-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HgUQuCKbF7gqW6Z2KEGi+YIUqGqHe8j61vW9Lox6vcpLqil/8AnPFiSrxf/AyMSD GhqlTCVBOHGc+vtQIOYd2Q== 0000950144-96-005258.txt : 19960814 0000950144-96-005258.hdr.sgml : 19960814 ACCESSION NUMBER: 0000950144-96-005258 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RFS HOTEL INVESTORS INC CENTRAL INDEX KEY: 0000906408 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 621534743 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12011 FILM NUMBER: 96609523 BUSINESS ADDRESS: STREET 1: 889 RIDGE LAKE BLVD SUITE 100 CITY: MEMPHIS STATE: TN ZIP: 38120 BUSINESS PHONE: 9017675154 MAIL ADDRESS: STREET 1: 889 RIDGE LAKE BLVD STREET 2: STE 100 CITY: MEMPHIS STATE: TN ZIP: 38120 10-Q 1 RFS HOTEL INVESTORS, INC. FORM 10-Q 06-30-96 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number 34-0-22164 RFS HOTEL INVESTORS, INC. (Exact name of registrant as specified in its charter) Tennessee 62-1534743 (State or other Jurisdiction of (I.R.S. employer Incorporation or Organization identification No.) 889 Ridge Lake Boulevard, Suite 100, Memphis, TN 38120 (901) 767-5154 (Address of Principal Executive Offices) (Registrant's Telephone Number (Zip Code) Including Area Code) n/a (Former address, if changed since last report) Indicate by check mark whether the Registrant (i) has filed all reports required to be filed by Section 13 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 (ii) has been subject to such filing requirements for the past 90 days. X Yes No The number of shares of the Registrant's Common Stock, $.01 par value, outstanding on June 30, 1996 was 24,369,000. 2 RFS HOTEL INVESTORS, INC. INDEX
Form 10-Q Report Page --------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RFS Hotel Investors, Inc. Consolidated Balance Sheets - December 31, 1995 and June 30, 1996 3 Consolidated Statements of Income - For the three months ended June 30, 1995 and 1996 and the six months ended June 30, 1995 and 1996 4 Consolidated Statements of Cash Flows - For the six months ended June 30, 1995 and 1996 5 Notes to Consolidated Financial Statements 6 RFS, Inc. Balance Sheets - December 31, 1995 and June 30, 1996 9 Statements of Income - For the three months ended June 30, 1995 and 1996 and the six months ended June 30, 1995 and 1996 10 Statements of Cash Flows - For the six months ended June 30, 1995 and 1996 11 Notes to Financial Statements 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of RFS Hotel Investors, Inc. and RFS, Inc. 14 Item 4. Submission of Matters to a Vote of Security Holders 22 PART II. OTHER INFORMATION Item 6. Exhibits and Reports of Form 8-K 23
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RFS HOTEL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
December 31, June 30, 1995 1996 ------------ ----------- (unaudited) ASSETS Investment in hotel properties, net $364,097 $399,089 Cash and cash equivalents 2,680 2,691 Accounts receivable-Lessee 5,795 9,785 Deferred expenses, net 1,579 1,398 Prepaid and other assets 574 575 Escrow deposits 2,201 3,457 -------- -------- $376,926 $416,995 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 1,758 $ 1,560 Accrued real estate taxes 1,660 2,107 Borrowings on line of credit 21,850 42,600 Long-term debt 8,336 8,316 Minority interest 4,509 4,536 -------- -------- 38,113 59,119 -------- -------- Commitments and contingencies Shareholders' equity: Preferred Stock, $.01 par value, 5,000,000 shares authorized, 973,684 outstanding 10 Common Stock, $.01 par value, 100,000,000 shares authorized, 24,294,000 and 24,369,000 shares outstanding 243 244 Paid-in capital 336,857 356,311 Undistributed income 3,111 3,763 Unearned directors' and officers' compensation (1,398) (2,452) -------- -------- Total shareholders' equity 338,813 357,876 -------- -------- $376,926 $416,995 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 RFS HOTEL INVESTORS, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three For the Three For the Six For the Six Months Ended Months Ended Months Ended Months Ended June 30, June 30, June 30, June 30, 1995 1996 1995 1996 ------------- ------------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) Revenue: Lease revenue $12,066 $16,100 $21,885 $29,368 Interest income 303 74 850 143 ------- ------- ------- ------- Total revenue 12,369 16,174 22,735 29,511 ------- ------- ------- ------- Expenses: Real estate taxes and property and casualty insurance 1,042 1,448 2,603 2,909 Depreciation 2,080 2,627 4,038 5,140 Amortization of franchise fees and unearned compensation 133 194 264 331 Compensation 224 444 455 913 Franchise taxes 50 65 100 130 General and administrative 22 619 298 927 Loss on sale of hotel property 244 Amortization of loan costs 72 89 135 177 Interest expense 33 701 48 1,409 ------- ------- ------- ------- Total expenses 3,656 6,187 7,941 12,180 ------- ------- ------- ------- Income before allocation to minority interest 8,713 9,987 14,794 17,331 Income allocation to minority interest (111) (137) (203) (245) ------- ------- ------- ------- Net income $ 8,602 $ 9,850 $14,591 $17,086 ======= ======= ======= ======= Net income per common and common equivalent share $ 0.35 $ 0.39 $ 0.60 $ 0.68 Weighted average shares and partnership units outstanding 24,627 24,716 24,627 24,685
The accompanying notes are an integral part of these consolidated financial statements. 4 5 RFS HOTEL INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the Six For the Six Months ended Months ended June 30, June 30, 1995 1996 ------------ ------------ (unaudited) (unaudited) Cash flows from operating activities: Net income $14,591 $17,086 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,437 5,648 Income allocated to minority interest 203 245 Loss on sale of hotel property 244 Changes in assets and liabilities: Accounts receivable-Lessee (2,603) (4,012) Prepaid and other assets 95 (1) Accounts payable and accrued expense 73 249 ------- ------- Net cash provided by operating activities 16,796 19,459 ------- ------- Cash flows from investing activities: Investment in hotel properties (27,580) (44,080) Proceeds from sale of hotel property 3,891 Escrow deposit on acquisition properties (25) (1,421) Cash paid for franchise agreements (364) ------- ------- Net cash used by investing activites (27,969) (41,610) ------- ------- Cash flows from financing activities: Borrowings on Credit Line 32,750 Payments on Credit Line (12,000) Payments on long-term debt (20) Net proceeds from sale of preferred stock 18,143 Distributions to shareholders (13,847) (16,434) Distributions to limited partners (309) (218) Loan fees paid (137) (59) ------- ------- Net cash provided (used) by financing activities (14,293) 22,162 ------- ------- Net increase (decrease) in cash and cash equivalents (25,466) 11 Cash and cash equivalents at beginning of period 45,650 2,680 ------- ------- Cash and cash equivalents at end of period $20,184 $ 2,691 ======= =======
Supplemental disclosures of non-cash activities: In 1996, the Company applied deposits of $140 and $25 towards the purchase of an acquired hotel and land respectively. In 1996, the Company issued 75,000 shares of Common Stock to an officer, which at date of issuance, were valued at $17 5/8 per share. The accompanying notes are an integral part of these consolidated financial statements. 5 6 RFS HOTEL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE, UNIT AND PER SHARE DATA) 1. ORGANIZATION AND PRESENTATION. RFS Hotel Investors, Inc. (the "Company") was incorporated in Tennessee on June 1, 1993. The Company has elected to be taxed as a real estate investment trust ("REIT"). The Company is the sole general partner in RFS Partnership, L.P. (the "Partnership") and at June 30, 1996 owned an approximately 98.7% interest in the Partnership. The Company was formed to acquire equity interests in hotel properties and at June 30, 1996 owned, through the Partnership, 49 hotels (the "Hotels"). RFS Managers, Inc. ("Managers"), a wholly owned subsidiary of the Company, was formed, effective January 1, 1995 to provide management services to the Company. These unaudited consolidated financial statements include the accounts of the Company, the Partnership and Managers and have been prepared pursuant to the Securities and Exchange Commission ("SEC") rules and regulations and should be read in conjunction with the financial statements and notes thereto of the Company included in the Company's 1995 Annual Report on Form 10-K. The following notes to the consolidated financial statements highlight significant changes to notes included in the Form 10-K and present interim disclosures required by the SEC. The accompanying 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. DECLARATION OF DIVIDEND. On July 24, 1996, the Company declared a $0.36 dividend on each share of Common Stock outstanding on August 5, 1996. The dividend will be paid on August 15, 1996. 3. ACQUISITIONS OF REAL ESTATE. On May 30, 1996, the Partnership acquired a 220-room DoubleTree Hotel in Del Mar, CA from an unaffiliated party for $16.6 million. The purchase price was paid with borrowings under the Credit Line. 4. CREDIT LINE. Effective May 29, 1996, the Company increased its Credit Line to $75 million. The Credit Line expires on September 8, 1998. The Credit Line may be used to fund working capital requirements and to fund investments in hotel properties. Borrowings under the Credit Line will bear interest at the 90-day LIBOR (5.62% at June 30, 1996) plus 1.75%. The Credit Line is secured by a first mortgage on 33 hotels (the "Collateral Pool") with a net book value of $238.3 million at June 30, 1996. The Credit Line contains various covenants, including maintenance of debt coverage ratios, as defined, on all debt and all hotels of 3.0:1 and on the Credit Line and Collateral Pool of 2.25:1. The Company must also maintain a minimum net worth in an amount equal to the net worth in its most recent year-end audited financial statements and a minimum operating income, as defined, from the Collateral Pool of approximately $26.3 million. The Company had outstanding borrowings of $42.6 million on the Credit Line at June 30, 1996. The Company is in the process of increasing the Credit Line to $100 million. 6 7 The Credit Line contains a term loan option which allows the Company to convert the principal balance outstanding on September 8, 1998, not to exceed $75 million, to a term loan (the "Term Loan"). The Term Loan would bear interest at a fixed rate equal to the 5-year U.S. Treasury Bond yield plus 2-1/2% or a variable rate equal to the lender's floating corporate base rate plus 1%. The Term Loan would be payable over 5 years in 59 equal monthly installments of principal plus interest, given a 10 year amortization, plus a sixtieth payment of remaining principal plus interest. 5. SUBSEQUENT EVENTS. In July 1996, the Partnership acquired a newly-constructed 132-room Hampton Inn in Plano, TX, for $6.8 million from an unaffiliated party. The purchase price was paid with borrowings under the Credit Line. 6. COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE. Net income per common and common equivalent share is computed as follows for the three and the six months ended June 30, 1996:
three months six months ended ended June 30, 1996 June 30, 1996 ------------- ------------- Net income before allocation to minority interest $ 9,987 $17,331 Less preferred stock dividend 352 484 ------- ------- $ 9,635 $16,847 ======= ======= Weighted average common shares and common stock equivalents outstanding 24,716 24,685 Net income per common share $ 0.39 $ 0.68 ======= =======
7 8 7. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro forma condensed statements of income for the six months ended June 30, 1995 and 1996 of the Company are presented as if the 49 hotel properties which are owned at June 30, 1996 were owned since January 1, 1995. These unaudited pro forma condensed statements of income are not necessarily indicative of what actual results of operations of the Company would have been assuming such transactions had been completed as of January 1, 1995, nor does it purport to represent the results of operations for future periods. The pro forma effects related to the issuance of preferred stock are not reflected in the following.
1995 1996 ------- ------- Operating Data: Total revenue $26,402 $30,289 Real estate taxes and casualty insurance 2,945 2,945 Depreciation and amortization 5,743 5,824 Compensation 455 913 Franchise taxes 100 130 General and administrative 298 927 Loss on sale of a hotel property 244 Interest expense 1,935 1,935 ------- ------- Income before allocation to minority interest 14,926 17,371 Less minority interest 197 229 ------- ------- Net income $14,729 $17,142 ======= ======= Net income per common share $ 0.60 $ 0.68 Weighted average shares and partnership units outstanding 24,685 24,685
8 9 RFS, INC. BALANCE SHEETS (DOLLARS IN THOUSANDS)
December 31, June 30, 1995 1996 ------------ ----------- (unaudited) ASSETS Cash and cash equivalents $ 9,238 $12,156 Accounts receivable, net 2,507 1,460 Current portion of notes and other receivables - - Other 364 302 ------- ------- Total current assets 12,109 13,918 ------- ------- Notes and other receivables, net of current portion - 3,000 Investments in partnerships and ventures (312) (312) Investments in RFS Hotel Investors, Inc. 1,379 19,884 Leasehold improvements and office equipment, net 334 293 Deferred costs and other assets, net 311 2,996 ------- ------- $13,821 $39,779 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 7,100 $ 6,833 Accrued interest payable 4 - Lease payable 5,795 9,568 Due to Parent - 511 Income taxes payable 151 1,285 ------- ------- Total current liabilities 13,050 18,197 ------- ------- Notes payable 672 - Deferred income taxes 36 36 ------- ------- 13,758 18,233 ------- ------- Common stock, no par value; 1,000 shares authorized, 100 shares issued and outstanding 282 18,782 Unearned employee compensation (211) (176) Unrealized gain on marketable securities 22 26 Retained earnings (accumulated deficit) (30) 2,914 ------- ------- Total Stockholders' Equity 63 21,546 ------- ------- $13,821 $39,779 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 9 10 RFS, INC. INCOME STATEMENTS (DOLLARS IN THOUSANDS)
For the Three For the Three For the Six For the Six Months Ended Months Ended Months Ended Months Ended June 30, June 30, June 30, June 30, 1995 1996 1995 1996 ------------- ------------- ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) Revenues: Management and franchise fees $ 116 $ 79 $ 214 $ 115 Hotel revenues 30,832 38,431 57,374 72,723 Other fees and income 119 504 348 778 ------- ------- ------- ------- Total Revenues 31,067 39,014 57,936 73,616 ------- ------- ------- ------- Operating Expenses: General & administrative 984 877 1,994 1,846 Hotel expenses 16,525 19,415 31,531 37,956 Lease expenses 12,066 15,889 21,885 29,157 Depreciation and amortization 26 85 48 116 Interest expense 23 - 64 11 ------- ------- ------- ------- Total Operating expenses 29,624 36,266 55,522 69,086 ------- ------- ------- ------- Income Before Taxes 1,443 2,748 2,414 4,530 Income tax (expense) benefit - (965) 174 (1,586) ------- ------- ------- ------- Net Income $ 1,443 $ 1,783 $ 2,588 $ 2,944 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 10 11 RFS, INC. STATEMENTS OF CASH FLOW (dollars in thousands)
For the Six For the Six Months Ended Months Ended 1995 1996 ------------ ------------ (unaudited) (unaudited) Cash flows from operating activities: $ 2,588 $ 2,944 Net income Adjustments to reconcile net income to net cash provided by operations: Provision for bad debts - 142 Depreciation and amortization 48 116 Other non-cash expenses - 35 Deferred income taxes (174) - (Increase) decrease in accounts receivable (1,304) 905 (Increase) decrease in other assets 87 (57) Increase in current liabilities 2,635 5,147 ------- ------- Net cash provided by operations 3,880 9,232 ------- ------- Cash flows for investing activities: Purchases of furniture and equipment (179) (16) Investment in RFS Hotel Investors, Inc. - (18,500) Investments in partnerships and ventures (96) - Increase in deferred costs and other assets (357) (2,626) Loans to owners of managed hotels, net - (3,000) ------- ------- Net cash used by investing activities (632) (24,142) ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock to Parent - 18,500 Payment of dividends and distributions to shareholders (824) - Principal repayments (807) (672) ------- ------- Net cash provided (used) by financing activities (1,631) 17,828 ------- -------- Net increase in cash and cash equivalents 1,617 2,918 Cash and cash equivalents at beginning of year 6,994 9,238 ------- ------- Cash and cash equivalents at end of year $ 8,611 $12,156 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 11 12 RFS, INC. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 1. ORGANIZATION AND PRESENTATION. Effective February 27, 1996, RFS, Inc., (the "Lessee") became a wholly owned subsidiary of DoubleTree Corporation. It generates substantially all of its revenue from operating and managing leased hotels owned by RFS Partnership, L.P. (the "Partnership"). The Partnership is 98.7% owned by RFS Hotel Investors, Inc. (the "Company"). Substantially all of the hotels owned by the Partnership (the "Hotels") are separately leased by the Partnership to the Lessee under a lease agreement (collectively, the "Percentage Leases"). The Percentage Leases provide for the payment of annual rent equal to the greater of (i) fixed base rent or (ii) percentage rent based on a percentage of gross room revenue, food revenue and beverage revenue at the Hotels. At June 30, 1996, the Lessee leased 48 hotels from the Partnership. It is anticipated that future hotels acquired by the Partnership will be leased by the Partnership to the Lessee pursuant to Percentage Leases. At June 30, 1996, the Lessee operated 44 of the Hotels. Three Hotels are operated by Alpha Inn Management Company and one by TMH, Inc. pursuant to management agreements between the Lessee and Alpha Inn Management Company and TMH, Inc. Additionally, the Lessee manages 11 hotels for unrelated entities of the Company. These unaudited financial statements of the Lessee have been prepared pursuant to the Securities and Exchange Commission ("SEC") rules and regulations and should be read in conjunction with the financial statements and notes thereto of the Company and the Lessee included in the Company's 1995 Annual Report on Form 10-K. The following notes to the consolidated financial statements highlight significant changes to notes included in the Form 10-K and present interim disclosures required by the SEC. The accompanying 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. Certain financial statement items from prior years have been reclassified to be consistent with the current year financial statement presentation. 2. INVESTMENT IN RFS HOTEL INVESTORS, INC. The Lessee purchased 973,684 shares of the Company's convertible preferred stock for $19 per share or $18,500. This investment is recorded at cost as there is no ready market for these securities. The convertible preferred stock will pay a fixed annual dividend of $1.45 per share and is convertible on a one-for-one share basis at the end of seven years. 12 13 3. NOTES AND OTHER RECEIVABLES. In June 1996, the Lessee obtained management agreements for eight hotel properties owned by entities unrelated to the Company. In connection with obtaining these contracts, the Lessee loaned $3,000 to the owners, principally for renovations. The loan bears interest at 10% and is repayable as follows: $300,000 on December 31, 1998 $600,000 on December 31, 1999 $300,000 on December 31, 2000 $1,800,000 on December 31, 2001 4. DEFERRED COSTS AND OTHER ASSETS. At June 30, 1996, deferred costs and other assets primarily consist of franchise application fees paid to the franchisors in connection with the Acquisition of the Lessee by DoubleTree Corporation. These costs are being amortized over the lives of the franchise agreements. Accumulated amortization at June 30, 1996 is $60. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) RFS HOTEL INVESTORS, INC. BACKGROUND The Company is the sole general partner of RFS Partnership, L.P. (the "Partnership") and owns an approximately 98.7% interest in the Partnership. The Company commenced operations in August 1993 upon completion of its initial public offering and the simultaneous acquisition of seven hotels with 1,118 rooms. The following chart summarizes information regarding the 49 hotels (the "Hotels") owned at June 30, 1996:
Number of Number of Franchise Affiliation Hotel Properties Rooms/Suites --------------------- ---------------- ------------ Limited Service Hotels: Hampton Inn 15 1,953 Comfort Inn 6 787 Holiday Inn Express 7 861 -- ----- Sub-total 28 3,601 -- ----- Full Service Hotels: Holiday Inn 6 1,206 DoubleTree 1 220 Independent 1 115 -- ----- Sub-total 8 1,541 -- ----- Extended Stay Hotels: Residence Inn 12 1,575 Hawthorn Suites 1 220 -- ----- Sub-total 13 1,795 -- ----- Total 49 6,937 == =====
The Hotels are located in 22 states. Management believes it is prudent to diversify geographically and among franchise brands. To maintain the Company's federal income tax status as a REIT, neither the Company nor the Partnership can operate hotels. The Partnership leases 48 Hotels to RFS, Inc., a wholly-owned subsidiary of DoubleTree Corporation, and one hotel to another wholly-owned subsidiary of DoubleTree Corporation (collectively, the "Lessees") pursuant to leases (the "Percentage Leases") which provide for annual rent equal to the greater of (i) fixed base rent, or (ii) rent payments based on percentages of the Hotels' revenues. Base rent is paid monthly. Percentage rent is paid quarterly. The Lessees operate 45 Hotels. Three Hotels are operated by Alpha Inn Management Company and one by TMH, Inc. pursuant to management agreements between the RFS, Inc. and Alpha Inn Management Company and TMH, Inc. RFS, Inc. has a 14 15 right of first refusal, subject to certain exceptions, to lease hotels acquired by the Partnership, through February 27, 2006. RESULTS OF OPERATIONS Comparison of the Three Months Ended June 30, 1996 to 1995 and Six Months Ended June 30, 1996 to 1995 Increases in lease revenue for the three months ended June 30, 1996 over 1995 and the six months ended June 30, 1996 over 1995 are due to (i) an increased number of hotels being owned by the Partnership and leased to the Lessees during the 1996 periods, (ii) increases in average daily rate ("ADR") at the hotels owned throughout both periods, and, (iii) to a lesser extent, increases in occupancy at the hotels owned throughout both periods. At December 31, 1994, the Partnership owned 41 hotels. The Partnership acquired seven hotels during 1995 on the following dates (the number of hotels is indicated in parenthesis following the date): January 4, 1995 (1), March 15, 1995 (1), April 20, 1995 (1), August 8, 1995 (1), October 2, 1995 (1), October 5, 1995 (1), October 18, 1995 (1). These hotels were owned the entire six months ended June 30, 1996. Additionally, the Partnership acquired a hotel on January 12, 1996, and a hotel on May 30, 1996. The following table shows statistical data regarding the Hotels on an actual and a pro forma basis assuming all 49 Hotels owned at June 30, 1996 were owned by the Partnership throughout both periods:
for the three months ended June 30, 1996 ------------------------------------------------------------------------------- Actual Pro Forma ------------------------------------ ------------------------------------- 1996 1995 % Increase 1996 1995 % Increase ------ ------ ---------- ------ ------ ---------- Occupancy 81.0% 80.0% 1.0 80.9% 79.5% 1.4 ADR $68.58 $61.72 11.1 $68.69 $64.14 7.1 RevPAR $55.52 $49.40 12.4 $55.56 $51.01 8.9
for the six months ended June 30, 1996 ------------------------------------------------------------------------------- Actual Pro Forma ------------------------------------ ------------------------------------- 1996 1995 % Increase 1996 1995 % Increase ------ ------ ---------- ------ ------ ---------- Occupancy 77.0% 76.7% 0.3 77.3% 76.8% 0.5 ADR $67.58 $61.19 10.4 $67.89 $63.49 6.9 RevPar $52.06 $46.92 10.9 $52.47 $48.73 7.7
Interest income results, in large part, from the temporary investment of the Company's cash. As cash was used to acquire hotels, interest income has decreased in 1996 over 1995. Increases in real estate taxes and property taxes and casualty insurance and depreciation in 1996 over 1995 are due to the increased number of hotels owned by the Partnership during 1996 over 1995. 15 16 Increases in amortization of franchise fees and unearned compensation are due to increased amortization of unearned compensation as a result of a grant of restricted stock to the newly appointed president of the Company in the second quarter of 1996. Increased general and administrative expenses in 1996 over 1995 is due to increased professional fees and travel expenses incurred in the three months ended June 30, 1996, as well as the reversal of accruals which management believed were needed at December 31, 1994, in the three months ended June 30, 1995. The increased costs were primarily related to potential acquisitions. Increases in compensation expense in 1996 over the same period in 1995 are primarily due to an increased number of employees in 1996 over 1995. Interest expense increased in 1996 over 1995 as a result of increased borrowings under the Credit Line to fund the purchase of hotels and the assumption of a promissory note payable in connection with the purchase of a hotel during the fourth quarter of 1995. LIQUIDITY AND CAPITAL RESOURCES The Company has a $75 million line of credit (the "Credit Line") which expires on September 8, 1998. The Credit Line may be used to fund working capital requirements and to fund investments in hotel properties. Borrowings under the Credit Line will bear interest at the 90-day LIBOR (5.62% at June 30, 1996) plus 1.75%. The Credit Line is secured by a first mortgage on 33 hotels (the "Collateral Pool") with a net book value of $238.3 million at June 30, 1996. The Credit Line contains various covenants, including maintenance of debt coverage ratios, as defined, on all debt and all hotels of 3.0:1 and on the Credit Line and Collateral Pool of 2.25:1. The Company must also maintain a minimum net worth in an amount equal to the net worth in its most recent year-end audited financial statements and a minimum operating income, as defined, from the Collateral Pool of approximately $26.3 million. The Company had outstanding borrowings of $42.6 million on the Credit Line at June 30, 1996. The Company is in the process of increasing the Credit Line to $100 million. The Credit Line contains a term loan option which allows the Company to convert the principal balance outstanding on September 8, 1998, not to exceed $75 million, to a term loan (the "Term Loan"). The Term Loan would bear interest at a fixed rate equal to the 5-year U.S. Treasury Bond yield plus 2-1/2% or a variable rate equal to the lender's floating corporate base rate plus 1%. The Term Loan would be payable over 5 years in 59 equal monthly installments of principal plus interest, given a 10 year amortization, plus a sixtieth payment of remaining principal plus interest. . In connection with the purchase of a hotel in Fishkill, NY, the Partnership assumed approximately $2.4 million of indebtedness pursuant to industrial development bonds issued in 1988 and which are due December 1, 2002. The industrial development bonds bear interest at a variable rate which, as of December 31, 1995, was approximately three percent (3%) per annum. 16 17 Principal is payable in installments of $600 every three years with the next installment due in 1997. In connection with the purchase of a hotel in Atlanta, GA, the Partnership assumed a promissory note payable with a principal balance of approximately $5.9 million. The promissory note bears interest at 10.15% and is due in monthly principal and interest installments of $53. The note is due July 1, 1998 and contains a severe prepayment premium. On February 27, 1996, the Company issued 973,684 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $18.5 million. The Company has budgeted $11.9 million for capital expenditures in 1996 at 48 of the 49 hotels owned at June 30, 1996. At June 30, 1996, the Partnership had spent approximately $6.8 million of the budgeted amounts. The Company will use cash generated from operations and borrowings under the Credit Line to fund these expenditures. The Company intends to substantially complete these improvements by the end of 1996. The renovations and improvements include replacing such items as carpets and drapes, renovating common areas and hotel exteriors. Pursuant to the Percentage Leases, the Partnership, and therefore the Company is required to fund capital improvements at the Hotels as wall as the ongoing replacement or refurbishment of furniture, fixtures and equipment at the Hotels. The Partnership acquired a 132-room Hampton Inn in Plano, TX for $6.8 million in July 1996. The purchase price was paid with borrowings under the Credit Line. The Partnership has contracted to acquire from third parties the following hotels upon completion of construction and opening of the hotel and subject to certain terms and conditions:
NUMBER OF ESTIMATED FRANCHISE LOCATION ROOMS/SUITES PURCHASE PRICE --------- -------- ------------ -------------- Marriott Courtyard Flint, MI 102 $6.3 million Hampton Inn Houston, TX 119 $5.9 million
Completion of the above hotels is expected in the latter half of 1996. The Partnership is developing the following hotels:
NUMBER OF ESTIMATED FRANCHISE LOCATION ROOMS/SUITES DEVELOPMENT COSTS --------- -------- ------------ ----------------- Homewood Suites Chandler, AZ 83 $6.4 million Hampton Inn Chandler, AZ 101 $5.2 million Homewood Suites Salt Lake City, UT 98 $7.8 million Homewood Suites Plano, TX 99 $8.0 million Hampton Inn Sedona, AZ 56 $4.6 million Marriott Courtyard Crystal Lake, MI 90 $6.0 million
17 18 Completion of the above hotels is expected by the end of the third quarter of 1997. Additionally, the Partnership plans to construct a 42-suite addition to the Residence Inn in Ann Arbor, MI. Construction costs are estimated at $3.3 million. Completion of the addition is expected in the first quarter of 1997. In addition to purchasing existing hotel properties at targeted rates of return, management anticipates that the Company will both develop additional hotels and enter into contracts to acquire hotels from third parties after development. It is expected that future investments in hotel properties will be financed, in whole or in part, with cash generated from operations, short-term investments, proceeds from additional issuances of Common Stock, borrowings under the Credit Line or other securities or borrowings. The Company in the future may seek to increase further the amount of its credit facilities, negotiate additional credit facilities, or issue corporate debt instruments. In June 1996, the Company's shareholders approved an amendment to the Company's charter to delete the charter limitation on indebtedness. Although the Company no longer has any charter restrictions on the amount of indebtedness the Company may incur, the Board of Directors of the Company has adopted a policy limiting the amount of indebtedness that the Company will incur to an amount not in excess of approximately 40% of the Company's investment in hotel properties, at cost, after giving effect to the Company's use of proceeds from any indebtedness and accounting for all investments in hotel properties under the purchase method of accounting. Any debt incurred or issued by the Company may be secured or unsecured, long-term or short-term, may charge a fixed or variable interest rate and may be subject to such other terms as the Board of Directors of the Company in it's discretion, may approve. The Company has filed a Shelf Registration Statement on Form S-3 (the "Shelf") with the Securities and Exchange Commission for the issuance from time to time of preferred stock, common stock and depositary shares representing entitlement to all rights and preferences of a fraction of a share of preferred stock of a specified series ("Depositary Shares") in the aggregate amount of up to $250 million. The Shelf became effective July 30, 1996. The Company intends to fund cash distributions to shareholders principally out of cash generated from operations. The Company may incur, or cause the Partnership to incur, indebtedness to meet distribution requirements imposed on a REIT under the Code (including the requirement that a REIT distribute to its shareholders annually at least 95% of its taxable income) to the extent that working capital and cash flow from the Company's investments are insufficient to make such distributions. In 1996, the Partnership made cash distributions to its partners, including the Company, of $16,520 or $0.67 per Partnership unit, from which the Company made cash distributions to common shareholders of $16,302, or $0.67 per share. The Company also made a cash distribution to the preferred shareholder of $132, or $0.3625 per share which represents the pro rata quarterly distribution from February 27, 1996 (date of issuance) through March 31, 1996. The Company and the Partnership utilized available cash to fund such distributions. 18 19 SEASONALITY The Hotels' operations historically have been seasonal in nature, reflecting higher occupancy during the second and third quarters. This seasonality can be expected to cause fluctuations in the Partnership's quarterly lease revenue to the extent that it receives Percentage Rent. FUNDS FROM OPERATIONS The National Association of Real Estate Investment Trusts has adopted a new definition of funds from operations ("FFO"). Under the new definition, FFO represents net income excluding gains (or losses) from debt restructuring or sales of properties, plus depreciation of real property and after adjustments for unconsolidated partnerships and joint ventures. Under this new definition, the Company's FFO is computed as follows:
for the three for the six months ended months ended June 30 June 30 ------------------- -------------------- 1995 1996 1995 1996 ------- ------- ------- ------- Income before allocation to minority interest $ 8,713 $ 9,987 $14,794 $17,331 Add depreciation 2,080 2,627 4,038 5,140 Add loss on sale of hotel 244 244 Less preferred dividend (352) (484) ------- ------- ------- ------- FFO $10,793 $12,262 $18,832 $22,231 ======= ======= ======= ======= Weighted average shares and partnership units outstanding 24,627 24,716 24,627 24,685 FFO per share $ 0.44 $ 0.50 $ 0.76 $ 0.90 ======= ======= ======= =======
RFS, INC. BACKGROUND RFS, Inc. (the "Lessee") leases 48 and operates 44 of the Hotels owned by RFS Partnership, L.P. (the "Partnership"). RESULTS OF OPERATIONS Comparison of Three Months Ended June 30, 1996 with Three Months Ended June 30, 1995 Total revenues increased $7.9 million or 25% to $39.0 million for the three months ended June 30, 1996 compared to $31.1 million for the three months ended June 30, 1995. The increase in hotel revenues of $7.6 million was attributable to the net addition of four leased properties as compared to the 1995 period and an increase of approximately $7 in average daily rate to $55 and an almost one percentage point increase in occupancy to 81%. The margin on hotel results (hotel revenues less hotel expenses and lease expenses) increased $0.9 million or 40% from $2.2 million 19 20 to $3.1 million reflecting the improved operating performance of the hotels offset by increased lease payments to the lessor attributable to increased revenues. Other fees and income increase $0.4 million principally attributable to interest income on invested cash balances and dividend income generated from the investment in the convertible preferred stock of the Company. General and administrative expenses decreased 11% or $0.1 million primarily due to a reduction in headcount attributable to the acquisition of RFS, Inc. by DoubleTree Corporation in February 1996. The increase in depreciation and amortization reflects the amortization of the franchise application fees paid in connection with the acquisition. The provision for income taxes reflects a 35% effective tax rate for the three months ended June 30, 1996 compared to no provision in 1995. Prior to its acquisition by DoubleTree Corporation, RFS, Inc. was a Subchapter S Corporation, and generally was not subject to income taxes. Had RFS, Inc. been included in the consolidated income tax returns of DoubleTree Corporation in 1995, the provision for income taxes for the three months ended June 30, 1996 would have been $0.5 million. Net income for the three months ended June 30, 1996 was $1.8 million compared to $1.4 million in 1995. With a normalized effective tax rate for 1995, net income would have increased $0.9 million to $1.8 million or 100%. Comparison of Six Months Ended June 30, 1996 with Six Months Ended June 30, 1995 Total revenues increased $15.7 million or 27% to $73.6 million for the six months ended June 30, 1996 compared to $57.9 million for the six months ended June 30, 1995. The increase in hotel revenues was attributable to the net addition of four leased properties as compared to the 1995 period and an increase of in excess of $6 in average daily rate to $52 and a nominal increase in occupancy to 77%. The margin on hotel results (hotel revenues less hotel expenses and lease expenses) increased $1.7 million or 42% from to $5.6 million reflecting the improved operating performance of the hotels offset by increased lease payments to the lessor attributable to increased revenues. Other fees and income increased $0.4 million principally attributable to interest income on invested cash balances and dividend income generated from the investment in the convertible preferred stock of the Company. General and administrative expenses decreased 7% or $0.1 million primarily due to a reduction in headcount. The increase in depreciation and amortization reflects the amortization of the franchise application fees paid in connection with the acquisition. The provision for income taxes reflects a 35% effective tax rate for the six months ended June 30, 1996 compared to a benefit of $0.2 million in 1995 resulting from the change to Subchapter S Corporation status. Had RFS, Inc. been included in the consolidated tax returns of 20 21 DoubleTree Corporation in 1995, the provision for income taxes for the six months ended June 30, 1996 would have been $0.8 million compared to a benefit of $0.2 million. Net income for the six months ended June 30, 1996 was $2.9 million compared to $2.6 million in 1995. With a normalized effective tax rate for 1995, net income would have increased $1.4 million to $2.8 million or 88%. LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 1996, RFS, Inc. generated cash flow from operations of $9.2 million as compared to $3.9 million for the comparable period of 1995. The increase was principally attributable to an increase in the lease payment due to the Lessor which is paid on a quarterly basis in arrears. Offsetting the cash generated from operations was the utilization of $24.1 million for investing activities of which $18.5 million was contributed by DoubleTree Corporation. The principal source of cash, other than capital contributions from DoubleTree Corporation, will come from operations. Since inception, RFS, Inc. has been able to meet its rent obligations under the Percentage Leases. To the extent that future operations are not sufficient to meet the rent obligations when due, RFS, Inc. will seek additional capital from DoubleTree Corporation which has agreed to maintain a minimum net worth of $15.0 million in RFS, Inc. SEASONALITY The Hotels' operations historically have been seasonal in nature, reflecting higher occupancy during the second and third quarters. This seasonality can be expected to cause fluctuations in the Partnership's quarterly lease revenue to the extent that it receives Percentage Rent. 21 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On April 17, 1996, the annual meeting of shareholders was held to elect two Class III directors to serve on the Board of Directors until the annual meeting of shareholders in 1999 and to consider and act upon a proposal to amend the Company's Amended and Restated 1993 Restricted Stock and Stock Option Plan (the "Plan") to increase the number of shares of common stock that may be subject to awards under the Plan from 1,000,000 to 2,000,000 shares. The shareholders voted to elect the two following directors: Votes For Votes Withheld ---------- -------------- Class III Directors: Robert M. Solmson 16,875,277 113,955 Harry J. Phillips, Sr. 16,875,277 113,955 The following directors terms of office continued after the meeting: Class III Directors (terms expiring in 1998) - Bruce E. Campbell, Jr. and H. Lance Forsdick, Sr. Class I Directors (terms expiring in 1997) - Michael S. Starnes and John W. Stokes, Jr. There were 13,485,452 votes cast for, 3,463,647 votes withheld and 40,131 abstentions regarding amendment of the Plan. On June 21, 996, a special meeting of shareholders was held for the shareholders to take an action on the following proposals: (i) to consider and vote upon a proposal to delete Article 7 of the Company's Charter, which limits the Company's consolidated indebtedness to 30% of the Company's investment in hotel properties, at cost ("Proposal One") and (ii) to consider and vote upon a proposal to amend Article 14 of the Company's Charter to provide, in effect that nothing contained therein will prohibit the settlement of any transaction entered into through the facilities of any national securities exchange registered under the Securities Act of 1934 (the "Exchange Act") or on the national market system of a national securities association registered under the Exchange Act ("Proposal Two"). Proposal One and Proposal Two received the required approval of the shareholders as follows:
Withheld/ For Against Abstain Total ---------- --------- ------- ---------- Proposal One 14,678,183 937,711 28,650 15,644,544 Proposal Two 15,537,470 80,264 26,810 15,644,544
22 23 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - 27 Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K - A Form 8-K dated June 21, 1996 describing the results of a special meeting of shareholders on June 21, 1996 was filed on July 9, 1996. 23 24 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. RFS HOTEL INVESTORS, INC. August 9, 1996 /s/ Michael J. Pascal - ---------------------- ------------------------------------------ Date Michael J. Pascal, Secretary and Treasurer (Principal Financial and Accounting Officer) August 9, 1996 /s/ Robert M. Solmson - ---------------------- ------------------------------- Date Robert M. Solmson, Chairman and Chief Executive Officer 24 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF RFS HOTEL INVESTORS, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 2,691 0 9,785 0 0 0 416,581 17,492 416,995 0 50,916 0 10 244 357,622 416,995 0 29,511 0 8,049 2,545 0 1,586 17,331 0 17,331 0 0 0 17,086 0.68 0.68
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