**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

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** **

**FORM 10-Q**

 

| **(MARK ONE)**                                                                                                                                                                                        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                            |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                  |   |   |
| **For the quarterly period ended June 30,  2003**                                                                                                                                                     |
|                                                                                                                                                                                                  |
| **OR**                                                                                                                                                                                                |
|                                                                                                                                                                                                  |
| o                                                                                                                                                                                                     |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15() OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                  |   |   |
| **for the transition period  from               to               ** |

 

| Commission  File Number |   | Exact name of registrant as specified in its charter, state of  incorporation, address of principal executive offices, and telephone number |   | I.R.S. Employer  Identification Number |
|-------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|
| **333-84334**           |   | **RFS Partnership, L.P.  A Tennessee Partnership  450 South Orange Avenue  Orlando, Florida 32801  Telephone (800) 650-1000**               |   | **62-1541639**                         |

 

Indicate by check mark whether the Registrant (i) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the Registrant was required to file such reports), and(ii) has been subject to such filing requirements for the past90 days.  ý Yes  o No

 

Indicate by check mark whether RFS Partnership, L.P. is an acceleratedfiler (as defined in Exchange Act Rule 12b-2).  o Yes ý No

 

                On August 14, 2003, RFS Partnership, L.P. (the “Partnership”), filedwith the Securities and Exchanged Commission (the “Commission”) a Certificationand Termination of Registration on Form 15 (the “Form 15”), terminating thePartnership’s obligation to file reports with the Commission under theSecurities Exchange Act of 1934, as amended (the “Act”).  Although the filing of the Form 15terminates the Partnership’s obligation to file reports under the Act, thePartnership is filing this Quarterly Report on Form 10Q, in accordance with itsobligation to do so set forth in that certain Indenture, by and among thePartnership, RFS 2002 Financing, Inc., CNL Rose Acquisition Corp., RFS LeasingVII, Inc. and U.S. Bank, N.A., dated as of February 26, 2002.

 

 

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**INDEX**

 
|                              | **Page  #**                                                                                 |
|-----------------------------------|---------------------------------------------------------------------------------------------|
|                              |                                                                                        |
| **PART I. FINANCIAL INFORMATION** |                                                                                        |
|                              |                                                                                        |
| Item 1.                           | Financial Statements                                                                        |   |
|                              |                                                                                        |   |
|                              | Consolidated Balance Sheets                                                                 | **3** |
|                              |                                                                                        |   |
|                              | Consolidated Statements of Operations                                                       | **4** |
|                              |                                                                                        |   |
|                              | Consolidated Statements of Cash Flows                                                       | **5** |
|                              |                                                                                        |   |
|                              | Notes to Consolidated Financial Statements                                                  | **6** |
|                              |                                                                                        |   |
| Item 2.                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | **16** |
|                              |                                                                                        |   |
| Item 3.                           | Quantitative  and Qualitative Disclosure About Market Risk                                  | **22** |
|                              |                                                                                        |   |
| Item 4.                           | Internal  Controls and Procedures                                                           | **24** |
|                              |                                                                                        |   |
| **PART II. OTHER INFORMATION**    |                                                                                        |
|                              |                                                                                        |
| Item 4.                           | Submission  of Matters to a Vote of Security Holders                                        | **25** |
|                              |                                                                                        |   |
| Item 5.                           | Other  Information                                                                          | **25** |
|                              |                                                                                        |   |
| Item 6.                           | Exhibits  and Reports on Form 8-K                                                           | **25** |

 

2

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**RFSPARTNERSHIP, L.P.**

**CONSOLIDATED BALANCE SHEETS**

**(inthousands)**

 
|                                                                                                                                        |   | **June  30,  2003** |    | **December  31,********2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------------|--------|
|                                                                                                                                        |   |                |    |                          |   |
| **ASSETS**                                                                                                                                  |   |                |    |                          |   |
| Investment in hotel properties, net                                                                                                         |   | $                   | 587,660 |                          | $      | 593,289 |   |
| Cash and cash equivalents                                                                                                                   |   | 5,894               |    | 1,938                         |   |
| Restricted cash                                                                                                                             |   | 5,474               |    | 4,383                         |   |
| Accounts receivable                                                                                                                         |   | 5,058               |    | 4,698                         |   |
| Deferred expenses, net                                                                                                                      |   | 7,779               |    | 8,805                         |   |
| Other assets                                                                                                                                |   | 4,105               |    | 3,712                         |   |
| Deferred income taxes                                                                                                                       |   | 27,376              |    | 25,830                        |   |
| Total assets                                                                                                                                |   | $                   | 643,346 |                          | $      | 642,655 |   |
|                                                                                                                                        |   |                |    |                          |   |
| **LIABILITIES AND  PARTNERS’ CAPITAL**                                                                                                 |   |                |    |                          |   |
| Accounts payable and accrued expenses                                                                                                       |   | $                   | 25,454  |                          | $      | 24,202 |   |
| Borrowings on Line of Credit                                                                                                                |   | 8,500               |    | 6,950                         |   |
| Mortgage notes payable                                                                                                                      |   | 157,941             |    | 159,279                       |   |
| Senior notes payable                                                                                                                        |   | 121,220             |    | 125,000                       |   |
| Total liabilities                                                                                                                           |   | 313,115             |    | 315,431                       |   |
|                                                                                                                                        |   |                |    |                          |   |
| Commitments and contingencies                                                                                                               |   |                |    |                          |   |
| Redeemable limited partnership units at  redemption value, 2,422 units at June 30, 2003 and 2,459 units at December  31, 2002, respectively |   | 29,837              |    | 26,702                        |   |
| Partners’ capital:                                                                                                                     |   |                |    |                          |   |
| General partnership units, 29,520 units and  28,467 units at June 30, 2003 and December 31, 2002, respectively                              |   | 300,394             |    | 300,522                       |   |
| Total partners’ capital                                                                                                                |   | 300,394             |    | 300,522                       |   |
| Total liabilities and partners’ capital                                                                                                |   | $                   | 643,346 |                          | $      | 642,655 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

3

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**RFSPARTNERSHIP, L.P.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

##### **FOR THE THREE AND SIX MONTHS ENDEDJUNE 30, 2003 AND 2002**

**(inthousands, except per unit data)**

** **
|                                                          |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended****June 30,** |   |
|---------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                                                          |   | **2003**                          |   | **2002**                          |   | **2003** |   | **2002** |   |
| Revenue:                                                      |   |                              |   |                              |   |   |   |   |   |
| Rooms                                                         |   | $                                 | 41,683 |                              | $      | 45,866 |   | $ | 80,046 |   | $ | 86,275 |   |
| Food and beverage                                             |   | 4,464                             |   | 4,674                             |   | 8,635 |   | 8,877 |   |
| Other operating departments                                   |   | 1,399                             |   | 1,714                             |   | 2,808 |   | 3,307 |   |
| Lease revenue                                                 |   | 1,227                             |   | 1,234                             |   | 2,842 |   | 2,868 |   |
| Deferred revenue                                              |   | (474                              | )      | (491                              | )      | (1,461 | ) | (1,503 | ) |
| Other                                                         |   | 169                               |   | 107                               |   | 208 |   | 261 |   |
| Total hotel revenue                                           |   | 48,468                            |   | 53,104                            |   | 93,078 |   | 100,085 |   |
| Hotel operating expenses:                                     |   |                              |   |                              |   |   |   |   |   |
| Rooms                                                         |   | 8,577                             |   | 9,010                             |   | 16,829 |   | 17,347 |   |
| Food and beverage                                             |   | 3,246                             |   | 3,346                             |   | 6,247 |   | 6,507 |   |
| Other operating departments                                   |   | 399                               |   | 458                               |   | 825 |   | 924 |   |
| Undistributed operating expenses:                             |   |                              |   |                              |   |   |   |   |   |
| Property operating costs                                      |   | 5,748                             |   | 5,361                             |   | 11,468 |   | 10,621 |   |
| Property taxes, insurance and other                           |   | 3,185                             |   | 3,153                             |   | 6,113 |   | 6,488 |   |
| Franchise costs                                               |   | 4,030                             |   | 4,339                             |   | 7,751 |   | 8,152 |   |
| Maintenance and repair                                        |   | 2,840                             |   | 2,463                             |   | 5,360 |   | 4,744 |   |
| Management fees                                               |   | 1,309                             |   | 1,256                             |   | 2,653 |   | 2,507 |   |
| Depreciation                                                  |   | 7,517                             |   | 7,539                             |   | 15,038 |   | 14,785 |   |
| Amortization of franchise fees and unearned  compensation     |   | 295                               |   | 319                               |   | 581 |   | 638 |   |
| General and administrative                                    |   | 5,348                             |   | 4,995                             |   | 10,001 |   | 9,734 |   |
| Total operating expenses                                      |   | 42,494                            |   | 42,239                            |   | 82,866 |   | 82,447 |   |
| Operating income                                              |   | 5,974                             |   | 10,865                            |   | 10,212 |   | 17,638 |   |
| Debt extinguishments and swap termination  costs              |   |                              |   |                              |   |   |   | 10,122 |   |
| Amortization of loan origination costs                        |   | 421                               |   | 420                               |   | 784 |   | 777 |   |
| Interest expense                                              |   | 6,485                             |   | 6,511                             |   | 13,143 |   | 12,555 |   |
| Income (loss) from continuing operations  before income taxes |   | (932                              | )      | 3,934                             |   | (3,715 | ) | (5,816 | ) |
| Provision for (benefit from) income taxes                     |   | (549                              | )      | 130                               |   | (1,546 | ) | (380 | ) |
| Income (loss) from continuing operations                      |   | (383                              | )      | 3,804                             |   | (2,169 | ) | (5,436 | ) |
| Income from discontinued operations                           |   |                              |   | 94                                |   |   |   | 19 |   |
| Gain (loss) on sale of assets                                 |   |                              |   | (10                               | )      | (9 | ) | 962 |   |
| Net income (loss)                                             |   | (383                              | )      | 3,888                             |   | (2,178 | ) | (4,455 | ) |
| Loss on redemption of Preferred Units                         |   |                              |   | (1,890                            | )      |   |   | (1,890 | ) |
| Preferred unit dividends                                      |   |                              |   | (781                              | )      |   |   | (1,562 | ) |
| **Net income (loss)  applicable to common unitholders**       |   | $                                 | (383   | )                                 | $      | 1,217 |   | $ | (2,178 | ) | $ | (7,907 | ) |
|                                                          |   |                              |   |                              |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per unit data:                                |   |                              |   |                              |   |   |   |   |   |
| Basic earnings (loss) per unit from  continuing operations    |   | $                                 | (0.01  | )                                 | $      | 0.04 |   | $ | (0.07 | ) | $ | (0.27 | ) |
| Discontinued operations                                       |   | 0.00                              |   | 0.00                              |   | 0.00 |   | 0.00 |   |
| Basic earnings (loss) per unit                                |   | $                                 | (0.01  | )                                 | $      | 0.04 |   | $ | (0.07 | ) | $ | (0.27 | ) |
|                                                          |   |                              |   |                              |   |   |   |   |   |
| Diluted earnings (loss) per unit from  continuing operations  |   | $                                 | (0.01  | )                                 | $      | 0.04 |   | $ | (0.07 | ) | $ | (0.27 | ) |
| Discontinued operations                                       |   | 0.00                              |   | 0.00                              |   | 0.00 |   | 0.00 |   |
| Diluted earnings (loss) per unit                              |   | $                                 | (0.01  | )                                 | $      | 0.04 |   | $ | (0.07 | ) | $ | (0.27 | ) |
| Weighted average common units  outstanding–basic         |   | 31,524                            |   | 29,505                            |   | 31,233 |   | 28,866 |   |
| Weighted average common units  outstanding–diluted       |   | 31,524                            |   | 29,676                            |   | 31,233 |   | 28,866 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**RFSPARTNERSHIP, L.P.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FORTHE SIX MONTHS ENDED JUNE 30, 2003 AND 2002**

**(inthousands)**

 
|                                                                             |   | **2003** |   | **2002** |   |
|----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                             |   |     |   |     |   |
| Cash flows from operating activities:                                            |   |     |   |     |   |
| Net loss                                                                         |   | $        | (2,178 | )        | $      | (4,455 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |     |   |     |   |
| Depreciation and amortization                                                    |   | 16,403   |   | 16,348   |   |
| Write-off of deferred expenses                                                   |   | 122      |   | 1,361    |   |
| Loss (gain) on sale of assets                                                    |   | 9        |   | (962     | )      |
| Changes in assets and liabilities:                                               |   |     |   |     |   |
| Accounts receivable                                                              |   | (360     | )      | 428      |   |
| Other assets                                                                     |   | (429     | )      | (396     | )      |
| Deferred income taxes                                                            |   | (1,546   | )      | (380     | )      |
| Accounts payable and accrued expenses                                            |   | 1,252    |   | 7,281    |   |
| Net cash provided by operating activities                                        |   | 13,273   |   | 19,225   |   |
| Cash flows from investing activities:                                            |   |     |   |     |   |
| Investment in hotel properties                                                   |   | (9,388   | )      | (4,646   | )      |
| Restricted cash                                                                  |   | (1,091   | )      | 1,442    |   |
| Cash returned for franchise fees                                                 |   | 107      |   |     |   |
| Proceeds from sale of assets                                                     |   | 6        |   | 1,111    |   |
| Net cash used by investing activities                                            |   | (10,366  | )      | (2,093   | )      |
| Cash flows from financing activities:                                            |   |     |   |     |   |
| Net proceeds (payments) on line of credit                                        |   | 1,550    |   | (71,938  | )      |
| Proceeds from issuance of (payments to  retire) Senior Notes                     |   | (3,780   | )      | 125,000  |   |
| Payments on mortgage notes payable                                               |   | (1,338   | )      | (59,417  | )      |
| Redemption of preferred units                                                    |   |     |   | (25,850  | )      |
| Distributions to unitholders                                                     |   | (7,735   | )      | (15,838  | )      |
| Issuance of common and preferred units                                           |   | 12,408   |   | 39,653   |   |
| Loan fees paid                                                                   |   | (56      | )      | (4,004   | )      |
| Net cash provided (used) by financing  activities                                |   | 1,049    |   | (12,394  | )      |
| Net increase in cash and cash equivalents                                        |   | 3,956    |   | 4,738    |   |
| Cash and cash equivalents at beginning of  period                                |   | 1,938    |   | 5,735    |   |
| Cash and cash equivalents at end of period                                       |   | $        | 5,894  |     | $      | 10,473 |   |

 

Supplemental disclosure of non-cash activities:

 

In 2003, the Partnership:

i.                                          Allocated$3.5 million from Partners’ Capital to redeemable limited partnership units.

ii.                                       Issued37 thousand general partnership units with a value of $0.4 million in exchangefor 37 thousand redeemable limited partnership units.

 

In 2002, the Partnership:

i.                                          Allocated$5.3 million from Partners’ Capital to redeemable limited partnership units.

ii.                                       Recordedan expense of $1.9 million related to the issuance costs associated with theredemption of the Series B Preferred Units on June 30, 2002 that was previouslyincluded in Partners’ Capital.

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**RFSPARTNERSHIP, L.P.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.***Organization.***  RFS Hotel Investors, Inc. (“RFS”), wasa publicly held hotel real estate investment trust which, at June 30, 2003,owned interests in 57 hotels with 8,271 rooms located in 24 states(collectively the “Hotels”) through its approximate 92% equity interest in RFSPartnership, L.P. (the “Operating Partnership”). At June 30, 2003, third partylimited partners owned the remaining 8%. RFS was the general partner in theOperating Partnership.  On July 10,2003, RFS and the Operating Partnership were acquired by subsidiaries of CNLHospitality Properties, Inc. (“CNL”) for approximately $383 million in cash($12.35 per share and per unit).  Uponconsummation of this transaction, RFS was merged with and into a subsidiary ofCNL and RFS ceased to exist as a separate corporate entity.  Further, upon consummation of thistransaction, a subsidiary of CNL was merged with and into the OperatingPartnership and the Operating Partnership continues to exist as a separateentity and an indirect wholly owned subsidiary of CNL.  Prior to the closing of this transaction thecommon stock of RFS was publicly traded on the New York Stock Exchange underthe symbol “RFS.”  The common stock ofRFS has since been removed from listing on the New York Stock Exchange.  RFS filed a Form 15 on July 14, 2003, terminatingits filing requirements with the Securities and Exchange Commission (“SEC”).  *See Note14, Subsequent Events.*

 

These unaudited consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialstatements pursuant to the rules and regulations of the SEC. Accordingly, theydo not include all the information and footnotes required by generally acceptedaccounting principles for audited financial statements and should be read inconjunction with the financial statements and notes thereto of the OperatingPartnership included in the combined RFS and Operating Partnership’s AnnualReport on Form 10-K for the year ended December 31, 2002. Thefollowing notes to the consolidated financial statements highlight significantchanges to notes included in the Form 10-K and present interim disclosuresrequired by the SEC.

 

The accompanying consolidated financial statements reflect, in theopinion of management, all adjustments necessary for a fair presentation of theinterim financial statements. All such adjustments are of a normal andrecurring nature. In preparing financial statements that conform with generallyaccepted accounting principles, management must make estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the date of the financial statements andamounts of revenues and expenses reflected during the reporting period. Theresults of operations for the three and six months ended June 30, 2003 and 2002are not necessarily indicative of the results of operations to be expected forthe full year or future periods.

 

2.  ***Basic and Diluted Earnings Per Unit.***Basic earnings (loss) per unit from continuing operations iscomputed by dividing income (loss) from continuing operations, less the loss onsale of Series B Preferred Units, less preferred unit dividends, plus (minus)the gain (loss) on sale of assets by the weighted average number of unitsoutstanding during the period. Diluted earnings (loss) per unit from continuingoperations is computed by dividing income (loss) from continuing operations,less the loss on sale of Series B Preferred Units, less preferred unitdividends, plus (minus) the gain (loss) on sale of assets by the weightedaverage number of units and equivalents outstanding.

 

Basic earnings per unit is computed by dividing net income (loss)applicable to common unitholders by the weighted average number of unitsoutstanding during the period. Diluted earnings per unit is computed bydividing net income (loss) applicable to unitholders by the weighted averagenumber of units outstanding. Unit equivalents represent units issuable uponexercise of options.

 

For the three months ended June 30, 2002, there were 171 thousand unitequivalents pursuant upon the exercise of options and for the three and sixmonths ended June 30, 2003, and for the six months ended June 30, 2002,one thousand, 15 thousand and 147 thousand unit equivalents pursuant uponthe exercise of options would be antidilutive, and accordingly, for thoseperiods, are not assumed to be converted in the computation of diluted earningsper unit. In addition, the Series B Preferred Units are non-convertibleand accordingly, are not included in the computation of diluted earning perunit.

 

3.** *Declaration of Dividends*.**  On March 3, 2003, the Operating Partnershipdeclared a $0.25 dividend on each general partnership and limited partnershipunit outstanding to unitholders of record on March 17, 2003. A portion ($23thousand) of the dividend payable to the limited partnership unitholders waspaid on March 31, 2003 and the remainder ($582 thousand) was paid on April 1,2003.

 

6

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4.** *Revenue Recognition*.**  In accordance with Staff Accounting Bulletin(SAB) 101, lease revenue is recognized as income after certain specific annualhurdles have been achieved by the lessee in accordance with provisions of thepercentage lease agreements. SAB 101 effectively defers the recognition ofrevenue from its percentage leases for the first and second quarters to thethird and fourth quarters. At June 30, 2003, deferred revenue of$1.5 million is included in accounts payable and accrued expenses. Thelessees are in compliance with their rental obligations under the PercentageLeases. For the three and six months ended June 30, 2003 and 2002, five hotelswere leased to third-party lessees.

 

5.  ***Debt*.**  During the first quarter of 2003, theOperating Partnership borrowed approximately $3.8 million under the Line ofCredit to retire $3.8 million of Senior Notes. The Senior Notes were purchasedin open market transactions at then prevailing market prices.  As a result of the prepayment of the $3.8million Senior Notes, the Operating Partnership expensed $122 thousand inunamortized debt issuance costs and $29 thousand of costs related to acquiringthe Senior Notes.

 

At June 30, 2003, the Operating Partnership was in violation of certainfinancial covenants under the Line of Credit. The covenant violations have no impact on the Operating Partnership as aresult of the covenant violations, because the Line of Credit was terminated inconnection with the acquisition of RFS by CNL on July 10, 2003.  Deferred issuance costs of approximately$1.8 million will be written off as a part of the termination.

 

6.** Issuance of Units*.***  On May 9, 2003, RFS sold 1.0 million sharesof common stock for $12.35 per share. Proceeds of approximately $12.3 million were contributed to theOperating Partnership in exchange for the issuance of 1.0 million OperatingPartnership units.  The OperatingPartnership used the proceeds to reduce the outstanding balance on the line ofcredit.

 

7.**  *Gain (Loss) on Sale of Assets.***  The loss of $9 thousand relates to lossesincurred on the sale of several hotel vans. In the first quarter 2002, the Operating Partnership recognized a gainof approximately $1.0 million on the sale of an unconsolidated joint venturefor approximately $1.1 million.

 

8.** *Income Taxes*.**  Income taxes are accounted for in accordancewith the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 109, “*Accounting for Income Taxes.*”Under SFAS No. 109, income taxes are recognized using the asset andliability method under which deferred tax assets and liabilities are recognizedfor the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases.

 

The components of income tax benefit for the three and six months endedJune 30, 2003 are as follows:

 
|                      |   | **Three  Months  Ended** |   | **Six  Months  Ended** |   |
|---------------------------|--------|--------------------------|--------|------------------------|--------|
|                      |   |                     |   |                   |   |
| Deferred:                 |   |                     |   |                   |   |
| Federal                   |   | $                        | (549   | )                      | $      | (1,546 | ) |
| Benefit from income taxes |   | $                        | (549   | )                      | $      | (1,546 | ) |

 

The deferred benefit from income taxes and related deferred tax assetwas calculated using an effective tax rate of 38% applied to the income or lossof the TRS Lessees, wholly owned subsidiary companies which lease 52 of the 57hotels owned by the Operating Partnership, adjusted for temporary differencesrelated mainly to the Hilton lease termination transaction and operatinglosses.

 

The deferred tax asset is provided for the temporary differencesbetween the financial reporting basis and the tax basis of the OperatingPartnership’s assets and liabilities, resulting primarily from the Hilton leasetermination, and for operating loss carryforwards.  The Operating Partnership believes that the TRS Lessees willgenerate sufficient future taxable income to realize in full the deferred taxasset. Accordingly, no valuation allowance has been recorded at June 30, 2003.

 

9.  ***Comprehensive Income.***  SFAS No. 130, “Reporting ComprehensiveIncome,” requires the disclosure of the components included in comprehensiveincome (loss). For the three and six months ended June 30, 2003, there were noitems of other comprehensive income.

 

10.** *Segment Information.***  SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” requires the disclosure ofselected information about operating segments. Based on the guidance providedin the standard, the Operating Partnership has determined that its business isconducted in one operating segment.

 

7

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11.  ***Discontinued Operations.**** *InNovember 2002, the Operating Partnership sold its Comfort Inn in Fort Mill,South Carolina for $3.25 million in cash, resulting in a loss on sale ofapproximately $3.8 million. The results of operations for this hotel forthe three and six months ended June 30, 2002 are included on the consolidatedstatement of operations under the heading, “income from discontinuedoperations.” There were no results of operations for this hotel in 2003.  The results of operations for this hotelhave been reclassified as Income from Discontinued Operations on theConsolidated Statements of Operations for the three and six months ended June30, 2002.  The components of income fromdiscontinued operations for the three and six months ended June 30, 2002 areshown below:

 
|                                |   | **Three  Months  Ended** |   | **Six Months    Ended** |   |
|-------------------------------------|--------|--------------------------|--------|-------------------------|--------|
|                                |   |                     |   |                    |   |
| Hotel revenue                       |   | $                        | 524    |                    | $      | 820 |   |
| Hotel operating costs               |   | (335                     | )      | (608                    | )      |
| Property taxes and insurance        |   | (22                      | )      | (45                     | )      |
| Depreciation                        |   | (73                      | )      | (148                    | )      |
| Income from discontinued operations |   | $                        | 94     |                    | $      | 19 |   |

 

12.** *Stock Based Compensation.***  The FASB issued SFAS No. 148“Accounting for Stock-Based Compensation—Transition and Disclosure.” SFASNo. 148 amends SFAS No. 123, “Accounting for Stock-BasedCompensation,” to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation. The Operating Partnership applies the fair value based method ofaccounting for stock-based employee compensation prospectively to all awardsgranted, modified, or settled beginning January 1, 2003.

 

There were no grants of options to purchase shares of RFS common stockmade during the three and six months ended June 30, 2003.  In May 2002, 40,000 options to purchaseshares of RFS common stock were granted to each of the seven independentdirectors.  Had compensation cost forthe Operating Partnership’s stock-based compensation plans been determinedconsistent with SFAS 123, the Operating Partnership’s net income (loss)and net income (loss) per unit would have been reduced to the pro forma amountsindicated below for the three and six months ended June 30, 2003 and 2002,respectively:

 
|                                          |   | **Three  Months Ended  June 30,** |   | **Six  Months Ended  June 30,** |   |
|-----------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                          |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                          |   |                              |   |                            |   |   |   |   |   |
| Net income (loss) applicable to  unitholders: |   |                              |   |                            |   |   |   |   |   |
| As reported                                   |   | $                                 | (383   | )                               | $      | 1,217 |   | $ | (2,178 | ) | $ | (7,907 | ) |
| Pro forma                                     |   | $                                 | (483   | )                               | $      | 1,098 |   | $ | (2,378 | ) | $ | (7,670 | ) |
| Basic and diluted earnings (loss) per unit:   |   |                              |   |                            |   |   |   |   |   |
| As reported                                   |   | $                                 | (0.01  | )                               | $      | 0.04 |   | $ | (0.07 | ) | $ | (0.27 | ) |
| Pro forma                                     |   | $                                 | (0.02  | )                               | $      | 0.04 |   | $ | (0.08 | ) | $ | (0.27 | ) |

 

***13.  Consolidating Financial Information of RFSPartnership, L.P.*** RFS Leasing II, Inc., RFS Leasing VII, Inc., RFS FinancingPartnership, L.P., RFS Financing Corporation and RFS Financing 2002, LLC,wholly-owned subsidiaries of the Operating Partnership (“Guarantor Subsidiaries”),have guaranteed on a full and unconditional basis, the payment of amounts dueunder the Operating Partnership’s Senior Notes. RFS Leasing II and RFS LeasingVII had no substantial operations prior to January 1, 2002. RFS Leasing IIleases 15 hotels directly from RFS Financing Partnership, L.P., which owns thefifteen hotels. RFS Leasing VII leases 21 hotels from the OperatingPartnership. As of and for the three and six months ended June 30, 2003 and2002, RFS Leasing II and RFS Leasing VII did not have a material amount ofassets, and incurred both operating and net losses. RFS Financing 2002 wasformed to facilitate the issuance of the Senior Notes. RFS FinancingCorporation was formed to facilitate the issuance of the 1996 commercialmortgage bonds, which were redeemed with a portion of the proceeds from thesale of the Senior Notes. RFS Financing Corporation and RFS Financing 2002 haveno operations or assets and no sources of revenue or cash flow. Consequently,in the event that is becomes necessary for RFS Leasing II, RFS Leasing VII, RFSFinancing 2002 or RFS Financing Corporation to provide credit support for theSenior Notes, RFS Leasing II, RFS Leasing VII, RFS Financing 2002 and RFSFinancing Corporation likely will not have sufficient cash flow to make anyrequired payments under the Senior Notes.

 

The following tables present consolidating information for thePartnership, the Guarantor Subsidiaries and the non-guarantor subsidiaries.

 

8

----

 

**Consolidating Balance Sheet**

**June30, 2003**

**(inthousands)**

** **
|                                         |   | **RFS  Partnership,  L.P.** |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Eliminations** |     | **Total  Consolidated** |   |
|----------------------------------------------|--------|-----------------------------|---------|-----------------------------|--------|---------------------------------|--------|------------------|----------|-------------------------|--------|
|                                         |   |                        |    |                        |   |                            |   |             |     |                    |   |
| **ASSETS**                                   |   |                        |    |                        |   |                            |   |             |     |                    |   |
| Investment in hotel properties, net          |   | $                           | 212,909 |                        | $      | 132,070                         |   | $                | 242,681  |                    |   |   | $ | 587,660 |   |
| Investment in consolidated entities          |   | 245,280                     |    |                        |   | 16,871                          |   | $                | (262,151 | )                       | — |   |
| Cash and cash equivalents                    |   | 260                         |    | 3,566                       |   | 2,068                           |   |             |     | 5,894                   |   |
| Restricted cash                              |   |                        |    |                        |   | 5,474                           |   |             |     | 5,474                   |   |
| Accounts receivable                          |   | 896                         |    | 9,674                       |   | 6,702                           |   | (12,214          | )        | 5,058                   |   |
| Deferred expenses, net                       |   | 5,810                       |    | 78                          |   | 1,891                           |   |             |     | 7,779                   |   |
| Other assets                                 |   | 1,732                       |    | 1,055                       |   | 1,318                           |   |             |     | 4,105                   |   |
| Deferred income taxes                        |   |                        |    | 15,654                      |   | 11,722                          |   |             |     | 27,376                  |   |
| Total assets                                 |   | $                           | 466,887 |                        | $      | 162,097                         |   | $                | 288,727  |                    | $      | (274,365 | ) | $ | 643,346 |   |
|                                         |   |                        |    |                        |   |                            |   |             |     |                    |   |
| **LIABILITIES AND  PARTNERS’ CAPITAL**  |   |                        |    |                        |   |                            |   |             |     |                    |   |
| Accounts payable and accrued expenses        |   | $                           | 6,936   |                        | $      | 15,558                          |   | $                | 15,174   |                    | $      | (12,214 | ) | $ | 25,454 |   |
| Borrowings on Line of Credit                 |   | 8,500                       |    |                        |   |                            |   |             |     | 8,500                   |   |
| Mortgage notes payable                       |   |                        |    |                        |   | 157,941                         |   |             |     | 157,941                 |   |
| Senior Notes Payable                         |   | 121,220                     |    |                        |   |                            |   |             |     | 121,220                 |   |
| Total liabilities                            |   | 136,656                     |    | 15,558                      |   | 173,115                         |   | (12,214          | )        | 313,115                 |   |
| Redeemable units at redemption value         |   | 29,837                      |    |                        |   |                            |   |             |     | 29,837                  |   |
| General partnership units                    |   | 300,394                     |    | 146,539                     |   | 115,612                         |   | (262,151         | )        | 300,394                 |   |
| Total partners’ capital                 |   | 300,394                     |    | 146,539                     |   | 115,612                         |   | (262,151         | )        | 300,394                 |   |
| Total liabilities and partners’ capital |   | $                           | 466,887 |                        | $      | 162,097                         |   | $                | 288,727  |                    | $      | (274,365 | ) | $ | 643,346 |   |

 

9

----

 

**Consolidating Balance Sheet**

**December 31,2002**

**(inthousands)**

 
|                                         |   | **RFS  Partnership, L.P.** |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Eliminations** |     | **Total  Consolidated** |   |
|----------------------------------------------|--------|----------------------------|---------|-----------------------------|--------|---------------------------------|--------|------------------|----------|-------------------------|--------|
|                                         |   |                       |    |                        |   |                            |   |             |     |                    |   |
| **ASSETS**                                   |   |                       |    |                        |   |                            |   |             |     |                    |   |
| Investment in hotel properties, net          |   | $                          | 212,823 |                        | $      | 133,507                         |   | $                | 246,959  |                    |   |   | $ | 593,289 |   |
| Investment in consolidated entities          |   | 253,921                    |    |                        |   | 18,962                          |   | $                | (272,883 | )                       | — |   |
| Cash and cash equivalents                    |   | 446                        |    | 825                         |   | 667                             |   |             |     | 1,938                   |   |
| Restricted cash                              |   |                       |    |                        |   | 4,383                           |   |             |     | 4,383                   |   |
| Accounts receivable                          |   | 2,596                      |    | 12,439                      |   | 10,901                          |   | (21,238          | )        | 4,698                   |   |
| Deferred expenses, net                       |   | 6,578                      |    | 176                         |   | 2,051                           |   |             |     | 8,805                   |   |
| Other assets                                 |   | 1,478                      |    | 620                         |   | 1,614                           |   |             |     | 3,712                   |   |
| Deferred income taxes                        |   |                       |    | 14,384                      |   | 11,446                          |   |             |     | 25,830                  |   |
| Total assets                                 |   | $                          | 477,842 |                        | $      | 161,951                         |   | $                | 296,983  |                    | $      | (294,121 | ) | $ | 642,655 |   |
|                                         |   |                       |    |                        |   |                            |   |             |     |                    |   |
| **LIABILITIES AND  PARTNERS’ CAPITAL**  |   |                       |    |                        |   |                            |   |             |     |                    |   |
| Accounts payable and accrued expenses        |   | $                          | 18,668  |                        | $      | 9,432                           |   | $                | 17,340   |                    | $      | (21,238 | ) | $ | 24,202 |   |
| Borrowings on Line of Credit                 |   | 6,950                      |    |                        |   |                            |   |             |     | 6,950                   |   |
| Mortgage notes payable                       |   |                       |    |                        |   | 159,279                         |   |             |     | 159,279                 |   |
| Senior Notes Payable                         |   | 125,000                    |    |                        |   |                            |   |             |     | 125,000                 |   |
| Total liabilities                            |   | 150,618                    |    | 9,432                       |   | 176,619                         |   | (21,238          | )        | 315,431                 |   |
| Redeemable units at redemption value         |   | 26,702                     |    |                        |   |                            |   |             |     | 26,702                  |   |
| General partnership units                    |   | 300,522                    |    | 152,519                     |   | 120,364                         |   | (272,883         | )        | 300,522                 |   |
| Total partners’ capital                 |   | 300,522                    |    | 152,519                     |   | 120,364                         |   | (272,883         | )        | 300,522                 |   |
| Total liabilities and partners’ capital |   | $                          | 477,842 |                        | $      | 161,951                         |   | $                | 296,983  |                    | $      | (294,121 | ) | $ | 642,655 |   |

 

10

----

 

## **Consolidating Statement of Operations**

**Forthe Three Months Ended June 30, 2003**

**(inthousands)**

** **
|                                                          |   | **RFS  Partnership,  L.P.** |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Eliminations** |   | **Total  Consolidated** |   |
|---------------------------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|-------------------------|--------|
| Revenue:                                                      |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Rooms                                                         |   |                        |   | $                           | 27,746 |                            | $      | 13,937           |   |                    |   | $ | 41,683 |   |
| Food and beverage                                             |   |                        |   | 3,013                       |   | 1,451                           |   |             |   | 4,464                   |   |
| Other operating departments                                   |   |                        |   | 744                         |   | 655                             |   |             |   | 1,399                   |   |
| Lease revenue                                                 |   | $                           | 6,579  |                        | 4,960  |                            | 655    |             | $      | (10,967                 | )      | 1,227 |   |
| Deferred revenue                                              |   | (105                        | )      |                        |   | (369                            | )      |             |   | (474                    | )      |
| Other                                                         |   | 275                         |   | 21                          |   | 50                              |   | (177             | )      | 169                     |   |
| Total hotel revenue                                           |   | 6,749                       |   | 36,484                      |   | 16,379                          |   | (11,144          | )      | 48,468                  |   |
| Hotel operating expenses:                                     |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Rooms                                                         |   |                        |   | 5,788                       |   | 2,789                           |   |             |   | 8,577                   |   |
| Food and beverage                                             |   |                        |   | 2,380                       |   | 866                             |   |             |   | 3,246                   |   |
| Other operating departments                                   |   |                        |   | 296                         |   | 103                             |   |             |   | 399                     |   |
| Undistributed operating expenses:                             |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Property operating costs                                      |   |                        |   | 4,009                       |   | 1,739                           |   |             |   | 5,748                   |   |
| Property taxes, insurance and other                           |   | 1,057                       |   | 908                         |   | 1,220                           |   |             |   | 3,185                   |   |
| Franchise costs                                               |   | (51                         | )      | 2,556                       |   | 1,525                           |   |             |   | 4,030                   |   |
| Maintenance and repair                                        |   |                        |   | 1,900                       |   | 940                             |   |             |   | 2,840                   |   |
| Management fees                                               |   |                        |   | 868                         |   | 441                             |   |             |   | 1,309                   |   |
| Percentage lease expense                                      |   |                        |   | 10,967                      |   |                            |   | (10,967          | )      |                    |   |
| Depreciation                                                  |   | 2,579                       |   | 1,727                       |   | 3,211                           |   |             |   | 7,517                   |   |
| Amortization of franchise fees and unearned  compensation     |   | 276                         |   | 11                          |   | 8                               |   |             |   | 295                     |   |
| General and administrative                                    |   | 870                         |   | 2,671                       |   | 1,807                           |   |             |   | 5,348                   |   |
| Total operating expenses                                      |   | 4,731                       |   | 34,081                      |   | 14,649                          |   | (10,967          | )      | 42,494                  |   |
| Operating income                                              |   | 2,018                       |   | 2,403                       |   | 1,730                           |   | (177             | )      | 5,974                   |   |
| Amortization of loan origination costs                        |   | 345                         |   | 1                           |   | 75                              |   | 421              |   |                    |   |
| Interest expense                                              |   | 3,310                       |   | 177                         |   | 3,175                           |   | (177             | )      | 6,485                   |   |
| Equity in (earnings) loss of consolidated  subsidiaries       |   | (1,254                      | )      |                        |   | 969                             |   | 285              |   |                    |   |
| Income (loss) from continuing operations  before income taxes |   | (383                        | )      | 2,225                       |   | (2,489                          | )      | 285              |   | (932                    | )      |
| Benefit from income taxes                                     |   |                        |   | (474                        | )      | (75                             | )      |             |   | (549                    | )      |
| Income (loss) from continuing operations                      |   | (383                        | )      | 2,699                       |   | (2,414                          | )      | 285              |   | (383                    | )      |
| Gain (loss) on sale of assets                                 |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Net income (loss)                                             |   | (383                        | )      | 2,699                       |   | (2,414                          | )      | 285              |   | (383                    | )      |
| Preferred unit dividends                                      |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Net income (loss) applicable to unitholders                   |   | $                           | (383   | )                           | $      | 2,699                           |   | $                | (2,414 | )                       | $      | 285 |   | $ | (383 | ) |

 

11

----

 

**ConsolidatingStatement of Operations**

**Forthe Three Months Ended June 30, 2002**

**(inthousands)**

** **
|                                                          |   | **RFS  Partnership,  L.P.** |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Eliminations** |   | **Total  Consolidated** |   |
|---------------------------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|-------------------------|--------|
| Revenue:                                                      |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Rooms                                                         |   |                        |   | $                           | 30,381 |                            | $      | 15,485           |   |                    |   | $ | 45,866 |   |
| Food and beverage                                             |   |                        |   | 3,186                       |   | 1,488                           |   |             |   | 4,674                   |   |
| Other operating departments                                   |   |                        |   | 921                         |   | 793                             |   |             |   | 1,714                   |   |
| Lease revenue                                                 |   | $                           | 7,291  |                        | 5,841  |                            | 609    |             | $      | (12,507                 | )      | 1,234 |   |
| Deferred revenue                                              |   | (163                        | )      |                        |   | (328                            | )      |             |   | (491                    | )      |
| Other                                                         |   | 232                         |   | 8                           |   | 52                              |   | (185             | )      | 107                     |   |
| Total hotel revenue                                           |   | 7,360                       |   | 40,337                      |   | 18,099                          |   | (12,692          | )      | 53,104                  |   |
| Hotel operating expenses:                                     |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Rooms                                                         |   |                        |   | 6,077                       |   | 2,933                           |   |             |   | 9,010                   |   |
| Food and beverage                                             |   |                        |   | 2,445                       |   | 901                             |   |             |   | 3,346                   |   |
| Other operating departments                                   |   |                        |   | 315                         |   | 143                             |   |             |   | 458                     |   |
| Undistributed operating expenses:                             |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Property operating costs                                      |   |                        |   | 3,737                       |   | 1,624                           |   |             |   | 5,361                   |   |
| Property taxes, insurance and other                           |   | 888                         |   | 933                         |   | 1,332                           |   |             |   | 3,153                   |   |
| Franchise costs                                               |   | (40                         | )      | 2,716                       |   | 1,663                           |   |             |   | 4,339                   |   |
| Maintenance and repair                                        |   |                        |   | 1,660                       |   | 803                             |   |             |   | 2,463                   |   |
| Management fees                                               |   |                        |   | 825                         |   | 431                             |   |             |   | 1,256                   |   |
| Percentage lease expense                                      |   |                        |   | 12,507                      |   |                            |   | (12,507          | )      |                    |   |
| Depreciation                                                  |   | 2,592                       |   | 1,762                       |   | 3,185                           |   |             |   | 7,539                   |   |
| Amortization of franchise fees and unearned  compensation     |   | 302                         |   | 11                          |   | 6                               |   |             |   | 319                     |   |
| General and administrative                                    |   | 194                         |   | 2,687                       |   | 2,114                           |   |             |   | 4,995                   |   |
| Total operating expenses                                      |   | 3,936                       |   | 35,675                      |   | 15,135                          |   | (12,507          | )      | 42,239                  |   |
| Operating income                                              |   | 3,424                       |   | 4,662                       |   | 2,964                           |   | (185             | )      | 10,865                  |   |
| Debt extinguishments and swap termination  costs              |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Amortization of loan origination costs                        |   | 344                         |   |                        |   | 76                              |   |             |   | 420                     |   |
| Interest expense                                              |   | 3,285                       |   | 186                         |   | 3,225                           |   | (185             | )      | 6,511                   |   |
| Equity in (earnings) loss of consolidated  subsidiaries       |   | (4,103                      | )      |                        |   | 483                             |   | 3,620            |   |                    |   |
| Income (loss) from continuing operations  before income taxes |   | 3,898                       |   | 4,476                       |   | (820                            | )      | (3,620           | )      | 3,934                   |   |
| Benefit from income taxes                                     |   |                        |   | (296                        | )      | 426                             |   |             |   | 130                     |   |
| Income (loss) from continuing operations                      |   | 3,898                       |   | 4,772                       |   | (1,246                          | )      | (3,620           | )      | 3,804                   |   |
| Earnings from discontinued operations                         |   |                        |   | 94                          |   |                            |   |             |   | 94                      |   |
| Gain (loss) on sale of assets                                 |   | (10                         | )      |                        |   |                            |   |             |   | (10                     | )      |
| Net income (loss)                                             |   | 3,888                       |   | 4,866                       |   | (1,246                          | )      | (3,620           | )      | 3,888                   |   |
| Loss on sale of Preferred Units                               |   | (1,890                      | )      |                        |   |                            |   |             |   | (1,890                  | )      |
| Preferred unit dividends                                      |   | (781                        | )      |                        |   |                            |   |             |   | (781                    | )      |
| Net income (loss) applicable to unitholders                   |   | $                           | 1,217  |                        | $      | 4,866                           |   | $                | (1,246 | )                       | $      | (3,620 | ) | $ | 1,217 |   |

 

12

----

 

**Consolidating Statement of Operations**

**For the Six Months Ended June 30, 2003**

**(in thousands)**

** **
|                                                          |   | **RFS  Partnership,  L.P.** |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Eliminations** |   | **Total  Consolidated** |   |
|---------------------------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|-------------------------|--------|
| Revenue:                                                      |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Rooms                                                         |   |                        |   | $                           | 52,704 |                            | $      | 27,342           |   |                    |   | $ | 80,046 |   |
| Food and beverage                                             |   |                        |   | 6,014                       |   | 2,621                           |   |             |   | 8,635                   |   |
| Other operating departments                                   |   |                        |   | 1,525                       |   | 1,283                           |   |             |   | 2,808                   |   |
| Lease revenue                                                 |   | $                           | 13,178 |                        | 9,199  |                            | 1,419  |             | $      | (20,954                 | )      | 2,842 |   |
| Deferred revenue                                              |   | (613                        | )      |                        |   | (848                            | )      |             |   | (1,461                  | )      |
| Other                                                         |   | 462                         |   | 22                          |   | 78                              |   | (354             | )      | 208                     |   |
| Total hotel revenue                                           |   | 13,027                      |   | 69,464                      |   | 31,895                          |   | (21,308          | )      | 93,078                  |   |
|                                                          |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Hotel operating expenses:                                     |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Rooms                                                         |   |                        |   | 11,209                      |   | 5,620                           |   |             |   | 16,829                  |   |
| Food and beverage                                             |   |                        |   | 4,625                       |   | 1,622                           |   |             |   | 6,247                   |   |
| Other operating departments                                   |   |                        |   | 601                         |   | 224                             |   |             |   | 825                     |   |
| Undistributed operating expenses:                             |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Property operating costs                                      |   |                        |   | 8,016                       |   | 3,452                           |   |             |   | 11,468                  |   |
| Property taxes, insurance and other                           |   | 1,620                       |   | 1,836                       |   | 2,657                           |   |             |   | 6,113                   |   |
| Franchise costs                                               |   | (102                        | )      | 4,883                       |   | 2,970                           |   |             |   | 7,751                   |   |
| Maintenance and repair                                        |   |                        |   | 3,599                       |   | 1,761                           |   |             |   | 5,360                   |   |
| Management fees                                               |   |                        |   | 1,770                       |   | 883                             |   |             |   | 2,653                   |   |
| Percentage lease expense                                      |   |                        |   | 20,954                      |   |                            |   | (20,954          | )      |                    |   |
| Depreciation                                                  |   | 5,159                       |   | 3,469                       |   | 6,410                           |   |             |   | 15,038                  |   |
| Amortization of franchise fees and unearned  compensation     |   | 548                         |   | 19                          |   | 14                              |   |             |   | 581                     |   |
| General and administrative                                    |   | 1,087                       |   | 5,295                       |   | 3,619                           |   |             |   | 10,001                  |   |
| Total operating expenses                                      |   | 8,312                       |   | 66,276                      |   | 29,232                          |   | (20,954          | )      | 82,866                  |   |
| Operating income                                              |   | 4,715                       |   | 3,188                       |   | 2,663                           |   | (354             | )      | 10,212                  |   |
| Amortization of loan origination costs                        |   | 633                         |   | 2                           |   | 149                             |   |             |   | 784                     |   |
| Interest expense                                              |   | 6,818                       |   | 354                         |   | 6,325                           |   | (354             | )      | 13,143                  |   |
| Equity in (earnings) loss of consolidated  subsidiaries       |   | (568                        | )      |                        |   | 2,375                           |   | (1,807           | )      |                    |   |
| Income (loss) from continuing operations  before income taxes |   | (2,168                      | )      | 2,832                       |   | (6,186                          | )      | 1,807            |   | (3,715                  | )      |
| Benefit from income taxes                                     |   |                        |   | (1,270                      | )      | (276                            | )      |             |   | (1,546                  | )      |
| Income (loss) from continuing operations                      |   | (2,168                      | )      | 4,102                       |   | (5,910                          | )      | 1,807            |   | (2,169                  | )      |
| Gain (loss) on sale of assets                                 |   | (10                         | )      | 1                           |   |                            |   |             |   | (9                      | )      |
| Net income (loss)                                             |   | (2,178                      | )      | 4,103                       |   | (5,910                          | )      | 1,807            |   | (2,178                  | )      |
| Preferred unit dividends                                      |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Net income (loss) applicable to unitholders                   |   | $                           | (2,178 | )                           | $      | 4,103                           |   | $                | (5,910 | )                       | $      | 1,807 |   | $ | (2,178 | ) |

 

13

----

 

**Consolidating Statement of Operations**

**For the Six Months Ended June 30, 2002**

**(in thousands)**

** **
|                                                          |   | **RFS  Partnership,  L.P.** |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Eliminations** |   | **Total  Consolidated** |   |
|---------------------------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|-------------------------|--------|
| Revenue:                                                      |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Rooms                                                         |   |                        |   | $                           | 57,170 |                            | $      | 29,105           |   |                    |   | $ | 86,275 |   |
| Food and beverage                                             |   |                        |   | 6,232                       |   | 2,645                           |   |             |   | 8,877                   |   |
| Other operating departments                                   |   |                        |   | 1,830                       |   | 1,477                           |   |             |   | 3,307                   |   |
| Lease revenue                                                 |   | $                           | 14,338 |                        | 10,807 |                            | 1,325  |             | $      | (23,602                 | )      | 2,868 |   |
| Deferred revenue                                              |   | (740                        | )      |                        |   | (763                            | )      |             |   | (1,503                  | )      |
| Other                                                         |   | 514                         |   | 22                          |   | 93                              |   | (368             | )      | 261                     |   |
| Total hotel revenue                                           |   | 14,112                      |   | 76,061                      |   | 33,882                          |   | (23,970          | )      | 100,085                 |   |
|                                                          |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Hotel operating expenses:                                     |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Rooms                                                         |   |                        |   | 11,702                      |   | 5,645                           |   |             |   | 17,347                  |   |
| Food and beverage                                             |   |                        |   | 4,827                       |   | 1,680                           |   |             |   | 6,507                   |   |
| Other operating departments                                   |   |                        |   | 642                         |   | 282                             |   |             |   | 924                     |   |
| Undistributed operating expenses:                             |   |                        |   |                        |   |                            |   |             |   |                    |   |
| Property operating costs                                      |   |                        |   | 7,396                       |   | 3,225                           |   |             |   | 10,621                  |   |
| Property taxes, insurance and other                           |   | 1,752                       |   | 1,792                       |   | 2,944                           |   |             |   | 6,488                   |   |
| Franchise costs                                               |   | (91                         | )      | 5,055                       |   | 3,188                           |   |             |   | 8,152                   |   |
| Maintenance and repair                                        |   |                        |   | 3,214                       |   | 1,530                           |   |             |   | 4,744                   |   |
| Management fees                                               |   |                        |   | 1,640                       |   | 867                             |   |             |   | 2,507                   |   |
| Percentage lease expense                                      |   |                        |   | 23,602                      |   |                            |   | (23,602          | )      |                    |   |
| Depreciation                                                  |   | 5,075                       |   | 3,442                       |   | 6,268                           |   |             |   | 14,785                  |   |
| Amortization of franchise fees and unearned  compensation     |   | 604                         |   | 21,                         |   | 13                              |   |             |   | 638                     |   |
| General and administrative                                    |   | 304                         |   | 5,346                       |   | 4,084                           |   |             |   | 9,734                   |   |
| Total operating expenses                                      |   | 7,644                       |   | 68,679                      |   | 29,726                          |   | (23,602          | )      | 82,447                  |   |
| Operating income                                              |   | 6,468                       |   | 7,382                       |   | 4,156                           |   | (368             | )      | 17,638                  |   |
| Debt extinguishments and swap termination  costs              |   | 3,210                       |   | 6,912                       |   |                            |   |             |   | 10,122                  |   |
| Amortization of loan origination costs                        |   | 613                         |   | 14                          |   | 150                             |   | 777              |   |                    |   |
| Interest expense                                              |   | 5,238                       |   | 1,259                       |   | 6,426                           |   | (368             | )      | 12,555                  |   |
| Equity in (earnings) loss of consolidated subsidiaries        |   | 2,837                       |   |                        |   | 600                             |   | (3,437           | )      |                    |   |
| Income (loss) from continuing operations  before income taxes |   | (5,430                      | )      | (803                        | )      | (3,020                          | )      | 3,437            |   | (5,816                  | )      |
| Benefit from income taxes                                     |   |                        |   | (368                        | )      | (12                             | )      |             |   | (380                    | )      |
| Income (loss) from continuing operations                      |   | (5,430                      | )      | (435                        | )      | (3,008                          | )      | 3,437            |   | (5,436                  | )      |
| Earnings from discontinued operations                         |   |                        |   | 19                          |   |                            |   |             |   | 19                      |   |
| Gain (loss) on sale of assets                                 |   | 975                         |   |                        |   | (13                             | )      |             |   | 962                     |   |
| Net income (loss)                                             |   | (4,455                      | )      | (416                        | )      | (3,021                          | )      | 3,437            |   | (4,455                  | )      |
| Loss on sale of Preferred Units                               |   | (1,890                      | )      |                        |   |                            |   |             |   | (1,890                  | )      |
| Preferred unit dividends                                      |   | (1,562                      | )      |                        |   |                            |   |             |   | (1,562                  | )      |
| Net income (loss) applicable to unitholders                   |   | $                           | (7,907 | )                           | $      | (416                            | )      | $                | (3,021 | )                       | $      | 3,437 |   | $ | (7,907 | ) |

 

14

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**Consolidating Statement of Cash Flows**

**For the Six Months Ended June 30, 2003**

**(in thousands)**

 
|                                              |   | **LP Only** |   | **Guarantor********Subsidiaries** |   | **Non-Guarantor********Subsidiaries** |   | **Total********Consolidated** |   |
|---------------------------------------------------|--------|-------------|--------|-----------------------------------|--------|---------------------------------------|--------|-------------------------------|--------|
| Cash flows from (used in) operating  activities   |   | $           | (5,991 | )                                 | $      | 9,070                                 |   | $                             | 10,194 |   | $ | 13,273 |   |
| Cash flows from (used in) investing  activities   |   | 3,417       |   | (6,329                            | )      | (7,454                                | )      | (10,366                       | )      |
| Cash flows from (used in) financing  activities   |   | 2,388       |   | —                            |   | (1,339                                | )      | 1,049                         |   |
| Net increase in cash and cash equivalents         |   | (186        | )      | 2,741                             |   | 1,401                                 |   | 3,956                         |   |
| Cash and cash equivalents at beginning of  period |   | 446         |   | 825                               |   | 667                                   |   | 1,938                         |   |
| Cash and cash equivalents at end of period        |   | $           | 260    |                              | $      | 3,566                                 |   | $                             | 2,068  |   | $ | 5,894 |   |

 

**Consolidating Statement of Cash Flows**

**For the Six Months Ended June 30, 2002**

**(in thousands)**

 
|                                              |   | **LP Only** |   | **Guarantor********Subsidiaries** |   | **Non-Guarantor********Subsidiaries** |   | **Total********Consolidated** |    |
|---------------------------------------------------|--------|-------------|--------|-----------------------------------|--------|---------------------------------------|--------|-------------------------------|---------|
|                                              |   |        |   |                              |   |                                  |   |                          |    |
| Cash flows from (used in) operating  activities   |   | $           | 28,965 |                              | $      | 1,973                                 |   | $                             | (11,713 | ) | $ | 19,225 |   |
| Cash flows from (used in) investing  activities   |   | (72,474     | )      | 56,576                            |   | 13,805                                |   | (2,093                        | )       |
| Cash flows from (used in) financing  activities   |   | 47,035      |   | (58,191                           | )      | (1,238                                | )      | (12,394                       | )       |
| Net increase in cash and cash equivalents         |   | 3,526       |   | 358                               |   | 854                                   |   | 4,738                         |    |
| Cash and cash equivalents at beginning of  period |   | 263         |   | 3,467                             |   | 2,005                                 |   | 5,735                         |    |
| Cash and cash equivalents at end of period        |   | $           | 3,789  |                              | $      | 3,825                                 |   | $                             | 2,859   |   | $ | 10,473 |   |

 

***14.  Subsequent Events –***OnJuly 10, 2003, RFS and the Operating Partnership were acquired by subsidiariesof CNL for approximately $383 million in cash ($12.35 per share and perunit).  Upon consummation of thistransaction, RFS was merged with and into a subsidiary of CNL and RFS ceased toexist as a separate corporate entity. Further, upon consummation of this transaction, a subsidiary of CNL wasmerged with and into the Operating Partnership and the Operating Partnershipcontinues to exist as a separate entity and an indirect wholly owned subsidiaryof CNL.  Prior to the closing of thistransaction the common stock of RFS was publicly traded on the New York StockExchange under the symbol “RFS.”  Thecommon stock of RFS has since been removed from listing on the New York StockExchange.  The former assets of RFS arenow held by subsidiaries of CNL.  Byvirtue of the closing of the transaction, CNL and its subsidiaries (which nowinclude the Operating Partnership) are responsible for the former debts andobligations of RFS and its subsidiaries (approximately $318 million).

 

On May 13,2003, A. Bruce Chasen, as class representative, filed a putative class actionlawsuit in the Circuit Court of Shelby County, Tennessee, 30thJudicial District against RFS, RFS’s directors and CNL.   On June 6, 2003, the complaint wasamended.  The amended putative classaction complaint alleges, among other things, that (i) the merger considerationto be received by RFS’s shareholders is significantly less than the intrinsicvalue of RFS, (ii) the RFS directors breached their fiduciary duties due toshareholders on a variety of grounds including failing to ascertain the truevalue of RFS, failing to determine whether there were any other bidders forRFS, and failing to avoid certain alleged conflicts of interest shared bymembers of the RFS board of directors and its financial advisor, (iii) CNLaided and abetted the RFS board of directors in connection with their breach offiduciary duties, (iv) the RFS board of directors violated portions of theTennessee Investor Protection Act, and (v) the RFS proxy statement is false andmisleading.  Among other relief, theamended complaint seeks certification of the class action, an injunction enjoiningRFS and CNL from completing the merger, monetary damages in an unspecifiedamount, the payment of attorney’s fees, and rescissory damages.  On June 23 and on July 1, 2003,respectively, RFS and CNL filed an answer to the amended complaint setting forthan affirmative defense and its general denials of the allegations set forththerein.  The plaintiff’s motion for atemporary restraining order for purposes of enjoining the transaction, whichwas argued by the plaintiff on July 8, 2003, was denied by the Circuit Court ofShelby County, Tennessee, 30th Judicial District on said date.  Based upon the information currentlyavailable to the Operating Partnership and CNL, the Operating Partnership andCNL believe the allegations contained in the amended complaint are withoutmerit and CNL intends to vigorously defend the action.

 

15

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**ITEM 2.****  *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

**Forward-lookingStatements**

 

Certainmatters discussed herein may constitute forward-looking statements within themeaning of the federal securities laws. Such statements may be identified bywords such as anticipate, believe, estimate, expect, intend, predict, will andhope or similar expressions. The Operating Partnership has based theseforward-looking statements on its current expectations, estimates andprojections about future events and trends affecting the industry and marketsin which the Operating Partnership operates, as well as the financial conditionof its business, which may prove to be incorrect. These forward-lookingstatements relate to future events, future financial performance, and involveknown and unknown risks, uncertainties and other factors which may cause the OperatingPartnership’s actual results, performance, achievements or industry results tobe materially different from any future results, performance or achievementsexpressed or implied by such forward looking statements. Future events andactual results could differ materially from those identified or contemplated bysuch forward-looking statements. General economic conditions, including thetiming and magnitude of recovery from the current economic downturn, futureacts of terrorism or war, risks associated with the hotel and hospitalitybusiness, the availability of capital, and numerous other factors may affectthe Operating Partnership’s future results, performance and achievements. Theserisks and uncertainties are described in greater detail in the OperatingPartnership’s other filings with the SEC, particularly under the caption “RiskFactors” in its combined Form 10-K with RFS for the fiscal year ended December31, 2002. You should carefully read these SEC filings.  Except as required by the federal securitieslaws, the Operating Partnership disclaims any obligations or undertaking topublicly release any updates or revisions to any forward-looking statementcontained in this quarterly report on Form 10-Q to reflect any change inthe Operating Partnership’s expectations with regard thereto or any change inevents, conditions or circumstances on which any such statement is based.Although the Operating Partnership believes current expectations are based uponreasonable assumptions, the Operating Partnership can give no assurance thatexpectations will be attained or that actual results will not differmaterially.

 

**General.**  RFS was a hotel real estate investment trustwhich, at June 30, 2003, owned interests in 57 hotels with 8,271 rooms locatedin 24 states (collectively the “Hotels”) through its approximate 92% equityinterest in the Operating Partnership. Third party limited partners owned theremaining 8%. RFS was the general partner in the Operating Partnership.  On July 10, 2003, RFS and the OperatingPartnership were acquired by subsidiaries of CNL for approximately $383 millionin cash ($12.35 per share and unit). Upon consummation of this transaction, RFS was merged with and into asubsidiary of CNL and RFS ceased to exist as a separate corporate entity.  Further, upon consummation of thistransaction, a subsidiary of CNL was merged with and into the OperatingPartnership and the Operating Partnership continues to exist as a separateentity and indirect, wholly owned subsidiary of CNL.  The following summarizes additional information for the 57 hotelsowned at June 30, 2003:

 

| **Franchise Affiliation**     |   | **Hotel  Properties** |   | **Rooms/Suites** |   |
|-------------------------------|--------|-----------------------|--------|------------------|--------|
| Full Service Hotels:          |   |                  |   |             |   |
| Holiday Inn                   |   | 5                     |   | 954              |   |
| Sheraton                      |   | 3                     |   | 864              |   |
| Sheraton Four Points          |   | 2                     |   | 412              |   |
| Doubletree                    |   | 1                     |   | 221              |   |
| Independent                   |   | 2                     |   | 331              |   |
| Hilton                        |   | 2                     |   | 234              |   |
|                          |   | 15                    |   | 3,016            |   |
|                          |   |                  |   |             |   |
| Extended Stay Hotels:         |   |                  |   |             |   |
| Residence Inn by Marriott     |   | 14                    |   | 1,851            |   |
| TownePlace Suites by Marriott |   | 3                     |   | 285              |   |
| Homewood Suites by Hilton     |   | 1                     |   | 83               |   |
|                          |   | 18                    |   | 2,219            |   |
|                          |   |                  |   |             |   |
| Limited Service Hotels:       |   |                  |   |             |   |
| Hampton Inn                   |   | 17                    |   | 2,113            |   |
| Holiday Inn Express           |   | 5                     |   | 637              |   |
| Courtyard by Marriott         |   | 1                     |   | 102              |   |
| Comfort Inn                   |   | 1                     |   | 184              |   |
|                          |   |                  |   |             |   |
|                          |   | 24                    |   | 3,036            |   |
| Total                         |   | 57                    |   | 8,271            |   |

 

16

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At June 30, 2003,the Operating Partnership and its wholly owned subsidiaries leased five hotelsto two third-party lessees and fifty-two hotels are leased by TRS Lessees.Fifty hotels are managed by Flagstone Hospitality Management Company LLC(“Flagstone”) and the remaining seven hotels are managed by four other thirdparty management companies.

 

**Resultsof Operations**

 

***Comparison of the three and six months endedJune 30, 2003 and June 30, 2002.***

 

*Revenue*

 

For purposesof the following discussion, the “Company” shall be deemed to include RFS, theOperating Partnership and their subsidiaries, as such discussions relate toevents that occurred on or prior to June 30, 2003.  Revenue decreased 8.7% for the quarter from $53.1 million to$48.5 million and 7.0% year to date from $100.1 million to $93.1million.  For the quarter and year todate, business travel demand continues to wane as a result of the sluggisheconomy coupled with the travel fears resulting from the war in Iraq and thethreat associated with the spreading of Severe Acute Respiratory Syndrome(“SARS”).  The Company’s overallrevenues have also decreased due to substantial renovations at three hotels:the Hotel Rex in San Francisco, CA, and the Residence Inns in Sacramento, CAand Fishkill, NY.  Excluding these threehotels, for the quarter, revenue per available room declined 7.8% due to adecline in occupancy of 2.9 percentage points and a 4.0% decline in averagedaily rate. Revenue per available room declined 5.3% year to date due to adecline in occupancy of 1.0 percentage points and a 3.8% decline in averagedaily rate.  Revenue per available roomat the Company’s 54 comparable hotels for the full service, extended stay andlimited service hotel portfolios showed decreases in revenue per available roomof 11.7%, 5.9% and 4.4% for the quarter, and 7.4%, 4.3% and 3.4% for the year,respectively, from the comparable 2002 period.

 

The Company’sfive comparable northern California properties experienced an average declinein revenue per available room of 16.6% in the quarter and 13.0% year to date.In San Francisco, the Hilton Fisherman’s Wharf experienced decreases in revenueper available room of 15.4% for the quarter and 8.6% year to date, while at theCompany’s four Silicon Valley hotels, revenue per available room decreased17.2% for the quarter and 14.5% year to date, which compares favorable to thedecline in revenue per available room within the San Jose/Santa CruzMetropolitan Service Area (“MSA”) of approximately 19.8% for the quarter and18.0% year to date. The decline in year over year revenue per available room inboth the San Francisco/San Mateo MSA and the San Jose/Santa Cruz MSA in SiliconValley was due to the continued downturn in the technology andtelecommunications industries, a weak convention calendar and a lack ofbusiness travelers, both domestic and international. Excluding the fivecomparable northern California properties, revenue per available room declinedapproximately 6.6% for the quarter and 4.9% year to date, which compares to theindustry’s decline of 3.2% for the quarter and 2.5% year to date, as reportedby Smith Travel Research.

 

The OperatingPartnership hopes to benefit in the future from any decline in new supplygrowth, which has been predicted by Smith Travel Research, which combined withan economic turnaround may create increased lodging demand for the Company’shotels. This may lead to growth in revenue per available room and net income.

 

The followingshows hotel operating statistics for the 54 comparable hotels for the three andsix months ended June 30, 2003. The hotels excluded in the comparablestatistics are the Residence Inns in Fishkill, NY and Sacramento, CA, whichwere undergoing substantial renovations resulting in meaningful rooms out ofservice, and the Hotel Rex in San Francisco, CA, which closed in November 2002and didn’t fully reopen until June 2003 after undergoing an earthquake retrofitand renovation.  Aggregate capitalexpenditures for these three hotel projects are approximately $5.8 million.

 

**For The Three Months Ended June 30, 2003**

** **
|            |   | **ADR**  |   | **OCCUPANCY**          |   | **Revenue Per  Available Room** |   |
|-----------------|--------|----------|--------|------------------------|--------|---------------------------------|--------|
| **Hotel Type**  |   | **2003** |   | **Variance vs.  2002** |   | **2003**                        |   | **Variance vs   2002** |   | **2003** |   | **Variance vs.  2002** |   |
|            |   |     |   |                   |   |                            |   |   |   |   |   |   |   |
| Full Service    |   | $        | 93.25  |                   | (7.4   | )%                              | 66.1   | % | (3.2 pts | ) | $ | 61.63 |   | (11.7 | )% |
| Extended Stay   |   | 88.29    |   | (3.2                   | )%     | 74.8                            | %      | (2.2 pts | ) | 66.04 |   | (5.9 | )% |
| Limited Service |   | 69.85    |   | (0.3                   | )%     | 68.8                            | %      | (3.0 pts | ) | 48.02 |   | (4.4 | )% |
| Total           |   | $        | 82.99  |                   | (4.0   | )%                              | 69.2   | % | (2.9 pts | ) | 57.45 |   | (7.8 | )% |
|                 |        |          |        |                        |        |                                 |        |  |  |  |  |  |  |  |  |

 

17

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## **COMPARABLE HOTELS OPERATING STATISTICS**

## **For The Six Months Ended June 30, 2003**

 
|            |   | **ADR**  |   | **OCCUPANCY**           |   | **Revenue  Per********Available Room** |   |
|-----------------|--------|----------|--------|-------------------------|--------|----------------------------------------|--------|
| **Hotel Type**  |   | **2003** |   | **Variance  vs.  2002** |   | **2003**                               |   | **Variance  vs  2002** |   | **2003** |   | **Variance  vs. 2002** |   |
|            |   |     |   |                    |   |                                   |   |   |   |   |   |   |   |
| Full Service    |   | $        | 92.95  |                    | (7.4   | )%                                     | 64.9   | % | 0.1  pts |   | $ | 60.28 |   | (7.4 | )% |
| Extended Stay   |   | 88.81    |   | (3.3                    | )%     | 75.8                                   | %      | (0.8) pts |   | 67.28 |   | (4.3 | )% |
| Limited Service |   | 71.04    |   | 0.0                     | %      | 64.5                                   | %      | (2.3) pts |   | 45.84 |   | (3.4 | )% |
| Total           |   | $        | 83.72  |                    | (3.8   | )%                                     | 67.4   | % | (1.0) pts |   | 56.40 |   | (5.3 | )% |
|                 |        |          |        |                         |        |                                        |        |  |  |  |  |  |  |  |  |

 

The Company’scomparable full service hotels experienced a year over year decrease in revenueper available room of 11.7% in the quarter and 7.4% year to date.  This decrease was caused by a quarterlydecrease in occupancy of 3.2 percentage points (year to date occupancy increased0.1 percentage points) and a quarter and year to date 7.4% decline in averagedaily rate, respectively.  The fivecomparable northern California hotels previously mentioned make up asubstantial portion of these decreases. Excluding the five northern Californiaproperties, revenue per available room at the Company’s other full servicehotels decreased approximately 7.7% for the quarter and 2.9% for the year.  The following five comparable full servicehotels located in Silicon Valley and San Francisco had decreases in revenue peravailable room averaging 16.6% and 13.0% for the three and six months endedJune 30, 2003.

 
| **Hotel**                     |   | **Location**       |   | **Three  Months********Ended** |   | **Six  Months********Ended** |   |
|-------------------------------|--------|--------------------|--------|--------------------------------|--------|------------------------------|--------|
|                          |   |               |   |                           |   |                         |   |
| 173-room Sheraton             |   | Sunnyvale,  CA     |   | (16.3                          | )%     | (14.7                        | )%     |
| 235-room Beverly Heritage     |   | Milpitas, CA       |   | (17.2                          | )%     | (19.7                        | )%     |
| 229-room Sheraton             |   | Milpitas, CA       |   | (26.4                          | )%     | (19.4                        | )%     |
| 214-room Sheraton Four Points |   | Pleasanton,  CA    |   | (6.5                           | )%     | (3.0                         | )%     |
| 234-room Hilton               |   | San  Francisco, CA |   | (15.4                          | )%     | (8.6                         | )%     |

 

In SiliconValley, where the Company has four full service hotels that experienced adecrease in revenue per available room of 17.2% for the quarter and 14.5% yearto date, the hotel guests are predominantly domestic and international businesstravelers. These hotels have been among the most adversely affected by thedecrease in  business travel due to thecontinued weakness in the technology and telecommunications industries, thethreat of SARS on international travelers and the effects of the war in Iraq.Furthermore, there is little leisure demand for hotels in the Silicon Valleymarket that would mitigate the significant decrease in business travel.  Increases in business travel associated withan economic turnaround in the technology and communications industries maybenefit the Company in growth of revenue per available room and net income.

 

Conversely,within San Francisco, occupancy at the Hilton Fisherman’s Wharf is drivenpredominantly by leisure travelers, with business travelers and groups makingup the balance in room demand. In the past, San Francisco has been host to alarge number of city wide conventions, but there have not been many in 2003,thus reducing the amount of business travelers into the San Franciscomarket.  Accordingly, the market remainsdepressed.  There is no consistency inthis market with respect to business or leisure travelers as evidence by thefact that throughout the year, revenue per available room increased 10.1% inJanuary and 16.2% in February, but decreased 11.7% in March, 10.2% in April,20.0% in May and 15.6% in June.

 

The Hotel Rexat Union Square was not open for most of the first quarter due to the $1.5million earthquake retrofit and renovation and the lobby and the new restaurantwere not completed until June 2003.  Theretrofit and renovation is required to be performed by early 2005 in order tocomply with existing building codes. Based on its location within San Francisco at Union Square, this hotelis more reliant on business travelers and city-wide conventions, and theCompany believes the Hotel Rex is well positioned to attract travelers.

 

The comparableextended stay hotels, which excludes the Residence Inns in Sacramento, CA andFishkill, NY that were undergoing substantial renovations, experienced a yearover year decline in revenue per available room of 5.9% for the quarter and4.3% year to date.  Most of our extendedstay hotels, with the exception of the 176-room Residence Inn in Orlando, arein markets that can best be categorized as “drive to” markets. These hotels aretypically less affected by the current geo-political

 

18

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unrest, the war in Iraq and thethreat of SARS, with revenue per available room declining 5.8% for the quarterand 3.5% year to date. The Orlando Residence Inn experienced a decline inrevenue per available room of nearly 7.2% for the quarter and 11.9% year todate. Fourteen of the eighteen extended stay properties are Residence Inns byMarriott.  Revenue per available room istypically less volatile as these hotels benefit from longer duration stays thatinclude the typically slower weekend days. The twelve comparable Residence Innsby Marriott experienced a decrease in revenue per available room of 5.5% forthe quarter and 4.3% year to date.

 

At June 30,2003, the Company’s limited service hotels experienced a decrease in revenueper available room of 4.4% for the quarter and 3.4% year to date. Quarter todate and year to date the limited service portfolio performed the best amongthe Operating Partnership portfolio in terms of revenue per available roomversus the prior year.  Seventeen of theOperating Partnership’s twenty-six limited service hotels are Hampton Innswhich the Operating Partnership currently believes has the strongest rewardsprogram among its limited service hotels and which experienced a decline inrevenue per available room of 1.9% for the quarter and 1.5% year to date.

 

*Expenses*

 

Totaloperating expenses increased $0.3 million for the quarter to $42.5 million in2003 versus $42.2 million in 2002 and increased $0.4 million year to date to$82.9 million in 2003 versus $82.5 million in 2002. Operating margins(operating income as a percentage of total hotel revenue, excluding the effectsof deferred revenue) decreased 8.0 points to 13.2% from 21.2% for the quarterand 6.5 points to 12.3% from 18.8% year to date, driven by the decrease inrevenue of 8.7% in the quarter and 7.0% year to date.  Operating income flowthrough for 2003 (decrease in operatingincome divided by the decrease in total hotel revenue, excluding deferredrevenue) was 105% for the quarter and year to date.  In other words, for every dollar lost in total hotel revenue, theCompany lost $1.05 in operating income. Individual line items comprising hotel operating expenses are discussedbelow.

 

Hoteloperating expenses for rooms, food and beverage and other operating departmentsdecreased 4.6% for the quarter to $12.2 million from $12.8 millionand decreased 3.5% year to date to $23.9 million from $24.8 million; however,as a percentage of total hotel revenue, hotel operating expenses increased to25.2% in 2003 versus 24.1% in 2002 for the quarter and increased to 25.7% from24.8% year to date. The increased percentage was caused primarily by thedecline in revenue year over year in relationship to significant fixed costs asthe decreases in occupancy continue to be less than the decrease in averagedaily rate, resulting in deteriorating margins as the costs to service hotelguests have not decreased as much as the room rental rates.

 

Propertyoperating costs increased $0.4 million or 7.2% for the quarter and $0.8million or 8.0% year to date due primarily to an increase in energy costsacross most of the portfolio of $0.2 million or 8.3% for the quarter and $0.4million or 9.8% year to date.  Energycosts have increased due to the well-publicized oil and gas price increasescaused primarily by the war in Iraq and shortages in production in SouthAmerica.  In addition, costs incurredassociated with the conversion of the Birmingham hotel to a Hilton from aSheraton were approximately $0.1 million in the quarter and $0.2 million yearto date.  A majority of the remainingincrease is attributable to increased marketing costs of $0.1 million in thequarter and year to date related to certain internet based sales initiatives.

 

Propertytaxes, insurance and other expenses increased only slightly ($33 thousand) forthe quarter and decreased $0.4 million or 5.8% year to date drivenprimarily by a decrease in real estate taxes of approximately $0.3 millionand earthquake premiums of $0.1 million. The decrease in real estate taxes results from reduced assessmentsthrough appeals made by the Company and assessor adjustments reflecting thelagging hotel industry. The decrease in earthquake insurance results from theCompany’s decision to reduce the aggregate amount of insurance coverage, basedon an analysis performed by an independent third party for the benefit of theCompany.

 

Franchisecosts decreased $0.3 million or 7.1% for the quarter and $0.4 million or4.9% year to date due to the decrease in total hotel revenue.  For both the quarter and year to date,franchise costs remained relatively flat at 8.3% of total hotel revenue in 2003versus 8.2% in 2002.

 

Maintenanceand repair costs increased $0.4 million or 15.3% for the quarter and $0.6million or 13.0% year to date. This increase is associated with the costsincurred in connection with the substantial renovations at the Hotel Rex andResidence Inn in Fishkill, NY and Sacramento, CA, the completion of productimprovement plans at seven of our Hampton Inns, the collapse of a canopy at theHampton Inn in Denver, Colorado, a major pipe burst at the Sheraton inPleasanton, California and water damage at the Holiday Inn in Columbia, SouthCarolina.

 

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Managementfees have increased $0.1 million for the quarter and year to date due tocosts associated with the participation in certain purchasing programs.

 

Depreciationdecreased only slightly ($22 thousand) during the quarter, but increased $0.3million to $15.0 million from $14.7 million year to date due tosubstantial capital expenditures in 2002.

 

Amortizationof franchise fees and unearned compensation decreased slightly ($24 thousand)for the quarter and $0.1 million year to date due to the amortization ofcertain employee restricted stock awards that fully vested in October 2002.

 

General andadministrative expenses increased $0.4 million or 7.1% for the quarter due tocosts incurred related to the Company’s acquisition by CNL of $0.7 million,partially offset by a decrease in compensation of approximately $0.2 millionresulting from the termination of the Company’s bonus plan for 2003 and theremainder of the offset attributable to the reduction of overhead at thecorporate and hotel level as a result of continued cost cutting initiatives of$0.1 million.  Year to date, expensesincreased $0.3 million or 2.7% as a result of the second quarter activity,offset by additional overhead savings in the first quarter of approximately$0.1 million.

 

Debtextinguishment and swap termination costs of $10.1 million in 2002 arecomprised of a yield maintenance premium of $5.5 million to pay off the1996 CMBS debt, $3.2 million to terminate two interest rate swaps and $1.4 millionto write-off the unamortized debt issuance costs related to the 1996 CMBSdebt.   All of these transactions werecompleted in connection with the issuance of the $125 million senior notes.

 

Amortizationon loan origination costs have remained flat year over year.

 

Interestexpense decreased only slightly ($26 thousand) for the quarter.  The increase in the weighted averageborrowings for the quarter of $2.7 million from $298.7 million to $300.1million was offset by the decrease in the average interest rate on borrowingsoutstanding under the Line of Credit and the refinancing of $3.8 million ofSenior Notes that were repurchased and retired through borrowings under theLine of Credit.  For the year, interestexpense increased $0.6 million or 4.7% due to the increase in the weightedaverage interest rate on borrowings outstanding for the year from 8.2% in 2002to 8.7% in 2003, offset by a decrease in the year to date weighted averageborrowings outstanding of $6.0 million from $305.6 million to $299.0 million.   The increase in the weighted averageinterest rate results from the issuance of $125.0 million, 9.75% Senior Notesin February 2002, of which a portion of the proceeds were used to redeem bonds thatcarried an interest rate of approximately 7.0%.  In addition, during the first quarter 2003, the Company expensedapproximately $151 thousand of costs associated with the repurchase andretirement of $3.8 million of Senior Notes, $122 thousand of which relates tothe write-off of unamortized debt issuance costs and $29 thousand of costsrelated to acquiring the Senior Notes.

 

The loss onsale of assets in 2003 and the quarter ended June 30, 2002 relates to the saleof hotel vans and the year to date gain in 2002 relates primarily to the saleof the Company’s interest in an unconsolidated partnership for approximately$1.1 million in the first quarter of 2002.

 

Benefit fromincome taxes increased $0.7 million for the quarter and $1.2 million yearto date due to the increase in losses in the taxable REIT subsidiaries.

 

*Net income (loss) applicable to unitholders—Operating Partnership*

 

For thequarter, net income (loss) applicable to unitholders decreased$1.6 million from net income of $1.2 million in 2002 to a net loss of $0.4million in 2003.  The decrease isattributable to the decrease in operating income of $4.9 million, offsetby the loss on redemption of the Series B Preferred Units of $1.9 million in2002, preferred dividends of $0.8 million in 2002 and the increase in thedeferred tax benefit in 2003 of $0.7 million.

 

For the year,net loss applicable to unitholders decreased $5.7 million from $7.9million in 2002 to $2.2 million in 2003. The decrease is primarily attributableto the decrease in operating income of $7.4 million, the increase ininterest expense of $0.6 million, offset by the debt extinguishments and swaptermination costs of $10.1 million in 2002, the loss on redemption of theSeries B Preferred Units of $1.9 million in 2002, and preferred dividends of$1.6 million in 2002.

 

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**Liquidityand Capital Resources**

 

The OperatingPartnership’s principal source of liquidity to meet its cash requirements,including distributions to unitholders and repayments of indebtedness, has beencash flow provided by operating activities. For the six months ended June 30, 2003, cash flow provided by operatingactivities of the Operating Partnership was $13.3 million. The OperatingPartnership believes that cash provided by operating activities will beadequate to meet some of its liquidity needs for the foreseeable future. TheOperating Partnership currently expects to fund its other liquidity needs byexchanging equity for hotel properties or possibly accessing the equity anddebt capital markets as market conditions permit. At June 30, 2003, the Companyhad $5.9 million of cash and cash equivalents and had borrowed$8.5 million under its $140.0 million Line of Credit, subject toborrowing base values, as calculated in accordance with the terms of the Lineof Credit, which value from time to time may be less than the maximum$140 million.  On July 10, 2003, aspart of the merger between the Operating Partnership, RFS and CNL, the Line ofCredit was terminated and replaced with a $320 million Bridge Loan from anaffiliate of Bank of America, of which only $101 million was drawn by CNL tofund the merger.

 

The followingdetails the Company’s debt outstanding at June 30, 2003 (dollar amounts inthousands):

 
|           |   |        |    |               |          |   |     |          |      | **Collateral**   |   |
|----------------|--------|-------------|---------|--------------------|---------------|--------|----------|---------------|-----------|------------------|--------|
|           |   | **Balance** |    | **Interest  Rate** |          |   |     | **Maturity**  |      | **# of  Hotels** |   | **Net  Book Value at********June 30, 2003** |   |
|           |   |        |    |               |          |   |     |          |      |             |   |   |   |
| Line of Credit |   | $           | 8,500   |               | LIBOR + 250bp |   | Variable |          | July 2005 |             | 24     |   | $ | 212,909 |   |
| Senior Notes   |   | 121,220     |    | 9.75               | %             | Fixed  |     | March 2012    |      | —           |   | — |   |
| Mortgage       |   | 89,802      |    | 7.83               | %             | Fixed  |     | December 2008 |      | 10               |   | 120,024 |   |
| Mortgage       |   | 17,793      |    | 8.22               | %             | Fixed  |     | November 2007 |      | 1                |   | 41,807 |   |
| Mortgage       |   | 50,346      |    | 8.00               | %             | Fixed  |     | August 2010   |      | 8                |   | 80,850 |   |
|           |   | $           | 287,661 |               |          |   |     |          |      |             |   |   | $ | 455,590 |   |

 

The interestrate on the Line of Credit ranged from 150 basis points to 250 basis pointsabove LIBOR, depending on the Company’s ratio of total debt to its investmentin hotel properties (as defined in the Line of Credit Agreement). The interestrate was approximately 3.8% at June 30, 2003. The Line of Credit wascollateralized by first priority mortgages on 24 hotels that restricted thetransfer, pledge or other hypothecation of the hotels (collectively, the“Collateral Pool”).  The Line of Creditcontains various covenants including the maintenance of a minimum net worth,minimum debt and interest coverage ratios, and total indebtedness and liabilitylimitations. The Company was not in compliance with certain of these covenantsat June 30, 2003, however, the Line of Credit was terminated on July 10, 2003in connection with the merger.

 

During thefirst quarter of 2003, the Company borrowed approximately $3.8 million underthe Line of Credit to retire $3.8 million of Senior Notes. As a result of theredemption of the $3.8 million Senior Notes, the Company expensed $122thousand in unamortized debt issuance costs and $29 thousand of costsrelated to acquiring the Senior Notes.

 

The OperatingPartnership’s other borrowings are nonrecourse to the Operating Partnership andcontain provisions allowing for the substitution of collateral, uponsatisfaction of certain conditions. Most of the mortgage borrowings areprepayable and subject to various prepayment penalties, yield maintenance, ordefeasance obligations. At June 30, 2003, approximately 97% of the Company’sdebt was fixed at a weighted average interest rate of 8.7%.

 

Futurescheduled principal payments of debt obligations at June 30, 2003 are asfollows (in thousands):

 
|       |   | **Amount** |    |
|------------|--------|------------|---------|
|       |   |       |    |
| 2003       |   | $          | 1,357   |   |
| 2004       |   | 2,888      |    |
| 2005       |   | 11,661     |    |
| 2006       |   | 3,424      |    |
| 2007       |   | 19,662     |    |
| Thereafter |   | 248,669    |    |
|       |   | $          | 287,661 |   |

 

In addition tothe above principal payment of debt obligations as of June 30, 2003, theOperating Partnership has a

 

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$3.0 million letter ofcredit outstanding. The letter of credit serves as collateral on the worker’scompensation plan for the benefit of the hotel employees of Flagstone. Thereare no outstanding balances on the letter of credit. The Company is alsocommitted to make future payments under various operating leases that are notsignificant.

 

Certainsignificant credit statistics at June 30, 2003 are as follows:

 

•                                       Weightedaverage maturity of fixed rate debt of 7.1 years

 

•                                       Fixedinterest rate debt equal to 97% of total debt

 

•                                       Debtequal to 35% of investment in hotel properties, at cost, as defined by theCompany

 

During the sixmonths ended June 30, 2003, the Company spent approximately $9.4 million ofcapital expenditures  on its hotels,primarily focused on projects at ten of the Company’s hotels: 1) the earthquakeretrofit and renovation at the Hotel Rex in San Francisco, CA; 2) theconversion of the Birmingham hotel to a Hilton from a Sheraton; 3) thecompletion of product improvement plans at six of the Hampton Inns; and 4) therenovation of the Residence Inns in Fishkill, NY and Sacramento, CA. TheOperating Partnership expects to spend approximately $2.3 million on capitalimprovements to its hotels for the remainder of 2003, which the OperatingPartnership is expected to fund from cash generated from operations andborrowings under the Line of Credit.

 

The OperatingPartnership expects to be able to meet its short-term working capital, capitalexpenditure and debt service requirements through cash flow from operations. Asmarket conditions permit, the Operating Partnership may, from time to time,access the debt and equity capital markets as a source of additionalliquidity.  At June 30, 2003, theOperating Partnership had $83.5 million of borrowing availability under theline of credit excluding outstanding letters of credit. Over the longer term,the Operating Partnership’s ability to generate sufficient cash flow fromoperations to make scheduled payments on its debt obligations will depend onits future financial performance, which will be affected by a range ofeconomic, competitive and business factors, many of which are outside of theOperating Partnership’s control. If the Operating Partnership does not generatesufficient cash flow from operations to satisfy its debt obligations, theOperating Partnership may have to undertake alternative financing plans. TheOperating Partnership cannot assume that completion of any such alternativefinancing plans will be possible. The Operating Partnership’s inability togenerate sufficient cash flow to satisfy its debt obligations or to refinanceits obligations on commercially reasonable terms would have an adverse effecton its business, financial condition and results of operations.

 

The OperatingPartnership in the future may seek to increase further the amount of its creditfacilities, negotiate additional credit facilities, or issue corporate debtinstruments. The Operating Partnership has no restrictions in its Agreement ofLimited Partnership on the amount of indebtedness the Operating Partnership mayincur.

 

**Inflation**

 

Operators ofhotels, in general, possess the ability to adjust room rates daily to reflectthe effects of inflation. However, competitive pressures may limit the abilityof the lessees and management companies to raise room rates.

 

#### **Seasonality**

 

The hotelindustry is seasonal in nature. Generally, occupancy rates and hotel revenuesare greater in the second and third quarters than in the first and fourthquarters. This seasonality can be expected to cause quarterly fluctuations inrevenues. Quarterly financial results also may be adversely affected by factorsoutside the Operating Partnership’s control, including weather conditions andpoor economic factors. As a result, the Operating Partnership may have to enterinto short-term borrowing in the first and fourth quarters in order to offsetthese fluctuations in revenues and to make payments on it outstanding debt.

 

**ITEM 3****.  *Qualitative and Quantitative Disclosure about MarketRisk***

 

The Operating Partnership is exposed tocertain financial market risks, one being fluctuations in interest rates. TheOperating Partnership monitors interest rate fluctuations as an integral partof the Operating Partnership’s overall risk management program, whichrecognizes the unpredictability of financial markets and seeks to reduce thepotentially adverse effect on the Operating Partnership’s results. The effectof interest rate fluctuations historically has been small relative to otherfactors affecting operating results, such as occupancy.

 

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The Company’soperating results have historically been affected by changes in interest ratesprimarily as a result of borrowing under its line of credit. If interest ratesincreased by 25 basis points, interest expense would have increased byapproximately $13 and $23 thousand for the three and six months ended June30, 2003, respectively, based on balances outstanding during the three and sixmonths ended June 30, 2003.   The CreditAgreement and the related Line of Credit were terminated pursuant to themergers with subsidiaries of CNL on July 10, 2003.

 

The OperatingPartnership’s primary market risk exposure is to changes in interest rate as aresult of its Line of Credit and long-term debt. At June 30, 2003, the Companyhad outstanding total indebtedness of approximately $287.7 million. TheOperating Partnership’s interest rate risk objective is to limit the impact ofinterest rate fluctuations on earnings and cash flows and to lower its overallborrowing costs. To achieve this objective, the Operating Partnership managesits exposure to fluctuations in market interest rates for its borrowingsthrough the use of fixed rate debt instruments to the extent that reasonablyfavorable rates are obtainable with such arrangements and derivative financialinstruments such as interest rate swaps, to effectively lock the interest rateon a portion of its variable debt. The Company has not entered into anyderivative or interest rate transactions for speculative purposes, nor does theOperating Partnership anticipate doing so in the future. Approximately 97% ofthe Company’s outstanding debt was subject to fixed rates with a weightedaverage interest rate of 8.7% at June 30, 2003. The Operating Partnershipregularly reviews interest rate exposure on its outstanding borrowings in aneffort to minimize the risk of interest rate fluctuations.

 

The followingtable provides information about the Company’s instruments that have beensensitive to changes in interest rates. For debt obligations outstanding atJune 30, 2003, the table presents principal cash flows and related weightedaverage interest rates by expected maturity dates. Weighted average variablerates are based on implied forward rates in the yield curve as of June 30,2003. The fair value of the Company’s fixed rate debt at June 30, 2003,indicates the estimated principal amount of debt having similar debt servicerequirements, which could have been borrowed by the Company at June 30, 2003.The rate assumed in the fair value calculation of fixed rate debt, excludingthe senior notes, is equal to 5.25%, which consists of the 7-year treasury of2.75% as of June 30, plus 250 basis points. The fair value calculation of thesenior notes is based on actual trade activity in the Operating Partnership’ssenior notes over the past 30 days.

 

**Expected Principal Cash Flows**

 
| **Liabilities**       |   | **2003**            |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   | **Fair********Value********Total** |   |
|-----------------------|--------|---------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|------------------------------------|--------|
|                  |   | **(in  thousands)** |   |
|                  |   |                |   |     |   |     |   |     |   |     |   |           |   |      |   |                               |   |
| Long-Term Debt:       |   |                |   |     |   |     |   |     |   |     |   |           |   |      |   |                               |   |
| Fixed Rate            |   | $                   | 1,357  |     | $      | 2,888    |   | $        | 3,161  |     | $      | 3,424          |   | $         | 19,662 |                               | $      | 248,669 |   | $ | 279,161 |   | $ | 298,308 |   |
| Average Interest Rate |   | 8.73                | %      | 8.73     | %      | 8.73     | %      | 8.73     | %      | 8.73     | %      | 8.73           | %      |      |   |                               |   |
| Variable Rate         |   | —              |   | —   |   | $        | 8,500  |     | — |     | — |           | — |      | $      | 8,500                              |   | $ | 8,500 |   |
| Average Interest Rate |   |                |   |     |   | 3.81     | %      |     |   |     |   |           |   |      |   |                               |   |
|                       |        |                     |        |          |        |          |        |          |        |          |        |                |        |           |        |                                    |        |  |  |  |  |  |  |  |  |

 

The tableincorporates only those exposures that exist as of June 30, 2003 and does notconsider exposures or positions that could arise after that date. In addition,because firm commitments are not represented in the table above, theinformation presented therein has limited predictive value. As a result, theOperating Partnership’s ultimate realized gain or loss with respect to interestrate fluctuations would depend on the exposures that arise during futureperiods, prevailing interest rates, and the Operating Partnership’s strategiesat that time. There is inherent rollover risk for borrowings as they mature andare renewed at current market rates. The extent of this risk is notquantifiable or predictable because of the variability of future interest ratesand the Operating Partnership’s financing requirements.

 

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**CriticalAccounting Policies and Estimates**

 

The Company’sdiscussion and analysis of its financial condition and results of operationsare based upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires the Companyto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. The Company has believed, and subsequent to the mergers withsubsidiaries of CNL, the Operating Partnership believes that the followingcritical accounting policies affect the more significant judgments andestimates used in the preparation of the consolidated financial statements.

 

The Companyhas evaluated, and since the consummation of the mergers, the OperatingPartnership anticipates evaluating its estimates, including those related tobad debts, carrying value of investments in hotels, income taxes, contingenciesand litigation. The Company has based its estimates on historical experienceand on various other assumptions that the Company has believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

The Companyhas maintained allowances for doubtful accounts for estimated losses resultingfrom the inability of customers to make required payments. The Company hasmonitored, and the Operating Partnership anticipates monitoring on a regularbasis its outstanding receivables and actively seeking to collect all overduebalances by sending overdue notices to customers, speaking with customers, andseeking collection through the use of an agency or the court of law. If theOperating Partnership believes that a portion of a receivable or an entirereceivable will not be collected, the Operating Partnership will  provide an allowance for doubtful accountsagainst that receivable for the estimate of the uncollectible amount. If thefinancial condition of the Operating Partnership’s customers were todeteriorate, resulting in an impairment of the customers’ ability to makepayments, additional allowances may be required.

 

The Companyhas recorded and the Operating Partnership anticipates recording an impairmentcharge when it believes an investment in hotel has been impaired such thatfuture undiscounted cash flows would not recover the book basis of theinvestment in hotel. Future adverse changes in market conditions or pooroperating results of underlying investments could result in losses or aninability to recover the carrying value of the investments that may not bereflected in an investment’s current carrying value, thereby possibly requiringan impairment charge in the future.

 

The Companyhas recognized and the Operating Partnership anticipates recognizing deferredtax assets to an amount that is more likely than not to be realized. TheOperating Partnership has determined that no valuation allowance is necessarybased on its estimates of future taxable income and ongoing prudent andfeasible tax planning strategies. Should the Operating Partnership determine itwould not be likely to realize in full the deferred tax asset in the future,the Operating Partnership would record a valuation allowance to reduce thedeferred tax asset to an amount that is more likely than not to be realized.Such adjustment to the deferred tax asset would decrease income in the periodsuch determination was made.

 

**ITEM 4.****  *Internal Controls and Procedures***

 

Pursuant to Rule 15d-15(b) under theSecurities Exchange Act of 1934, as amended, the Operating Partnership carriedout an evaluation, with the participation of the Operating Partnership'smanagement, including the Operating Partnership's Chief Executive Officer andPrincipal Financial Officer, of the effectiveness of the OperatingPartnership's disclosure controls and procedures (as defined under Rule15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report.  Basedupon that evaluation, the Operating Partnership's management, including theChief Executive Officer and Principal Financial Officer, has concluded that theOperating Partnership's disclosure controls and procedures are effective intimely alerting them to information required to be disclosed in the OperatingPartnership's periodic SEC filings.

 

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**PARTII****—OTHER INFORMATION**

 

**ITEM 4.*Submission of Matters to a Vote of Security Holders***

 

DuringJune 2003, the Operating Partnership sought the approval of its holders oflimited partnership interests to the merger of a subsidiary of CNL with andinto the Operating Partnership.  Theholders of limited partnership interests in the Operating Partnershipunanimously approved such merger.

 

**ITEM 5. *Other**Information***

 

**AvailableInformation**

 

The Company’sformer internet website, www.rfshotel.com, is no longer operational. CNL’s internetwebsite is www.cnlonline.com.  CNL makesavailable free of charge through its website the Operating Partnership’s annualreports on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K and amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,as soon as reasonably practicable after such documents are electronically filedwith, or furnished to, the SEC. The information on the CNL website is not, andshall not be deemed to be, a part of this report or incorporated into any otherfilings that the Operating Partnership makes with the SEC.

 

**ITEM 6. *Exhibits**and Reports on Form 8-K***

 

The following documents arefiled as part of this report:

 

**(a)Exhibits**

 

Exhibit 31.1            Certificationof Chief Executive Officer, Pursuant to Rule 13a-14(a), as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 - "(filed herewith)"

 

Exhibit 31.2            Certificationof Principal Financial Officer, Pursuant to Rule 13a-14(a), as Adopted Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002 - "(filed herewith)"

 

Exhibit 32.1            Certificationof Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - "(furnishedherewith)"

 

Exhibit 32.2            Certificationof Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - "(furnishedherewith)"

 

**(b)The Operating Partnership filed the following reports during the quarter endedJune 30, 2003 on Form 8-K:**

 

•                                       May1, 2003—Item 9 and Item 12 report regarding the issuance of a pressrelease announcing the Company’s operating results for the first quarter endedMarch 31, 2003.

 

**•****                                      **May9, 2003 – Item 5 report regarding the issuance of a press release announcingthe acquisition of the Company by CNL Hospitality Properties, Inc.

 

**•****                                      **May27, 2003 – Item 5 report regarding the filing of a putative class actioncomplaint against the Company and CNL pertaining to the acquisition.

 

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned authorizedsignatory and principal financial and accounting officer thereunto dulyauthorized.

 
|             | RFS  PARTNERSHIP, L.P.                                                         |
|------------------|--------------------------------------------------------------------------------|
|             |                                                                           |
|             | By: CNL ROSE GP CORP., its  general partner                                    |
| August 14,  2003 |                                                                           | /s/ C. Brian  Strickland |   |
| Date             | C. Brian  Strickland                                                           |
|             | Title:  Executive Vice President (Principal Financial and  Accounting Officer) |
|                  |                                                                                |  |  |

 

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