<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A/A
Amendment to Amended Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For The Quarterly Period Ended March 31, 1998 Commission File Number 0-23290
EQUITY INNS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1550848
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer)
Incorporation or Organization Identification No.)
4735 Spottswood, Suite 102, Memphis, TN 38117
--------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(901) 761-9651
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the Registrant: (i) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
----- -----
The number of shares of Common Stock, $.01 par value, outstanding on
April 30, 1998 was 36,228,030.
1 of 20
<PAGE>
EQUITY INNS, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1998
(unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations (unaudited) -
For the three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
For the three months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $ 619,606,262 $ 617,071,977
Cash and cash equivalents 6,323,632 190,458
Due from Lessees 7,892,638 5,925,109
Note receivable 3,884,052 3,884,052
Deferred expenses, net 7,147,093 7,275,473
Deposits and other assets 2,730,272 1,178,028
------------- -------------
Total assets $ 647,583,949 $ 635,525,097
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 230,871,159 $ 233,206,156
Accounts payable and accrued expenses 10,878,956 12,467,254
Distributions payable 11,602,786 10,645,348
Deferred lease revenue (Note 2) 7,892,638
Minority interest in Partnership 18,691,735 19,034,524
------------- -------------
Total liabilities 279,937,274 275,353,282
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $.01 par value, 50,000,000
shares authorized, 36,230,985 and 34,865,578
shares issued and outstanding 362,310 348,656
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding
Additional paid-in capital 407,099,182 387,133,407
Unearned directors' and officers' compensation (250,411) (273,482)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (38,300,519) (25,772,879)
------------- -------------
Total shareholders' equity 367,646,675 360,171,815
------------- -------------
Total liabilities and shareholders' equity $ 647,583,949 $ 635,525,097
============= =============
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
3
<PAGE>
EQUITY INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenue
Lease revenue (Note 2) $ 13,514,296 $ 11,777,863
Other income 170,318 17,311
------------ ------------
Total revenue 13,684,614 11,795,174
------------ ------------
Expenses
Real estate and personal property taxes 2,433,363 1,309,842
Depreciation and amortization 6,682,119 3,846,120
Amortization of loan costs 212,997 188,969
Interest 4,290,630 2,145,324
General and administrative 1,639,809 1,019,135
------------ ------------
Total expenses 15,258,918 8,509,390
------------ ------------
Income (loss) before minority interest (1,574,304) 3,285,784
Minority interest (78,270) 119,187
------------ ------------
Net income (loss) (Note 2) $ (1,496,034) $ 3,166,597
============ ============
Net income (loss) per common share - basic
and diluted (Note 2) $ (.04) $ .13
============ ============
Weighted average number of common shares
outstanding - diluted 37,064,000 24,595,000
============ ============
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
4
<PAGE>
EQUITY INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (1,496,034) $ 3,166,597
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,682,119 3,846,120
Amortization of loan costs 212,997 188,969
Amortization of unearned directors' compensation 23,070 23,071
Directors' compensation 8,468
Minority interest (78,270) 119,187
Changes in assets and liabilities:
Due from Lessees (1,967,529) (1,520,244)
Deferred lease revenue 7,892,638
Deferred expenses (110,166) (6,466)
Deposits and other assets (1,552,244) 835,842
Accounts payable and accrued expenses (525,532) (212,613)
------------ ------------
Net cash provided by operating activities 9,089,517 6,440,463
------------ ------------
Cash flows from investing activities:
Investment in hotel properties (44,742,279)
Improvements and additions to hotel properties (9,145,727) (3,092,294)
Cash paid for franchise applications (356,800)
Cash placed in escrow for acquisitions (10,000,000)
------------ ------------
Net cash used by investing activities (9,145,727) (58,191,373)
------------ ------------
Cash flows from financing activities:
Gross proceeds from public offering 20,144,615
Payment of offering expenses (1,042,258)
Proceeds from exercise of stock options 112,500
Distributions paid (10,645,348) (6,864,126)
Borrowings under revolving credit facility 25,950,000 68,040,395
Payments on revolving credit facility (27,750,000) (94,631,395)
Borrowings under CMBS credit facility 88,000,000
Payments on CMBS credit facility (534,570) (167,293)
Cash paid for loan costs (45,128) (2,631,925)
Payments on capital lease obligations (427) (414)
------------ ------------
Net cash provided by financing activities 6,189,384 51,745,242
------------ ------------
Net increase (decrease) in cash and cash equivalents 6,133,174 (5,668)
Cash and cash equivalents at beginning of period 190,458 128,974
------------ ------------
Cash and cash equivalents at end of period $ 6,323,632 $ 123,306
============ ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During February 1998, the Company issued 69,123 shares of common stock at
$15.375 per share to officers of the Company in lieu of cash as a performance
bonus. Additionally, the Company issued 406 shares of common stock at $14.75 per
share and 160 shares of common stock at $15.50 per share to the independent
directors of the Company in lieu of cash as compensation.
At March 31, 1998, $11,602,786 in distributions to shareholders and limited
partners had been declared but not paid. The distributions are scheduled to be
paid on May 1, 1998. At December 31, 1997, $10,645,348 in distributions to
shareholders and limited partners had been declared but not paid.
At March 31, 1997, $6,901,439 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on May 2,
1997. At December 31, 1996, $6,864,126 in distributions to shareholders and
limited partners had been declared but not paid.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
5
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------------
1. Organization and Basis of Presentation
Equity Inns, Inc. (the "Company") was incorporated on November 24, 1993.
The Company is a self-administered real estate investment trust ("REIT")
for federal income tax purposes. The Company, through its wholly-owned
subsidiary, Equity Inns Trust (the "Trust"), is the sole general partner
of Equity Inns Partnership, L.P. (the "Partnership") and at March 31,
1998 owned an approximate 95.2% interest in the Partnership. The Company
was formed to acquire equity interests in hotel properties and at March
31, 1998 owned, through the Partnership, 89 hotel properties with a total
of 10,777 rooms in 30 states.
The Partnership, under operating leases providing for the payment of
percentage rent (the "Percentage Leases"), leased 25 of the current
hotels to Crossroads/Memphis Partnership, L.P., 31 of the current hotels
to Crossroads Future Company, L.L.C. and 23 of the current hotels to
Crossroads/Memphis Financing Company, L.L.C. (referred to collectively as
"Crossroads"). Each of these lessees is an affiliate of Interstate Hotels
Company ("Interstate"). All payments due under these Percentage Leases
are guaranteed by Interstate. The Partnership leased 10 hotels to
Caldwell Holding Company ("Caldwell"), a wholly-owned subsidiary of Prime
Hospitality Corporation ("Prime"). Caldwell is required, under the terms
of its master lease agreement, to maintain 20% of the expected annual
percentage rents in cash or marketable securities. All hotels owned by
the Company are leased to Crossroads and Caldwell (collectively, the
"Lessees" and individually as a "Lessee"). The Lessees operate and lease
hotels owned by the Partnership pursuant to separate Percentage Leases
which provide for rent payments equal to the greater of (i) a fixed base
rent ("Base Rent") or (ii) percentage rent based on the revenues of the
hotels ("Percentage Rent").
During the quarter ended March 31, 1998, the Company did not acquire any
additional hotel properties.
On February 18, 1998, the Company sold 641,556 shares of common stock,
$.01 par value ("Common Stock") to Prudential Securities Incorporated.
The offering price was $15.81 per share, resulting in gross proceeds of
approximately $10,100,000. On March 30, 1998, the Company sold 645,162
shares of Common Stock to J.C. Bradford & Co. The offering price was
$15.50 per share, resulting in gross proceeds of approximately
$10,000,000. The Company received approximately $19,100,000 after
underwriters' discounts and offering expenses from the combined
offerings.
These unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of Securities and Exchange
Commission ("SEC") and should be read in conjunction with the financial
statements and notes thereto of the Company included in the Company's
1997 Annual Report on Form 10-K. The accompanying condensed
6
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
1. Organization and Basis of Presentation, continued
consolidated financial statements, reflect, in the opinion of management,
all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring
nature.
2. Change in Accounting Principle
In May 1998, the Financial Accounting Standards Board's Emerging Issues
Task Force issued EITF number 98-9 "Accounting for Contingent Rent in
Interim Periods" ("EITF 98-9"). EITF 98-9 provides that a lessor shall
defer recognition of contingent rental income in interim periods until
specified targets that trigger the contingent income are met. In July
1998, the Task Force issued transition guidance stating that the
consensus could be applied on a prospective basis or in a manner similar
to a change in accounting principle effective April 1, 1998. The Company
has reviewed the terms of its percentage leases and has determined that
the provisions of EITF 98-9 will significantly impact the Company's
current revenue recognition on an interim basis, but will have no impact
on the Company's annual percentage lease revenue or interim cash flow
from its third party Lessees. The Company adopted the provisions of EITF
98-9 and elected to restate the first quarter results of 1998 in
accordance with the new pronouncement. The effect of the change on the
three months ended March 31, 1998 was to decrease lease revenues and,
therefore, net income applicable to common shareholders by $7,892,638
($.21 per share-basic and diluted) to a loss of $1,496,034 ($(.04) per
share-basic and diluted). The pro forma per share amounts below reflect
the effect on prior periods had the new method been in effect. The 1998
amounts are presented for comparative purposes only.
<TABLE>
<CAPTION>
Three Months Ended
1998 1997
----------- -----------
<S> <C> <C>
Pro forma amounts:
Net loss applicable to common shareholders $(1,496,034) $(1,698,562)
=========== ===========
Net loss per common share-basic and diluted $ (.04) $ (.07)
=========== ===========
Amounts actually reported:
Net income (loss) applicable to common
shareholders $(1,496,034) $ 3,166,597
=========== ===========
Net income (loss) per common share-basic
and diluted $ (.04) $ .13
=========== ===========
</TABLE>
7
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
3. Net Income Per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), which changes the computation and presentation of earnings
per share. SFAS 128 requires the presentation of basic and diluted
earnings per share, replacing primary and fully diluted earnings per
share previously required. Earnings per share for all prior years
presented have been presented in accordance with SFAS 128.
A reconciliation of the numerator and denominator used in the basic
earnings per share computation to the numerator and denominator used in
the diluted earnings per share computation is presented below for the
three months ended March 31, 1998 and 1997, respectively. Stock options
are anti-dilutive for the three months ended March 31, 1998 and thus are
not considered in the calculation of diluted earnings per share.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1998 1997
----------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) - basic $(1,496,034) 35,221,367 $(.04) $3,166,597 23,693,278 $.13
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest (78,270) 1,842,520 119,187 859,861
Dilutive effect of stock
options outstanding
using the treasury
stock method 41,991
----------- ---------- ----- ---------- ---------- ----
Net income (loss)-diluted $(1,574,304) 37,063,887 $(.04) $3,285,784 24,595,130 $.13
=========== ========== ===== ========== ========== ====
</TABLE>
4. Debt
Debt is comprised of the following at March 31, 1998:
<TABLE>
<S> <C>
Commercial Mortgage Bonds $ 85,748,526
Unsecured Line of Credit 145,050,000
Other 72,633
------------
$230,871,159
============
</TABLE>
8
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
4. Debt, Continued
The Company's $250 million unsecured line of credit (the "Unsecured Line
of Credit") bears interest at a variable rate of LIBOR plus 1.4%, 1.5%,
1.625%, or 1.75% as determined by the Company's percentage of total debt
to the total value of the Company's investment in hotel properties, as
defined in the loan agreement (the "Percentage"). The Percentage is
reviewed quarterly, and the interest rate is adjusted as necessary. At
March 31, 1998, the interest rate on the Unsecured Line of Credit was
LIBOR (5.69% at March 31, 1998) plus 1.625%. The Unsecured Line of Credit
has a three-year term, expiring in October 2000, plus a one-year renewal
option.
5. Subsequent Events
The following hotels were acquired by the Company subsequent to March 31,
1998:
<TABLE>
<CAPTION>
Date of # of Cost
Acquisition Property Rooms (in millions)
----------- ------------------------------- ----- -------------
<S> <C> <C> <C>
April 14, 1998 Hampton Inn-San Antonio, Texas 169 $12.6
April 15, 1998 Homewood Suites-Cincinnati
(Sharonville) Ohio 111 7.7
April 28, 1998 Residence Inn-Boise, Idaho 104 7.0
April 28, 1998 Residence Inn-Portland, Oregon 168 23.5
</TABLE>
On April 14, 1998, the Partnership issued 123,457 Units valued at
approximately $1.9 million in conjunction with the purchase of the San
Antonio hotel. On April 14, 1998, 2,050 shares of Common Stock were
issued upon redemption of Units.
On April 21, 1998, the Company announced that it had signed a
definitive agreement to merge with RFS Hotel Investors, Inc. ("RFS") in
a stock transaction in which each share of RFS will be exchanged for
shares of Common Stock of the Company ("Common Stock"). Under the terms
of the agreement, each RFS shareholder will receive 1.5 shares of
Common Stock for each RFS share, providing the Company's average stock
price is between $14 and $17 per share during an agreed upon 20-day
measurement period prior to the closing of the merger. If the Company's
average stock price during that period exceeds $17 per share, the
exchange ratio will be adjusted to provide RFS shareholders with $25.50
worth of Common Stock for each share of RFS stock. If the average stock
price during such period is less than $14, then either the Company or
RFS may terminate the agreement. The merger is subject to approval of
the shareholders of the Company and RFS and other conditions.
9
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
BACKGROUND
The Company commenced operations on March 1, 1994 upon completion of the
Company's initial public offering (the "IPO") and the simultaneous acquisition
of eight Hampton Inn hotel properties with 995 rooms. Since the IPO, the Company
has actively implemented its acquisition strategy. The following chart
summarizes information regarding the Company's hotels at March 31, 1998:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
--------------------- ---------------- ------------
<S> <C> <C>
Premium Limited Service Hotels:
Hampton Inn 57 6,947
Comfort Inn 2 182
Holiday Inn Express 1 101
-- ------
Sub-total 60 7,230
All-Suite Hotels:
AmeriSuites 10 1,238
Premium Extended Stay Hotels:
Residence Inn 9 1,039
Homewood Suites 5 536
-- ------
Sub-total 14 1,575
-- ------
Full Service Hotels:
Holiday Inn 4 557
Comfort Inn 1 177
-- ------
Sub-total 5 734
-- ------
Total 89 10,777
== ======
</TABLE>
In order for the Company to qualify as a REIT, neither the Company nor the
Partnership can operate hotels. Therefore, the Partnership leases the Hotels to
the Lessees pursuant to the Percentage Leases. The Partnership's, and therefore
the Company's, principal source of revenue is lease payments by the Lessees
under the Percentage Leases. Percentage Rent is based primarily upon the Hotels'
room revenue, and to a lesser extent, when applicable, food and beverage
revenue.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
BACKGROUND, Continued
Change in Accounting Principle
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim
Financial Periods" ("EITF 98-9"). EITF 98-9 provides that a lessor shall defer
recognition of contingent rental income in interim periods until specified
targets that trigger the contingent income are met. In July 1998, the Task Force
issued transition guidance stating that the consensus could be applied on a
prospective basis or in a manner similar to a change in accounting principle
effective April 1, 1998. The Company has reviewed the terms of its percentage
leases and has determined that the provisions of EITF 98-9 will significantly
impact the Company's current revenue recognition on an interim basis, but will
have no impact on the Company's annual percentage lease revenue, funds from
operations or interim cash flow from its third party Lessees. The Company has
adopted the provisions of EITF 98-9 and elected to restate the first quarter
results of 1998 in accordance with the new pronouncement. The effect of the
change on the three months ended March 31, 1998 was to decrease lease revenues
and, therefore, net income applicable to common shareholders by $7,892,638
($(.21) per share-basic and diluted) to a loss of $1,496,034 ($(.04) per
share-basic and diluted).
The Company's percentage leases provide for the greater of (i) annual fixed base
rent or (ii) Percentage Rent to be remitted to the Company annually. The leases
contain annual room revenue thresholds used to calculate two tiers of Percentage
Rent which are applied to annualized room revenues on a quarterly basis to
determine quarterly Lessee Percentage Rent payments. The provisions of EITF 98-9
call for straight-line recognition of the annual base rent throughout the year
and for the deferral of any additional Percentage Rent collected or due from the
lessees until such amounts exceed the annual fixed base rent. This will
generally result in base rent being recognized in the first and second quarters
and Percentage Rents collected or due from the Lessees in the first and second
quarters being deferred and then recognized in the third and fourth quarters due
to the structure of the Company's percentage leases and the seasonality of the
hotel operations. Historically, the Company has recorded lease revenue in
interim periods on a basis similar to that used to determine quarterly Lessee
Percentage Rent payments, resulting in the second and third quarters being the
strongest quarters.
At March 31, 1998, deferred revenue of $7,892,638 represents Percentage Rent
collected or due from the Lessees under the terms of the leases which the
Company expects to recognize as lease revenue in the third and fourth quarters
of 1998. The Company's quarterly distributions to shareholders generally are
based on Percentage Rents collected or due from Lessees as opposed to percentage
lease revenue recognized. Management expects its hotel portfolio to yield
substantial Percentage Rent annually, based on its cash flow analyses of the
hotels prior to their acquisition and based on the negotiated terms of the
related leases.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Lease revenue $13,514,296 $11,777,863
Add:
Deferred lease revenue 7,892,638
----------- -----------
Percentage rents collected or due from Lessees $21,406,934 $11,777,863
=========== ===========
</TABLE>
The decrease in reported lease revenue for the three months ended March 31, 1998
from the comparable period in 1997 is attributable to the change in the
Company's revenue recognition as discussed above. Included in deferred revenue
at March 31, 1998 is $7,892,638 of first quarter Percentage Rents collected or
due from the Lessees which management expects the Company to recognize as
revenue in the third and fourth quarters of 1998. After considering such amounts
included in deferred revenue at March 31, 1998, Percentage Rents collected or
due from the Lessees under the terms of the leases during the three months ended
March 31, 1998 were $21,406,934 compared to $11,777,863 for the three months
ended March 31, 1997. The increase in Percentage Lease revenue for the three
months ended March 31, 1998 over the comparable period last year is the result
of (i) the number of hotels increasing from 55 at March 31, 1997 to 89 at March
31, 1998 and (ii) to a lesser extent, increased Percentage Lease revenue for the
Hotels owned throughout both periods. On a comparable basis, the increase in
Percentage Lease revenue was caused by an increase in revenue per available room
("REVPAR") for Hotels owned by the Company throughout both periods of 3.9% to
$46.51 from $44.78. In addition, for hotels, on a pro forma basis, which were in
operation for the full quarter in both 1998 and 1997, REVPAR (on a pro forma
basis) increased to $47.52 from $46.58, an increase of 2.0%.
Real estate and personal property taxes and depreciation and amortization
increased over the comparable period in 1997 due to the increase in the number
of hotel properties owned by the Company, from 55 properties at March 31, 1997
to 89 properties at March 31, 1998.
General and administrative expenses increased primarily as a result of (i)
increased legal and professional fees resulting from the Company's growth; (ii)
increases in number of hotels owned subject to ground leases; and (iii)
increased corporate staff and related expenses.
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
Interest expense increased $2,145,306 in the three months ended March 31, 1998
over the comparable period in 1997. The increase was due primarily to an
increase in the average outstanding balance of the Company's debt from $116
million for the three months ended March 31, 1997 to $232 million for the three
months ended March 31, 1998. Average interest rates increased slightly, from
7.5% to 7.6% for the quarter ended March 31, 1998.
Funds From Operations as defined below were $12,929,776 or $0.35 per share for
the three months ended March 31, 1998, compared to $7,070,545 or $0.29 per share
for the three months ended March 31, 1997. The Company considers Funds From
Operations to be a key measure of a REIT's performance and believes that Funds
From Operations should be considered along with, but not as an alternative to,
net income and cash flows as a measure of the Company's operating performance
and liquidity.
Funds From Operations
The Company considers Funds From Operations ("FFO") (after adjustment for
deferred lease revenue) one measure of REIT performance. In accordance with the
resolution adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT"), FFO represents net income (loss) (computed
in accordance with generally accepted accounting principles), excluding gains
(or losses) from debt restructuring or sales of property, plus depreciation, and
after adjustments for unconsolidated partnerships and joint ventures. For the
periods presented, depreciation and minority interest were the only non-cash
adjustments. FFO should not be considered 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 payments with
respect to indebtedness on the hotels.
FFO presented herein is not necessarily comparable to FFO presented by other
real estate companies due to the fact that not all real estate companies use the
same definition. However, the Company's FFO is comparable to the FFO of real
estate companies that use the current definition of the NAREIT, after the
adjustment for deferred lease revenue.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
The following is a reconciliation of income before minority interest to Funds
From Operations under the NAREIT definition and after adjustment to add back
deferred lease revenue:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Income (loss) before minority interest $(1,574,304) $3,285,784
Add:
Depreciation of buildings, furniture
and equipment 6,611,442 3,784,761
Deferred lease revenue 7,892,638
----------- ----------
Funds From Operations $12,929,776 $7,070,545
=========== ==========
Weighted average number of outstanding shares of
Common Stock and Units of the Partnership 37,063,887 24,595,130
========== ==========
Funds From Operations per Share and Unit $ .35 $ .29
=========== ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements, including
distributions to its shareholders, is its cash distributions from the
Partnership. The Partnership receives cash payments from the Lessees pursuant to
the Percentage Leases. The Company's liquidity, including its ability to make
distributions to shareholders, is dependent upon the Lessees' ability to make
payments under the Percentage Leases. All of Crossroads' lease obligations are
guaranteed by Interstate. The Company's other Lessee, Caldwell, is required,
under the terms of its master lease agreement, to maintain 20% of its expected
annual percentage rents generated from the Percentage Leases in cash or
marketable securities.
Cash and cash equivalents as of March 31, 1998 were $6,323,632, compared to
$190,458 at December 31, 1997. The increase in cash at March 31, 1998 is due to
the receipt of proceeds from the Company's latest equity offering, which were
applied to debt maturing in early April 1998. Additionally, all of the March 31,
1998 receivable due from the Lessees was received in April 1998. Net cash
provided by operating activities for the three months ended March 31, 1998 was
$9,089,517.
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
The Company intends to make additional investments in hotel properties and may
incur, or cause the Partnership to incur, indebtedness to make such investments
or to meet distribution requirements imposed on a REIT under the Code to the
extent that working capital and cash flow from the Company's investments are
insufficient to make such distributions. The Company's Charter currently limits
aggregate indebtedness to 45% of the Company's investment in hotel properties,
at cost, after giving effect to the Company's use of proceeds from any
indebtedness. The Company has submitted to its shareholders for consideration at
the Company's annual meeting to be held on May 14, 1998, a proposal to delete
this debt limitation from the Company's Charter. At March 31, 1998, the Company
had outstanding debt of approximately $230.9 million, including $85.8 million
under the Bonds, and $145.1 million under the Unsecured Line of Credit, leaving
approximately $104.9 million available under the Unsecured Line of Credit for
future acquisitions. The Company's consolidated indebtedness was 34.4% of its
investments in hotels, at cost, at March 31, 1998.
During the three months ended March 31, 1998, the Company invested approximately
$9.1 million to fund capital improvements to its properties, including
replacement of carpets, drapes, renovation of common areas and improvement of
hotel exteriors. Most of these capital improvements were required by the
franchisors on hotels that the Company purchased as part of the franchisors'
product improvement plans ("PIPs"). The Company took the PIPs into consideration
when negotiating the prices for these properties. In addition, the Company has
committed to fund approximately $16.1 million during the remainder of 1998 for
capital improvements. The Company intends to fund such improvements out of
future cash from operations, present cash balances and borrowing under the
Unsecured Line of Credit. Under the Unsecured Line of Credit and the Bonds, the
Partnership has agreed to fund a minimum of 4% of room revenues per quarter on a
cumulative basis, for the ongoing replacement or refurbishment of furniture,
fixtures and equipment at the hotels. Management believes that these amounts
will be sufficient to fund required expenditures for the term of the Percentage
Leases for the capital improvements anticipated. Recurring repairs and
maintenance are performed by the Lessees.
During the three months ended March 31, 1998, the Partnership declared
distributions in the aggregate of $11,602,786 to its partners, including the
Trust, or $.31 per Unit, and the Company declared distributions in the aggregate
of $11,031,605, or $.31 per share to its shareholders, with such distributions
being payable on May 1, 1998.
On April 21, 1998, the Company announced that it signed a definitive agreement
to merge with RFS Hotel Investors, Inc. ("RFS") in a stock transaction in which
each share of RFS will be exchanged for shares of the Company. Under the terms
of the agreement each RFS shareholder will receive 1.5 Equity Inns shares for
each RFS share, providing the Company's average stock price is between $14 and
$17 per share during an agreed upon 20-day measurement period. If the Company's
average
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
stock price during that period exceeds $17 per share, the exchange ratio will be
adjusted to provide RFS shareholders with $25.50 worth of Equity Inns' stock for
each share of RFS stock. If the average stock price during such period is less
than $14, then either the Company or RFS may terminate the agreement. The merger
is subject to approval of the shareholders of the Company and RFS and other
conditions.
The Company expects to meet its short-term liquidity requirements generally
through net cash provided by operations, existing cash balances and, if
necessary, short-term borrowing under its Unsecured Line of Credit. The Company
believes that its net cash provided by operations will be adequate to fund both
operating requirements and payment of dividends by the Company in accordance
with REIT requirements.
The Company expects to meet its long-term liquidity requirements, such as
scheduled debt maturities and property acquisitions, through long-term secured
and unsecured borrowing, the issuance of additional equity securities of the
Company, or, in connection with acquisitions of hotel properties, issuance of
Units in the Partnership. Pursuant to the Partnership Agreement for the
Partnership, holders of Units have the right to require the Partnership to
redeem their Units. During the three months ended March 31, 1998, no Units were
tendered for redemption. Pursuant to the Partnership Agreement, the Company has
the option to redeem Units tendered for redemption on a one-for-one basis for
shares of Common Stock or for an equivalent amount of cash. The Company
anticipates that it will acquire any Units tendered for redemption in the
foreseeable future in exchange for shares of Common Stock.
INFLATION
Operators of hotels, including the Lessees and any third-party manager retained
by the Lessees, in general possess the ability to adjust room rates quickly.
However, competitive pressures have limited and may in the future limit the
ability of the Lessees and any third-party manager retained by the Lessees to
raise room rates in response to inflation.
SEASONALITY
The hotel industry is seasonal in nature. The Hotels' operations historically
reflect higher occupancy rates and ADR during the second and third quarters. The
provisions of EITF 98-9 call for straight-line recognition of the annual base
rent throughout the year and for the deferral of any Percentage Rent amounts
collected or due from the Lessees until such amounts exceed the annual fixed
base rent. This will generally result in base rent being recognized in the first
and second quarters and
16
<PAGE>
Management Discussion and Analysis of
Financial Condition and Results of Operations, Continued
SEASONALITY, Continued
and second quarters and Percentage Rents collected or due from the Lessees
being deferred and then recognized in the third and fourth quarters due
to the structure of the Company's percentage leases and the seasonality
of the hotel operations. Historically, the Company has recorded lease revenue
in interim periods on a basis similar to that used to determine quarterly
Lessee Percentage Rent payments, resulting in the second and third quarters
being the strongest quarters. To the extent that cash flow from operating
activities from the Hotels for a quarter is sufficient to generate Percentage
Lease revenue necessary to fund all of the distributions for such quarter,
the Company may maintain the annual distribution rate by funding seasonal-
related shortfalls with available cash or borrowing under the Unsecured Line of
Credit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -- The following exhibit is filed in this Quarterly Report on
Form 10-Q.
27 Financial Data Schedule (filed only electronically with the
Securities and Exchange Commission)
(b) Reports on Form 8-K -- The Company filed the following Current Reports
on Form 8-K during the period covered by this Quarterly Report on Form
10-Q:
(i) Current Report on Form 8-K dated January 20, 1998 and
filed on February 6, 1998, reporting the Company's alliance
with U.S. Franchise Systems, Inc. (no financial information
required);
(ii) Current Report on Form 8-K dated February 12, 1998 and
filed on February 13, 1998, reporting the filing of certain
exhibits in connection with the Company's public offering of
641,556 shares of Common Stock (no financial information
required); and
(iii) Current Report on Form 8-K dated March 25, 1998 and
filed on March 26, 1998, reporting the filing of certain
exhibits in connection with the Company's public offering of
645,162 shares of Common Stock (no financial information
required).
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
Equity Inns, Inc.
August 28, 1998 By: /s/Donald H. Dempsey
- --------------- ------------------------------------------------
Date Donald H. Dempsey
Executive Vice President, Secretary, Treasurer,
and Chief Financial Officer (Principal Financial
and Accounting Officer)
19
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
27 Financial Data Schedule (filed only electronically with the SEC)
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Equity Inns, Inc. for the three months ended March
31, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 6,323,632
<SECURITIES> 0
<RECEIVABLES> 11,776,690
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 619,606,262
<DEPRECIATION> 0
<TOTAL-ASSETS> 647,583,949
<CURRENT-LIABILITIES> 0
<BONDS> 230,871,159
0
0
<COMMON> 362,310
<OTHER-SE> 367,284,365
<TOTAL-LIABILITY-AND-EQUITY> 647,583,949
<SALES> 13,684,614
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,258,918
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,290,630
<INCOME-PRETAX> (1,574,304)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,496,034)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
