-----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, AArbL+00qcrGkRqCUt1d6KwQT75mfnFzHNs5XVeJaP1Y3hIY33RhMv+oarwsudrk qTIqBjuEhuj2CctNiAJCSw== 0000950144-99-009955.txt : 19990813 0000950144-99-009955.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950144-99-009955 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 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: SEC FILE NUMBER: 001-12011 FILM NUMBER: 99685415 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 1 RFS HOTEL INVESTORS, INC 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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, 1999 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, 1999 was 25,005,946 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, 1999 and December 31, 1998 3 Consolidated Statements of Income - For the three and the six months ended June 30, 1999 and June 30, 1998 4 Consolidated Statements of Cash Flows - For the three and the six months ended June 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15
2 3 RFS HOTEL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 1999 1998 ------------ ---------- (unaudited) ASSETS Investment in Hotel Properties, net $ 643,464 $ 624,730 Hotels under development 7,751 18,289 Cash and cash equivalents 1,833 2,014 Restricted cash 1,081 7,809 Accounts receivable-Lessees 15,128 10,656 Notes receivable 4,926 4,949 Deferred expenses, net 4,926 5,216 Prepaid and other assets 6,249 8,818 Escrow deposits 1,510 1,510 --------- --------- $ 686,868 $ 683,991 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 4,105 $ 5,320 Accrued real estate taxes 4,104 2,961 Borrowings on line of credit 90,307 82,307 Long-term obligations 185,861 190,492 Minority interest 35,897 35,974 --------- --------- 320,274 317,054 --------- --------- 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, 25,115,946 and 24,986,946 shares outstanding 251 251 Paid-in capital 374,959 374,959 Treasury stock, 110,000 shares (2,012) (2,012) Distributions in excess of income (5,228) (4,468) Unearned directors' and officers' compensation (1,386) (1,803) --------- --------- Total shareholders' equity 366,594 366,937 --------- --------- $ 686,868 $ 683,991 ========= =========
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 SHARE DATA)
FOR THE FOR THE FOR THE FOR THE 3 MONTHS 3 MONTHS 6 MONTHS 6 MONTHS ENDED ENDED ENDED ENDED 06/30/99 06/30/98 06/30/99 06/30/98 ----------- ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) Revenue: Leases $ 26,073 $ 25,601 $ 49,588 $ 47,624 Other 165 152 376 238 -------- -------- -------- -------- Total revenue 26,238 25,753 49,964 47,862 -------- -------- -------- -------- Expenses: Real estate taxes and property and casualty insurance 2,538 2,480 4,902 4,968 Depreciation 5,770 5,147 11,372 10,065 Amortization of franchise fees and unearned compensation 202 157 477 386 Compensation 346 447 841 1,041 Franchise taxes 45 45 90 90 General and administrative 527 571 1,044 1,377 Lease termination fee 239 Gain on sale of a hotel property (523) Amortization of loan costs 294 273 570 516 Interest expense, net 4,707 3,962 9,331 7,510 -------- -------- -------- -------- Total expenses 14,429 13,082 28,866 25,430 -------- -------- -------- -------- Income before minority interest 11,809 12,671 21,098 22,432 Minority interest (1,035) (1,179) (1,900) (2,115) -------- -------- -------- -------- Net income 10,774 11,492 19,198 20,317 Preferred stock dividends (352) (352) (700) (700) -------- -------- -------- -------- Net income applicable to common shareholders $ 10,422 $ 11,140 $ 18,498 $ 19,617 ======== ======== ======== ======== Basic earnings per share 0.42 0.45 0.74 0.80 Diluted earnings per share 0.41 0.44 0.74 0.79 Weighted average common shares outstanding 25,006 24,877 25,006 24,630
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, 1999 1998 ------------ ----------- (unaudited) (unaudited) Cash flows from operating activities: Net income $ 19,198 $ 20,317 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,419 10,967 Income allocated to minority interest 1,900 2,115 Gain on sale of a hotel property (523) Write-off of old loan costs 129 Changes in assets and liabilities: Accounts receivable-Lessees (4,472) (5,153) Prepaids and other assets 2,569 (3,209) Accounts payable and other liabilities (72) (925) -------- -------- Net cash provided by operating activities 31,542 23,718 -------- -------- Cash flows from investing activities: Investment in hotel properties and hotels under development (19,568) (60,708) Cash received from reserves 6,728 Cash paid for franchise fees (90) Proceeds from sale of hotel property 4,440 -------- -------- Net cash used by investing activites (12,930) (56,268) -------- -------- Cash flows from financing activities: Net proceeds from issuance of common stock 11,040 Purchase of treasury stock (2,012) Distributions to common and preferred shareholders (19,958) (19,209) Distributions to limited partners (1,977) (1,927) Borrowings on revolving credit agreement 8,000 52,500 Redemption of limited partnership units (37) Payments on debt and bonds (4,631) (7,868) Collections on notes receivable 23 Loan fees paid (250) (220) -------- -------- Net cash provided (used) by financing activities (18,793) 32,267 -------- -------- Net decrease in cash and cash equivalents (181) (283) Cash and cash equivalents at beginning of period 2,014 4,131 -------- -------- Cash and cash equivalents at end of period $ 1,833 $ 3,848 ======== ========
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 a deposit of $20 towards the purchase of land In 1998, due to the resignation of an officer, the Company cancelled 45,000 shares of restricted common stock which had not vested. In 1998, the Company sold a hotel for which the purchaser paid $2,940 in cash and signed a note to the Company for $1,500. The accompanying notes are an integral part of these consolidatedfinancial 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 Partners, Inc. ("RLGP") was formed to purchase a hotel. The Company owns approximately 95% of RLGP. In June 1998, the Company purchased a 75% interest in Wharf Associates Partnership ("Wharf") which owns a hotel in California. In December 1998, RFS SPE 1 1998, LLC, ("SPE 1"), and RFS SPE 2 1998, LLC, ("SPE 2"), bankruptcy remote, single-purpose limited liability companies, were formed to effect a debt financing of ten hotel properties. The Company owns 100% of SPE 1 and SPE 2. 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 28, 1999, the Company declared a $.385 dividend on each share of Common Stock outstanding to shareholders of record on August 6, 1999 and a $.3625 dividend on each share of Series A Preferred Stock outstanding. The dividend will be paid on August 16, 1999. 6 7 3. 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 $ 10,774 $ 11,492 $ 19,198 $ 20,317 Less dividends declared on preferred stock (352) (352) (700) (700) -------- -------- -------- -------- $ 10,422 $ 11,140 $ 18,498 $ 19,617 ======== ======== ======== ======== Weighted average common shares outstanding 25,006 24,877 25,006 24,630 $ 0.42 $ 0.45 $ 0.74 $ 0.80 ======== ======== ======== ======== Diluted EPS: Net income $ 10,774 $ 11,492 $ 19,198 $ 20,317 ======== ======== ======== ======== Weighted average common shares outstanding 25,006 24,877 25,006 24,630 Preferred shares outstanding 974 974 974 974 Potential dilutive common shares 23 180 13 162 -------- -------- -------- -------- Weighted average common shares, preferred shares and dilutive common stock equivalents outstanding 26,003 26,031 25,993 25,766 $ 0.41 $ 0.44 $ 0.74 $ 0.79 ======== ======== ======== ========
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. 7 8 BACKGROUND The following chart summarizes information regarding the 61 hotels (the "Hotels") owned at June 30, 1999:
Number of Number of Franchise Affiliation Hotel Properties Rooms/Suites - --------------------- ---------------- ------------ Full Service Hotels: Holiday Inn ............................. 6 1,208 Sheraton Hotels and Sheraton Four Points .................. 5 1,018 DoubleTree .............................. 1 220 Ramada Plaza ............................ 1 234 Independent ............................. 2 290 ---- ----- Sub-total ....................... 15 2,970 ---- ----- Extended Stay Hotels: Residence Inn by Marriott ............... 14 1,815 Homewood Suites ......................... 1 83 Hawthorn Suites ......................... 1 280 TownePlace Suites ....................... 2 190 ---- ----- Sub-total ........................ 18 2,368 Limited Service Hotels: Hampton Inn ............................. 19 2,364 Courtyard by Marriott ................... 1 102 Comfort Inn ............................. 5 637 Holiday Inn Express ..................... 3 472 ---- ----- Sub-total ........................ 28 3,575 ---- ----- Total ............................ 61 8,913 ==== =====
The following chart summarizes ownership history for the periods presented:
1999 1998 ---- ---- Hotels owned at beginning of year 60 60 Acquisitions and developed Hotels placed into service 1 5 Sales (1) ---- ---- Hotels owned at June 30, 1999 and 1998 61 64 ==== ====
8 9 The Hotels are located in 24 states. Management believes it is prudent to diversify geographically and among franchise brands. The Partnership leases all except four of 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. Four hotels are not leased and are operated by third parties pursuant to management agreements. 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, 1999 to 1998 and the Six Months Ended June 30, 1999 to 1998. Increases in lease revenue for the three and the six months ended June 30, 1999 over 1998 are due to increases in revenue per available room ("REVPAR") at the hotels owned throughout both periods. The following table shows statistical data regarding the Hotels on an actual and a pro forma basis. The pro forma assumes 58 of the 61 hotels owned at June 30, 1999 were owned by the Partnership throughout both periods; it excludes three hotels which were opened since January 1998.
for the Three Months Ended June 30, Actual Pro Forma ------ --------- % Increase % Increase 1999 1998 (Decrease) 1999 1998 (Decrease) ---- ---- ---------- ---- ---- --------- Occupancy 75.7% 77.2% (1.9) 76.1% 77.8% (2.2) ADR $88.20 $82.65 6.7 $88.58 $85.20 4.0 RevPAR $66.78 $63.79 4.7 $67.39 $66.28 1.7 for the Six Months Ended June 30, Actual Pro Forma ------ --------- % Increase % Increase 1999 1998 (Decrease) 1999 1998 (Decrease) ---- ---- ---------- ---- ---- --------- Occupancy 72.8% 74.6% (2.4) 73.1% 75.1% (2.6) ADR $88.16 $82.04 7.4 $88.40 $84.79 4.2 RevPAR $64.21 $61.17 5.0 $64.64 $63.69 1.5
Increases in depreciation in 1999 over 1998 are due to capitalized renovation costs at certain of the Hotels. 9 10 Decreases in compensation are due to decreased bonus accruals for the officers of the Company in 1999 over 1998. Increases in interest expense in 1999 over 1998 are primarily due to the fixed rate financing of approximately $95 million of debt which was used to repay variable rate borrowings under the Line of Credit. The fixed rate debt carries a higher interest rate than the variable rate Line of Credit. LIQUIDITY AND CAPITAL RESOURCES The Company has a bank line of credit (the "Line of Credit") for $100 million. Borrowings under the Line of Credit bear interest at LIBOR. The interest rate was approximately 7.0% at June 30, 1999. The Line of Credit is collateralized by first priority mortgages on 16 hotels and agreements restricting the transfer, pledge or other hypothecation of 5 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, 1999. The Company had borrowed $90.3 million on the Line of Credit at June 30, 1999. 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 on the Class A Bonds. In December 1998, SPE 1 and SPE 2 completed a $95.8 million long-term financing of 10 of the Hotels. Principal and interest payments, based on a 25-year amortization, of $.7 million and escrow payments of $.4 million are due monthly through December 2008 at which time all outstanding principal and interest is due. The debt bears interest at 7.8%. 10 11 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, 1999, was approximately 3.5% per year. Interest is payable quarterly; principal is payable annually. The outstanding balance on the Birmingham IDB's is $4.4 million. The Birmingham hotel is collateral for the Birmingham IDB's. Wharf has non-recourse debt of $18.9 million. This debt bears interest at 8.22%. Principal and interest payments, based on a 25-year amortization, of $152,000 and escrow payments of $50,000 are due monthly through November of 2007 at which time all outstanding principal and interest is due. The Company budgeted $16.6 million for 1999 capital improvements at 58 of the hotels owned at June 30, 1999. At June 30, 1999, the Partnership had spent approximately $7.5 million of the budgeted amounts. The Company will use cash generated from operations and borrowings under the Line of Credit to fund the remaining $9.1 million of expenditures. The Company intends to substantially complete these improvements by the end of the second quarter of 2000. The Partnership is developing a 95-suite TownPlace Suites in Miami West, FL. Total estimated development costs are $6.5 million. Completion is expected in the third quarter of 1999. The Partnership is also constructing a 40-room addition to the Beverly Heritage Hotel in Milpitas, CA. Construction costs are estimated at $4.0 million. Completion of the addition is expected in the fourth quarter of 1999. 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 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. 11 12 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 1999, the Partnership has, through June 30, 1999, made cash distributions to its partners, including the Company, of $21.2 million or $.385 per Partnership unit, from which the Company made cash distributions to common shareholders of $19.3 million, or $.385 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 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. Beginning in the fourth quarter of 1997, the Company began evaluating the impact of the Year 2000 (Y2K) problem on its systems. The Company also began inquiring of its Lessees regarding the operation of the Lessee's systems at properties owned by the Company. The only software package that was not Y2K compliant was the accounting system of the Company. The Company purchased a new accounting system in January of 1998. The Company has been converting to the new format and plans to go live in the third quarter of 1999. All computers passed the Y2K check, as well as the phone system and other hardware. The Company has been advised by its Lessees and management companies that the systems at the properties (reservation, accounting, etc.) are being upgraded where necessary by the appropriate management company. Since the Company depends on its Lessees and management companies for revenue information at the hotels in order to calculate percentage rent due to the Company under the leases, any Y2K problem which affects revenue accounting by the Lessees or management companies at the Company's hotels could have a material adverse impact on the Company's business. Although we do not believe the Y2K issue will materially affect our operations, we can't assure you that our Y2K remediations will be fully in compliance, nor can we assure you that any third party, on whose data or services we rely, will be fully in compliance. Testing will continue throughout 1999 on both the new and old software to verify its operation. The Company is in the process of obtaining a statement from its vendors about their Y2K status. The Company estimates its total cost related to the Y2K problem to be approximately $80,000. 12 13 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. The computation of FFO is consistent with the NAREIT White Paper Definition of FFO with the exception that the 1999 lease termination fee has been added back to calculate FFO. 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, 1999 and 1998 was computed as follows:
For the Three Months Ended For the Six Months Ended June 30 June 30 ------- ------- 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands, except per share amounts) Income before allocation to minority interest $ 11,809 $ 12,671 $ 21,098 $ 22,432 Add depreciation 5,770 5,147 11,372 10,065 Add lease termination fee 239 Less gain on sale of hotel (523) Less preferred dividend (352) (352) (700) (700) -------- -------- -------- -------- FFO $ 17,227 $ 17,466 $ 32,009 $ 31,274 ======== ======== ======== ======== Weighted average shares, partnership units and potential dilutive shares outstanding 27,597 27,445 27,587 27,198 FFO per share $ 0.62 $ 0.64 $ 1.16 $ 1.15
13 14 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 28, 1999, the annual meeting of shareholders was held to elect three Class III directors to serve on the Board of Directors until the annual meeting of shareholders in 2002, one Class II director to serve until the annual meeting of shareholders in 2001 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 2,000,000 to 3,000,000 shares. The shareholders voted to elect the four following directors:
Votes For Votes Withheld --------- -------------- Class III Directors: Robert M. Solmson 23,890,746 154,469 Harry J. Phillips, Sr. 23,821,981 223,234 R. Lee Jenkins 23,857,578 187,637 Class II Director: J. William Lovelace 23,889,735 155,480
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 II Directors (terms expiring in 2001) - Bruce Campbell and H. Lance Forsdick, Sr. Effective July 1, 1999, J. William Lovelace resigned as a director and officer of the Company. There were 16,876,449 votes cast for, 6,742,983 votes withheld and 425,783 abstentions regarding amendment to the Plan and the proposal was approved. 14 15 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - Financial Data Schedule (b) Reports on Form 8-K - A Form 8-K was filed on May 12, 1999 which describes material risk factors that may affect our business and financial condition. 15 16 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 10, 1999 /s/ Michael J. Pascal - --------------- -------------------------------------------- Date Michael J. Pascal, Secretary and Treasurer (Principal Financial and Accounting Officer) August 10, 1999 /s/ Robert M. Solmson - --------------- -------------------------------------------- Date Robert M. Solmson, Chairman and Chief Executive Officer 16 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 MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1,833 0 15,128 0 0 0 712,856 69,392 686,868 0 276,168 0 18,143 350,463 (2,012) 686,868 0 0 0 0 19,535 0 9,331 19,198 0 19,198 0 0 0 19,198 0.74 0.74
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