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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- - --- ACT OF 1934
[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - --- EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
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 INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
850 RIDGE LAKE BOULEVARD, SUITE 220
MEMPHIS, TENNESSEE 38120
(901) 767-7005
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE AND TELEPHONE
NUMBER)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
(Title of Class)
New York Stock Exchange
(Name of Market)
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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 and (2) has been subject to such filing requirements for
the past 90 days. X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ______
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $417,865,000 based on the last sale price in the
New York Stock Exchange for such stock on March 14, 1997.
The number of shares of the Registrant's Common Stock, outstanding was
24,389,000 as of March 14, 1997.
Documents Incorporated by Reference
Portions of the RFS Hotel Investors, Inc. Proxy Statement dated March 24, 1997
and filed with the Securities and Exchange Commission on March 24, 1997 with
respect to the Annual Meeting of Shareholders to be held on April 24, 1997 are
incorporated by reference into Part I and Part III. The financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report to Shareholders' for the year
ended December 31, 1996 are incorporated into Part II and Part IV.
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PART I
ITEM 1. BUSINESS
(a) General Development of Business
RFS Hotel Investors, Inc. (the "Company") was incorporated in Tennessee
on June 1, 1993 and is a self-administered real estate investment trust
("REIT").
The Company contributed substantially all of the net proceeds of its
public offerings to RFS Partnership, L.P. (the "Partnership") in exchange for
the sole general partnership interest in the Partnership. The Partnership began
operations in August 1993. At December 31, 1996, the Company owned an
approximately 98.7% interest in the Partnership.
(b) Financial Information About Industry Segment
The Company is in the business of acquiring equity interests in hotel
properties. See the Consolidated Financial Statements and notes thereto included
in Item 8 of this Annual Report on Form 10-K for certain financial information
required in Item 1.
(c) Narrative Description of Business
General. At December 31, 1996, the Company owned, through the
Partnership and other subsidiaries, 53 hotels (the "Hotels") containing 7,387
rooms located in 23 states. In order to qualify as a REIT for federal income tax
purposes, neither the Company nor the Partnership can operate hotels. As a
result, the Partnership leases all of its hotel properties to RFS, Inc. and
other wholly-owned subsidiaries of Doubletree Corporation (collectively, the
"Lessees") pursuant to leases (the "Percentage Leases") as described in Item 2
below.
Strategies. The Company seeks to increase funds from operations and
enhance shareholder value through its strategies for internal growth and
acquisitions.
Internal Growth Strategy. The Company's strategy for internal growth
includes participating in increased revenue at the Hotels through Percentage
Leases, limiting leverage, an extensive renovation program and affiliations with
national franchises.
The Percentage Leases provide for the payment of (i) fixed monthly base
rent and (ii) quarterly percentage rent based on a percentage of gross room
revenue, food revenue and beverage revenue, if any, at the Hotels. The use of
Percentage Leases allows the Company to participate in increased revenue at the
Hotels. See Item 2 for further information with respect to the Percentage
Leases.
The Company recognizes the potential competitive advantage gained by
owning hotel properties with little or no debt. High leverage may impair the
ability of management to renovate,
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maintain and effectively manage properties. 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.
The Company budgeted $12.1 million for capital improvements in 1996 at
the 53 hotels owned at December 31, 1996. At December 31, 1996, the Partnership
had spent $11.0 million of the budgeted amounts. The Company intends to fund the
remaining $1.1 million to complete these capital improvements during 1997. The
Company has budgeted an additional $13.8 million to be spent on capital
improvements at 52 of the 53 Hotels owned at December 31, 1996 during 1997. The
capital improvements are primarily designed to enhance revenues and the guests'
experience and include replacing such items as carpets and drapes, renovating
common areas and hotel exteriors. This does not include one Hotel at which
extensive renovations are being contemplated or the four Sheraton hotels
acquired in January 1997.
All but one of the Hotels are licensed to operate under nationally
franchised brands. The Company believes that franchised properties generally
have higher levels of occupancy and average daily rate ("ADR") than properties
which are unfranchised due to access to national reservation systems and
advertising and marketing programs provided by franchisors.
Acquisition Strategy. The Company intends to acquire equity interests
in existing hotel properties, to develop hotels and to enter into contracts to
acquire properties from third parties after development.
The Company considers investments in hotel properties which meet one or
more of the following criteria:
- Favorable market characteristics
- Long-term asset quality
- Prospects of increasing profitability
- National franchises
- Diversification-geographically, by brand and by segment
- Return on investment
The Company's current investment and acquisition policies provide that
no more than 25% of the Company's total assets may be invested in any one
property at the time of investment. The Company's current policies also provide
that the Company will not invest in luxury properties, budget hotels or resorts.
The Company's investment and acquisition policies may be changed by the Board of
Directors without shareholder approval.
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Property Management. RFS, Inc. has managed hotel properties since 1974
and, as of December 31, 1996, managed 62 hotels with 10,062 rooms in 23 states,
including 48 of the Hotels. One Hotel is managed by another wholly-owned
subsidiary of Doubletree Corporation. Three Hotels are managed by Alpha Inn
Management Company ("Alpha") and one by TMH, Inc. ("TMH") pursuant to management
agreements between the Lessees and Alpha and TMH, respectively. Alpha has
managed hotel properties since 1985 and currently manages 7 properties with 692
rooms in 6 states. TMH has managed hotel properties since 1984 and currently
manages 4 properties with 352 rooms in 3 states. The Lessees, Alpha and TMH are
generally required to perform all operational and management functions necessary
to operate the Hotels. Such functions include but are not limited to ordering
supplies, advertising and marketing, maid service, laundry and maintenance.
Alpha and TMH are paid a fee by RFS, Inc. under management agreements equal to
3% of the gross revenues of the Hotels, plus reimbursement of out-of-pocket
expenses. The Lessees manage other hotel properties in addition to the Hotels
and are not required to devote all of their time and efforts to the Hotels.
Operating Practices. The Lessees utilize a centralized accounting and
data processing system for the Hotels which facilitates financial statement and
budget preparation, payroll management, internal auditing and other support
functions for the on-site hotel management team. The Lessees provide centralized
control over purchasing and project management (which can create economies of
scale in purchasing) while emphasizing local discretion within specific
guidelines.
The Lessees develop a written marketing plan for the Hotels with a
strong emphasis on room revenue, market segmentation and yield management. The
Lessees corporate staff assists in developing corporate sales programs and
negotiating national contracts where appropriate. The Lessees monitor each sales
employee on a continuing basis. Operating multiple properties allows
participation in numerous marketing programs that might be unavailable or not
cost-efficient for an individual hotel.
Each hotel property employs a general manager who is responsible for
the overall operations of the hotel. General managers report to regional
managers, who generally have responsibility for up to fifteen hotels. Daily
operations are managed with a centralized approach through regional managers who
report to the Lessees' central office. The Lessees' strategy is to encourage
decision-making by those people closest to the hotel operation at the lowest
administrative cost.
Competition. Substantially all of the Hotels are located in a developed
area that includes other hotel properties. The number of competitive hotel
properties in a particular area could have a material adverse effect on
occupancy and ADR of the Hotels or at hotel properties acquired in the future.
New, competing hotels may be opened in the Company's markets which could
materially and adversely affect hotel operations.
Employees. At December 31, 1996, the Company had a total of 24
employees.
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Seasonality. The hotel industry is seasonal in nature. Generally, hotel
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in the percentage rent.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects" and words of similar import. Such forward-looking
statements relate to future events, the future financial performance of the
Company, and involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward looking
statements. Readers should specifically consider the various factors identified
in this report which could cause actual results to differ. The Company disclaims
any obligation to update any such factors or to publicly announce the result of
any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
Business Issues. The Hotels are subject to all operating risks common
to the hotel industry. These risks include, among other things: competition from
other hotels; recent over-building in the hotel industry which has adversely
affected occupancy and room rates; increases in operating costs due to inflation
and other factors; significant dependence on business and commercial travelers
and tourism; increases in energy costs and other expenses of travel; and adverse
effects of general and local economic conditions. These factors could adversely
affect the Lessees' ability to make lease payments and therefore the Company's
ability to make expected distributions to shareholders. Further, decreases in
room revenues of the Hotels will result in decreased revenues to the Partnership
under the Percentage Leases.
The Company must rely on the Lessees to generate sufficient cash flow
from the operation of the Hotels to enable the Lessees to meet the rent
obligations under the Percentage Leases. The rent obligations under the
Percentage Leases are unsecured and are not guaranteed by Doubletree. At
December 31, 1996, the Lessees are in compliance with the provisions of the
Percentage Leases.
The Company's investments are subject to varying degrees of risk
generally incident to the ownership of real property. The underlying value of
the Company's real estate investments and the Company's income and ability to
make distributions to its shareholders is dependent upon the ability of the
Lessees to operate the Hotels in a manner sufficient to maintain or increase
revenues and to generate sufficient income in excess of operating expenses to
make rent payments under the Percentage Leases. Income from the Hotels may be
adversely affected by adverse changes in national economic conditions, adverse
changes in local market conditions due to changes in general or local economic
conditions and neighborhood characteristics, competition from other hotel
properties, the impact of present or future environmental legislation and
compliance with environmental laws, the ongoing need for capital improvements,
particularly in older structures, changes in real estate tax rates and other
operating expenses, adverse changes in governmental rules and fiscal policies,
civil unrest, acts of God, including earthquakes and other natural disasters
(which may result in uninsured losses), acts of war, adverse changes in zoning
laws, and other factors which are beyond the control of the Company and the
Lessees.
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Environmental Issues. Under various federal, state and local laws and
regulations, an owner or operator of real estate may be liable for the costs of
removal or remediation of certain hazardous or toxic substances on such
property. Such laws often impose such liability without regard to whether the
owner knew of, or was responsible for, the presence of hazardous or toxic
substances. Furthermore, a person that arranges for the disposal or transports
for disposal or treatment a hazardous substance at another property may be
liable for the costs of removal or remediation of hazardous substances released
into the environment at the property. The costs of remediation or removal of
such substances may be substantial, and the presence of such substances, or the
failure to promptly remediate such substances, may adversely affect the owner's
ability to sell such real estate or to borrow using such real estate as
collateral. Thus, if such liability were to arise in connection with the
ownership and operation of the Hotels, the Company, the Partnership, the
Lessees, Alpha or TMH, as the case may be, may be potentially liable for such
costs.
Phase I Environmental Survey Assessments ("ESA's") have been obtained
on all of the Hotels from independent environmental engineering firms. The Phase
I ESA's were intended to identify potential sources on contamination for which
the Hotels may be responsible and to assess the status of environmental
regulatory compliance. No assurance can be given that the Phase I ESA's
identified all significant environmental problems or that no additional
environmental liabilities exist. The Phase I ESA's included historical reviews
of the Hotels, reviews of certain public records, preliminary investigations of
the sites and surrounding properties, screening for the presence of asbestos,
PCBs, wetlands and underground storage tanks, and the preparation and issuance
of a written report. The Phase I ESA's did not include invasive procedures, such
as soil or ground water sampling and analysis.
The Phase I ESA reports indicated that several of the Hotels have
asbestos containing materials (ACM) on or in insulation, floor or ceiling
coverings and various other structural and non-structural items. While the
precise amounts of ACM contained in the Hotels cannot be accurately determined
without incurring substantial expense, the Company believes, based on its review
of the Phase I ESA reports, that overall levels are low. The Phase I ESA on the
Clayton, Missouri Hotel indicated further testing of ACM was necessary in
certain locations within the hotel. The Phase II ESA revealed that ACM was
present and recommended that some of the ACM be removed to simplify an asbestos
management program. A portion of the ACM will be removed at a cost of
approximately $46,000. The partnership which sold the Clayton Hotel to the
Partnership will bear the cost of such removal and has escrowed funds to cover
such costs. The remaining material will be managed in-place as recommended in
the Phase II ESA report in accordance with federal, state and local laws and
regulations. The Company also believes that, given the condition and location of
ACM in the other Hotels, risks to human health are at acceptable levels. The
Company has no plans, and is not required by law, to remove ACM unless it would
be affected by proposed renovation or demolition work. Absent such scheduled
work, ACM will be managed in-place in accordance with federal, state and local
laws and regulations.
If any ACM in the Hotels becomes damaged, deteriorates, or is in an
area scheduled for renovation or demolition work, asbestos could be released
into the air and the Company may incur substantial costs to remove, encapsulate,
or enclose the asbestos in accordance with applicable law and to reduce risks to
human health. Elevated levels of airborne asbestos can create a health hazard
for workers and, to a lesser degree because of the typically short duration of
their stays, guests.
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Increased health hazards increase the probability that the Partnership will
incur liability for health-related claims.
The partnership formerly owning the hotel in Columbia, South Carolina
received notice in October 1992 regarding potential liability under the federal
Comprehensive Environmental Response, Compensation and Liability Act
("Superfund") for cleanup of contamination at a site in Greer, South Carolina.
The relevant Phase I ESA report indicated that the Columbia Hotel contributed
approximately 500 pounds of a hazardous substance to the site. This compares to
an estimated total of 42 million pounds of hazardous substances disposed of at
the site, contributed by more than 700 potential responsible parties ("PRP's")
identified currently. Under Superfund, each PRP, including the Columbia Hotel,
may be jointly and severally liable for the entire cost of the site-cleanup. On
the Greer site, removal costs alone were approximately $18 million. A PRP Group
has been formed to conduct removal action at the site, allocate liability among
the PRP's, and generally work to resolve matters at the site. The partnership
which sold the Columbia Hotel to the Partnership has agreed to remain liable for
all costs and claims incurred by the Partnership arising as a result of the
Greer Superfund site and has escrowed $5,000 to defray such costs and claims. In
response to a demand for payment from the PRP Group, a payment of $1,127 has
been made from such escrowed funds for the cost of removing drums, cylinders,
and other waste materials found on the surface of the Superfund site and the
government's oversight costs associated with the removal. In addition, a
separate claim for the cost of investigating and remediating soil and
groundwater contamination associated with the Superfund site is expected. There
have been no remediation costs or estimates thereof to date. The PRP Group's
approach to the allocation is such that the ultimate liability of each PRP is
generally expected to be proportionate to its relative contribution of hazardous
substances.
In certain cases, state and federal regulators overseeing cleanup of
Superfund sites will permit de minimis PRP's to pay an agreed upon amount and
obtain a release from further liability. No such releases have yet been
authorized or granted with respect to the Greer site. While the Company believes
that such a release may in the future be available with respect to liability
resulting from any contributions of hazardous substances from the Columbia
Hotel, there is no assurance that a release will be obtained. Unless and until
such a release is obtained, the Partnership may potentially incur liability for
the entire cost of the cleanup of the site. However, based on the Phase I ESA
reports and other information obtained by the Company regarding the relative
amount and nature of the Columbia Hotels contribution to the Greer site, the
Company believes that the liability for the hotel's substances will be only a
very small portion of the total costs of removal and remediation. To the extent
that any of the major PRP's declare bankruptcy or otherwise are unable to pay
their share of removal and remediation costs, liability for the Columbia Hotel's
substances may increase.
In all but two cases where Phase I ESA reports recommended specific
remedial action, either the prior owner or the Company has taken, provided for,
or scheduled the recommended action. the Company has decided not to undertake
the consultant's recommended actions in two cases. First, the Company has
determined that testing of the soil near the transformers at the Columbia hotel
site is unnecessary because (1) South Carolina Electric & Gas Co. tested the
transformers, determined that they did contain PCBs and removed the transformers
and (2) the consultant found no evidence (e.g. stained soil or stressed
vegetation) that PCBs were released
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from the transformers. Second, at the Clayton, Missouri Hotel site, the Company
does not intend to train employees in handling ACM because, if such an activity
becomes necessary at any of its properties, the Company will use licensed
asbestos contractors, not employees, in handling ACM.
The Phase I ESA for the Hampton Inn - Airport in Indianapolis,
indicated that the Indianapolis Hotel disposes of approximately 10% of its solid
waste at a facility that is a state Superfund site. Such a site may be subject
to investigation and remediation under the federal and state Superfund laws, and
persons that sent hazardous substances to the site may be jointly and severally
liable for the costs of the that work. The Phase I ESA report states that solid
waste from the Indianapolis Hotel was disposed of into a domestic waste cell of
the facility. A state official informed the engineering firm conducting the
Phase I ESA that this domestic waste cell is segregated by a containment
structure and is adjacent to, but not part of, the Superfund site. The Phase I
audit did not indicate that the Indianapolis Hotel has arranged for the disposal
of any hazardous substances at this facility. If the Indianapolis Hotel in fact
arranged for such disposal, however, it could be found liable for at least a
part of any response costs.
Each former owner of the Hotels has represented that it knows of no
hazardous substance or PCBs in, on, or under the hotels or the real property
upon which the Hotels are situated. With respect to the Hotels each such former
owner will remain liable for all claims and costs arising from a breach of such
representation. In addition, the seller of the Hotels will remain liable for all
costs and claims incurred by the Partnership arising as a result of the Greer
Superfund site and (other than as described above) items with respect to which
the Phase I ESA reports recommended corrective or remedial action, specifically
(i) removal by the former owner of the Hotel in Clayton, Missouri of ACM, and
(ii) removal by the former owner of the Hotel in Franklin, Tennessee of debris
dumped or buried in a corner of the real property upon which such Hotel is
situated and erection of a fence around the area to prevent further dumping. The
Company believes the former owners of the Hotels have, and will have, sufficient
assets to satisfy their obligations to the Partnership which might reasonably be
expected to arise under the contacts pursuant to which such properties were
acquired by the Partnership. There can be no assurances, however, that such
former owners will be able to satisfy any of such obligations.
Except as noted specifically above, the Phase I ESA reports have not
revealed an environmental liability or compliance concerns that the Company
believes would have a material adverse effect on the Company's business, assets
or results of operations, nor is the Company aware of an such liability or
compliance concerns. Nevertheless, it is possible that these reports do not
reveal all environmental liabilities or compliance concerns or that there are
material environmental liabilities or compliance concerns of which the Company
is unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the Hotels will not be affected
by the condition of the properties in the vicinity of the Hotels (such as the
presence of leaking underground storage tanks) or by third parties unrelated to
the Partnership or the Company.
The Company believes that the Hotels are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances and other environmental matters. Except
as noted above with respect to the hotels in Columbia, South Carolina and
Indianapolis, Indiana, neither the Company nor, to the knowledge of the
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Company, any of the former owners of the Hotels has been notified by any
governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental substances in
connection with any of its present or former properties.
Tax Status. The Company has elected to be taxed as a REIT under Section
856 through 860 of the Internal Revenue Code, commencing with its taxable period
ended December 31, 1993. The Company generally will not be subject to federal
income tax to the extent it distributes at least 95% of its REIT taxable income
to its shareholders. If the Company fails to qualify as a REIT in any taxable
year, the Company will be subject to Federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
tax rates. The Company is subject to certain state and local taxes on its income
and property and to Federal income and excise taxes on its undistributed income.
Executive Officers. Information with respect to Robert M. Solmson,
Chairman of the Board and Chief Executive Officer of the Company is incorporated
by reference to the Company's Proxy Statement. See Item 10. Information with
respect to Minor W. Perkins, President of the Company, is incorporated by
reference to the Company's Proxy Statement. See Item 10. J. William Lovelace
(age 58) is Executive Vice President of the Company. From 1991 to June 1994, he
was an officer of RFS, Inc. and Subsidiaries. From 1984 to 1991, Mr. Lovelace
served as President of Dominion Hospitality Management, Inc., a hotel management
company. Mr. Lovelace has been active in the hotel/motel industry for over 30
years. Mr. Lovelace is a graduate of the University of Missouri. Michael J.
Pascal (age 38) is Secretary, Treasurer and Chief Financial Officer of the
Company. From 1991 to June 1994, he was Chief Financial Officer of RFS, Inc.
From 1990 to 1991, he was Controller and General Counsel for Dominion
Hospitality Management, Inc., a hotel management company. From 1985 to 1990, he
was General Counsel and Chief Financial Officer for The McDowell Company. Mr.
Pascal holds a B.S. and a J.D. degree from Memphis State University. Mr.
Lovelace is Mr. Pascal's father-in-law.
ITEM 2. PROPERTIES
The following table sets forth certain pro forma information for the
year ended December 31, 1996 with respect to the Hotels. For hotels acquired
during 1996, this information includes the actual operating results both prior
and subsequent to acquisition by the Partnership.
FOR THE YEAR ENDED DECEMBER 31, 1996
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AVERAGE REVENUE PER
DATE NUMBER ROOM DAILY AVAILABLE
OPENED OF ROOMS REVENUE OCCUPANCY RATE ROOM
------ -------- --------- --------- ------- -----------
HAMPTON INN HOTELS:
Denver, CO (Airport) 1985 138 $ 904,084 71.5% $59.42 $42.46
Detroit (Warren), MI 1988 124 776,398 66.9% 54.19 36.25
Ft. Lauderdale, FL 1986 122 2,133,164 76.4% 62.57 47.79
Hattiesburg, MS 1988 155 $2,187,265 75.2% $53.65 $40.35
Houston, TX (Hobby) (1) 1996 119 92,354 31.2% 50.08 15.64
Indianapolis, IN 1988 131 2,360,332 76.9% 64.05 49.23
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FOR THE YEAR ENDED DECEMBER 31, 1996
AVERAGE REVENUE PER
DATE NUMBER ROOM DAILY AVAILABLE
OPENED OF ROOMS REVENUE OCCUPANCY RATE ROOM
------ -------- --------- --------- ------- ----------
HAMPTON INN HOTELS, CONT'D.:
Lakewood (Denver), CO 1987 150 2,764,313 80.8% 62.34 50.35
Lansing, MI 1985 109 1,450,606 66.2% 54.87 36.35
Laredo, TX 1995 120 1,748,268 71.7% 55.51 39.81
Lincoln, NE 1983 111 1,815,855 80.3% 55.68 44.70
Memphis, TN 1992 120 2,297,681 82.3% 63.57 52.32
Minneapolis, MN (Airport) 1985 135 2,509,844 78.3% 64.88 50.80
Minneapolis (Milwaukee), MN 1990 127 1,964,348 70.6% 59.88 42.26
Oklahoma City, OK 1986 134 2,276,591 75.7% 61.35 46.42
Omaha, NE 1985 129 2,146,618 74.1% 61.33 45.47
Plano, TX (1) 1996 131 821,222 58.8% 62.72 36.88
Tulsa, OK 1986 148 2,092,427 68.7% 56.21 38.63
RESIDENCE INN HOTELS:
Ann Arbor, MI 1985 72 1,911,589 87.1% 83.52 72.74
Charlotte, NC 1984 80 2,080,103 89.1% 79.91 71.24
Fishkill, NY 1988 136 3,956,081 89.3% 89.24 79.70
Fort Worth, TX 1983 120 3,161,884 85.4% 84.53 72.19
Kansas City, MO 1987 96 2,195,444 77.3% 81.08 62.66
Providence, RI 1989 96 2,835,701 91.8% 88.14 80.93
Torrance, CA 1984 248 6,452,706 85.1% 83.74 71.28
Tyler, TX 1985 128 2,528,310 82.0% 66.01 54.12
Wilmington, DE 1989 120 3,010,911 90.5% 76.00 68.74
Perimeter West (Atlanta), GA 1987 128 3,514,907 76.2% 98.44 75.03
Orlando, FL 1984 176 4,654,030 83.8% 86.26 72.25
Sacramento, CA 1987 176 4,267,876 78.5% 86.99 68.31
HOLIDAY INN HOTELS:
Clayton, MO 1965 253 5,134,804 76.9% 72.14 55.45
Columbia, SC 1969 175 2,529,266 71.6% 55.13 39.49
Flint, MI 1990 171 4,268,137 81.0% 84.15 68.18
Lafayette, LA 1983 242 4,034,039 78.4% 58.13 45.55
Louisville, KY 1970 169 2,384,577 75.9% 50.78 38.55
Crystal Lake (Chicago), IL 1988 196 4,531,345 77.2% 81.86 63.17
COMFORT INN HOTELS:
Clemson, SC 1989 122 1,469,631 66.5% 49.50 32.91
Conyers, GA 1989 83 1,431,222 74.6% 63.14 47.11
Detroit (Farmington Hills), MI 1987 135 1,970,082 70.0% 56.94 39.87
Fort Mill, SC (Charlotte, NC) 1987 153 2,509,643 75.8% 59.10 44.82
Grand Rapids, MI 1982 109 1,609,293 76.0% 53.08 40.34
Marietta, GA 1989 185 2,923,866 67.9% 63.56 43.18
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FOR THE YEAR ENDED DECEMBER 31, 1996
AVERAGE REVENUE PER
DATE NUMBER ROOM DAILY AVAILABLE
OPENED OF ROOMS REVENUE OCCUPANCY RATE ROOM
------ -------- --------- --------- ------- ----------
HOLIDAY INN EXPRESS HOTELS:
Austin, TX 1992 125 $2,077,857 71.6% $63.42 $45.42
Chicago (Arlington Heights), IL 1989 125 2,279,018 74.2% 67.18 49.81
Chicago (Downers Grove), IL 1984 123 2,072,129 70.4% 65.36 46.03
Franklin, TN 1969 100 1,383,901 72.2% 52.38 37.81
Milwaukee (Wauwatosa), WI 1984 122 1,772,683 72.7% 54.61 39.70
Minneapolis (Bloomington), MN
(Airport) 1987 142 2,624,073 78.2% 64.57 50.49
Tupelo, MS 1963 124 1,224,217 56.6% 47.68 26.97
HAWTHORN SUITES HOTEL:
Atlanta, GA 1984 200 5,711,041 73.7% 96.26 70.93
DOUBLETREE HOTEL:
Del Mar, CA 1990 220 4,943,196 79.1% 77.64 61.39
EXECUTIVE INN HOTEL:
Tupelo, MS 1982 115 1,224,217 68.4% 52.94 36.20
COURTYARD BY MARRIOTT HOTEL:
Flint, MI (1) 1996 102 18,417 13.2% 78.04 $10.30
HOMEWOOD SUITES HOTEL:
Salt Lake City, UT (1) 1996 98 78,251 18.3% 81.01 $14.79
(1) Represents operations since the opening of hotel in July 1996 for the
Hampton Inn in Plano, TX, in November 1996 for the Homewood Suites in Salt Lake
City, UT, and in December 1996 for the Hampton Inn in Houston, TX and the
Courtyard by Marriott in Flint, MI.
Recent Acquisitions and Pending Developments. The Partnership acquired
four Sheraton Hotels in California with a total of 814 rooms on January 2, 1997
for an aggregate purchase price of approximately $91 million, consisting of cash
and 2,244,934 operating partnership units. The Partnership is developing six
hotels in the following areas: Jacksonville, FL, Chandler, AZ (2), Plano, TX,
Sedona, AZ and Crystal Lake, IL.
Completion of these hotels is expected during 1997.
Master Agreement. The Company and the Partnership have entered into a
master agreement, (the "Master Agreement"), with the Lessees. Under the Master
Agreement, the Company and the Partnership have granted to the Lessees, a right
of first offer and right of first refusal (the "Right of First Refusal") to
lease hotels acquired by the Partnership or the Company until February 27, 2006
(the "Term"), subject to certain exceptions described below.
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During the Term, the Partnership and the Company must deliver to the
Lessees a written notice specifying the proposed Base Rent and Percentage Rent
upon which the Partnership would be willing to lease a proposed acquisition or
development hotel to the Lessees. In the event the Lessees do not agree within
15 days to lease the particular hotel pursuant to the rent terms set forth in
the notice, the Partnership may seek an alternative lessee; provided, however,
that before executing a lease with such alternative lessee, the Partnership must
send a second notice to the Lessees setting forth the final rent terms of the
proposed lease between the Partnership and such alternative lessee. The Lessees
will then have 5 days to elect to lease the hotel from the Partnership upon the
terms set forth in the second notice. If the Lessees do not make such election,
the Partnership may enter into a lease with the alternative lessee upon the
terms set forth in the second notice.
The Partnership may terminate the Right of First Refusal at any time
following February 27, 2003, in the event the hotels leased by the Lessees
throughout such seven-year period fail to meet certain financial performance
goals. The Partnership may also terminate the Right of First Refusal: (i) upon
the occurrence under a lease of an "Event of Default" by the Lessees; (ii) in
the event the Company's status as a real estate investment trust is terminated
and the leases are terminated by the Company, and the Company (a) redeems all
outstanding Series A Preferred Stock owned by the RFS, Inc. at a price per share
equal to the greater of (A) $19.00 or (B) the average sales prices for the
Company's Common Stock for the ten trading days prior to the closing date, (b)
the Partnership pays the Lessees the fair market value of the remaining terms of
the leases and (c) if such termination occurs prior to February 27, 2006, the
Partnership pays the Lessees an amount equal to $5,000,000 minus $41,667 for
each calendar month which has expired since February 27, 1996; or (iii) if RFS,
Inc. fails to maintain a minimum net worth of $15,000,000 during the term of any
lease or defaults under the terms of the Master Agreement.
The Right of First Refusal will not apply to hotels acquired or
developed by the Partnership where the seller requires, after the Partnership's
reasonable efforts to obtain a price at which the lease or management of the
hotel could be bought out or to obtain a price for the hotel without the
seller's continued management, that the seller or an affiliate of the seller be
the lessee or the manager of the hotel following acquisition by the Partnership
("Excluded Hotels"). The aggregate purchase prices for the Excluded Hotels
cannot, in the aggregate, exceed 20% of the aggregate purchase prices for all
hotels acquired by the Partnership during the Term.
The Right of First Refusal also will not apply to the acquisition by
the Partnership of any hotel (a "Subject Hotel") located in proximity to a hotel
(a "Competing Hotel") owned, leased, managed or franchised by the Lessees or an
affiliate of the Lessees such that the ownership, lease, management or franchise
of the Competing Hotel would violate the non-competition provisions of the lease
with respect to the Subject Hotel if a lease were entered into between the
Partnership and the Lessees. The foregoing exception to the Right of First
Refusal will not apply if the ownership, lease, management or franchise of the
Competing Hotel is pursuant to a lease or other agreement with the Partnership,
and even if the exception is applicable, the Partnership must notify the Lessee
of its proposed acquisition of the Subject Hotel so that the Lessees have the
opportunity to terminate its ownership, lease, management or franchise of the
Competing Hotel, or take such other action as is necessary, in order to allow
the Lessees to enter into a percentage lease with respect to the Subject Hotel
without violating the non-competition restrictions.
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The Right of First Refusal is also inapplicable to any hotels acquired
by the Partnership from a real estate investment trust other than the Company in
connection with the acquisition by the Partnership of substantially all of the
hotels of such other real estate investment trust, whether by merger, purchase
of assets or otherwise.
RFS, Inc. is required to maintain a $15,000,000 tangible net worth
during the terms of the Leases. The Master Agreement provides that there can be
no change in control of the Lessees without prior consent of the Partnership.
The Percentage Leases. Each hotel owned by the Partnership is
separately leased to the Lessees under a Percentage Lease.
Effective February 27, 1996, each of the Percentage Leases between the
Partnership and RFS, Inc. was amended to provide the following among other
things: (i) the term of each Percentage Lease was increased to 15 years from the
date of inception; (ii) the non-compete provisions were amended to preclude the
Lessees or its Affiliates from owning, leasing, operating, managing or
franchising any hotel or motel within a five-mile radius of any hotel in which
the Partnership or an Affiliate of the Partnership has an interest, as compared
to a previous 20-mile radius restriction; (iii) events of default shall include,
among others, (a) the failure of the Lessees to pay quarterly percentage rent
when due and payable and continuing for a 10-day period after receipt of notice
from the Partnership, as compared to the previous 90-day period and (b)
occurrence of an event of default under the Master Agreement (iv) the Lessees
shall be required, not later than 60 days prior to commencement of each lease
year, to prepare and submit to the Partnership an operating budget and marketing
plan; (v) the termination of any Percentage Lease due to total condemnation will
not affect any other Percentage Leases then in effect between the Lessee and the
Partnership; (vi) any management fee payable to an Affiliate of the Lessees
shall be subordinate to the payment of rent to the Partnership under the leases;
(vii) future leases entered into between the Lessees and the Partnership will
not be subject to cross-default provisions in regard to the existing percentage
leases or other future leases; (viii) the Lessees will have an extended right
(120 days as compared to 90 days) to cure defaults under the franchise
agreements; (ix) the respective obligations of the parties relating to capital
expenditures and repairs and maintenance were clarified and amended, (x) the
Partnership will have 120 days to tender a substitute lease to the Lessee upon
sale of a hotel by the Partnership, as compared to 90 days previously, and, (xi)
percentage rent is payable within 35 days following the end of the first three
calendar quarters and on or before February 10 with respect to the fourth
calendar quarter.
On November 21, 1996, a new limited purpose subsidiary of the
Partnership issued $75,000,000 of commercial mortgage bonds secured by 15 of
the Hotels. In connection with the issuance of the bonds, the Master Agreement
was amended and new Percentage Leases were entered into for the 15 Hotels by
subsidiaries of the Partnership and the existing Lessee under terms
substantially similar to the existing Percentage Leases. The Percentage Leases
for the 15 Hotels are not cross-defaulted with the Percentage Leases for the
other Hotels.
Percentage Lease Terms. Fifteen of the Percentage Leases have terms
expiring on December 31, 2011 and each of the other Percentage Leases has a
term expiring fifteen years from the date of inception. Each Percentage Lease
is subject to earlier termination upon the occurrence of certain contingencies
described in the Percentage Lease.
Amounts Payable Under the Percentage Leases. During the term of each
Percentage Lease, the Lessee is obligated to pay (i) the greater of Base Rent or
Percentage Rent and (ii) certain other amounts, including interest accrued on
any late payments or charges (the "Additional Charges"). Base Rent accrues and
is required to be paid monthly; Percentage Rent is payable quarterly, on or
before the 35th day following the end of each of the first three calendar
quarters in each fiscal year and on or before February 10 of the next year, with
respect to the fourth calendar quarter of each
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fiscal year, and is calculated by multiplying fixed percentages by room revenue
and, with respect to the full service Hotels, beverage revenue and food revenue.
For the year ended December 31, 1996, room revenue for each of the Hotels
exceeded the amount required to trigger the top tier of room revenue payable as
Percentage Rent. The following table summarizes the percentages of room revenues
in excess of certain levels payable as Percentage Rent under the Percentage
Leases.
FIRST TIER MIDDLE TIER TOP TIER
------------ ----------- ----------
Full Service (1)................. 17% to 41.5% 30% to 70% 50% to 70%
Extended Stay.................... 24% to 41% 45% to 50% 60% to 72%
Limited Service.................. 20% to 41.5% N/A 50% to 76.5%
(1) Percentage Rent formula also includes 20% of beverage revenue and 5%
of food revenue.
The rent terms for the leases for each Hotel are set forth in Exhibit
10.2(a) to this Form 10-K.
Under the Percentage Leases for all of the hotels acquired since March
1994, beginning in 1995 and for each year thereafter, the Base Rent and
Percentage Rent thresholds for each year will be adjusted to reflect any
year-to-year changes in the consumer price index ("CPI") in the two preceding
years. Additionally, the Company anticipates the Percentage Leases for hotels
acquired in the future will have a similar provision.
Other than real estate taxes, casualty insurance and maintenance of
underground utilities and structural elements, which are obligations of the
Partnership, the Percentage Leases require the Lessees to pay rent, personal
property taxes, all costs and expenses and all utility and other charges
incurred in the operation of the Hotels. The Percentage Leases also provide for
rent reductions and abatements in the event of a partial taking of any Hotel or
six months after occurrence of an event causing damage or destruction to any
Hotel.
Maintenance and Modifications. Under the Percentage Leases, the
Partnership is required to maintain the underground utilities and the structural
elements of the improvements, including exterior walls (excluding plate glass)
and the roof of each Hotel. The Partnership is required to fund capital
improvements at the Hotels subject to (i) the Partnership's right to approve
capital budgets and (ii) the Partnership's right in its sole discretion to
refuse to make any capital expenditures required by a franchisor. Otherwise, the
Lessees are required, at their expense, to maintain the Hotels in good order and
repair, except for ordinary wear and tear, and to make non-structural, foreseen
and unforeseen, and ordinary and extraordinary, repairs which may be necessary
and appropriate to keep the Hotels in good order and repair.
The Lessees, at their expense and with the Lessor's prior consent, may
make non-capital and capital additions, modifications or improvements to the
Hotels, provided that such action does not significantly alter the character or
purposes of the Hotels or significantly detract from the value or operating
efficiencies of the Hotels. All such alterations, replacements and improvements
are
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subject to all the terms and provisions of the Percentage Leases and will
become the property of the Partnership upon termination of the Percentage
Leases. The Partnership owns substantially all personal property (other than
inventory, linens, and other nondepreciable personal property) not affixed to or
deemed a part of, the real estate or improvements thereon comprising the Hotels,
except to the extent that ownership of such personal property would cause the
rents under the Percentage Leases not to qualify as "rents from real property"
for REIT income test purposes.
Insurance and Property Taxes. The Partnership is responsible for paying
real estate taxes and casualty insurance premiums on the Hotels. The Lessees are
required to pay or reimburse the Partnership for all other insurance on the
Hotels, which must include extended coverage, comprehensive general public
liability, workers' compensation and other insurance appropriate and customary
for properties similar to the Hotels and name the Partnership as an additional
insured.
Indemnification. Under each of the Percentage Leases, the Lessees have
agreed to indemnify, and are obligated to hold harmless, the Partnership and its
Affiliates, including the Company, from and against all liabilities, costs and
expenses (including reasonable attorneys' fees and expenses) incurred by,
imposed upon or asserted against the Partnership or its Affiliates, on account
of, among other things, (i) any accident or injury to person or property on or
about the Hotels; (ii) any misuse by the Lessees or any of its agents of the
leased property; (iii) any environmental liability resulting from conditions
caused or resulting from any action or negligence of the Lessees; (iv) taxes and
assessments in respect of the Hotels (other than real estate taxes and income
taxes of the Company or Partnership on income attributable to the Hotels); (v)
liability resulting from the sale or consumption of alcoholic beverages on or in
the real property or improvements thereon; or (vi) any breach of the Percentage
Leases by Lessees; provided, however, that such indemnification will not be
construed to require the Lessees to indemnify the Company and the Partnership
against the Company's or Partnership's own grossly negligent acts or omissions
or willful misconduct.
Assignment and Subleasing. The Lessees are not permitted to sublet all
or any part of the Hotels or assign its interest under any of the Percentage
Leases, other than to an Affiliate of the Lessees, without the prior written
consent of the Partnership.
Damage to Hotels. In the event of damage to or destruction of any Hotel
covered by insurance, whether or not such damage or destruction renders the
Hotel unsuitable for the Lessees' use and occupancy , the Lessees are obligated
to the extent of any insurance proceeds made available to the Lessee and any
other sums advanced by the Partnership, to repair, rebuild, or restore the Hotel
on the terms set forth in the applicable Percentage Lease. If the insurance
proceeds are not adequate to restore the Hotel, each of the Lessees and the
Partnership has the right to terminate the Percentage Lease without affecting
any other Percentage Leases in effect between the Lessees and the Partnership,
by giving notice to the other. The Partnership will retain the insurance
proceeds. If the Lessees terminate the Percentage Lease due to the inadequacy of
the insurance proceeds, the Partnership may nullify the termination and keep the
Percentage Lease in full force by providing within 30 days after receipt of
notice of termination the Partnership's unconditional, legally binding
obligation to be responsible for restoration costs in excess of the insurance
proceeds. If the Percentage Lease is terminated by either the Lessees or the
Partnership due to the inadequacy of the insurance proceeds and the inadequacy
of insurance proceeds was the
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result of the Partnership's failure to maintain the proper insurance coverage as
required, the Partnership must, within 180 days, pay the Lessee the fair market
value of the applicable Percentage Lease on the date of termination or offer
other percentage leases to the Lessees having an aggregate fair market value of
no less than the fair market value of the applicable Percentage Lease. If damage
or destruction of a Hotel is not covered by insurance, the provisions of the
Percentage Lease which govern inadequacy of coverage apply. The Percentage Lease
shall remain in full force and effect during the first six months of any period
required for repair or restoration of any damaged or destroyed Hotel, after
which time, rent will be equitably abated.
Condemnation of Hotels. In the event of a total condemnation of a
Hotel, the relevant Percentage Lease will terminate with respect to such Hotel
as of the date of taking the Partnership and the Lessees will be entitled to
their shares of any condemnation award in accordance with the provision of the
Percentage Lease. In the event of a partial taking which does not render the
Hotel unsuitable for the Lessees' use, the Lessees shall restore the untaken
portion of the Hotel to a complete architectural unit but only to the extent of
any condemnation awards made available to Lessee or amounts advanced by
Partnership. If the condemnation award is not adequate to restore a Hotel, each
of the Lessees and Partnership have the right to terminate the Percentage Lease
on the Hotel without affecting the other leases between the Lessees and the
Partnership then in effect..
Events of Default. Events of Default under the Percentage Leases
include, among others, the following:
(i) the occurrence of an Event of Default under any other lease between
the Partnership and the Lessees or any Affiliate of the Lessees (with respect to
the leases entered into prior to February 27, 1996);
(ii) The failure by the Lessees to pay Base Rent when due and the
continuation of such failure for a period of 10 days after receipt by the
Lessees of notice from the Partnership thereof;
(iii) the failure by the Lessees to pay the excess of Percentage Rent
over Base Rent when due and continuation of such failure for a period of 10 days
after receipt by the Lessee of Notice from the Partnership thereof;
(iv) the failure by the Lessees to observe or perform any other term of
a Percentage Lease and the continuation of such failure for a period of 30 days
after receipt by the Lessees of notice from the Partnership thereof, unless such
failure cannot be cured within such period and the Lessees commence appropriate
action to cure such failure within said 30 days and thereafter acts, with
diligence, to correct such failure within such time as is necessary;
(v) if the Lessees shall file a petition in bankruptcy or
reorganization pursuant to any federal or state bankruptcy law or any similar
federal or state law, or shall be adjudicated a bankrupt or shall make an
assignment for the benefit of creditors or shall admit in writing its inability
to pay its debts generally as they become due, or if a petition or answer
proposing the adjudication of the Lessees as a bankrupt or its reorganization
pursuant to any federal or state bankruptcy law or any similar federal or state
law shall be filed in any court and the Lessees shall be adjudicated a bankrupt
and such adjudication shall not be vacated or set aside or stayed within 60
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days after the entry of an order in respect thereof, or if a receiver of the
Lessees or of the whole or substantially all of the assets of the Lessees shall
be appointed in any proceeding brought by the Lessees or if any such receiver,
trustee or liquidator shall be appointed in any proceeding brought against the
Lessees shall not be vacated or set aside or stayed within 60 days after such
appointment;
(vi) if the Lessees voluntarily discontinue operations of a Hotel for
more than 30 days, except as a result of damage, destruction, or condemnation;
or
(vii) if the franchise agreement with respect to a Hotel is terminated
by the franchisor as a result of any action or failure to act by the Lessees or
its agents, other than a failure to complete a capital improvement required by
the franchisor as a result of the Company's failure to fund the capital
improvement; or
(viii) if the Lessees default under the Master Agreement.
If an Event of Default occurs and continues beyond any curative period,
the Partnership will have the option of terminating the Percentage Lease and may
terminate any other Percentage Lease which is subject to a cross-default with
such Percentage Lease by giving the Lessees ten days' written notice of the date
for termination of the Percentage Leases and, unless such Event of Default is
cured prior to the termination date set forth in said notice, the Percentage
Leases shall terminate on the date specified in the Company's notice and the
Lessee is required to surrender possession of the affected Hotels.
Termination of Percentage Leases on Disposition of the Hotels. In the
event the Partnership enters into an agreement to sell or otherwise transfer a
Hotel, the Partnership will have the right to terminate the Percentage Lease
with respect to such Hotel and either (i) pay the Lessees the fair market value
of the Lessees' leasehold interest in the remaining term of the Percentage Lease
to be terminated or (ii) within 120 days of termination of the lease, offer to
lease to Lessees a substitute hotel on terms that would create a leasehold
interest in such Hotel with a fair market value equal to or exceeding the fair
market value of the Lessees' remaining leasehold interest under the Percentage
Lease to be terminated.
Franchise License. The Lessees are the licensee under the franchise
licenses on the hotels currently owned by the Partnership and are expected to
hold the franchise licenses for future hotels leased from the Partnership. Upon
the occurrence of certain events of default by the Lessees under a franchise
license, each franchisor has agreed to transfer the franchise license for the
hotel to the Partnership (or its designee). The Company anticipates that the
franchisors of the hotels currently under contract will agree to a similar
arrangement. In exchange, the Partnership has guaranteed all of the Lessees'
franchise payments under the franchise agreements.
Other Lease Covenants. The Lessees have agreed that during the term of
the Percentage Leases it will maintain a ratio of total debt to consolidated net
worth (as defined in the Percentage Leases) of not more than 50%, exclusive of
capitalized leases. Management fees paid to affiliates of the Lessees are
subordinated to the lease payments.
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Breach by Partnership. If the Partnership fails to cure a breach by it
under a Percentage Lease, the Lessees may purchase the relevant Hotel from the
Partnership for a purchase price equal to at least the Hotel's then fair market
value. Upon notice from the Lessees that the Partnership has breached the
Lease, the Partnership has 30 days to cure the breach or proceed to cure the
breach, which period may be extended in the event of certain specified,
unavoidable delays.
Inventory. All inventory required in the operation of the Hotels is
purchased and owned by the Lessee at its expense. The Partnership has the option
to purchase all inventory related to a particular Hotel at its fair market value
upon termination of the related Percentage Lease.
Franchise Agreements. All but one of the Hotels, the Executive Inn in
Tupelo, Mississippi, are licensed to operate under a franchise license.
Seventeen Hotels are licensed as Hampton Inn hotels, twelve are licensed as
Residence Inn hotels, six are licensed as Comfort Inn hotels, seven are licensed
as Holiday Inn Express hotels, six are licensed as Holiday Inn hotels, one is
licensed as a Hawthorn Suites hotel, one is licensed as a Doubletree hotel, one
is licensed as a Homewood Suites, one is licensed as a Courtyard by Marriott and
one is licensed as a Ramada Hotel. Holiday Inn and Holiday Inn Express are
registered trademarks of Holiday Inn, Inc. Ramada Hotel is a registered
trademark of Franchise System Holdings, Inc. Comfort Inn is a registered
trademark of Choice Hotels International, Inc. Residence Inn and Courtyard by
Marriott are registered trademarks of Marriott Corporation. Hampton Inn and
Homewood Suites are registered trademarks of The Promus Companies, Inc. Hawthorn
Suites is a registered trademark of Hawthorn Suites Hotels. Doubletree is a
registered trademark of Doubletree Corporation.
The franchise licenses generally specify certain management,
operational, recordkeeping, accounting, reporting and marketing standards and
procedures with which the Lessees, Alpha and TMH as applicable, must comply. The
franchise licenses obligate the Lessees to comply with the franchisor' standards
and requirements with respect to training of operational personnel, safety,
maintaining specified insurance, the types of services and products ancillary to
guest room services that may be provided by the Lessee, display of signage, and
the type, quality and age of furniture, fixtures and equipment included in guest
rooms, lobbies and other common areas.
The Lessees hold the franchise license for each Hotel. The Partnership
paid the franchise license application fees with respect to the Hotels. The
franchisors may require the Partnership to complete certain capital improvements
to certain of the Hotels. The Partnership will fund the costs of the
improvements and will own the improvements. The Company estimates that all of
such required improvements to Hotels will be completed by the middle of 1997.
The franchisors of any Hotels on which improvements have been required will
permit the operation of such Hotels prior to completion of the improvements
under conditional franchise license.
Each franchise license gives the Lessees the right to operate the
particular Hotel under a franchise for a period of from ten to 20 years. The
franchise agreements provide for termination at the franchisor's option upon the
occurrence of certain events, including the Lessees' failure to pay royalties
and fees or perform its other covenants under the license agreement, bankruptcy,
abandonment of the franchise, commission of a felony, assignment of the license
without the consent of the franchisor, or failure to comply with applicable law
in the operation of the relevant hotel. The Lessees are entitled to terminate
the franchise license only by giving at least 12 months
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notice and paying a specified amount of liquidated damages. The license
agreements will not renew automatically upon expiration. The Lessees are
responsible for making all payments under the franchise agreements to the
franchisors. Under the Holiday Inn franchise agreements, the Lessees are
required to pay a franchise fee of 4% of room revenue (plus additional fees)
from the Hotels operating as Holiday Inn hotels and a franchise fee ranging from
4-5% of room revenue (plus additional fees) from the Hotels operating as Holiday
Inn Express hotels. Under the Ramada franchise agreement, the Lessees are
required to pay a franchise fee of 3% of revenue from the Ramada Hotel, plus
fees for use of the reservation system and other miscellaneous fees. Under the
Comfort Inn franchise agreements, the Lessees are required to pay a franchise
fee ranging from 4-5% of revenue for the Hotels operating as Comfort Inn hotels
plus fees for use of the reservation system and other miscellaneous fees. Under
the Promus Companies, Inc. franchise agreements, the Lessees are required to pay
a franchise fee ranging from 4-5% of room revenue (plus additional fees) from
the Hotels operating as Hampton Inn hotels and 5% from the Hotels operating as
Homewood Suites hotels. Under the Marriott Corporation franchise agreement, the
Lessees are required to pay a franchise fee ranging from 3-5% of room revenue
(plus additional fees) from the Hotels operating as Residence Inn hotels and 5%
from the Hotels operating as Courtyard by Marriott hotels. Under the Hawthorn
Suites franchise agreement, the Lessees are required to pay a franchise fee of
4% of room revenue (plus additional fees) from the Hotels operating as Hawthorn
Suites. Under the Doubletree Corporation franchise agreement, the Lessees are
required to pay 3% from the Hotels operating as Doubletree hotels.
The franchisors have agreed that, in the event of a default by the
Lessees under a franchise agreement with respect to a franchised Hotel currently
owned by the Partnership, the franchise license for that Hotel will be assigned
to the Partnership or a designee of the Partnership acceptable to the
franchisor. The Partnership anticipates that the franchisors of future hotels
acquired will agree to similar arrangements. The Partnership will be obligated
to pay the franchisor's actual costs of investigating the Partnership's designee
and processing the transfer, but will pay no transfer fee. In consideration of
the franchisors' agreements to transfer the franchise licenses upon default by
the Lessees as described above, the Partnership has agreed to guarantee the
Lessees' obligations to make the franchise fee payments to the franchisors under
the franchise agreements.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Partnership currently is involved in any
material litigation nor, to the Company's knowledge, is any material litigation
currently threatened against the Company or the Partnership. The Lessees, Alpha
and TMH have advised the Company that they currently are not involved in any
material litigation, other than routine litigation arising in the ordinary
course of business, substantially all of which is expected to be covered by
liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders during the
fourth quarter of 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
(A) MARKET INFORMATION
The Company's common stock began trading on the New York Stock Exchange
("NYSE") under the symbol "RFS" on September 7, 1996. It previously traded on
the Nasdaq Stock Market under the symbol "RFSI". The high and low sales prices
for the shares on The Nasdaq Stock Market prior to September 6, 1996 and on the
NYSE subsequent to September 5, 1996 and the dividends declared per share since
August 13, 1993, the date of inception, are as follows:
Stock Price Dividend
High Low Per Share
---- --- ---------
First Quarter 1995 15.87 13.00 0.29
Second Quarter 1995 16.25 14.12 0.30
Third Quarter 1995 16.25 13.75 0.31
Fourth Quarter 1995 15.75 14.37 0.33
First Quarter 1996 18.50 15.37 0.34
Second Quarter 1996 18.00 14.87 0.36
Third Quarter 1996 17.12 14.75 0.36
Fourth Quarter 1996 19.75 14.87 0.36
(b) Holders
The number of holders of record of shares of common stock was 197 as of
March 14, 1997.
(c) Dividend
The Company intends to pay regular quarterly dividends, which are
dependent upon receipt of distributions from the Partnership, in order to
maintain its REIT status under the Internal Revenue Code.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth (i) selected historical financial data
for the Company; (ii) selected historical financial data for RFS, Inc.; and
(iii) selected financial data for the Company's predecessor.
The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and all of the financial statements and notes thereto
included elsewhere, and incorporated by reference.
(in thousands, except per share data)
THE COMPANY
---------------------------------------
1996 1995 1994 1993(1)
---- ---- ---- ----
Total revenue $ 61,986 $ 48,307 $ 23,354 $ 2,011
Income before minority interest 35,087 31,085 14,351 1,236
Net income 34,587 30,646 14,156 1,208
Net income per share 1.37 1.26 0.94 0.25
Cash dividends per share 1.39 1.18 1.02 0.11
Funds from operations 45,723 39,663 18,109 1,576
Total assets 499,129 376,962 346,870 80,754
Total debt 133,064 30,186 2,420 0
RFS, INC.
---------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Total revenue $151,503 $122,818 $ 62,616 $10,536
Income from continuing operations 6,668 2,129 759 639
Net income 6,668 2,129 657 565
Total assets 39,217 14,134 11,601 5,636
Total debt 324 672 1,511 1,625
THE INITIAL HOTELS (2)
----------------------
1993 1992
---- ----
Hotels' total revenue 11,668 $ 19,596
Income before interest, depreciation
and amortization 2,020 3,136
Income (loss) before minority interest
or extraordinary gain (911) (1,329)
Net income (loss) (911) (1,060)
Total assets n/a 27,923
Total debt n/a 23,772
(1) For the period August 13, 1993 (inception of the Company) through
December 31, 1993.
(2) Information for the Initial Hotels relates to periods prior to August
13, 1993, the date of acquisition of the Initial Hotels by the Company.
Under the rules and regulations of the Securities and Exchange
Commission, the Initial Hotels are deemed to be the predecessor to the
Company.
22
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
Following is Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Company and the Lessee.
THE COMPANY
Incorporated herein by reference to the Company's Annual Report for the year
ended December 31, 1996 and filed as Exhibit 13.1 to this Form 10-K.
THE LESSEE
BACKGROUND
The Partnership leases all of its hotels to RFS, Inc. (the "Lessee") pursuant to
Percentage Leases as described above. Effective February 27, 1996, the Lessee
was acquired by and became a wholly-owned subsidiary of Doubletree Corporation
("Doubletree") in a business combination accounted for as a pooling of
interests. The Lessee generates substantially all of its revenues from operating
and managing hotels leased to it by the Partnership. As of December 31, 1996,
the Lessee manages and/or leases 62 hotels, 52 of which are leased from the
Partnership.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Total revenues increased $28.7 million or 23% to $151.5 million for the
year ended December 31, 1996 compared to $122.8 million for the year ended
December 31, 1995. The increase in hotel revenues of $26.4 million was
attributable to the net addition of four leased properties as compared to the
1995 period and an increase of approximately $5 in average daily rate to $68 on
a same store basis while occupancy remained stable at approximately 77%.
Additionally, revenues in the current year include the full year results of
seven hotels that commenced operations in 1995. The margin on hotel results
(hotel revenues less leased hotel expenses and lease expenses) increased $3.0
million or 37% from $8.2 million to $11.2 million reflecting the improved
operating performance of the hotels partially offset by increased lease payments
to the lessor attributable to increased revenues.
Management and consulting fees increased 81% to $0.8 million reflecting
the net addition of eight management contracts that commenced in the first half
of 1995. Other fees and income increased $1.9 million principally attributable
to interest income on invested cash balances and loans made to the owners of
certain of the managed hotels and dividend income generated from the investment
in the convertible preferred stock of the Company.
23
23
General and administrative expenses decreased 35% or $2.0 million
primarily due to a reduction in headcount realized after the acquisition of the
Lessee by Doubletree Corporation in February 1996. Business combination expenses
of $1.0 million incurred in connection with the acquisition of the Lessee by
Doubletree, principally consisted of legal, professional and accounting fees,
and certain other expenses. The nominal increase in depreciation and
amortization reflects the amortization of the franchise application fees paid in
connection with the acquisition.
The provision for income taxes in 1996 reflects a 35% effective tax
rate, the consolidated effective tax rate for Doubletree Corporation in 1995 and
1996. Prior to its acquisition by Doubletree Corporation, the Lessee was a
Subchapter S Corporation, and generally was not subject to income taxes.
Excluding the business combination expenses and utilizing an effective tax rate
of 35% for 1995, net income would have increased $4.6 million from $2.1 million
or 223%.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Total revenues increased $60.1 million or 96% to $122.8 million for the
year 1995 compared to $62.7 million for the year ended 1994. The increase in
hotel revenues of $60.4 million was attributable to the net addition of seven
leased properties as compared to those leased as of December 31, 1994 plus the
full year results of 31 hotels that the Lessee commenced leasing during 1994.
Additionally, the portfolio experienced increases in occupancy and the average
daily rate for guest rooms as compared to the prior year. The margin on hotel
results (hotel revenues less leased hotel expenses and lease expenses) increased
$4.4 million or 117% from $3.8 million to $8.2 million reflecting the increased
number of hotels, improved operating results and the fixed nature of certain
expenses that do not increase in proportion to increases in revenues.
General and administrative expenses increased 65% or $2.1 million
primarily due to an increase in headcount and other corporate expenses directly
attributable to the growth in the number of hotels managed and/or leased as
compared to 1994. Depreciation and amortization increased nominally.
The provision for income taxes in 1995 reflects the Lessee's election,
commencing January 1, 1995, to be taxed as a Subchapter S Corporation.
Accordingly, the Lessee was generally not subject to income taxes. For the year
ended December 31, 1994, the Lessee's effective tax rate was approximately 42%
which more closely resembles the statutory federal and state income tax rates.
Excluding the business combination expenses and utilizing an effective tax rate
of 35% for 1995, net income would have increased $1.4 million from $0.7 million
or 213%.
LIQUIDITY AND CAPITAL RESOURCES
The principal source of cash to the Lessee, other than capital contributions
from Doubletree Corporation, will come from operations. Since inception, the
Lessee, has been able to meet its rent obligations under the Percentage Leases.
During 1996, the Lessee generated cash flow from operations of $3.7 million as
compared to $6.2 million during 1995. The decrease was principally attributable
to changes in the Lessee's receivable and payables offset by an increase of $4.5
million in net income. The Lessee expects that its cash flow from operations
will be sufficient to meet its liquidity and capital requirements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference to the Company's Annual Report to
Shareholders for the year ended December 31, 1996.
24
24
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
RFS, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of RFS, Inc. and
Subsidiary (a wholly-owned subsidiary of Doubletree Corporation) ("Company") as
of December 31, 1996 and the related consolidated statements of operations,
stockholder's equity (deficit) and cash flows for the year ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The financial statements of RFS, Inc.
as of December 31, 1995 and for each of the years in the two-year period then
ended, were audited by other auditors whose report was dated February 2, 1996,
except for a subsequent events note dated February 27, 1996, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RFS, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
January 20, 1997
26
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
ASSETS 1996 1995
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $7,108 9,238
Trade receivables (net of an allowance for doubtful accounts of
$62 and $40 at December 31, 1996 and 1995, respectively) 3,287 2,507
Inventories 168 173
Prepaid expenses 354 192
Due from parent 1,749 -
------- ------
TOTAL CURRENT ASSETS 12,666 12,110
Investments in RFS Hotel Investors, Inc. 20,032 1,379
Note receivable 3,000 -
Leasehold improvements and office equipment, net 300 334
Capitalized franchise costs 2,563 -
Deferred costs and other assets, net 656 311
------ ------
$39,217 14,134
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Note payable $ 324 -
Current maturities of long-term debt - 53
Accounts payable and accrued expenses 6,350 7,071
Lease payable 6,775 5,795
Other - 185
------ ------
TOTAL CURRENT LIABILITIES 13,449 13,104
Net deficit in partnerships and ventures 314 312
Long-term debt, less current maturities - 619
Deferred income taxes 61 36
------ ------
TOTAL LIABILITIES 13,824 14,071
------ ------
(Continued)
2
27
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
1996 1995
---- ----
STOCKHOLDER'S EQUITY:
Common stock, no par value; 5,000 shares authorized;
100 and 896 shares issued and outstanding at
December 31, 1996 and 1995, respectively $ 282 282
Additional paid-in capital 18,500 -
Unearned employee compensation (141) (211)
Unrealized gain on marketable equity securities,
net of income taxes 114 22
Retained earnings (accumulated deficit) 6,638 (30)
------ ------
TOTAL STOCKHOLDER'S EQUITY 25,393 63
------ ------
Commitments and contingencies
------ ------
$39,217 14,134
====== ======
See accompanying notes to consolidated financial statements.
3
28
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
---- ---- ----
REVENUES:
Hotel revenue $148,699 122,253 61,825
Management and consulting fees 817 452 666
Other 1,987 113 221
--------- ------- ------
TOTAL REVENUES 151,503 122,818 62,712
--------- ------- ------
EXPENSES:
Hotel expenses:
Salary and benefits 30,299 25,847 15,654
Franchise costs 10,153 8,315 4,078
Advertising and promotion 5,069 4,294 2,749
Utilities 7,090 6,151 3,317
Repair and maintenance 7,088 6,006 3,194
Leases, insurance and taxes 1,214 1,603 650
Other operating costs 16,486 14,624 6,756
--------- ------- ------
77,399 66,840 36,398
General and administrative 3,430 5,386 3,257
Business combination expenses - 1,007 -
Depreciation and amortization 266 172 77
Lease expense 60,148 47,249 21,666
--------- ------- ------
TOTAL OPERATING EXPENSES 141,243 120,654 61,398
--------- ------- ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 10,260 2,164 1,314
Income taxes (3,592) (35) (555)
--------- ------- ------
INCOME FROM CONTINUING OPERATIONS 6,668 2,129 759
Loss on discontinued operations, net of related tax
benefit of $57 in 1994 - - (102)
--------- ------- ------
NET INCOME $ 6,668 2,129 657
========= ======= ======
See accompanying notes to consolidated financial statements.
4
29
PAGE 5
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
5
30
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,668 2,129 657
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 290 172 147
Equity in loss of partnerships - 198 -
Provision for bad debts 22 40 131
Net gain on sale of partnership interests - - (96)
Deferred income tax provision - (158) (1)
(Increase) decrease in accounts receivable (766) 163 (989)
(Increase) decrease in other assets (1,818) 121 (182)
Increase (decrease) in accounts payable and
accrued expenses (733) 3,582 6,105
------- ------ -----
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,663 6,247 5,772
------- ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in RFS Hotel Investors, Inc. (18,500) - -
Investments in partnerships and ventures (175) (270) (185)
Distributions from partnerships and ventures 2 1 84
Franchise application fees (2,626) - -
Purchase of furniture and equipment (79) (241) (56)
Loan to owners of managed hotels (3,000) - -
Purchase of marketable securities - (516) -
Increase in deferred costs and other assets (90) (82) 76
------- ------ -----
NET CASH USED BY INVESTING ACTIVITIES (24,468) (1,108) (81)
------- ------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of paid-in capital from parent 18,500 - -
Payments on notes payable 175 (839) (414)
Payment of preferred stock dividends - - (34)
Distributions to common stockholders - (2,055) -
Purchase of preferred and common stock - - (182)
------- ------ -----
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 18,675 (2,894) (630)
------- ------ -----
(Continued)
6
31
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
---- ---- ----
NET INCREASE (DECREASE) IN CASH $(2,130) 2,245 5,061
Cash and cash equivalents:
Beginning of year 9,238 6,993 1,932
------ ----- -----
End of year $ 7,108 9,238 6,993
====== ===== =====
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 19 100 150
====== ===== =====
Income taxes paid $ 3,666 123 424
====== ===== =====
NON-CASH INVESTING AND FINANCING ACTIVITIES:
On January 2, 1995, the Company issued 12 shares of common stock to
employees at an estimated fair value on the date of grant of $281,000. In
1995, furniture and equipment with cost and accumulated depreciation of
$250,000 was retired.
In 1994, furniture and equipment with cost and accumulated depreciation of
$250,000 was retired. The Company retired $100,000 of preferred stock
purchased during 1994. On December 31, 1994, the Company converted
$440,000 in preferred stock to common stock.
See accompanying notes to consolidated financial statements.
7
32
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) ORGANIZATION AND PRESENTATION
Effective February 27, 1996, RFS, Inc. (the "Company") became a
wholly-owned subsidiary of Doubletree Corporation ("Doubletree") in a
transaction accounted for as a pooling of interests. The Company
generates substantially all of its revenue from operating and managing
leased hotels owned by RFS Partnership, L.P. (the "Partnership"). The
Partnership is 98% owned by RFS Hotel Investors, Inc. (the "REIT").
Substantially all of the hotels owned by the Partnership (the "Hotels")
are separately leased by the Partnership to the Company under
individual lease agreements (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. In connection with the February 27, 1996 merger with
Doubletree, the Company amended each of the individual Percentage
Leases. The significant amendments include extending the terms of the
leases, clarifying the Company's and the Partnership's responsibilities
with respect to repairs and maintenance at the hotels and clarifying
certain other provisions of the Percentage Leases. These provisions
include the Partnership granting the Company a 10-year right of first
refusal to manage and lease future hotels acquired or developed by the
Partnership.
At December 31, 1996, the Company leased 52 hotels from the
Partnership. At December 31, 1996, the Company operated 62 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 Company
manages 10 hotels for unrelated entities. The Company leases and/or
manages hotel properties in 22 states, primarily in the Southeast and
Midwest and substantially all are affiliated with a nationally
recognized franchise.
Prior to December 31, 1994, the Company was the parent corporation of
six subsidiaries which were involved in various real estate development
and management activities. Effective December 31, 1994, these six
subsidiaries were merged into the Company. This merger has been treated
as a combination of entities under common control and is accounted for
in a manner similar to that of a pooling of interests.
8
33
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) REVENUE RECOGNITION
Revenue is recognized as earned. Ongoing credit evaluations
are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is
estimated to be uncollectible.
(b) LEASE EXPENSE
Lease expense is recognized as due to the Partnership under
the Percentage Leases commencing on the date a lease is
executed between the Partnership and the Company.
(c) CAPITALIZED FRANCHISE COSTS
In connection with the Company's acquisition by Doubletree,
franchise application fees were paid to various franchisors of
the Hotels. These fees are amortized over the remaining lives
of the franchise agreements. The recoverability of the
franchise application fees are periodically evaluated to
determine whether such costs will be recovered from future
operations.
The initial cost of obtaining the franchise licenses is paid
by the Partnership, and the ongoing franchise fees are paid by
the Company. These fees are generally computed as a percentage
of room revenue for each respective hotel in accordance with
the franchise agreements.
(d) LEASEHOLD IMPROVEMENTS AND OFFICE EQUIPMENT
Improvements to office leaseholds are amortized over the
shorter of the lives of the assets or the terms of the related
leases. Office furniture and equipment is depreciated using
the straight-line basis over their estimated useful lives,
which is 7 years for furniture and 5 years for equipment.
Accumulated depreciation at December 31, 1996 and 1995 was
approximately $431,000 and $318,000, respectively.
9
34
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maintenance and repairs are charged to operations as incurred;
major renewals and betterments at the hotels are the
responsibility of the Partnership. When furniture and
equipment are sold, the related cost and accumulated
depreciation are removed from the respective accounts and any
gain or loss is credited or charged to operations.
(e) INVENTORIES
Inventories consisting of food and beverages are stated at the
lower of cost (generally first-in, first-out) or market.
(f) INVESTMENTS
Investments in partnerships and ventures in which the Company
controls the assets of the partnership are accounted for using
the equity method. All other investments are accounted for
using the cost method with the exception of marketable equity
securities which are classified as available-for-sale and
recorded at fair value with unrealized gains or losses
reflected in stockholder's equity pursuant to FASB Statement
No. 115.
(g) INCOME TAXES
Under the asset and liability method of accounting for income
taxes, deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets, including net operating loss
carryforwards, and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
The Company's parent, Doubletree, files a consolidated federal
income tax return. The intercompany settlement of taxes paid
is based on an informal tax sharing agreement which allocates
taxes to the Company based upon a proportionate allocation of
Doubletree's consolidated current and deferred tax expenses.
Prior to its acquisition by Doubletree the Company elected
Subchapter S corporation status for federal income tax
purposes and certain states effective January 1, 1995. The
Company's Subchapter S corporation election was revoked upon
the Company's acquisition by Doubletree.
10
35
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(h) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents for purposes of the statement of cash flows.
(i) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(j) RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform
to 1996 presentation.
(3) INVESTMENTS IN RFS HOTEL INVESTORS, INC.
The Company has the following investments in RFS Hotel Investors, Inc.
and its related entity RFS Partnership, L.P. (in thousands):
1996 1995
---- ----
RFS HOTEL INVESTORS, INC.
Series A Convertible Preferred Stock $18,500 -
Common Stock 691 538
RFS PARTNERSHIP, L.P.
Partnership Units 841 841
------ -----
$20,032 1,379
====== =====
On February 27, 1996, the Company received from the REIT 973,684 shares
of the REIT's Series A Convertible Preferred Stock ("Series A Preferred
Stock") for an aggregate purchase price of $18.5 million or $19.00 per
share. The Series A Preferred Stock has an initial preference value of
$19.00 per share ("Stated Value"), a par value of $.01, and is senior
to the REIT's common stock as to dividends and upon liquidation of the
REIT. Each
11
36
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
share of Series A Preferred Stock has one vote and is convertible into
one share of the REIT's common stock after the seventh anniversary of
the issuance. The shares of Series A Preferred Stock are entitled to a
$1.45 cumulative dividend per share. The Series A Preferred Stock has
mandatory redemption rights upon the occurrence of certain events which
are under the REIT's control. The REIT can redeem the Series A
Preferred Stock after the seventh anniversary of issuance at the Stated
Value, together with all accrued and unpaid dividends.
The Company's investment in the Partnership units is carried at the
amount of cash consideration the Company could have received in lieu of
Partnership units which is approximately $841,000 on 77,904 units
owned. At present, there is no market for the Partnership units.
However, the Partnership units are convertible into REIT common stock.
The Company owns 35,000 shares of REIT common stock carried at their
market value of $691,020 and $538,125 at December 31, 1996 and 1995,
respectively.
(4) INVESTMENTS IN PARTNERSHIPS
Information with respect to the Company's investments in partnerships
at December 31, 1996 and 1995 is as follows:
CARRYING VALUE
% TYPE OF (IN THOUSANDS)
ENTITY OWNERSHIP INTEREST 1996 1995
------ --------- -------- ---- ----
Devonshire Associates 10% General $ 1 $ 1
SF Partners 2% General - 1
Highland Plaza Partners, Ltd. 5% General 1 1
DDP Partners, L.P. 5% General 13 14
---- ----
15 17
Shelby Distribution Partners, L.P. 46% General (329) (329)
--- ---
$(314) $(312)
=== ===
(5) NOTE RECEIVABLE
In June 1996, the Company obtained management agreements for eight
hotel properties owned by entities unrelated to the Company. In
connection with obtaining these contracts, the Company loaned $3
million to the owners, principally for renovations. The note is
unsecured, 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.
12
37
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) DEBT
At December 31, 1996 and 1995, debt consists of the following (in
thousands):
1996 1995
---- ----
Notes payable on premium financing contracts, monthly
payments of approximately $47,000 including interest
at 5.25% due September 1997, uncollateralized $324 -
Note payable to stockholder, monthly payments of
approximately $9,000 including interest at 8% due
through May 2011, uncollateralized, paid-off in
February 1996 - 672
--- ---
$324 672
=== ===
(7) PREFERRED AND COMMON STOCK
In connection with the Company's acquisition by Doubletree, the Company
retired all its issued and outstanding common stock and issued 100 new
shares to Doubletree. In addition, Doubletree made a $18,500,000
capital contribution to the Company. The proceeds from this capital
contribution were used to acquire Series A Preferred Stock issued by
the REIT as discussed in note 3.
In 1995, the Company granted a total of 12 shares of common stock to
certain employees. These shares were recorded at the estimated fair
value on the date of grant. These shares vest ratably over the next
four years. Such vesting requirements are contingent upon the
employees' continued employment with the Company.
In 1994, the Company converted 56 shares of Series A preferred stock
and 108 shares of Series B preferred stock into 164 shares of common
stock. During 1994, the Company declared and paid dividends of $321,000
and $100,000 per share on each outstanding share of Series A and B
preferred stock, respectively. Simultaneously, with the conversion of
the preferred stock, the Company retired 280 shares of common stock
held in treasury.
13
38
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) DISCONTINUED OPERATIONS
During 1994, the construction division and the property management
division of a former subsidiary and the operations of another former
subsidiary were sold to related parties at nominal selling prices. The
disposal date for the construction division was June 30, 1994; the
disposal date for the property management division and the operations
of the former subsidiary was December 31, 1994. No gains or losses were
recognized on these sales. The net 1994 and 1993 results of the
operations for these three activities have been presented in the
accompanying statement of income in the caption "loss on discontinued
operations." On a combined basis, these three activities had revenue of
$5,014,000 for 1994 and total assets of $179,000 at December 31, 1994.
(9) INCOME TAXES
Effective February 27, 1996, the Company's results of operations are
included in Doubletree's consolidated U.S. Federal income tax return.
Under the terms of an informal agreement, the Company makes payments to
Doubletree for a proportionate allocation of Doubletree's consolidated
current and deferred income tax expense. During 1996, income tax
expense of approximately $3,592,000 was recorded and the Company
remitted $3,666,000 to Doubletree for income tax payments. At December
31, 1996, $75,000 was due from the Parent in settlement of the 1996 tax
estimates.
The following represents the significant components of income tax
expense and the effect of recognizing deferred tax assets and
liabilities on various temporary differences for years prior to 1996
(in thousands):
1995 1994
---- ----
Federal:
Current $ - 502
Deferred - (39)
Change in tax status (161) -
--- ---
(161) 463
--- ---
State:
Current 193 54
Deferred 3 (9)
Utilization of net operating loss carryforwards - 47
--- ---
196 92
--- ---
$ 35 555
=== ===
14
39
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company income tax provision for 1995 and 1994 was calculated as
follows (in thousands):
1995 1994
---- ----
Tax at federal statutory rate $ - 447
Non-deductible expenses - 23
State income taxes, net of federal benefit 196 69
Reduction in federal deferred tax liability
due to change in tax status (161) -
Other - 16
Income tax provision $ 35 555
==== ===
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets as of December 31, 1995 are as follows (in
thousands):
1995
Deferred tax liabilities: ----
Furniture and equipment $ 4
Investments in partnerships 48
----
52
Deferred tax assets: ----
Allowance for doubtful accounts 2
Accruals for certain employee benefits 14
Net operating loss carryforwards 180
----
196
Valuation allowance for deferred tax assets (180)
----
16
Net deferred tax liabilities $ 36
====
15
40
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable
operating lease agreements expiring at varying intervals through 2002.
The future minimum rental payments required under these leases as of
December 31, 1996 are as follows (in thousands):
YEAR AMOUNT
---- ------
1997 $ 301
1998 301
1999 312
2000 315
2001 315
Thereafter 79
-------
$1,623
Rental expense, except for the lease expense described below, was
approximately $301,000 $431,000 and $211,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Company has future lease commitments to the Partnership under the
Percentage Leases through 2011. At December 31, 1996, minimum future
rental payments under the Percentage Leases are as follows (in
thousands):
YEAR AMOUNT
---- ------
1997 $ 26,979
1998 26,925
1999 26,925
2000 26,925
2001 26,925
Thereafter 201,632
-------
$336,311
The Company paid base rents of approximately $25,255,000, $21,995,000
and $10,705,000 and percentage rents in excess of base rents of
approximately $34,893,000, $25,254,000 and $10,961,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. At December 31,
1996 and 1995, the Company had a net payable to the Partnership of
$6,775,000 and $5,795,000, respectively, for percentage rents and other
transactions.
16
41
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has management agreements with two hotel operators to
manage four of the leased hotels. The management agreements have terms
ranging from ten to twenty years and provide for a fee based on a
percentage of each hotel's revenue.
(11) RELATED PARTY TRANSACTIONS
Certain of the partnerships in which the Company has an interest and
certain former stockholders owed the Company approximately $439,000 and
$197,000 for advances and other transactions at December 31, 1996 and
1995, respectively.
At December 31, 1995 and 1994, the Company owed the Chairman of the
Board approximately $672,000 and $902,000, respectively, under a
promissory note for the purchase of common stock of a former
subsidiary. Interest expense related to this note was approximately
$63,000 and $73,000 for the years ended December 31, 1995 and 1994,
respectively. The promissory note was repaid in February 1996.
The Company has recognized, as income, approximately $1,340,956 and
$176,000 of distributions received from the Partnership with respect to
Series A Preferred Stock, Partnership units and REIT common stock owned
by the Company for the years ended December 31, 1996 and 1995,
respectively.
On December 31, 1994, the Company entered into a consulting agreement
("Agreement") with Hospitality Advisory Services, Inc. ("HAS"). The
Agreement requires monthly payments of $40,000 to HAS beginning January
1, 1995 through December 31, 1995 with the term of the Agreement
extended for one additional year. The Agreement also provides for
incentive fees at the discretion of the Company. The owners of HAS are
officers of RFSI and were stockholders of the Company. Total fees paid
to HAS during 1995 were approximately $780,000. The Agreement was
terminated effective February 27, 1996 and was replaced with new
consulting agreements with two former officers of the Company. These
consulting agreements may be terminated by the Company on or after
February 27, 1997. Total fees paid on these consulting agreements was
$175,000 in 1996.
(12) EMPLOYEE BENEFIT PLANS
In January 1995, the Company adopted an employee savings plan under
Section 401(k) of the Internal Revenue Code. This plan covers all
full-time employees of the Company who are 21 years of age and have
completed at least one year of continuous service. The participants'
maximum contributions are limited under applicable IRS regulations were
approximately $9,000 per participant. The Company currently contributes
50% of
17
42
RFS, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND UNIT DATA)
employee contributions to the plan, up to a maximum of 2% of employee
compensation. Company contributions generally vest at 20% per year
becoming fully vested in the seventh year of service. Contribution
expense related to this plan was approximately $41,000 and $195,000 for
the years ended December 31, 1996 and 1995, respectively.
The Company maintains a self-insured group health plan. Aggregate and
stop loss insurance exists at amounts which limit the Company's
exposure. Liabilities are included in accrued expenses for estimated
incurred but not reported claims.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties. The Company's financial instruments consist primarily
of cash and cash equivalents, trade receivables, note receivables,
investments in partnerships and ventures, accounts payable and accrued
expenses, each as included in the balance sheets under such captions.
With the exception of note receivable, investments in partnerships and
ventures, and the investments in RFS Partnership, L.P. units, the
carrying amounts of all other classes of financial instruments
approximate fair value due to the short maturity of those instruments
or, in the case of marketable equity securities they are carried at
their estimated fair value.
The Company has determined that the fair value of its note receivable
is not significantly different from their carrying value based on
interest rate and payment terms the Company would currently offer on
notes with similar security to borrowers of similar creditworthiness.
The fair value of the partnership interests, which are carried at cost,
are estimated based upon the residual value to the Company in the
respective partnership's net assets. RFS Partnership, L.P. units, which
are convertible into REIT common shares, have a carrying value of
$841,000 and an estimated fair value of approximately $1,539,000 and
$1,197,000 at December 31, 1996 and 1995, respectively.
18
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the sections entitled "Election of
Class I and Class III Directors" and "Executive Compensation" in the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with respect
to its Annual Meeting of Shareholders to be held on April 24, 1997 (the "Proxy
Statement"). See also Item 1. Business-Executive Officers.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the section entitled "Executive
Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the sections entitled "Ownership of
the Company's Common Stock" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the section entitled "Certain
Relationships and Related Transactions" in the Proxy Statement.
25
44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The following financial statements included in the Company's Annual
Report to Shareholders for the year ended December 31, 1996 are incorporated by
reference:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for years ended December 31,
1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity
for years ended December 31, 1996, 1995 and 1994 Consolidated
Statements of Cash Flows for years ended December 31, 1996, 1995
and 1994 Notes to Consolidated Financial Statements
The following financial statement schedules and report of independent
accountants on the financial statement schedules are included in this report on
Form 10-K:
Report of Independent Accountants on the Financial Statement
Schedules Schedule III - Real Estate and Accumulated Depreciation
for RFS Hotel Investors, Inc.
Schedule IV - Mortgage Loans on Real Estate
The following financial statements of RFS, Inc. are included in this
report on Form 10-K: Independent Auditors' Report
ConsolidatedBalance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Stockholder's Equity for years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for year ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
No filings of Form 8-K were made during the last quarter of 1996.
(c) Exhibits
Exhibit
Number Exhibit
3.1 - Amended and Restated Charter of the Registrant (previously filed as Exhibit 3.1 to the
Company's Current Report on Form 8-K dated March 6, 1995 and incorporated herein by
reference).
26
45
3.2 - By-Laws of the Registrant (previously filed as Exhibit 3.2 to the Company's Form S-11
Registration Statement, Registration No. 33-63696 and incorporated herein by reference).
3.3 - Second Amended and Restated Agreement of Limited Partnership of RFS Partnership, L.P.,
(previously filed as Exhibit 3.3 to the Company's Form S-3 Registration Statement,
Registration No. 33-83450 and incorporated herein by reference).
3.3(a) - Third Amended and Restated Agreement of Limited Partnership of RFS Partnership, L.P.,
(previously filed as Exhibit 4.3 to the Company's Form S-3 Registration Statement,
Registration No. 333-3307 and incorporated herein by reference).
* 3.3(b) - Fourth Amended and Restated Agreement of Limited Partnership.
10.1 - Consolidated Lease Amendment (previously filed as
Exhibit 10.3 to the Company's current report on Form
8-K, dated February 27, 1996 and incorporated herein
by reference).
10.2 - Form of Future Percentage Lease (previously filed
as Exhibit 10.4 to the Company's Current Report on
Form 8-K, dated February 27, 1996 and incorporated
herein by reference).
*10.2(a) - Schedule of terms of Percentage Leases
10.3 - Form of Sale and Purchase Agreement (previously
filed as Exhibit 10.2 to the Company's Form 10-K for
the year ended December 31, 1994 and incorporated
herein by reference).
*10.3(a) - Schedule of terms of Sale and Purchase Agreements
*10.4 - Employment Agreement between RFS Managers, Inc. and Robert M. Solmson
*10.5 - Employment Agreement between RFS Managers, Inc. and Minor W. Perkins
*10.6 - Employment Agreement between RFS Managers, Inc. and J. William Lovelace
*10.7 - Employment Agreement between RFS Managers, Inc. and Michael J. Pascal
*10.8 - First Amended Revolving Credit and Term Loan Agreement
*10.8(a) - First Modification to First Amended Revolving Credit and Term Loan Agreement
27
46
10.9 - Master Agreement, dated February 1, 1996 (previously filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K dated February 27, 1996 and incorporated herein by
reference).
*10.9(a) - First Amendment to Master Agreement dated as of November 21, 1996.
*10.10 - Indenture dated as of November 21, 1996.
*10.11 - Form of Deed of Trust dated as of November 21, 1996.
*13.1 - Annual Report to Shareholders for the year ended December 31, 1996
*21.1 - List of Subsidiaries of the Registrant
*23.1 - Consent of Coopers & Lybrand
*23.2 - Consent of KPMG Peat Marwick LLP
*27 - Financial Data Schedule (for SEC use only)
- - ----------------
* Filed herewith
28
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant as duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RFS HOTEL INVESTORS, INC.
By: /s/ Robert M. Solmson
Robert M. Solmson
Chairman of the Board and Chief Executive Officer
Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
/s/ Robert M. Solmson
- - -------------------------------
Robert M. Solmson Chairman of the Board, March 26, 1997
and Chief Executive Officer
/s/ Minor W. Perkins
- - -------------------------------
Minor W. Perkins President March 26, 1997
/s/ Michael J. Pascal
- - -------------------------------
Michael J. Pascal Chief Financial Officer March 26, 1997
Secretary and Treasurer
/s/ H. Lance Forsdick
- - -------------------------------
H. Lance Forsdick, Sr. Director March 26, 1997
/s/ Bruce E. Campbell, Jr.
- - -------------------------------
Bruce E. Campbell, Jr. Director March 26, 1997
- - -------------------------------
Michael E. Starnes Director
/s/ John W. Stokes, Jr.
- - -------------------------------
John W. Stokes, Jr. Director March 26, 1997
/s/ Harry W. Phillips, Sr.
- - -------------------------------
Harry W. Phillips, Sr. Director March 26, 1997
- - -------------------------------
R. Lee Jenkins Director
29
48
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of RFS Hotel Investors,
Inc. is included on page _____ of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule in the index on page 31 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Memphis, Tennessee
January 22, 1997
49
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
(IN THOUSANDS)
AS OF DECEMBER 31, 1996
Cost Capitalized Gross Amount at Which Carried
Initial Cost Subsequent to Acquisition at end of Period
-------------------------------------------------------- -----------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements Land Improvements
----------- ------------ ---- ------------- ---- ------------- ---- -------------
Holiday Inn
Franklin, TN (2) $ 737 $2,094 $ 227 $ 737 $2,321
Holiday Inn
Clayton, MO (2) 1,599 4,968 1,342 1,599 6,310
Holiday Inn
Columbia, SC (2) 790 3,573 443 790 4,016
Holiday Inn Express
Louisville, KY none 1,328 3,808 454 1,328 4,262
Holiday Inn Express
Tupelo, MS(1) (2) 477 2,449 138 477 1,919
Executive Inn
Tupelo, MS (2) 686 2,603 176 686 2,779
Comfort Inn
Conyers, GA (2) 440 2,866 (36) 27 404 2,893
Comfort Inn
Marietta, GA (3) 989 5,509 108 989 5,617
Holiday Inn
Lafayette, LA (2) 700 8,858 498 700 9,356
Residence Inn
Kansas City, MO (2) 392 5,344 68 392 5,412
Comfort Inn
Ft. Mill, SC (3) 763 6,612 94 763 6,706
Comfort Inn
Clemson, SC (2) 201 4,901 56 201 4,957
Hampton Inn
Ft. Lauderdale, FL (2) 590 4,664 107 590 4,771
Holiday Inn Express
Arlington Heights, IL (2) 350 4,121 369 350 4,490
Hampton Inn
Denver, CO none 500 8,098 334 500 8,432
Holiday Inn Express
Downers Grove, IL (2) 400 5,784 292 400 6,076
Comfort Inn
Farmington Hills, MI (2) 525 4,118 183 525 4,301
Comfort Inn
Grand Rapids, MI (2) 400 3,176 40 400 3,216
Hampton Inn
Indianapolis, IN (2) 475 8,008 250 475 8,258
Hampton Inn
Lansing, MI (2) 500 3,647 268 500 3,915
Life Upon Which
Accumulated Net Book Depreciation in
Depreciation Value Latest Income
Buildings and Buildings and Date of Statement is
Total Improvements Improvements Acquisition Calculated
----- ------------- ------------- ----------- ----------
Holiday Inn
Franklin, TN $3,058 $190 $2,131 1993 40
Holiday Inn
Clayton, MO 7,909 489 5,821 1993 40
Holiday Inn
Columbia, SC 4,806 329 3,687 1993 40
Holiday Inn Express
Louisville, KY 5,590 343 3,919 1993 40
Holiday Inn Express
Tupelo, MS(1) 2,396 209 1,710 1993 40
Executive Inn
Tupelo, MS 3,465 228 2,551 1993 40
Comfort Inn
Conyers, GA 3,297 237 2,656 1993 40
Comfort Inn
Marietta, GA 6,606 424 5,193 1993 40
Holiday Inn
Lafayette, LA 10,056 732 8,624 1993 40
Residence Inn
Kansas City, MO 5,804 387 5,025 1994 40
Comfort Inn
Ft. Mill, SC 7,469 451 6,255 1994 40
Comfort Inn
Clemson, SC 5,158 342 4,615 1994 40
Hampton Inn
Ft. Lauderdale, FL 5,361 321 4,450 1994 40
Holiday Inn Express
Arlington Heights, IL 4,840 271 4,219 1994 40
Hampton Inn
Denver, CO 6,932 516 7,916 1994 40
Holiday Inn Express
Downers Grove, IL 6,476 369 5,707 1994 40
Comfort Inn
Farmington Hills, MI 4,826 263 4,038 1994 40
Comfort Inn
Grand Rapids, MI 3,616 203 3,013 1994 40
Hampton Inn
Indianapolis, IN 8,733 513 7,745 1994 40
Hampton Inn
Lansing, MI 4,415 235 3,680 1994 40
continued
50
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED
(IN THOUSANDS)
AS OF DECEMBER 31, 1996
Cost Capitalized Gross Amount at Which Carried
Initial Cost Subsequent to Acquisition at end of Period
-------------------------------------------------------- -----------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements Land Improvements
----------- ------------ ---- ------------- ---- ------------- ---- -------------
Hampton Inn
Lincoln, NE (2) $ 350 $4,829 $ 319 $ 350 $5,149
Hampton Inn
Minneapolis, MN (2) 375 8,657 102 375 8,759
Holiday Inn Express
Minneapolis, MN (2) 780 6,910 150 780 7,060
Hampton Inn
Minnetonka, MN (2) 475 5,066 109 475 5,175
Hampton Inn
Oklahoma City, OK (3) 530 6,826 296 530 7,124
Hampton Inn
Omaha, NE (3) 450 6,362 329 450 6,691
Hampton Inn
Tulsa, OK (2) 350 5,715 372 350 6,087
Hampton Inn
Warren, MI (2) 500 2,814 204 500 3,018
Holiday Inn Express
Wauwatosa, WI (2) 700 4,926 398 700 5,324
Residence Inn
Fiskill, NY $2,420 2,280 10,484 77 2,280 10,561
Residence Inn
Providence, RI (3) 1,385 7,742 41 1,385 7,783
Residence Inn
Tyler, TX none 855 6,212 195 855 6,407
Hampton Inn
Memphis, TN (2) 980 6,157 47 980 6,204
Residence Inn
Ft. Worth, TX (3) 985 10,726 39 985 10,765
Residence Inn
Wilmington, DE (2) 1,100 8,488 317 1,100 8,805
Residence Inn
Torrance, CA (2) 2,600 17,789 733 2,600 18,522
Residence Inn
Ann Arbor, MI (3) 525 4,461 119 525 4,580
Holiday Inn
Flint, MI (2) 1,200 11,994 190 1,220 12,184
Resdience Inn
Charlotte, NC (3) 850 3,844 153 850 3,997
Hawthorne Suites
Atlanta, GA none 3,000 12,886 638 3,000 13,524
Life Upon Which
Accumulated Net Book Depreciation in
Depreciation Value Latest Income
Buildings and Buildings and Date of Statement is
Total Improvements Improvements Acquisition Calculated
----- ------------- ------------- ----------- ----------
Hampton Inn
Lincoln, NE $5,498 $312 $4,836 1994 40
Hampton Inn
Minneapolis, MN 9,134 551 8,208 1994 40
Holiday Inn
Minneapolis, MN 7,840 440 6,620 1994 40
Holiday Inn Express
Minnetonka, MN 5,650 323 4,852 1994 40
Hampton Inn
Oklahoma City, OK 7,654 435 6,689 1994 40
Hampton Inn
Omaha, NE 7,141 409 6,282 1994 40
Hampton Inn
Tulsa, OK 6,437 371 5,716 1994 40
Hampton Inn
Warren, MI 3,518 180 2,838 1994 40
Holiday Inn Express
Wauwatosa, WI 6,024 315 5,009 1994 40
Residence Inn
Fiskill, NY 12,841 623 9,938 1994 40
Residence Inn
Providence, RI 9,168 460 7,323 1994 40
Residence Inn
Tyler, TX 7,262 370 6,037 1994 40
Hampton Inn
Memphis, TN 7,184 354 5,850 1994 40
Residence Inn
Ft. Worth, TX 11,750 592 10,173 1994 40
Residence Inn
Wilmington, DE 9,905 474 8,331 1994 40
Residence Inn
Torrance, CA 21,122 997 17,525 1994 40
Residence Inn
Ann Arbor, MI 5,105 247 4,333 1994 40
Holiday Inn
Flint, MI 13,404 665 11,519 1994 40
Resdience Inn
Charlotte, NC 4,847 205 3,792 1994 40
Hawthorne Suites
Atlanta, GA 16,524 665 12,859 1994 40
continued
51
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED
(IN THOUSANDS)
AS OF DECEMBER 31, 1996
Gross Amount at Which
Cost Capitalized Carried
Initial Cost Subsequent to Acquisition at end of Period
-------------------------------------------------------- -----------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements Land Improvements
----------- ------------ ---- ------------- ---- ------------- ---- -------------
Holiday Inn Express
Austin, TX (3) $ 500 $ 4,737 $ 79 $ 500 $4,816
Hampton Inn
Lakewood, CO (3) 957 6,790 58 957 6,648
Hampton Inn
Hattiesburg, MS (3) 785 4,653 1,501 785 6,154
Hampton Inn
Laredo, TX none 1,037 4,116 (6) 1,037 4,110
Residence Inn
Atlanta, GA $5,875 1,306 10,200 1 1,306 10,201
Holiday Inn
Crystal Lake, IL (3) 1,685 10,932 (11) 1,685 10,921
Residence Inn
Orlando, FL (3) 1,045 8,880 1 1,045 8,881
Residence Inn
Sacramento, CA (3) 1,000 13,122 1,000 13,122
Doubletree Hotel
Del Mar, CA (3) 1,500 13,535 1,500 13,535
Hampton Inn
Plano, TX none 959 5,178 959 5,178
Courtyard by Marriott
Flint, MI none 600 4,852 600 4,852
Homewood Suites
Salt Lake City, UT none 791 5,546 791 5,546
Unimproved Land
Chandler, AZ none 961 961 0
Unimproved Land
Plano, TX none 864 864 0
Unimproved Land
Crystal Lake, IL none 252 252 0
Unimproved Land
Sedona, AZ none 1,386 1,386 0
Unimproved Land
Ann Arbor, MI none 223 223 0
Unimproved Land
Jacksonville, FL none 1,318 1,318 0
------------------------------------------------------------------------------------------------------
Totals $8,255 $50,301 $340,630 ($36) $11,927 $50,265 $351,689
======================================================================================================
Life Upon Which
Accumulated Net Book Depreciation in
Depreciation Value Latest Income
Buildings and Buildings and Date of Statement is
Total Improvements Improvements Acquisition Calculated
----- ------------- ------------- ----------- ----------
Holiday Inn Express
Austin, TX $5,316 $237 $4,579 1995 40
Hampton Inn
Lakewood, CO 7,805 304 6,544 1995 40
Hampton Inn
Hattiesburg, MS 6,939 224 5,930 1995 40
Hampton Inn
Laredo, TX 5,147 146 3,964 1995 40
Residence Inn
Atlanta, GA 11,507 319 9,882 1995 40
Holiday Inn
Crystal Lake, IL 12,606 341 10,580 1995 40
Residence Inn
Orlando, FL 9,926 277 8,604 1995 40
Residence Inn
Sacramento, CA 14,122 328 12,794 1996 40
Doubletree Hotel
Del Mar, CA 15,035 224 13,311 1996 40
Hampton Inn
Plano, TX 6,137 65 5,113 1996 40
Courtyard by Marriott
Flint, MI 5,452 10 4,842 1996 40
Homewood Suites
Salt Lake City, UT 6,337 12 5,534 1996 40
Unimproved Land
Chandler, AZ 961 N/A 0 1995 N/A
Unimproved Land
Plano, TX 864 N/A 0 1995 N/A
Unimproved Land
Crystal Lake, IL 252 N/A 0 1995 N/A
Unimproved Land
Sedona, AZ 1,386 N/A 0 1996 N/A
Unimproved Land
Ann Arbor, MI 223 N/A 0 1996 N/A
Unimproved Land
Jacksonville, FL 1,318 N/A 0 1996 N/A
----------------------------------------------------
$402,154 $16,527 $333,362
====================================================
(1) A write-down under Statement of Financial Accounting Standards #121 of
$668 was recorded in 1996.
(2) Property is collateral for the Credit Line.
(3) Property is collateral for commercial Mortgage Bonds Payable.
31