<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
Commission File Number 1-7062
REALTY REFUND TRUST
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
34-6647590
(I.R.S. Employer Identification Number)
925 EUCLID AVENUE
SUITE 1750
CLEVELAND, OHIO 44115
(Address of principal executive offices)
(216) 622-0046
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Number of outstanding Shares of Beneficial Interest, without par value, as
of September 1, 1998: 2,091,504.
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
REALTY REFUND TRUST
BALANCE SHEETS
JULY 31, AND JANUARY 31, 1998
<TABLE>
<CAPTION>
JULY 31, 1998 JANUARY 31, 1998
------------- ----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES.............................. $59,527,080 $41,241,241
CASH AND CASH EQUIVALENTS................................... 717,570 2,378,398
OTHER ASSETS................................................ 634,010 --
----------- -----------
$60,878,660 $43,619,639
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
MORTGAGE NOTES PAYABLE...................................... $23,793,591 $17,709,589
NOTES PAYABLE TO BANKS...................................... 8,549,982 155,000
OTHER NOTES PAYABLE......................................... 2,646,627 2,864,690
ADVANCES PAYABLE TO RELATED PARTIES......................... 1,330,182 1,699,601
DUE TO LESSEE............................................... 343,685 944,234
DEFERRED REVENUE............................................ 738,674 --
ACCRUED DISTRIBUTIONS/DIVIDENDS............................. 948,771 --
ACCOUNTS PAYABLE AND ACCRUED EXPENSES....................... 1,768,416 572,031
MINORITY INTEREST IN PARTNERSHIP............................ 15,251,460 14,075,523
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, without par value;
unlimited authorization; 1,667,817 shares outstanding
at July 31 and January 31, 1998........................ 5,507,272 5,598,971
----------- -----------
$60,878,660 $43,619,639
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
1
<PAGE> 3
REALTY REFUND TRUST
UNAUDITED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JULY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUES:
Lease revenue (Note 2).................................... $4,731,492 $ --
Interest income........................................... 19,780 --
Rental revenue from real estate held for sale............. -- 1,104,859
---------- ----------
4,751,272 1,104,859
---------- ----------
EXPENSES:
Real estate depreciation.................................. 1,110,274 --
Real estate and personal property taxes, insurance and
ground rent............................................ 553,679 --
General and administrative................................ 813,585 111,875
Interest on mortgage notes payable........................ 1,084,209 --
Interest on notes payable to banks........................ 181,795 --
Interest on note payable to related party................. -- 97,446
Advisory fee paid to related party........................ 303,969 --
Operating expenses of real estate held for sale........... -- 1,013,676
Amortization of deferred leasing commissions.............. -- 21,724
---------- ----------
4,047,511 1,244,721
---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST...................... 703,761 (139,862)
MINORITY INTEREST........................................... 628,679 --
---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES............... $ 75,082 $ (139,862)
========== ==========
EARNINGS PER SHARE -- basic and diluted..................... $ .04 $ (.14)
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 1,667,817 1,020,586
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
REALTY REFUND TRUST
UNAUDITED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JULY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUES:
Lease revenue (Note 2).................................... $2,013,162 $ --
Interest income........................................... 8,435 --
Rental revenue from real estate held for sale............. -- 545,926
---------- ----------
2,021,597 545,926
---------- ----------
EXPENSES:
Real estate depreciation.................................. 591,005 --
Real estate and personal property taxes, insurance and
ground rent............................................ 324,185 --
General and administrative................................ 382,959 53,964
Interest on mortgage notes payable........................ 455,697 --
Interest on notes payable to banks........................ 181,795 --
Interest on note payable to related party................. -- 49,961
Advisory fee paid to related party........................ 159,816 --
Operating expenses of real estate held for sale........... -- 480,027
Amortization of deferred leasing commissions.............. -- 10,863
---------- ----------
2,095,457 594,815
---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST...................... (73,860) (48,889)
MINORITY INTEREST........................................... 23,956 --
---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES............... $ (97,816) $ (48,889)
========== ==========
EARNINGS PER SHARE -- basic and diluted..................... $ (.06) $ (.05)
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 1,667,817 1,020,586
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
REALTY REFUND TRUST
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 75,082 $(139,862)
Adjustments to reconcile net income (loss) to net cash
used for operating activities --
Depreciation and amortization.......................... 1,110,274 --
Minority interest...................................... 628,679 --
Amortization of deferred leasing commissions........... -- 21,724
Increase in other assets............................... (634,010) (26,200)
Decrease in amounts due to Lessee...................... (600,549) --
Increase in accounts payable and accrued expenses...... 713,402 222,140
Increase in deferred revenue........................... 738,674 --
----------- ---------
Net cash provided by operating activities......... 2,031,552 77,802
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties........................... (1,448,000) --
Improvements and additions to hotel properties............ (1,012,967) --
----------- ---------
Net cash used for investing activities............ (2,460,967) --
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net bank borrowings....................................... 8,344,982 --
Payments of mortgage notes payable........................ (7,000,624) --
Payment of cash dividends................................. -- (153,088)
Payment of other notes payable............................ (218,063) --
Payment to related parties................................ (2,357,708) --
----------- ---------
Net cash used for financing activities............ (1,231,413) (153,088)
----------- ---------
NET DECREASE IN CASH........................................ (1,660,828) (75,286)
CASH AT BEGINNING OF PERIOD................................. 2,378,398 531,997
----------- ---------
CASH AT END OF PERIOD....................................... $ 717,570 $ 456,711
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
REALTY REFUND TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION:
Prior to fiscal 1999, Realty ReFund Trust (the Trust or the Company)
specialized in mortgage financing as its investment vehicle, refinancing
existing income-producing commercial, industrial and multi-unit residential real
property by supplementing or replacing existing financing. The primary
refinancing technique which the Trust employed was wrap-around mortgage lending.
On January 31, 1998, the Trust contributed $2,081,000 to RRF Limited
Partnership (the Partnership), a Delaware limited partnership, in exchange for a
13.6% general partnership interest therein. The Trust is the sole general
partner of the Partnership. The Partnership issued limited partnership interests
representing 86.4% of the Partnership to acquire six hotel properties from
various entities. In addition, in order to acquire a seventh hotel property
through a wholly-owned subsidiary, the Trust issued 647,231 shares of beneficial
interest in exchange for all of the outstanding shares of Buenaventura
Properties, Inc. (BPI), which owned a hotel located in Scottsdale, Arizona.
These hotels, together with the hotels described in Note 4, are referred to
herein as the Hotels. The Hotels are leased to Realty Hotel Lessee Corp. (the
Lessee) pursuant to leases which contain provisions for rent based on the
revenues of the Hotels (the Percentage Leases). Each Percentage Lease obligates
the Lessee to pay rent equal to the greater of the minimum rent or a percentage
rent based on the gross revenues of each Hotel. The Lessee holds the franchise
agreement for each Hotel. The Lessee is owned 9.8% by InnSuites Innternational
Hotels, Inc., an entity owned by James F. Wirth, Chairman, President and Chief
Executive Officer of the Trust ("Wirth") and his spouse.
Partnership Agreement
The Partnership Agreement provides for the issuance of two classes of
limited partnership units, Class A and Class B. Such classes are identical in
all respects, except that each Class A limited partnership unit in the
Partnership shall be convertible into a like number of shares of beneficial
interest of the Trust, at any time at the option of the particular limited
partner, if the Trust determines that such conversion would not cause the Trust
to fail to qualify as a REIT. As of July 31, 1998, a total of 2,790,360 Class A
limited partnership units were issued. Additionally, 39,046 Class A limited
partnership units were reserved for issuance to those partners who did not
accept the formation exchange offer. A total of 4,990,523 Class B limited
partnership units were issued to Wirth and his affiliates, in lieu of the
issuance of Class A limited partnership units. If all of the Class A limited
partnership units were to be converted, the limited partners in the Partnership
would hold 2,790,360 shares of beneficial interest of the Trust. The Class B
limited partnership units may only become convertible with the approval of the
Board of Trustees, in its sole discretion.
Basis of Presentation
As general partner, the Trust exercises unilateral control over the
Partnership. Therefore, the financial statements of the Trust, its wholly owned
subsidiaries and the Partnership are consolidated. All significant intercompany
transactions and balances have been eliminated.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six and three-month periods ended July 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
January 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the period ended January 31, 1998.
5
<PAGE> 7
2. CHANGE IN ACCOUNTING PRINCIPLE:
In May 1998, the Financial Accounting Standards Board's Emerging Issues
Task Force issued EITF number 98-9 "Accounting for Contingent Rent in Interim
Periods" ("EITF 98-9"). EITF 98-9 provides that a lessor shall defer recognition
of contingent rental income in interim periods until specified targets that
trigger the contingent income are met. In July 1998, the Task Force issued
transition guidance stating that the consensus could be applied on a prospective
basis or in a manner similar to a change in accounting principle. The Company
has reviewed the terms of its Percentage Leases and has determined that the
provisions of EITF 98-9 will significantly impact the Company's current revenue
recognition on an interim basis, but will have no impact on the Company's annual
Percentage Lease revenue or interim cash flow from the Lessee. The Company
adopted the provisions of EITF 98-9 and elected to restate the first quarter
results of 1998 in accordance with the new pronouncement. The effect of the
change on the three months ended April 30, 1998 was to decrease lease revenues
of $1,053,000 and, therefore, net income applicable to shareholders by $262,000
($.16 per share -- basic and diluted) to income of $173,000 ($.10 per
share -- basic and diluted).
3. NET INCOME PER SHARE:
Pursuant to SFAS No. 128 "Earnings Per Share", the concept of common stock
equivalents was eliminated, and "primary" and "fully diluted" earnings per share
were replaced with "basic" and "diluted" earnings per share. For the periods
presented there were no dilutive securities.
Basic earnings per share has been computed based on the weighted average
number of shares outstanding during the periods presented. The calculation of
basic earnings per share for the six- and three-month periods ended July 31,
1998 and 1997 was based upon 1,667,817 and 1,020,586 shares, respectively.
4. ACQUISITIONS:
On February 1, 1998, the Partnership acquired 100% of the ownership
interests in the Tucson St. Mary's Hotel and Resort for $10,820,000. The
Partnership issued 699,933 Class B limited partnership units to Wirth, and his
spouse, who each held a 50% equity ownership interest in the Tucson St. Mary's
hotel.
On April 29, 1998, the Trust acquired a hotel property located in San
Diego, California for an aggregate consideration of $5,148,000, which was funded
with cash, proceeds from the Trust's credit facility and two promissory notes
secured by mortgage trust deeds on the property.
On June 1, 1998, the Partnership acquired 100% of the ownership of the
InnSuites Hotel Buena Park for $7,100,000. The Partnership assumed $4,116,754 in
mortgage debt and other obligations and issued 628,052 limited partnership units
to Wirth and Steven S. Robson (of which 13,034 units were subsequently paid to a
third party as an advisory fee), who each held a 50% equity ownership interest
in the Buena Park hotel. Mr. Robson is a Trustee of the Trust.
All of the above acquisitions have been accounted for as purchases.
5. CREDIT FACILITY:
The Trust has established a $12,000,000 secured revolving line of credit
with Pacific Century Bank. The credit facility requires, among other things, the
Trust to maintain a minimum net worth, a specified coverage ratio of EBITDA to
debt service, and a specified coverage ratio of EBITDA to debt service and fixed
charges. Further, the Trust is required to maintain its franchise agreement at
each of the hotel properties and to maintain its REIT status.
6. PERCENTAGE LEASE AGREEMENTS:
The Percentage Leases have noncancellable terms, which expire at various
dates through May 31, 2007, subject to earlier termination on the occurrence of
certain contingencies, as defined. The rent due under each Percentage Lease is
the greater of minimum rent, as defined, or percentage rent. Percentage rent
applicable to
6
<PAGE> 8
room and other hotel revenue varies by lease and is calculated by multiplying
fixed percentages by the total amounts of such gross revenues in excess of
specified threshold amounts. Both the minimum rent and the revenue thresholds
used in computing percentage rents are subject to annual adjustments beginning
January 1, 1999, based on increases in the United States Consumer Price Index.
Percentage rent applicable to food and beverage revenues is calculated as 5% of
such revenues over a minimum threshold.
Future minimum rentals (ignoring CPI increases) to be received by the Trust
from the Lessee pursuant to the Percentage Leases for the Hotels for each of the
next five fiscal years and in total thereafter are as follows:
<TABLE>
<S> <C>
Fiscal 1999............................................. $ 3,425,000
2000.................................................... 6,850,000
2001.................................................... 6,850,000
2002.................................................... 6,850,000
2003.................................................... 6,850,000
Thereafter.............................................. 29,683,000
-----------
$60,508,000
===========
</TABLE>
7. RELATED PARTY TRANSACTIONS:
Wirth beneficially owns 9.8% of the common stock of the Lessee. The Lessee
was the sole source of the Trust's Percentage Lease revenue during the quarter
ended July 31, 1998.
8. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:
In connection with the acquisition of the Buena Park hotel, approximately
$4,544,000 of historical net book value in hotel properties was contributed to
the Partnership in exchange for Partnership units and the Partnership assumed
approximately $4,103,000 of debt and other obligations. The exchanging partners'
interest, other than Wirth, resulted in adjustment to the historical net
carrying values of the Buena Park hotel property equal to $1,271,000 of the
difference between the fair market values and the historical net carrying
values.
In connection with the acquisition of the San Diego hotel, $3,700,000 of
the purchase price was satisfied through promissory notes payable to the
sellers.
At July 31, 1998, $948,771 in distributions and dividends to limited
partners and shareholders had been declared but not paid. The distributions and
dividends were paid August 31, 1998.
9. SUBSEQUENT EVENTS:
On August 11, 1998, the Trust satisfied a $2.65 million participating
mortgage obligation related to the Ontario hotel through the issuance of 423,687
shares of beneficial interest to former partners of Ontario Hospitality
Properties Limited Partnership and 133,492 Class B limited partnership units in
the Partnership to Wirth and his affiliates for their respective interests.
On September 10, 1998, the Securities and Exchange Commission declared
effective the Trust's Registration Statement on Form S-2 relating to the
offering by certain selling stockholders of up to 4,182,361 shares of beneficial
interest of the Trust which shares have been or will be issued in one or more
private placements, or may be issued upon conversion of Class A limited
partnership units in the Partnership.
10. PRO FORMA FINANCIAL INFORMATION:
The pro forma financial information set forth below is presented as if (i)
the formation transactions discussed in Note 1, (ii) the acquisition of the
membership interests in the Tucson St. Mary's and Buena Park hotels and (iii)
the acquisition of the San Diego hotel had been consummated as of February 1,
1997. The pro forma financial information is not necessarily indicative of what
actual results of operations of the Trust would have
7
<PAGE> 9
been assuming the formation transactions and the acquisitions had been
consummated as of February 1, 1997 nor does it purport to represent the results
of operations for future periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
----------------
1998 1997
------ ------
<S> <C> <C>
LEASE REVENUE............................................... $5,068 $4,729
INTEREST INCOME............................................. 20 --
------ ------
Total revenue..................................... 5,088 4,729
------ ------
DEPRECIATION AND AMORTIZATION............................... 1,175 1,182
REAL ESTATE AND PERSONAL PROPERTY TAXES, INSURANCE AND
GROUND RENT............................................... 607 628
GENERAL AND ADMINISTRATIVE.................................. 859 395
INTEREST EXPENSE ON MORTGAGE AND OTHER NOTES PAYABLE........ 1,504 1,681
ADVISORY FEE TO RELATED PARTY ADVISOR....................... 344 409
MINORITY INTEREST........................................... 530 385
------ ------
TOTAL EXPENSES AND MINORITY INTEREST........................ 5,019 4,680
------ ------
NET INCOME APPLICABLE TO COMMON SHARES...................... $ 69 $ 49
====== ======
NET INCOME PER SHARE -- basic and diluted................... $ .04 $ .03
====== ======
</TABLE>
8
<PAGE> 10
REALTY HOTEL LESSEE CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR
------------
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES, at cost:
Land................................................... $ 3,439,738 $ --
Buildings and improvements............................. 24,831,670 --
Furniture and equipment................................ 10,845,586 --
----------- -----------
39,116,994 --
Less -- Accumulated depreciation....................... 12,184,479 --
----------- -----------
Net investment in hotel properties..................... 26,932,515 --
Cash and cash equivalents................................... 129,871 463,518
Accounts receivable......................................... 571,301 821,962
Loans to affiliates......................................... -- 90,000
Payments on behalf of the Partnership....................... -- 703,905
Inventories................................................. 415,575 682,469
Other assets................................................ 295,440 925,047
Cash held in escrow......................................... 296,099 --
Deferred expenses, net...................................... 252,430 --
----------- -----------
$28,893,231 $ 3,686,901
=========== ===========
LIABILITIES AND COMBINED EQUITY
Mortgage notes payable...................................... $17,776,627 --
Accounts payable
Trade.................................................. 678,637 1,224,286
Affiliates............................................. 1,260,601 475,000
Bank overdrafts........................................ 121,052 297,884
Partners' capital purchases payable......................... 275,366 --
Lines of credit............................................. 131,000 57,809
Percentage rent payable..................................... -- 3,214,138
Capital lease obligation.................................... 22,437 --
Land lease payable.......................................... 80,441 --
Participation investors contingent liability................ 2,646,627 --
Accrued expenses and other liabilities...................... 867,267 854,106
----------- -----------
23,860,055 6,123,223
EQUITY:..................................................... 5,033,176 (2,436,322)
----------- -----------
$28,893,231 $ 3,686,901
=========== ===========
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 11
REALTY HOTEL LESSEE CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
------------ -------------
FOR THE SIX FOR THE FIVE FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1998 1997 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues from hotel operations:
Room revenue............................ $10,928,309 $10,973,754 $4,496,300 $5,555,116
Food and beverage revenue............... 295,724 568,237 117,541 302,312
Other revenue........................... 68,929 722,929 39,908 573,826
----------- ----------- ---------- ----------
Total revenues..................... 11,292,962 12,264,920 4,653,749 6,431,254
----------- ----------- ---------- ----------
Expenses:
Department expenses:
Rooms................................. 3,016,935 3,185,405 1,575,555 2,218,886
Food and beverage..................... 322,907 818,280 144,524 502,613
General and administrative.............. 1,252,440 1,438,995 611,129 804,209
Advertising and promotion............... 416,362 826,940 216,683 636,894
Utilities............................... 438,663 544,843 221,720 317,593
Repairs and maintenance................. 1,565,751 482,508 993,965 339,166
Real estate, personal property taxes,
and insurance......................... 485,175 -- 275,311 --
Percentage rent......................... -- 4,922,298 -- 2,181,866
Interest expense........................ 716,740 -- 291,410 --
Depreciation............................ 539,221 -- 229,927 --
Other................................... 107,662 -- 47,388 --
----------- ----------- ---------- ----------
Total expenses..................... 8,861,856 12,264,269 4,607,612 7,046,227
----------- ----------- ---------- ----------
Net income (loss)............................ $ 2,431,106 $ 651 $ 46,137 $ (614,973)
=========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 12
REALTY HOTEL LESSEE CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR
------------
FOR THE SIX FOR THE FIVE
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $ 2,431,106 $ (301,691)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 471,894 --
(Increase) decrease in:
Accounts receivable............................... (436,276) (230,093)
Inventories....................................... (34,174) (284,662)
Other assets...................................... (189,358) (803,356)
Payments on behalf of the Partnership............. -- (706,905)
(Increase) decrease in:
Accounts payable.................................. 120,098 603,212
Bank overdraft.................................... -- (111,312)
Accrued expenses.................................. (210,270) (35,997)
Percentage rent payable........................... -- 3,214,138
----------- -----------
Net cash provided by operating activities......... 2,153,020 1,343,334
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures, and equipment.... (10,875) --
Transfer of net assets............................ -- (1,644,720)
----------- -----------
Net cash used by investing activities............. (10,875) (1,644,720)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of mortgage notes payable................. (297,943) --
Increase in loans from affiliates................. 353,855 385,000
Distributions..................................... (1,624,119) --
Line of credit.................................... -- 57,809
Other............................................. (679,248) --
----------- -----------
Net cash (used) provided by financing
activities...................................... (2,247,455) 442,809
----------- -----------
Net change in cash and cash equivalents..................... (105,310) 141,423
Cash and cash equivalents at beginning of year.............. 628,797 322,095
----------- -----------
Cash and cash equivalents at end of year.................... $ 523,487 $ 463,518
=========== ===========
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 13
REALTY HOTEL LESSEE CORP.
Notes to Financial Statements
Five months ended June 30, 1998
(unaudited)
1. DESCRIPTION OF BUSINESS:
Realty Hotel Lessee Corp. (the Lessee) manages and operates full and limited
service hotels located in Arizona and California pursuant to the terms of
percentage leases with the Partnership and RRF Sub Corp., a wholly-owned
subsidiary of the Trust (collectively, the Lessor).
2. ORGANIZATION:
The Lessee commenced operations on January 31, 1998. The Lessor acquired
seven of the hotel properties as of January 31, 1998, one as of February 1,
1998, one as of April 29, 1998, and one as of June 1, 1998. The predecessor
to the Lessee's business consisted of the entities which owned the seven
initial hotels.
3. BASIS OF PRESENTATION:
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
The Lessee operates on a calendar year basis, and accordingly, its financial
information is presented on that basis. The financial statements for 1997
represent the predecessor's financial statements and are not comparable in
all respects with the financial statements of the Lessee. Operating results
for the five and three-month periods ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1998. For further information, refer to the predecessor's consolidated
financial statements and footnotes thereto included in the Trust's Annual
Report on Form 10-K for the period ended January 31, 1998.
4. PERCENTAGE LEASE AGREEMENTS:
The Lessee leases in total ten hotels (the Hotels) from the Partnership and
RRF Sub Corp., pursuant to long-term leases (the Percentage Leases). The
Hotels are located in Phoenix, Tempe, Scottsdale, Flagstaff, Tucson (2), and
Yuma, Arizona; and Buena Park, Ontario, and San Diego, California.
The Percentage Leases end on May 31, 2007, subject to earlier termination on
the occurrence of certain contingencies, as defined. The Percentage Leases do
not contain renewal terms. The Lessee is required to pay the higher of a
minimum rent, as defined, or a percentage rent. Percentage rent applicable to
room and other hotel revenue varies by lease and is calculated by multiplying
fixed percentages by the total amounts of such revenues over specified
threshold amounts. Percentage rent related to food and beverage revenues is
at 5% of such revenues in excess of $200,000 for all of the Percentage
Leases. Both the threshold amounts used in computing percentage rent and
minimum rent are subject to annual adjustments beginning January 1, 1999
based on increases in the United States Consumer Price Index.
Other than real estate and personal property taxes, casualty insurance and
capital improvements, which are obligations of the Lessor, the Percentage
Leases require the Lessee to pay all costs and expenses incurred in the
operation of the Hotels.
The Percentage Leases require the Lessee to indemnify the Lessor against all
liabilities, costs and expenses incurred by, imposed on or asserted against
the Lessor in the normal course of operating the Hotels.
12
<PAGE> 14
REALTY HOTEL LESSEE CORP.
Notes to Financial Statements
Five months ended June 30, 1998
(unaudited)
Future minimum rent (ignoring CPI increases) to be paid by the Lessee under
the Percentage Leases at June 30, 1998 for each of the years in the period
1998 to 2002 and in total thereafter is as follows:
<TABLE>
<S> <C>
1998.................................. $ 3,425,000
1999.................................. 6,850,000
2000.................................. 6,850,000
2001.................................. 6,850,000
2002.................................. 6,850,000
Thereafter............................ 30,254,000
-----------
$61,079,000
===========
</TABLE>
Rent expense for the five months ended June 30, 1998 was $4,922,298 of which
approximately $1,882,198 was in excess of minimum rent.
5. PRO FORMA FINANCIAL INFORMATION:
The following unaudited pro forma condensed statements of operations for the
six-month periods ended June 30, 1998 and 1997 are presented as if the Lessee
leased and operated from January 1, 1997 all of the Hotels owned by the
Partnership as of June 30, 1998.
The pro forma condensed statements of operations do not purport to present
what actual results of operations would have been if the Hotels were operated
by the Lessee pursuant to the Percentage Leases from January 1, 1997 or to
project results for any future period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Room revenue...................................... $14,050 $13,790
Food and beverage revenue......................... 699 806
Other revenue..................................... 890 306
------- -------
Total revenues.......................... 15,639 14,902
------- -------
Departmental expenses of hotels................... 5,713 4,752
Percentage lease expense.......................... 5,639 6,884
Other expenses.................................... 5,709 5,429
------- -------
Net loss................................ $(1,422) $(2,163)
======= =======
</TABLE>
6. NEW ACCOUNTING STANDARDS:
In May 1998, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial
Periods." This issue addresses lessor revenue and lessee expense recognition
in interim periods related to rental agreements which provide for minimum
rental payments, plus contingent rents based on the lessee's operations, such
as a percentage of sales in excess of an annual specified sales target. The
EITF reached a final consensus that lessees should accrue contingent rental
expense in interim periods prior to the lessee's achievement of the specified
target that triggers the contingent rent expense, provided that achievement
of the target by the end of the fiscal year is considered probable.
Application of the consensus had no material impact on the Lessee's reported
operating results.
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
On February 1, 1998, the Partnership acquired 100% of the ownership
interests in the Tucson St. Mary's InnSuites Hotel and Resort for $10,820,000.
The Partnership assumed $7,803,000 in mortgage debt and other obligations and
issued 669,933 Class B limited partnership units to James F. Wirth, Trustee,
Chairman, President and Chief Executive Officer of the Company, ("Wirth") and
his wife (of which 28,800 units were subsequently paid to third parties as
advisory fees), who collectively held all of the equity ownership interests in
the Tucson St. Mary's hotel. On April 29, 1998, the Partnership acquired the
InnSuites Hotel San Diego for $5,148,000. The Partnership invested $1,448,000 in
cash (of which $1,348,000 was drawn under the Company's secured revolving line
of credit with Pacific Century Bank) and became obligated for $3,700,000 in
seller financing in the form of two promissory notes secured by mortgage trust
deeds on the property. On June 1, 1998, the Partnership acquired 100% of the
ownership interests in an 185-suite InnSuites Hotel located in Buena Park,
California for $7,100,000. The Partnership assumed $4,103,000 in mortgage debt
and other obligations and issued 628,052 limited partnership units to Wirth and
Steven S. Robson, Trustee of the Company (of which 13,034 units were
subsequently paid to a third party as an advisory fee), who each held a 50%
equity interest in the Buena Park hotel.
At July 31, 1998, the Company owned interests in nine hotels through its
sole general partner interest in the Partnership and 100% of a tenth hotel
through RRF Sub Corp., a wholly-owned subsidiary of the Company. (Unless the
context indicates otherwise, all references to the Partnership shall include RRF
Sub Corp.) In order for the Company to qualify as a real estate investment trust
under the Internal Revenue Code of 1986, as amended (a "REIT"), neither the
Company nor the Partnership can operate the hotels. Therefore, each of the
hotels is leased to, and operated by, Realty Hotel Lessee Corp. (the "Lessee")
pursuant to a Percentage Lease. Each Percentage Lease obligates the Lessee to
pay rent equal to the greater of a minimum rent or a percentage rent based on
the gross revenues of each hotel. The Lessee also holds the franchise agreement
for each hotel. The Lessee is owned 9.8% by InnSuites Innternational Hotels,
Inc., an entity owned by Mr. Wirth and his wife. The Company's principal source
of revenue is distributions from the Partnership, which are dependent upon lease
payments from the Lessee pursuant to the Percentage Leases. The Lessee's ability
to make payments to the Partnership pursuant to the Percentage Leases is
dependent primarily upon the operations of the hotels. Therefore, management
believes that a discussion of the pro forma operating results of the Lessee is
important to an understanding of the business of the Company. The following
discusses (i) the Company's pro forma results of operations for the six months
ended July 31, 1998 and July 31, 1997; and (ii) the Lessee's pro forma results
of operations for the six months ended June 30, 1998 and June 30, 1997.
RESULTS OF OPERATIONS
ADOPTION OF EITF 98-9
In May 1998, the Financial Accounting Standards Board's Emerging Issues
Task Force (the "EITF") issued EITF number 98-9, "Accounting for Contingent Rent
in Interim Financial Periods" (EITF 98-9"). EITF 98-9 provides that a lessor
shall defer recognition of contingent rental income in interim periods until
specified annual targets that trigger the contingent income are met. The Company
has reviewed the terms of its Percentage Leases and has determined that the
provisions of EITF 98-9 will impact the Company's current revenue recognition on
an interim basis, but will have no impact on the Company's annual Percentage
Lease revenue recognition or interim cash flow from the Lessee.
The Company's Percentage Leases provide for rent equal to the greater of
(i) fixed annual base rent or (ii) rent based on percentages of room revenues at
each of the hotels ("Percentage Rent"). The Company's Percentage Leases are
structured to provide Percentage Rent equal to a certain percentage of specified
levels of room revenues which are expressed on an annual basis (the
"Thresholds"), and a certain higher percentage of room revenues in excess of the
Thresholds. Prior to EITF 98-9 the Company, in accordance with industry
14
<PAGE> 16
practice, recognized Percentage Leases revenue in interim periods equal to
Percentage Rent payments due under the Percentage Leases. Under the terms of the
Percentage Leases, Percentage Rent is calculated by applying the percentage rent
formula to year-to-date room revenue using a prorated portion of the Thresholds.
Thus, "higher tier" percentage rent was recognized as income, and collected from
the Lessee, in interim periods before room revenues exceeded the Thresholds.
EITF 98-9 clarifies that meeting the Thresholds is a contingency that must be
met before higher tier percentage rent can be recognized as current income. This
will generally result in base rent being recognized as revenue in the first and
second quarters and percentage rents already collected or due from the Lessee
being deferred and recognized as revenue in the third and/or fourth quarters.
The adoption of EITF 98-9 has had no effect on the Percentage Rent payments due
under the Percentage Leases.
PRO FORMA RESULTS OF OPERATIONS FOR THE CONSOLIDATED COMPANY
For the six months ended July 31, 1998, the Company had pro forma revenues
of $5.1 million compared to $4.7 million for the six months ended July 31, 1997,
an increase of $.4 million (8.5%). This was due primarily to a $.3 million
increase in Percentage Lease revenues in 1998 caused by an 2.0% increase in
occupancy at the hotels and an $3.09 increase in the average daily rate (ADR) at
the hotels. Total expenses increased $.3 million from $4.7 million in the six
months ended July 31, 1997 to $5.0 million in the six months ended July 31,
1998. An increase of $.46 million in general and administrative expenses was due
to increased legal and accounting and advisory expenses. Overall, the Company
improved net income applicable to common shares to $.069 million for the six
months ended July 31, 1998, an increase of $.02 million (38%), from $.049
million for the six months ended July 31, 1997 and grew earnings per common
share (basic and diluted) to $.04 from $.03 for the same respective periods.
PRO FORMA RESULTS OF OPERATIONS OF LESSEE
For the six months ended June 30, 1998, the Lessee had pro forma revenues
of $14.1 million compared to $13.8 million for the six months ended June 30,
1997. This was due to consistent occupancy in 1998 and 1997 and a $3.09 increase
in ADR from 1997 to 1998. Total expenses were unchanged from $17.1 million in
the six months ended June 30, 1997 to $17.1 million in the six months ended June
30, 1998.
Room revenues increased $.3 million, or 1.9%, from the six months ended
June 30, 1997 to the six months ended June 30, 1998. This was driven by an
increase in ADR of $3.09, along with constant occupancy from period to period.
This was attributable to the general improvement in the business travel and
tourism industries, offset by some new competition in the markets where the
hotels operate and the InnSuites' refurbishment program. Food and beverage
revenue declined $.11 million or 13.3% from the six months ended June 30, 1997
to the six months ended June 30, 1998 relating to reduced food and beverage
revenue at the Scottsdale and Tucson St. Mary's hotels and expansion of food
service, including room service at two of the other hotels.
Departmental expenses grew by $.96 million, or 20.2%, between the years
because of expansion of food service, increased payroll costs, general
inflationary pressures and increased occupancy. These costs grew as a percentage
of revenues from 31.8% in 1997 to 36.5% in 1998.
ACTUAL RESULTS OF OPERATIONS FOR THE CONSOLIDATED COMPANY
Comparison of the six months ended July 31, 1998 with 1997
For the six months ended July 31, 1998, the Company had revenues of $4.8
million compared to $1.1 million for the six months ended July 31, 1997, an
increase of $3.7 million, reflecting the inclusion of lease revenues of $4.7
million in the six months ending July 31, 1998 following the formation
transactions and the absence of $1.1 million of revenue from rental of real
estate held for sale (the Carbon & Carbide Building) which was sold in September
1997. Total expenses of $4.0 million included a $2.8 million increase over
expenses of $1.2 million in the six months ended July 31, 1998 due to inclusion
of $1.1 million in depreciation, $1.08 million in mortgage interest paid, $.55
million in property taxes, insurance and ground rent paid and $.3 million in
advisory fees paid to Mid-America ReaFund Advisors, Inc., a related party, which
were all associated with the ownership of the hotels in the six months ending
July 31, 1998 compared to no similar expenses in the six months ended July 31,
1997 when the Company owned no hotels. General and administrative expense
increased $.7 million from $.1 million in the six months ended July 31, 1997 to
$.8 million in the six months ended July 31, 1998 due to increased expenses
related to administering and increasing the number of hotels from nine to ten at
15
<PAGE> 17
July 31, 1998. Expenses related to the operation of the Carbon & Carbide
Building of $1 million incurred in the six months ending July 31, 1997 were not
incurred in the six months ending July 31, 1998 due to the sale of that building
in September 1997. Net income before minority interest of $.70 million in the
six months ended July 31, 1998 represented a $.8 million improvement over the
$.14 million loss incurred in the six months ended July 31, 1997. After
deducting minority interest of $.63 million, net income applicable to common
shares of $.07 million and earnings per share of $.04 for the six months ended
July 31, 1998 represented an increase of $.21 million over the $.14 million loss
($.14 per share) incurred in the six months ended July 31, 1997. Funds from
Operations (FFO), which represents net income plus non-cash charges, including
depreciation and amortization, increased from ($.14) million or ($.14) per share
in the six months ended July 31, 1997 to $1.8 million or $.19 per share/unit in
the six months ended July 31, 1998. Cash available for distribution (CAD) which
is FFO less amortization of debt and reserves for repairs and replacements (4%
of gross revenue) was $.69 million or $.07 per share/unit for the six months
ended July 31, 1998 compared to $(.14) million and $(.14) per share for the six
months ended July 31, 1997.
Comparison of the quarter ended July 31, 1998 with 1997
For the quarter ended July 31, 1998, the Company had revenues of $2.02
million compared to $.55 million for the quarter ended July 31, 1997, an
increase of $1.47 million, reflecting the inclusion of lease revenues of $2.01
million in the quarter ending July 31, 1998 following the formation transactions
and the absence of $.6 million of revenue from rental of real estate held for
sale (the Carbon & Carbide Building) which was sold in September 1997. Total
expenses of $2.10 million in the quarter ended July 31, 1998 included a $1.50
million increase over expenses of $.59 million in the quarter ended July 31,
1997 due to inclusion of $.59 million in depreciation, $.46 million in mortgage
interest paid, $.18 million in other interest paid, $.32 million in property
taxes, insurance and ground rent paid and $.16 million in advisory fees paid to
Mid-America ReaFund Advisors, Inc., which were all associated with the ownership
of the hotels in the quarter ending July 31, 1998 compared to no similar
expenses in the quarter ended July 31, 1997 when the Company owned no hotels.
General and administrative expense increased $.33 million from $.05 million in
the quarter ended July 31, 1997 to $.38 million in the quarter ended July 31,
1998 due to increased expenses related to administering and increasing the
number of hotels. Expenses related to the operation of the Carbon & Carbide
Building of $.48 million incurred in the quarter ending July 31, 1997 were not
incurred in the quarter ending July 31, 1998 due to the sale of that building in
September 1997. Net loss before minority interest of $.07 million in the quarter
ended July 31, 1998 represented a $.25 million decrease over the $0.05 million
loss incurred in the quarter ended July 31, 1997. After deducting minority
interest of $.024 million, net loss applicable to common shares of $.098 million
and loss per share of $.06 for the quarter ended July 31, 1998 represented a
further decrease of $.049 million over the $.049 million loss ($.05 per share)
incurred in the quarter ended July 31, 1997. FFO increased from ($.049) million
or ($.05) per share in the quarter ended July 31, 1997 to $.52 million or $.05
per share/unit in the quarter ended July 31, 1998. Cash available for
distribution (CAD) which is FFO less amortization of debt and reserves for
repairs and replacements (4% of gross revenue) was $(.05) million or $(.01) per
share/unit for the quarter ended July 31, 1998 compared to $(.05) million and
$(.05) per share for the quarter ended July 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Outstanding mortgage debt increased from $17.7 million at January 31, 1998
to $23.8 million at July 31, 1998 due to mortgage debt assumed or borrowed
related to the acquisitions of the Tucson St. Mary's, San Diego and Buena Park
hotels.
Beyond the 4% reserve for refurbishment and replacements set aside
annually, the Company has no present commitments for extraordinary capital
expenditures other than $450,000 in anticipated refurbishing costs at the
recently acquired InnSuites Hotel San Diego.
SEASONALITY
The hotels' operations historically have been seasonal. The six southern
Arizona hotels and the Ontario, California hotel experience their highest
occupancy rates in the first fiscal quarter. The Flagstaff, Arizona and San
Diego and Buena Park, California hotels experience their highest occupancy rates
in the second and third fiscal quarters. This seasonality pattern can be
expected to cause fluctuations in the Company's quarterly lease revenues
16
<PAGE> 18
under the Percentage Leases. The Company anticipates that its cash flow from the
Lessee's operation of the hotels will be sufficient to enable the Company to
make quarterly distributions at the rate of $.10 per share for at least the next
twelve months. To the extent that cash flow from operations is insufficient
during any quarter, because of temporary or seasonal fluctuations in lease
revenue, the Company expects to utilize other cash on hand or borrowings to make
those distributions. No assurance can be given that the Company will make
distributions in the future at the indicated rate, or at all.
YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of computer programs having been
written using two digits instead of four digits to define the applicable year.
Any of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could potentially result in a system failure or miscalculations, causing
disruptions of operations and normal business activity.
The Company is currently in the process of upgrading its computer
accounting programs and has commenced installing a new property management
system along with necessary hardware. These new systems have been warranted to
be Year 2000 compliant. The Company has estimated the total cost which will be
incurred in connection with these installations to be approximately $400,000,
which will be capitalized and amortized over seven years. The Company believes
that such costs will not result in a material adverse effect on its financial
condition or results of operations.
These new systems represent virtually all of the Company's computer
systems, however, the Company cannot predict the effect of the Year 2000 problem
on vendors, customers and other entities with which the Company transacts
business, and there can be no assurance that the effect of the Year 2000 problem
on such entities will not adversely affect the Company's operations.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company intends that
such forward-looking statements be subject to the safe harbors created by such
Acts. Those forward-looking statements include statements regarding the intent,
belief or current expectations of the Company, its Trustees or its officers in
respect of (i) the declaration or payment of dividends; (ii) the leasing,
management or operation of the hotels; (iii) the adequacy of reserves for
renovation and refurbishment; (iv) the Company's financing plans; (v) the
Company's position regarding investments, acquisitions, financings, conflicts of
interest and other matters; (vi) the Company's continued qualification as a
REIT; and (vii) trends affecting the Company's or any hotel's financial
condition or results of operations. The words and phrases "looking ahead", "we
are confident", "should be", "will be", "predicted", "believe", "expect",
"anticipate" and similar expressions identify forward-looking statements.
These forward-looking statements reflect the Company's current views in
respect of future events and financial performance, but are subject to many
uncertainties and factors relating to the operations and business environment of
the hotels which may cause the actual results of the Company to differ
materially from any future results expressed or implied by such forward-looking
statements. Examples of such uncertainties include, but are not limited to:
fluctuations in hotel occupancy rates; changes in room rental rates which may be
charged by the Lessee in response to market rental rate changes or otherwise;
interest rate fluctuations; changes in federal income tax laws and regulations;
competition; any changes in the Company's financial condition or operating
results due to acquisitions or dispositions of hotel properties; real estate and
hospitality market conditions; hospitality industry factors; and local or
national economic and business conditions, including, without limitation,
conditions which may affect public securities markets generally, the hospitality
industry, or the markets in which the Company operates or will operate. The
Company undertakes no obligation to update publicly or revise any
forward-looking statements whether as a result of new information, future events
or otherwise. Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of
1934, the qualifications set forth hereinabove are inapplicable to any
forward-looking statements in this Form 10-Q relating to the operations of the
Partnership.
17
<PAGE> 19
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
For purposes of preserving the Company's real estate investment trust
("REIT") qualification under the Internal Revenue Code of 1986, as amended (the
"Code"), the Second Amended and Restated Declaration of Trust (the
"Declaration"), adopted and approved by the shareholders at the June 16, 1998
Annual Meeting of Shareholders, contains ownership limitations which restrict
the ownership and transfer of the Company's capital stock under certain
circumstances.
Subject to certain exceptions specified in the Declaration, no person may
own, or be deemed to own by virtue of the applicable attribution provisions of
the Code, more than 4.9% of any class of the Company's outstanding capital stock
(the "Ownership Limitation") or more than 10% of the ownership interests in a
tenant of the Company (the "Related Party Limit"). The Board of Trustees may,
but in no event will be required to, waive the Ownership Limitation or the
Related Party Limit if it determines that such ownership will not jeopardize the
Company's status as a REIT. As a condition of such waiver, the Board of Trustees
may require opinions of counsel satisfactory to it and/or undertakings or
representations from the applicant with respect to preserving the REIT status of
the Company. The Ownership Limitation or the Related Party Limit provisions of
the Declaration will not apply if the Board of Trustees and the holders of
two-thirds of the outstanding shares of capital stock entitled to vote on such a
matter determine that it is no longer in the best interests of the Company to
attempt to qualify, or to continue to qualify, as a REIT. Without such waiver or
determination, any purported transfer of the Company's capital stock in
violation of the Ownership Limitation or the Related Party Limit will be void
and of no force or effect as to the number of shares in excess of the Ownership
Limitation or the Related Party Limit and the purported transferee shall acquire
no rights or interests as to such excess shares.
In addition, if any purported transfer of capital stock of the Company
would otherwise cause the Company to be considered to be "closely held" under
the Code or otherwise fail to qualify as a REIT under the Code (other than as a
result of a violation of the requirement that a REIT have at least 100
shareholders), then such purported transfer shall be void and of no force or
effect as to that number of shares in excess of the number that could have been
transferred without such result and the purported transferee shall acquire no
rights or interests as to such excess shares.
All shares of capital stock of the Company will bear a legend referring to
the restrictions described above.
The Declaration also provides for the Company's Board of Trustees to be
divided into three classes, with initial terms of either one, two or three
years, and thereafter for staggered three-year terms. The classification of the
Board of Trustees, together with Trustee removal only for cause, could have a
negative effect on any person seeking to acquire control of the Company. At
least two years would be required in order to change the membership of a
majority of the Board of Trustees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 16, 1998, the Company held its Annual Meeting of Shareholders to
consider the election of Trustees and the adoption and approval of a Second
Amended and Restated Declaration of Trust. Prior to such meeting, the Company
provided notice of the Annual Meeting and solicited proxies through the
Company's definitive Proxy Statement, dated May 15, 1998, wherein the considered
transactions were described to the shareholders.
Shareholders representing 1,571,766 of the voting shares of the Company
were present at the Annual Meeting, in person or by proxy, representing a quorum
for such Annual Meeting. The considered transactions
18
<PAGE> 20
were properly placed before the shareholders for adoption and approval.
Following the votes of the shareholders, such votes were certified by the
Inspector of Election of the Annual Meeting as follows:
<TABLE>
<CAPTION>
ABSTENTION AND
FOR AGAINST BROKER NON-VOTES
--- ------- ----------------
<S> <C> <C> <C>
ELECTION OF TRUSTEES:
James F. Wirth....................................... 1,564,041 0 7,725
Gregory D. Bruhn..................................... 1,565,041 0 6,725
Marc E. Berg......................................... 1,565,041 0 6,725
Lee J. Flory......................................... 1,565,041 0 6,725
Edward G. Hill....................................... 1,565,041 0 6,725
Steven S. Robson..................................... 1,565,041 0 6,725
Adoption and Approval of Second Amended and Restated
Declaration of Trust.................................... 1,135,566 31,080 7,479
</TABLE>
The Second Amended and Restated Declaration of Trust was adopted and
approved and all of the nominees for Trustee were elected by the requisite
majorities.
ITEM 5. OTHER INFORMATION.
At the 1999 Annual Meeting of Shareholders, the Company may exercise
discretionary voting authority and vote proxies returned to the Company on
matters not specifically reflected in the Company's Proxy Statement or on its
form of proxy if the Company was not notified of such matters on or before March
31, 1999 and such Proxy Statement or form of proxy relating to the 1999 Annual
Meeting contains a specific statement to that effect. Shareholders retain the
right to submit their proposals to the Company for consideration for inclusion
in the Company's Proxy Statement or form of proxy relating to the 1999 Annual
Meeting if such proposals are received by the Company on or before January 15,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.1 Second Amended and Restated Declaration of Trust
(incorporated by reference to Annex A of the Company's
definitive Proxy Statement, filed with the Securities and
Exchange Commission on May 15, 1998).
10.1 Contribution Agreement dated as of June 1, 1998, among James
F. Wirth, Steven S. Robson and RRF Limited Partnership
(incorporated by reference to Exhibit 2.1 of the Company's
Form 8-K, filed with the Securities and Exchange Commission
on September 2, 1998).
27.1 Financial Data Schedule. (l)
</TABLE>
- ---------------
(1) Filed only in electronic format pursuant to Item 601(c) of Regulation S-K.
(b) REPORTS ON FORM 8-K.
1. Current Report on Form 8-K filed May 14, 1998, as amended by Form 8-K/A filed
May 27, 1998, in connection with the acquisition of interests in a San Diego,
California hotel property.
2. Current Report on Form 8-K/A filed May 15, 1998, as amended by Form 8-K/A
filed June 30, 1998, in connection with the acquisition of interests in a
Tucson, Arizona hotel property, and including the following financial
statements: Report of Independent Public Accountants; Balance Sheet as of
December 31, 1997; Statements of Operations and Members' Deficit for the year
ended December 31, 1997; Statement of Cash Flows for the year ended December
31, 1997; Notes to the Financial Statements; Pro Forma Consolidated Balance
Sheet as of January 31, 1998 and 1997; Notes to the Pro Forma Consolidated
Balance Sheet as of January 31, 1998; Pro Forma Consolidated Statement of
Operations for the year ended January 31, 1998; and Notes to the Pro Forma
Consolidated Statement of Operations for the year ended January 31, 1998.
3. Current Report on Form 8-K filed June 24, 1998, in connection with the
exercise of an option to acquire interests in a Buena Park, California hotel
property.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 18, 1998 REALTY REFUND TRUST (Registrant)
By: /s/ GREGORY D. BRUHN
------------------------------------
Gregory D. Bruhn, Executive Vice
President, Chief Financial Officer,
Treasurer and Secretary
20
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000082473
<NAME> REALTY REFUND TRUST
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 717,570
<SECURITIES> 0
<RECEIVABLES> 634,010
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 59,527,080
<DEPRECIATION> 0
<TOTAL-ASSETS> 60,878,660
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 55,371,388
0
0
<COMMON> 0
<OTHER-SE> 5,507,272
<TOTAL-LIABILITY-AND-EQUITY> 60,878,660
<SALES> 0
<TOTAL-REVENUES> 4,751,272
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,410,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,266,004
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,082
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<FN>
<F1>The registrant utilizes an unclassified balance sheet therefore the
captions "total current assets" and "total current liabilities" are not
applicable.
</FN>
</TABLE>
