<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 34-0-22164
RFS HOTEL INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1534743
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
850 Ridge Lake Boulevard, Suite 220, (901) 767-7005
Memphis, TN 38120 (Registrant's Telephone Number
(Address of Principal Executive Offices) Including Area Code)
(Zip Code)
n/a
(Former address, if changed since last report)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days.
[X] Yes No [ ]
The number of shares of Registrant's Common Stock, $.01 par value,
outstanding on September 30, 1999 was 24,989,946.
<PAGE> 2
RFS HOTEL INVESTORS, INC.
INDEX
<TABLE>
<CAPTION>
Form 10-Q
Report
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RFS Hotel Investors, Inc.
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Income - For the three and the
nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows - For the nine months
ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE> 3
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Investment in Hotel Properties, net $ 642,832 $ 624,730
Hotels under development 9,931 18,289
Cash and cash equivalents 1,705 2,014
Restricted cash 1,696 7,809
Accounts receivable-Lessees 16,088 10,656
Notes receivable 4,914 4,949
Deferred expenses, net 4,808 5,216
Prepaid and other assets 5,999 8,818
Escrow deposits 1,510 1,510
--------- ---------
$ 689,483 $ 683,991
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 4,197 $ 5,320
Accrued real estate taxes 5,261 2,961
Borrowings on line of credit 92,307 82,307
Long-term obligations 184,689 190,492
Minority interest 36,041 35,974
--------- ---------
322,495 317,054
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 973,684 shares outstanding 10 10
Common Stock, $.01 par value, 100,000,000 shares
authorized, 25,115,946 shares outstanding 251 251
Paid-in capital 374,959 374,959
Treasury stock, 126,000 and 110,000 shares (2,217) (2,012)
Distributions in excess of income (4,992) (4,468)
Unearned directors' and officers' compensation (1,023) (1,803)
--------- ---------
Total shareholders' equity 366,988 366,937
--------- ---------
$ 689,483 $ 683,991
========= =========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
3
<PAGE> 4
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE
3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED
09/30/99 09/30/98 09/30/99 09/30/98
-------- -------- -------- --------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Leases $ 27,600 $ 27,201 $ 77,188 $ 74,825
Other 164 135 540 373
-------- -------- -------- --------
Total revenue 27,764 27,336 77,728 75,198
-------- -------- -------- --------
Expenses:
Real estate taxes and property and
casualty insurance 2,312 2,572 7,214 7,540
Depreciation 6,286 5,341 17,658 15,406
Amortization of franchise fees and
unearned compensation 189 152 666 538
Compensation 344 645 1,185 1,686
Franchise taxes 45 45 135 135
General and administrative 500 449 1,544 1,826
Attempted merger expenses 1,617 1,617
Franchise and lease termination fees 1,284 1,523
Loss on sale of hotel properties 74 1,133 74 610
Amortization of loan costs 321 256 891 772
Interest expense, net 5,038 4,603 14,369 12,113
-------- -------- -------- --------
Total expenses 16,393 16,813 45,259 42,243
-------- -------- -------- --------
Income before minority interest 11,371 10,523 32,469 32,955
Minority interest (1,155) (1,071) (3,055) (3,186)
-------- -------- -------- --------
Net income 10,216 9,452 29,414 29,769
Preferred stock dividends (356) (356) (1,056) (1,056)
-------- -------- -------- --------
Net income applicable to common
shareholders $ 9,860 $ 9,096 $ 28,358 $ 28,713
======== ======== ======== ========
Basic earnings per share 0.39 0.37 1.13 1.16
Weighted average common shares outstanding 24,990 24,877 25,001 24,713
Diluted earnings per share 0.39 0.37 1.13 1.15
Weighted average shares outstanding 25,964 25,884 25,984 25,797
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
4
<PAGE> 5
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE
MONTHS MONTHS
SEPT. 30, SEPT. 30,
1999 1998
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 29,414 $ 29,769
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,215 16,716
Income allocated to minority interest 3,055 3,186
Loss on sale of hotel properties 74 610
Attempted merger expenses 1,746
Changes in assets and liabilities:
Accounts receivable-Lessees (5,432) (6,149)
Prepaids and other assets 2,819 (2,975)
Accounts payable and other liabilities 1,177 (252)
-------- --------
Net cash provided by operating activities 50,322 42,651
-------- --------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (28,285) (71,350)
Cash paid into reserves 6,113 (2,245)
Cash paid for franchise fees (40)
Escrow deposits and prepayments under
purchase agreements (450)
Proceeds from sale of hotel properties 808 19,627
-------- --------
Net cash used by investing activities (21,404) (54,418)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 11,040
Purchase of treasury stock (2,012)
Distributions to common and preferred shareholders (29,938) (28,890)
Distributions to limited partners (2,966) (2,890)
Borrowings on revolving credit agreement 10,000 52,500
Redemption of limited partnership units (22) (37)
Payments on long-term debt obligations (5,803) (8,699)
Collections on notes receivable 35
Loan fees paid (533) (370)
-------- --------
Net cash provided (used) by financing activities (29,227) 20,642
-------- --------
Net decrease in cash and cash equivalents (309) 8,875
Cash and cash equivalents at beginning of periods 2,014 4,131
-------- --------
Cash and cash equivalents at end of periods $ 1,705 $ 13,006
======== ========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
In 1998, the Company assumed $19,169 of debt in connection with the purchase
of a hotel.
In 1998, the Company applied a deposit of $20 towards the purchase of land.
In 1998, due to the resignation of an officer, the Company cancelled 45,000
shares of restricted common stock which had not vested.
In 1998, the Company sold a hotel for which the purchaser paid $2,940
in cash and signed a note to the Company for $1,500.
The accompanying notes are an integral
part of these consolidated financial statements.
5
<PAGE> 6
RFS HOTEL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE, UNIT AND PER SHARE DATA)
1. ORGANIZATION AND PRESENTATION. RFS Hotel Investors, Inc. and subsidiaries
(the "Company"), is a self-administered real estate investment trust ("REIT")
and at September 30, 1999, owned approximately 90.7% of RFS Partnership, L.P.
(The "Partnership"). The Company owns 100% of 58 hotels, 95% of two hotels and
75% of one hotel at September 30, 1999.
The Company acquires or develops and owns hotel properties which are
leased to third parties.
These unaudited consolidated financial statements include the accounts
of the Company and have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the financial statements and notes thereto of the Company included in the
Company's 1998 Annual Report on Form 10-K. The following notes to the
consolidated financial statements highlight significant changes to notes
included in the Form 10-K and present interim disclosures required by the SEC.
The accompanying consolidated financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
2. DECLARATION OF DIVIDEND. On October 28, 1999, the Company declared a $.385
dividend on each share of Common Stock outstanding to shareholders of record on
November 8, 1999 and a $.3625 dividend on each share of Series A Preferred
Shares outstanding. The dividend will be paid on November 15, 1999.
6
<PAGE> 7
3. CALCULATION OF EARNINGS PER SHARE. Calculations of basic and diluted earnings
per share are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
9/30/99 9/30/98 9/30/99 9/30/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic EPS:
Net income $ 10,216 $ 9,452 $ 29,414 $ 29,769
Less dividends declared on preferred stock (356) (356) (1,056) (1,056)
-------- -------- -------- --------
Net income applicable to common shareholders $ 9,860 $ 9,096 $ 28,358 $ 28,713
======== ======== ======== ========
Weighted average common shares outstanding 24,990 24,877 25,001 24,713
======== ======== ======== ========
Basic Earnings Per Share $ 0.39 $ 0.37 $ 1.13 $ 1.16
Diluted EPS:
Net income $ 10,216 $ 9,452 $ 29,414 $ 29,769
======== ======== ======== ========
Weighted average common shares outstanding 24,990 24,877 25,001 24,713
Preferred shares outstanding 974 974 974 974
Potential dilutive common shares 33 9 110
-------- -------- -------- --------
Weighted average shares and potential
dilutive common shares outstanding 25,964 25,884 25,984 25,797
======== ======== ======== ========
Diluted earnings per share $ 0.39 $ 0.37 $ 1.13 $ 1.15
======== ======== ======== ========
</TABLE>
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, including, without
limitation, statements containing the words "believes," "anticipates," "expects"
and words of similar import. Such forward-looking statements relate to future
events and the future financial performance of the Company, and involve known
and unknown risks, uncertainties and other factors including those described in
the Company's Form 8-K filed with the Securities and Exchange Commission on May
12, 1999 which may cause the actual results, performance or achievements of the
Company to be materially different from the results or achievements expressed or
implied by such forward-looking statements. The Company is not obligated to
update any such factors or to reflect the impact of actual future events or
developments on such forward-looking statements.
BACKGROUND
The following chart summarizes information regarding the 61 hotels (the
"Hotels") owned at September 30, 1999:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Full Service Hotels:
Holiday Inn ..........................5..............................953
Sheraton .............................4..............................757
Sheraton Four Points..................2..............................516
DoubleTree............................1..............................220
Ramada Plaza..........................1..............................234
Independent...........................2........................... 290
-- -----
Sub-total...................15............................2,970
-- -----
Extended Stay Hotels:
Residence Inn........................14............................1,851
Homewood Suites.......................1...............................83
TownePlace Suites.....................2............. ................190
Hawthorn Suites.......................1........................... 280
-- -----
Sub-total...................18............................2,404
-- -----
Limited Service Hotels:
Hampton Inn..........................19............................2,367
Courtyard by Marriott.................1..............................102
Comfort Inn...........................3..............................472
Holiday Inn Express...................5........................... 637
-- -----
Sub-total...................28............................3,578
-- -----
Total.......................61............................8,952
== ======
</TABLE>
8
<PAGE> 9
The following chart summarizes ownership history for the periods presented:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Hotels owned at beginning of years 60 60
Acquisitions and developed Hotels placed into service 1 5
Sales of Hotels (5)
---- ----
Hotels owned at end of periods 61 60
==== ====
</TABLE>
The Hotels are located in 24 states. Management believes it is prudent
to diversify geographically and among franchise brands.
The Partnership leases all except four of the Hotels to third parties
(collectively, the "Lessees") pursuant to leases (the "Percentage Leases") which
provide for annual rent equal to the greater of (i) fixed base rent, or (ii)
rent payments based on percentages of the Hotels' revenues. Base rent is payable
monthly. Percentage rent is payable quarterly. Four Hotels are not leased and
are operated by third parties pursuant to management agreements. One of the
Lessees has a right of first refusal, subject to certain exceptions, to lease
hotels acquired by the Partnership, through February 27, 2006.
RESULTS OF OPERATIONS
Comparison of the Three Months ended September 30, 1999 to 1998 and the Nine
Months Ended September 30, 1999 to 1998.
The increase in Lease revenue for the three and nine months ended
September 30, 1999 from the comparable period in 1998 is primarily attributable
to increases in revenue per available room ("REVPAR") at the hotels owned
throughout both periods offset by the sale of 4 hotels during the third quarter
of 1998. Additionally, the Company received $0.7 million as a result of
converting the Holiday Inn, Clayton, MO to a Sheraton.
9
<PAGE> 10
The following table shows statistical data regarding the Hotels on an
actual and a pro forma basis. The pro forma assumes 58 of the 61 hotels owned at
September 30, 1999 were owned by the Partnership throughout both periods; it
excludes two hotels which were opened since January 1998 and one hotel which was
undergoing a major renovation:
<TABLE>
<CAPTION>
for the Three Months Ended September 30,
-----------------------------------------------------------------
Actual Pro Forma
-------------------------------- --------------------------------
% Increase % Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
--------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 75.9% 78.3% (3.1) 76.9% 78.8% (2.5)
ADR $ 88.74 $ 85.81 3.4 $ 89.27 $ 86.40 3.3
RevPAR $ 67.31 $ 67.20 1.6 $ 68.62 $ 68.12 0.7
</TABLE>
<TABLE>
<CAPTION>
for the Nine Months Ended September 30,
-----------------------------------------------------------------
Actual Pro Forma
-------------------------------- --------------------------------
% Increase % Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
--------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 73.9% 75.8% (2.5) 74.7% 76.4% (2.3)
ADR $ 88.36 $ 83.34 6.0 $ 88.68 $ 85.21 4.1
RevPAR $ 65.26 $ 63.20 3.3 $ 66.20 $ 65.11 1.7
</TABLE>
Decreases in real estate taxes and property and casualty insurance in
1999 over 1998 are primarily due to the sale of 4 hotels during the third
quarter of 1998.
Increases in depreciation in 1999 over 1998 are due to increases in
depreciable assets due to 1999 and 1998 renovation costs at certain of the
Hotels.
Decreases in compensation are due to decreased bonus accruals for the
officers of the Company in 1999 over 1998.
Decreases in general and administrative expenses for the nine months
ended September 30, 1999 over 1998 are due to the 1998 write-off of costs
incurred in considering formation of a new REIT, Lodging Trust USA, which
transaction was not completed.
In September 1998, $1.6 million of expenses were incurred by the
Company in connection with its terminated merger with Equity Inns, Inc.
A franchise agreement termination fee of $1.3 million was paid in
August 1999 related to the conversion of the Holiday Inn, Clayton, MO to a
Sheraton Hotel.
Increases in amortization of loan costs in 1999 over 1998 are due to
costs associated with the long-term financing of 10 hotels in December 1998.
10
<PAGE> 11
Increases in interest expense in 1999 over 1998 are primarily due to
increased borrowings on the Line of Credit and the fixed rate financing of
approximately $95 million of debt which was used to repay variable rate
borrowings under the Line of Credit. The fixed rate debt carries a higher
interest rate than the variable rate Line of Credit.
FUNDS FROM OPERATIONS
The Company considers Funds From Operations ("FFO") to be a widely
accepted and appropriate measure of performance for an equity REIT and that it
provides a relevant basis for comparison among REITs. FFO, as defined by the
National Association of Real Estate Investment Trusts (NAREIT), means income
(loss) before minority interest (determined in accordance with GAAP), excluding
gains (losses) from debt restructuring and sales of property, plus real estate
depreciation and after adjustments for unconsolidated partnerships and joint
ventures. FFO is presented to assist investors in analyzing the performance of
the Company. The Company's method of calculating FFO may be different from the
methods used by other REITs and, accordingly, may not be comparable to such
other REITs. The computation of FFO below is consistent with the NAREIT White
Paper Definition of FFO with the exception that the 1999 franchise and lease
termination fees and the 1998 non-recurring write-off of merger costs have been
added back to calculate FFO. FFO (i) does not represent cash flows from
operations as defined by GAAP, (ii) is not indicative of cash available to fund
all cash flow needs and liquidity, including its ability to make distributions,
and (iii) should not be considered as an alternative to net income (as
determined in accordance with GAAP) for purposes of evaluating the Company's
operating performance.
The Company's FFO for the periods ended September 30, 1999 and 1998 was
computed as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
September 30 September 30
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Income before allocation
to minority interest $ 11,371 $ 10,523 $ 32,469 $ 32,955
Depreciation 6,286 5,341 17,658 15,406
Franchise and lease
termination fees 1,284 1,523
Write-off of merger costs 1,617 1,617
Loss on sale of hotel properties 74 1,133 74 610
Preferred stock dividends (356) (356) (1,056) (1,056)
-------- -------- -------- --------
FFO $ 18,659 $ 18,258 $ 50,668 $ 49,532
======== ======== ======== ========
Weighted average shares and
partnership units outstanding 27,557 27,445 27,577 27,281
FFO per share $ 0.68 $ 0.67 $ 1.84 $ 1.82
======== ======== ======== ========
</TABLE>
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company has a bank line of credit (the "Line of Credit") for $100
million. Borrowings under the Line of Credit bear interest at LIBOR. The
interest rate was approximately 7.4% at September 30, 1999. The Line of Credit
is collateralized by first priority mortgages on 16 hotels and agreements
restricting the transfer, pledge or other hypothecation of 5 hotels
(collectively, the "Collateral Pool"). The Line of Credit contains various
covenants including the maintenance of a minimum net worth, minimum debt
coverage and interest coverage ratios, total indebtedness and total liabilities
limitations and borrowing base to value limitations. The Company was in
compliance with these covenants at September 30, 1999. The Company had borrowed
$92.3 million on the Line of Credit at September 30, 1999. The Line of Credit
expires July 30, 2000.
The Company is in the process of extending the Line of Credit to July
2003 at the same pricing. There can be no assurances that the Line of Credit
will be extended or that the pricing will remain the same.
The Company has outstanding $75 million of commercial mortgage bonds,
(the "Bonds") series 1996-1 as follows:
<TABLE>
<CAPTION>
Initial Balance at
Principal September 30,
Class Amount 1999 Rate Stated Maturity
----- ------ ---- ---- ---------------
<S> <C> <C> <C> <C>
Class A $50 Million $ 41.4 6.83% August 20, 2008
Class B $25 Million $ 25.0 7.30% November 21, 2011
</TABLE>
Principal payments due on the Class A Bonds are payable based on a
141-month amortization schedule beginning in December 1996 and principal
payments on the Class B Bonds are payable based on a 39-month amortization
schedule beginning in September 2008. The total monthly principal and interest
payments approximate $0.7 million.
The Company also has outstanding $95.0 million of long-term financing
collateralized by 10 of the Hotels. Principal and interest payments, based on a
25-year amortization, of $0.7 million and escrow payments of $0.4 million are
due monthly through December 2008 at which time all outstanding principal and
interest is due. The debt bears interest at 7.8%.
The Company has outstanding industrial development bonds ("IDB's"), due
in 2001 and bearing interest at a variable rate which, at September 30, 1999 was
approximately 4% per year. Interest is payable quarterly and principal is
payable annually. The IDB's are collateralized by one hotel and the outstanding
balance on September 30, 1999 is $4.4 million.
The Company has non-recourse debt of $18.9 million at September 30,
1999 which is collateralized by one hotel. This debt bears interest at 8.22%.
Principal and interest payments, based
12
<PAGE> 13
on a 25-year amortization of $152 thousand and escrow payments of $50 thousand
are due monthly through November 2007, at which time all outstanding principal
and interest is due.
Aggregate principal payments for the fourth quarter of 1999 and the
next five years for the debt are as follows (in thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
4th Quarter 1999 $ 4,513
2000 98,481
2001 5,449
2002 5,857
2003 6,296
2004 6,438
Thereafter 149,962
--------
$276,996
========
</TABLE>
Certain significant credit and debt statistics at September 30, 1999
are as follows:
- - Interest coverage ratio of 4.4x
- - Total debt to trailing twelve month EBITDA is 3.3x
- - Weighted average maturity of fixed rate debt is 9.3 years
- - Fixed rate debt is 65% of total debt
- - Debt is equal to 39% of investment in hotel properties, at cost
The Company budgeted $16.6 million for 1999 capital improvements at 58
of the hotels owned at September 30, 1999. At September 30, 1999, the
Partnership had spent approximately $11.2 million of the budgeted amounts. The
Partnership will use cash generated from operations and borrowings under the
Line of Credit to fund the remaining $5.4 million of expenditures. The Company
intends to substantially complete these improvements by the end of the second
quarter of 2000.
The Partnership recently developed a 95-suite TownPlace Suites in Miami
West, FL. Total development costs were $6.5 million. This property opened in
October 1999. The Partnership is constructing a 40-room addition to the Beverly
Heritage Hotel in Milpitas, CA. Construction costs are estimated at $4.0
million. Completion of the addition is expected in the fourth quarter of 1999.
The Company in the future may seek to increase further the amount of
its credit facilities, negotiate additional credit facilities, or issue
corporate debt instruments. Although the Company has no charter restrictions on
the amount of indebtedness the Company may incur, the Board of Directors of the
Company has adopted a 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 as defined.
13
<PAGE> 14
The Company intends to fund cash distributions to shareholders
principally out of cash generated from operations. The Company may incur, or
cause the Partnership to incur, indebtedness to meet distribution requirements
imposed on a REIT under the Internal Revenue Code (including the requirement
that a REIT distribute to its shareholders annually at least 95% of its taxable
income) to the extent that working capital and cash flow from the Company's
investments are insufficient to make such distributions.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy during the second and third quarters. This
seasonality can be expected to cause fluctuations in the Partnership's quarterly
lease revenue to the extent that it receives Percentage Rent.
YEAR 2000 MANAGEMENT
Many existing computer programs have been designed to use only two
digits to identify a year in the date field, without considering the impact of
the upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000. Beginning in the
fourth quarter of 1997, the Company began evaluating the impact of the Year 2000
(Y2K) problem on its systems. The only Company owned software package that was
not Y2K compliant was the accounting system of the Company. The Company
purchased a new accounting system in January of 1998. The Company has been
converting to the new format and plans to go live in the fourth quarter of 1999.
All computers passed the Y2K check, as well as the phone system and other
hardware.
In late 1997, the Company also began inquiring of its Lessees
regarding the operation of the Lessee's systems at properties owned by the
Company. The Company has been advised by its Lessees and management companies
that the systems at the properties (reservation, accounting, etc.) are being
upgraded where necessary by the appropriate management company. Since the
Company depends on its Lessees and management companies for revenue information
at the hotels in order to calculate percentage rent due to the Company under the
leases, any Y2K problem which affects revenue accounting by the Lessees or
management companies at the Company's hotels could have a material adverse
impact on the Company's business. Although we do not believe the Y2K issue will
materially affect our operations, we cannot assure you that our Y2K remediations
will be fully in compliance, nor can we assure you that any third party, on
whose data or services we rely, will be fully in compliance. Testing will
continue throughout the remainder of 1999 on both the new and old software to
verify its operation. The Company is in the process of obtaining a statement
from its vendors about their Y2K statues. The Company estimates its total cost
related to the Y2K issue to be not more than $600,000.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Pursuant to the general instructions to Item 305 of SEC Regulation S-K,
the quantitative and qualitative disclosures called for by this Item 3 and by
Rule 305 of Regulation S-K are inapplicable to the Company at this time.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K - None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
RFS HOTEL INVESTORS, INC.
November 15, 1999 /s/ Michael J. Pascal
- --------------------- ------------------------------------------------
Date Michael J. Pascal, Secretary and Treasurer
(Principal Financial and Accounting Officer)
November 15, 1999 /s/ Robert M. Solmson
- --------------------- ------------------------------------------------
Date Robert M. Solmson, Chairman and
Chief Executive Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RFS HOTEL INVESTORS, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,705
<SECURITIES> 0
<RECEIVABLES> 16,088
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 718,488
<DEPRECIATION> 75,656
<TOTAL-ASSETS> 689,483
<CURRENT-LIABILITIES> 9,458
<BONDS> 276,996
0
18,500
<COMMON> 349,511
<OTHER-SE> (1,023)
<TOTAL-LIABILITY-AND-EQUITY> 689,483
<SALES> 0
<TOTAL-REVENUES> 77,728
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,890
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,369
<INCOME-PRETAX> 32,469
<INCOME-TAX> 0
<INCOME-CONTINUING> 32,469
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,414
<EPS-BASIC> 1.13
<EPS-DILUTED> 1.13
</TABLE>
