-----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, KdkCq63+GL3QqwtfeelzH4e4wwU9so1ODoaEPBRoeCTrMZvY37iaFP4Cngmd7OR0 AwaO4IOx0o7S3NmF6wD+QQ== 0000950144-99-008202.txt : 19990629 0000950144-99-008202.hdr.sgml : 19990629 ACCESSION NUMBER: 0000950144-99-008202 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990628 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/A SEC ACT: SEC FILE NUMBER: 001-12011 FILM NUMBER: 99653468 BUSINESS ADDRESS: STREET 1: 850 RIDGE LAKE BLVD STE 220 CITY: MEMPHIS STATE: TN ZIP: 38120 BUSINESS PHONE: 9017677005 MAIL ADDRESS: STREET 1: 850 RIDGE LAKE BLVD STE 220 CITY: MEMPHIS STATE: TN ZIP: 38120 10-Q/A 1 RFS HOTEL INVESTORS, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (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, 1998 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.) 850 Ridge Lake Boulevard, Suite 220, (901) 767-7005 Memphis, TN 38120 (Registrant's Telephone Number (Address of Principal Executive Offices) Including Area Code) (Zip 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 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 Registrant's Common Stock, $.01 par value, outstanding on June 30, 1998 was 24,876,946. 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 - June 30, 1998 and December 31, 1997 3 Consolidated Statements of Income - For the three and the six months ended June 30, 1998 and June 30, 1997 4 Consolidated Statements of Cash Flows - For the three and the six months ended June 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Submission of Matters to a Vote of Security Holders 16 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17
2 3 RFS HOTEL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 1998 1997 ------------- ------------ (unaudited) ASSETS Investment in Hotel Properties, net $ 638,400 $ 573,826 Hotels under development 17,179 15,739 Cash and cash equivalents 3,848 4,131 Restricted cash 3,824 2,514 Accounts receivable-Lessees 15,040 9,887 Deferred expenses, net 3,565 4,061 Prepaid and other assets 8,664 6,765 Escrow deposits 85 205 --------- --------- $ 690,605 $ 617,128 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 4,861 $ 6,423 Accrued real estate taxes 4,128 3,491 Borrowings on line of credit 176,343 123,843 Bonds 70,378 71,892 Other debt 25,989 13,174 Minority interest 36,386 36,235 --------- --------- 318,085 255,058 --------- --------- Commitments and contingencies Shareholders' equity: Preferred Stock, $.01 par value, 5,000,000 shares authorized, 973,684 shares outstanding 10 10 Common Stock, $.01 par value, 100,000,000 shares authorized, 24,986,946 and 24,389,000 shares outstanding 250 244 Paid-in capital 373,307 363,066 Treasury stock, 110,000 shares (2,012) 0 Undistributed income 1,445 337 Unearned directors' and officers' compensation (480) (1,587) --------- --------- Total shareholders' equity 372,520 362,070 --------- --------- $ 690,605 $ 617,128 ========= =========
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 FOR THE FOR THE FOR THE 3 MONTHS 3 MONTHS 6 MONTHS 6 MONTHS ENDED ENDED ENDED ENDED 06/30/98 06/30/97 06/30/98 06/30/97 ----------- ----------- ----------- ---------- (unaudited) (unaudited) (unaudited) (unaudited) Revenue: Leases $ 25,601 $ 21,736 $ 47,624 $ 39,599 Other 152 11 238 55 -------- -------- -------- -------- Total revenue 25,753 21,747 47,862 39,654 -------- -------- -------- -------- Expenses: Real estate taxes and property and casualty insurance 2,480 1,985 4,968 3,932 Depreciation 5,147 4,284 10,065 8,192 Amortization of franchise fees and unearned compensation 157 222 386 443 Compensation 447 606 1,041 1,227 Franchise taxes 45 75 90 150 General and administrative 571 392 1,377 916 Gain on sale of a hotel property (523) Amortization of loan costs 273 266 516 410 Interest expense, net 3,962 2,548 7,510 4,486 -------- -------- -------- -------- Total expenses 13,082 10,378 25,430 19,756 -------- -------- -------- -------- Income (loss) before minority interest 12,671 11,369 22,432 19,898 Minority interest (1,179) (1,061) (2,115) (1,896) -------- -------- -------- -------- Net income (loss) 11,492 10,308 20,317 18,002 Preferred stock dividends (352) (352) (700) (700) -------- -------- -------- -------- Net income (loss) applicable to common shareholders $ 11,140 $ 9,956 $ 19,617 $ 17,302 ======== ======== ======== ======== Basic earnings (loss) per share 0.45 0.41 0.80 0.71 Diluted earnings (loss) per share 0.44 0.40 0.79 0.71 Weighted average common shares outstanding 24,877 24,385 24,630 24,385
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 MONTHS JUNE 30, JUNE 30, 1998 1997 ------------ ----------- (unaudited) (unaudited) Cash flows from operating activities: Net income (loss) $ 20,317 $ 18,002 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,967 9,045 Income allocated to minority interest 2,115 1,896 Gain on sale of a hotel property (523) Write-off of old loan costs 129 Changes in assets and liabilities: Accounts receivable-Lessees (5,153) (6,601) Prepaids and other assets (3,209) (607) Accounts payable and other liabilities (925) 1,057 -------- --------- Net cash provided by operating activities 23,718 22,792 -------- --------- Cash flows from investing activities: Investment in hotel properties and hotels under development (60,708) (111,976) Proceeds from sale of hotel property 4,440 Escrow deposits and prepayments under purchase agreements Refund on franchise agreements 8 -------- --------- Net cash used by investing activites (56,268) (111,968) -------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock 11,040 72 Purchase of treasury stock (2,012) Distributions to common and preferred shareholders (19,209) (18,266) Distributions to limited partners (1,927) (1,850) Borrowings on revolving credit agreement 52,500 58,000 Redemption of limited partnership units (37) Payments on debt and bonds (7,868) (2,037) Loan fees paid (220) (310) -------- --------- Net cash provided by financing activities 32,267 35,609 -------- --------- Net increase (decrease) in cash and cash equivalents (283) (53,567) Cash and cash equivalents at beginning of period 4,131 57,935 -------- --------- Cash and cash equivalents at end of period $ 3,848 $ 4,368 ======== =========
Supplemental disclosures of non-cash investing and financing activities: In 1998, the Company, through a partnership, assumed $19,169 of debt in connection with the purchase of a hotel. In 1998, the Company applied deposits of $120 towards the purchase of land. In 1998, due to the resignation of an officer, the Company cancelle 45,000 shares of restricted common stock which had not vested. In 1998, the Partnership sold a hotel for which the purchaser paid $2,940 in cash and signed a note to the Company for $1,500. In 1997, the Partnership issued 2,244,934 of limited partnership units valued at $38,200 in accordance with the purchase of four hotels. In 1997, the Company recorded a $6,356 allocation to paid-in capital from minority interest. In 1997, the Partnership applied deposits of $6,064 towards the purchase of hotels. 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, and is a self-administered real estate investment trust ("REIT"). The Company contributed substantially all of the net proceeds of its public offerings to RFS Partnership, L.P. (the "Partnership") in exchange for the sole general partnership interest in the Partnership. The Partnership began operations in August 1993. At June 30, 1998, the Company owned approximately 90.6% of the Partnership. RFS Managers, Inc. ("Managers") a wholly-owned subsidiary of the Company, was formed effective January 1, 1995 to provide management services to the Company. RFS Financing Partnership, L.P., (the "Financing Partnership"), a bankruptcy remote, single purpose Tennessee limited partnership, was formed to issue commercial mortgage bonds (the "Bonds"). During 1997, Ridge Lake General Partner, Inc. ("RLGP") was formed to purchase a hotel. RLGP purchased a second hotel in May 1998. The Company owns 95% of RLGP. In June 1998, the Company purchased a 75% interest in Wharf Associates Partnership ("Wharf"). Wharf and RLGP are consolidated in these consolidated financial statements. The Company, through its subsidiary partnerships, acquires or develops and owns hotel properties which are leased to third parties. These unaudited consolidated financial statements include the accounts of the Company, and its subsidiaries, 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 1997 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 29, 1998, the Company declared a $.375 dividend on each share of Common Stock outstanding to shareholders of record on August 10, 1998 and a $.36 dividend on each share of Series A Preferred Stock outstanding. The dividend will be paid on August 17, 1998. 3. ACQUISITIONS OF REAL ESTATE. In April 1998, the Partnership completed development of an 83-suite Homewood Suites in Chandler, AZ. Development costs were approximately $6.6 million and were paid with cash and borrowings from the Line of Credit. This property is not leased, but is operated by a third party pursuant to a management contract. 6 7 In April 1998, the Partnership acquired The Hotel Rex, a 94-room hotel, in San Francisco, CA for a purchase price of approximately $15 million. The purchase price was paid with funds from the sale of 547,946 shares of common stock in March 1998 and borrowings under the Line of Credit. In June 1998, the Company, through a subsidiary, purchased a 75% interest in Wharf, which owns a 234-room full service hotel in San Francisco, CA for approximately $34 million, including the assumption of $19.2 million in debt. 4. SUBSEQUENT EVENTS. In July 1998, the Partnership sold two hotels to third parties for an aggregate sales price of $8.9 million. The Company will realize a gain of $712,000 as a result of these sales. The sales price was paid with cash. In August 1998, the Partnership sold a hotel for a sales price of $4.7 million. The purchaser paid cash of $3.5 million and signed a note to the Company for $1.2 million. 5. CALCULATION OF EARNINGS PER SHARE. Calculations of basic and diluted earnings per share are as follows:
For the Three Months For the Six Months Ended Ended 6/30/99 6/30/98 6/30/99 6/30/98 ------- ------- ------- ------- Basic EPS: Net income $ 11,492 $ 10,308 $ 20,317 $ 18,002 Less dividends declared on preferred stock (352) (352) (700) (700) -------- -------- -------- -------- $ 11,140 $ 9,956 $ 19,617 $ 17,302 ======== ======== ======== ======== Weighted average common shares outstanding 24,877 24,385 24,630 24,385 $ 0.45 $ 0.41 $ 0.80 $ 0.71 Diluted EPS: Net income $ 11,492 $ 10,308 $ 20,317 $ 18,002 ======== ======== ======== ======== Weighted average common shares outstanding 24,877 24,385 24,630 24,385 Preferred shares outstanding 974 974 974 974 Common stock equivalents 180 140 162 125 -------- -------- -------- -------- Weighted average common shares and dilutive common stock equivalents outstanding 26,031 25,499 25,766 25,484 $ 0.44 $ 0.40 $ 0.79 $ 0.71
7 8 6. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro forma condensed statements of income for the six months ended June 30, 1998 and 1997 of the Company are presented as if the 64 hotel properties owned at June 30, 1998 were owned since January 1, 1997, excluding properties under development which are included on the date opened. 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, 1997, nor does it purport to represent the results of operations for future periods.
1998 1997 ---- ---- Operating Data: Total revenue $ 49,695 $ 44,343 Real estate taxes and casualty insurance 5,430 4,346 Depreciation and amortization 11,496 11,496 Compensation 386 443 Franchise taxes 90 150 General and administrative 1,377 916 Gain on sale of a hotel property (523) Interest expense 8,647 8,949 -------- -------- Income before allocation to minority interest 22,792 18,043 Less minority interest (2,134) (1,688) -------- -------- Net income $ 20,658 $ 16,355 ======== ======== Diluted earnings per share $ 0.80 $ 0.68 Weighted average common shares and common stock equivalents 25,051 25,051
7. CHANGE IN ACCOUNTING PRINCIPLE. The Financial Accounting Standards Board's Emerging Issues Task Force has rescinded EITF number 98-9, "Accounting for Contingent Rent in Interim Financial Periods" (EITF 98-9). The Company filed a Form 10-Q for the second quarter of 1998 in accordance with EITF 98-9. This Form 10-Q/A amends and restates the second quarter results of 1998 to reflect the rescission of EITF 98-9. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, 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. BACKGROUND 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 64 hotels (the "Hotels") owned at June 30, 1998:
Number of Number of Franchise Affiliation Hotel Properties Rooms/Suites - --------------------- ---------------- ------------ Full Service Hotels: Holiday Inn ........................ 6 ......................... 1,208 Sheraton............................. 5 ...........................1,018 DoubleTree........................... 1 .............................220 Ramada Plaza......................... 1 .............................234 Independent.......................... 2 .............................290 --- ----- Sub-total.................... 15 ...........................2,970 --- ----- Extended Stay Hotels: Residence Inn........................14............................1,815 Homewood Suites...................... 1 ..............................83 Hawthorn Suites...................... 1 ............................ 280 --- ----- Sub-total.....................16............................2,178 --- ----- Limited Service Hotels: Hampton Inn..........................20............................2,478 Courtyard by Marriott................ 1 .............................102 Comfort Inn.......................... 6 .............................786 Holiday Inn Express.................. 6 .............................737 --- ----- Sub-total.....................33............................4,103 --- ----- Total.........................64............................9,251 --- -----
9 10 The following chart summarizes ownership history for the periods presented:
1998 1997 ---- ---- Hotels owned at beginning of year 60 53 Acquisitions and developed Hotels placed into service 5 8 Sales (1) ----- ---- Hotels owned at June 30, 1998 and 1997 64 61 ==== ====
The Hotels are located in 24 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 the Hotels to third parties (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 payable monthly. Percentage rent is payable quarterly. The Lessees operate 56 Hotels. Four Hotels are operated by other third parties, (the "Operators"), pursuant to management agreements between the Lessees and the Operators. One hotel is operated by a subsidiary. One of the Lessees has a 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, 1998 to 1997 and the Six Months Ended June 30, 1998 to 1997. Increases in lease revenue for the three and the six months ended June 30, 1998 over 1997 are due to (i) an increased number of hotels being owned by the Partnership and leased to the Lessees during the 1998 period, and (ii) increases in revenue per available room ("REVPAR") at the hotels owned throughout both periods. 10 11 The following table shows statistical data regarding the Hotels on an actual and a pro forma basis. The pro forma assumes 47 of the 64 hotels owned at June 30, 1998 were owned by the Partnership throughout both periods; it excludes six hotels which were opened since January 1997 and two expanded hotels where the room additions were not open for all of both periods presented, three hotels which were undergoing major renovations and six hotels which the Company intends to sell:
for the Three Months Ended June 30, ----------------------------------- Actual Pro Forma ------ --------- % Increase % Increase 1998 1997 (Decrease) 1998 1997 (Decrease) ---- ---- ---------- ---- ---- ---------- Occupancy 77.2% 78.3% (1.4) 79.3% 80.4% (1.5) ADR $82.65 $75.19 9.9 $85.02 $79.70 6.7 RevPAR $63.79 $58.87 8.4 $67.38 $64.11 5.1 for the Six Months Ended June 30, --------------------------------- Actual Pro Forma ------ --------- % Increase % Increase 1998 1997 (Decrease) 1998 1997 (Decrease) ---- ---- ---------- ---- ---- --------- Occupancy 74.6% 75.1% (0.8) 76.3% 76.8% (0.7) ADR $82.04 $74.57 10.0 $84.10 $78.83 6.7 RevPAR $61.17 $56.02 9.2 $64.15 $60.54 5.9
Increases in real estate taxes and property and casualty insurance in 1998 over 1997 are due to the increased number of hotels owned during 1998, increased real estate tax assessments, as well as an estimate for increased real estate tax assessments at certain hotels. Increases in depreciation in 1998 over 1997 are due to the increased number of hotels owned during 1998 and capitalized renovation costs at certain of the Hotels. Increases in general and administrative expenses for the three months ended June 30, 1998 over 1997 are due to increased professional fees. Increases in general and administrative expenses for the six months ended June 30, 1998 over 1997 are due to the write-off of costs incurred in considering formation of a new REIT, Lodging Trust USA, which transaction was not completed and increased professional fees. The gain on the sale of a hotel property relates to the sale of the Executive Inn in Tupelo, MS which was sold in February 1998. Increases in amortization of loan costs in 1998 over 1997 are due to costs associated with the assumption of the industrial development bond financing for the Birmingham Sheraton Hotel and the amortization of increased commitment fees on the Line of Credit. 11 12 Increases in interest expense in 1998 over 1997 are primarily due to increased borrowings on the Line of Credit. LIQUIDITY AND CAPITAL RESOURCES The Company has a bank line of credit (the "Line of Credit") for $185 million. Borrowings under the Line of Credit bear interest at LIBOR plus 157.5 basis points at June 30, 1998. The Line of Credit is secured by first priority mortgages on 28 hotels and agreements restricting the transfer, pledge or other hypothecation of 9 hotels (collectively, the "Collateral Pool"). The Line of Credit contains various covenants including the maintenance of a minimum net worth, minimum debt coverage and interest coverage ratios, total indebtedness and total liabilities limitations and borrowing base to value limitations. The Company was in compliance with these covenants at June 30, 1998. The Company had borrowed $176.3 million on the Line of Credit at June 30, 1998. The Line of Credit is due July 30, 2000. In November 1996, the Company, through a subsidiary, issued $75 million of commercial mortgage bonds, (the "Bonds") series 1996-1 as follows:
Initial Class Principal Amount Rate Stated Maturity ---------------------------------------------------------------------- Class A $50 Million 6.83% August 20, 2008 Class B $25 Million 7.30% November 21, 2011
Principal payments due on the Class A Bonds are payable based on a 141-month amortization schedule beginning in December 1996; principal payments on the Class B Bonds are payable based on a 39-month amortization schedule beginning in September 2008. The total monthly principal and interest payments approximate $.7 million. 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 June 30, 1998, was approximately three and one-half percent (3.5%) per annum. Principal is payable in installments of $0.6 million every three years with the next installment due in 2000. In July 1998, a note payable with a principal balance of $5.9 became due. Funds from the Line of Credit were used to pay-off this debt. In connection with the purchase of a Sheraton Hotel in Birmingham, AL, Ridge Lake General Partners, Inc. ("RLGP"), a subsidiary of the Company, assumed industrial development bonds ("Birmingham IDB's"), which are due in 2001. The Birmingham IDB's bear interest at a variable rate which, at June 30, 1998, was approximately 4% per year. Interest is payable 12 13 quarterly; principal is payable annually. The outstanding balance on the Birmingham IDB's is $5.0 million. The Birmingham hotel is collateral for the Birmingham IDB's. Wharf has non-recourse debt of $19.2 million. This debt bears interest at 8.22%. Principal, interest and escrow of $202 are due monthly. The Ramada Plaza is collateral for this debt. The Company budgeted $26.0 million for 1997 capital improvements at the 60 hotels owned at December 31, 1997. At June 30, 1998, the Partnership had spent approximately $23.3 million of the budgeted amounts. The Company will use cash generated from operations and borrowings under the Line of Credit to fund the remaining $2.7 million of expenditures. The Company intends to substantially complete these improvements by the end of the third quarter of 1998. Additionally, the Company has budgeted approximately $20.6 million in 1998 for capital improvements at 55 of the Hotels owned June 30, 1998. At June 30, 1998, the Partnership had spent approximately $11.7 million of the budgeted amounts. The Partnership is developing the following hotels:
ANTICIPATED NUMBER OF ESTIMATED OPENING FRANCHISE LOCATION ROOMS/SUITES DEVELOPMENT COSTS QUARTER --------------------------------- ------------ ----------------- ------- TownePlace Suites Fort Worth, TX 95 $6.5 million 3Q98 Courtyard by Marriott Crystal Lake, IL 95 $7.5 million 4Q99 TownePlace Suites Miami Lakes, FL 95 $6.5 million 1Q99 TownePlace Suites Pinellas Park, FL 95 $6.3 million 3Q99 Residence Inn Olathe, KS 90 $7.1 million 4Q99 TownePlace Suites Miami West, FL 95 $6.5 million 2Q99
The Partnership is constructing a 40-room addition to the Beverly Heritage Hotel in Milpitas, CA. Construction costs are estimated at $3.8 million. Completion of the addition is expected in the third quarter of 1998. Additionally, the Partnership is constructing a 36-suite addition to the Residence Inn in Charlotte, NC. Construction costs are estimated at $3.6 million. Completion of the addition is expected in the third quarter of 1998. The construction costs are being funded with borrowings under the Line of Credit. In addition to purchasing existing hotel properties, management anticipates that the Company will both develop additional hotels and enter into contracts to acquire hotels from third parties after completion of 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 capital stock, borrowings under the Line of Credit 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. Although the Company 13 14 has no 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 its 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 Internal Revenue 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 1998, the Partnership has, through June 30, 1998, made cash distributions to its partners, including the Company, of $20.4 million or $.375 per Partnership unit, from which the Company made cash distributions to common shareholders of $18.5 million, or $.375 per share. The Company also made cash distributions to the preferred shareholder of $.7 million, or $.72 per share. The Company and the Partnership utilized available cash to fund such distributions. 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. YEAR 2000 MANAGEMENT In order to address the computer industry's "Year 2000" problem, the Company is in the process of upgrading the accounting software and network server. Management does not believe the costs for this upgrade will be significant. The Company is in the process of determining whether the companies that manage the Hotels are in the process of studying the "Year 2000" issue. Upon completion, the Company will determine the extent to which it is vulnerable to third parties' failure to remediate their own "Year 2000" issues and the costs associated with resolving this issue. 14 15 CHANGE IN ACCOUNTING PRINCIPLE The Financial Accounting Standards Board's Emerging Issues Task Force has rescinded EITF number 98-9, "Accounting for Contingent Rent in Interim Financial Periods" (EITF 98-9). The Company filed a Form 10-Q for the second quarter of 1998 in accordance with EITF 98-9. This Form 10-Q/A amends and restates the second quarter results of 1998 to reflect the rescission of EITF 98-9. FUNDS FROM OPERATIONS The Company considers Funds From Operations ("FFO") a widely accepted and appropriate measure of performance for an equity REIT that provides a relevant basis for comparison among REITs. FFO, as defined by the National Association of Real Estate Investment Trusts (NAREIT), means income (loss) before minority interest (determined in accordance with GAAP), excluding gains (losses) from debt restructuring and sales of property, plus real estate depreciation and after adjustments for unconsolidated partnerships and joint ventures. FFO is presented to assist investors in analyzing the performance of the Company. The Company's method of calculating FFO may be different from the methods used by other REITs and, accordingly, may not be comparable to such other REITs. FFO (i) does not represent cash flows from operations as defined by GAAP, (ii) is not indicative of cash available to fund all cash flow needs and liquidity, including its ability to make distributions, and (iii) should not be considered as an alternative to net income (as determined in accordance with GAAP) for purposes of evaluating the Company's operating performance. The Company's FFO for the periods ended June 30, 1998 and 1997 was computed as follows:
For the Three Months Ended For the Six Months Ended June 30 June 30 ------- ------- 1998 1997 1998 1997 ---- ---- ---- ---- (in thousands, except per share amounts) Income before allocation to minority interest $ 12,671 $ 11,369 $ 22,432 $ 19,898 Add depreciation 5,147 4,284 10,065 8,192 Less gain on sale of hotel (523) Less preferred dividend (352) (352) (700) (700) -------- --------- -------- -------- FFO $ 17,466 $ 15,301 $ 31,274 $ 27,390 ======== ========= ======== ======== Weighted average shares and partnership units outstanding 27,445 26,959 27,198 26,946 FFO per share $ .64 $ 0.57 $ 1.15 $ 1.02
15 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Pursuant to the general instructions to Item 305 of SEC Regulation S-K, the quantitative and qualitative disclosures called for by this Item 3 and by Rule 305 of Regulation S-K are inapplicable to the Company at this time. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On April 30, 1998, the annual meeting of shareholders was held to elect two Class II directors to serve on the Board of Directors until the annual meeting of shareholders in 2001. The shareholders voted to elect the four following directors:
Votes For Votes Against --------- ------------- Class II Directors: Bruce E. Campbell 21,174,980 1,864,251 H. Lance Forsdick, Sr. 22,884,308 154,923
The following directors terms of office continued after the meeting: Class I Directors (terms expiring in 2000) - Michael S. Starnes and John W. Stokes, Jr. Class III Directors (terms expiring in 1999) - Robert M. Solmson, Harry J. Phillips, Sr., and R. Lee Jenkins 16 17 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - Financial Data Schedule (b) Reports on Form 8-K - none. 17 18 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. 6/24/99 /s/ Michael J. Pascal - ---------------------- ------------------------------------------- Date Michael J. Pascal, Secretary and Treasurer (Principal Financial and Accounting Officer) 6/24/99 /s/ Robert M. Solmson - ---------------------- -------------------------------------------- Date Robert M. Solmson, Chairman and Chief Executive Officer 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF RFS HOTEL INVESTORS FOR THE SIX MONTH ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 3,848 0 15,040 0 0 0 0 0 690,605 8,989 272,710 0 10 250 372,260 690,605 0 25,601 0 0 9,120 0 3,962 12,671 0 0 0 0 0 11,492 .45 .44
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