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