<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-39595-01
FELCOR SUITES LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
MARYLAND 72-2541756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
-- --
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<PAGE> 2
FELCOR SUITES LIMITED PARTNERSHIP
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. -- FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements ................................................................ 3
FelCor Suites Limited Partnership
Consolidated Balance Sheets - September 30, 1997 (Unaudited)
and December 31, 1996 ....................................................... 3
Consolidated Statements of Operations -- For the Three and Nine Months
Ended September 30, 1997 and 1996 (Unaudited) ............................... 4
Consolidated Statements of Cash Flows -- For the Nine Months
Ended September 30, 1997 and 1996 (Unaudited) ............................... 5
Notes to Consolidated Financial Statements ....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
General/Third Quarter Highlights ................................................. 13
Results of Operations ............................................................ 13
Liquidity and Capital Resources .................................................. 18
PART II. -- OTHER INFORMATION
Item 5. Other Information ................................................................... 21
Item 6. Exhibits and Reports on Form 8-K .................................................... 21
SIGNATURES ................................................................................... 22
</TABLE>
2
<PAGE> 3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR SUITES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Investment in hotels, net of accumulated depreciation of $72,607
and $36,718 at September 30, 1997 and December 31, 1996 respectively $1,447,340 $899,691
Investment in unconsolidated partnerships ............................ 127,606 59,867
Cash and cash equivalents ............................................ 18,942 7,793
Deposits ............................................................. 1,616 1,616
Due from Lessee ...................................................... 13,419 5,526
Deferred expenses, net of accumulated amortization of $1,375
and $364 at September 30, 1997 and December 31, 1996 ............... 3,793 3,235
Other assets ......................................................... 3,771 1,060
---------- --------
Total assets .................................................... $1,616,487 $978,788
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Distributions payable ................................................ $ 24,171 $ 16,090
Accrued expenses and other liabilities ............................... 5,766 5,235
Debt ................................................................. 406,650 226,550
Capital lease obligations ............................................ 11,527 12,875
Minority interest in other partnerships 8,358
---------- --------
Total liabilities ............................................... 456,472 260,750
---------- --------
Commitments and contingencies (Note 2)
Redeemable units, at redemption value ................................ 119,266 98,542
Preferred units ...................................................... 151,250 151,250
Partners' capital .................................................... 889,499 468,246
---------- --------
Total liabilities and partners' capital ......................... $1,616,487 $978,788
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 4
FELCOR SUITES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER UNIT DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Percentage lease revenue ................................... $ 48,603 $ 25,263 $122,651 $72,648
Income from unconsolidated partnerships .................... 2,338 927 5,765 1,412
Other income................................................ 112 163 283 937
-------- -------- -------- -------
Total revenue ............................................ 51,053 26,353 128,699 74,997
-------- -------- -------- -------
Expenses:
General and administrative ................................. 897 458 2,743 1,307
Depreciation ............................................... 14,238 7,529 35,969 17,833
Taxes, insurance and other ................................. 6,155 3,260 16,912 9,859
Interest expense ........................................... 7,183 1,760 20,097 6,273
Minority interest in other partnerships..................... 195 337
-------- -------- -------- -------
Total expenses ........................................... 28,668 13,007 76,058 35,272
-------- -------- -------- -------
Net income before extraordinary charge ....................... 22,385 13,346 52,641 39,725
Extraordinary charge from write off of deferred financing fees 2,354 2,354
-------- -------- -------- -------
Net income ................................................... 22,385 10,992 52,641 37,371
Preferred distributions ...................................... 2,949 2,949 8,848 4,784
-------- -------- -------- -------
Net income applicable to unitholders ......................... $ 19,436 $ 8,043 $ 43,793 $32,587
======== ======== ======== =======
Per unit information:
Net income applicable to unitholders before
extraordinary charge ................................... $ 0.49 $ 0.40 $ 1.35 $ 1.35
Extraordinary charge ....................................... (0.09) (0.09)
-------- -------- -------- -------
Net income ................................................. $ 0.49 $ 0.31 $ 1.35 $ 1.26
======== ======== ======== =======
Weighted average number of units outstanding ............... 39,347 26,172 32,412 25,953
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
FELCOR SUITES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 52,641 $ 37,371
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation ................................................. 35,969 17,833
Amortization of deferred financing fees and organization costs 1,011 269
Amortization of unearned officers' and directors' compensation 737 315
Income from unconsolidated partnerships ...................... (5,765) (1,412)
Cash distributions from unconsolidated partnerships .......... 2,849 896
Extraordinary charge for write off of deferred financing fees 2,354
Minority interest in other partnerships ...................... 337
Changes in assets and liabilities:
Due from Lessee .............................................. (7,893) (1,359)
Deferred expenses and other assets ........................... (4,362) (3,979)
Accrued expenses and other liabilities ....................... (966) (3,142)
--------- ---------
Net cash flow provided by operating activities ..... 74,558 49,146
--------- ---------
Cash flows from investing activities:
Acquisition of hotels .................................................. (537,100) (287,715)
Acquisition of interests in unconsolidated partnerships ................ (59,571) (28,204)
Improvements and additions to hotels ................................... (38,413) (44,960)
--------- ---------
Net cash flow used in investing activities ......... (635,084) (360,879)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings ............................................... 332,000 185,350
Repayment of borrowings ................................................ (151,900) (190,954)
Contributions .......................................................... 448,586 44,978
Contributions from preferred units ..................................... 144,251
Distributions paid ..................................................... (48,163) (28,795)
Distributions paid to preferred unitholders ............................ (8,848) (1,835)
--------- ---------
Net cash flow provided by financing activities ..... 571,675 152,995
--------- ---------
Net change in cash and cash equivalents .......................................... 11,149 (158,738)
Cash and cash equivalents at beginning of periods ................................ 7,793 166,821
--------- ---------
Cash and cash equivalents at end of periods ...................................... $ 18,942 $ 8,083
========= =========
Supplemental cash flow information --
Interest paid .......................................................... $ 19,907 $ 6,971
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
FELCOR SUITES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS
FelCor Suites Limited Partnership, (the "Partnership"), a Delaware
limited partnership, commenced operations on July 28, 1994. Simultaneously with
the closing of the initial public offering (the "IPO") of FelCor Suite Hotels,
Inc. ("FelCor"), which is the sole general partner of the Partnership,
contributed the net proceeds of the IPO to the Partnership in exchange for an
approximate 75% general partnership interest.
The Partnership owned six Embassy Suites(R) hotels (the "Initial
Hotels"), with an aggregate of 1,479 suites, which it had acquired through a
merger with entities, originally formed in 1991, controlled by Hervey A.
Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board of Directors and
Chief Executive Officer of the Company, respectively.
At September 30, 1997, the Partnership owned interests in 71 hotels with
an aggregate of 17,486 suites/rooms (collectively the "Hotels") through its
consolidated subsidiaries (collectively, the "Company"). The Company owns 100%
equity interests in 53 of the Hotels (12,983 suites), a 90% or greater interest
in partnerships owning four hotels (1,041 suites), and 50% interests in
separate partnerships that own 14 hotels (3,462 suites). At September 30, 1997,
51 of the Hotels were operated as Embassy Suites hotels, 12 as Doubletree Guest
Suites(R) hotels, one as a Hilton Suites(R) hotel, one hotel was in the process
of conversion to an Embassy Suites hotel, four hotels were operated as
Sheraton(R) hotels and two were operated as Sheraton Suites(R) hotels. The
Hotels are located in 26 states, with 31 hotels in California, Florida and
Texas. The following table provides certain information regarding the Hotels
through September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF HOTELS
ACQUIRED NUMBER OF SUITES
---------------- ----------------
<S> <C> <C>
1994 7 1,730
1995 13 2,649
1996 23 5,769
1ST QUARTER 1997 15 3,446
2ND QUARTER 1997 9 2,715
3RD QUARTER 1997 4 1,000
------ ------
71 17,309
======
Additional suites constructed by
the Company 177
------
17,486
======
</TABLE>
The Company completed construction and placed into service on
July 1, 1997, 129 net additional suites, meeting rooms and other public area
upgrades at its Boston-Marlborough, Massachusetts hotel at a cost of $15.9
million. The Company is constructing 67 additional suites at its Jacksonville,
Florida hotel and 67 additional suites at its Orlando (North), Florida hotel at
an aggregate projected cost of $10.2 million with an expected completion in
early 1998.
The Company leases all of the Hotels to DJONT Operations, L.L.C.
("DJONT"), or a consolidated subsidiary thereof (collectively, the "Lessee"),
under operating leases providing for the payment of percentage rent (the
"Percentage Leases"). Hervey A. Feldman and Thomas J. Corcoran, Jr., the
Chairman of the Board and President of the Company, respectively, beneficially
own a 50% voting equity interest in DJONT. The remaining 50% non-voting equity
interest in DJONT is beneficially owned by the children of Charles N.
Mathewson, a director of the Company and major investor in the predecessor
entities. The Company's partners in partnerships owning 12 of the Hotels hold
special purpose non-voting equity interests in the consolidated subsidiary of
DJONT which leases such Hotels, which interests entitle them to 50% of such
subsidiary's net income before overhead with respect to such Hotels. In
addition, the Company's partner in a partnership owning three of the Hotels
holds a 50% non-voting equity interest in the consolidated subsidiary of DJONT
leasing those Hotels. See Note 2 Commitments and Related Party Transactions for
6
<PAGE> 7
FELCOR SUITES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS -(CONTINUED)
additional discussion regarding Lessee consolidated subsidiaries. The Lessee
has entered into management agreements pursuant to which 50 of the Hotels are
managed by Promus Hotels, Inc. ("Promus"), 12 of the Hotels are managed by a
subsidiary of Doubletree Hotel Corporation ("Doubletree"), six of the hotels
are managed directly by, or by a subsidiary of, ITT Sheraton Corporation
("Sheraton"),the three remaining Hotels are managed by two other management
companies.
A brief discussion of the hotels acquired and other significant
transactions occurring in the third quarter of 1997 follows:
o On July 28, 1997 the Company acquired three Doubletree Guest Suites
hotels for an aggregate purchase price of $71.2 million in cash. The
hotels total 635 suites and are located in Lake Buena Vista, Florida;
Raleigh/Durham, North Carolina and Tampa (Rocky Point), Florida. These
hotels are managed by a subsidiary of Doubletree.
o On September 30, 1997 the Company acquired the partnership which owns
the 365 room Sheraton Society Hill hotel in Philadelphia, Pennsylvania
for $51 million in cash. This hotel is managed by Sheraton.
o On September 30, 1997 the Company declared a third quarter dividend of
$0.55 per common share and $0.4875 per share on its $1.95 Series A
Cumulative Preferred Stock to shareholders of record on October 15,
1997. This dividend is payable on October 31, 1997.
o On August 14, 1997 the Company announced that it had increased its
unsecured revolving line of credit from $400 million to $550 million,
extended the maturity for an additional year to September 30, 2000 and
reduced the effective interest rate.
o Following the end of the third quarter, the Company announced the
completion of a private placement of $300 million of long term senior
unsecured notes. The notes were issued in two maturities, consisting of
$175 million of 7d% notes due 2004 and $125 million of 7e% notes due
2007. The proceeds were used to pay off the Company's $85 million
collateralized term loan and to pay down the Line of Credit. The Company
has filed a registration statement with the SEC, which has not yet been
declared effective, to exchange this privately placed debt for
registered debt with identical terms.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") and
should be read in conjunction with the financial statements and notes thereto
of the Company and the Lessee included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996 (the "10-K"). The notes to the
financial statements included herein highlight significant changes to the notes
included in the 10-K and present interim disclosures required by the SEC. The
statements for the three and nine months ended September 30, 1997 are
unaudited; however, in the opinion of management, all adjustments (which
include only normal recurring accruals) have been made which are considered
necessary to present fairly the operating results and financial position of the
Partnership for the unaudited periods.
2. SUPPLEMENTAL CASH FLOW INFORMATION
In the first nine months of 1997 the Company purchased certain assets
and assumed certain liabilities of hotels. These purchases were recorded under
the purchase method of accounting. The fair value of the acquired assets and
liabilities recorded at the date of acquisition are as follows:
<TABLE>
<S> <C>
Assets acquired .................................... $ 545,122
Minority interest contribution to other
partnerships...................................... (8,022)
---------
Net cash paid by the Partnership ............... $ 537,100
=========
</TABLE>
7
<PAGE> 8
FELCOR SUITES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the first nine months of 1997 the Company purchased interests in nine
unconsolidated partnerships that hold hotel properties. The hotels associated
with these unconsolidated subsidiaries are located in Atlanta (Perimeter), GA;
Austin, TX; Covina, CA; Kansas City (Country Club Plaza), MO; Overland Park,
KS; Raleigh, NC; San Antonio, TX; San Antonio (Airport), TX; and Secaucus, NJ.
These purchases were recorded under the equity method of accounting. The
value of the assets recorded at the date of acquisition are as follows:
<TABLE>
<S> <C>
Assets acquired ............................ $ 64,672
Operating partnership units issued ......... (5,101)
--------
Net cash paid by the Partnership ....... $ 59,571
========
</TABLE>
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Upon final completion of the conversion of one hotel, the Hotels will be
operated as Embassy Suites (52), Doubletree Guest Suites (12), Sheraton Suites
(2), Sheraton (4) and Hilton Suites (1) hotels. The Embassy Suites hotels and
Hilton Suites hotel will operate pursuant to franchise license agreements which
require the payment of fees based on a percentage of suite revenue. These fees
are paid by the Lessee. There are no separate franchise license agreements with
respect to the Doubletree Guest Suites hotels, Sheraton hotels or Sheraton
Suites hotels, which rights are included in the management agreement.
The Lessee generally pays the managers a base management fee based on a
percentage of total revenue and an incentive management fee based on the
Lessee's net income before overhead expenses. In certain instances, the hotel
managers have subordinated fees and committed to make subordinated loans to the
Lessee, if needed, to meet its rental and other obligations under the leases.
The Company is to receive rental income from the Lessee under the
Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels), 2006 (19
hotels) and 2007 (19 hotels). The rental income under the Percentage Leases
between the 14 unconsolidated partnerships, of which the Company owns 50%, and
the Lessee are payable to the respective partnerships and as such is not
included in the following schedule of future lease commitments to the Company.
Minimum future rental income (i.e., base rents) to the Company under these
noncancellable operating leases at September 30, 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
Remainder of 1997 ................. $ 26,150
1998 .............................. 104,600
1999 .............................. 104,600
2000 .............................. 104,600
2001 .............................. 104,600
2002 and thereafter ............... 493,961
--------
$938,511
========
</TABLE>
Minority equity interest in two of DJONT's consolidated subsidiaries,
relating to an aggregate of 15 Hotels, are held by unrelated third parties that
also own an equity interest in such Hotels. Messrs. Feldman and Corcoran, such
unrelated third party owners, and the managers of certain of the Hotels have
agreed, directly or through their affiliates, to make loans to the Lessee of up
to an aggregate of approximately $15.4 million, to the extent necessary to
enable the Lessee to pay rent and other obligations due under the respective
Percentage Leases relating to a total of 32 of the Hotels. Amounts so borrowed
by the Lessee, if any, will be subordinate in right of repayment to the prior
payment in full of rent and other obligations due under the Percentage Leases
relating to such Hotels. No loans were outstanding under such agreements at
September 30, 1997.
8
<PAGE> 9
FELCOR SUITES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations at September 30, 1997 and December
31, 1996 consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Line of Credit ................................... $296,000 $115,000
Term loan ........................................ 85,000 85,000
Renovation loan .................................. 25,000 25,000
Other debt payable ............................... 1,550 650
-------- --------
$406,650 $226,550
======== ========
</TABLE>
In the third quarter of 1997, the Company increased the amount available
under its unsecured Line of Credit from $400 million to $550 million, extended
the term by one year to September 30, 2000 and reduced the effective interest
rate. Interest payable on borrowings under the Line of Credit is variable,
determined from a ratings-based pricing matrix, and is currently set at LIBOR
plus 140 basis points.
The Company had an $85 million collateralized term loan outstanding at
September 30, 1997 which bore interest at LIBOR plus 150 basis points. The $85
million collateralized term loan was repaid in full on October 1, 1997 from the
proceeds of the long term senior unsecured private placement debt. This senior
unsecured private placement debt, which the Company placed on October 1, 1997,
bears interest at 7d% for the notes due 2004 and 7e% for the notes due 2007.
The Company has filed a registration statement with the SEC, which has not yet
been declared effective, to exchange privately placed debt for registered debt
with identical terms. Also outstanding at September 30, 1997 was a renovation
loan of $25 million that bears interest at LIBOR plus 45 basis points. At
September 30, 1997, 30 day LIBOR was 5.6563%.
Under its loan agreements the Company is required to satisfy various
affirmative and negative covenants. The Company was in compliance with these
covenants at September 30, 1997.
Capital lease obligations at September 30, 1997 and December 31, 1996
consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1997
------------- ------------
<S> <C> <C>
Capital land and building lease obligations ........... $ 9,419 $ 9,675
Capital equipment lease obligations ................... 2,108 3,200
------- -------
$11,527 $12,875
======= =======
</TABLE>
5. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS
At September 30, 1997, the Company owned 50% interests in separate
partnerships owning 14 hotels, a parcel of undeveloped land and a condominium
management company. The Company is accounting for its investments in these
unconsolidated partnerships under the equity method.
9
<PAGE> 10
FELCOR SUITES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS -- (CONTINUED)
Summarized combined financial information for unconsolidated partnerships, of
which the Company owns 50%, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Balance sheet information:
Partnership assets (primarily hotel assets) $390,302 $138,972
Non-recourse mortgage debt ................ 158,455 49,402
Equity .................................... 255,212 119,734
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
------- ------ ------- ------
<S> <C> <C> <C> <C>
Statement of operations information:
Percentage lease revenue ....................................... $13,297 $3,889 $35,551 $6,011
Other income ................................................... 3,140 4,316
------- ------ ------- ------
Total revenue .............................................. 16,437 3,889 39,867 6,011
Expenses:
Depreciation .............................................. 4,216 1,085 11,431 2,037
Taxes, insurance and other ................................ 3,436 195 6,314 358
Interest expense .......................................... 3,215 689 8,216 689
------- ------ ------- ------
Total expenses ............................................. 10,867 1,969 25,961 3,084
------- ------ ------- ------
Net income ..................................................... $ 5,570 $1,920 $13,906 $2,927
======= ====== ======= ======
50% of net income attributable to the Company .................. $ 2,785 $ 960 $ 6,953 $1,464
Amortization of cost in excess of book value ................... 447 33 1,188 52
------- ------ ------- ------
Income from unconsolidated partnerships ........................ $ 2,338 $ 927 $ 5,765 $1,412
======= ====== ======= ======
</TABLE>
6. TREASURY STOCK
In conjunction with the June 30, 1997 common stock offering of 11.2
million shares, the Company purchased, at the net offering price of $36.625,
1.2 million shares of its common stock from Promus. The stock was purchased at
an aggregate cost of $41.1 million (after allocation of offering expenses) and
is recorded using the cost method of accounting. All of the acquired shares are
held as common stock in treasury.
7. TAXES, INSURANCE AND OTHER
Taxes, insurance and other is comprised of the following for the three
and nine months ended September 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -----------------
1997 1996 1997 1996
------ ------ ------- ------
<S> <C> <C> <C> <C>
Real estate and personal property taxes $5,015 $2,631 $13,848 $7,649
Property insurance .................... 483 353 1,347 966
Land lease expense .................... 459 268 1,119 869
State franchise taxes ................. 198 4 498 333
Other ................................. 4 100 42
------ ------ ------- ------
Total taxes, insurance and other .. $6,155 $3,260 $16,912 $9,859
====== ====== ======= ======
</TABLE>
10
<PAGE> 11
FELCOR SUITES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited Pro Forma Consolidated Statements of Operations
for the nine months ended September 30, 1997 and 1996 are presented as if the
acquisitions of all hotels owned by the Company at September 30, 1997, the
private placement of $300 million of senior unsecured notes and the equity
offerings (and subsequent contribution of proceeds to the Company) consummated
during 1996 and 1997 had occurred as of January 1, 1996 and the Hotels had all
been leased to the Lessee pursuant to Percentage Leases. Such pro forma
information is based in part upon the Consolidated Statements of Operations of
the Company and pro forma Statements of Operations of the Lessee included
elsewhere in this Quarterly Report on Form 10-Q. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made.
The following unaudited Pro Forma Consolidated Statements of Operations
for the periods presented are not necessarily indicative of what actual results
of operations of the Company would have been assuming such transactions had
been completed on January 1, 1996, nor does it purport to represent the results
of operations for future periods.
11
<PAGE> 12
FELCOR SUITES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER UNIT DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Percentage lease revenue ........................................... $152,127 $132,487
Income from unconsolidated partnerships ............................ 5,681 2,859
-------- --------
Total revenue .................................................. 157,808 135,346
Expenses:
General and administrative ......................................... 2,743 2,707
Depreciation ....................................................... 43,243 30,147
Taxes, insurance and other ......................................... 21,045 18,450
Interest expense ................................................... 28,244 25,642
Minority interest in other partnerships ............................ 427 242
-------- --------
Total expenses ................................................. 95,702 77,188
-------- --------
Net income ........................................................... 62,106 58,158
Preferred distributions .............................................. 8,848 8,848
-------- --------
Net income applicable to unitholders ................................. $ 53,259 $ 49,310
======== =======
Per unit information:
Net income ......................................................... $ 1.35 $ 1.26
======== =======
Weighted average number of units outstanding ....................... 39,481 39,179
</TABLE>
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
For background information relating to the Partnership and the
definitions of certain capitalized terms used herein, reference is made to Note
1 of Notes to Consolidated Financial Statements of FelCor Suites Limited
Partnership appearing elsewhere herein.
THIRD QUARTER HIGHLIGHTS:
o FFO of $39.2 million or $0.89 per share and unit sets a new record for
the Company and represents a 27% increase in FFO per share and unit
for the quarter. Revenues increased from $26.4 million in the third
quarter of 1996 to $51.1 million in the current quarter.
o Net income before extraordinary charges increased from $0.38 per share
to $0.49 per share, an increase of 28.9%.
o RevPAR for the Company's total portfolio increased 7.3% over the third
quarter of 1996. Excluding the Company's four hotels located in
Atlanta, which were impacted by the Olympics in 1996, RevPAR for the
third quarter increased 9.8% over the third quarter of 1996. In
addition, on a comparable basis excluding the twelve hotels undergoing
rebranding, renovation or room additions, RevPAR increased 12.3% for
the quarter.
o The 18 fully renovated Crown Sterling Suites(R) hotels ("CSS Hotels")
experienced a 22.2 % increase in RevPAR as compared to the third
quarter of 1996.
o The Company acquired four hotels (one Sheraton(R) hotel and three
Doubletree Guest Suites(R) hotels) during the quarter, representing a
gross investment of approximately $122 million and 1,000 suites/rooms.
o On August 18, 1997 the Company amended and restated its existing
unsecured line of credit in order to increase availability from $400
million to $550 million, extend the term by one year to September 30,
2000 and reduce pricing.
o On September 30, 1997 the Company announced that it would increase its
Common Stock dividend by 10% to an annual rate of $2.20 per share,
beginning with a third quarter 1997 dividend of $0.55 per share.
o Following the end of the quarter, the Company announced the completion
of a private placement of $300 million of long term senior unsecured
notes. The notes were issued in two maturities, consisting of $175
million of 7d% notes due 2004 and $125 million of 7e% notes due 2007.
Upon application of the proceeds, the Company had only $12 million of
secured indebtedness and more than $1.6 billion of unencumbered
assets.
RESULTS OF OPERATIONS
The Partnership -- Actual
Nine Months Ended September 30, 1997 and 1996
For the nine months ended September 30, 1997 and 1996, the Partnership
had revenues of $128.7 million and $75.0 million, respectively, consisting of
Percentage Lease revenues of $122.7 million and $72.6 million, income in
unconsolidated partnerships of $5.8 million and $1.4 million and other revenue
(made up primarily of interest income) of $283,000 and $937,000, respectively.
Percentage Lease revenue is computed as a percentage of suite revenues, food
and beverage revenues and food and beverage rents of the Hotels. For the nine
months ended September 30, 1997, 97.3% of Percentage Lease revenue was derived
from suite revenues. A more detailed discussion of hotel suite revenue begins
at "The Hotels - Actual" section of this Management's Discussion and Analysis
of Financial Condition and Results of Operations.
The increase in Percentage Lease revenue is attributed primarily to
the increased number of hotels owned at September 30, 1997 compared to the same
period in 1996 and increased suite revenue at the comparable hotels (those
13
<PAGE> 14
hotels owned for the entire nine months in both 1996 and 1997). The increase in
the number of hotels accounted for approximately $43.0 million of the increase
(86%) while Percentage Lease revenue for the nineteen comparable hotels
increased by $7.1 million (14%).
Suite revenues for the Original Hotels increased 9.3% and the CSS
Hotels increased suite revenue by 21.4% for this nine month period.
The increase in income from unconsolidated partnerships is principally
attributed to the increase in unconsolidated partnership hotels from five
hotels at September 30, 1996 to 14 at September 30, 1997.
Total expenses increased $40.8 million in the nine months ended
September 30, 1997 from $35.3 million to $76.1 million over the same period in
1996. The primary components of the dollar increase are: depreciation; taxes,
insurance and other; and interest expense. The primary reason for these
increases relate to the increased number of hotels owned by the Partnership.
Those expenses that made up the majority of the increase, as a percentage of
total revenue, were depreciation (27.9% of total revenue for the nine months
ended September 30, 1997 compared to 23.8% in the same period 1996), and
interest expense (15.6% of total revenue in 1997 compared to 8.4% in 1996).
Depreciation, as a percentage of total revenue, increased primarily as
a result of the major renovation projects which were placed in service and
started depreciating in late 1996 or early 1997.
The increased interest expense, as a percentage of total revenue, is
reflective of the additional borrowings during the end of 1996 and first nine
months of 1997 to finance hotel acquisitions and the renovation program.
Preferred distributions increased from $4.8 million for the nine
months in 1996 to $8.8 million for the same period in 1997. This increase is
due to the preferred units, issued in May 1996, which accrued a full nine
months of dividends in 1997.
Net income applicable to unitholders for the nine months ended
September 30, 1997 and 1996 was $43.8 million and $32.6 million respectively.
Three Months Ended September 30, 1997 and 1996
For the three months ended September 30, 1997 and 1996, the
Partnership had revenues of $51.1 million and $26.4 million, respectively,
consisting primarily of Percentage Lease revenues of $48.6 million and $25.3
million respectively, income from unconsolidated partnerships of $2.3 million
and $927,000, and other income of $112,000 and $163,000, respectively. A more
detailed discussion of hotel suite revenue begins at "The Hotels -- Actual"
section of this Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The increases in Percentage Lease revenues of $23.3 million is
attributable primarily to the hotels acquired since the third quarter of 1996
coupled with increased suite revenues at the 36 hotels that are comparable
(those hotels owned for the entire quarter in both 1997 and 1996). The increase
in hotels accounted for $17.2 million of the increase while the comparable
hotels contributed $6.1 million of the increase.
The increase in income from unconsolidated partnerships is principally
attributed to the increase in unconsolidated partnership hotels from five
hotels at September 30, 1996 to 14 at September 30, 1997.
Total expenses increased $15.7 million in the three months ended
September 30, 1997, from $13.0 million to $28.7 million. This represents an
increase in expenses as a percentage of total revenue of 6.8 percentage points
from 49.4% to 56.2%. The primary components of this increase in dollars were:
depreciation; taxes, insurance and other; and interest expense. The primary
reason for this increase is related to the increased number of hotels owned by
the Partnership. The expense that made up the majority of the increase, as a
percentage of total revenue, was interest expense (14.1% of total revenue in
1997 compared to 6.7% in 1996).
The increased interest expense, as a percentage of total revenue, is
reflective of the additional borrowings during the end of 1996 and first nine
months of 1997 to finance hotel acquisitions and the renovation program.
14
<PAGE> 15
Net income applicable to unitholders before extraordinary charge for
the quarter was $19.4 million, or 38.1% of total revenue, as compared to $8.0
million, or 30.5% of total revenue, for the third quarter of 1996.
Funds From Operations
The Company considers Funds From Operations to be a key measure of a
REIT's performance and should be considered along with, but not as an
alternative to, net income and cash flow as a measure of the Company's
operating performance and liquidity.
The following table computes Funds From Operations under the National
Association of Real Estate Investment Trusts ("NAREIT") definition. Funds From
Operations under the NAREIT definition consists of net income, computed in
accordance with generally accepted accounting principles, excluding gains or
losses from debt restructuring and sales of property, plus depreciation of real
property (including furniture and equipment) and after adjustments for
unconsolidated partnerships and joint ventures (in thousands, except per share
and unit data).
15
<PAGE> 16
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Funds From Operations (FFO):
Net income ........................................................ $22,385 $10,992 $52,641 $37,371
Less preferred distributions ...................................... 2,949 2,949 8,848 4,784
------- ------- ------- -------
Net income applicable to unitholders .............................. 19,436 8,043 43,793 32,587
Add back:
Extraordinary charge for write-off of deferred
financing ...................................................... 2,354 2,354
Depreciation .................................................... 14,238 7,529 35,969 17,833
Depreciation for unconsolidated partnerships .................... 2,555 575 6,904 1,070
------- ------- ------- -------
FFO available to units ............................................ 36,229 18,501 86,666 53,844
Add preferred distributions ....................................... 2,949 2,949 8,848 4,784
------- ------- ------- -------
FFO diluted for conversion of preferred units ..................... $39,178 $21,450 $95,514 $58,628
======= ======= ======= =======
Weighted average units outstanding ................................ 39,347 26,172 32,412 25,953
Weighted average units outstanding,
diluted for conversion of preferred stock ....................... 44,037 30,862 37,102 28,555
Per share and unit data:
FFO per units outstanding ......................................... $ 0.92 $ 0.71 $ 2.67 $ 2.07
FFO per units outstanding, diluted for
conversion of preferred units ................................... $ 0.89 $ 0.70 $ 2.57 $ 2.05
</TABLE>
Included in the Funds From Operations described above is the
Partnerships' share of FFO from its interest in fourteen unconsolidated
partnerships. The FFO contribution from these unconsolidated partnerships is as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Statement of operations information:
Percentage Lease revenue ........................................... $ 13,297 $ 3,889 $ 35,551 $ 6,011
Other income ....................................................... 3,140 4,316
-------- ------- -------- -------
Total revenue ................................ 16,437 3,889 39,867 6,011
Expenses:
Depreciation ............................................... 4,216 1,085 11,431 2,037
Taxes, insurance and other ................................. 3,436 195 6,314 358
Interest expense ........................................... 3,215 689 8,216 689
-------- ------- -------- -------
Total expenses ............................... 10,867 1,969 25,961 3,084
-------- ------- -------- -------
Net income ......................................................... $ 5,570 $ 1,920 $ 13,906 $ 2,927
======== ======= ======== =======
50% of net income attributable to the Partnership .................. $ 2,785 $ 960 $ 6,953 $ 1,464
Amortization of cost in excess of book value ....................... (447) (33) (1,188) (52)
-------- ------- -------- -------
Income from unconsolidated partnerships ............................ 2,338 927 5,765 1,412
Add back: Depreciation ............................................ 2,108 542 5,715 1,018
Amortization of cost in excess of book value ............ 447 33 1,189 52
-------- ------- -------- -------
FFO contribution of unconsolidated partnerships .................... $ 4,893 $ 1,502 $ 12,669 $ 2,482
======== ======= ======== =======
</TABLE>
16
<PAGE> 17
The Hotels -- Actual
The following table sets forth historical suite revenue and percentage
changes therein between the periods presented for the 71 hotels which the
Lessee operated at September 30, 1997. The following table also presents
comparative information with respect to percentage of occupied rooms
("Occupancy"), average daily rate ("ADR") and revenue per available room
("RevPAR") for the 13 Original Hotels, the 18 CSS Hotels, the 12 1996
Acquisitions and the 28 1997 Acquisitions, regardless of ownership, through
September 30, 1997. Except as otherwise noted below, each of such hotels is
operated as an Embassy Suite's hotel.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
1997 1996 VARIANCE 1997 1996 VARIANCE
---------- ----------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Room Revenue (in thousands):
Original Hotels (13) . $ 21,958 $ 19,828 10.7% $ 64,876 $ 59,353 9.3%
CSS Hotels (18) ...... 35,816 29,317 22.2% 108,379 89,287 21.4%
1996 Acquisitions (12) 24,007 22,749 5.5% 69,493 64,782 7.3%
1997 Acquisitions (28) 51,266 50,874 0.8% 157,331 155,134 1.4%
---------- ----------- ---------- -------
Total (71) ........... $ 133,047 $ 122,768 8.4% $ 400,079 $ 368,557 8.6%
========== =========== ========== =======
Occupancy:
Original Hotels ...... 76.9% 77.8% (0.9)pts 77.4% 77.7% (0.3)pts
CSS Hotels ........... 74.5% 68.3% 6.2 pts 74.5% 68.4% 6.1 pts
1996 Acquisitions .... 77.0% 76.6% 0.4 pts 76.2% 74.6% 1.6 pts
1997 Acquisitions .... 71.8% 73.9% (2.1)pts 72.9% 75.2% (2.3)pts
Total ................ 74.2% 73.5% 0.7 pts 74.6% 73.7% 0.9 pts
ADR:
Original Hotels ...... $ 107.50 $ 101.13 6.3% $ 109.29 $ 102.11 7.0%
CSS Hotels ........... 113.40 101.30 11.9% 115.67 103.21 12.1%
1996 Acquisitions .... 120.34 115.66 4.0% 118.69 112.74 5.3%
1997 Acquisitions .... 108.51 104.55 3.8% 110.25 105.18 4.8%
Total ................ 111.61 105.04 6.3% 112.92 105.42 7.1%
RevPAR:
Original Hotels ...... $ 82.70 $ 78.69 5.1% $ 84.61 $ 79.39 6.6%
CSS Hotels ........... 84.49 69.14 22.2% 86.16 70.60 22.0%
1996 Acquisitions .... 92.70 88.62 4.6% 90.44 84.07 7.6%
1997 Acquisitions .... 77.89 77.29 0.8% 80.42 79.13 1.6%
Total ................ 82.81 77.17 7.3% 84.24 77.70 8.4%
</TABLE>
ORIGINAL HOTELS: Boston - Marlborough, MA; Brunswick, GA; Chicago - Lombard,
IL; Corpus Christi, TX; Dallas (Love Field), TX; Dallas
(Park Central), TX; Flagstaff, AZ; Jacksonville, FL;
Nashville, TN; New Orleans, LA; Orlando (North), FL;
Orlando (South), FL; Tulsa, OK.
CSS HOTELS: Anaheim, CA; Baton Rouge, LA; Birmingham, AL; Boca Raton,
FL (1); Deerfield Beach, FL; Ft. Lauderdale, FL; Los
Angeles (LAX South), CA; Miami, FL; Milpitas, CA;
Minneapolis (Airport), MN; Minneapolis (Downtown), MN;
Napa, CA; Oxnard (Mandalay Beach), CA; Phoenix, AZ; San
Francisco (Airport North), CA; San Francisco (Airport
South), CA; St. Paul, MN; Tampa (Busch Gardens), FL(1).
1996 ACQUISITIONS: Atlanta-Buckhead, GA; Beaver Creek Resort (Avon-Vail), CO;
Boca Raton, FL; Charlotte, NC; Cleveland, OH; Deerfield,
IL; Indianapolis, IN; Kingston Plantation (Myrtle Beach),
SC(3); Lexington, KY(2); Parsippany, NJ; Piscataway, NJ;
San Rafael (Marin County) CA.
1997 ACQUISITIONS: Atlanta, GA; Atlanta Galleria, GA(4); Atlanta Gateway,
GA(4); Austin, TX; Austin (Downtown), TX(1); Bloomington,
MN(1); BWI Airport, MD(1); Chicago O'Hare, IL(4); Covina,
CA; Dallas Market Center, TX; Dallas Park Central(4); Dana
Point, CA(1); Kansas City, MO; Lake Buena Vista, FL(1); LAX
North, CA; Nashville, TN; Nashville, TN(1); Omaha, NE(1);
Overland Park, KS; Phoenix Crescent, AZ(4); Raleigh, NC;
San Antonio, TX; San Antonio (Airport), TX; Secaucus, NJ;
Society Hill, PA (4) ;Syracuse, NY; Tampa Rocky Point,
FL(1); Troy, MI(1).
(1) Operating as a Doubletree Guest Suites hotel
(2) Operating as a Hilton Suites hotel
(3) In the process of conversion to Embassy Suites hotels
(4) Operating as a Sheraton hotel
17
<PAGE> 18
Comparison of The Hotels' Suite Revenues for the Nine Months
Ended September 30, 1997 and 1996
Suite revenues from the 71 Hotels, included without regard to
ownership, increased 8.6% for the nine months ended September 30, 1997 from the
same period of 1996. The Original Hotels increased 9.3%, the CSS Hotels
increased 21.4%, the 1996 Acquisition Hotels increased 7.3% and the 1997
Acquisition Hotels increased 1.4% for the nine months ended September 30, 1997
as compared to the same period of 1996.
The Original Hotels were owned by the Partnership throughout all of
the first nine months of both 1997 and 1996. Suite revenue for these hotels
increased $5.5 million over the same period in 1996. This improvement in suite
revenue resulted from increased average daily rates ("ADR") of 7.0%. The hotels
in this group recorded increases in ADR ranging from 2.5% to 12.5%. The
increases in ADR at these hotels are attributed to the strength of the markets
in which these hotels operate as well as aggressive rate management.
For the nine months of 1997 over 1996 the CSS Hotels experienced an
increase in ADR of 12.1% to $115.67 and a 6.1 percentage point increase in
Occupancy to 74.5%. The strength of the improvement in the CSS Hotels is
partially reflective of the $54 million suite renovation program that was
completed in the first quarter of 1997. This program made substantial upgrades
and improvements to these former Crown Sterling Suites hotels. This group of
hotels were also converted to the Embassy Suites (16) or Doubletree Guest
Suites (2) brand during 1996. The increase in both occupancy and ADR is also
attributable in part, to the stronger marketing presence of the Embassy Suites
and Doubletree Guest Suites brands.
The 1996 Acquisition Hotels increased ADR by 5.3% to $118.69 and
occupancy increased 1.6 percentage points which resulted in suite revenue
increases for these hotels of $4.7 million in the first nine months of 1997
compared to the same period in 1996. Some of the 1996 Acquisition Hotels
benefitted from suite renovations completed in 1996 or during the first quarter
of 1997. The Company has committed to reserving 4% of suite revenue for ongoing
capital replacements and improvements for all of its Hotels, in addition to
making normal repair and maintenance expenditures and any necessary renovations
for hotels acquired.
The 1997 Acquisition hotels, collectively, increased ADR by 3.8%
and 4.8%, respectively for the three and nine months ended September 30, 1997
compared to the same period of 1996. Certain of the individual 1997 Acquisition
hotels, however, had decreases in ADR and/or Occupancy for such comparable
periods. These decreases are primarily the result of temporary declines
attributed to disruptions from rebranding, repositioning and/or renovation of
certain hotels and in the case of those hotels located in Atlanta, Georgia,
decreased demand in 1997 compared to 1996 due to the 1996 Summer Olympics which
were held in Atlanta.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's principal source of cash to meet its cash
requirements, including distributions to unitholders, is its share of the cash
flow from the Percentage Leases. For the nine months ended September 30, 1997,
cash flow provided by operating activities, consisting primarily of Percentage
Lease revenue, was $74.6 million and funds from operations diluted for the
conversion preferred units, which is the sum of net income and depreciation of
real property (including furniture and equipment), was $95.5 million. The
Lessee's obligations under the Percentage Leases are unsecured. The Lessee's
ability to make lease payments under the Percentage Leases and the
Partnership's liquidity, including its ability to make distributions to
unitholders, are substantially dependent on the ability of the Lessee to
generate sufficient cash flow from the operation of the Hotels.
At September 30, 1997, the Lessee had paid all amounts then due the
Partnership under the Percentage Leases. During the nine months ended 1997, the
Lessee realized a net loss of $1.6 million. The Lessee's accumulated
shareholders' deficit of $8.0 million at September 30, 1997 resulted from the
nine months ended 1997 loss and from losses during 1996 as a consequence of the
one-time costs of converting the CSS Hotels to the Embassy Suites and
Doubletree Guest Suites brands and the substantial number of suite nights lost
during the year due to renovation. It is anticipated that a substantial portion
of any future profits of the Lessee will be retained until a positive
shareholders' equity is restored. Although it is currently anticipated that the
Lessee could sustain a loss during 1997, it is anticipated that its future
earnings will be sufficient to enable it to continue to make its lease payments
under the Percentage Leases when due.
18
<PAGE> 19
Minority equity interest in two of DJONT's consolidated subsidiaries,
relating to an aggregate of 15 Hotels, are held by unrelated third parties that
also own an equity interest in such Hotels. Messrs. Feldman and Corcoran, such
unrelated third party owners, and the managers of certain of the Hotels have
agreed, directly or through their affiliates, to make loans to the Lessee of up
to an aggregate of approximately $15.4 million, to the extent necessary to
enable the Lessee to pay rent and other obligations due under the respective
Percentage Leases relating to a total of 32 of the Hotels. Amounts so borrowed
by the Lessee, if any, will be subordinate in right of repayment to the prior
payment in full of rent and other obligations due under the Percentage Leases
relating to such Hotels. No loans were outstanding under such agreements at
September 30, 1997.
The Partnership intends to acquire additional hotels and may incur
indebtedness to make such acquisitions, or to meet distribution requirements to
the extent that working capital and cash flow from the Partnership's
investments are insufficient to make such distributions.
At September 30, 1997, the Partnership had $18.9 million of cash and
cash equivalents and had utilized $296 million of the amount available under
the Partnership's $550 million unsecured revolving Line of Credit. On October
1, 1997, the Company placed $300 million in long term senior unsecured private
placement debt. This senior unsecured private placement debt, bears interest at
7d% for the notes due 2004, and 7e% for the notes due 2007. The Company has
filed a registration statement with the SEC, which has not yet been declared
effective, to exchange privately placed debt for registered debt with identical
terms.
To manage the relative mix of its debt between fixed and variable rate
instruments, the Partnership has entered into two separate interest rate swap
agreements. These interest rate swap agreements modify a portion of the
interest characteristics of the Partnership's outstanding debt without an
exchange of the underlying principal amount and effectively convert variable
rate debt to a fixed rate. The fixed rates to be paid, the effective fixed
rate, and the initial variable rate to be received by the Partnership at
September 30, 1997 are summarized in the following table:
<TABLE>
<CAPTION>
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 9/30/97 MATURITY
- --------------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C>
$50 million 6.1112 7.6112 6.4762% October 1999
$25 million 5.9550 7.4550 6.1910% November 1999
</TABLE>
After application of the $300 million senior unsecured privately
placed debt, and taking into consideration the $75 million in interest rate
swaps, the Company has reduced its variable rate debt to about 10% of total
debt outstanding. The fixed rate debt held by the Company bears interest at a
weighted average rate of 7.6%.
The differences to be paid or received by the Partnership under the
terms of the interest rate swap agreements are accrued as interest rates change
and recognized as an adjustment to interest expense by the Partnership pursuant
to the terms of its interest rate agreement and will have a corresponding
effect on its future cash flows. Agreements such as these contain a credit risk
that the counterparties may be unable to meet the terms of the agreement. The
Partnership minimizes that risk by evaluating the creditworthiness of its
counterparties, which are limited to major banks and financial institutions,
and does not anticipate nonperformance by the counterparties.
The Company completed construction and placed into service on July 1,
1997, 129 net additional suites, meeting rooms and other public area upgrades
at its Boston-Marlborough, Massachusetts hotel at a cost of $15.9 million. The
Company is constructing 67 additional suites at its Jacksonville, Florida hotel
and 67 additional suites at its Orlando (North), Florida hotel at an aggregate
projected cost of $10.2 million with an expected completion in early 1998.
The Partnership's cash flow from financing activities of approximately
$571.7 million for the nine months ended September 30, 1997 resulted from the
following: The sale of an aggregate of 14.2 million units with net proceeds of
$448.6 million; (3.0 million units in the first quarter of 1997 at $35.50 per
unit and 11.2 million units at September 30, 1997 at $36.625) net of 1.2
million units repurchased from Promus net borrowings under the Company's line
of credit of $180.1 million; and distributions paid of $57.0 million.
19
<PAGE> 20
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates periodically to reflect the effects of inflation. Competitive pressures
may, however, limit the Lessee's ability to raise room rates.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates primarily during the first three quarters of
each year. This seasonality can be expected to cause fluctuations in the
Partnership's quarterly lease revenue, particularly during the fourth quarter,
to the extent that it receives Percentage Rent. To the extent the cash flow
from operations are insufficient during any quarter, due to temporary or
seasonal fluctuations in lease revenue, the Partnership expects to utilize
other cash on hand or borrowings under the Line of Credit to make distributions
to its shareholders.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"),
No. 129 "Disclosure of Information About Capital Structure" ("SFAS 129"), No.
130 "Reporting Comprehensive Income" ("SFAS 130"), and No. 131 "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131"), all of
which are effective for fiscal years beginning after December 15, 1997.
SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 129 establishes standards for
disclosing information about an entity's capital structure such as information
about securities, liquidation preference of preferred stock and redeemable
stock. SFAS 130 specifies the presentation and disclosure requirements for
reporting comprehensive income which includes those items which have been
formerly reported as a component of shareholders' equity. SFAS 131 establishes
the disclosure requirements for reporting segment information.
Management believes that, when adopted, SFAS 128, 129, 130 and 131 will
not have a significant impact on the Company's financial statements.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Quarterly Report on Form 10-Q include forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended ("1933 Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended ("1934 ACT"). Although the Partnership believes that the
expectations reflected in such forward looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Important factors that could cause actual results to differ
materially from the Partnership's current expectations are disclosed herein and
in the Company's other filings under the 1933 Act and 1934 Act (collectively,
"Cautionary Disclosures"). The forward looking statements included herein, and
all subsequent written and oral forward looking statements attributable to the
Partnership or persons acting on its behalf, are expressly qualified in their
entirety by the Cautionary Statements.
20
<PAGE> 21
PART II. -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
For information relating to hotel acquisitions and certain other
transactions by the Company through September 30, 1997, see Note 1 of Notes to
Consolidated Financial Statements of FelCor Suites Limited Partnership
contained in Item 1 of Part I of this Quarterly Report on Form 10-Q. Such
information is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C> <C>
3.1 -- Certificate of Limited Partnership of the Partnership dated May 20, 1994, as
filed with the Secretary of State of Delaware (filed as Exhibit 3.1 to the
Partnership's registration statement on Form S-4 (File No. 333-39595) (the
"1997 S-4 Registration Statement") and incorporated herein by reference).
3.2 -- Amended and Restated Agreement of Limited Partnership of the Partnership (filed
as Exhibit 10.1 to FelCor's Annual Report on Form 10-K/A Amendment No. 1 for the
fiscal year ended December 31, 1994 (the "1994 10-K/A") and incorporated herein
by reference).
3.2.1 -- First Amendment to Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of November 17, 1995 by and among FelCor, Promus Hotels,
Inc. and all of the persons or entities who are or shall in the future become
limited partners of the Partnership (filed as Exhibit 10.1.1 to FelCor's Annual
Report on Form 10-K, as amended, for the fiscal year ended December 31, 1995
(the "1995 10-K") and incorporated herein by reference).
3.2.2 -- Second Amendment to Amended and Restated Agreement of Limited Partnership of
Partnership dated as of January 9, 1996 between FelCor and all of the persons
or entities who are or shall in the future become limited partners of the
Partnership (filed as Exhibit 10.1.2 to the 1995 10-K and incorporated herein
by reference).
3.2.3 -- Third Amendment to Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of January 10, 1996 by and among FelCor, MarRay-LexGreen,
Inc. and all of the persons and entities who are or shall in the future become
limited partners of the Partnership (filed as Exhibit 10.1.3 to the 1995 10-K and
incorporated herein by reference).
3.2.4 -- Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of
the Partnership dated as of January 10, 1996 by and among FelCor, Piscataway-
Centennial Associates Limited Partnership and all of the persons or entities who
are or shall in the future become limited partners of the Partnership (filed as
Exhibit 10.1.4 to the 1995 10-K and incorporated herein by reference).
3.2.5 -- Fifth Amendment to Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of May 2, 1996, between FelCor and all of the persons or
entities who are or shall in the future become limited partners of the Partner-
ship, adopting Addendum No. 2 to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of May 2, 1996 (filed as Exhibit 10.1.5
to FelCor's Form 10-Q for the quarter ended June 30, 1996 (the "1996 Second
Quarter 10-Q") and incorporated herein by reference).
3.2.6 -- Sixth Amendment to Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of September 16, 1996, by and among FelCor, John B.
Urbahns, II and all of the persons or entities who are or shall in the future
become limited partners of the Partnership (filed as Exhibit 10.1.6 to FelCor's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996
10-K") and incorporated herein by reference).
4.1 -- Indenture dated as of October 1, 1997 by and among the Partnership, FelCor, the
Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as
Trustee (filed as Exhibit 4.1 to the 1997 S-4 Registration Statement and
incorporated herein by reference).
10.2.2 -- Schedule of executed Lease Agreements identifying material variations from the
form of Lease Agreement with respect to hotels acquired by the Partnership
through September 30, 1997 (filed as Exhibit 10.2.2 to the 1997 S-4 Registration
Statement and incorporated herein by reference).
10.23 -- Third Amended and Restated Revolving Credit Agreement dated as of August 14,
1997 among FelCor and the Partnership, as Borrower, the Lenders party thereto,
The Chase Manhattan Bank, as Administrative Agent, and Wells Fargo Bank,
National Association, as Documentation Agent (filed as Exhibit 10.23 to the 1997
S-4 Registration Statement and incorporated herein by reference).
10.25 -- Registration Rights Agreement dated as of September 26, 1997 among the General
Partner, the Partnership, Morgan Stanley & Co. Incorporated, NationsBank Capital
Markets, Inc. and Salomon Brothers Inc (filed as Exhibit 10.25 to the 1997 S-4
Registration Statement and incorporated herein by reference).
27.1 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1997
FELCOR SUITES LIMITED PARTNERSHIP
By: /s/ Lester C. Johnson
--------------------------------
Lester C. Johnson
Vice President and Controller
FelCor Suite Hotels, Inc.
its general partners
(Chief Accounting Officer)
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,942
<SECURITIES> 0
<RECEIVABLES> 13,419
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,361
<PP&E> 1,519,947
<DEPRECIATION> 72,607
<TOTAL-ASSETS> 1,616,487
<CURRENT-LIABILITIES> 29,937
<BONDS> 418,177
0
151,250
<COMMON> 0
<OTHER-SE> 1,008,765
<TOTAL-LIABILITY-AND-EQUITY> 1,616,487
<SALES> 0
<TOTAL-REVENUES> 51,053
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,183
<INCOME-PRETAX> 22,385
<INCOME-TAX> 0
<INCOME-CONTINUING> 22,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,385
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
