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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
Commission File Number 34-0-22164
RFS HOTEL INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-1534743
(STATE OR OTHER 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 $0.01 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.
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $274,705,659 based on the last sale price in the
New York Stock Exchange for such stock on March 15, 1999.
The number of shares of the Registrant's Common Stock outstanding was
25,115,946 as of March 15, 1999.
Documents Incorporated by Reference
Portions of the RFS Hotel Investors, Inc. Proxy Statement with respect to the
Annual Meeting of Shareholders to be held on April 28, 1999 to be filed with
the Securities and Exchange Commission within 120 days following the end of the
year covered by the Form 10-K (the "Proxy Statement") 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, 1998 are incorporated into Part II and Part IV.
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PART I
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, 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 and in any other documents filed by the
Company with the Securities and Exchange Commission 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.
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 has contributed substantially all of the net proceeds of
its public offerings to RFS Partnership, L.P. (the "Partnership") and is the
sole general partner of the Partnership. The Partnership began operations in
August 1993. At December 31, 1998, the Company owned an approximately 90.4%
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, 1998, the Company owned, through the
Partnership and other subsidiaries, 60 hotels (the "Hotels") containing 8,850
rooms located in 24 states. Reference herein to the "Partnership" includes
these subsidiaries, where the context indicates. The Partnership leases all
except four of its hotel properties to third parties (collectively, the
"Lessees") pursuant to leases (the "Percentage Leases") as described below.
Four Hotels are not leased and are operated by third parties (the "Operators")
pursuant to management agreements between the Partnership and the Operators.
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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 annual rent equal to the greater of
(i) fixed base rent, or (ii) rent payments based on percentages of the Hotels'
revenues. Base rent is payable monthly. Percentage rent is payable quarterly.
The 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 limited leverage. High leverage may impair the
ability of management to renovate, maintain and effectively manage properties.
The Board of Directors of the Company has adopted a current 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 Board of Directors may change the policy relating to the debt
limit at any time without shareholder approval.
The Company budgeted $20.6 million for 1998 capital improvements at 55
of the Hotels owned at December 31, 1998. At December 31, 1998, the Partnership
had spent $17.9 million of the budgeted amounts. The Company will use cash
generated from operations to fund the remaining $2.7 million of expenditures.
The Company intends to substantially complete these improvements by the second
quarter of 1999. The Company has budgeted approximately $15.9 million for 1999
to be spent on capital improvements at 58 of the Hotels owned at December 31,
1998. 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.
All but two 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:
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- 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 investment and acquisition
policies may be changed by the Board of Directors without shareholder approval.
Property Management. The Lessees operate 52 of the 56 Hotels they
lease. The other four leased Hotels are operated by other third parties, (the
"Lessee Operators"), pursuant to management agreements between the Lessees and
the Lessee Operators. The Lessee Operators are paid a fee equal to 3% of gross
revenue of the Hotels, plus reimbursement of out-of-pocket expenses. The
Lessees and the Lessee Operators 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. The Lessees and the Lessee
Operators manage other hotel properties in addition to the Hotels and are not
required to devote all of their time and efforts to the Hotels.
Competition. Substantially all of the Hotels are located in developed
areas that include 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, 1998, the Company had a total of 19
employees.
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.
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
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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. At December 31, 1998,
the Lessees were 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.
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, the Lessee Operators, as the case may be, may be potentially liable
for such costs.
Phase I Environmental Survey Assessments ("ESA's") were obtained on
all of the Hotels from independent environmental engineering firms at the time
of acquisition (and, for some Hotels, in connection with subsequent financing
transactions). The Phase I ESA's were intended to identify potential sources of
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,
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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 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 to the Company 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 Hotel will remain
liable for all costs and claims incurred by the Partnership with respect to
which the Phase I ESA reports recommended corrective or remedial action,
specifically removal by the former owner of the Hotel in Clayton, Missouri of
asbestos materials. 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
Company, any of the former owners of the Hotels has been notified by any
governmental
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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 elected to be taxed as a REIT under Section
856 through 860 of the Internal Revenue Code. 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 (age
51), Chairman of the Board, Chief Executive Officer of the Company and J.
William Lovelace (age 61), President of the Company, is incorporated by
reference to the Company's Proxy Statement. See Item 10. Michael J. Pascal (age
40) is Secretary, Treasurer and Chief Financial Officer of the Company. From
1991 to June 1994, he was Chief Financial Officer of RFS, Inc., one of the
Lessees. 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, a
real estate development firm. Mr. Pascal holds a B.S. and a J.D. degree from
Memphis State University. Mr. Lovelace is Mr. Pascal's father-in-law.
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ITEM 2. PROPERTIES
The following table sets forth certain information for the year ended
December 31, 1998 with respect to the Hotels. For hotels acquired during 1998,
this information includes the actual operating results both prior and
subsequent to acquisition by the Partnership.
FOR THE YEAR ENDED DECEMBER 31, 1998
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AVERAGE REVENUE PER
DATE NUMBER ROOM DAILY AVAILABLE
OPENED OF ROOMS REVENUE OCCUPANCY RATE ROOM
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(in thousands)
HAMPTON INN HOTELS:
Denver, CO (Airport) 1985 138 $ 2,025 71.1% $56.54 $40.21
Detroit (Warren), MI 1988 124 1,811 64.4% 62.11 40.01
Ft. Lauderdale, FL 1986 122 2,168 68.2% 71.40 48.69
Hattiesburg, MS 1988 154 2,315 72.3% 56.94 41.18
Houston, TX (Hobby) 1996 119 2,000 81.2% 56.71 46.06
Indianapolis, IN 1988 131 2,462 74.7% 68.93 51.49
Jacksonville, FL (1) 1998 118 1,637 58.5% 77.22 45.18
Lakewood (Denver), CO 1987 150 2,609 68.8% 69.31 47.65
Laredo, TX 1995 119 2,269 82.1% 63.65 52.24
Lincoln, NE 1983 111 2,106 81.7% 63.61 51.99
Memphis, TN 1992 120 2,293 76.0% 68.91 52.35
Minneapolis, MN (Airport) 1985 135 2,966 80.4% 74.82 60.19
Minneapolis (Minnetonka), MN 1990 127 2,193 69.9% 67.69 47.31
Oklahoma City, OK 1986 134 2,207 72.7% 62.08 45.12
Omaha, NE 1985 129 2,194 72.0% 64.75 46.59
Plano, TX 1996 131 2,098 70.6% 62.15 43.87
Tulsa, OK 1986 148 2,261 70.6% 59.33 41.86
Sedona, AZ 1997 56 1,114 65.2 83.53 54.49
Chandler, AZ 1997 65 1,768 62.2 77.15 47.95
RESIDENCE INN HOTELS:
Ann Arbor, MI 1985 114 3,102 80.1% 93.04 74.54
Charlotte, NC 1984 89 2,457 79.5% 95.02 75.58
Fishkill, NY 1988 136 4,437 91.2% 97.98 89.39
Fort Worth, TX 1983 120 3,489 84.0% 94.79 79.66
Jacksonville, FL 1997 120 2,791 73.78 86.44 63.72
Kansas City, MO 1987 96 2,461 76.4% 91.96 70.23
Orlando, FL 1984 176 5,001 78.3% 99.48 77.85
Perimeter West (Atlanta), GA 1987 128 3,228 76.3% 90.51 69.10
Providence, RI 1989 96 3,295 90.1% 104.36 94.03
Sacramento, CA 1987 176 5,068 82.3% 95.91 78.88
Torrance, CA 1984 247 7,774 92.0% 93.72 86.22
Tyler, TX 1985 128 2,625 82.5% 68.10 56.18
West Palm Beach, FL (1) 1998 78 1,716 78.1% 84.39 65.88
Wilmington, DE 1989 120 3,799 87.5% 99.10 86.72
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FOR THE YEAR ENDED DECEMBER 31, 1998
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AVERAGE REVENUE PER
DATE NUMBER ROOM DAILY AVAILABLE
OPENED OF ROOMS REVENUE OCCUPANCY RATE ROOM
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(in thousands)
HOLIDAY INN HOTELS:
Clayton, MO 1965 255 $4,878 60.9% $86.06 $52.41
Columbia, SC 1969 175 2,665 67.8% 61.50 41.72
Crystal Lake (Chicago), IL 1988 196 4,906 75.6% 90.75 68.58
Flint, MI 1990 171 4,527 78.3% 92.65 72.54
Lafayette, LA 1983 242 4,364 79.9% 61.82 49.41
Louisville, KY 1970 169 2,408 74.8% 52.20 39.04
COMFORT INN HOTELS:
Detroit (Farmington Hills), MI 1987 135 2,225 63.3% 71.34 45.15
Fort Mill, SC (Charlotte, NC) 1987 153 2,253 65.7% 61.43 40.34
Marietta, GA 1989 185 2,349 68.5% 51.02 34.97
HOLIDAY INN EXPRESS HOTELS:
Austin, TX 1992 125 2,165 71.9% 66.01 47.46
Chicago (Arlington Heights), IL 1989 125 2,773 72.7% 83.64 60.77
Chicago (Downers Grove), IL 1984 123 2,528 66.8% 84.31 56.31
Milwaukee (Wauwatosa), WI 1984 122 2,215 77.2% 64.48 49.74
Minneapolis, MN 1987 142 3,007 76.6% 75.69 58.01
SHERATON AND SHERATON FOUR POINTS HOTELS:
Bakersfield, CA 1983 197 3,556 69.5% 71.15. 49.46
Birmingham, AL 1984 202 4,457 62.0% 96.11 59.57
Pleasanton, CA 1985 214 6,157 71.0% 111.04 78.83
Milpitas, CA 1988 229 9,010 72.2% 149.32 107.79
Sunnyvale, CA 1980 174 6,549 77.9% 132.50 103.26
HOTEL REX:
San Francisco, CA 1998 94 3,910 78.4% 144.13 113.04
RAMADA PLAZA HOTEL:
San Francisco, CA 1998 234 8,624 76.7% 133.50 102.45
HAWTHORN SUITES HOTEL:
Atlanta, GA 1984 280 6,269 70.0% 87.60 61.34
DOUBLETREE HOTEL:
Del Mar, CA 1990 220 6,787 80.0% 105.67 84.56
HOMEWOOD SUITES HOTEL:
Chandler, AZ (1) 1998 83 971 49.7% 85.51 42.53
TOWNEPLACE SUITES HOTEL:
Ft. Worth, TX (1) 1998 95 45 13.2% 58.10 7.69
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BEVERLY HERITAGE HOTEL:
Milpitas, CA 1988 196 6,737 67.1% 140.25 94.18
COURTYARD BY MARRIOTT HOTEL:
Flint, MI 1996 102 2,337 81.2% 77.26 62.76
(1) Represents operations since the opening of the hotel in February 1998 for
the Residence Inn in West Palm Beach, FL, in March 1998 for the Hampton Inn in
Jacksonville, FL, April 1998 for the Homewood Suites in Chandler, AZ and
November 1998 for the TownePlace Suites in Ft. Worth, TX.
Acquisitions, Sales and Pending Developments. During 1998, the Partnership
acquired two hotels and opened four newly-developed properties. Also, during
1998, the Partnership sold six hotels. The Partnership is developing the
following hotel properties:
Estimated Estimated
Number of Development Opening
Location Franchise Rooms/Suites Costs Quarter
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Miami Lakes, FL TownePlace Suites 95 $6.5 million 2Q99
Tampa, FL TownePlace Suites 95 $6.3 million 3Q99
Miami Airport TownePlace Suites 95 $6.5 million 3Q99
West, FL
Crystal Lake, IL Courtyard by Marriott 90 $7.5 million 1Q00
(Chicago)
The Partnership is constructing a 40-room addition to the Beverly Heritage
Hotel in Milpitas, CA. Construction costs are estimated at $3.8 million.
Completion of the addition is expected in the fourth quarter of 1999.
Master Agreement. The Company and the Partnership have entered into a
master agreement (the "Master Agreement"), with one of the Lessees, RFS, Inc.,
a wholly owned subsidiary of Promus Hotel Corporation. Under the Master
Agreement, the Company and the Partnership have granted to RFS, Inc., 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 prior to February 27,
2006 (the "Term"), subject to certain exceptions described below.
During the Term, the Partnership and the Company must deliver to RFS,
Inc. 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 RFS, Inc. In the event RFS, Inc. does 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 RFS, Inc. setting forth the final rent terms of the
proposed lease between the Partnership and such alternative lessee. RFS, Inc.
will then have 5 days to elect to lease the hotel from the Partnership upon the
terms set forth in the second notice. If RFS, Inc. does not make such
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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 RFS, Inc.
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 Lessee; (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 RFS, Inc. 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 RFS, Inc. 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 RFS, Inc.
or an affiliate of RFS, Inc. such that the ownership, lease, management or
franchise of the Competing Hotel would violate the five-mile radius
non-competition provisions of the lease with respect to the Subject Hotel if a
lease were entered into between the Partnership and RFS, Inc. 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. Even if the exception is applicable, the
Partnership must notify RFS, Inc. of its proposed acquisition of the Subject
Hotel so that RFS, Inc. has 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 RFS, Inc. to enter into a percentage lease with
respect to the Subject Hotel without violating the non-competition
restrictions.
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.
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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 RFS, Inc. without prior consent of the Partnership.
The Percentage Leases. All but four of the hotels owned by the
Partnership are 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 their 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.
Percentage Lease Terms. Each Percentage Lease has an initial term of
fifteen years from the date of inception, and 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 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, 1998, room revenue for each of the Hotels exceeded the
amount required to trigger the top tier of room revenue payable as Percentage
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Rent. The following table summarizes the percentages of room revenues in excess
of certain levels payable as Percentage Rent under the Percentage Leases.
PROPERTY TYPE FIRST TIER MIDDLE TIER TOP TIER
- ------------- ---------- ----------- --------
Full Service (1)................. 17% to 53.1% 30% to 70% 50% to 75%
Extended Stay.................... 24% to 41% 45% to 50% 60% to 72%
Limited Service.................. 20% to 47.2% N/A 50% to 76.5%
(1) Percentage Rent formula also includes 20% of beverage revenue and 5%
of food revenue.
The specific rent terms for each Percentage Lease 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 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
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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
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insurance proceeds was the 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
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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 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 Lessee's 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 the Lessee 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 Lessee's 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. RFS, Inc. has agreed during the term of the
Percentage Leases to maintain a ratio of total debt to consolidated net worth
(as defined in the Percentage Leases)
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of not more than 50%, exclusive of capitalized leases. Management fees paid to
affiliates of the Lessees are subordinated to the lease payments.
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 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 two of the Hotels, the Hotel Rex in San
Francisco, CA and the Beverly Heritage in Milpitas, CA, are licensed to operate
under a franchise license. Nineteen Hotels are licensed as Hampton Inn hotels,
fourteen are licensed as Residence Inn hotels, three are licensed as Comfort
Inn hotels, five 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 Courtyard by Marriott, one
is licensed as a Ramada hotel, one is licensed as a Homewood Suites hotel, one
is licensed as a TownePlace Suites hotel, one is licensed as a Sheraton hotel
and four are licensed as Sheraton Four Points hotels. Holiday Inn and Holiday
Inn Express are registered trademarks of Holiday Inn, 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 is registered a trademark of The Promus Companies, Inc. Hawthorn
Suites is a registered trademark of Hawthorn Suites Hotels. Doubletree is a
registered trademark of Doubletree Corporation. Sheraton and Sheraton Four
Points are registered trademarks of ITT Sheraton Corporation.
The franchise licenses generally specify certain management,
operational, record keeping, accounting, reporting and marketing standards and
procedures with which the Lessees or the Lessee Operators, 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 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
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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 notice and paying a specified amount of liquidated damages and
only with the Company's prior consent. 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 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 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 and TownePlace Suites
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. Under the ITT Sheraton Corporation franchise agreements, the
Lessees are required to pay a franchise fee of 5% of gross room sales (plus
additional fees) for the hotels operating as Sheraton and Sheraton Four Points.
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 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. The Partnership anticipates that the franchisors of
future hotels acquired will agree to similar arrangements.
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.
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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 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
(A) MARKET INFORMATION
The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "RFS". Sales prices for the shares and the dividends
declared per share, are as follows:
Stock Price Dividend Declared
High Low Per Share
---- --- ---------
First Quarter 1997 19.75 16.75 0.36
Second Quarter 1997 18.875 17.25 0.36
Third Quarter 1997 19.9375 17.875 0.375
Fourth Quarter 1997 21.25 18.125 0.375
First Quarter 1998 $20.13 $17.50 0.375
Second Quarter 1998 21.4374 17.9375 0.375
Third Quarter 1998 20.1875 12.00 0.385
Fourth Quarter 1998 14.4375 9.5 0.385
(b) Holders
The number of holders of record of shares of common stock was 296 as of
March 15, 1999.
(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 selected historical financial data for
the Company.
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
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total revenue $ 96,927 $ 83,069 $ 61,986 $ 48,307 $ 23,354
Income before minority interest 37,723 37,847 35,087 31,085 14,351
Net income 34,068 34,232 34,587 30,646 14,156
Diluted earnings per share 1.31 1.34 1.37 1.26 0.94
Cash dividends declared per share 1.52 1.47 1.42 1.23 1.02
Total assets 683,991 617,128 499,129 376,962 346,870
Total debt 272,799 208,909 133,064 30,186 2,420
OTHER DATA:
Funds from operations 63,030 55,263 45,723 39,663 18,109
Cash provided by operating activities 55,092 58,590 46,448 38,896 17,321
Cash used by investing activities (65,932) (140,751) (74,518) (74,028) (235,296)
Cash provided (used) by financing 8,723 28,357 83,325 (7,838) 242,296
activities
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
THE COMPANY
Incorporated herein by reference to the Company's Annual Report to Shareholders
for the year ended December 31, 1998 filed as Exhibit 13.1 to this Form 10-K.
RFS, INC. AND SUBSIDIARY
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Total revenues increased $6.3 million or 3.2% to $203.1 million for
the year ended December 31, 1998 compared to $196.8 million for the year ended
December 31, 1997. The increase in hotel revenues was attributable, on a same
store basis, as compared to the 1997 period, to the average daily rate
increasing approximately $4 to $80 while occupancy declined 1.0 percentage
point to 74.8%. The margin on hotel results (hotel revenues less hotel expenses
and lease expenses) decreased $0.7 million or 4.9% from $15.2 million to $14.5
million
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reflecting improved operating performance of the hotels on a same store basis
offset by the loss of six hotels sold during 1998.
Management and consulting fees decreased 21% to $1.3 million
reflecting the termination of five management contracts during 1998 that were
active throughout 1997, partially offset by the impact of two new contracts.
Other fees and income increased $3.2 million primarily reflecting $2.7 million
of revenue attributable to lease termination fees on the hotels that were sold
in 1998, and $0.5 million of revenue generated through various partnership
interests.
General and administrative expenses, as well as, depreciation and
amortization expense increased nominally.
The provision for income taxes in 1998 reflects a 39.1% effective tax
rate (the consolidated effective tax rate for Promus Hotel Corporation in 1998)
as compared to a 38.3% effective tax rate in 1997. The Company files a
consolidated tax return with Promus Hotel Corporation.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total revenues increased $45.3 million or 30% to $196.8 million for
the year ended December 31, 1997 compared to $151.5 million for the year ended
December 31, 1996. The increase in hotel revenues of $44.6 million was
attributable to the net addition of four leased properties in 1996 that
generated a full year of revenues in 1997 and the addition of eight leased
properties in 1997. Additionally, on a same store basis as compared to the 1996
period, the average daily rate increased approximately $2 to $71 while
occupancy declined 1.6 percentage points to 75.4%. The margin on hotel results
(hotel revenues less hotel expenses and lease expenses) increased $4.1 million
or 37% from $11.2 million to $15.2 million reflecting the addition of new
properties and the improved operating performance of the hotels on a same store
basis offset by increased lease payments to the Lessor attributable to
increased revenues.
Management and consulting fees increased 97% to $1.6 million
principally reflecting the full year impact of eight management contracts that
commenced in the first half of 1996. Other fees and income decreased nominally.
General and administrative expenses increased 16% or $0.5 million
primarily due increased staffing necessary to support the additional hotels.
Depreciation and amortization increased reflecting the amortization of certain
pre-opening costs associated with the leased hotels and a full year of
amortization on the franchise application fees paid in 1996.
The provision for income taxes in 1997 reflects a 38.3% effective tax
rate (the consolidated effective tax rate for Doubletree Corporation in 1997)
as compared to a 35% effective tax rate in 1996. The Company files a
consolidated tax return with Doubletree.
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LIQUIDITY AND CAPITAL RESOURCES
The principal source of cash to the Lessee, other than capital
contributions from Promus Hotel Corporation, will come from operations. Since
inception, the Lessee has been able to meet its rent obligations under the
Percentage Leases. During 1998, the Lessee generated cash flow from operations
of $8.0 million as compared to $10.4 million during 1997, excluding the effect
of a cash flow sharing agreement between Lessee and Promus Hotel Corporation.
The decrease was principally attributable to a decrease in the Lessee's working
capital, partially offset by a $1.1 million increase in net income. The Lessee
expects that its cash flow from operations will be sufficient to meet its
liquidity and capital requirements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Pursuant to the general instructions to Rule 305 of SEC Regulation S-K,
the quantitative and qualitative disclosures called for by this Item 7a and by
Rule 305 of Regulation S-K are inapplicable to the Company at this time.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE COMPANY
Incorporated herein by reference to the Company's Annual Report to
Shareholders for the year ended December 31, 1998.
RFS, INC.
Report of Independent Public Accountants
To the Board of Directors and Stockholder
of RFS, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of RFS, INC. AND
SUBSIDIARY (a wholly-owned subsidiary of Promus Hotel Corporation) (the
"Company") as of December 31, 1998 and the related consolidated statements of
operations, stockholder's equity and cash flows for the year then ended. 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 consolidated financial statements of RFS,
Inc. and subsidiary as of December 31, 1997 and for each of the two years then
ended were audited by other auditors whose report dated January 23, 1998,
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. and
subsidiary as of December 31, 1998 and the results of their operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Memphis, Tennessee,
February 5, 1999.
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RFS, INC. AND SUBSIDIARY
(a wholly-owned subsidiary of Promus Hotel Corporation)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(in thousands)
1998 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,986 $ 7,322
Trade receivables, net of estimated uncollectible
accounts of $80 and $110 6,854 4,300
Inventory 203 206
Prepaid expenses 1,094 943
Due from Parent 24,883 13,567
-------- --------
TOTAL CURRENT ASSETS 37,020 26,338
Investments 19,964 19,724
Note receivable 1,529 1,529
Leasehold improvements and office equipment, net
of $616 and $526 accumulated depreciation 253 284
Capitalized franchise costs, net 2,032 2,303
Deferred costs and other assets, net 720 790
-------- --------
TOTAL ASSETS $ 61,518 $ 50,968
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,576 $ 7,723
Percentage lease payable 9,425 8,901
-------- --------
TOTAL CURRENT LIABILITIES 17,001 16,624
DEFERRED INCOME TAXES 442 70
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDER'S EQUITY:
Common stock, no par value; 5,000 shares authorized;
100 shares issued and outstanding 282 282
Additional paid-in capital 18,500 18,500
Unearned employee compensation -- (70)
Accumulated other comprehensive income,
net of income taxes (54) 112
Retained earnings 25,347 15,450
-------- --------
TOTAL STOCKHOLDER'S EQUITY 44,075 34,274
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 61,518 $ 50,968
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
23
25
RFS, INC. AND SUBSIDIARY
(a wholly-owned subsidiary of Promus Hotel Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(in thousands)
1998 1997 1996
-------- -------- --------
REVENUES:
Hotel revenue $196,749 $193,282 $148,699
Management and consulting fees 1,267 1,611 817
Other 5,061 1,868 1,987
-------- -------- --------
Total revenues 203,077 196,761 151,503
-------- -------- --------
COSTS AND EXPENSES:
Hotel expenses:
Salaries and benefits 42,790 43,173 35,355
Franchise costs 13,874 13,183 10,153
Advertising and promotions 3,075 3,199 2,089
Utilities 7,962 8,368 7,090
Repairs and maintenance 4,159 4,240 3,631
Leases, insurance and taxes 1,331 1,317 1,018
Other operating costs 25,515 24,518 18,063
-------- -------- --------
98,706 97,998 77,399
General and administrative 4,027 3,972 3,430
Depreciation and amortization 554 460 266
Percentage lease expense 83,550 80,049 60,148
-------- -------- --------
Total operating expenses 186,837 182,479 141,243
-------- -------- --------
Income before income taxes 16,240 14,282 10,260
Income taxes 6,343 5,470 3,592
-------- -------- --------
NET INCOME $ 9,897 $ 8,812 $ 6,668
======== ======== ========
The accompanying notes are an integral
part of these consolidated financial statements.
24
26
RFS, INC. AND SUBSIDIARY
(a wholly-owned subsidiary of Promus Hotel Corporation)
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
Additional Unearned
Comprehensive Common Paid-in Employee
Income Stock Capital Compensation
------------ ------ ---------- ------------
Balances, December 31, 1995 $282 $ -- $(211)
Contribution of paid-in capital -- 18,500 --
Amortization of unearned employee compensation -- -- 70
Comprehensive income - 1996 -
Net income $6,668 -- -- --
Other comprehensive income, net of tax:
Change in unrealized gain on
marketable equity securities, net of tax of $61 92 -- -- --
------ ---- ------- -----
Balances, December 31, 1996 6,760 282 18,500 (141)
======
Amortization of unearned employee compensation -- -- 71
Comprehensive income - 1997 -
Net income 8,812 -- -- --
Other comprehensive income, net of tax:
Change in unrealized gain on
marketable equity securities, net of tax of $9 (2) -- -- --
------ ---- ------- -----
Balances, December 31, 1997 8,810 282 18,500 (70)
======
Amortization of unearned employee compensation -- -- 70
Comprehensive income - 1998 -
Net income 9,897 -- -- --
Other comprehensive income, net of tax:
Change in unrealized gain on
marketable equity securities, net of tax of $(104) (166) -- -- --
------ ---- ------- -----
Balances, December 31, 1998 $9,731 $282 $18,500 $ --
====== ==== ======= =====
Accumulated
Other Retained
Comprehensive Earnings
Income (Deficit) Total
------------ -------- -------
Balances, December 31, 1995 $ 22 $ (30) $ 63
Contribution of paid-in capital -- -- 18,500
Amortization of unearned employee compensation -- -- 70
Comprehensive income - 1996 -
Net income -- 6,668 6,668
Other comprehensive income, net of tax:
Change in unrealized gain on
marketable equity securities, net of tax of $61 92 -- 92
------ ------- -------
Balances, December 31, 1996 114 6,638 25,393
Amortization of unearned employee compensation -- -- 71
Comprehensive income - 1997 -
Net income -- 8,812 8,812
Other comprehensive income, net of tax:
Change in unrealized gain on
marketable equity securities, net of tax of $9 (2) -- (2)
------ ------- -------
Balances, December 31, 1997 112 15,450 34,274
Amortization of unearned employee compensation -- -- 70
Comprehensive income - 1998 -
Net income -- 9,897 9,897
Other comprehensive income, net of tax:
Change in unrealized gain on
marketable equity securities, net of tax of $(104) (166) -- (166)
------ ------- -------
Balances, December 31, 1998 $ (54) $25,347 $44,075
====== ======= =======
The accompanying notes are an integral
part of these consolidated financial statements.
27
RFS, INC. AND SUBSIDIARY
(a wholly-owned subsidiary of Promus Hotel Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(in thousands)
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,897 $ 8,812 $ 6,668
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 554 460 290
Provision for bad debts (30) 48 22
Equity in earnings of unconsolidated affiliates (509) -- --
Changes in operating assets and liabilities:
Increase in accounts receivable (2,524) (668) (1,159)
Increase in due from parent (11,316) (11,818) (1,749)
Increase in other assets (202) (737) (127)
Increase in accounts payable and accrued expenses 853 2,497 270
--------- --------- ---------
Net cash (used in) provided by
operating activities (3,277) (1,406) 4,215
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in RFS Hotel Investors, Inc. -- -- (18,500)
Investments in partnerships and ventures -- -- (175)
Distributions from partnerships and ventures -- 1 2
Franchise application fees -- -- (2,626)
Purchase of furniture and equipment (59) (79) (79)
Loan to owners of managed hotels -- -- (3,000)
Collection of loan to owners of managed hotels -- 1,471 --
Increase in deferred cost and other assets -- -- (90)
--------- --------- ---------
Net cash (used in) provided by
investing activities (59) 1,393 (24,468)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of paid-in capital from parent -- -- 18,500
Payments on notes payable -- (325) 175
--------- --------- ---------
Net cash (used in) provided by
financing activities -- (325) 18,675
--------- --------- ---------
Net decrease in cash (3,336) (338) (1,578)
CASH AND CASH EQUIVALENTS:
Beginning of year 7,322 7,660 9,238
--------- --------- ---------
End of year $ 3,986 $ 7,322 $ 7,660
========= ========= =========
The accompanying notes are an integral
part of these consolidated financial statements.
26
28
RFS, INC. AND SUBSIDIARY
(a wholly-owned subsidiary of Promus Hotel Corporation)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 90.5% owned by RFS Hotel Investors, Inc. (the "REIT").
On December 19, 1997, Doubletree became a wholly-owned subsidiary of
Promus Hotel Corporation ("Promus" or "Parent") pursuant to a merger
transaction in which each outstanding share of Doubletree common stock
was exchanged for one share of Promus common stock. The Company's
wholly-owned subsidiary, RFS Leasing, Inc., leases and manages 15
hotels owned by RFS Financing Partnership, L.P., a special purpose
entity wholly-owned by RFS Hotel Investors, Inc.
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, 1998, the Company leased 51 hotels from the Partnership
and operated 65 hotels. Four hotels leased by the Company are operated
by other third party management companies. Two of the hotels operated
by the Company are for unrelated entities. The Company leases and/or
manages hotel properties in 26 states, primarily in the Southeast and
Midwest and substantially all are affiliated with a nationally
recognized franchise.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
Inventories-
Inventories consisting of food and beverages are stated at the lower of
cost (generally first-in, first-out) or market.
Receivable/Payable with Parent-
The Company maintains an intercompany balance with its Parent based on
available cash flows. This balance is due on demand and is non-interest
bearing.
27
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Investments-
Investments in partnerships and joint ventures are accounted for using
the equity method when the Company has a general partnership interest
or its limited partnership interest exceeds 5% and the Company does
not exercise control over the venture. Preferred stock investments are
accounted for using the cost method. Marketable equity securities are
classified as available-for-sale and recorded at fair value with
unrealized gains or losses reflected in stockholder's equity.
Leasehold Improvements and Office Equipment-
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments at the hotels are the responsibility of the
Partnership.
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.
Capitalized Franchise Costs-
In connection with the Company's acquisition by Doubletree, franchise
application fees were paid to franchisors of the Hotels. These fees
are being amortized over the remaining lives of the franchise
agreements. The recoverability of the franchise application fees is
periodically evaluated to determine whether such costs will be
realized from future operations.
The initial cost of obtaining any new franchise licenses is paid by
the Partnership, and the ongoing franchise fees are paid by the
Company. These fees are usually computed as a percentage of room
revenue in accordance with each hotel's franchise agreements and are
expensed as incurred.
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.
Percentage Lease Expenses-
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.
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 when the new rate is enacted.
The Company's parent, Promus Hotel Corporation, files a consolidated
federal income tax return. Beginning in 1996, 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 Promus' consolidated current and deferred tax expenses
in 1998 and 1997, and Doubletree's in 1996.
28
30
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
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.
Reclassifications-
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Recent Accounting Pronouncements-
During 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting on Comprehensive
Income." This statement establishes standards for reporting and
display of comprehensive income and its components in a financial
statement that is displayed with the same prominence as other
financial statements. The change in the components of other
comprehensive income is reported net of income taxes in the
accompanying financial statements. Accumulated other comprehensive
income is comprised solely of unrealized gains and losses on
marketable equity securities.
3. INVESTMENTS-
Investments in RFS Hotel Investors, Inc.-
The Company has the following investments in the REIT and its related
entity, the Partnership (in thousands):
1998 1997
------- -------
RFS Hotel Investors, Inc.
Series A Convertible Preferred Stock $18,500 $18,500
Common Stock 429 698
RFS Partnership, L.P.
Partnership Units 841 841
------- -------
$19,770 $20,039
======= =======
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31
3. INVESTMENTS (Continued):
On February 27, 1996, the Company bought from the REIT 973,684 shares
of Series A Convertible Preferred Stock for $18,500,000 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 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 issuance. The owners of Series A Preferred
Stock are entitled to a $1.45 annual 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 cost
which is approximately $841,000 on 77,904 units owned. At present,
there is no quoted market for the Partnership units. However, the
Partnership units are convertible into REIT common stock. The Company
also owns 35,000 shares of REIT common stock, which is carried at
quoted market value.
Investments in Partnerships-
Information with respect to the Company's investments in partnerships
at December 31, 1998 and 1997 is as follows:
Carrying value
(in thousands)
% Type of -------------------
Entity Ownership Interest 1998 1997
------ --------- -------- ---- ----
Devonshire Associates 10% General $ 1 $ 1
SF Partners 2% General -- --
Highland Plaza Partners, Ltd. 5% General 1 1
DDP Partners, L.P. 5% General 10 12
---- -----
12 14
Shelby Distribution Partners, L.P. 33% General 182 (329)
---- -----
$194 $(315)
==== =====
4. NOTE RECEIVABLE:
In June 1996, the Company obtained management agreements for eight
hotel properties owned by entities unrelated to the Company. In
connection with acquiring these contracts, the Company loaned
$3,000,000 to the owners through an unsecured promissory note with
interest at 10% per annum. During 1996, the note receivable was
reduced by approximately $1,500,000 primarily from proceeds of new
debt financing and two hotel property sales by the owners.
On September 15, 1998, the owners of the hotels effectively terminated
their management agreement with the Company. Pursuant to the note
agreement, upon termination of the Company as manager of the hotels,
the remaining principal balance with unpaid interest is due within one
year from the date of termination. As of December 31, 1998, no
payments have been made to the Company subsequent to the effective
termination of the management contracts. Accrued unpaid interest was
$192,000 and $40,000 at December 31, 1998 and 1997, respectively.
30
32
5. PREFERRED AND COMMON STOCK:
In connection with the Company's acquisition by Doubletree, the
Company retired all of its then outstanding common stock and issued
100 new shares of common stock to Doubletree. In addition, Doubletree
made an $18,500,000 capital contribution to the Company. The proceeds
from this capital contribution were used by the Company to purchase
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. Such vesting requirements are contingent
upon the employees' continued employment with the Company. The value
of the shares at the grant date was charged to compensation expense
over the four-year period.
6. INCOME TAXES:
Effective December 19, 1997, the Company's results of operations are
included in Promus' consolidated U.S. Federal income tax return. Prior
to then, income taxes were the responsibility of the Company. Under
the terms of a tax sharing agreement, the Company makes payments to
its Parent for a proportionate allocation of its consolidated income
tax expense based on statutory tax rates then in effect. The Company's
deferred tax liabilities are primarily comprised of temporary
differences related to income from joint ventures and taxes, other
than income taxes.
Income tax expense attributable to income consisted of the following
(in thousands):
1998 1997 1996
------ ------ ------
Current
Federal $5,222 $4,999 $3,592
State 645 471 --
Deferred
Federal 424 -- --
State 52 -- --
------ ------ ------
$6,343 $5,470 $3,592
====== ====== ======
Income tax expense at
federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal
tax benefit 4.1% 3.3% --
------ ------ ------
39.1% 38.3% 35.0%
====== ====== ======
The Company remitted $6,343,000 and $5,470,000 to Promus for income
tax payments for the years ended December 31, 1998 and 1997,
respectively.
31
33
7. 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, 1998 were as follows (in thousands):
Year Amount
---- ------
1999 $ 312
2000 315
2001 315
2002 79
------
$1,021
======
Rental expense, except for the lease expense described below, was
approximately $301,000 for the years ended December 31, 1998 and 1997.
The Company has future lease commitments to the Partnership under
percentage leases through 2015. At December 31, 1998, minimum future
rental payments under percentage leases were as follows (in
thousands):
Year Amount
---- --------
1999 $ 31,578
2000 30,810
2001 30,810
2002 30,810
2003 30,229
Thereafter 70,890
--------
$225,127
========
The Company paid base rents of approximately $33,665,000 and
$34,956,000 and percentage rents in excess of base rents of
approximately $49,885,000 and $45,093,000 for the years ended December
31, 1998 and 1997, respectively. At December 31, 1998 and 1997 the
Company had a net payable to the Partnership of $9,425,000 and
$8,901,000, respectively, for percentage rents and other transactions.
The Company has management agreements with two hotel operators to
manage four of the leased hotels. The management agreements have terms
ranging from 10 to 20 years and provide for a fee based on a
percentage of each hotel's revenue.
8. RELATED PARTY TRANSACTIONS:
The Company has an intercompany receivable from its Parent subject to
an informal agreement where excess cash of the Company is transferred
to the Parent. No interest is earned on this receivable.
Certain of the partnerships in which the Company has an interest and
certain former stockholders owed the company approximately $321,000
for advances and other transactions at December 31, 1998 and 1997.
The Company has recognized, as income, approximately $1,529,000 and
$1,564,000 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, 1998 and 1997,
respectively.
32
34
8. RELATED PARTY TRANSACTIONS (Continued):
The Company maintained a consulting agreement ("Agreement") with
Hospitality Advisory Services, Inc. ("HAS"). The owners of HAS are
officers of the REIT and were stockholders of the Company. 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 were terminated by the Company on
February 27, 1997. Total fees paid on these consulting agreements were
$35,000 in 1997.
9. EMPLOYEE BENEFIT PLANS:
The Company maintains 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. The Company currently
matches 50% of employee contributions to the plan, up to a maximum of
2% of employee compensation. Vesting in the employer contribution
account is graduated over a seven year period. Contribution expense
related to this plan was approximately $139,000 and $151,000 for the
years ended December 31, 1998 and 1997, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards 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 receivable, due from Parent,
investments in the REIT, investments in partnerships and ventures,
accounts payable and accrued expenses and Percentage Lease payable,
each as included in the balance sheets under such captions.
With the exception of the note receivable and investments in
partnerships and ventures, 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, are carried at their estimated fair value.
The Company has determined that the fair value of its note receivable
is not significantly different from its 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 is carried at cost,
is estimated based upon the residual value to the Company in the
respective partnership's net assets. Partnership units, which are
convertible into REIT common stock, have a carrying value of $841,000
and an estimated fair value of approximately $1,270,000 and $1,553,000
at December 31, 1998 and 1997, respectively. Additionally, the fair
value of the Series A Convertible Preferred Stock was $11,928,000 and
$19,415,000 at December 31, 1998 and 1997, respectively, based on the
quoted market value of the REIT's common stock.
11. YEAR 2000:
With the approach of the year 2000, there has been concern over the
impact of this event on computer systems worldwide. The Company has
assessed the impact of the year 2000 on its business and has developed
a project plan to remediate its current status of systems not yet
deemed year 2000 compliant. The Company spent $60,000 in 1998 on year
2000 system upgrades, and expects to spend approximately $340,000 in
1999 to complete its year 2000 compliance efforts.
33
35
11. YEAR 2000 (Continued):
The Company has begun developing a formal contingency plan for year
2000 non-compliance and expects the contingency plan to be complete by
the second quarter 1999. In the event of the Company's non-compliance,
management does not believe there will be a significant adverse effect
on its operations or reporting the results thereof.
The Company and the hotels that it manages are also dependent on
external businesses that supply them with goods and services such as
front office hotel systems and utilities, as well as telephone,
financial and food services. The Company is not able to control or
ensure that all of these businesses will be year 2000 compliant and,
accordingly, such lack of compliance may negatively affect the Company
and its managed hotels.
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 III Directors" and "Executive Compensation" in the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days following the end of the year covered by this Form 10-K with respect
to its Annual Meeting of Shareholders to be held on April 28, 1999 (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.
34
36
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, 1998 are
incorporated by reference:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for years ended December 31,
1998, 1997 and 1996
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.
The following financial statements of RFS, Inc. are included in this
report on Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholder's Equity for years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for year ended December 31,
1998, 1997 and 1996 Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
No filings of Form 8-K were made during the last quarter of 1998.
35
37
(c) Exhibits
Exhibit
Number Exhibit
------- -------
3.1 - Second Restated Charter of the Registrant
(previously filed as Exhibit 3.1 to the
Company's Current Report on Form 8-K dated
March 6, 1996 and incorporated herein by
reference).
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 (previously filed as Exhibit
3.3(b) to the Company's Form 10-K for the
year ended December 31, 1996 and
incorporated herein by reference).
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
36
38
10.4 - Second Amended and Restated Employment Agreement
between RFS Managers, Inc. and Robert M.
Solmson (previously filed as Exhibit 10.4
to the Company's Form 10-K for the year
ended December 31, 1997, and incorporated
herein by reference).
10.6 - Second Amended and Restated Employment Agreement
between RFS Managers, Inc. and J. William
Lovelace (previously filed as Exhibit 10.6
to the Company's Form 10-K for the year
ended December 31, 1997, and incorporated
herein by reference).
10.7 - Second Amended and Restated Employment Agreement
between RFS Managers, Inc. and Michael J.
Pascal (previously filed as Exhibit 10.6 to
the Company's Form 10-K for the year ended
December 31, 1997, and incorporated herein
by reference).
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 (previously filed as
Exhibit 10.9(a) to the Company's Form 10-K
for the year ended December 31, 1996 and
incorporated herein by reference).
10.10 - Indenture dated as of November 21, 1996 (previously
filed as Exhibit 10.10 to the Company's
Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
10.11 - Form of Deed of Trust dated as of November 21, 1996
(previously filed as Exhibit 10.11 to the
Company's Form 10-K for the year ended
December 31, 1996 and incorporated herein
by reference).
10.12 - Second Amended and Restated Revolving Credit and
Term Loan Agreement (previously filed as
Exhibit 10.12 to the Company's Form 10-K
for the year ended December 31, 1997 and
incorporated herein by reference.)
*10.13 - Third Amended and Restated Revolving Credit Agreement
*13.1 - Relevant Portions of the Company's Annual Report to
Shareholders for the year ended December 31, 1998
*21.1 - List of Subsidiaries of the Registrant
*23.1 - Consent of PricewaterhouseCoopers LLP
37
39
*23.2 - Consent of KPMG LLP
*23.3 - Consent of Arthur Andersen LLP
*27.1 - Financial Data Schedule (for SEC use only)
----------------
* Filed herewith
38
40
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, 1999
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, 1999
Chief Executive Officer
and President
/s/ Michael J. Pascal
- ------------------------------
Michael J. Pascal Chief Financial Officer March 26, 1999
Secretary and Treasurer
(principal financial and
accounting officer)
/s/ H. Lance Forsdick
- ------------------------------
H. Lance Forsdick, Sr. Director March 26, 1999
/s/ Bruce E. Campbell, Jr.
- ------------------------------
Bruce E. Campbell, Jr. Director March 26, 1999
/s/ Michael E. Starnes
- ------------------------------
Michael E. Starnes Director March 26, 1999
/s/ John W. Stokes, Jr.
- ------------------------------
John W. Stokes, Jr. Director March 26, 1999
/s/ Harry W. Phillips, Sr.
- ------------------------------
Harry W. Phillips, Sr. Director March 26, 1999
/s/ R. Lee Jenkins
- ------------------------------
R. Lee Jenkins Director March 26, 1999
39
41
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Director
of RFS Hotel Investors, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 27, 1999, except for Note 12 as to which the date is February 16,
1999, appearing on page 19 of the 1998 Annual Report to Shareholders of RFS
Hotel Investors, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Memphis, Tennessee
January 27, 1999, except for
Note 12 as to which the
date is February 16, 1999
40
42
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
(IN THOUSANDS)
AS OF DECEMBER 31, 1998
Cost Capitalize 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
Clayton, MO (1) $1,599 $4,968 $1,376 $1,599 $6,344
Holiday Inn
Columbia, SC (1) 790 3,573 456 790 4,029
Holiday Inn Express
Louisville, KY (1) 1,328 3,808 770 1,328 4,578
Comfort Inn
Marietta, GA (2) 989 5,509 129 989 5,638
Holiday Inn
Lafayette, LA (1) 700 8,858 806 700 9,664
Residence Inn
Kansas City, MO (2) 392 5,344 80 392 5,424
Comfort Inn
Ft Mill, SC (2) 763 6,612 138 763 6,750
Hampton Inn
Ft Lauderdale, FL (1) 590 4,664 242 590 4,906
Holiday Inn Express
Arlington Heights, IL (1) 350 4,121 393 350 4,514
Hampton Inn
Denver, CO none 500 8,098 360 500 8,458
Holiday Inn Express
Downers Grove, IL (1) 400 5,784 356 400 6,140
Comfort Inn
Farmington Hills, MI (2) 525 4,118 186 525 4,304
Hampton Inn
Indianapolis, IN (2) 475 8,008 262 475 8,270
Hampton Inn
Lincoln, NE (1) 350 4,829 304 350 5,133
Hampton Inn
Bloomington, MN (2) 375 8,657 174 375 8,831
Holiday Inn Express
Bloomington, MN (1) 780 6,910 $152 191 932 7,101
Hampton Inn
Minnetonka, MN (1) 475 5,066 126 475 5,192
Hampton Inn
Oklahoma City, OK (2) 530 6,826 418 530 7,244
Hampton Inn
Omaha, NE (2) 450 6,362 445 450 6,807
Hampton Inn
Tulsa, OK (1) 350 5,715 405 350 6,120
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
- ----- ------------ ------------ ----------- ----------
$7,943 $1,587 $4,757 1993 40
4,819 535 3,494 1993 40
5,906 575 4,003 1993 40
6,627 711 4,927 1993 40
10,364 1,218 8,446 1993 40
5,816 664 4,760 1994 40
7,513 794 5,956 1994 40
5,496 565 4,341 1994 40
4,864 501 4,013 1994 40
8,958 947 7,511 1994 40
6,540 679 5,461 1994 40
4,829 482 3,822 1994 40
8,745 935 7,335 1994 40
5,483 575 4,558 1994 40
9,206 998 7,833 1994 40
8,033 801 6,300 1994 40
5,667 587 4,605 1994 40
7,774 804 6,440 1994 40
7,257 753 6,054 1994 40
6,470 682 5,438 1994 40
continued
43
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
(IN THOUSANDS)
AS OF DECEMBER 31, 1998
Cost Capitalize 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
Warren, MI (1) $ 500 $ 2,814 $ 205 $ 500 $ 3,019
Holiday Inn Express
Wauwatosa, WI (2) 700 4,926 437 700 5,363
Residence Inn
Fishkill, NY $1,820 2,280 10,484 155 2,280 10,639
Residence Inn
Providence, RI (2) 1,385 7,742 240 1,385 7,982
Residence Inn
Tyler, TX (1) 855 6,212 219 855 6,431
Hampton Inn
Memphis, TN (2) 980 6,157 61 980 6,218
Residence Inn
Ft Worth, TX (2) 985 10,726 104 985 10,830
Residence Inn
Wilmington, DE (1) 1,100 8,488 404 1,100 8,892
Residence Inn
Torrance, CA (1) 2,600 17,789 779 2,600 18,568
Residence Inn
Ann Arbor, MI (2) 525 4,461 227 3,192 752 7,653
Holiday Inn
Flint, MI (1) 1,220 11,994 307 1,220 12,301
Residence Inn
Charlotte, NC (2) 850 3,844 159 174 1,009 4,018
Hawthorn Suites
Atlanta, GA (1) 3,000 12,886 740 3,000 13,626
Holiday Inn Express
Austin, TX (2) 500 4,737 101 500 4,838
Hampton Inn
Lakewood, CO (2) 957 6,790 86 957 6,876
Hampton Inn
Hattiesburg, MS (2) 785 4,653 1,517 785 6,170
Hampton Inn
Laredo, TX (1) 1,037 4,116 (3) 1,037 4,113
Residence Inn
Atlanta, GA none 1,306 10,200 132 1,306 10,332
Holiday Inn
Crystal Lake, IL (2) 1,685 10,932 85 1,685 11,017
Residence Inn
Orlando, FL (2) 1,045 8,880 97 1,045 8,977
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
- ----- ------------ ------------ ----------- ----------
$ 3,519 $ 334 $ 2,685 1994 40
6,063 588 4,775 1994 40
12,919 1,165 9,474 1994 40
9,367 865 7,117 1994 40
7,286 698 5,733 1994 40
7,198 657 5,561 1994 40
11,815 1,142 9,688 1994 40
9,992 930 7,962 1994 40
21,168 1,943 16,625 1994 40
8,405 582 7,071 1994 40
13,521 1,264 11,037 1994 40
5,027 409 3,609 1994 40
16,626 1,329 12,297 1994 40
5,338 478 4,360 1995 40
7,833 654 6,222 1995 40
6,955 533 5,637 1995 40
5,150 351 3,762 1995 40
11,638 834 9,498 1995 40
12,702 891 10,126 1995 40
10,022 724 8,253 1995 40
continued
44
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED
(IN THOUSANDS)
AS OF DECEMBER 31, 1998
Cost Capitalize 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
----------- ------------ ---- ------------- ---- ------------- ---- -------------
Residence Inn
Sacramento, CA (2) $1,000 $13,122 $135 $1,000 $13,257
Doubletree Hotel
Del Mar, CA (2) 1,500 13,535 64 1,500 13,599
Hampton Inn
Plano, TX (1) 959 5,178 17 959 5,195
Courtyard by Marriott
Flint, MI (1) 600 4,852 179 600 5,031
Hampton Inn
Sedona, AZ none 1,464 3,858 18 1,464 3,876
Hampton Inn
Chandler, AZ none 485 3,950 1 485 3,951
Hampton Inn
Houston, TX (1) 606 4,919 0 606 4,919
Sheraton Hotel
Milpitas, CA (2) 5,253 23,169 0 5,253 23,169
Sheraton Four Points
Sunnyvale, CA (2) 785 22,401 0 785 22,401
Sheraton Four Points
Pleasant, CA (2) 1,935 19,251 0 1,935 19,251
Sheraton Four Points
Bakersfield, CA (2) 1,390 7,554 1 1,390 7,555
Beverly Heritage
Milpitas, CA none 5,250 25,118 64 5,250 25,182
Sheraton Hotel
Birmingham, AL $5,000 3,108 13,491 (5) 3 3,103 13,494
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
----- ------------ ------------ ----------- ----------
$14,257 $ 987 $12,270 1996 40
15,099 901 12,698 1996 40
6,154 324 4,871 1996 40
5,631 260 4,771 1996 40
5,340 136 3,740 1997 40
4,436 155 3,796 1997 40
5,525 237 4,682 1997 40
28,422 1,158 22,011 1997 40
23,186 1,120 21,281 1997 40
21,186 962 18,289 1997 40
8,945 378 7,177 1997 40
30,432 996 24,186 1997 40
16,597 422 13,072 1997 40
continued
45
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED
(IN THOUSANDS)
AS OF DECEMBER 31, 1998
Cost Capitalize 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
----------- ------------ ---- ------------- ---- ------------- ---- -------------
Residence Inn
Jacksonville, FL none $ 1,339 $ 4,990 $(6) $ 1,339 $ 4,984
Residence Inn
West Palm Beach, FL none 1,293 4,025 1,293 4,025
Hampton Inn
Jacksonville, FL none 1,047 4,375 1,047 4,375
Homewood Suites
Chandler, AZ none 485 4,601 485 4,601
Hotel Rex
San Francisco, CA none 3,000 11,039 3,000 11,039
Ramada Inn
San Francisco, CA $19,062 3,007 28,308 3,007 10,677
TownPlace Suites
Ft. Worth, TX none 753 4,721 753 4,721
Unimproved land
Crystal Lake, IL none 252 252
Unimproved land
Olathe, KS none 500 500
Unimproved land
Miami, FL none 914 914
Unimproved land
Miami, FL none 836 836
-----------------------------------------------------------------------------------------------------
Totals $25,882 $74,767 $499,118 $533 $17,125 $75,300 $498,612
=====================================================================================================
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
----- ------------ ------------ ----------- ----------
$ 6,323 $ 145 $ 4,839 1997 40
5,318 83 3,942 1998 40
5,422 90 4,285 1998 40
5,086 84 4,517 1998 40
14,039 184 10,855 1998 40
13,684 593 10,084 1998 40
5,474 4,721 1998 40
252 0 1995 n/a
500 0 1995 n/a
914 0 1997 n/a
836 0 1997 n/a
- -----------------------------------------
$573,912 $40,979 $457,633
=========================================
(1) Property is collateral for the Line of Credit.
(2) Property is collateral for long-term, fixed rate debt.