Ohio.... 1990 127 2,215 66.7 71.67 47.78
Cincinnati (Forest Park),
Ohio......................... 1992 126 2,106 65.5 69.88 45.79
Columbus, Ohio................. 1994 126 2,628 74.4 76.80 57.15
Flagstaff, Arizona............. 1993 117 1,838 65.4 65.35 42.76
Indianapolis, Indiana.......... 1992 126 2,244 65.2 74.84 48.80
Jacksonville, Florida.......... 1996 112 1,965 71.5 67.20 48.06
Kansas City (Overland Park),
Kansas....................... 1994 126 2,729 78.3 75.78 59.34
Miami (Airport), Florida....... 1996 126 2,969 83.2 77.59 64.57
Richmond, Virginia............. 1992 126 3,070 80.0 83.46 66.75
Tampa, Florida................. 1994 126 2,915 78.7 80.57 63.38
------ -------- ----- ------- -------
Subtotals/weighted
average for Current
Hotels(4).......... 11,571 $213,648 72.4% $ 70.89 $ 51.30
------ -------- ----- ------- -------
AMERISUITES ACQUISITION HOTELS
- --------------------------
Albuquerque, New Mexico(3)..... 1997 128 $ 811 55.0% $ 72.04 $ 39.59
Baltimore, Maryland............ 1996 128 2,647 73.8 76.79 56.65
Baton Rouge, Louisiana(3)...... 1997 128 901 57.2 73.25 41.89
Birmingham, Alabama(3)......... 1997 128 329 38.0 71.89 27.34
Las Vegas, Nevada(2)........... 1998 202 -- -- -- --
Memphis (Wolfchase),
Tennessee.................... 1996 128 2,217 65.7 72.25 47.46
Miami (Kendall), Florida....... 1996 67 1,966 88.2 91.20 80.41
Minneapolis, Minnesota(3)...... 1997 128 1,231 59.1 82.54 48.82
Nashville, Tennessee(3)........ 1997 128 622 41.7 74.70 31.17
------ -------- ----- ------- -------
Subtotals/weighted
average for
AmeriSuites
Acquisition
Hotels(4).......... 1,165 $ 10,725 73.6% $ 78.77 $ 57.94
------ -------- ----- ------- -------
RFS HOTELS
- ----------
HAMPTON INN:
Dallas (Plano), Texas.......... 1996 131 $ 2,070 70.4% $ 61.46 $ 43.29
Denver (Airport), Colorado..... 1985 138 2,163 77.3 55.53 42.95
</TABLE>
(Continued on following page)
S-19
<PAGE> 20
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
REVENUE
DATE NUMBER ROOM AVERAGE PER AVAILABLE
RFS HOTELS OPENED OF ROOMS REVENUE OCCUPANCY DAILY RATE ROOM(1)
- ---------- ------ -------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Denver (Lakewood), Colorado.... 1987 150 $ 2,779 76.6% $ 66.25 $ 50.76
Detroit (Warren), Michigan..... 1988 124 1,734 63.3 60.50 38.31
Ft. Lauderdale, Florida........ 1986 122 2,151 71.0 68.01 48.30
Hattiesburg, Mississippi....... 1988 154 2,231 73.1 54.32 39.69
Houston, Texas (Hobby)......... 1996 119 1,578 67.0 54.28 36.34
Indianapolis (Airport),
Indiana...................... 1988 131 2,383 77.7 64.15 49.83
Jacksonville, Florida(2)....... 1998 118 -- -- -- --
Lansing, Michigan.............. 1985 109 1,503 66.4 56.89 37.78
Laredo, Texas.................. 1995 119 2,043 80.7 58.24 46.98
Lincoln, Nebraska.............. 1983 111 1,973 82.0 59.41 48.70
Memphis (Walnut Grove),
Tennessee.................... 1992 120 2,374 83.2 65.15 54.21
Minneapolis (Airport),
Minnesota.................... 1985 135 2,846 80.7 71.61 57.75
Minneapolis (Minnetonka),
Minnesota.................... 1990 127 2,017 66.3 65.64 43.51
Oklahoma City, Oklahoma........ 1986 134 2,409 77.8 63.33 49.25
Omaha, Nebraska................ 1985 129 2,155 75.5 60.59 45.77
Phoenix (Chandler), Arizona
(3).......................... 1997 101 941 57.3 69.49 39.81
Sedona, Arizona (3)............ 1997 56 494 49.4 90.37 44.60
Tulsa, Oklahoma................ 1986 148 2,049 65.4 58.01 37.94
RESIDENCE INN:
Ann Arbor, Michigan............ 1985 114 2,378 83.5 91.69 76.53
Atlanta (Perimeter West),
Georgia...................... 1987 128 3,170 74.4 91.18 67.86
Charlotte, North Carolina...... 1984 80 2,224 84.0 90.72 76.17
Fishkill, New York............. 1988 136 4,267 83.4 103.03 85.97
Fort Worth, Texas.............. 1983 120 3,490 86.9 91.75 79.69
Jacksonville, Florida(3)....... 1997 120 402 51.5 85.73 44.13
Kansas City, Missouri.......... 1987 96 2,477 74.5 94.95 70.70
Orlando, Florida............... 1984 176 5,079 85.9 91.99 79.06
Providence, Rhode Island....... 1989 96 3,117 91.5 97.23 88.96
Sacramento, California......... 1987 176 4,691 79.1 92.30 73.02
Torrance, California........... 1984 247 7,561 89.7 93.52 83.86
Tyler, Texas................... 1985 128 2,710 89.9 64.51 58.00
West Palm Beach, Florida(2).... 1998 78 -- -- -- --
Wilmington, Delaware........... 1989 120 3,605 92.0 89.46 82.30
HOLIDAY INN:
Chicago (Crystal Lake),
Illinois..................... 1988 196 4,761 76.9 86.50 66.55
Columbia, South Carolina....... 1969 175 2,413 69.0 54.76 37.77
Flint, Michigan................ 1990 171 4,201 77.7 86.64 67.30
Lafayette, Louisiana........... 1983 242 4,131 78.1 59.87 46.77
Louisville, Kentucky........... 1970 169 2,249 71.9 50.71 36.45
St. Louis (Clayton),
Missouri..................... 1965 255 5,069 69.7 78.13 54.46
COMFORT INN:
Atlanta (Conyers), Georgia..... 1989 83 1,087 62.5 57.44 35.88
Atlanta (Marietta), Georgia.... 1989 185 2,125 63.8 49.32 31.46
Clemson, South Carolina........ 1989 122 1,556 66.9 52.28 34.95
</TABLE>
(Continued on following page)
S-20
<PAGE> 21
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
REVENUE
DATE NUMBER ROOM AVERAGE PER AVAILABLE
RFS HOTELS OPENED OF ROOMS REVENUE OCCUPANCY DAILY RATE ROOM(1)
- ---------- ------ -------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Detroit (Farmington Hills),
Michigan..................... 1987 135 $ 2,188 67.5% $ 65.80 $ 44.41
Fort Mill, South Carolina...... 1987 153 2,362 72.3 58.49 42.30
(Charlotte, North Carolina)
Grand Rapids, Michigan......... 1982 109 1,547 70.9 54.85 38.87
HOLIDAY INN EXPRESS:
Austin, Texas.................. 1992 125 2,088 71.3 64.14 45.76
Chicago (Arlington Heights),
Illinois..................... 1989 125 2,609 77.2 74.11 57.19
Chicago (Downers Grove),
Illinois..................... 1984 123 2,390 70.3 75.72 53.24
Milwaukee (Wauwatosa),
Wisconsin.................... 1984 122 1,981 77.4 57.50 44.48
Minneapolis, Minnesota......... 1987 142 2,861 82.4 67.02 55.21
Nashville (Franklin),
Tennessee.................... 1969 100 1,413 73.5 52.65 38.71
SHERATON AND SHERATON FOUR
POINTS:
Bakersfield, California........ 1983 197 3,412 68.0 69.79 47.45
Birmingham, Alabama............ 1984 205 4,471 69.1 87.87 60.75
Pleasanton, California......... 1985 214 5,367 73.5 93.46 68.72
Milpitas, California........... 1988 229 8,371 74.6 134.26 100.15
Sunnyvale, California.......... 1980 174 6,192 83.4 116.93 97.50
HAWTHORN SUITES:
Atlanta, Georgia............... 1984 280 5,667 68.4 81.03 55.45
HOMEWOOD SUITES:
Chandler, Arizona(2)........... 1998 83 -- -- -- --
DOUBLETREE:
Del Mar, California............ 1990 220 5,828 81.7 88.94 72.69
BEVERLY HERITAGE:
Milpitas, California........... 1988 196 7,125 74.9 132.95 99.59
HOTEL REX:
San Francisco, California...... 1912 94 3,203 74.9 124.63 93.36
COURTYARD BY MARRIOTT:
Flint, Michigan................ 1996 102 1,864 65.0 77.01 50.07
------ -------- ----- ------- -------
Subtotals/weighted
averages for RFS
Hotels(4).......... 9,017 $179,760 75.4% $ 77.52 $ 58.43
------ -------- ----- ------- -------
Consolidated
totals/weighted
average for all
Hotels(4).......... 21,753 $399,500 73.6% $ 73.86 $ 54.39
====== ======== ===== ======= =======
</TABLE>
- ---------------
(1) Determined by dividing annual room revenue by available rooms.
(2) Hotel was not open in 1997.
(3) Represents operations since the opening of the following hotels: the
Homewood Suites in Augusta, Georgia (April 1997); the AmeriSuites
Acquisition Hotels in Albuquerque, New Mexico (July 1997), Baton Rouge,
Louisiana (July 1997), Birmingham, Alabama (September 1997), Minneapolis,
Minnesota (June 1997) and Nashville, Tennessee (July 1997); the Hampton Inns
in Phoenix, (Chandler), Arizona (May 1997) and Sedona, Arizona (June 1997);
and the Residence Inn in Jacksonville, Florida (October 1997).
(4) Weighted averages for occupancy, ADR and REVPAR reflect only hotels operated
for the full year.
S-21
<PAGE> 22
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and a brief description of the business
experience of each person who is a director, future director or executive
officer of the Company.
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Current Directors and Executive Officers:
Phillip H. McNeill, Sr....................... Chairman of the Board, Chief Executive
Officer and Director
James A. Thomas, III......................... Independent Director
William W. Deupree, Jr....................... Independent Director
Joseph W. McLeary............................ Independent Director
Howard A. Silver............................. President, Chief Operating Officer, Treasurer
and Chief Financial Officer
Phillip H. McNeill, Jr....................... Executive Vice President of Development
J. Ronald Cooper............................. Vice President, Secretary, Assistant
Treasurer and Controller
Connie O. Parker............................. Assistant Secretary
Richard Mitchell............................. Vice President -- Asset Management
Bradley W. Barber............................ Vice President
Gregory Blair................................ Assistant Vice President -- Development
Future Directors:(1)
Robert M. Solmson............................ Independent Director
Bruce E. Campbell............................ Independent Director
</TABLE>
- ---------------
(1) Appointments contingent upon consummation of the Merger.
Phillip H. McNeill, Sr. (age 59) has been Chairman of the Board and Chief
Executive Officer of the Company since 1994 and has been Chairman of McNeill
Hospitality Corporation since 1984. From 1963 to 1977, he served in various
capacities, including President and Chief Executive Officer, with Schumacher
Mortgage Company, Inc., a mortgage banking firm and subsidiary of Time, Inc. Mr.
McNeill has served as President and Director of the Memphis Mortgage Bankers
Association and the Tennessee State Mortgage Bankers Association. He has served
as a member of the Board of Trustees of the University of Memphis Foundation and
as a Director of First Commercial Bank of Memphis. He is currently serving as a
member of the Board of Directors of National Commerce Bancorporation. Mr.
McNeill holds both a B.S. and a J.D. degree from the University of Memphis and
is a graduate of the Northwestern School of Mortgage Banking.
James A. Thomas, III (age 57) has been Chairman of the Board of NewSouth
Capital Management, Inc., a registered investment advisory firm in Memphis,
Tennessee, which manages approximately $1.6 billion in investment assets, since
January 1985. He is a director of First Commercial Bank of Memphis and a member
of the Board of Trustees of Rhodes College. Mr. Thomas has been a director of
the Company since February 1994. He serves on the Audit and Compensation
Committees of the Board of Directors.
William W. Deupree, Jr. (age 56) has been a Managing Director of Morgan
Keegan & Company, Inc. and its parent company Morgan Keegan, Inc., a NYSE listed
company, since 1985. Mr. Deupree joined Morgan Keegan in 1972 and served as its
President from 1985 to 1996. He is also a director of NSA International, Inc., a
provider of water filtration devices. He is a member of the Regional Firms
Advisory Committee of the NYSE, as well as a member of the Board of Directors
for the Securities Industry Association. Mr. Deupree has been a director of the
Company since February 1994. He serves on the Audit and Compensation Committees
of the Board of Directors.
S-22
<PAGE> 23
Joseph W. McLeary (age 58) has been Chairman of Executive Financial
Services, Inc., a private consulting and benefits administration firm, since
1997. From 1987 to 1997, he was Chairman and Chief Executive Officer of Midland
Financial Group, Inc., a publicly-owned automobile insurance company. From 1984
to 1987, he was president of McLeary & Co., a company organized to manage a
privately-held investment fund engaged in the acquisition of small businesses in
the Memphis, Tennessee area. From 1969 to 1983, he was President and Chief
Financial Officer and a Director of Cook International, Inc., a publicly owned
agricultural commodities firm. Prior to 1969, he was employed by the Federal
Reserve Bank of Atlanta. He has been a director of SCB Computer Technology,
Inc., a computer consulting corporation whose shares are traded on The Nasdaq
Stock Market, since January 1996. Mr. McLeary has been a director of the Company
since February 1994. He serves on the Audit and Compensation Committees of the
Board of Directors.
Howard A. Silver (age 43) was appointed President and Chief Operating
Officer of the Company on June 11, 1998 and will continue to serve as the
Company's Chief Financial Officer and Treasurer for an interim period until a
new Chief Financial Officer and Treasurer is named. Since joining the Company in
1994 until June 11, 1998, he served in various capacities, most recently
Executive Vice President of Finance, Secretary, Treasurer and Chief Financial
Officer of the Company. Since October 1997, he has been a certified public
accountant since 1980. From 1992 until 1994, Mr. Silver served as Chief
Financial Officer of Alabaster Originals, L.P., a fashion jewelry wholesaler
located in Memphis, Tennessee. From 1978 to 1985, Mr. Silver was a certified
public accountant with Coopers & Lybrand, L.L.P., and from 1987 to 1992 Mr.
Silver was employed as a certified public accountant with Ernst & Young. Mr.
Silver holds a B.S. in Accounting from the University of Memphis.
Phillip H. McNeill, Jr. (age 36) has been Executive Vice President of
Development of the Company since 1996. From 1994 to 1996, he served as President
of Trust Leasing, Inc., formerly McNeill Hotel Co., Inc., the former lessee of
the Company's hotels (the "Former Lessee"), and from 1994 to 1996 served as Vice
President of Trust Management, Inc., formerly McNeill Hospitality Corporation,
both of which are affiliates of a former lessee of the Company's hotels. Mr.
McNeill is the son of Phillip H. McNeill, Sr. and holds a B.B.A. from the
University of Memphis. He is a graduate of the Northwestern School of Mortgage
Banking.
J. Ronald Cooper (age 49) was appointed Secretary of the Company on June
11, 1998, and has been Vice President, Assistant Treasurer and Controller of the
Company since 1996 and from 1996 until June 11, 1998, Mr. Cooper served as the
Company's Assistant Secretary. From 1994 to 1996, he was Controller and Director
of Financial Reporting for the Former Lessee and joined the Former Lessee in
October 1994. Mr. Cooper has been a certified public accountant since 1972. From
1978 until joining the Former Lessee, Mr. Cooper was employed as Secretary,
Treasurer and Controller of Wall Street Deli, Inc., a publicly-owned
delicatessen company. Prior to that, Mr. Cooper was a certified public
accountant with the national accounting firm of Coopers & Lybrand, L.L.P. from
1970 to 1976. Mr. Cooper holds a B.S. in Accounting from Murray State
University.
Richard F. Mitchell (age 53) has been Vice President -- Asset Management of
the Company since 1996. From 1995 to 1996, he was Vice President of Operations
for the Former Lessee and joined the Former Lessee in 1994 as an Area Manager.
Prior to joining the Former Lessee, Mr. Mitchell held various positions with
North American Hospitality, Inc., including Director of Training and
Development. Mr. Mitchell has held management positions in a number of hotels
including Sheraton, Hampton Inn, Residence Inn and Best Western. He holds a B.S.
degree in Business Administration from the University of Kansas.
Bradley W. Barber (age 34) has been a Vice President of the Company since
October 1997. From January 1991 to October 1997, Mr. Barber was employed by
Morgan Keegan & Company, Inc. where he served from January 1991 to February 1992
as an analyst, from February 1992 to July 1993 as an associate and from July
1993 to May 1995 as Associate Vice President in the Corporate Finance division
and from November 1995 to October 1997 as Vice President and Assistant to the
Director of the Equity Research division. From 1988 to January 1991, Mr. Barber
was a research consultant with the University of Memphis. Mr. Barber holds a
B.B.A. from Freed-Hardeman University and a M.B.A. from the University of
Memphis.
S-23
<PAGE> 24
Gregory Blair (age 35) has been Assistant Vice President -- Development of
the Company since December 1997. From 1995 to December 1997, Mr. Blair served as
Assistant Vice President -- Development for the Former Lessee, and from 1985 to
1995 he served as Chief Engineer for the Hampton Inns hotel in Jackson,
Tennessee.
Upon consummation of the Merger, two current directors of RFS, Robert M.
Solmson (RFS' Chairman of the Board, President and Chief Executive Officer) and
Bruce E. Campbell, Jr. (an RFS independent director), are expected to be
appointed to the Company's Board of Directors, and the Company's Board of
Directors expects to designate a three-person executive committee consisting of
Messrs. McNeill, Solmson and Deupree. The executive committee will be
responsible for routine corporate decisions and will have only such powers and
authority as the Board of Directors may grant. See "Prospectus Supplement
Summary -- Pending Merger with RFS."
Bruce E. Campbell, Jr. (age 66) has been Chairman of the Executive
Committee of the Board of Directors of National Commerce Bancorporation, a
national bank holding company, since 1993. Prior to 1993, Mr. Campbell was
Chairman and Chief Executive Officer of National Commerce Bancorporation, since
1977. During such period, Mr. Campbell was also Chairman and Chief Executive
Officer of National Bank of Commerce, Memphis, Tennessee, a wholly-owned
national banking subsidiary of National Commerce Bancorporation. He has been a
director of RFS since 1993. Following the Merger, Mr. Campbell is expected to be
appointed as a director of the Company.
Robert M. Solmson (age 50) is Chairman, President and Chief Executive
Officer of RFS. Mr. Solmson has been Chairman and Chief Executive Officer since
RFS' formation in 1993 and President from 1993 to February 1996 and since
February 1998. Following the Merger, Mr. Solmson is expected to be appointed as
a director of the Company.
S-24
<PAGE> 25
DESCRIPTION OF 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, each of
which is available from the Company and has been filed with the Securities and
Exchange Commission. This description of the particular terms of the Series A
Preferred Stock supplements, and to the extent inconsistent therewith, replaces,
the description of the general terms and provisions of the Preferred Stock set
forth in the accompanying Prospectus.
GENERAL
The Company is authorized to issue up to 10,000,000 shares of preferred
stock ("Preferred Stock") from time to time, in one or more series or classes,
with such designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption, in each case, if any, as are permitted by
Tennessee law and as the Board of Directors may determine prior to issuance
thereof by adoption of an amendment of the Charter without any further vote or
action by the Company's shareholders. See "Description of Preferred Stock" in
the accompanying Prospectus. As of the date of this Prospectus Supplement, there
are no classes or series of outstanding shares of Preferred Stock.
On June 9, 1998, a form of Designating Amendment was adopted by the
Company's Board of Directors, determining the terms of a series of Preferred
Stock consisting of 4,600,000 shares, designated % Series A Cumulative
Preferred Stock. The Designating Amendment will become effective when accepted
for filing by the Secretary of State of the State of Tennessee.
The Company intends to contribute or otherwise transfer the net proceeds of
the sale of the Series A Preferred Stock to the Partnership in exchange for
% Series A Preferred Units in the Partnership, the economic terms of which
will be substantially identical to the Series A Preferred Stock. The Partnership
will be required to make all required distributions on the Series A Preferred
Units (which will 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 Units 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 will, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company, rank (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.
S-25
<PAGE> 26
DIVIDENDS
Holders of Series A Preferred Stock shall be 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 % per annum of the $25
liquidation preference (equivalent to $ 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 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 Internal Revenue Code of 1986, as amended (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
S-26
<PAGE> 27
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 other shares of any class or series of Parity 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 , 2003 (except in certain limited circumstances relating to
the Company's maintenance of its ability to qualify as a REIT as described in
"-- Restrictions on Ownership.") On and after , 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
S-27
<PAGE> 28
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 right 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
"-- Restrictions on Ownership").
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 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
S-28
<PAGE> 29
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 (1) 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
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.
S-29
<PAGE> 30
TRANSFER AND DIVIDEND PAYING AGENT
SunTrust Bank, Atlanta, will act as the transfer and dividend payment agent
and registrar in respect of the Series A Preferred Stock.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, certain restrictions
apply to the ownership of shares of its capital stock. See the accompanying
Prospectus under "Federal Income Tax Considerations -- Requirements for
Qualification." 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 acquisition of shares of the Company's capital stock, including
shares of Series A Preferred 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 (i) the
number of outstanding shares of Common Stock or (ii) the number of outstanding
shares of any series of Preferred Stock (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 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 trust (the "Share Trust") effective on the day before the
purported transfer of such shares of Common Stock or Preferred Stock. The record
holder of the shares of Common Stock or Preferred Stock that are designated as
Shares-in-Trust (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 of the
Share Trust (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.
S-30
<PAGE> 31
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.
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 both the 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 Common Stock and 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.
S-31
<PAGE> 32
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 Internal Revenue Service (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 -- Ownership Limitation" and "Limitation or
Acquisition and Change in Control" in the accompanying Prospectus.
All certificates representing shares of Series A Preferred Stock will bear
a legend referring to the restrictions described above.
The Ownership Limitation will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Any change in the Ownership Limitation would require an amendment to
the Charter. In addition to preserving the Company's status as a REIT, the
Ownership Limitation may have the effect of precluding an acquisition of control
of the Company without the approval of the Board of Directors.
The Designating Amendment provides that each holder of Series A Preferred
Stock shall upon demand be required to disclose to the Company in writing such
information as the Company may request in good faith in order to determine the
Company's status as a REIT.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This discussion supplements the discussion set forth in the accompanying
Prospectus under the heading "Federal Income Tax Considerations." This
discussion generally does not address the taxation of the Company or the impact
on the Company of its election to be taxed as a REIT. Such matters are discussed
in the accompanying Prospectus under "Federal Income Tax Considerations."
Prospective investors should consult, and must depend on, their own tax advisors
regarding the state, local, foreign and other tax consequences of holding and
disposing of Series A Preferred Stock.
TAXATION OF THE COMPANY
In the opinion of Hunton & Williams, the Company qualified to be taxed as a
REIT pursuant to sections 856 through 860 of the Code for its taxable years
ended December 31, 1994 through December 31, 1997, and the Company's
organization and proposed method of operation will enable it to qualify to be
taxed as a REIT for its taxable year ending December 31, 1998, and future
taxable years. Investors should be aware, however, that opinions of counsel are
not binding upon the Service or any court. It must be emphasized that Hunton &
Williams' opinion is based on various assumptions and is conditioned upon
certain representations made by the Company as to factual matters, including
representations regarding the nature of the Company's properties and the future
conduct of its business. Such factual assumptions and representations are set
out in the federal income tax opinion that will be delivered by Hunton &
Williams at the closing of the Offering. Moreover, such qualification and
taxation as a REIT depend upon the Company's ability to meet on a continuing
basis, through actual annual operating results, distribution levels and stock
ownership, the various qualification tests imposed under the Code. Hunton &
Williams will not review the Company's compliance with those tests on a
continuing basis. Accordingly, no assurance can be given that the actual results
of the Company's operations for any particular taxable year will satisfy such
requirements. For a discussion of the tax consequences of
S-32
<PAGE> 33
failure to qualify as a REIT, see "Federal Income Tax Considerations -- Failure
to Qualify" in the accompanying Prospectus.
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. For purposes of determining whether a distribution is made out of
the Company's current or accumulated earnings and profits, the Company's
earnings and profits will be allocated first to its Preferred Stock (including
the Series A Preferred Stock), and then to its Common Stock. As used herein, the
term "U.S. Shareholder" means a holder of Series A Preferred Stock that for U.S.
federal income tax purposes is (i) a citizen or resident of the United States,
(ii) a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof,
(iii) an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United States,
or (iv) any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or more
U.S. 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 its Series A Preferred 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 its 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 Series A Preferred 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 Series A Preferred Stock, such distributions will be included
in income as long-term capital gain (or short-term capital gain if the Series A
Preferred Stock has been held for one year or less), assuming the Series A
Preferred Stock is 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.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Series A Preferred 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 Series A Preferred 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.
S-33
<PAGE> 34
TAXATION OF U.S. SHAREHOLDERS ON THE DISPOSITION OF THE SERIES A PREFERRED STOCK
In general, any gain or loss realized upon a taxable disposition of the
Series A Preferred Stock by a U.S. Shareholder who is not a dealer in securities
will be treated as long-term capital gain or loss if the Series A Preferred
Stock has been held for more than one year and otherwise as short-term capital
gain or loss. However, any loss upon a sale or exchange of shares of Series A
Preferred Stock by a U.S. 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 Series A Preferred Stock may
be disallowed if other shares of Series A Preferred 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 28% for sales and exchange of assets held for more than one year but not more
than 18 months, and 20% for sales and exchanges of assets held for more than 18
months. The maximum tax rate on long-term capital gain from the sale or exchange
of "section 1250 property" (i.e., depreciable real property) held for more than
18 months 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 shareholders at a 20%, 25%, or 28% 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 amount of $3,000. Unused capital losses may be carried forward.
All net capital gain of a corporate taxpayer is subject to tax at ordinary
corporate rates. A corporate taxpayer can deduct capital losses only to the
extent of capital gains, with unused losses being carried back three years and
forward five years.
REDEMPTION OF SERIES A PREFERRED STOCK
A redemption of Series A Preferred Stock will be treated under Section 302
of the Code as a distribution that is taxable at ordinary income tax rates as a
dividend (to the extent of the Company's current or accumulated earnings and
profits), unless the redemption satisfies certain tests set forth in Section
302(b) of the Code enabling the redemption to be treated as sale of the Series A
Preferred Stock (in which case the redemption will be treated in the same manner
as a sale described in the preceding paragraph). The redemption will satisfy
such tests if it (i) is "substantially disproportionate" with respect to the
holder's stock interest in the Company, (ii) results in a "complete termination"
of the holder's interest in all classes of stock of the Company, or (iii) is
"not essentially equivalent to a dividend" with respect to the holder, all
within the meaning of Section 302(b) of the Code. In determining whether any of
these tests have been met, shares considered to be owned by the holder by reason
of certain constructive ownership rules set forth in the Code, as well as shares
actually owned, generally must be taken into account. Because the determination
as to whether any of the three alternative tests of Section 302(b) of the Code
described above will be satisfied with respect to any particular holder of
Series A Preferred Stock depends upon the facts and circumstances at the time
that the determination must be made, prospective investors are advised to
consult their own tax advisors to determine such tax treatment.
If a redemption of Series A Preferred Stock does not meet any of the three
tests described above, the redemption proceeds will be treated as a
distribution, as described above under "Taxation of Taxable U.S. Shareholders."
In that case, a shareholder's adjusted tax basis in the redeemed Series A
Preferred Stock will be transferred to any of such shareholder's remaining stock
holdings in the Company. If the shareholder does not retain any stock ownership
in the Company, such basis could be transferred to a related person or it may be
lost.
S-34
<PAGE> 35
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 and on the intention of the Company to invest its assets in
a manner that will avoid the recognition of UBTI by the Company, amounts
distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition of
Series A Preferred 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 shares only if (i) the UBTI Percentage is at
least 5%, (ii) the Company qualifies as a REIT by reason of the modification of
the 5/50 Rule that allows the beneficiaries of the pension trust to be treated
as holding shares of the Company in proportion to their actuarial interests in
the pension trust, and (iii) either (A) one pension trust owns more than 25% of
the value of the Company's shares or (B) a group of pension trusts individually
holding more than 10% of the value of the Company's stock collectively own 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 SERIES A PREFERRED STOCK, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends 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. For
purposes of determining whether a distribution is made out of the Company's
current or accumulated earnings and profits, the Company's earnings and profits
will be allocated first to its Preferred Stock (including the Series A Preferred
Stock), and then to its Common Stock. 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 Series A Preferred 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
S-35
<PAGE> 36
complies with the withholding requirements. Based on IRS Notice 98-16, those
regulations will apply to 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 Series A
Preferred 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 Series A Preferred
Stock, such distributions will give rise to tax liability if the Non-U.S.
Shareholder would otherwise be subject to tax on any gain from the sale or
disposition of its Series A Preferred 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 to a Non-U.S.
Shareholder 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 its Series A
Preferred Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. Because the Company's Common
Stock is and the Series A Preferred Stock will be publicly traded, no assurance
can be given that the Company is or 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 Series A Preferred Stock is
effectively connected with the Non-U.S. Shareholder's U.S. trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
U.S. shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of the Series A Preferred
Stock is 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.
S-36
<PAGE> 37
UNDERWRITING
Upon the terms and subject to the conditions stated in the underwriting
agreement, dated the date hereof (the "Underwriting Agreement"), each of the
Underwriters named below (each, an "Underwriter" and together, the
"Underwriters") has severally agreed to purchase, and the Company has agreed to
sell to each Underwriter, the number of shares of Series A Preferred Stock set
forth opposite the name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Smith Barney Inc. ..........................................
J.C. Bradford & Co. ........................................
CIBC Oppenheimer............................................
Morgan Keegan & Company, Inc. ..............................
Prudential Securities Incorporated..........................
Roney Capital Markets.......................................
---------
Total............................................. 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Series A Preferred
Stock are subject to approval of certain legal matters by counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Series A Preferred Stock offered hereby (other than those covered by
the over-allotment option described below) if any such shares are taken.
The Underwriters initially propose to offer part of the shares of Series A
Preferred Stock directly to the public at the public offering price set forth on
the cover page of this Prospectus Supplement and part to certain dealers at a
price which represents a concession not in excess of $ per share under the
public offering price. Each Underwriter may allow, and such dealers may
re-allow, a concession not in excess of $ per share to the other
Underwriters or to certain other dealers. After the initial offering, the public
offering price and such concessions may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for
thirty days from the date of this Prospectus Supplement, to purchase up to an
aggregate of 600,000 additional shares of Series A Preferred Stock from the
Company at the price to the public set forth on the cover page of this
Prospectus Supplement minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, incurred in connection with the offering of the shares
of Series A Preferred Stock offered hereby. To the extent that such option is
exercised, each Underwriter will be obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as the
number of shares set forth opposite such Underwriter's name in the preceding
table bears to the total number of shares listed in such table.
In connection with this Offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more shares of Series A Preferred Stock
than the total amount shown on the list of Underwriters and participations which
appears above) and may effect transactions which stabilize, maintain or
otherwise affect the market price of the shares of Series A Preferred Stock at
levels above those which might otherwise prevail in the open market. Such
transactions may include placing bids for the shares of Series A Preferred Stock
or effecting purchases of the shares of Series A Preferred Stock for the purpose
of pegging, fixing or maintaining the price of the shares of Series A Preferred
Stock or for the purpose of reducing a syndicate short position created in
connection with the Offering. A syndicate short position may be covered by
exercise of the option described above in lieu of or in addition to open market
purchases. The Underwriters are not required to engage in any of these
activities and any such activities, if commenced, may be discontinued at any
time.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
S-37
<PAGE> 38
The Company intends to apply to list the shares of Series A Preferred Stock
on the NYSE under the symbol "ENNPrA." Prior to this Offering, there has been no
public market for the shares of Series A Preferred Stock. If so approved,
trading of the shares of Series A Preferred Stock on the NYSE is expected to
commence within 30 days after the initial delivery of the shares of Series A
Preferred Stock. The Underwriters have advised the Company that they intend to
make a market in the shares of Series A Preferred Stock prior to the
commencement of trading on the NYSE, but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
that a market for the shares of Series A Preferred Stock will exist prior to
commencement of trading or at any other time.
Smith Barney Inc. and its affiliates have acted as financial advisor and
lender to the Company and may in the future from time to time in the ordinary
course of business act as financial advisor or lender to the Company.
William W. Deupree, Jr., who is a director of Morgan Keegan & Company, Inc.
("Morgan Keegan") and of Morgan Keegan, Inc. (the parent company of Morgan
Keegan), is a director of the Company. Morgan Keegan has acted as financial
advisor to the Company in connection with the Merger and has rendered to the
Company's Board of Directors its opinion to the effect that, as of the date of
such opinion, based on Morgan Keegan's review and subject to the considerations
and limitations set forth in such opinion, the Exchange Ratio is fair, from a
financial point of view, to the Company. The Company has agreed to pay Morgan
Keegan a transaction fee to reimburse Morgan Keegan for its reasonable
out-of-pocket expenses and to indemnify Morgan Keegan and certain related
persons against certain liabilities arising out of or in conjunction with its
rendering of services under its engagement in connection with the Merger. In
addition, Morgan Keegan was a managing underwriter of the Company's initial
public offering and certain follow-on public equity offerings and received
investment banking fees and other compensation in connection with those public
offerings. Morgan Keegan has also received fees in connection with providing
financial advisory services to the Company.
Roney Capital Markets is a division of First Chicago Capital Markets, Inc.,
an indirect, wholly-owned subsidiary of First Chicago NBD Corporation, which
owns First Chicago, the administrative agent for the Unsecured Line of Credit.
LEGAL MATTERS
The validity of the shares of Series A Preferred Stock offered hereby will
be passed upon for the Company by Hunton & Williams. The validity of the shares
of Series A Preferred Stock offered hereby will be passed upon for the
Underwriters by King & Spalding, Atlanta, Georgia. In rendering such opinion,
King & Spalding will rely upon the opinion of Hunton & Williams as to certain
matters of Tennessee law. The descriptions of federal income tax consequences
contained in the Prospectus Supplement under the caption "Certain Federal Income
Tax Considerations" and contained in the accompanying Prospectus under the
caption "Federal Income Tax Considerations" are based upon the opinion of Hunton
& Williams.
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 the
accompanying 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 report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of RFS Hotel Investors, 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 the accompanying Prospectus by reference
to the Company's Current Report on Form 8-K dated April 21, 1998. The above said
financial statements have been so incorporated in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
said firm as experts in auditing and accounting.
S-38
<PAGE> 39
The consolidated financial statements of RFS, Inc. as December 31, 1997 and
1996 and for the years then ended have been incorporated in the accompanying
Prospectus by reference to the Company's Current Report on Form 8-K dated April
21, 1998 in reliance on the report of KPMG Peat Marwick LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
S-39
<PAGE> 40
EQUITY INNS
UNAUDITED PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
The following unaudited pro forma consolidated balance sheet as of March
31, 1998 gives effect to the acquisition of the AmeriSuites Acquisition Hotels,
the Offering of the Series A Preferred Stock, and the Merger as if such
transactions had been consummated on such date. The unaudited Equity Inns
Historical, As Adjusted consolidated balance sheet as of March 31, 1998 gives
effect to the acquisition of the AmeriSuites Acquisition Hotels and the Offering
of the Series A Preferred Stock as if such transactions had been consummated on
such date. The Merger will be accounted for by the Company under the purchase
method of accounting for business combinations. The following unaudited Equity
Inns Historical, As Adjusted consolidated statement of operations for the year
ended December 31, 1997 and the three months ended March 31, 1998 give effect to
the following transactions as if such transactions had been consummated on
January 1, 1997:
Equity Inns Historical, As Adjusted:
(i) the acquisition of 41 hotels acquired by Equity Inns in 1997
("the 1997 Hotel Acquisitions") and the acquisition of the AmeriSuites
Acquisition Hotels, and as if all such hotels had been leased pursuant
to Percentage Leases;
(ii) the consummation of Equity Inns' May and November 1997
offerings of Common Stock ("the 1997 Offerings") and Equity Inns'
February and March 1998 offerings of Common Stock ("the 1998 Offerings")
and the application of the net proceeds therefrom, and
(iii) the Offering of the Series A Preferred Stock (the
"Offering").
The following unaudited pro forma consolidated statement of operations
of the Company for the year ended December 31, 1997 and the three months
ended March 31, 1998 give effect to the aforementioned transactions and the
Merger as if such transactions had been consummated on January 1, 1997 and
as if all the hotels acquired in the Merger had been leased, pursuant to
the Percentage Leases. Additionally, the pro forma effects of the following
items specific to RFS are given effect as if such transactions had been
consummated on January 1, 1997.
RFS, As Adjusted:
(i) the acquisition of nine hotels acquired by RFS in 1997 and as
if all such hotels had been leased pursuant to Percentage Leases.
Additionally, three of the nine properties acquired by RFS in 1997 were
properties which began operations in 1997, and two of the RFS
development properties opened in the first quarter of 1998. Accordingly,
the pro forma financial information reflects an estimate for base rent
only, depreciation and real estate and personal property taxes for the
period prior to their opening; and
(ii) the consummation of the RFS March 1998 common stock offering
and the application of the net proceeds therefrom.
Such pro forma information is based in part upon the historical
consolidated financial statements of the Company and RFS and should be read in
conjunction with such financial statements which are contained herein or
incorporated by reference. Certain historical RFS amounts have been reclassified
to conform with the Company's presentation. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made.
The following unaudited pro forma financial information is not necessarily
indicative of the financial position or operating results that would have
occurred had such transactions been consummated on the date as of which, or at
the beginning of the periods for which, the transactions are being given effect,
nor is it necessarily indicative of future financial position or operating
results.
F-1
<PAGE> 41
EQUITY INNS
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
PREFERRED
EQUITY OFFERING AND EQUITY INNS
INNS AMERISUITES HISTORICAL, RFS MERGER
HISTORICAL ACQUISITION AS ADJUSTED HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in hotel properties,
net.......................... $619,606 $ 96,997(A) $716,603 $581,278 $381,485(E) $1,679,366
Hotels under development....... 13,831 13,831
Cash and cash equivalents...... 6,324 6,324 17,370 (1,500)(F) 22,194
Due from Lessees............... 7,893 7,893 12,166 20,059
Note receivable................ 3,884 3,884 3,884
Deferred expenses, net......... 7,147 7,147 3,775 (3,775)(E) 10,647
2,000(G)
1,500(F)
Deposits and other assets...... 2,730 2,730 8,782 11,512
-------- -------- -------- -------- -------- ----------
Total Assets.......... $647,584 $ 96,997 $744,581 $637,202 $379,710 $1,761,493
======== ======== ======== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt........................... $230,871 $ 497(B) $231,368 $222,621 $125,777(H) $ 579,766
Accounts payable and accrued
expenses..................... 10,879 10,879 7,786 18,665
Distributions payable.......... 11,603 11,603 11,603
Minority interest in
Partnership.................. 19,084 19,084 36,170 (36,170)(I) 77,035
59,743(J)
(1,792)(K)
-------- -------- -------- -------- -------- ----------
Total Liabilities..... 272,437 497 272,934 266,577 147,558 687,069
-------- -------- -------- -------- -------- ----------
Shareholders' Equity:
Preferred stock.............. 100,000(C) 100,000 10 (10)(I) 100,000
Common stock................. 362 362 250 (250)(I) 750
388(J)
Treasury stock............... (2,012) 2,012(I)
Additional paid-in capital... 407,099 (3,500)(D) 403,599 373,307 (373,307)(I) 1,005,988
600,597(J)
1,792(K)
Unearned officers' and
directors' compensation...... (250) (250) (598) 598(I) (250)
Predecessor basis assumed...... (1,264) (1,264) (1,264)
Distributions in excess of net
earnings..................... (30,800) (30,800) (332) 332(I) (30,800)
-------- -------- -------- -------- -------- ----------
Total Shareholders'
Equity.............. 375,147 96,500 471,647 370,625 232,152 1,074,424
-------- -------- -------- -------- -------- ----------
Total Liabilities and
Shareholders'
Equity.............. $647,584 $ 96,997 $744,581 $637,202 $379,710 $1,761,493
======== ======== ======== ======== ======== ==========
</TABLE>
- ---------------
(A) Represents an adjustment for the purchase of the AmeriSuites Acquisition
Hotels.
(B) Represents the incremental borrowings necessary to complete the purchase of
the AmeriSuites Acquisition Hotels ($96,997), in addition to the net
proceeds of the Offering ($96,500).
(C) Represents an adjustment for the gross proceeds of the Series A Preferred
Stock expected to be sold in the Offering.
(D) Represents an adjustment for the underwriters' discounts and commissions
and expenses of the Offering.
F-2
<PAGE> 42
(E) Represents adjustments attributable to the application of purchase
accounting to RFS based upon the estimated value of the Company's Common
Stock and Units to be issued upon consummation of the Merger, and the
estimated additional borrowings incurred to pay direct costs of the Merger.
(F) Represents an adjustment for additional financing fees incurred to
restructure credit facilities upon consummation of the Merger.
(G) Represents an adjustment for new anticipated franchise fees incurred as a
result of the Merger.
(H) Represents an adjustment for the estimated additional borrowings incurred
to pay direct costs of the Merger, including lease termination fees
incurred by RFS in connection with the Merger ($95,500), franchise
agreements ($2,000), professional and advisory fees ($11,200), employee
severance related costs ($9,507), real estate property transfer taxes
($7,220) and other miscellaneous costs ($350).
(I) Represents an adjustment for the elimination of the historical
shareholders' equity of RFS and minority interest ownership in RFS
Partnership.
(J) Represents an adjustment for the estimated value of the Company's Common
Stock and Units to be issued upon consummation of the Merger. The
adjustment assumes each share of RFS common stock and RFS preferred stock,
and each RFS Partnership unit or 25,848,819 shares and 2,569,609 units,
respectively, will be exchanged for 1.5 shares of the Company's Common
Stock or Units, as applicable. The adjustment assumes the shares of Common
Stock and Units are valued at $15.50 per share or Unit as of the date of
the Merger.
(K) Represents an adjustment to the minority interest in the Partnership to
reflect the pro forma minority ownership percentage of 7.06% at March 31,
1998, following the Merger.
F-3
<PAGE> 43
EQUITY INNS
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PREFERRED
OFFERING
AND EQUITY INNS RFS
EQUITY INNS HISTORICAL AMERISUITES HISTORICAL, RFS HISTORICAL HISTORICAL,
HISTORICAL ADJUSTMENTS ACQUISITION AS ADJUSTED HISTORICAL ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Percentage lease revenues...... $21,407 $ $ 2,412(B) $23,819 $22,023 $ 240(A) $22,263
Gain on sale of hotel
properties................... 523 523
Other income................... 170 170 86 86
------- ---- ------- ------- ------- ----- -------
Total Revenue............ 21,577 2,412 23,989 22,632 240 22,872
Expenses:
Real estate and personal
property taxes............... 2,433 276(E) 2,709 2,302 37(D) 2,339
Property and casualty
insurance.................... 186 186
Depreciation and
amortization................. 6,682 925(G) 7,607 4,951 50(F) 5,001
Interest....................... 4,291 (278)(H) 10(I) 4,023 3,548 (180)(H) 3,368
Amortization of loan costs..... 213 213 243 243
General and administrative..... 1,410 1,410 1,409 1,409
Amortization of unearned
directors' and officers'
compensation................. 23 23 196 196
Rental expense................. 207 12(K) 219 36 36
------- ---- ------- ------- ------- ----- -------
Total Expenses........... 15,259 (278) 1,223 16,204 12,871 (93) 12,778
Income before minority
interest..................... 6,318 278 1,189 7,785 9,761 333 10,094
Minority interest.............. 314 0 263 936 928
------- ------- ------- ------- -------
Net income..................... 6,004 1,189 7,522 8,825 9,165
Preferred stock dividends...... 2,344(M) 2,344 348 348
------- ------- ------- -------
Net income applicable to common
shareholders................. $ 6,004 $(1,155) $ 5,178 $ 8,477 $ 8,817
======= ======= ======= ======= =======
Net income per share:
Basic........................ .17 .14
Diluted...................... .17 .14
Weighted average number of
common shares outstanding:
Basic........................ 35,221 36,231
======= =======
Diluted...................... 37,160 38,170
======= =======
<CAPTION>
MERGER
ADJUSTMENTS PRO FORMA
----------- ---------
<S> <C> <C>
Revenue:
Percentage lease revenues...... $ 2,642(C) $48,724
Gain on sale of hotel
properties................... 523
Other income................... 256
------- -------
Total Revenue............ 2,642 49,503
Expenses:
Real estate and personal
property taxes............... 587(N) 5,635
Property and casualty
insurance.................... (186)(O)
Depreciation and
amortization................. 3,609(P) 16,217
Interest....................... 2,390(Q) 9,781
Amortization of loan costs..... (117)(R) 339
General and administrative..... (1,153)(S) 1,666
Amortization of unearned
directors' and officers'
compensation................. (196)(T) 23
Rental expense................. 255
------- -------
Total Expenses........... 4,934 33,916
Income before minority
interest..................... (2,292) 15,587
Minority interest.............. 935
-------
Net income..................... 14,652
Preferred stock dividends...... (348) 2,344
-------
Net income applicable to common
shareholders................. $12,308
=======
Net income per share:
Basic........................ .16
Diluted...................... .16
Weighted average number of
common shares outstanding:
Basic........................ 75,004
=======
Diluted...................... 80,847
=======
</TABLE>
See Notes to Pro Forma Consolidated Statement of Operations
F-4
<PAGE> 44
EQUITY INNS
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREFERRED
OFFERING
AND EQUITY INNS
EQUITY INNS HISTORICAL AMERISUITES HISTORICAL, RFS HISTORICAL
HISTORICAL ADJUSTMENTS ACQUISITION AS ADJUSTED HISTORICAL ADJUSTMENTS
----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Percentage lease revenues.............. $70,590 $25,476(A) $ 9,147(B) $105,213 $82,949 $5,641(A)
Gain on sale of hotel properties....... 666 666
Other income........................... 505 505 120
------- ------- ------- -------- ------- ------
Total Revenue.................... 71,761 25,476 9,147 106,384 83,069 5,641
Expenses:
Real estate and personal property
taxes................................ 6,688 2,361(D) 977(E) 10,026 7,613 1,016(D)
Property and casualty insurance........ 744
Depreciation and amortization.......... 20,214 6,620(F) 3,701(G) 30,535 17,809 422(F)
Interest............................... 12,601 4,929(H) 38(I) 17,568 11,562 1,142(H)
Amortization of loan costs............. 1,013 27(J) 1,040 913
General and administrative............. 4,142 4,142 4,499
Amortization of unearned directors' and
officers' compensation............... 92 92 738
Rental expense......................... 566 248(D) 47(K) 861 180
Loss on sale of hotel properties....... 1,164
------- ------- ------- -------- ------- ------
Total Expenses................... 45,316 14,185 4,763 64,264 45,222 2,580
Income before extraordinary item and
minority interest...................... 26,445 11,291 4,384 42,120 37,847 3,061
Extraordinary charge from write-off of
deferred financing fees................ 1,984 (1,984)(L)
------- ------- ------- -------- ------- ------
Income before minority interest......... 24,461 13,275 4,384 42,120 37,847 3,061
Minority interest....................... 918 1,588 3,615
------- -------- -------
Net income.............................. 23,543 40,532 34,232
Preferred stock dividends............... 9,375(M) 9,375 1,412
------- ------- -------- -------
Net income applicable to common
shareholders........................... $23,543 $(4,991) $ 31,157 $32,820
======= ======= ======== =======
Net income per share:
Basic.................................. .82 .86
Diluted................................ .82 .86
Weighted average number of common shares
outstanding:
Basic.................................. 28,773 36,152
======= ========
Diluted................................ 29,963 38,056
======= ========
<CAPTION>
RFS
HISTORICAL, MERGER
AS ADJUSTED ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
Revenue:
Percentage lease revenues.............. $88,590 $ 8,949(C) $202,752
Gain on sale of hotel properties....... 666
Other income........................... 120 625
------- ------- --------
Total Revenue.................... 88,710 8,949 204,043
Expenses:
Real estate and personal property
taxes................................ 8,629 2,349(N) 21,004
Property and casualty insurance........ 744 (744)(O)
Depreciation and amortization.......... 18,231 14,404(P) 63,170
Interest............................... 12,704 9,471(Q) 39,743
Amortization of loan costs............. 913 (413)(R) 1,540
General and administrative............. 4,499 (3,474)(S) 5,167
Amortization of unearned directors' and
officers' compensation............... 738 (738)(T) 92
Rental expense......................... 180 1,041
Loss on sale of hotel properties....... 1,164 1,164
------- ------- --------
Total Expenses................... 47,802 20,855 132,921
Income before extraordinary item and
minority interest...................... 40,908 (11,906) 71,122
Extraordinary charge from write-off of
deferred financing fees................
------- ------- --------
Income before minority interest......... 40,908 (11,906) 71,122
Minority interest....................... 3,689 4,363
------- --------
Net income.............................. 37,219 66,759
Preferred stock dividends............... 1,412 (1,412) 9,375
------- --------
Net income applicable to common
shareholders........................... $35,807 $ 57,384
======= ========
Net income per share:
Basic.................................. .77
Diluted................................ .76
Weighted average number of common shares
outstanding:
Basic.................................. 74,926
========
Diluted................................ 80,769
========
</TABLE>
- ---------------
(A) As it relates to the Company, amount represents pro forma lease revenue
calculated by applying the rent provisions of the Percentage Leases to the
historical results of operations of the 1997 Hotel Acquisitions for the
period prior to their acquisition. As it relates to RFS, the pro forma
adjustment for the three months ended March 31, 1998 represents an estimate
for base rent for the period prior to the opening of two hotels in 1998.
The pro forma adjustment for the year ended December 31, 1997 represents
pro forma lease revenue calculated by applying the rent provisions of the
percentage leases to the historical results of operations of six hotels
acquired by RFS in 1997 for the period prior to their acquisition, and an
estimate for base rent of $1,560 for the period prior to the opening of
three hotels in 1997. Additionally assumes annual base rent of $960 for
each of two hotels opened in the first quarter of 1998.
(B) Represents an adjustment for pro forma lease revenue from the Company's
Prime Lessee based upon the Company's estimates of the Percentage Lease
rent provisions for new hotel leases expected to be entered into upon
completion of the purchase of the AmeriSuites Acquisition Hotels. For the
three months ended March 31, 1998, the adjustment includes an estimate for
base rent of $64 for the period prior to the opening of one hotel in 1998.
For the year ended December 31, 1998, the adjustment includes an estimate
for base rent of $4,087 for the period prior to the opening of six hotels
in 1997. The actual rent provisions in the Percentage Leases may vary from
the estimates used in developing the pro forma lease payments.
F-5
<PAGE> 45
(C) Represents an adjustment to reflect the pro forma results of increased rent
from new leases which the Company expects to enter into with respect to
certain of the RFS Hotels, excluding those hotels acquired or opened by RFS
after March 31, 1998, and based upon the Company's estimate of the new rent
terms for such new leases. The actual rent provisions of such new leases
may vary from such estimate.
(D) As it relates to the Company, amount represents a pro forma adjustment for
historical real estate and personal property taxes and rental expense of
the 1997 Hotel Acquisitions incurred during the period prior to their
respective dates of acquisition by the Company. As it relates to RFS, the
pro forma adjustment for the three months ended March 31, 1998 represents
an estimate for real estate taxes for two hotels for the period prior to
their opening in 1998. The pro forma adjustment for the year ended December
31, 1997 represents an adjustment for historical real estate taxes of six
hotels acquired by RFS in 1997 for the period prior to their acquisition,
and an estimate for real estate taxes of $195 for the period prior to the
opening of three hotels in 1997. Additionally, includes an estimate for
annual real estate taxes of $320 for two hotels that were opened in the
first quarter of 1998.
(E) Represents an adjustment for the real estate and personal property taxes of
the AmeriSuites Acquisition Hotels that will be paid by the Company upon
completion of the acquisition. For the three months ended March 31, 1998,
amount represents a pro forma adjustment for the historical real estate and
personal property taxes of the AmeriSuites Acquisition Hotels. For the year
ended December 31, 1997, the amount represents the historical real estate
and personal property taxes incurred by the three AmeriSuites Acquisition
Hotels open for the full year of 1997, plus the Company's estimate of
annual real estate and personal property taxes to be incurred by the six
AmeriSuites Acquisition Hotels that were not open for all of 1997.
(F) As it relates to the Company, amount represents an adjustment for
depreciation of buildings and improvements, and furniture, fixtures, and
equipment of the 1997 Hotel Acquisitions during the period prior to their
respective dates of acquisition by the Company, based on their respective
acquisition costs. As it relates to RFS, amount represents an adjustment
for depreciation of buildings and improvements, and furniture, fixtures,
and equipment for two hotels opened in 1998, based on their respective
development costs. Depreciation and amortization is computed on a
straight-line basis over 31 years for building and improvements, 7 years
for furniture, fixtures and equipment, and 10-15 years for franchise
agreements.
(G) Represents an adjustment for depreciation and amortization related to the
AmeriSuites Acquisition Hotels based upon the aggregate purchase price of
$96,997 and an assumed allocation of $14,743 to land, $72,784 to buildings
and improvements, and $9,470 to furniture, fixtures and equipment.
Depreciation is computed on a straight-line basis over assumed estimated
useful lives of 31 years for buildings and improvements and 7 years for
furniture, fixtures and equipment.
(H) As it relates to the Company, the pro forma adjustment for interest expense
for the three months ended March 31, 1998 represents a reduction in
interest expense caused by the decrease in the borrowing levels resulting
from the assumption that the 1998 Offerings had occurred prior to January
1, 1998, based on the Company's borrowing rates. The pro forma adjustment
for the year ended December 31, 1997 represents interest expense related to
the acquisition costs of the 1997 Hotel Acquisitions as if they had been
acquired on January 1, 1997, based on the Company's weighted average
interest rate incurred during the period on historical outstanding
borrowings. This increase in interest expense has been reduced by the
decrease in the borrowing levels caused by the assumption that the 1997
Offerings and the 1998 Offerings had occurred on January 1, 1997. As it
relates to RFS, the pro forma adjustment for interest expense for the three
months ended March 31, 1998 represents a reduction in interest expense
caused by the decrease in the borrowing levels resulting from the
assumption that the RFS March 1998 common stock offering had occurred prior
to January 1, 1998, based on RFS' borrowing rates. The pro forma adjustment
for the year ended December 31, 1997 represents interest expense related to
the acquisition costs of nine hotels acquired by RFS during 1997 as if they
had been acquired on January 1, 1997, based on RFS' borrowing rates. This
increase in interest expense has been reduced by the decrease in the
borrowing levels caused by the assumption that the RFS March 1998 common
stock offering had occurred on January 1, 1997.
(I) Represents an adjustment for interest expense related to the AmeriSuites
Acquisition Hotels that reflects the interest on the incremental borrowings
assumed to purchase the AmeriSuites Acquisition Hotels after giving effect
to the use of the net proceeds of the Offering as described in "Use of
Proceeds". The adjustment is based on the Company's weighted average
interest rate incurred during the period on historical outstanding
borrowings.
(J) Represents an adjustment for amortization expense on deferred loan costs
related to the Company's issuance of the Bonds for the period in 1997 prior
to their issuance.
F-6
<PAGE> 46
(K) Represents an adjustment for the rental expense of the AmeriSuites
Acquisition Hotels that will be paid by the Company upon completion of the
acquisition. Amount represents the historical rental expense of four of the
AmeriSuites Acquisition Hotels incurred during the periods presented.
(L) Represents the elimination of the historical extraordinary charge incurred
by the Company in 1997.
(M) Represents the preferred stock dividends that would have been paid by the
Company following consummation of the Offering.
(N) Represents an adjustment for estimated incremental annual real estate taxes
of $2,000 based upon the Company's estimates of property value
reassessments of the RFS Hotels which will result from consummation of the
Merger, and an annual amount of $349 for personal property taxes previously
paid by RFS Lessees.
(O) Represents the elimination of RFS' historical property and casualty
insurance expense which will be paid by the Company's Lessees following
consummation of the Merger.
(P) Represents an adjustment necessary to reflect incremental depreciation on
the RFS Hotels due to the step-up in cost basis attributable to the
application of purchase accounting. The adjustment reflects an assumed
allocation of the step-up in cost basis of approximately $46 to land, $335
to buildings and improvements, $2 to franchise agreements, and an amount
necessary to reflect an estimated useful life of 31 years for buildings and
improvements, 7 years for furniture, fixtures and equipment and 10 to 15
years for franchise agreements. RFS historical depreciation reflects a
useful life of 40 years for buildings and improvements. The estimated
useful lives utilized by management are based upon their knowledge of hotel
properties and the hotel industry in general.
(Q) Represents an adjustment for interest expense related to the estimated
additional borrowings of $125,777 incurred to pay direct costs of the
Merger, based on the Company's weighted average interest rate incurred
during the respective periods on historical outstanding borrowings.
(R) Represents (i) the elimination of the historical amortization of deferred
financing costs of RFS and (ii) the amortization of the estimated
incremental financing costs of $1,500 that will be incurred upon
consummation of the Merger.
(S) Represents (i) the elimination of the historical amounts of general and
administrative expenses of RFS and (ii) the estimated incremental general
and administrative expenses to be incurred by the Company.
(T) Represents elimination of the 1997 historical amortization expense of
unearned directors' and officers' compensation of RFS as a result of the
Merger.
F-7
<PAGE> 47
PROSPECTUS
EQUITY INNS, INC.
$400,000,000
COMMON STOCK, PREFERRED STOCK AND DEPOSITARY SHARES
---------------------
Equity Inns, Inc. (together with its subsidiaries, the "Company") may from
time to time offer and sell (i) shares of its Common Stock, $.01 par value (the
"Common Stock"), (ii) in one or more series, shares of its Preferred Stock, $.01
par value (the "Preferred Stock") and (iii) depositary shares representing
entitlement to all rights and preferences of a fraction of a share of Preferred
Stock of a specified series and represented by depositary receipts ("Depositary
Shares"), all with an aggregate public offering price of up to $400,000,000, on
terms to be determined at the time of offering. The Common Stock, Preferred
Stock and Depositary Shares offered hereto (the "Offered Securities") may be
offered in amounts, at prices and on terms to be set forth in one or more
supplements to this Prospectus (each, a "Prospectus Supplement"). The aggregate
public offering price and terms of the Offered Securities will be determined by
market conditions at the time such securities are offered.
The Company's Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "ENN." The Company's charter contains limitations on
direct or beneficial ownership and restrictions on transfer of the Common Stock
to preserve the status of the Company as a real estate investment trust ("REIT")
for United States federal income tax purposes. See "Restrictions on Ownership of
Common Stock."
The applicable Prospectus Supplement shall set forth with respect to (i)
Preferred Stock, the specific designation and stated value per share, any
dividend, liquidation, redemption, conversion, voting and other rights, and all
other specific terms of the Preferred Stock; (ii) Common Stock, the specific
number of shares and issuance price per share; (iii) Depositary Shares, the
fractional share of Preferred Stock represented by each such Depositary Share;
and (iv) all Offered Securities, whether such Offered Securities will be offered
separately or as a unit with other Offered Securities. The applicable Prospectus
Supplement will also contain information, where applicable, about certain United
States federal income tax considerations relating to, and any listing on a
securities exchange of, the Offered Securities covered thereby.
The Offered Securities may be sold on a negotiated or competitive bid basis
to or through underwriters or dealers designated from time to time or by the
Company, directly or through agents, to other purchasers. Certain terms of any
offering and sale of the Offered Securities, including, where applicable, the
names of the underwriters, dealers or agents, if any, the principal amount or
number of shares to be purchased, the purchase price of the shares to be
purchased, any applicable commissions, discounts and other compensation to
underwriters, dealers and agents, and the proceeds to the Company from such
sale, will be set forth in, or will be calculable from information contained in,
a Prospectus Supplement. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 2 OF THIS PROSPECTUS FOR CERTAIN
FACTORS RELATING TO AN INVESTMENT IN THE OFFERED SECURITIES.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE OFFERED
SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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 date of this Prospectus is April 21, 1998.
<PAGE> 48
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated reference herein contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
without limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import. Such forward-looking statements relate to
future events, the future financial performance of the Company, and involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company or industry results
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Prospective investors
should specifically consider the various factors identified in the Prospectus
and in any applicable Prospectus Supplement which could cause actual results to
differ, including those discussed in the section herein entitled "Risk Factors."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission") pursuant to the Exchange
Act. Such reports, proxy statements and other information filed by the Company
may be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a
World Wide Web site at http:/www.sec.gov, and reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission (including the Company) can be obtained from that site. The
Common Stock is listed on the New York Stock Exchange ("NYSE"), and such
reports, proxy and informational statements and other information concerning the
Company can be inspected and copied at the offices of the NYSE at 20 Broad
Street, New York, New York 10005.
This Prospectus is part of a registration statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") filed by
the Company with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"). This Prospectus does not contain all of the information
set forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the content of any contract or other document
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such reference
and the exhibits and schedules hereto. For further information regarding the
Company and the Common Stock offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Equity Inns, Inc. (the "Company") with the
Commission (File No. 0-23290) are incorporated herein by reference and made a
part hereof: (i) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997; (ii) the Company's Current Reports on Form 8-K dated
January 20, 1998 and February 12, 1998; and (iii) the description of the
Company's Common Stock contained in the Company's Registration Statement on Form
8-A filed with the Commission on August 19, 1996. All documents filed by the
Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the 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.
i
<PAGE> 49
The Company will provide without charge to each person to whom a copy of
this Prospectus or any Prospectus Supplement is delivered, upon the written or
oral request of such person, a copy of any and all of the documents incorporated
by reference herein (not including the exhibits to such documents, unless such
exhibits are specifically incorporated by reference in such documents). Requests
for such copies should be directed to Equity Inns, Inc., 4735 Spottswood, Suite
102, Memphis, Tennessee 38117, Attention: Howard A. Silver, Corporate Secretary,
telephone number (901) 761-9651.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other document
subsequently filed with the Commission which also is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus or any accompanying Prospectus
Supplement.
ii
<PAGE> 50
THE COMPANY
The following is qualified in its entirety by the more detailed information
and financial statements appearing elsewhere or incorporated by reference in
this Prospectus. Unless the context indicates otherwise, the term "Company"
includes the Company's subsidiaries and controlled entities.
The Company is a self-administered equity real estate investment trust
("REIT") incorporated as a Tennessee corporation in November 1993 to acquire
equity interests in hotel properties. The Company completed its initial public
offering in March 1994. The Company, through Equity Inns Trust (the "Trust"), a
wholly-owned subsidiary of the Company, is the sole general partner of the
Equity Inns Partnership, L.P. (the "Partnership") and at March 1, 1998 owned
approximately a 95.1% general partnership interest in the Partnership. At March
1, 1998, the Company, through the Partnership, owned 89 hotels with an aggregate
of 10,778 rooms located in 30 states (the "Current Hotels"). The Current Hotels
operate as Hampton Inn(R) hotels (57), AmeriSuites(R) hotels (10), Residence
Inn(R) hotels (9), Homewood Suites(R) hotels (5), Holiday Inn(R) hotels (4),
Comfort Inn(R) hotels (3), and one Holiday Inn Express(R) hotel. The Company has
entered into contracts to acquire two additional hotels with an aggregate of 411
rooms in two states (the "Acquisition Hotels" and, together with the Current
Hotels, the "Hotels").
In order to qualify as a REIT under federal tax provisions, neither the
Company, the Partnership nor the Trust can operate hotels. The Partnership
leases 79 of its Current Hotels to subsidiaries (collectively, the "Interstate
Lessee") of Interstate Hotels Company ("Interstate"), and all of its AmeriSuites
hotels to a subsidiary (the "Prime 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
Interstate Lessee and the Prime Lessee are referred to herein as, collectively,
the "Lessees" and, individually, a "Lessee." On December 2, 1997, Interstate
announced that it had agreed to be acquired by Patriot American Hospitality,
Inc.
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its taxable year ended December 31, 1994. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its taxable income. In connection with the
Company's election to be taxed as a REIT, the Company's Charter imposes certain
restrictions on the transfer and ownership of shares of Common Stock. See
"Restrictions on Ownership of Common Stock." The Company has adopted the
calendar year as its taxable year. The Company's Charter limits consolidated
indebtedness to 45% of the Company's investment in hotel properties, at its
cost.
The Company's principal executive offices are located at 4735 Spottswood,
Suite 102, Memphis, Tennessee 38117 and its telephone number is (901) 761-9651.
1
<PAGE> 51
RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
making an investment decision regarding the Offered Securities offered hereby.
COMPANY'S RELIANCE UPON ITS LESSEES
In order for the Company to continue to qualify as a REIT, neither the
Company nor the Partnership can operate any hotel or participate in the
decisions affecting the daily operations of any hotel. The Interstate Lessee
leases 79 of the Current Hotels, and the Prime Lessee leases all ten of the
AmeriSuites brand Current Hotels. The Lessees control the daily operations of
the Company's hotels. Neither the Company nor the Partnership has the authority
to require any hotel to be operated in a particular manner or to govern any
particular aspect of the daily operations of any hotel. Even if the Company's
management believes the Hotels are being operated inefficiently or in a manner
that does not result in an appropriate level of Percentage Rent payments to the
Company or the Partnership under the Percentage Leases, neither the Company nor
the Partnership may require a change to the method of operation. The Company is
dependent on lease payments from the Lessees for substantially all of its
revenues.
DEBT LIMITATION
The Company intends to continue to pursue a growth strategy which includes
acquiring hotel properties. There is a risk that the Company will not have
access to sufficient equity capital to pursue its acquisition strategy. Since,
in order to qualify as a REIT, the Company generally must distribute at least
95% of its taxable income annually and thus cannot retain earnings and the
Company's Charter limits outstanding indebtedness to 45% of the Company's
investment in hotel properties at cost, the Company's ability to continue to
make acquisitions will depend primarily on its ability to obtain additional
private or public equity financing. There can be no assurance that such
financing will be available. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Distribution Requirements"
in the accompanying Prospectus.
DEVELOPMENT RISKS
As part of its growth strategy, the Company intends to develop additional
hotels. Development involves substantial risks, including the risk that
development costs will exceed budgeted or contracted amounts, the risk of delays
in completion of construction, the risk of failing to obtain all necessary
zoning and construction permits, the risk that financing might not be available
on favorable terms, the risk that developed properties will not achieve desired
revenue levels once opened, the risk of competition for suitable development
sites from competitors that may have greater financial resources that 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 adversely affects occupancy and
revenues; increases in operating costs due to inflation and other factors, which
increases have not been, and may not be, offset by increased room rates;
dependence on business and commercial travelers and tourism; increases in energy
costs and other expenses affecting travel; and adverse effects of general and
local economic conditions. These factors could adversely affect the Lessees'
ability to make lease payments and therefore the Company's ability to make
expected distributions to shareholders. Further, decreases in room revenues of
the Hotels would result in decreased revenues to the Partnership under the
Percentage Leases and, therefore, decreased amounts available for distribution
to the Company's shareholders.
2
<PAGE> 52
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 the Lessees.
Competition for Acquisitions. The Company will compete for investment
opportunities with entities which have substantially greater financial resources
than the Company. These entities generally may be able to accept more risk than
the Company can manage prudently. Competition generally may reduce the number of
suitable investment opportunities offered to the Company and may increase the
bargaining power of property owners seeking to sell. Further, the Company
believes that competition from entities organized for purposes substantially
similar to the Company's objectives has increased and will increase
significantly in the future.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
This seasonality can be expected to cause quarterly fluctuations in the
Company's lease revenues. Quarterly earnings may be adversely affected by
factors beyond the Company's control, including poor weather conditions and
economic factors. The Company may be required to enter into short-term borrowing
in the first and fourth quarters in order to offset such fluctuations in
revenues and to fund the Company's anticipated obligations, including
distributions to its shareholders.
Investment Concentration in Certain Segments of Single Industry
The Company's current investment strategy is to acquire interests in
limited service and extended stay hotel properties. Therefore, a downturn in the
hotel industry, in general, and the limited service and extended stay segments,
in particular, will have a material adverse effect on the Company's lease
revenue and amounts available for distribution to its shareholders.
Emphasis on Certain Hotels Brands
Because 57 of the Current Hotels operate as Hampton Inn hotels, ten Current
Hotels operate as AmeriSuites hotels and nine Current Hotels operate as
Residence Inn hotels, the Company is subject to 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 Company's hotel properties have an ongoing need for renovations and
other capital improvements, including periodic replacement of furniture,
fixtures and equipment. Franchisors of the Hotels may also require periodic
capital improvements as a condition of retaining the franchise licenses. The
cost of such capital improvements could have an adverse effect on the Company's
financial condition. Such renovations involve certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
the possibility that the Company will not have available cash to fund
renovations or that financing for renovations will not be available on favorable
terms, uncertainties as to market demand or deterioration in market demand after
commencement of renovation and the emergence of unanticipated competition from
hotels. The Company intends to fund such improvements out of future cash from
operations, present cash balances or the remaining available borrowing capacity
under its three-year $250 million unsecured line of credit (the "Unsecured Line
of Credit").
REAL ESTATE INVESTMENT RISKS
General Risks of Investing in Real Estate
The Company's investments in the Hotels are subject to varying degrees of
risk generally incident to the ownership of real property. The underlying value
of the Company's real estate investments and the Company's
3
<PAGE> 53
income and ability to make distributions to its shareholders are both dependent
upon the ability of the Lessees to operate the Hotels in a manner sufficient to
maintain or increase room revenues and to generate sufficient income in excess
of operating expenses to make rent payments under the Percentage Leases. Income
from the Hotels may be adversely affected by adverse changes in national
economic conditions, changes in local market conditions due to changes in
general or local economic conditions and neighborhood characteristics,
competition from other hotel properties, changes in interest rates and in the
availability, cost and terms of mortgage funds, the impact of present or future
environmental legislation and compliance with environmental laws, the ongoing
need for capital improvements, particularly in older structures, changes in real
property tax rates and other operating expenses, changes in governmental rules
and fiscal policies, civil unrest, acts of God, including earthquakes, floods
and other natural disasters (which may result in uninsured losses), acts of war,
adverse changes in zoning laws, and other factors which are beyond the control
of the Company.
Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions is
limited. There can be no assurance that the Company will be able to dispose of
an investment when it finds disposition advantageous or necessary or that the
sale price of any disposition will recoup or exceed the amount of the Company's
investment.
Operational Risks of Rapid Growth
Beginning with the Company's initial public offering in March 1994, the
Company has acquired 89 hotels and has contracted to acquire an additional two
hotels, increasing the size and geographic dispersion of the Company's hotel
properties. The Company's growth strategy also contemplates acquisitions of
additional hotels that meet the Company's investment criteria, further
increasing the size and geographic dispersion of its hotel properties. Failure
of the Company and the Lessees to effectively manage such expanded operations
could have a material adverse effect on the Hotels' operating results.
Deteriorating operations could negatively impact revenues at the Hotels and,
therefore, the lease payments under the Percentage Leases and amounts available
for distribution to shareholders.
Uninsured and Underinsured Losses
Each Percentage Lease specifies comprehensive insurance to be maintained on
each of the Hotels, including liability, fire and extended coverage. Management
believes such specified coverage is of the type and amount customarily obtained
for or by an owner or real property assets. Leases for subsequently acquired
hotels will contain similar provisions. However, there are certain types of
losses, generally of a catastrophic nature, such as earthquakes and floods, that
may be uninsurable or not economically insurable. The Company's Board of
Directors will use their discretion in determining amounts, coverage limits and
deductibility provisions of insurance, with a view to maintaining appropriate
insurance coverage on the Company's investments at a reasonable cost and on
suitable terms. This may result in insurance coverage that, in the event of a
substantial loss, would not be sufficient to pay the full current market value
or current replacement cost of the Company's lost investment. Inflation, changes
in building codes and ordinances, environmental considerations and other factors
also might make it infeasible to use insurance proceeds to replace the property
after such property has been damaged or destroyed. Under such circumstances, the
insurance proceeds received by the Company might not be adequate to restore its
economic position with respect to such property.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of contamination from
hazardous or toxic substances, or the failure to remediate such contaminated
property properly, may adversely affect the owner's ability to use or sell the
property or to borrow using such
4
<PAGE> 54
real property as collateral. Persons who arrange for the disposal or treatment
of hazardous or toxic substances also may be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether or
not such facility is or ever was owned or operated by such person. Certain
environmental laws and common-law principles could be used to impose liability
for release of hazardous or toxic substances, including asbestos-containing
materials ("ACMs"), into the environment or a work place, and third parties may
seek recovery from owners or operators of real properties for personal injury or
property damage associated with exposure to released hazardous or toxic
substances, including ACMs. Environmental laws also may impose restrictions on
the manner in which property may be used or businesses may be operated, and
these restrictions may require expenditures. In connection with the ownership of
the Hotels, the Company or the Partnership may be potentially liable for any
such costs. The cost of defending against claims of liability or remediating the
contaminated property or otherwise complying with environmental laws could
materially adversely affect amounts available for distribution to the Company's
shareholders. Phase I environmental audits have been obtained on each of the
Hotels in connection with their respective acquisitions by the Partnership. The
purpose of Phase I audits is to identify potential environmental contamination
for which the Hotels may be responsible and the potential for environmental
regulatory compliance liabilities. The Phase I audit reports on the Hotels did
not reveal any environmental liability that the Company believes would have a
material adverse effect on the Company's business, assets, results of operating
or liquidity, nor is the Company aware of any such liability. Nevertheless, it
is possible that these reports do not reveal all environmental liabilities or
that there are material environmental liabilities of which the Company is
unaware.
The Clean Water Act ("CWA") prohibited the Environmental Protection Agency
("EPA") from requiring permits for all but a few (primarily industrial and
certain municipal) discharges of storm water prior to October 1, 1994. Even
though the moratorium ended, the EPA has not yet issued permitting regulations
for non-industrial and non-municipal discharges of storm water. In October 1994,
EPA officials indicated that all storm water discharges without permits were
technically in violation of the CWA. How the EPA will ultimately define the
universe of dischargers requiring a permit is unclear. Nevertheless, it is
possible that storm water drainage to a navigable water from one or more of the
Company's properties is a discharge in violation of the CWA since October 1,
1994. Penalties for non-compliance may be substantial. Although the EPA has
stated that it will not take enforcement action against those storm water
dischargers formerly subject to the moratorium and the Company is not aware of
any current or reasonably likely penalties to be imposed for its storm water
discharges, it is possible, given the uncertainty about the scope and timing of
EPA or state regulations on the subject, that liability may exist.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND OTHER CHANGES IN
GOVERNMENTAL RULES AND REGULATIONS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company believes that the Hotels
are substantially in compliance with these requirements, a determination that
the Company is not in compliance with the ADA could result in imposition of
fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use and
operation of the Hotels, including changes to building codes and fire and life
safety codes, may occur. If the Company were required to make substantial
modifications at the Hotels to comply with the ADA or other changes in
governmental rules and regulations, the Company's ability to make distributions
to its shareholders could be adversely affected.
FLUCTUATIONS IN PROPERTY TAXES
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase or decrease as tax rates change and as the properties are assessed or
reassessed by taxing authorities. If property taxes increase, the Company's
ability to make distributions to its shareholders could be adversely affected.
5
<PAGE> 55
RISKS OF LEVERAGE
The Company's Charter currently provides that the Company may not incur
consolidated indebtedness in an amount in excess of 45% of the Company's
investment in hotel properties, at its cost, which cost includes the fair market
value of any equity securities issued in connection with the acquisition of
hotel properties, after giving effect to the Company's use of proceeds from any
indebtedness. The Company may submit to its shareholders for approval an
amendment to the Charter which removes the Charter's limitation on indebtedness.
The Company currently has the Unsecured Line of Credit to provide, as necessary,
working capital, funds for investments in additional hotel properties and cash
to pay dividends.
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 assets, including the Hotels, to foreclosure. Adverse
economic conditions could result in higher interest rates which could increase
debt service requirements on floating rate debt and could reduce the amounts
available for distribution to shareholders. The Company may obtain one or more
forms of interest rate protection (swap agreements, interest rate caps
contracts, etc.) to hedge against the possible adverse effects of interest rate
fluctuations. However, there can be no assurances that such hedging would be
effective in mitigating the adverse effects of interest rate fluctuations.
Adverse economic conditions could cause the terms on which borrowings become
available to be unfavorable. In such circumstances, if the Company is in need of
capital to repay indebtedness in accordance with its terms or otherwise, it
could be required to liquidate one or more investments in hotel properties at
times which may not permit realization of the maximum return on such
investments.
In February 1997, EQI Financing Partnership I, L.P., the Company's indirect
subsidiary, issued $88 million of fixed-rate, collateralized bonds in three
classes. The expected repayment dates for Classes A, B and C of the Bonds are
November 20, 2006, February 20, 2007 and February 20, 2007. Upon maturity of the
Class A Bonds, the Company is required to use substantially all of its cash flow
to amortize the remaining outstanding principal amount of the Bonds. If the
remaining principal amounts cannot be refinanced, the Company's ability to make
required distributions to its shareholders could be adversely affected and its
status as a REIT could be jeopardized. There can be no assurance that such
refinancing will be available or will be on terms acceptable to the Company.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
All of the Current Hotels are subject to franchise agreements. The
continuation of the franchise licenses is subject to specified operating
standards and other terms and conditions. The franchisors periodically inspect
their licensed properties to confirm adherence to operating standards. The
failure of a hotel, the Partnership or a Lessee to maintain such standards or
adhere to such other terms and conditions could result in the loss or
cancellation of the franchise license. It is possible that a franchisor could
condition the continuation of a franchise license on the completion of capital
improvements which the Board of Directors determines are too expensive or
otherwise unwarranted in light of general economic conditions or the operating
results or prospects of the affected hotel. In that event, the Board of
Directors may elect to allow the franchise license to lapse. In any case, if a
franchise is terminated, the Partnership and the Lessee may seek to obtain a
suitable replacement franchise, or to operate the hotel independent of a
franchise license. The loss of a franchise license could have a material adverse
effect upon the operations or the underlying value of the hotel covered by the
franchise because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchisor. Although the
Percentage Leases require the Lessees to maintain the franchise license for each
Hotel, a Lessee's loss of a franchise license for one or more of the Hotels
could have a material adverse effect on the Partnership's revenues under the
Percentage Leases and the Company's cash available for distribution to its
shareholders.
ABILITY OF BOARD OF DIRECTORS TO CHANGE CERTAIN POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, operations and distributions, are determined by
its Board of Directors. The Board of Directors may amend or revise these and
other policies from time to time without a vote of the shareholders of the
Company.
6
<PAGE> 56
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 Bylaw Provisions -- Restrictions on
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' interests.
Staggered Board
The Board of Directors of the Company has three classes of directors. The
current terms of the Company's directors expire in 1998, 1999 and 2000,
respectively. Directors for each class will be elected for a three-year term
upon the expiration of that class' term. The staggered terms of directors may
affect the shareholders' ability to change control of the Company, even if such
a change were in the shareholders' interests. See "Description of Capital
Stock -- Charter and Bylaw Provisions." The foregoing may also discourage offers
or other bids for the Common Stock at a premium over the market price.
Authority to Issue Preferred Stock
The Company's Charter authorizes the Board of Directors to issue up to
10,000,000 shares of preferred stock and to establish the preferences and rights
of any shares issued. See "Description of Capital Stock -- Preferred Stock." The
issuance of preferred stock may have the effect of delaying or preventing a
change in control of the Company even if a change in control were in the
shareholders' interests.
Tennessee Anti-Takeover Statutes
As a Tennessee corporation, the Company is subject to various legislative
acts set forth in Chapter 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 Code
provisions, the Company also would be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As a result, the funds available for distribution to the shareholders would be
reduced for each of the years involved. Although the Company currently intends
to continue to operate in a manner designed to qualify as a REIT, it is possible
that future economic, market, legal, tax or other considerations may cause the
Board of Directors, with the consent of a majority of the shareholders, to
revoke the REIT election. See "Federal Income Tax Considerations."
7
<PAGE> 57
REIT Minimum Distribution Requirements
In order to avoid corporate income taxation of the earnings it distributes,
the Company generally is required each year to distribute to its shareholders at
least 95% of its net taxable income (excluding any net capital gain). In
addition, the Company will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of (i) 85% of its ordinary income for that
year, (ii) 95% of its capital gain net income for that year and (iii) 100% of
its undistributed income from prior years. To the extent that the Company elects
to retain and pay income tax on its net long-term capital gain, such retained
amounts will be treated as having been distributed for purposes of the 4% excise
tax.
The Company has made and intends to continue to make distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The Company's income consists primarily of the
Company's share of the income of the Partnership, and the Company's cash
available for distribution consists primarily of the Company's share of cash
distributions from the Partnership. Differences in timing between the
recognition of taxable income and the receipt of cash available for distribution
due to the seasonality of the hospitality industry could require the Company,
through the Partnership, to borrow funds on a short-term basis to meet the 95%
distribution requirement and to avoid the nondeductible excise tax.
Distributions by the Partnership will be determined by the Board of
Directors of the Company, as the sole general partner of the Partnership, and
will be dependent on a number of factors, including the amount of the
Partnership's cash available for distribution, the Partnership's financial
condition, any decision by the Board of Directors to reinvest funds rather than
to distribute such funds, the Partnership's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Distribution Requirements."
Failure of the Partnership to be Classified as a Partnership for Federal Income
Tax Purposes; Impact on REIT Status
The Company has not requested, and does not expect to request, a ruling
from the Service that the Partnership and its subsidiary partnerships (the
"Subsidiary Partnerships") will be classified as 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, no more
than 50% in value of its outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of any taxable year. Furthermore, if any
shareholder or group of shareholders of a Lessee owns, actually or
constructively, 10% or more of the stock of the Company, the Lessee could become
a related party tenant, which likely would result in loss of REIT status for the
Company. For the purpose of preserving the Company's REIT qualification, the
Company's Charter prohibits direct or indirect ownership of more than 9.9% of
the outstanding shares of any class of the Company's stock by any person or
group (the "Ownership Limitation"), subject to adjustment as described below.
Generally, the capital stock owned by affiliated owners will be aggregated for
purposes of the Ownership Limitation.
Any transfer of shares that would prevent the Company from continuing to
qualify as a REIT under the Code will be void ab initio, and the intended
transferee of such shares will be deemed never to have had an interest in such
shares. Further, if, in the opinion of the Board of Directors, (i) a transfer of
shares would
8
<PAGE> 58
result in any shareholder or group of shareholders acting together owning shares
in excess of the Ownership Limitation or (ii) a proposed transfer of shares may
jeopardize the qualification of the Company as a REIT under the Code, the Board
of Directors may, in its sole discretion, refuse to allow the shares to be
transferred to the proposed transferee. Finally, the Company may, in the
discretion of the Board of Directors, redeem any stock held of record by any
shareholder in excess of the Ownership Limitation.
The Company's Charter sets the redemption price of the stock to be redeemed
at the lesser of the market price on the date the Company provides written
notice of redemption or the date such stock was purchased, subject to certain
provisions of Tennessee law. Therefore, the record holder of stock in excess of
the Ownership Limitation may experience a financial loss when such shares are
redeemed, if the market price falls between the date of purchase and the date of
redemption. See "Restrictions on Ownership of Common Stock" and "Federal Income
Tax Considerations -- Requirements for Qualification."
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.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Company's Common Stock is traded on the NYSE under the symbol "ENN."
The following table sets forth for the indicated periods the high and low
closing prices for the Common Stock, as traded through the facilities of the
NYSE and, prior to September 9, 1996, The Nasdaq Stock Market, and the cash
distributions declared per share:
<TABLE>
<CAPTION>
CASH
PRICE RANGE DISTRIBUTIONS
----------------- DECLARED
HIGH LOW PER SHARE
------- ------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
First Quarter............................................... $11 1/8 $ 9 1/2 $0.24
Second Quarter.............................................. 12 10 3/8 0.24
Third Quarter............................................... 12 1/2 10 3/8 0.26
Fourth Quarter.............................................. 12 10 3/4 0.26
YEAR ENDED DECEMBER 31, 1996
First Quarter............................................... 13 1/4 11 1/2 0.28
Second Quarter.............................................. 12 3/4 11 1/4 0.28
Third Quarter............................................... 13 11 0.28
Fourth Quarter.............................................. 13 1/8 11 1/8 0.28
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................... 14 1/2 12 1/2 0.28
Second Quarter.............................................. 14 1/8 12 7/8 0.28
Third Quarter............................................... 15 3/16 13 1/4 0.29
Fourth Quarter.............................................. 16 9/16 14 1/8 0.29
YEAR ENDING DECEMBER 31, 1998
First Quarter (through March 17, 1998)...................... 15 15/16 14 7/16
</TABLE>
On March 17, 1998, there were 1,072 record holders of the Company's Common
Stock, including shares held in "street name" by nominees who are record
holders, and approximately 31,000 beneficial owners.
The Company intends to make regular quarterly distributions to its
shareholders. The Company's ability to make distributions is dependent on the
receipt of distributions from the Partnership. In order to qualify as a REIT for
federal income tax purposes, the Company must distribute to shareholders
annually at least 95% of
9
<PAGE> 59
its taxable income. The Company, as general partner of the Partnership through a
wholly-owned subsidiary, intends to cause the Partnership to distribute to its
partners sufficient amounts to permit the Company to make regular quarterly
distributions to its shareholders. The Partnership's primary source of revenue
consists of rent payments from the Lessees under the Percentage Leases.
Future distributions paid by the Company will be at the discretion of the
Board of Directors of the Company and will depend on the actual cash flow of the
Company, its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code and such other factors as the
directors of the Company deem relevant.
USE OF PROCEEDS
The Company will contribute the net proceeds of any sale of the Offered
Securities by the Company to the Partnership in exchange for additional units of
partnership interest. Unless otherwise set forth in the applicable Prospectus
Supplement, the net proceeds from the sale of any Common Stock will be used by
the Company and the Partnership for general corporate purposes, which may
include repayment of indebtedness, making improvements to hotel properties and
the acquisition of additional hotel properties.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratio of earnings
to fixed charges for the periods presented.
<TABLE>
<CAPTION>
1997 1996 1995 1994(1) 1993(1)
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges.......................... 2.9 3.5 3.0 7.7 1.4
</TABLE>
- ---------------
(1) Periods prior to March 1, 1994 (the date of the Company's initial public
offering) reflect data for the Company's predecessor entities.
The consolidated ratio of earnings to fixed charges was computed by
dividing earnings by fixed charges. To date, the Company has not issued any
Preferred Shares; therefore, the ratio of earnings to combined fixed charges and
preferred share dividends and the ratio of earnings to fixed charges are the
same. For purposes of computing the ratio, earnings have been calculated by
adding fixed charges to income before minority interest. Fixed charges consist
of interest expense and amortization of loan origination fees.
Prior to the completion of the Company's initial public offering ("IPO") in
March 1994 and intent to qualify as a REIT, the Company's predecessor entities
operated in a manner so as to minimize net taxable income and were capitalized
primarily with debt.
DESCRIPTION OF CAPITAL STOCK
Under the Company's Charter, the total number of shares of all classes of
capital stock that the Company has authority to issue is 60,000,000, consisting
of 50,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock.
At February 27, 1998, there were 35,585,257 shares of Common Stock outstanding
and no shares of Preferred Stock outstanding.
The following information with respect to the capital stock of the Company
is subject to the detailed provisions of the Charter and the Company's Bylaws,
as currently in effect. These statements do not purport to be complete, or to
give full effect to the provisions of statutory or common law, and are subject
to, and are qualified in their entirety by reference to, the terms of the
Charter and Bylaws, which are exhibits to the Registration Statement.
10
<PAGE> 60
COMMON STOCK
Subject to the provisions of the Charter described under "Restrictions on
Ownership of Capital Stock," the holders of Common Stock are entitled to one
vote per share on all matters voted on by the shareholders, including elections
of directors. Except as otherwise required by law or provided in any resolution
adopted by the Board of Directors with respect to any series of Preferred Stock,
the holders of shares of Common Stock exclusively possess all voting power of
the Company. The Charter does not provide for cumulative voting in the election
of directors. Subject to any preferential rights of any outstanding series of
Preferred Stock, the holders of Common Stock are entitled to such dividends as
may be declared from time to time by the Board of Directors from funds available
therefor, and upon liquidation are entitled to receive pro rata all assets of
the Company available for distribution to such holders. The holders of Common
Stock have no conversion, sinking fund, redemption rights or any other
preemptive rights to subscribe for any securities of the Company. Upon issuance
and delivery against payment therefor, all shares of Common Stock offered hereby
will be duly authorized, fully paid and non-assessable.
The Common Stock is traded on the New York Stock Exchange under the symbol
"ENN." The transfer agent and registrar for the Company's Common Stock is
SunTrust Bank, Atlanta, Georgia. The Company will apply to the NYSE to list the
additional Common Shares to be sold pursuant to any Prospectus Supplement, and
the Company anticipates that such shares will be so listed.
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of shares
of Preferred Stock from time to time, in one or more series, to establish the
number of shares in each series and to fix the designation, powers, preferences
and rights of each such series and the qualifications, limitations or
restrictions thereof. Because the Board of Directors has the power to establish
the preferences and rights of each class or series of Preferred Stock, the Board
of Directors may afford the holders of any series or class of Preferred Stock
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of Common Stock. The issuance of Preferred Stock could have the effect
of delaying or preventing a change in control of the Company.
The applicable Prospectus Supplement will describe each of the following
terms that may be applicable in respect of any Preferred Stock offered and
issued pursuant to this Prospectus: (1) the specific designation, number of
shares, seniority and purchase price; (2) any liquidation preference per share;
(3) any maturity date; (4) any mandatory or option redemption or repayment dates
and terms or sinking fund provisions; (5) any dividend rate or rates and the
dates on which any dividends will be payable (or the method by which such rates
or dates will be determined); (6) any voting rights; (7) any rights to convert
the Preferred Stock into other securities or rights, including a description of
the securities or rights into which such Preferred Stock is convertible (which
may include other Preferred Stock) and the terms and conditions upon which such
conversions will be effected, including, without limitation, conversion rates or
formulas, conversion periods and other related provisions; (8) the place or
places where dividends and other payments with respect to the Preferred Stock
will be payable; and (9) any additional voting, dividend, liquidation,
redemption and other rights, preferences, privileges, limitations and
restrictions, including restrictions imposed for the purpose of maintaining the
Company's qualification as a REIT under the Code. Upon issuance and delivery
against payment therefor, all shares of the Preferred Stock offered hereby will
be duly authorized, fully paid and non-assessable.
CHARTER AND BYLAW PROVISIONS
Staggered Board of Directors
The Charter provides that the Board of Directors is divided into three
classes of directors, each class constituting approximately one-third of the
total number of directors with the classes serving staggered three-year terms.
The classification of directors has the effect of making it more difficult for
shareholders to change the composition of the Board of Directors.
11
<PAGE> 61
The classification provisions also could have the effect of discouraging a
third party from accumulating large blocks of the Company's stock or attempting
to obtain control of the Company, even though such an attempt might be
beneficial to the Company and its shareholders. Accordingly, shareholders could
be deprived of certain opportunities to sell their shares of Common Stock at a
higher market price than might otherwise be the case.
Number of Directors; Removal; Filling Vacancies
The Charter and Bylaws provide that, subject to any rights of holders of
Preferred Stock to elect additional directors under specified circumstances, the
number of directors will consist of not less than three nor more than nine
persons, subject to increase or decrease by the affirmative vote of 80% of the
members of the entire Board of Directors. At all times a majority of the
directors shall be directors of the Company who are not officers or employees of
the Company or Affiliates (as defined below) of (i) any advisor to the Company
under an advisory agreement, (ii) any lessee of any property of the Company,
(iii) any subsidiary of the Company or (iv) any partnership which is an
Affiliate of the Company (the "Independent Directors"), except that upon the
death, removal or resignation of an Independent Director, such requirement shall
not be applicable for 60 days. "Affiliate" is defined as being (i) any person
that, directly or indirectly, controls or is controlled by or is under common
control with such person, (ii) any other person that owns, beneficially,
directly or indirectly, five percent (5%) or more of the outstanding capital
stock, shares or equity interests of such person or (iii) any officer, director,
employee, partner or trustee of such person or any person controlling,
controlled by or under common control with such person (excluding trustees and
persons serving in similar capacities who are not otherwise an Affiliate of such
person). There are four directors currently, three of whom are Independent
Directors. The holders of Common Stock are entitled to vote on the election or
removal of directors, with each share entitled to one vote. The Bylaws provide
that, subject to any rights of holders of Preferred Stock, and unless the Board
of Directors otherwise determines, any vacancies will be filled by the
affirmative vote of a majority of the remaining directors, though less than a
quorum, provided that Independent Directors shall nominate and approve directors
to fill vacancies created by Independent Directors. Accordingly, the Board of
Directors could temporarily prevent any shareholder entitled to vote from
enlarging the Board of Directors and filling the new directorships with such
shareholder's own nominees. Any director so elected shall hold office until the
next annual meeting of shareholders.
A director may be removed with or without cause by the affirmative vote of
the holders of 75% of the outstanding shares entitled to vote in the election of
directors at a special meeting of the shareholders called for the purpose of
removing him.
Limitation of Liability; Indemnification
The Company's Charter obligates the Company to indemnify and advance
expenses to present and former directors and officers to the maximum extent
permitted by Tennessee law. The Tennessee Business Corporation Act ("TBCA")
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, settlements, penalties, fines or
reasonable expenses incurred with respect to a proceeding to which they may be
made a party by reason of their service in those or other capacities if (i) such
persons conducted themselves in good faith, (ii) they reasonably believed, in
the case of conduct in their official capacities with the corporation, that
their conduct was in its best interests and, in all other cases, that their
conduct was at least not opposed to its best interests and (iii) in the case of
any criminal proceeding, they had no reasonable cause to believe that their
conduct was unlawful.
Any indemnification by the Company pursuant to the provisions of the
Charter and the TBCA described above shall be paid out of the assets of the
Company and shall not be recoverable from the shareholders. The Company
currently purchases director and officer liability insurance for the purpose of
providing a source of funds to pay any indemnification described above. To the
extent that the foregoing indemnification provisions purport to include
indemnification for liabilities arising under the Securities Act, in the opinion
of the Commission such indemnification is contrary to public policy and is,
therefore, unenforceable.
12
<PAGE> 62
The TBCA permits the charter of a Tennessee corporation to include a
provision eliminating or limiting the personal liability of its directors to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except that such provision cannot eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law
or (iii) for unlawful distributions that exceed what could have been distributed
without violating the TBCA or the corporation's charter. The Company's Charter
contains a provision eliminating the personal liability of its directors or
officers to the Company or its shareholders for money damages to the maximum
extent permitted by Tennessee law from time to time.
Amendment
The Company's Charter may be amended by the affirmative vote of the holders
of a majority of the shares of the Common Stock present at a meeting at which a
quorum is present, with the shareholders voting as a class with one vote per
share; provided, however, that (i) the Charter provision providing for the
classification of the Board of Directors into three classes may not be amended,
altered, changed or repealed without the affirmative vote of at least 80% of the
members of the Board of Directors or the affirmative vote of holders of at least
75% of the outstanding shares of capital stock entitled to vote generally in the
election of directors, voting separately as a class; (ii) the provisions
relating to the limitation on indebtedness may not be amended without an
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock; and (iii) the Company cannot take any action intended to terminate
its qualification as a REIT without the approval of the holders of two-thirds of
the outstanding shares of Common Stock. The Company's Bylaws may be amended by
the Board of Directors or by vote of the holders of a majority of the
outstanding shares of Common Stock, provided that provisions with respect to the
staggered terms of the Board of Directors cannot be amended without the
affirmative vote of 80% of the members of the entire Board of Directors or the
holders of 75% of the outstanding shares of capital stock entitled to vote
generally in the election of directors, voting separately as a class.
Operations
Pursuant to its Charter, the Company generally is prohibited from engaging
in certain activities, including (i) incurring consolidated indebtedness in
excess of 45% of the Company's investment in hotel properties, at cost, after
giving effect to the Company's use of proceeds from any indebtedness, and (ii)
acquiring or holding property or engaging in any activity that would cause the
Company to fail to qualify as a REIT.
TENNESSEE ANTI-TAKEOVER STATUTES
In addition to certain of the Company's Charter provisions discussed above,
Tennessee has adopted a series of statutes which may deter takeover attempts or
tender offers, including offers or attempts that might result in the payment of
a premium over the market price for the Common Stock or that a shareholder might
otherwise consider in its best interest.
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
13
<PAGE> 63
at any time within seven days from the date the Takeover Offer has become
effective following filing with the Commissioner and the offeree company and
public announcement of the terms or after 60 days from the date the Takeover
Offer has become effective. If an offeror makes a Takeover Offer for less than
all the outstanding equity securities of any class, and if the number of
securities tendered is greater than the number the offeror has offered to accept
and pay for, the securities shall be accepted pro rata. If an offeror varies the
terms of a Takeover Offer before its expiration date by increasing the
consideration offered to shareholders of the offeree company, the offeror shall
pay the increased consideration for all equity securities accepted, whether
accepted before or after the variation in the terms of the Takeover Offer.
Under the Tennessee Business Combination Act, subject to certain
exceptions, no Tennessee corporation may engage in any "business combination"
with an "interested shareholder" for a period of five years following the date
that such shareholder became an interested shareholder unless prior to such date
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the shareholder becoming an
interested shareholder. Consummation of a business combination that is subject
to the five-year moratorium is permitted after such period when the transaction
(a) (i) complies with all applicable charter and bylaw requirements and (ii) is
approved by the holders of two-thirds of the voting stock not beneficially owned
by the interested shareholder, and (b) meets certain fair price criteria.
"Business combination" is defined by the statute as being any (i) merger or
consolidation; (ii) share exchange; (iii) sale, lease, exchange, mortgage,
pledge or other transfer of assets representing 10% or more of (A) the aggregate
market value of the corporation's consolidated assets, (B) the aggregate market
value of the corporation's shares or (C) the corporation's consolidated net
income; (iv) issuance or transfer of shares from the corporation to the
interested shareholder; (v) plan of liquidation or dissolution proposed by the
interested shareholder; (vi) transaction or recapitalization which increases the
proportionate share of any outstanding voting securities owned or controlled by
the interested shareholder; or (vii) financing arrangement whereby any
interested shareholder receives, directly or indirectly, a benefit except
proportionately as a shareholder. "Interested shareholder" is defined as (i) any
person that is the beneficial owner of 10% or more of the voting power of class
or series of outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation who at any time within the five-year period
immediately prior to the date in question was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of any class or series of the
outstanding stock of the corporation.
The Tennessee Greenmail Act prohibits a Tennessee corporation from
purchasing, directly or indirectly, any of its shares at a price above the
market value of such shares (defined as the average of the highest and lowest
closing market price for such shares during the 30 trading days preceding the
purchase and sale or preceding the commencement or announcement of a tender
offer if the seller of such shares has commenced a tender offer or announced an
intention to seek control of the corporation) from any person who holds more
than 3% of the class of securities to be purchased if such person has held such
shares for less than two years, unless the purchase has been approved by the
affirmative vote of a majority of the outstanding shares of each class of voting
stock issued by such corporation or the corporation makes an offer, of at least
equal value per share, to all holders of shares of such class.
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK
For the Company to qualify as a REIT under the Code, shares of capital
stock must be held by a minimum of 100 persons for at least 335 days in each
taxable year or during a proportionate part of a shorter taxable year. In
addition, at all times during the second half of each taxable year, no more than
50% in value of the shares of beneficial interest of the Company may be owned,
directly or indirectly and by applying certain constructive ownership rules, by
five or fewer individuals (the "5/50 Rule"). Because the Board of Directors
believes it is essential for the Company to continue to qualify as a REIT, the
Charter restricts the acquisition of shares of Common Stock (the "Ownership
Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in the Charter, no shareholder may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.9% of the outstanding
shares of Common Stock. The Board of Directors may, but in no event is required
to, waive
14
<PAGE> 64
the Ownership Limitation if evidence satisfactory to the Board of Directors is
presented that ownership in excess of such amount will not jeopardize the
Company's status as a REIT. As a condition of such waiver, the Board of
Directors may require opinions of counsel satisfactory to it or an undertaking
from the applicant with respect to preserving the REIT status of the Company. If
shares in excess of the Ownership Limitation, or shares which would cause the
Company to be beneficially owned by fewer than 100 persons, are issued or
transferred to any person, such issuance or transfer shall be null and void and
the intended transferee will acquire no rights to the shares.
The Ownership Limitation will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Any change in the Ownership Limitation would require an amendment to
the Charter. In addition to preserving the Company's status as a REIT, the
Ownership Limitation may have the effect of precluding an acquisition of control
of the Company without the approval of the Board of Directors. All certificates
representing shares of capital stock will bear a legend referring to the
restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, 5% or more of the outstanding Common Stock and any shareholder
requested by the Company must file an affidavit with the Company containing the
information specified in the Charter with respect to their ownership of shares
within 30 days after January 1 of each year. In addition, each shareholder
shall, upon demand, be required to disclose to the Company in writing such
information with respect to the direct, indirect and constructive ownership of
shares as the Board of Directors deems necessary to comply with the provisions
of the Code applicable to a REIT or to comply with the requirements of any
taxing authority or governmental agency.
Any transfer of shares which would prevent the Company from continuing to
qualify as a REIT under the Code will be void ab initio to the fullest extent
permitted under applicable law and the intended transferee of such shares will
be deemed never to have had an interest in such shares. Further, if, in the
opinion of the Board of Directors, (i) a transfer of shares would result in any
shareholder or group of shareholders acting together owning in excess of the
Ownership Limitation or (ii) a proposed transfer of shares may jeopardize the
qualification of the Company as a REIT under the Code, the Board of Directors
may, in its sole discretion, refuse to allow the shares to be transferred to the
proposed transferee. Finally, the Company may, in the discretion of the Board of
Directors, redeem any stock held of record by any shareholder in excess of the
Ownership Limitation, for a price equal to the lesser of (i) the market price on
the date of notice of redemption; (ii) the market price on the date of purchase;
or (iii) the maximum price allowed under the applicable provisions of the TBCA.
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may, at its option, elect to offer fractional shares of
Preferred Stock, rather than full shares of Preferred Stock. In such event, the
Company will issue to the public receipts for Depositary Shares, each of which
will represent a fraction (to be set forth in the Prospectus Supplement relating
to a particular series of Preferred Stock) of a share of a particular series of
Preferred Stock as described below.
The shares of any series of Preferred Stock represented by Depositary
Shares will be deposited under a Deposit Agreement (the "Deposit Agreement")
between the Company and the depositary named in the applicable Prospectus
Supplement (the "Depositary"). Subject to the terms of the Deposit Agreement,
each owner of a Depositary Share will be entitled, in proportion to the
applicable fraction of a share of Preferred Stock represented by such Depositary
Share, to all the rights and preferences of the Preferred Stock represented
thereby (including dividend, voting, redemption and liquidation rights).
The Depositary Shares will be evidenced by depositary receipts issued
pursuant to the Deposit Agreement ("Depositary Receipts"). Depositary Receipts
will be distributed to those persons purchasing the fractional shares of
Preferred Stock in accordance with the terms of the offering. If Depositary
Shares are issued, copies of the forms of Deposit Agreement and Depositary
Receipt will be incorporated by reference in
15
<PAGE> 65
the Registration Statement of which this Prospectus is a part, and the following
summary is qualified in its entirety by reference to such documents.
Pending the preparation of definitive engraved Depositary Receipts, the
Depositary may, upon the written order of the Company, issue temporary
Depositary Receipts substantially identical to (and entitling the holders
thereof to all the rights pertaining to) the definitive Depositary Receipts but
not in definitive form. Definitive Depositary Receipts will be prepared
thereafter without unreasonable delay, and temporary Depositary Receipts will be
exchangeable for definitive Depositary Receipts at the Company's expense.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Preferred Stock to the record holders
of Depositary Shares relating to such Preferred Stock in proportion to the
number of such Depositary Shares owned by such holders. The Depositary shall
distribute only such amount, however, as can be distributed without attributing
to any holder of Depositary Shares a fraction of one cent, and the balance not
so distributed shall be added to and treated as part of the next sum received by
the Depositary for distribution to record holders of Depositary Shares.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto, unless the Depositary determines that it is not feasible to
make such distribution, in which case the Depositary may, with the approval of
the Company, sell such property and distribute the net proceeds from such sale
to such holders.
The Deposit Agreement will also contain provisions relating to the manner
in which any subscription or similar rights offered by the Company to holders of
the Preferred Stock shall be made available to the holders of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
If a series of Preferred Stock represented by Depositary Shares is subject
to redemption, the Depositary Shares will be redeemed from the proceeds received
by the Depositary resulting from the redemption, in whole or in part, of such
series of Preferred Stock held by the Depositary. The redemption price per
Depositary Share will be equal to the applicable fraction of the redemption
price per share payable with respect to such series of Preferred Stock. Whenever
the Company redeems shares of Preferred Stock held by the Depositary, the
Depositary will redeem as of the same redemption date the number of Depositary
Shares representing the shares of Preferred Stock so redeemed. If fewer than all
the Depositary Shares are to be redeemed, the Depositary Shares to be redeemed
will be selected by lot or pro rata as may be determined by the Depositary.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be outstanding and all rights of the holders of the
Depositary Shares will cease, except the right to receive the money, securities
or other property payable upon such redemption and any money, securities or
other property to which the holders of such Depositary Shares were entitled upon
such redemption upon surrender to the Depositary of the Depositary Receipts
evidencing such Depositary Shares.
VOTING THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of Preferred
Stock are entitled to vote, the Depositary will mail the information contained
in such notice of meeting to the record holders of the Depositary Shares
relating to such Preferred Stock. Each record holder of such Depositary Shares
on the record date (which will be the same date as the record date for the
Preferred Stock) will be entitled to instruct the Depositary as to the exercise
of the voting rights pertaining to the amount of Preferred Stock represented by
such holder's Depositary Shares. The Depositary will endeavor, insofar as
practicable, to vote the amount of Preferred Stock represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all action which may be deemed necessary by the Depositary in
order to enable
16
<PAGE> 66
the Depositary to do so. The Depositary may abstain from voting shares of
Preferred Stock to the extent it does not receive specific instructions from the
holders of Depositary Shares representing such Preferred Stock.
AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary. However, any amendment that materially
and adversely alters the rights of the holders of Depositary Shares will not be
effective unless such amendment has been approved by the holders of at least a
majority of the Depositary Shares then outstanding. The Deposit Agreement may be
terminated by the Company or the Depositary only if (i) all outstanding
Depositary Shares have been redeemed or (ii) there has been a final distribution
in respect of the Preferred Stock in connection with any liquidation,
dissolution or winding up of the Company and such distribution has been
distributed to the holders of Depositary Receipts.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of the
Preferred Stock and any redemption of the Preferred Stock. Holders of Depositary
Receipts will pay other transfer and other taxes and governmental charges and
such other charges, including a fee for the withdrawal of shares of Preferred
Stock upon surrender of Depositary Receipts, as are expressly provided in the
Deposit Agreement to be for their accounts.
MISCELLANEOUS
The Depositary will forward to holders of Depository Receipts all reports
and communications from the Company that are delivered to the Depositary and
that the Company is required to furnish to holders of Preferred Stock.
Neither the Depositary nor the Company will be liable if it is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under the Deposit Agreement. The obligations of the Company and the
Depositary under the Deposit Agreement will be limited to performance in good
faith of their duties thereunder and they will not be obligated to prosecute or
defend any legal proceeding in respect of any Depositary Shares or Preferred
Stock unless satisfactory indemnity is furnished. They may rely upon written
advice of counsel or accountants, or upon information provided by persons
presenting Preferred Stock for deposit, holders of Depositary Receipts or other
persons believed to be competent and on documents believed to be genuine.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 60 days after delivery of the notice of
resignation or removal.
RESTRICTIONS ON OWNERSHIP
In order to safeguard the Company against an inadvertent loss of REIT
status, the Deposit Agreement will contain provisions restricting the ownership
and transfer of Depositary Shares. Such restrictions will be described in the
applicable Prospectus Supplement and will be referenced on the applicable
Depositary Receipts.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations that
may be relevant to a prospective holder of Offered Securities is based on
current law, is for general information only, and is not tax
17
<PAGE> 67
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, tax-exempt organizations, financial institutions or
broker-dealers, and, 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
OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
The Company 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.
Hunton & Williams has acted as tax counsel to the Company. Prior to issuing
the Offered Securities, the Company expects to receive an opinion of Hunton &
Williams as to its REIT qualification. Investors should be aware, however, that
opinions of counsel are not binding upon the Service or any court. It must be
emphasized that the opinion of Hunton & Williams will be based on various
assumptions and will be conditioned upon certain representations made by the
Company as to factual matters, including representations regarding the nature of
the Company's properties and the future conduct of its business. Such factual
assumptions and representations are described below in this discussion of
"Federal Income Tax Considerations." Moreover, such continued qualification and
taxation as a REIT depend upon the Company's ability to meet on a continuing
basis, through actual annual operating results, distribution levels, and stock
ownership, the various qualification tests imposed under the Code discussed
below. Hunton & Williams will not review the Company's compliance with those
tests on a continuing basis. Accordingly, no assurance can be given that the
actual results of the Company's operation for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "-- Failure to Qualify."
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
18
<PAGE> 68
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 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 share of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and to maintain REIT status; (viii) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations promulgated thereunder; and (ix) that meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. 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). See "-- Proposed Tax
Legislation." In addition, the Company's Charter provides for restrictions
regarding ownership and transfer of the shares of Common and Preferred 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 Transfer."
For purposes of determining share ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes is considered an individual, although a trust that is a qualified trust
under
19
<PAGE> 69
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 two subsidiaries and may have additional
subsidiaries in the future. One subsidiary is the Trust and the other subsidiary
is Equity Inn Services, Inc., both of which have been wholly owned by the
Company since the commencement of their 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.
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.
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 share 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 the Company's noncustomary services will be
at least equal to 150% of the Company's cost of providing the services.
20
<PAGE> 70
Pursuant to the Percentage Leases, the Interstate Lessee and the Prime
Lessee (collectively, the "Lessee") will lease from the Partnership the land,
buildings, improvements, furnishings and equipment comprising the Current Hotels
for a 10-year period. The Percentage Leases provide that the Lessee is obligated
to pay to the Partnership (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 Existing Properties in excess of certain levels. Both
the Base Rent and the threshold room revenue amount in each Percentage Rent
formal 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.
In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property).
In addition, Code Section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a lease
of property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property, (ii) the service recipient controls the
property, (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property), (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract, (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient, and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
The Company believes that the Percentage Leases will be treated as true
leases for federal income tax purposes, and prior to issuing Offered Securities,
the Company expects to obtain an opinion of Hunton & Williams as to the "true
lease" status of the Percentage Leases for federal income tax purposes. Such
opinion will be based, in part, on the following facts: (i) the Partnership and
the Lessee intend for their relationship to be that of a lessor and lessee and
such relationship will be documented by lease agreements, (ii) the Lessee has
the right to exclusive possession and use and quiet enjoyment of the 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 Hotels, other
than the cost of maintaining underground utilities and structural elements, and
dictates how the Hotels are operated, maintained, and improved, (iv) the Lessee
bears all of the costs and expenses of operating the 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 Hotels during the term of the Percentage
Leases, (vi) in the event of damage or destruction to a 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
21
<PAGE> 71
or (B) purchase the Hotel for an amount generally equal to the Partnership's
investment in the Property, (vii) the Lessee will indemnify the Partnership
against all liabilities imposed on the Partnership during the term of the
Percentage Leases by reason of (A) injury to persons or damage to property
occurring at the Hotels or (B) the Lessee's use, management, maintenance or
repair of the Hotels, (viii) the Lessee is obligated to pay substantial fixed
rent for the period of use of the Hotels, and (ix) the Lessee stands to incur
substantial losses (or reap substantial gains) depending on how successfully it
operates the Hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings or judicial decisions involving leases with terms
substantially the same as the Percentage Leases that discuss whether such leases
constitute true leases for federal income tax purposes. Therefore, any opinion
of Hunton & Williams with respect to the relationship between the Partnership
and the Lessees will be based upon all of the facts and circumstances and upon
rulings and judicial decisions involving situations that are considered to be
analogous. Opinions of counsel are not binding upon the Service or any court,
and there can be no complete assurance that the Service will not assert
successfully a contrary position. If the Percentage Leases are recharacterized
as service contracts or partnership agreements, rather than true leases, part or
all of the payments that the Partnership receives from the Lessees may not be
considered rent or may not otherwise satisfy the various requirements for
qualification as "rents from real property." In that case, the Company likely
would not be able to satisfy either the 75% or 95% gross income tests and, as a
result, would lose its REIT status.
In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising a 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 rent 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 bases of the personal property in such hotel was less than 15%
of the initial adjusted bases of both the real and personal property comprising
such hotel. 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 excess of the appraised
value, or that a court would not uphold such assertion. If such a challenge were
successfully asserted, the Company could fail the 15% Adjusted Basis Ratio as to
one or more of the 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 (i) based on
fixed percentages of the gross revenues from the Hotels that are established in
the Percentage Leases, 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)
conforms 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
22
<PAGE> 72
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 or
Preferred Stock if such person's acquisition of such 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. Provided that the Percentage
Leases are respected as true leases, the Company should satisfy that requirement
because the Partnership is not performing any services other than customary ones
for the Lessee. 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, or manages or operates the Current 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.
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
23
<PAGE> 73
Partnership will attempt to comply with the terms of safe-harbor provisions in
the Code prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company or
the Partnership can comply with the safe-harbor provisions of the Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business."
The Company 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.
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% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions will be generally available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of
24
<PAGE> 74
those relief provisions. As discussed above in "Federal Income Tax
Considerations -- Taxation of the Company," even if those relief provisions
apply, a tax would be imposed with respect to the net income attributable to the
excess of 75% or 95% of the Company's gross income over its qualifying income in
the relevant category, whichever is greater.
Asset Tests. The Company, at the close of each quarter of its taxable
year, also must satisfy two tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
cash or cash items (including certain receivables), government securities, "real
estate assets," or, in cases where the Company raises new capital through share
or long-term (at least five-year) debt offerings, temporary investments in
shares or debt instruments during the one-year period following the Company's
receipt of such capital. The term "real estate assets" includes interests in
real property, interests in mortgages on real property to the extent the
mortgage balance does not exceed the value of the associated real property, and
shares of other REITs. For purposes of the 75% asset test, the term "interest in
real property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold in real
property, and an option to acquire real property (or a leasehold in real
property). Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
interest in any partnership or 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 for the tax
benefits accorded to REITs under the Code, 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 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
25
<PAGE> 75
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 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
26
<PAGE> 76
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.
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 28% for sales and exchanges of assets held for more than one year but not
more than 18 months, and 20% for sales and exchanges of assets held for more
than 18 months. The maximum tax rate on long-term capital gain from the sale or
exchange of "section 1250 property" (i.e., depreciable real property) held for
more than 18 months 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 shareholders at a 20%, 25%, or 28% 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 will be effective for distributions made after
December 31, 1998. See "-- Taxation of Non-U.S. Shareholders."
PROPOSED TAX LEGISLATION
On February 2, 1998, President Clinton released his budget proposal for
fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal
potentially 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 a C corporation, 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
27
<PAGE> 77
REIT on or after the date of "first committee action" (i.e., first action by the
House Ways and Means Committee with respect to the provision). If enacted as
presently written, that provision would severely limit the use by a REIT of
taxable subsidiaries to conduct businesses the income from which would be
nonqualifying income if received by the REIT. 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
28
<PAGE> 78
determining the number of partners in a partnership, a person owning an interest
in a flow-through entity (i.e., a partnership, grantor trust, or S corporation)
that owns an interest in the partnership is treated as a partner in such
partnership only if (a) substantially all of the value of the owner's interest
in the flow-through entity is attributable to the flow-through entity's interest
(direct or indirect) in the partnership and (b) a principal purpose of the use
of the flow-through entity is to permit the partnership to satisfy the
100-partner limitation. Each 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.
The Company believes that each Hotel Partnership will be treated as a
partnership for federal income tax purposes and not as a corporation or
association taxable as a corporation. The Company has not requested, and does
not intend to request, a ruling from the Service that the Hotel Partnerships
will be classified as a partnership for federal income tax purposes. However,
prior to issuing Offered Securities, the Company expects to obtain an opinion of
Hunton & Williams that, based on the provisions of the Partnership Agreement,
the partnership agreements of each Subsidiary Partnership, certain factual
assumptions, and certain representations, each Hotel Partnership will be treated
for federal income tax purposes as a partnership and not as a corporation or an
association taxable as a corporation. Unlike a tax ruling, an opinion of counsel
is not binding upon the Service, and no assurance can be given that the Service
will not challenge the status of a Hotel Partnership as a partnership for
federal income tax purposes. If such challenge were sustained by a court, the
Hotel Partnership would be treated as a corporation for federal income tax
purposes, as described below. In addition, the opinion of Hunton & Williams will
be based on existing law, which is to a great extent the result of
administrative and judicial interpretation. No assurance can be given that
administrative or judicial changes would not modify the conclusions expressed in
the opinion.
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 "Federal
Income Tax Considerations -- 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.
29
<PAGE> 79
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.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally will be 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 properties for cash, the Partnership's initial basis in
such Properties 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 properties 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
30
<PAGE> 80
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 Existing
Properties 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. See "Risk Factors -- Conflicts of Interest -- Conflicts
Relating to Sales of McNeill Initial Hotels."
The Company's share of any gain realized by the Partnership on the sale of
any property held by the Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. See "Federal Income Tax Considerations --
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 "Federal Income Tax
Considerations -- Requirements For Qualification -- Income Tests" above. 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
The Company may sell the Offered Securities to one or more underwriters or
dealers for public offering and sale by them or may sell the Offered Securities
to investors directly or through designated agents. Any such underwriter, dealer
or agent involved in the offer and sale of the Offered Securities will be named
in the applicable Prospectus Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, or from time to time at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Company also may, from time to time, authorize
underwriters acting as agents to offer and sell the Offered Securities upon the
terms and conditions set forth in any Prospectus Supplement. Underwriters may
sell the Offered Securities to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions (which may be
changed from time to time) from the underwriters and/or from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of the Offered Securities and any discounts,
concessions or commissions allowed by underwriters to participating dealers will
be set forth in the applicable Prospectus Supplement. Underwriters, dealers and
agents participating in the distribution of the Offered Securities may be deemed
to be underwriters, and any discounts and commissions received by them from the
Company or from purchasers of the Offered Securities and any profit realized by
them on resale of the Offered Securities may be deemed to be underwriting
discounts and commissions under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with the Company, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act.
31
<PAGE> 81
Offers to purchase the Offered Securities may be solicited by agents
designated by the Company from time to time. Any such agent involved in the
offer or sale of the Offered Securities will be named, and any commissions
payable by the Company to such agent will be set forth in the Prospectus
Supplement. Unless otherwise indicated in the Prospectus Supplement, any such
agent will be acting on a best-efforts basis for the period of its appointment.
Any such agent may be deemed to be an "underwriter," as that term is defined in
the Securities Act, of the Offered Securities so offered and sold.
If an underwriter or underwriters are utilized in the sale of the Offered
Securities, the Company will execute an underwriting agreement with such
underwriter or underwriters at the time an agreement for such sale is reached,
and the names of the specific managing underwriter or underwriters, as well as
any other underwriters, and the terms of the transactions, including
compensation of the underwriters and dealers, if any, will be set forth in the
applicable Prospectus Supplement.
If a dealer is utilized in the sale of the Offered Securities, the Company
will sell such Offered Securities to the dealer, as principal. The dealer may
then resell such Offered Securities to the public at varying prices to be
determined by such dealer at the time of resale. The name of the dealer and the
terms of the transactions will be set forth in the applicable Prospectus
Supplement.
The distribution of the Offered Securities may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices.
Under agreements which may be entered into by the Company, underwriters and
agents who participate in the distribution of Debt Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts (the "Contracts") providing for payment and delivery on the
date or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the principal amount of Offered Securities sold
pursuant to Contracts shall not be less nor more than, the respective amounts
stated in such Prospectus Supplement. Institutions with which Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and other institutions, but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions except
(i) the purchase by an institution of the Offered Securities covered by its
Contract shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject and (ii)
the Company shall have sold to such underwriters the total principal amount of
the Offered Securities less the principal amount thereof covered by Contracts. A
commission indicated in the Prospectus Supplement will be paid to agents and
underwriters soliciting purchases of Offered Securities pursuant to Contracts
accepted by the Company. Agents and underwriters shall have no responsibility in
respect of the delivery or performance of Contracts.
Offers to purchase the Offered Securities may be solicited directly by the
Company and sales thereof may be made by the Company directly to institutional
investors or others. The terms of any such sales, including the terms of any
bidding or auction prices, if utilized, will be described in the applicable
Prospectus Supplement.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company in the ordinary
course of business.
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
32
<PAGE> 82
financial statements have been so incorporated in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the Common Stock will be passed upon for the Company by
Hunton & Williams. The description of federal income tax considerations under
the caption "Federal Income Tax Considerations" is based on the opinion of
Hunton & Williams.
33
<PAGE> 83
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF SERIES A
PREFERRED STOCK OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary......... S-3
Risk Factors.......................... S-12
Use of Proceeds....................... S-15
Capitalization........................ S-15
Business and Properties............... S-16
Management............................ S-22
Description of Series A Preferred
Stock............................... S-25
Certain Federal Income Tax
Considerations...................... S-32
Underwriting.......................... S-37
Legal Matters......................... S-38
Experts............................... S-38
Unaudited Pro Forma Financial
Information......................... F-1
PROSPECTUS
Special Note Regarding Forward-Looking
Statements.......................... i
Available Information................. i
Incorporation of Certain Documents by
Reference........................... i
The Company........................... 1
Risk Factors.......................... 2
Price Range of Common Stock and
Distributions....................... 9
Use of Proceeds....................... 10
Ratio of Earnings to Fixed Charges.... 10
Description of Capital Stock.......... 10
Restrictions on Ownership of Common
Stock............................... 14
Description of Depositary Shares...... 15
Federal Income Tax Considerations..... 17
Plan of Distribution.................. 31
Experts............................... 32
Legal Matters......................... 33
</TABLE>
======================================================
======================================================
4,000,000 SHARES
EQUITY INNS, INC.
% SERIES A CUMULATIVE
PREFERRED STOCK
------------
PROSPECTUS SUPPLEMENT
JUNE , 1998
------------
SALOMON SMITH BARNEY
J.C. BRADFORD & CO.
CIBC OPPENHEIMER
MORGAN KEEGAN &
COMPANY, INC.
PRUDENTIAL SECURITIES INCORPORATED
RONEY CAPITAL MARKETS
A DIVISION OF FIRST CHICAGO CAPITAL MARKETS, INC.
======================================================
