-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DOhLx6hDhjlQVo2RPUpX1ZO4DYPnj9EbErFc1igFxwG99TF9XgPUbN1FltFin3yp FxrPKhVrmcbiDflV424fzg== 0000950144-99-013142.txt : 19991117 0000950144-99-013142.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950144-99-013142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RFS HOTEL INVESTORS INC CENTRAL INDEX KEY: 0000906408 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 621534743 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12011 FILM NUMBER: 99752930 BUSINESS ADDRESS: STREET 1: 850 RIDGE LAKE BLVD STE 220 CITY: MEMPHIS STATE: TN ZIP: 38120 BUSINESS PHONE: 9017677005 MAIL ADDRESS: STREET 1: 850 RIDGE LAKE BLVD STE 220 CITY: MEMPHIS STATE: TN ZIP: 38120 10-Q 1 RFS HOTEL INVESTORS FORM 10-Q 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. 2 RFS HOTEL INVESTORS, INC. INDEX
Form 10-Q Report Page ---- 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
2 3 RFS HOTEL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 1999 1998 --------- --------- (unaudited) 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 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 RFS HOTEL INVESTORS, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
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) 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
The accompanying notes are an integral part of these consolidated financial statements. 4 5 RFS HOTEL INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE NINE FOR THE NINE MONTHS MONTHS SEPT. 30, SEPT. 30, 1999 1998 -------- -------- (unaudited) (unaudited) 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 ======== ========
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 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 7 3. CALCULATION OF EARNINGS PER SHARE. Calculations of basic and diluted earnings per share are as follows:
For the Three Months For the Nine Months Ended Ended 9/30/99 9/30/98 9/30/99 9/30/98 -------- -------- -------- -------- 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 ======== ======== ======== ========
7 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:
Number of Number of Franchise Affiliation Hotel Properties Rooms/Suites - --------------------- ---------------- ------------ 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 == ======
8 9 The following chart summarizes ownership history for the periods presented:
1999 1998 ---- ---- 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 ==== ====
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 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:
for the Three Months Ended September 30, ----------------------------------------------------------------- Actual Pro Forma -------------------------------- -------------------------------- % Increase % Increase 1999 1998 (Decrease) 1999 1998 (Decrease) --------- --------- ---------- --------- --------- ---------- 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
for the Nine Months Ended September 30, ----------------------------------------------------------------- Actual Pro Forma -------------------------------- -------------------------------- % Increase % Increase 1999 1998 (Decrease) 1999 1998 (Decrease) --------- --------- ---------- --------- --------- ---------- 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
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 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:
For the Three Months For the Nine Months Ended Ended September 30 September 30 ---------------------- ---------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (in thousands, except per share amounts) 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 ======== ======== ======== ========
11 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:
Initial Balance at Principal September 30, Class Amount 1999 Rate Stated Maturity ----- ------ ---- ---- --------------- Class A $50 Million $ 41.4 6.83% August 20, 2008 Class B $25 Million $ 25.0 7.30% November 21, 2011
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 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):
Amount ------ 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 ========
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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1,705 0 16,088 0 0 0 718,488 75,656 689,483 9,458 276,996 0 18,500 349,511 (1,023) 689,483 0 77,728 0 0 30,890 0 14,369 32,469 0 32,469 0 0 0 29,414 1.13 1.13
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