<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amended Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For The Quarterly Period Ended June 30, 1998 Commission File Number 01-12073
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.)
7700 Wolf River Boulevard, Germantown, TN 38138
--------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(901) 754-7774
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
4735 Spottswood, Suite 102, Memphis, TN 38117
----------------------------------------------------
(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
August 9, 1998 was 36,408,319.
1 of 24
<PAGE>
EQUITY INNS, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1998
(unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations (unaudited) -
For the three months and six months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
For the six months ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 21
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $ 776,019,221 $ 617,071,977
Cash and cash equivalents 326,875 190,458
Due from Lessees 13,191,804 5,925,109
Note receivable 3,884,052 3,884,052
Deferred expenses, net 6,913,408 7,275,473
Deposits and other assets 2,794,334 1,178,028
------------- -------------
Total assets $ 803,129,694 $ 635,525,097
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 316,633,905 $ 233,206,156
Accounts payable and accrued expenses 12,800,450 12,467,254
Dividends and distributions payable 11,948,492 10,645,348
Minority interest in Partnership 19,814,049 19,034,524
------------- -------------
Total liabilities 361,196,896 275,353,282
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $.01 par value, 50,000,000
shares authorized, 36,266,467 and 34,865,578
shares issued and outstanding, respectively 362,665 348,656
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, 2,750,000 shares of Series A and
-0- shares issued and outstanding 68,750,000
Additional paid-in capital 405,796,246 387,133,407
Unearned directors' and officers' compensation (160,220) (273,482)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (31,552,006) (25,772,879)
------------- -------------
Total shareholders' equity 441,932,798 360,171,815
------------- -------------
Total liabilities and shareholders' equity $ 803,129,694 $ 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>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Lease revenue $28,050,668 $15,713,892 $49,457,602 $27,491,755
Other income 186,261 324,632 356,579 341,943
----------- ----------- ----------- -----------
Total revenues 28,236,929 16,038,524 49,814,181 27,833,698
----------- ----------- ----------- -----------
Expenses
Real estate and personal property taxes 2,922,571 1,647,708 5,355,934 2,957,550
Depreciation and amortization 7,287,011 4,493,384 13,969,130 8,339,504
Amortization of loan costs 210,201 238,049 423,198 427,018
Interest 5,027,133 2,496,476 9,317,763 4,641,800
General and administrative 1,631,544 1,208,726 3,271,353 2,227,861
----------- ----------- ----------- -----------
Total expenses 17,078,460 10,084,343 32,337,378 18,593,733
----------- ----------- ----------- -----------
Income before minority interest 11,158,469 5,954,181 17,476,803 9,239,965
Minority interest 558,741 207,964 872,865 327,151
----------- ----------- ----------- -----------
Net income 10,599,728 5,746,217 16,603,938 8,912,814
Preferred stock dividends 108,854 108,854
----------- ----------- ----------- -----------
Net income applicable to
common shareholders $10,490,874 $ 5,746 217 $16,495,084 $ 8,912,814
=========== =========== =========== ===========
Net income per common share-
basic and diluted $ .29 $ .22 $ .46 $ .35
=========== =========== =========== ===========
Weighted average number of
common shares outstanding-diluted 38,176,000 27,620,000 37,623,000 26,116,000
=========== =========== =========== ===========
</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 Six Months Ended
June 30,
-----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders $ 16,495,084 $ 8,912,814
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,969,130 8,339,503
Amortization of loan costs 423,198 427,018
Amortization of unearned directors' compensation 39,762 46,142
Directors' compensation 29,943
Minority interest 872,865 327,151
Changes in assets and liabilities:
Due from Lessees (7,266,695) (4,675,350)
Deferred expenses (8,750) (6,466)
Deposits and other assets (1,616,306) (487,179)
Accounts payable and accrued expenses 1,395,962 5,175,908
Preferred dividends payable 108,854
------------ -----------
Net cash provided by operating activities 24,443,047 18,059,541
------------ -----------
Cash flows from investing activities:
Investment in hotel properties (145,583,927) (222,482,927)
Improvements and additions to hotel properties (14,464,854) (9,242,682)
Cash paid for franchise applications (179,437) (2,018,650)
------------ -----------
Net cash used by investing activities (160,228,218) (233,744,259)
------------ -----------
Cash flows from financing activities:
Gross proceeds from public offering of common stock 20,144,615 108,769,513
Gross proceeds from public offering of preferred stock 68,750,000
Payment of offering expenses (3,450,515) (6,474,036)
Proceeds from exercise of stock options 112,500
Distributions paid (22,248,134) (13,765,565)
Borrowings under revolving credit facility 123,475,000 194,095,395
Payments on revolving credit facility (49,725,000) (151,010,395)
Borrowings under CMBS credit facility 88,000,000
Payments on CMBS credit facility (1,078,418) (674,968)
Payments on debt assumed (39,158)
Cash paid for loan costs (17,582) (3,132,839)
Payments on capital lease obligations (1,720) (414)
------------ -----------
Net cash provided by financing activities 135,921,588 215,806,691
------------ -----------
Net increase (decrease) in cash and cash equivalents 136,417 121,973
Cash and cash equivalents at beginning of period 190,458 128,974
------------ -----------
Cash and cash equivalents at end of period $ 326,875 $ 250,947
============ ===========
</TABLE>
5
<PAGE>
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, during the six month period ending June 30, 1998, the Company
issued 508 shares of common stock at $14.75 per share; 160 shares at $15.50 per
share; 729 shares at $15.44; 164 shares at $15.19; 243 shares at $15.38; and 182
shares at $13.69 to the independent directors of the Company in lieu of cash as
compensation.
At June 30, 1998, $11,839,638 in distributions to shareholders and limited
partners had been declared but not paid. The distributions are scheduled to be
paid on August 3, 1998. At December 31, 1997, $10,645,348 in distributions to
shareholders and limited partners had been declared but not paid.
At June 30, 1997, $9,266,670 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on August
1, 1997. At December 31, 1996, $6,864,126 in distributions to shareholders and
limited partners had been declared but not paid.
In April 1998, 123,457 limited partnership units valued at $1,925,912 were
issued as part of the total acquisition cost of a Hampton Inn hotel in San
Antonio, Texas. Of this amount, $717,080 was allocated to minority interest and
additional paid-in capital, respectively.
In April 1998, the Company assumed mortgage notes payable totaling approximately
$10.8 million in connection with the purchase of two hotels.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
6
<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 June 30, 1998
owned an approximate 95.0% interest in the Partnership. The Company was
formed to acquire equity interests in hotel properties and at June 30,
1998 owned, through the Partnership, 104 hotel properties with a total of
12,739 rooms in 35 states.
At June 30, 1998, 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., 34 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. At June 30, 1998, the
Partnership leased 19 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. The Partnership leases 101 of the hotels owned by
the Company at June 30, 1998 to Crossroads and Caldwell (collectively,
the "Lessees" and individually, 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"). The remaining three hotels
are operated pursuant to management agreements, two of which are operated
by Interstate and one is operated by MeriStar Management Company, L.L.C.,
a wholly-owned subsidiary of MeriStar Hotels and Resorts, Inc. On June 2,
1998, Interstate was acquired by Patriot American Hospitality, Inc., a
publicly traded hotel REIT.
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.
7
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
1. Organization and Basis of Presentation, Continued
During the quarter ended June 30, 1998, the Company acquired the
following hotel properties:
<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-Sharonville
(Cincinnati), Ohio 111 7.8
April 28, 1998 Residence Inn-Portland, Oregon 168 23.5
April 28, 1998 Residence Inn-Boise, Idaho 104 7.0
May 8, 1998 Residence Inn-Somers Point,
New Jersey 120 8.1
June 26, 1998 AmeriSuites-Albuquerque, New
Mexico 128 9.5
June 26, 1998 AmeriSuites-Baltimore, Maryland 128 10.0
June 26, 1998 AmeriSuites-Baton Rouge, Louisiana 128 10.9
June 26, 1998 AmeriSuites-Birmingham, Alabama 128 7.7
June 26, 1998 AmeriSuites-Las Vegas, Nevada 202 19.1
June 26, 1998 AmeriSuites-Memphis, Tennessee 128 8.4
June 26, 1998 AmeriSuites-Miami, Florida 67 10.5
June 26, 1998 AmeriSuites-Minneapolis, Minnesota 128 9.6
June 26, 1998 Nashville, Tennessee 128 11.2
----- ------
1,837 $155.9
===== ======
</TABLE>
Also during the quarter ended June 30, 1998, the Company completed its
first development property, a 125-room Hampton Inn & Suites located in
Bartlett (Memphis), Tennessee, at a cost of approximately $7.5 million.
On June 25, 1998, the Company completed its first offering of preferred
stock ("Preferred Stock"), selling 2,750,000 shares of its 9 1/2% Series
A Cumulative Preferred Stock, $.01 par value ("Series A Preferred
Stock"). The offering price was $25 per share, resulting in gross
proceeds of $68.8 million. The Company received approximately $66.3
million after underwriters' discounts and offering expenses from the
offering.
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
8
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
1. Organization and Basis of Presentation, Continued
Company's 1997 Annual Report on Form 10-K. The accompanying condensed
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. 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 and six months ended June 30, 1998 and 1997, respectively. Stock
options are anti-dilutive for the three-month and six-month periods ended
June 30, 1998 and thus are not considered in the calculation of diluted
earnings per share.
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
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 - basic $10,490,874 36,236,749 $0.29 $5,746,217 26,603,100 $0.22
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest 558,741 1,939,037 207,964 972,022
Dilutive effect of stock
options outstanding
using the treasury
stock method 60,871 44,501
----------- ----------- ----- ----------- ---------- -----
Net income-diluted $11,049,615 38,236,657 $0.29 $5,954,181 27,619,623 $0.22
=========== =========== ===== =========== ========== =====
</TABLE>
9
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
2. Net Income Per Common Share, Continued
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
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 - basic $16,495,084 35,731,863 $0.46 $8,912,814 25,156,227 $0.35
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest 872,865 1,891,045 327,151 916,252
Dilutive effect of stock
options outstanding
using the treasury
stock method 73,055 43,249
----------- ---------- ----- ---------- ---------- -----
Net income-diluted $17,367,949 37,695,963 $0.46 $9,239,965 26,115,728 $0.35
=========== ========== ===== ========== ========== =====
</TABLE>
3. Debt
Debt is comprised of the following at June 30, 1998:
<TABLE>
<S> <C>
Commercial Mortgage Bonds $ 85,204,678
Unsecured Line of Credit 220,500,000
NBC Credit Line 100,000
Other 10,829,227
------------
$316,633,905
============
</TABLE>
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
June 30, 1998, the interest rate on the Unsecured Line of Credit was
LIBOR (5.69% at June 30, 1998) plus 1.50%. The Unsecured Line of Credit
has a three-year term, expiring in October 2000, plus a one-year renewal
option.
The Company's $5,000,000 line of credit with the National Bank of
Commerce (the "NBC Credit Line") bears interest at the bank's prime rate
(8.5% at June 30, 1998) and is also unsecured. The NBC Credit Line has a
three-year term, expiring in September 2000.
10
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
3. Debt, Continued
In connection with the purchase of a Hampton Inn hotel in San Antonio,
Texas in April 1998, the Partnership assumed a mortgage note payable with
a principal balance of approximately $6.5 million. The note bears
interest at 10% and is due in monthly principal and interest installments
of approximately $66,000. The note is due September 1, 2015. The hotel
securing this note has a carrying value of $12.6 million at June 30,
1998.
In connection with the purchase of a Residence Inn hotel in Boise, Idaho
in April 1998, the Partnership assumed a mortgage note payable with a
principal balance of approximately $4.3 million. The note bears interest
at a variable rate which, as of June 30, 1998, was approximately 8.6% and
is due in monthly principal and interest installments of approximately
$39,000. The note is due December 1, 2016 and contains a prepayment
premium. The hotel securing this note has a carrying value of
approximately $7.0 million at June 30, 1998.
4. Shareholders' Equity
In connection with the purchase of the Hampton Inn hotel located in San
Antonio, Texas on April 14, 1998, the Partnership issued 123,457 Units
valued at approximately $1.9 million.
During the quarter ended June 30, 1998, 40,062 shares of Common Stock
were issued upon redemption of Units.
5. Subsequent Events
The following hotel was acquired by the Company subsequent to June 30,
1998:
<TABLE>
<CAPTION>
Date of # of Cost
Acquisition Property Rooms (in millions)
----------- ------------------------ ----- -------------
<S> <C> <C> <C>
August 7, 1998 Homewood Suites-Seattle,
Washington 169 $22.0
</TABLE>
6. Pro Forma Financial Information
Due to the impact of the acquisitions in 1998, historical results of
operations may not be indicative of future results of operations and
earnings per share. The following unaudited pro forma condensed
consolidated statements of operations for the six months ended June 30,
1998 and 1997, are presented as if the acquisition of all 104 hotels
owned at June 30, 1998, and the consummation of the Company's equity
offerings and the application of the net proceeds therefrom had
occurred on or prior to January 1, 1997, and the hotels had been
11
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
6. Pro Forma Financial Information, Continued
leased to the Lessees pursuant to the percentage leases. The pro forma
condensed consolidated statement of operations does not purport to
present what actual results of operations would have been if the
acquisition of the hotels had occurred on such date or to project results
for any future period.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Lease revenues $59,011,445 $57,623,819
Interest income 356,579 341,943
----------- -----------
Total revenues 59,368,024 57,965,762
Expenses:
Real estate and personal property taxes 6,198,871 5,721,446
Depreciation and amortization 16,516,464 16,305,742
Amortization of loan costs 423,198 453,685
Interest 11,764,055 12,045,984
General and administrative 3,271,353 2,454,828
----------- -----------
Total expenses 38,173,941 36,981,685
----------- -----------
Income before minority interest 21,194,083 20,984,077
Minority interest 903,594 893,483
----------- -----------
Net income 20,290,489 20,090,594
Preferred stock dividends 3,265,625 3,265,625
----------- -----------
Net income applicable to common shareholders $17,024,864 $16,824,969
=========== ===========
Net income per share-basic and diluted $ .47 $ .46
=========== ===========
Weighted average number of common
shares outstanding-basic 36,266,467 36,266,467
=========== ===========
Weighted average number of common
shares outstanding-diluted 38,265,948 38,225,616
=========== ===========
</TABLE>
12
<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 June 30, 1998:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
--------------------- ---------------- ------------
<S> <C> <C>
Premium Limited Service Hotels:
Hampton Inn 58 7,116
Hampton Inn & Suites 1 125
Comfort Inn 2 182
Holiday Inn Express 1 101
--- ------
Sub-total 62 7,524
All-Suite Hotels:
AmeriSuites 19 2,403
Premium Extended Stay Hotels:
Residence Inn 12 1,431
Homewood Suites 6 647
--- ------
Sub-total 18 2,078
--- ------
Full Service Hotels:
Holiday Inn 4 557
Comfort Inn 1 177
--- ------
Sub-total 5 734
--- ------
Total 104 12,739
=== ======
</TABLE>
In order for the Company to qualify as a REIT, neither the Company nor the
Partnership can operate hotels. Therefore, the Partnership leases 101 of the
Hotels to the Lessees pursuant to the Percentage Leases. The remaining three
hotels are operated pursuant to management agreements, two of which are operated
by Interstate and one operated by MeriStar Management Company, L.L.C., a
wholly-owned subsidiary of MeriStar Hotels and Resorts, Inc. 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.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
For the three months ended June 30, 1998 and 1997, the Company had revenues of
$28,236,929 and $16,038,524, respectively, consisting of Percentage Lease
revenue of $28,050,668 and $15,713,892. This represents a 78.5% increase in
Percentage Lease revenue for the three months ended June 30, 1998 over the
comparable period last year. The increase is the result of (i) the number of
hotels increasing from 85 at June 30, 1997 to 104 at June 30, 1998 and (ii) to a
lesser extent, increased Percentage Rents collectible from the Lessees for
hotels owned throughout both periods. On a comparable basis, the increase was
caused by an increase in revenue per available room ("REVPAR") for hotels owned
by the Company throughout both periods of 1.9% to $53.48 from $52.48. 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 $55.43 from
$55.07, an increase of .7%.
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 85 properties at June 30, 1997 to
104 properties at June 30, 1998.
General and administrative expenses increased primarily as a result of (i)
increases in number of hotels owned subject to ground leases; and (ii) increased
corporate staff and related expenses.
Interest expense increased $2,530,657 in the three months ended June 30, 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 $140
million for the three months ended June 30, 1997 to $270 million for the three
months ended June 30, 1998. Average interest rates increased slightly, from 7.4%
to 7.5% for the quarter ended June 30, 1998.
Funds From Operations (as defined below) were $18,262,667 or $0.48 per share for
the three months ended June 30, 1998, compared to $10,382,010 or $0.38 per share
for the three months ended June 30, 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.
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
Six Months Ended June 30, 1998 and 1997
For the six months ended June 30, 1998 and 1997, the Company had revenues of
$49,814,181 and $27,833,698, respectively, consisting of Percentage Lease
revenue of $49,457,602 and $27,491,755. The increase is the result of (i) the
number of hotels increasing from 85 at June 30, 1997 to 104 at June 30, 1998 and
(ii) to a lesser extent, increased Percentage Rents collectible from the Lessees
for hotels owned throughout both periods. On a comparable basis, this increase
was caused by an increase in REVPAR for hotels owned by the Company throughout
both periods of 2.9% to $49.58 from $48.19. 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 $52.04 from $51.29, an increase of 1.5%.
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 85 properties at June 30, 1997 to
104 properties at June 30, 1998.
General and administrative expenses increased primarily as a result of (i)
increased legal and professional fees and shareholder expenses, 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.
Interest expense increased $4,675,963 in the six months ended June 30, 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 $130 million for the
six months ended June 30, 1997 to $252 million for the six months ended June 30,
1998.
Funds From Operations (as defined below) were $31,192,443 or $0.83 per share for
the six months ended June 30, 1998, compared to $17,452,555 or $0.67 per share
for the six months ended June 30, 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.
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
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 of 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.
The following is a reconciliation of income before minority interest to Funds
From Operations under the NAREIT definition:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before minority interest $11,158,469 $ 5,954,181 $17,476,803 $ 9,239,965
Less:
Preferred stock dividends (108,854) (108,854)
Add:
Depreciation of buildings, furniture
and equipment 7,213,052 4,427,829 13,824,494 8,212,590
----------- ----------- ----------- -----------
Funds From Operations $18,262,667 $10,382,010 $31,192,443 $17,452,555
=========== =========== =========== ===========
Weighted average number of outstanding shares of
Common Stock - Dilutive 38,236,657 27,575,122 37,695,963 26,072,479
=========== =========== =========== ===========
Funds From Operations per share $ .48 $ .38 $ .83 $ .67
=========== =========== =========== ===========
</TABLE>
16
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
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 June 30, 1998 were $326,875, compared to
$190,458 at December 31, 1997. Additionally, all of the June 30, 1998 receivable
due from the Lessees was received in July 1998. Net cash provided by operating
activities for the six months ended June 30, 1998 was $24,443,047.
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. Prior to its latest annual meeting, the
Company's Charter limited 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. This requirement was deleted by
shareholder vote on May 14, 1998. The Company's Board of Directors has
subsequently adopted a policy currently imposing the same limitations previously
imposed by the Charter. At June 30, 1998, the Company had outstanding debt of
approximately $316.6 million, including $85.2 million under the Bonds, and
$220.5 million under the Unsecured Line of Credit, leaving approximately $29.5
million available under the Unsecured Line of Credit for future acquisitions.
The Company's consolidated indebtedness was 38.0% of its investments in hotels,
at cost, at June 30, 1998.
During the six months ended June 30, 1998, the Company invested approximately
$14.5 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 $13.3 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 borrowings under the
Unsecured Line of Credit. Under the Unsecured Line of Credit and the Commercial
Mortgage 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
17
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
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 six months ended June 30, 1998, the Partnership declared
distributions in the aggregate of $23,442,424 to its partners, including the
Trust, or $.62 per Unit, and the Company declared distributions in the aggregate
of $22,274,210, or $.62 per share to its shareholders.
In June 1998, the Company issued 2,750,000 shares of 9 1/2% Series A Preferred
Stock. Dividends on the Series A Preferred Stock are cumulative from the date of
issue and are payable quarterly in an amount equal to $2.375 per share. The
Series A Preferred Stock has a liquidation preference of $25 per share plus
accumulated accrued and unpaid dividends.
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 the Company. 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.
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.
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 six months ended June 30, 1998, 40,062 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 issued
40,062 shares of Common Stock upon redemption of the 40,062 Units in the first
six months
18
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
of 1998 and 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 managers 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 managers retained by the Lessees to
raise room rates in response to inflation.
YEAR 2000 COMPLIANCE
Many existing computer programs have been 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's
assessment of its Year 2000 compliance is not complete. The Company has used its
computer and software contractors to implement a compliance program to address
the challenges the Year 2000 may present to the Company's systems and
applications. This program includes an analysis of computer systems and
applications operated by the Company and computer systems of third parties upon
whose data or services the Company relies (including the Lessees).
The Company's management, as a result of discussions with its computer and
software contractors, anticipates modifying its systems, and conversions to new
software and related testing will be substantially complete by late 1998. As
part of its compliance program, the Company has also surveyed its customers,
vendors and the Lessees, whose failure to timely convert their systems could
have an impact on the Company's operations. Although the Company does not
believe the Year 2000 issue will materially affect its business, financial
condition and results of operations, there can be no assurance that its Year
2000 remediation efforts will be fully in compliance. In addition, although the
Company has no reason to believe that the Lessees will not be in compliance by
the Year 2000, the Company is unable to determine the extent to which the Year
2000 issue will affect the operations of the hotels. The Company continues to
discuss with the Lessees the need for implementing adequate procedures to
address this issue.
Management does not consider the incurred or estimated costs of the Company's
compliance program to be material.
19
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1993, as amended, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import. Such forward-looking statements relate to future events and
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 to be materially different from the
results or achievements expressed or implied by such forward-looking statements.
The Company is not obligated to update any such factors or to reflect the impact
of actual future events or developments on such forward-looking statements.
SEASONALITY
The hotel industry is seasonal in nature. The Hotels' operations historically
reflect higher occupancy rates and ADR during the second and third quarters.
This seasonality can be expected to cause fluctuations in the Partnership's
quarterly revenue to the extent that it receives Percentage Rent. To the extent
that cash flow from operating activities from the Hotels for a quarter is
insufficient 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.
20
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The 1998 annual meeting of shareholders (the "Annual Meeting") of the Company
was held on May 14, 1998 for the Company's shareholders to take action on each
of five proposals: (1) to elect one Class I director to serve on the Board of
Directors until the Company's annual meeting of shareholders in 2001 or until
his successor has been duly elected and qualified; (2) to consider and vote upon
a proposal to amend Article 5 of the Charter to increase the number of
authorized shares of Common Stock from 50 million shares to 100 million shares;
(3) to consider and vote upon a proposal to delete Article 7 of the Charter,
which limits the Company's consolidated indebtedness to 45% of the Company's
investment in hotel properties, at its cost; (4) to consider and vote upon a
proposal to amend Article 14(c) of the Charter to conform Article 14(c) to other
provisions in the Charter relating to the Company's ability to preserve its
status as a real estate investment trust so long as its actions to not prohibit
the settlement of any transactions entered into through the facilities of any
national securities exchange registered under the Exchange Act or of the
national market system of a national securities association registered under the
Exchange Act; and (5) to consider and vote on a proposal to approve an amendment
to the Company's Non-Employee Directors' Stock Incentive Plan (the "Directors'
Plan") to, among other things, permit the Company's independent directors to
elect to receive retainer and meeting fees in the form of shares of Common Stock
and increase the number of shares that may be issued under the Directors' Plan
to allow for such elections.
The results of the shareholders' votes, approving each of the above matters
submitted before the 1998 Annual Meeting, were summarized in the Company's
Current Report on Form 8-K dated May 14, 1998 and filed with the SEC on May 28,
1998.
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 SEC)
(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:
(1) Current Report on Form 8-K dated April 21, 1998 and filed with
the SEC on May 21, 1998, reporting the Company's execution of
an Asset Sale Agreement and Plans of Mergers (the "Merger
Agreement") by and among RFS Hotel Investors, Inc., RHI
Acquisition, Inc., the Company, the Partnership and RFS
Partnership, L.P., with the following financial statements and
information:
21
<PAGE>
Pro forma financial information (unaudited) for the
Company for the year ended December 31, 1997 and for
the three months ended March 31, 1998 reflecting the
pro forma effects of the transactions described in
the Merger Agreement, as well as certain other
transactions specific to RFS Hotel Investors, Inc.
and the Company;
Historical audited financial statements of RFS Hotel
Investors, Inc. as of December 31, 1997 and 1996 and
for the three-year period ended December 31, 1997;
Historical unaudited financial statements of RFS
Hotel Investors, Inc. as of March 31, 1998 and for
the three months ended March 31, 1998 and 1997
(unaudited); and
Historical audited financial statements of RFS, Inc.
as of December 31, 1997 and 1996 and for the
three-year period ended December 31, 1997.
(2) Current Report on Form 8-K dated May 14, 1998 and filed with
the SEC on May 28, 1998, reporting the results of the Annual
Meeting (no financial information required);
(3) Current Report on Form 8-K dated June 15, 1998 and filed with
the SEC on June 16, 1998, reporting the filing of certain
exhibits in connection with the Company's public offering of
its shares of Series A Preferred Stock (no financial
information required); and
(4) Current Report on Form 8-K dated June 23, 1998 and filed with
the SEC on June 24, 1998, reporting the filing of certain
underwriting-related exhibits in connection with the Company's
public offering of its shares of Series A Preferred Stock (no
financial information required).
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Equity Inns, Inc.
March 5, 1999 By: /s/Donald H. Dempsey
- ------------------- ------------------------------------------------
Date Donald H. Dempsey
Executive Vice President, Secretary, Treasurer,
and Chief Financial Officer (Principal Financial
and Accounting Officer)
23
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule (filed only electronically with the SEC)
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Equity Inns, Inc. for the six months ended June
30, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 326,875
<SECURITIES> 0
<RECEIVABLES> 17,075,856
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 776,019,221
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 316,633,905
0
68,750,000
<COMMON> 362,665
<OTHER-SE> 372,820,133
<TOTAL-LIABILITY-AND-EQUITY> 803,129,694
<SALES> 49,814,181
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 32,337,778
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,317,763
<INCOME-PRETAX> 0
<INCOME-TAX> 17,476,803
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,495,084
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
