<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 September 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
November 3, 1998 was 36,430,906.
1 of 24
<PAGE>
EQUITY INNS, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1998
(unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations (unaudited) -
For the three and nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
For the nine months ended September 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 14
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $792,308,017 $617,071,977
Cash and cash equivalents 7,642,109 190,458
Due from Lessees 14,624,665 5,925,109
Note receivable 3,884,052 3,884,052
Deferred expenses, net 6,610,851 7,275,473
Deposits and other assets 1,091,033 1,178,028
------------ ------------
Total assets $826,160,727 $635,525,097
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $339,744,416 $233,206,156
Accounts payable and accrued expenses 14,013,022 12,467,254
Dividends and distributions payable 13,629,951 10,645,348
Minority interest in Partnership 19,671,722 19,034,524
------------ ------------
Total liabilities 387,059,111 275,353,282
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $.01 par value, 100,000,000
shares authorized, 36,423,422 and 34,865,578
shares issued and outstanding, respectively 364,234 348,656
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 407,601,629 387,133,407
Unearned directors' and officers' compensation (2,097,554) (273,482)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (34,252,806) (25,772,879)
------------ ------------
Total shareholders' equity 439,101,616 360,171,815
------------ ------------
Total liabilities and shareholders' equity $826,160,727 $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 Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Lease revenue $32,919,517 $24,713,825 $82,377,119 $52,205,580
Loss on sale of hotel properties (693,801) (693,801)
Other income 254,815 31,476 611,394 373,419
----------- ----------- ----------- -----------
Total revenues 32,480,531 24,745,301 82,294,712 52,578,999
----------- ----------- ----------- -----------
Expenses
Real estate and personal property taxes 3,106,366 2,050,054 8,462,300 5,007,604
Depreciation and amortization 8,655,204 5,518,009 22,624,334 13,857,513
Amortization of loan costs 201,005 352,574 624,203 779,593
Interest 6,204,676 4,109,401 15,522,439 8,751,201
General and administrative 1,438,009 1,046,152 4,709,362 3,274,012
Merger Expenses 2,197,301 2,197,301
----------- ----------- ----------- -----------
Total expenses 21,802,561 13,076,190 54,139,939 31,669,923
----------- ----------- ----------- -----------
Income before minority interest 10,677,970 11,669,111 28,154,773 20,909,076
Minority interest 454,707 433,882 1,327,572 761,033
----------- ----------- ----------- -----------
Net income 10,223,263 11,235,229 26,827,201 20,148,043
Preferred stock dividends 1,632,803 1,741,657
----------- ----------- ----------- -----------
Net income applicable to
common shareholders $ 8,590,460 $11,235,229 $25,085,544 $20,148,043
=========== =========== =========== ===========
Net income per common share-
basic and diluted $ .24 $ .35 $ .70 $ .74
=========== =========== =========== ===========
Weighted average number of
common shares outstanding-diluted 38,311,000 33,110,000 37,909,000 28,444,000
=========== =========== =========== ===========
</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 Nine Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders $25,085,544 $20,148,043
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on sale of hotel properties 693,801
Depreciation and amortization 22,624,334 13,857,513
Amortization of loan costs 624,203 779,593
Amortization of unearned directors' compensation 191,867 69,214
Directors' compensation 42,420
Minority interest 1,327,572 761,033
Changes in assets and liabilities:
Due from Lessees (8,699,556) (9,643,332)
Deferred expenses (3,589) (24,540)
Deposits and other assets 86,995 (884,571)
Accounts payable and accrued expenses 2,608,535 6,186,604
Preferred dividends payable 1,741,657
----------- -----------
Net cash provided by operating activities 46,323,783 31,249,557
----------- -----------
Cash flows from investing activities:
Investment in hotel properties (167,583,927) (255,334,261)
Improvements and additions to hotel properties (25,879,535) (13,741,443)
Proceeds from sale of hotel properties 7,940,368
Cash paid for franchise applications (214,537) (2,143,569)
----------- -----------
Net cash used by investing activities (185,737,631) (271,219,273)
----------- -----------
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 (3,745,480) (6,474,036)
Proceeds from exercise of stock options 112,500 1,125,000
Distributions paid (34,087,772) (23,032,235)
Borrowings under revolving credit facility 161,275,000 232,050,395
Payments on revolving credit facility (63,800,000) (155,965,395)
Borrowings under CMBS credit facility 88,000,000
Payments on CMBS credit facility (1,631,705) (1,191,454)
Payments on debt assumed (99,055)
Cash paid for loan costs (49,579) (3,309,794)
Payments on capital lease obligations (3,025) (414)
----------- -----------
Net cash provided by financing activities 146,865,499 239,971,580
----------- -----------
Net increase in cash and cash equivalents 7,451,651 1,864
Cash and cash equivalents at beginning of period 190,458 128,974
----------- -----------
Cash and cash equivalents at end of period $ 7,642,109 $ 130,838
=========== ===========
</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 for 1997 and during the nine months ended September 30, 1998, issued 2,941
shares of common stock at prices ranging from $12.06-$15.50 to independent
directors of the Company in lieu of cash as directors' compensation.
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. Additionally, the Company assumed mortgage notes payable
totaling approximately $10.8 million in connection with the purchase of two
hotels.
In July 1998, the Company issued 141,000 shares of restricted shares of common
stock to its officers under the 1994 Stock Incentive Plan. The above were valued
at prices ranging from $13.50-$13.56. Except for 4,000 shares which vested
immediately, the restriction periods are tied to employment and range from three
to five years.
In August 1998, the Company issued a total of 15,000 restricted shares of common
stock to its independent directors. The shares were valued at $12.31 and vest
ratably over five years. All of the restricted shares issued to the independent
directors were issued subject to the approval of the Company's shareholders. It
is anticipated that such approval will be requested at the annual shareholders
meeting in 1999.
At September 30, 1998, $13,629,951 in distributions, including $11,888,294 to
common shareholders and $1,741,657 to preferred shareholders, had been declared
but not paid. The distributions were paid on November 2, 1998. At December 31,
1997, $10,645,348 in distributions to shareholders and limited partners had been
declared but not paid.
At September 30, 1997, $9,623,723 in distributions to shareholders and limited
partners had been declared but not paid. At December 31, 1996, $6,864,126 in
distributions to shareholders and limited partners had been declared but not
paid.
During February, March and June 1997, 448,215 limited partnership units valued
at $6,051,721 were issued as part of the total acquisition cost of certain hotel
properties.
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 September 30,
1998 owned an approximate 95.0% interest in the Partnership. The Company
was formed to acquire equity interests in hotel properties and at
September 30, 1998 owned, through the Partnership, 102 hotel properties
with a total of 12,640 rooms in 36 states.
At September 30, 1998, the Partnership, under operating leases providing
for the payment of percentage rent (the "Percentage Leases"), leased 22
of the current hotels to Crossroads/Memphis Partnership, L.P., 35 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
Patriot American Hospitality, Inc., successor by merger to Interstate
Hotels Company ("Patriot"). All payments due under these Percentage
Leases are guaranteed by Patriot and by Interstate Hotels, LLC
("Interstate"), successor by merger to Interstate Hotels Corporation and
an indirect subsidiary of Patriot. At September 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 a
capitalization of 20% of the expected annual percentage rents in cash or
marketable securities. Crossroads and Caldwell are described herein as,
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 Crossroads Hospitality Company, L.L.C., a subsidiary of Interstate,
and one of which is operated by MeriStar Management Company, L.L.C., a
wholly-owned subsidiary of MeriStar Hotels and Resorts, Inc.
On September 8, 1998, the Company announced that the previously announced
merger agreement between the Company and RFS Hotel Investors, Inc. had
been terminated by mutual agreement.
7
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
1. Organization and Basis of Presentation, Continued
During the nine months ended September 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
August 7, 1998 Homewood Suites-Seattle,
Washington 161 22.0
----- ------
1,998 $177.9
===== ======
</TABLE>
In May 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.
During the quarter ended September 30, 1998, the Partnership sold three
hotels ( Hampton Inn, Little Rock, Arkansas; Hampton Inn, Shelby, North
Carolina; Hampton Inn, Cleveland, Tennessee) to third parties for an
aggregate sales price of approximately $8.0 million. The Company realized
a loss of approximately $694,000 as a result of these sales. The sales
price was paid with cash.
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.
8
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
----------------------
1. Organization and Basis of Presentation, Continued
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 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 nine months ended September 30, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
For the Three Months Ended September 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 applicable to
common shareholders-
basic $8,590,460 36,384,908 $.24 $11,235,229 31,840,252 $.35
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest 454,707 1,925,915 433,882 1,269,673
Dilutive effect of stock
options outstanding
using the treasury
stock method 386
---------- ---------- ---- ----------- ---------- ----
Net income applicable to
common shareholders-
diluted $9,045,167 38,311,209 $.24 $11,669,111 33,109,925 $.35
========== ========== ==== =========== ========== ====
</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 Nine Months Ended September 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 applicable to
common shareholders-
basic $25,085,544 35,951,937 $.70 $20,148,043 27,408,719 $.74
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest 1,327,572 1,902,796 761,033 1,035,353
Dilutive effect of stock
options outstanding
using the treasury
stock method 54,523
----------- ----------- ---- ----------- ---------- ----
Net income applicable to
common shareholders-
diluted $26,413,116 37,909,256 $.70 $20,909,076 28,444,072 $.74
=========== =========== ==== =========== ========== ====
</TABLE>
3. Debt
Debt is comprised of the following at September 30, 1998:
<TABLE>
<S> <C>
Commercial Mortgage Bonds $ 84,651,391
Unsecured Line of Credit 239,400,000
Other 15,693,025
------------
$339,744,416
============
</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
September 30, 1998, the interest rate on the Unsecured Line of Credit was
LIBOR (5.37% at September 30, 1998) plus 1.625%. The Unsecured Line of
Credit has a three-year term, expiring in October 2000, plus a one-year
renewal option.
10
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
----------------------
3. Debt, Continued
The Company's $10,000,000 line of credit with the National Bank of
Commerce (the "NBC Credit Line") bears interest at the bank's prime rate
(8.5% at September 30, 1998) and is also unsecured. The NBC Credit Line
has a three-year term, expiring in September 2000.
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 September 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 September 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 penalty. The hotel securing this note has a carrying value of
approximately $7.0 million at September 30, 1998.
4. Shareholders' Equity
During the nine months ended September 30, 1998, 40,062 partnership units
were tendered for redemption. Pursuant to the Partnership Agreement, the
Company issued 40,062 shares of Common Stock on a one-for-one basis to
redeem the units tendered.
5. Subsequent Events
In October 1998, 6,512 shares of Common Stock were issued upon redemption
of units on a one-for-one basis.
Dividends on the Preferred Stock for the period June 25 through October
31, 1998 were paid on November 2, 1998.
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 nine months ended September
30, 1998 and 1997, are presented as if the acquisition of all 102 hotels
owned at September 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 leased
11
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
----------------------
6. Pro Forma Financial Information, Continued
to the Lessees pursuant to the Percentage Leases. Additionally, the pro
forma statement of operations for the nine months ended September 30,
1998 includes approximately $2.2 million of merger expenses relating to
the terminated merger agreement between the Company and RFS Hotel
Investors and approximately $700,000 in losses from the sale of hotel
properties, both of which collectively reduced pro forma net income
applicable to common shareholders by $.07. 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.
12
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
----------------------
6. Pro Forma Financial Information, Continued
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Revenues
Lease revenue $92,118,200 $92,680,627
Loss on sale of hotel properties (693,801)
Other income 611,394 373,419
----------- -----------
Total revenues 92,035,793 93,054,046
Expenses:
Real estate and personal property taxes 9,410,237 8,768,951
Depreciation and amortization 25,650,542 24,971,182
Amortization of loan costs 624,203 806,260
Interest 18,917,970 19,760,335
General and administrative 4,709,362 3,516,712
Merger Expenses 2,197,301
------------ -----------
Total expenses 61,509,615 57,823,440
------------ -----------
Income before minority interest 30,526,178 35,230,606
Minority interest 1,291,638 1,529,551
----------- -----------
Net income 29,234,540 33,701,055
Preferred stock dividends 4,898,438 4,898,438
----------- -----------
Net income applicable to common shareholders $24,336,102 $28,802,617
=========== ===========
Net income per common share-basic and diluted $ .67 $ .79
=========== ===========
Weighted average number of common
shares outstanding-basic 36,423,422 36,423,422
=========== ===========
Weighted average number of common
shares outstanding-diluted 38,403,860 38,393,796
=========== ===========
</TABLE>
13
<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 September 30, 1998:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
--------------------- ---------------- ------------
<S> <C> <C>
Premium Limited Service Hotels:
Hampton Inn 55 6,856
Hampton Inn & Suites 1 125
Comfort Inn 2 182
Holiday Inn Express 1 101
--- ------
Sub-total 59 7,264
All-Suite Hotels:
AmeriSuites 19 2,403
Premium Extended Stay Hotels:
Residence Inn 12 1,431
Homewood Suites 7 808
--- ------
Sub-total 19 2,239
--- ------
Full Service Hotels:
Holiday Inn 4 557
Comfort Inn 1 177
--- ------
Sub-total 5 734
--- ------
Total 102 12,640
=== ======
</TABLE>
The Partnership leases 99 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 Crossroads Hospitality
Company, L.L.C., a subsidiary of Interstate, and one of which is 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.
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
For the three months ended September 30, 1998 and 1997, the Company had revenues
of $32,480,531 and $24,745,301, respectively, consisting of Percentage Lease
revenue of $32,919,517 and $24,713,825. This represents a 33.2% increase in
Percentage Lease revenue for the three months ended September 30, 1997 over the
comparable period last year. The increase is primarily the result of (i) the
number of hotels increasing from 88 at September 30, 1997 to 102 at September
30, 1998 and (ii) 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 revenue per available room ("REVPAR") for hotels owned
by the Company throughout both periods of .1% to $54.99 from $54.94. 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 $58.62 from $57.90, an
increase of 1.2%.
Real estate and personal property taxes and depreciation and amortization
increased over the comparable period in 1997 primarily due to the increase in
the number of hotel properties owned by the Company, from 88 properties at
September 30, 1997 to 102 properties at September 30, 1998.
General and administrative expenses increased primarily as a result of (i)
increases in the number of hotels owned subject to ground leases; and (ii)
increased corporate staff and related expenses.
Merger expenses totaling $2,197,301, relating to actual costs associated with a
previously announced merger agreement between the Company and RFS Hotel
Investors, Inc., were written off during the three months ended September 30,
1998 due to the termination of the merger agreement.
Interest expense increased $2,095,275 in the three months ended September 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 $270
million for the three months ended September 30, 1997 to $331 million for the
three months ended September 30, 1998. Average interest rates decreased slightly
from the comparable period in 1997, from 7.5% to 7.4%.
Funds From Operations (as defined below) were $20,516,357 or $0.54 per share for
the three months ended September 30, 1998, compared to $17,123,259 or $0.52 per
share for the three months ended September 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
Nine Months Ended September 30, 1998 and 1997
For the nine months ended September 30, 1998 and 1997, the Company had revenues
of $82,294,712 and $52,578,999, respectively, consisting of Percentage Lease
revenue of $82,377,119 and $52,205,580. The increase is primarily the result of
(i) the number of hotels increasing from 88 at September 30, 1997 to 102 at
September 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 4.1% to $54.84 from $52.68. 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 $56.16 from
$54.98, an increase of 2.1%.
Real estate and personal property taxes and depreciation and amortization
increased over the comparable period in 1997 primarily due to the increase in
the number of hotel properties owned by the Company, from 88 properties at
September 30, 1997 to 102 properties at September 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 the number of hotels owned subject to
ground leases; and (iii) increased corporate staff and related expenses.
Interest expense increased $6,771,238 in the nine months ended September 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 $252
million for the nine months ended September 30, 1997 to $279 million for the
nine months ended September 30, 1998.
Funds From Operations (as defined below) were $51,708,808 or $1.36 per share for
the nine months ended September 30, 1998, compared to $34,575,814 or $1.22 per
share for the nine months ended September 30, 1997.
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 Investments 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, loss on the sale of hotel properties,
non-recurring merger expenses and minority interest. FFO should not be
considered an alternative to net income or other measurements under generally
16
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
Funds From Operations, Continued
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 non-recurring merger related expenses.
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 and non-recurring merger expenses:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before minority interest $10,677,970 $11,669,111 $28,154,773 $20,909,076
Less:
Preferred stock dividends (1,632,803) (1,741,657)
Add:
Depreciation of buildings, furniture
and equipment 8,580,088 5,454,148 22,404,582 13,666,738
Loss on sale of hotel properties 693,801 693,801
Non-recurring merger expenses 2,197,301 2,197,301
---------- ----------- ----------- -----------
Funds From Operations $20,516,357 $17,123,259 $51,708,800 $34,575,814
=========== =========== =========== ===========
Weighted average number of outstanding shares of
Common Stock - dilutive 38,311,209 33,109,925 37,909,256 28,444,072
=========== =========== =========== ===========
Funds From Operations per share $ .54 $ .52 $ 1.36 $ 1.22
=========== =========== =========== ===========
</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 Patriot and by Interstate. The Company's other Lessee, Caldwell,
is required under the terms of its master lease agreement to maintain a
capitalization of 20% of its expected annual Percentage Rents generated from the
Percentage Leases in cash or marketable securities.
17
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
Cash and cash equivalents as of September 30, 1998 were $7,642,109, compared to
$190,458 at December 31, 1997. The increase in cash at September 30, 1998 is due
to the receipt of proceeds from the sale of hotel properties, which were applied
to debt maturing in early October 1998. Additionally, all of the September 30,
1998 receivable due from the Lessees was received in October 1998. Net cash
provided by operating activities for the nine months ended September 30, 1998
was $46,323,783.
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. The Board of Directors may amend, modify or change the
Company's debt limitation policy at any time without shareholder approval.
The Company's long-term debt at September 30, 1998 consists of (i) borrowings
under the Company's $250 million unsecured line of credit (the "Unsecured Line
of Credit"), (ii) Commercial Mortgage Bonds in three classes ("Bonds") and (iii)
a $10 million line of credit with National Bank of Commerce (the "NBC Credit
Line"). At September 30, 1998, the Company had outstanding debt of approximately
$339.7 million, including $239.4 million under the Unsecured Line of Credit,
$84.7 million under the Bonds, and $4.9 million under the NBC Credit Line,
leaving approximately $10.6 million available under the Unsecured Line of Credit
and $5.1 million available under the NBC Credit Line. The Company's consolidated
indebtedness was 39.7% of its investments in hotels, at cost, at September 30,
1998.
During the nine months ended September 30, 1998, the Company invested
approximately $25.9 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 $6.5 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.
18
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
The Company has entered into purchase agreements to purchase three hotels at a
total cost of $86 million. The hotels are currently in various stages of
development, with projected openings between May 1999 and February 2000. Also,
the Company is currently developing a hotel with an expected cost of $18
million, with a projected opening in April 2000. Funds needed to complete these
projects will be obtained from borrowings under the Unsecured Line of Credit and
from other sources of debt or equity financing.
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 nine months ended September 30, 1998, the Partnership declared
distributions in the aggregate of $35,330,719 to its partners, including the
Trust, or $.93 per Unit, and the Company declared distributions in the aggregate
of $33,565,471, or $.93 per share to its common 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 in equal quarterly installments in an annual 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.
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 nine months ended September 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
and anticipates that it will acquire any Units tendered for redemption in the
foreseeable future in exchange for shares of Common Stock.
19
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
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.
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.
20
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
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.
21
<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:
(1) Current Report on Form 8-K dated June 30, 1998 and filed on
July 17, 1998, reporting the Company's Percentage Lease terms
for its hotels as of June 30, 1998 (no financial information
required); and
(2) Current Report on Form 8-K dated September 8, 1998 and filed
on September 14, 1998, reporting the termination of the Asset
Sale Agreement and Plans of Mergers dated as of April 21, 1998
by and among RFS Hotel Investors, Inc., RHI Acquisition, Inc.,
the Company, the Partnership and RFS Partnership, L.P. (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 nine months ended September
30, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 7,642,109
<SECURITIES> 0
<RECEIVABLES> 18,508,717
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 792,308,017
<DEPRECIATION> 0
<TOTAL-ASSETS> 826,160,727
<CURRENT-LIABILITIES> 0
<BONDS> 339,744,416
0
68,750,000
<COMMON> 364,234
<OTHER-SE> 369,987,382
<TOTAL-LIABILITY-AND-EQUITY> 826,160,727
<SALES> 82,377,119
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 54,139,939
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,522,439
<INCOME-PRETAX> 28,154,773
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,085,544
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
