<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
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 0-24250
FELCOR SUITE HOTELS, INC.
(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.
5215 N. O'CONNOR BLVD., SUITE 330, IRVING, TEXAS 75039
(Address of principal executive offices) (Zip Code)
(214) 869-8180
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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
----- -----
The number of shares of Common Stock, par value $.01 per share, of
FelCor Suite Hotels, Inc. outstanding on April 30, 1996 was 22,884,520.
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<PAGE> 2
FELCOR SUITE HOTELS, INC.
INDEX
PART I. -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FELCOR SUITE HOTELS, INC.
Condensed Consolidated Balance Sheets - March 31, 1996 (Unaudited)
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations -- For the Three Months
Ended March 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows -- For the Three Months
Ended March 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . 7
DJONT OPERATIONS, L.L.C.
Consolidated Balance Sheets - March 31, 1996 (Unaudited)
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Consolidated Statements of Operations -- For the Three Months
Ended March 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . . . . 13
Consolidated Statements of Cash Flows -- For the Three Months
Ended March 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . . . . 14
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART II. -- OTHER INFORMATION
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
2
<PAGE> 3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR SUITE HOTELS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- -----------
(UNAUDITED)
<S> <C> <C>
Investment in hotel properties, net ........................................... $ 726,727 $ 338,974
Cash and cash equivalents ..................................................... 660 166,821
Prepayments ................................................................... 8,959 35,317
Due from Lessee ............................................................... 8,048 2,396
Deferred expenses, net ........................................................ 2,391 1,713
Mortgage notes receivable (Notes 1 and 5)...................................... 24,000
Other assets .................................................................. 1,912 3,138
--------- ---------
Total assets ......................................................... $ 772,697 $ 548,359
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Distributions payable ......................................................... $ 11,907 $ 4,918
Accrued expenses and other liabilities ........................................ 5,563 3,552
Debt .......................................................................... 164,916 8,410
Capital lease obligations ..................................................... 13,627 11,256
Minority interest in Partnership .............................................. 69,202 58,837
--------- ---------
Total liabilities .................................................... 265,215 86,973
--------- ---------
Commitments and contingencies (Note 2)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized, no shares issued
Common Stock, $.01 par value, 50,000 shares authorized, 22,784 and
21,135 shares issued and outstanding at March 31, 1996
and December 31, 1995, respectively .................................. 228 211
Additional paid in capital .................................................... 508,208 463,524
Unearned officers' and directors' compensation ................................ (571) (473)
Distributions in excess of earnings ........................................... (383) (1,876)
--------- ---------
Total shareholders' equity ........................................... 507,482 461,386
--------- ---------
Total liabilities and shareholders' equity ........................... $ 772,697 $ 548,359
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 4
FELCOR SUITE HOTELS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
------- -------
<S> <C> <C>
Revenues:
Percentage lease revenue ............................................................ $24,351 $ 5,372
Other revenue ....................................................................... 147 8
------- -------
Total revenue ................................................................ 24,498 5,380
------- -------
Expenses:
General and administrative .......................................................... 297 147
Depreciation ........................................................................ 4,516 1,058
Amortization of loan costs and organization costs ................................... 115 43
Taxes, insurance and other .......................................................... 3,585 559
Amortization of unearned officers' and directors' compensation ...................... 69 30
Interest expense .................................................................... 2,325 317
------- -------
Total expenses ............................................................... 10,907 2,154
------- -------
Income before minority interest ....................................................... 13,591 3,226
Minority interest ..................................................................... 1,620 854
------- -------
Net income applicable to common shareholders .......................................... $11,971 $ 2,372
======= =======
Net income per common share ........................................................... $ 0.53 $ 0.50
======= =======
Weighted average number of common shares outstanding .................................. 22,614 4,707
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
FELCOR SUITE HOTELS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 11,971 $ 2,372
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation and amortization ................................. 4,700 1,131
Minority interest ............................................. 1,620 854
Changes in assets and liabilities:
Due from Lessee ............................................... (5,652) (781)
Deferred expenses and other assets ............................ (450) 274
Accrued expenses and other liabilities ........................ 2,011 (569)
--------- ---------
Net cash flow provided by operating activities ......... 14,200 3,281
--------- ---------
Cash flows from investing activities:
Acquisition of hotel properties and related accounts ................. (226,577) (1,568)
Acquisition of mortgage notes receivable ............................. (24,000)
Improvements and additions to hotel properties ....................... (9,272) (338)
--------- ---------
Net cash flow used in investing activities ............. (259,849) (1,906)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings ............................................. 66,200
Repayment of borrowings .............................................. (18,746)
Loan costs ........................................................... (875)
Proceeds from Second Subscription Agreement .......................... 37,827
Distributions paid to limited partners ............................... (1,102) (653)
Distributions paid to common shareholders ............................ (3,816) (1,804)
--------- ---------
Net cash flow provided by (used in) financing
activities........................................... 79,488 (2,457)
--------- ---------
Net change in cash and cash equivalents .................................... (166,161) (1,082)
Cash and cash equivalents at beginning of period ........................... 166,821 1,118
--------- ---------
Cash and cash equivalents at end of period ................................. $ 660 $ 36
========= =========
Supplemental cash flow information --
Interest paid ........................................................ $ 1,455 $ 390
========= =========
</TABLE>
5
<PAGE> 6
FELCOR SUITE HOTELS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Supplemental disclosure of noncash financing activities:
The Company granted an aggregate of 6,000 shares of common stock in lieu
of cash compensation to four of its directors for 1996, which at January 1,
1996, were valued at $27.75 per share.
In the first quarter of 1996 the Company purchased certain assets and
assumed certain liabilities of hotel properties. 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 ................................... $ 383,492
Application of prepayment to acquisition
of hotel properties.............................. (28,612)
Debt assumed ...................................... (108,744)
Capital equipment leases assumed .................. (2,679)
Partnership units issued .......................... (10,880)
Common stock issued ............................... (6,000)
---------
Net cash paid ............................... $ 226,577
=========
</TABLE>
On March 18, 1996, the Company declared a dividend of $0.46 per share of
Common Stock for the first quarter of 1996 which was paid on April 30, 1996 to
shareholders of record on April 1, 1996.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE> 7
FELCOR SUITE HOTELS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS
FelCor Suite Hotels, Inc. formed as a self-administered real estate
investment trust ("REIT"), was incorporated on May 16, 1994 and commenced
operations on July 28, 1994. At the commencement of operations, FelCor Suite
Hotels, Inc. acquired an equity interest of approximately 74% in FelCor Suites
Limited Partnership (the "Partnership"), which owned six Embassy Suites(R)
hotels (the "Initial Hotels") with an aggregate of 1,479 suites. At March 31,
1996, FelCor Suite Hotels, Inc. owned, through its 88.0% ownership of the
Partnership and its consolidated subsidiaries (collectively, the "Company"),
interests in 34 hotels with an aggregate of 7,880 suites (collectively the
"Hotels"), and had two additional hotels under purchase contracts and one hotel
under option. The following table provides certain information regarding the
Company's acquisition of the 28 additional hotels acquired through March 31,
1996:
<TABLE>
<CAPTION>
NUMBER OF HOTELS NUMBER OF SUITES AGGREGATE
QUARTER ACQUIRED ACQUIRED PURCHASE PRICE
------- ---------------- ---------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
4th Quarter 1994 1 251 $ 25.8
1st Quarter 1995 2 350 27.4
2nd Quarter 1995 1 100 9.4
3rd Quarter 1995 3 542 31.3
4th Quarter 1995 7 1,657 169.0
1st Quarter 1996 14 3,501 383.5
----- ----- ------
28 6,401 $646.4
===== ===== ======
</TABLE>
The Company owns 100% equity interests in 26 of the acquired hotels and 69%
and 50% interests in separate partnerships that own the Los Angeles Airport and
Chicago-Lombard hotels. Of the Hotels, 12 were Embassy Suites hotels at the time
of acquisition, and at March 31, 1996, 10 hotels had undergone upgrading or
renovation since acquisition and been converted to Embassy Suites hotels (8) or
to Doubletree Guest Suites(R) hotels (2), 11 hotels were in the process of being
upgraded or renovated in preparation for their conversion to Embassy Suites
hotels and one was a Hilton Suites(R) hotel. In addition, the Company is
currently constructing an additional 17 suites at one of the acquired hotels and
presently intends to construct an aggregate of 161 net additional suites at two
of the acquired hotels at an estimated aggregate cost of $17.7 million.
A brief discussion of the hotels acquired in the first quarter of 1996
follows:
On January 3, 1996, the Company acquired nine of the 18 Crown Sterling
Suites(R) hotels (collectively, in whole or part, the "CSS Hotels") for an
aggregate consideration of approximately $295 million, consisting of
approximately $214 million in cash including previous prepayments, the
assumption of approximately $75 million in existing indebtedness and the
issuance of 215,827 shares of common stock of the Company valued at $6 million.
The nine CSS Hotels are located in Anaheim, California (222 suites), Baton
Rouge, Louisiana (224 suites), Birmingham, Alabama (242 suites), Deerfield
Beach, Florida (244 suites), Ft. Lauderdale, Florida (359 suites), Miami
(Airport), Florida (314 suites), Milpitas, California (267 suites), Phoenix
(Biltmore), Arizona (233 suites) and San Francisco (Airport North), California
(312 suites). The Company has converted one hotel and plans to convert the
remaining hotels to Embassy Suites hotels.
On January 10, 1996, the Company acquired an Embassy Suites hotel in
Piscataway, New Jersey (225 suites) and a Hilton Suites(R) hotel in Lexington,
Kentucky (174 suites) for an aggregate consideration of approximately $36
million, consisting of approximately $11 million in cash, the assumption of
approximately $14 million in existing mortgage indebtedness and the issuance of
410,517 units of Partnership interest valued at approximately $11 million. The
Lexington hotel continues to operate as a Hilton Suites hotel.
On February 21, 1996, the Company acquired the Beaver Creek Lodge in
Beaver Creek, Colorado (72 suites) for approximately $11.3 million in cash. The
Company has converted this hotel to an Embassy Suites hotel.
7
<PAGE> 8
FELCOR SUITE HOTELS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND ACQUISITIONS -- (CONTINUED)
On February 28, 1996, the Company acquired the Embassy Suites hotel in
Boca Raton, Florida (263 suites) for approximately $18.8 million in cash.
On March 27, 1996, the Company acquired the general and certain limited
partner interests (representing an approximate 69% aggregate equity interest)
in, and certain indebtedness of, the limited partnership owning the 350-suite
CSS Hotel at the Los Angeles International Airport. Due to
the limited partnership's indebtedness to the Company, the Company will realize
substantially all of the economic benefit of the hotel's operations for the
foreseeable future. The Company paid approximately $690,000 in cash for such
interests and loaned this partnership approximately $2.5 million. Of this loan,
approximately $2.0 million was used to reduce such partnership's non-recourse
first mortgage indebtedness to a third party to approximately $19.7 million.
The aggregate consideration is approximately $22.4 million.
Pursuant to a subscription agreement, the Company issued an aggregate of
1,427,439 shares of Common Stock to Promus Hotels, Inc. ("Promus") effective in
January and February 1996 at a subscription price of $26.50 per share. In
addition to the proceeds from the sale of stock to Promus and cash on hand,
funds were borrowed under the Line of Credit (as herein defined) and debt was
assumed on certain of the hotels acquired to finance the purchases of the
foregoing hotels.
At March 31, 1996, the Company leased all of the Hotels to DJONT
Operations, L.L.C. or a wholly-owned subsidiary (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 Chief Executive Officer of the Company, respectively,
beneficially own 50% of the Lessee. The remaining 50% of the Lessee is
beneficially owned by the children of Charles N. Mathewson, a director of the
Company. The Lessee has entered into management agreements pursuant to which
30 of the Hotels are managed by Promus, two of the Hotels are managed by a
subsidiary of Doubletree Hotel Corporation ("Doubletree"), and two of the
Hotels are managed by American General Hospitality, Inc. ("AGHI").
At March 31, 1996, the Company was committed to purchasing two
additional CSS Hotels for an estimated aggregate consideration of $46 million.
In anticipation of the purchase of these hotels the Company purchased the
mortgage debt and accrued interest associated with the hotels, with a face
value of $28.4 million, for $24 million on March 28, 1996. These notes continue
to accrue interest at the respective mortgage rates which is fixed at 8.25% for
one hotel while the other is variable based on the London interbank offered
rate ("LIBOR") plus 250 basis points. (See Note 5. Subsequent Events.)
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, 1995 (the "10-K"). The notes to the
financial statements included herein highlight significant changes to notes
included in the 10-K and present interim disclosures required by the SEC. The
accompanying financial statements reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the interim financial
statements. All such adjustments are of a normal and recurring nature.
2. COMMITMENTS AND CONTINGENCIES
After conversion of the hotels acquired by the Company in December
1995 and the first quarter of 1996, the Hotels will operate as Embassy Suites
(31), Doubletree Guest Suites (2) and Hilton Suites (1). 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.
8
<PAGE> 9
FELCOR SUITE HOTELS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Hotels are managed by Promus (30), Doubletree (2), and AGHI (2) on
behalf of the Lessee. The Lessee 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.
The Lessee has future lease commitments to the Company under the Percentage
Leases which expire in 2004 (7 hotels), 2005 (12 hotels) and 2006 (14 hotels).
The lease commitment under the Percentage Lease between the Lessee and the
Promus/FelCor Lombard Venture (which owns the Chicago-Lombard hotel and which is
not consolidated with the Company), of which the Company owns 50%, is not
included in the following schedule of future lease commitments to the Company.
Minimum future rental income (i.e., base rents) under these noncancellable
operating leases (excluding the Chicago-Lombard hotel) at March 31, 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
Remainder of 1996 ................................................. $ 37,944
1997............................................................... 50,592
1998............................................................... 50,592
1999............................................................... 50,592
2000............................................................... 50,592
2001 and thereafter ............................................... 237,914
--------
$478,226
========
</TABLE>
The Company has a capital upgrade and renovation program for the CSS
Hotels and the other hotels acquired since September 1995 and has committed
approximately $60 million to be spent in 1995 and 1996 for this program. The
Company has spent approximately $10.9 million on such capital improvements
through the end of the first quarter of 1996 and expects to substantially
complete this program by the end of 1996. Promus has guaranteed a loan to the
Company up to $25 million to be used to fund a portion of the renovations of the
CSS Hotels that are being converted to Embassy Suites hotels ("Renovation
Loan"). At March 31, 1996, the Company had borrowed an aggregate of
approximately $8.0 million under this Renovation Loan.
3. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations at March 31, 1996 and December 31, 1995
consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Bank line of credit ................................ $ 43,600
Hotel mortgage debt ................................ 108,744
Renovation loan facility ........................... 8,000
Note payable to Promus ............................. 3,672 $ 7,500
Other debt payable ................................. 900 910
Capital equipment lease obligations ................ 3,710 1,213
Capital land and building lease obligations ........ 9,917 10,043
-------- --------
$178,543 $ 19,666
======== ========
</TABLE>
The Company has a revolving line of credit facility ("Line of Credit") of
$100 million. The Line of Credit bears interest, at the Company's option, at (1)
the prime rate, or (2) the 30-day or 90-day LIBOR plus 200 basis points, or (3)
the 30-day or 90-day U. S. Treasury Note yield plus 250 or 275 basis points,
respectively. At March 31, 1996, the Line of Credit interest rate was based on
LIBOR and the interest rates ranged from 7.28% to 7.50%.
9
<PAGE> 10
FELCOR SUITE HOTELS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEBT AND CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
The hotel mortgage debt bears interest at various rates ranging from 6.89%
to 8.78% for the three months ended March 31, 1996. These mortgages are
collateralized by interests in eight hotel properties and have maturities that
range from 2000 to 2005.
Minimum future principal payments on hotel mortgage debt outstanding at
March 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
Remainder of 1996 ................................................. $ 10,150
1997............................................................... 1,029
1998............................................................... 1,134
1999............................................................... 1,228
2000............................................................... 80,185
2001 and thereafter ............................................... 15,018
--------
$108,744
========
</TABLE>
The Company has a Renovation Loan facility, guaranteed by Promus, of up to
$25 million, to be used to fund a portion of the renovation costs of the CSS
Hotels being converted to Embassy Suites hotels. The Renovation Loan bears
interest based on LIBOR ranging from 5.84% to 5.96% at March 31, 1996. The
Renovation Loan requires quarterly principal payments of $1.25 million beginning
June 30, 1999 with the remaining principal balance due on June 1, 2000.
Minimum future lease payments under capital land, building and equipment
leases at March 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
Remainder of 1996 ............................................... $ 2,470
1997 ............................................................ 3,015
1998 ............................................................ 2,368
1999 ............................................................ 1,465
2000 ............................................................ 1,328
2001 and thereafter ............................................. 13,602
--------
24,248
Executory costs ................................................. (889)
Imputed interest ................................................ (9,732)
--------
Present value of net minimum lease payments ..................... $ 13,627
========
</TABLE>
4. PRO FORMA INFORMATION
The following unaudited Pro Forma Consolidated Statements of Operations for
the three months ended March 31, 1996 and 1995 are presented as if the
acquisition of the Company's interest in all the Hotels, the acquisition of the
two additional CSS Hotels then under contract, and the consummation of the
Company's securities offerings through March 31, 1996 had occurred on January 1,
1995 and all of the 36 hotels had been leased to Lessee pursuant to the
Percentage Leases since that date. Such pro forma information is based in part
upon the Statements of Operations of Lessee included elsewhere in this Quarterly
Report on Form 10-Q. Such information should be read in conjunction with the
financial statements listed in the Index on page 2. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made. The pro forma information does not include earnings on the Company's cash
and short term investments and does not purport to present what the actual
results of operations of the Company would have been if the previously mentioned
transactions had occurred on such dates or to project the results of operations
of the Company for any future period.
10
<PAGE> 11
FELCOR SUITE HOTELS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PRO FORMA INFORMATION --(CONTINUED)
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
------- -------
<S> <C> <C>
REVENUES:
Percentage lease revenue .............................................. $27,276 $26,062
EXPENSES:
General and administrative ............................................ 306 306
Depreciation and amortization ......................................... 6,542 6,117
Taxes, insurance and other ............................................ 3,864 3,422
Amortization of unearned officers' and directors ...................... 69 41
Interest expense ...................................................... 3,536 3,635
------- -------
Income before minority interest ....................................... 12,959 12,541
Minority interest ..................................................... 1,542 1,492
------- -------
Net income applicable to common shareholders .......................... $11,417 $11,049
======= =======
Net income per common share ........................................... $ .50 $ .48
======= =======
Weighted average number of common shares outstanding .................. 23,054 23,031
======= =======
</TABLE>
5. SUBSEQUENT EVENTS
On April 25, 1996, the SEC declared effective the Company's omnibus shelf
registration statement ("Shelf Registration"), which provides for offerings by
the Company, from time to time of up to an aggregate of $500 million in
securities, which may include its debt securities, preferred stock, common stock
and/or common stock warrants. On May 6, 1996, the Company announced the closing
of an offering pursuant to the Shelf Registration of six million shares of its
$1.95 Series A Cumulative Convertible Preferred Stock ("Series A Preferred
Stock") at $25.00 per share. The Series A Preferred Stock will pay an annual
dividend equal to the greater of $1.95 per share (yielding 7.8% based on the $25
purchase price) or the cash distributions declared or paid for the corresponding
period on the number of shares of common stock into which the Series A Preferred
Stock is then convertible and will be cumulative from May 6, 1996. Each share of
the Series A Preferred Stock is convertible at the shareholder's option to
0.7752 shares of common stock, subject to certain adjustments, and may not be
redeemed by the Company before April 30, 2001. The Company plans to use
approximately $87.3 million of the proceeds from the Series A Preferred Stock to
pay down debt existing at March 31, 1996. The balance of the net proceeds is
expected to be used to acquire the two remaining CSS Hotels in Mandalay Beach
and Napa, California, to fund a portion of the Company's $60 million renovation
and conversion program for all acquired hotels, and to provide funds for future
acquisitions and general corporate purposes.
On March 18, 1996, the Company declared a dividend of $0.46 per share of
common stock for the first quarter of 1996 which was paid on April 30, 1996 to
shareholders of record on April 1, 1996.
On May 8, 1996, the Company acquired two additional CSS Hotels in Mandalay
Beach, California (249 suites) and Napa, California (205 suites) for an
aggregate purchase price of approximately $46 million. The purchase of these
hotels fulfills the commitment to purchase a total of 18 hotels from Crown
Sterling Suites, as announced in September 1995. In conjunction with the
purchase of these hotels the mortgage notes receivable that were acquired by
the Company in the first quarter of 1996, relating to these hotels, were
canceled.
On April 2, 1996, Promus paid approximately $2.8 million for 104,028 shares
of the Company's common stock relating to the purchase of the Los Angeles
Airport hotel, pursuant to a subscription agreement. Additionally as a result of
the purchase of the Napa, California and Mandalay Beach, California hotels on
May 8, 1996, the Company has met the requirements under the previously noted
subscription agreement requiring Promus to purchase the final 165,569
shares of common stock purchasable thereunder for approximately $4.4 million.
11
<PAGE> 12
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------- -----------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents ..................................................... $ 14,144 $ 5,345
Accounts receivable, net ...................................................... 5,639 3,129
Inventories ................................................................... 822 532
Prepaid expenses .............................................................. 355 288
Other assets .................................................................. 1,143 305
-------- --------
Total assets ............................................................ $ 22,103 $ 9,599
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade ....................................................... $ 1,567 $ 1,393
Accounts payable, other ....................................................... 730 605
Due to FelCor Suite Hotels, Inc. .............................................. 8,048 2,396
Accrued expenses and other liabilities ........................................ 11,676 5,978
-------- --------
Total liabilities ....................................................... 22,021 10,372
-------- --------
Shareholders' equity (deficit):
Capital .................................................................. 1 1
Earnings in excess (deficient) of distributions .......................... 81 (774)
-------- --------
Total shareholders' equity (deficit) ................................... 82 (773)
-------- --------
Total liabilities and shareholders' equity .............................. $ 22,103 $ 9,599
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 13
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Revenue:
Suite revenue .................................................................. $52,176 $12,852
Food and beverage revenue ...................................................... 3,863 598
Food and beverage rent ......................................................... 426 45
Other revenue .................................................................. 3,978 677
------- -------
Total revenues ............................................................. 60,443 14,172
------- -------
Expenses:
Property operating costs and expenses .......................................... 13,244 3,362
General and administrative ..................................................... 4,085 982
Advertising and promotion ...................................................... 4,278 1,088
Repair and maintenance ......................................................... 2,719 721
Utilities ...................................................................... 2,497 543
Management fee ................................................................. 1,519 305
Franchise fee .................................................................. 1,015 514
Food and beverage expenses ..................................................... 3,797 522
Percentage lease payments ...................................................... 24,727 5,372
Lessee overhead expenses ....................................................... 324 222
Liability insurance ............................................................ 377 71
Other .......................................................................... 1,006 81
------- -------
Total expenses ............................................................. 59,588 13,783
------- -------
Net income .......................................................................... $ 855 $ 389
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 14
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................................... $ 855 $ 389
Adjustments to reconcile net income to net cash used in
operating activities:
Changes in assets and liabilities:
Accounts receivable ....................................................... (2,510) (823)
Inventories ............................................................... (290) (79)
Prepaid expenses .......................................................... (67) (191)
Other assets .............................................................. (838) (146)
Due to FelCor Suite Hotels, Inc. .......................................... 5,652 781
Accounts payable, accrued expenses and other liabilities .................. 5,997 (436)
-------- --------
Net cash flow provided by operating activities ....................... 8,799 (505)
-------- --------
Net change in cash and cash equivalents ............................................. 8,799 (505)
Cash and cash equivalents at beginning of periods ................................... 5,345 3,259
-------- --------
Cash and cash equivalents at end of periods ......................................... $ 14,144 $ 2,754
======== ========
</TABLE>
The accompany notes are an integral part of these financial statements.
14
<PAGE> 15
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
DJONT Operations, L.L.C. is a Delaware limited liability company
(together with its wholly-owned subsidiary, the "Lessee") which was incorporated
on June 29, 1994 and began operations on July 28, 1994. All of the voting Class
A membership interest in Lessee (representing a 50% equity interest) is owned by
Hervey A. Feldman and Thomas J. Corcoran, Jr. who serve as directors and
officers of FelCor Suite Hotels, Inc. (the "Company") and as managers and
officers of the Lessee. All of the non-voting Class B membership interest in
Lessee (representing the remaining 50% equity interest) is owned by RGC Leasing,
Inc., a Nevada corporation owned by the children of Mr. Mathewson, a director of
the Company. The Lessee leases each of the 34 hotels in which FelCor Suites
Limited Partnership (the "Partnership") had an ownership interest at March 31,
1996 (the "Hotels"), pursuant to percentage leases ("Percentage Leases").
Messrs. Feldman and Corcoran, as the beneficial owners of an aggregate 50%
of the Lessee, have entered into an agreement with the Company pursuant to
which they have agreed that, for a period of ten years, any distributions
received by them from the Lessee (in excess of their tax liabilities with
respect to the income of the Lessee) will be utilized to purchase common stock
from the Company annually, at a price based upon a formula approved by the
independent directors relating to the then current market prices. The agreement
stipulates that Messrs. Feldman and Corcoran are restricted from selling any
stock so acquired for a period of two years from the date of purchase. RGC
Leasing, Inc., which owns the other 50% of the Lessee, may elect to purchase
common stock or units of Partnership interest upon similar terms, at its
option. The independent directors of the Company may suspend or terminate such
agreement at any time.
Thirty-one of the Hotels are, or are in the process of being converted
into, Embassy Suites(R) hotels, 30 of which are being managed for the Lessee by
Promus Hotels, Inc. ("Promus"). Two of the hotels are operated as Doubletree
Guest Suites(R) hotels and managed by a subsidiary of Doubletree Hotels
Corporation ("Doubletree"). One of the Hotels is operated under a Hilton
Suites(R) hotel franchise and, together with one of the Company's Embassy Suites
hotels, is managed for the Lessee by American General Hospitality, Inc.
("AGHI").
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Lessee has future lease commitments under the Percentage Leases which
expire in 2004 (7 hotels) 2005 (13 hotels) and 2006 (14 hotels). Minimum future
rental payments are computed based on the base rent as defined under these
noncancellable operating leases and are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
<S> <C>
Remainder of 1996 ................................................. $ 39,369
1997 .............................................................. 52,492
1998 .............................................................. 52,492
1999 .............................................................. 52,492
2000 .............................................................. 52,492
2001 and thereafter ............................................... 246,781
--------
$496,118
========
</TABLE>
Under the franchise agreements, the Lessee typically remits to Promus a
franchise fee of 4% of suite revenue, a marketing and reservation contribution
(for the benefit of Embassy Suites hotels system wide) of 3.5% of suite
revenue, and certain additional fees for each of the Hotels operated as an
Embassy Suites hotel. With regard to the CSS Hotels, in the first and second
year of operations, Promus has agreed to reduced franchise fees of 1.5% and
3.5% of suite revenue, respectively. Additionally, with regard to the CSS
Hotels, Promus has agreed to reductions in the marketing and reservations
contribution for the first three years of operations to 2%, 2.5% and 3% of
suite revenue, respectively. The franchise fees will revert to 4% of suite
revenue beginning the third year of operations of these hotels and the
15
<PAGE> 16
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
marketing and reservation contribution will return to 3.5% of suite revenue
beginning in the fourth year. The Lessee pays to Hilton Inns, Inc. a franchise
fee of 5% of suite revenue for the Lexington Hilton Suites hotel. There are no
separate franchise fees for the properties operated as Doubletree Guest Suites
hotels; however, the Lessee pays a marketing and reservation contribution of
3.5% of suite revenue under the management agreements.
The Lessee pays a base management fee of 2% of adjusted gross revenue for
each hotel managed by Promus, AGHI and Doubletree (collectively the "Hotel
Managers"). In addition, the Lessee pays the Hotel Managers an incentive
management fee, which ranges from 50% to 75% of a hotel's net income (after
lease payments but before Lessee overhead expenses) up to a maximum of 2% to 3%
of revenues. In association with the acquisition of the CSS Hotels, Promus has
made its base their management fees and incentive management fees subordinate
to the Percentage Lease payments for a period of two years.
The Company had two additional CSS Hotels under contract at March 31,
1996. These hotels were acquired on May 8, 1996 and will be leased to the
Lessee pursuant to 10-year operating leases similar to the Percentage Leases.
3. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited Pro Forma Consolidated Statements of Operations for
the three months ended March 31, 1996 and 1995 are presented as if Lessee had
leased and operated all of the Hotels and the two additional CSS Hotels under
contract at March 31, 1996 beginning on January 1, 1995. Such information should
be read in conjunction with the financial statements listed in the Index on page
2. In management's opinion, all adjustments necessary to reflect the effects of
these transactions have been made. The Pro Forma Consolidated Statements of
Operations do not purport to present what actual results of operations would
have been if such hotels had been operated by Lessee pursuant to the Percentage
Leases since such date or to project the results of operations for any future
periods.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Revenues $68,559 $66,369
------- -------
Expenses:
Property operating costs and expenses ......... 15,215 14,971
General and administrative .................... 4,761 4,696
Advertising and promotion ..................... 4,316 3,676
Repairs and maintenance ....................... 3,176 3,117
Utilities ..................................... 2,823 2,655
Management fee ................................ 1,166 1,729
Franchise fee ................................. 2,128 1,467
Food and beverage expenses .................... 4,633 4,711
Percentage lease payments ..................... 27,652 26,398
Lessee overhead expenses ...................... 324 324
Liability insurance ........................... 402 527
Other ......................................... 370 810
------- -------
Total expenses ............................. 66,966 65,080
------- -------
Net income ................................. $ 1,593 $ 1,288
======= =======
</TABLE>
16
<PAGE> 17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
For background information relating to the Company and the definitions
of certain capitalized terms used herein, reference is made to Note 1 of Notes
to Condensed Consolidated Financial Statements of FelCor Suite Hotels, Inc.
appearing elsewhere herein.
Between the first quarter of 1995 and the comparable period of 1996,
the Company's revenues increased from approximately $5.4 million to
approximately $24.5 million, net income applicable to common shareholders
increased from approximately $2.4 million to approximately $12.0 million, net
income per common share increased from $0.50 to $0.53, and the Initial Hotels
experienced increases of 8.5% in suite revenues.
During the first quarter of 1996, the Company acquired 14 additional
hotels with 3,501 suites for an aggregate purchase price of approximately
$383.5 million. Of the hotels so acquired during the first quarter, two were
and will remain Embassy Suites hotels, one was and will remain a Hilton Suites
hotel and 11 hotels have been or are in the process of being converted to the
Embassy Suites brand. Ten of the hotels acquired by the Company during the
first quarter that have been or will be converted into Embassy Suites hotel had
been part of the Crown Sterling Suites chain that the Company agreed to acquire
in September 1995.
The Company has undertaken a $60 million plan for the upgrade and
renovation of the CSS Hotels and the five other hotels acquired since
September 1995. Through March 31, 1996, the Company had expended approximately
$10.9 million under such plan and expects to complete such capital improvements
by the end of 1996. In addition, the Company was in the process of adding 17
suites at its Flagstaff hotel (with completion scheduled for summer 1996) and
presently intends to add a net of 161 additional suites to two of its other
hotels at an estimated aggregate cost of approximately $17.7 million.
17
<PAGE> 18
In order for the Company to qualify as a REIT, neither the Company nor the
Partnership can operate hotels. Therefore, the Partnership leases the Hotels to
the Lessee. The Partnership's and, therefore, the Company's principal sources
of revenue are lease payments by the Lessee under the Percentage Leases. Of the
aggregate pro forma Percentage Lease revenue from the Hotels under the
Percentage Leases for the three months ended March 31, 1996, approximately
97.4% was derived from suite revenues and 2.6% was derived from food and
beverage operations. The Lessee's ability to make payments to the Company under
the Percentage Leases is dependent on the operations of the Hotels.
RESULTS OF OPERATIONS
The Company -- Actual
Three Months Ended March 31, 1996 and 1995
For the three months ended March 31, 1996 and 1995, the Company had
revenues of $24,498,000 and $5,380,000, respectively, consisting of Percentage
Lease revenues of $24,351,000 and $5,372,000 and interest income of $147,000
and $8,000.
18
<PAGE> 19
RESULTS OF OPERATIONS -- (CONTINUED)
The increase in Percentage Lease revenue was attributable primarily to the
Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of
the 27 additional hotels acquired during the period from February 1995 through
March 1996. As previously noted, Percentage Lease revenue is dependent on the
operations of the Hotels, primarily suite revenue. The Company owned seven
hotels throughout both the first quarter of 1995 and 1996, but only the Initial
Hotels are considered by the Company to have been "stabilized" properties during
both periods. The Initial Hotels experienced suite revenue growth of 8.5% and
increases of revenue per available suite ("REVPAR") of 7.3%. All but one of the
Initial Hotels experienced increases in REVPAR, with the increases ranging from
3% to 14% over the prior year, and one experienced a decrease in REVPAR (2.5%)
which was caused by a significant number of new hotel rooms opening in its
market. Management believes that the acquired hotels will generally experience
increases in suite revenues (and accordingly, provide the Company with increases
in Percentage Lease revenues) after the completion of renovation and upgrade
programs, the conversion to the Embassy Suites or Doubletree Guest Suites
franchises, where applicable, and the transition to a national management
company such as Promus. However, as individual hotels undergo such transitions,
their performances may be adversely affected temporarily by such factors as
suites out of service during renovation and renovation disruptions on hotel
operations. (A more detailed discussion of hotel suite revenue is contained in
"The Hotels - Actual" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
The increase in interest income primarily resulted from interest earned on
escrow deposits existing during the first quarter of 1996, relating to hotel
acquisitions, that did not exist in the same quarter of the prior year.
Total expenses increased $8,753,000 in the first quarter of 1996 compared
to the same quarter of 1995. The primary components of this increase were
depreciation; taxes, insurance and other and interest expense.
Depreciation expense increased to $4,516,000 in the quarter ended March
31, 1996 from $1,058,000 in the same quarter of 1995. The increase resulted
from the acquisition of hotels in 1995 and 1996 and capital expenditures made
on existing and acquired hotels.
Taxes, insurance and other expenses increased $3,026,000 from $559,000 in
the first quarter of 1995. This increase is primarily attributed to the
additional hotel properties acquired in 1995 and 1996.
Interest expense increased from $317,000 for the three months ended March
31, 1995 to $2,325,000 for the three months ended March 31, 1996. The increase
in interest expense is primarily associated with debt acquired and assumed
relating to the hotels purchased during the fourth quarter of 1995 and the
first quarter of 1996.
Minority interest in earnings increased $766,000 from $854,000 for the
first quarter of 1995 to $1,620,000 for the same period in 1996. The percentage
of income attributable to minority interests was 11.9% for the three months
ended March 31, 1996 and 26.5% for the same period in 1995. The decrease in the
minority interest percentage was primarily the result of the additional shares
of common stock issued during the May 1995 and December 1995 stock offerings
partially offset by additional units of limited partnership interest in the
Partnership issued to Promus and the sellers of the Piscataway and Lexington
hotels.
19
<PAGE> 20
RESULTS OF OPERATIONS -- (CONTINUED)
The following table computes "Funds From Operations" under both the newly
adopted National Association of Real Estate Investment Trusts ("NAREIT")
definition and the definition previously recommended by NAREIT and utilized by
the Company. Funds From Operations under the new 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. Under the prior NAREIT definition of Funds From Operations,
adjustments to net income also included amortization of unearned officers' and
directors' compensation, amortization of loan costs and the non-cash portion of
general and administrative expenses (presented in thousands except for per
share and unit data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
------- -------
<S> <C> <C>
Net income applicable to common shareholders .......................... $11,971 $ 2,372
Add:
Minority interest .................................................. 1,620 854
Depreciation ....................................................... 4,516 1,058
------- -------
Funds From Operations available for common
shares and Units (New definition) .............................. 18,107 4,284
Amortization of unearned officers' and directors' compensation ..... 69 30
Amortization of loan costs ......................................... 115 43
Non-cash portion of general and administrative expenses ............ 34
------- -------
Funds From Operations available for common
shares and Units (Prior definition) ............................ $18,291 $ 4,391
======= =======
Funds From Operations per share and unit (New definition).............. $0.71 $0.67
======= =======
Funds From Operations per share and unit (Prior definition)............ $0.71 $0.69
======= =======
Weighted average common shares outstanding ............................ 22,614 4,707
Weighted average units outstanding .................................... 3,061 1,695
------- -------
Weighted average shares and units outstanding ......................... 25,675 6,402
======= =======
</TABLE>
The Company -- Pro Forma
The following pro forma information is presented as if the acquisition of
all the Hotels, the acquisition of the additional two CSS Hotels acquired on
May 8, 1996, the consummation of the Company's common stock offerings and
Partnership unit transactions had occurred as of January 1, 1995.
Pro Forma Three Months Ended March 31, 1996 and 1995
For the three months ended March 31, 1996, the Company's pro forma
Percentage Lease revenue increased $1,214,000. This increase is attributable to
the historical increases in suite revenue. The historical suite revenue
increased by 3.8% for the 36 hotels presented in the pro forma financial
statements. (The historical hotel revenue increase is more fully discussed in
"The Hotels - Actual" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Pro forma general and administrative expenses for the three months ended
March 31, 1996 and 1995 are $306,000 and $306,000. Depreciation and
amortization expenses increased by $425,000, primarily reflecting the
historical asset additions made by the Company during 1995 and in the first
quarter of 1996. Pro forma taxes, insurance and other increased $442,000 and
amortization of unearned officers' and directors' compensation increased
$28,000. Pro forma interest expense declined by $99,000 reflecting the
historical decrease in LIBOR and the amortization of principal on the capital
lease obligations. Minority interest was $1,542,000 and $1,492,000 for pro
forma 1996 and 1995 first quarters,
20
<PAGE> 21
RESULTS OF OPERATIONS -- (CONTINUED)
respectively. The pro forma net income applicable to common shareholders was
$0.50 and $0.48 for the three months ended March 31, 1996 and 1995,
respectively.
The Lessee -- Actual
The Three Months Ended March 31, 1996 and 1995
Total revenues increased 325% from $14.2 million in the first quarter of
1995 to $60.4 million in the same period of 1996. The primary reason for this
increase is the increase in the number of hotels operated by the Lessee from
nine hotels at the end of the first quarter of 1995 to 34 hotels at the end of
the same quarter of 1996. The increase in Percentage Lease expense, property
operating costs and other hotel expenses in the first quarter of 1996 compared
to the same period of 1995 relate primarily to the increased number of hotels
operated by the Lessee. The Lessee had net income of $389,000 and $855,000
for the three months ended March 31, 1995 and 1996 respectively. Net income as
a percentage of total revenue decreased from 2.7% to 1.4% for the first
quarters of 1995 and 1996. The principal reason for this decline in net income
is related to costs of taking over operations on acquired hotels, converting
and upgrading the 21 hotels acquired in the fourth quarter of 1995 and the
first quarter of 1996.
The Hotels -- Actual
The following discussion and suite revenue data reflect the actual
operations of the Hotels and the two hotels under contract at March 31, 1996,
and are independent of ownership or other pro forma considerations.
The following table sets forth historical suite revenue and percentage
changes therein between the periods presented for the 36 hotels included in the
pro forma financial information with respect to the Lessee. The following
presentation groups separately the suite revenues of the Initial Hotels, 18 CSS
Hotels (including both the 16 hotels acquired during the fourth quarter of 1995
and the first quarter of 1996 as well as the two hotels under purchase
contracts at March 31, 1996), and the other 12 hotels acquired by the Company
("Other Acquired Hotels") through March 31, 1996.
<TABLE>
<CAPTION>
SUITE REVENUE
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------- PERCENT
1996 1995 CHANGE
------- ------- ------
<S> <C> <C> <C>
Initial Hotels .................... $11,178 $10,301 8.5%
CSS Hotels ........................ 32,114 31,312 2.6%
Other Acquired Hotels ............. 15,696 15,228 3.1%
------- -------
Totals .................... $58,988 $56,841 3.8%
======= =======
</TABLE>
Comparison of The Hotels' Suite Revenues for the Three Months Ended March
31, 1996 and 1995
Suite revenues from the 36 hotels included in the pro forma information
increased 3.8% for the three months ended March 31, 1996 from the comparative
period of 1995. The Initial Hotels increased 8.5% while the CSS Hotels and the
Other Acquired Hotels increased 2.6% and 3.1%, respectively.
The increase in suite revenue is primarily the result of increases in
average daily rate ("ADR"), partially offset by decreases in occupancy. The
Initial Hotels increased in both ADR and occupancy: ADR increased 7.0% to
$104.85 and occupancy percentage increased 0.3% to 79.2%. The Company has
committed to a capital program for these hotels that ensures that at least 4%
of suite revenue will be available for capital improvements in addition to
normal repair and maintenance.
The CSS Hotels experienced an increase in ADR of 3.9% to $109.27 and a
decrease in occupancy of 2.1% to 70.3%. The Other Acquired Hotels increased ADR
by 5.0% to $104.62 which was partially offset by a decrease in occupancy of
3.5% to 73.3%. The Company has committed to a capital renovation and conversion
program for the CSS Hotels and the five other hotels acquired since September,
1995 of approximately $60 million and is also reserving 4% of suite
21
<PAGE> 22
RESULTS OF OPERATIONS -- (CONTINUED)
revenue for ongoing capital improvements in addition to making normal repair and
maintenance expenditures. The CSS Hotels either have been or are in the process
of being converted to Embassy Suites hotels (16) or Doubletree Guest Suites
hotels (2). At April 30, 1996, five of the CSS Hotels had been converted to the
new franchise brands.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, is its share of the Partnership's cash
flow from the Percentage Leases. For the quarter ended March 31, 1996, cash
flow provided by operating activities, consisting primarily of Percentage Lease
revenue, was $14.2 million and funds from operations, which is the sum of net
income, minority interest, depreciation of real property including furniture
and equipment, was $18.1 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 Company's liquidity, including its ability to make
distributions to shareholders, are substantially dependent on the ability of
the Lessee to generate sufficient cash flow from the operations of the
Company's hotels.
The Company intends to acquire additional hotel properties and may incur
indebtedness to make such acquisitions, or to meet distribution requirements
imposed on a REIT under the Internal Revenue Code, to the extent that working
capital and cash flow from the Company's investments are insufficient to make
such distributions.
The Company's Charter limits consolidated indebtedness to 40% of the
Company's investment in hotel properties, at cost, on a consolidated basis,
after giving effect to the Company's use of proceeds from any indebtedness. For
purposes of this limitation, the Company's consolidated investment in hotel
properties, at cost, is its investment, at cost, in hotel properties, as
reflected in its consolidated financial statements plus (to the extent not
otherwise reflected) the value (as determined by the Board of Directors at the
time of issuance) of any equity securities issued, otherwise than for cash, by
the Company or any of its subsidiaries in connection with the acquisition of
hotel properties. Under this definition as of March 31, 1996, the Company's
investment in hotel properties at cost was $778 million. Accordingly, the
Company's maximum permitted indebtedness would have been $404 million (of which
$178 million was borrowed at March 31, 1996), assuming all of such
indebtedness, together with the Company's available cash and cash equivalents,
were used for the acquisition of hotel properties.
On May 6, 1996, the Company completed an offering of six million shares of
$1.95 Series A Cumulative Convertible Preferred Stock ("Series A Preferred
Stock") at $25 per share. The Series A Preferred Stock will pay an annual
dividend equal to the greater of $1.95 per share (yielding 7.8% based on the $25
purchase price) or the cash distributions declared or paid for the corresponding
period on the number of shares of common stock into which the Series A Preferred
Stock is then convertible and will be cumulative from May 6, 1996. Each share of
the Series A Preferred Stock is convertible at the shareholder's option to
0.7752 shares of common stock, subject to certain adjustments, and may not be
redeemed by the Company prior to April 30, 2001. The Company plans to use
approximately $87.3 million of the proceeds from the Series A Preferred Stock to
pay down debt existing at March 31, 1996. The balance of the net proceeds is
expected to be used to acquire the two remaining CSS Hotels in Mandalay Beach
and Napa, California, to fund a portion of the Company's $60 million renovation
and conversion program, to provide funds for future acquisitions and for general
corporate purposes.
At March 31, 1996, the Company had $660,000 of cash and cash equivalents
and had utilized approximately $43.6 million of the amount available under the
Company's revolving credit facility ("Line of Credit"). The Line of Credit, as
amended, has an initial term of two years (currently ending October 6, 1997)
and any outstanding balance at the end of that period is convertible, at the
Company's option, into a three-year term loan. Borrowings under the Line of
Credit bear interest, at the Company's option, (i) at the prime rate, (ii) the
30-day or 90-day LIBOR rate plus 200 basis points or (iii) the 30-day or 90-day
U.S. Treasury Note yield plus 250 or 275 basis points, respectively. Up to ten
percent of the maximum commitment amount of the Line of Credit may be used for
working capital purposes. At March 31, 1996, there were no borrowings for
working capital purposes. The amended Line of Credit will convert
22
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
into a three-year term loan in October 1997, maturing in October 2000. During
such period, the balance will bear interest at (i) the prime rate plus 50 basis
points, (ii) the 90-day LIBOR rate plus 225 basis points, or (iii) the 36-
month U.S. Treasury Note yield plus 250 basis points, at Company's option. The
Line of Credit is collateralized by first mortgages on certain of the Hotels.
Promus has guaranteed a loan to the Company of up to $25 million to be
used to fund a portion of the renovation cost of the CSS Hotels being converted
to Embassy Suites hotels. At March 31, 1996, the loan bears interest at LIBOR
plus 52.5 basis points, requires quarterly principal payments of $1.25 million
beginning June 1999 and matures in June 2000. The Company had drawn $8 million
under this loan facility at March 31, 1996.
The Company assumed a $75 million debt collateralized by six hotels
acquired in the first quarter. The debt bears interest at LIBOR plus 150 basis
points and matures in September 1996, unless extended by the Company, in which
event the debt will bear interest at LIBOR plus 175 basis points and matures in
December 2000. Additionally the Company assumed a $14 million debt
collateralized by a hotel property bearing interest at 8.75% to July 1996,
whereupon the rate changes to 9.0% until maturity in July 1997 unless extended
to July 2000.
The Company has a capital upgrade and renovation program for the CSS Hotels
and the other hotels acquired since September 1995 and has committed
approximately $60 million to be spent in 1995 and 1996 for this program. The
Company has spent approximately $10.9 million on such capital improvements
through the end of the first quarter of 1996 and expects to substantially
complete this program by the end of 1996. These capital improvements will be
funded partially through (i) the $25 million Renovation Loan facility, (ii) the
proceeds of the Series A Preferred Stock offering, and (iii) the Company's Line
of Credit. As individual hotels undergo such upgrade and renovation, their
performances may be adversely affected, although such effects are expected to be
temporary.
The Company is presently constructing 17 additional suites at the Flagstaff
hotel (with completion scheduled for the summer of 1996) and intends to
construct 32 additional suites at the New Orleans hotel and a net addition of
129 suites at the Boston-Marlborough hotel (with completion of such projects
currently scheduled for late 1996 and mid-1997, respectively) at an aggregate
cost of approximately $17.7 million.
The Company and Promus have entered into a subscription agreement under
which Promus has subscribed for the purchase of shares of Common Stock in an
aggregate amount of $50 million, at a price per share of $26.50, the offering
price per share of the Company's common stock offering in December 1995. Such
investment has been, and will be made in increments in conjunction with the
Company's acquisition of the CSS Hotels and other qualifying hotels. Through
March 31, 1996, the Company had issued an aggregate of 1,617,195 shares of
Common Stock to Promus pursuant to this subscription agreement for an aggregate
investment of approximately $42.9 million. On April 2, 1996, Promus paid
approximately $2.8 million for 104,028 shares of the Company's common stock
relating to the purchase of the Los Angeles Airport hotel, pursuant to a
subscription agreement. Additionally as a result of the purchase of the Napa,
California and Mandalay Beach, California hotels on May 8, 1996, the Company has
met the requirements under the previously noted subscription agreement requiring
Promus to purchase the final 165,569 shares of common stock purchasable
thereunder for approximately $4.4 million.
The Company's cash flow from financing activities of approximately $79.5
million for the quarter ended March 31, 1996 resulted from the sale of common
stock to Promus under a subscription agreement of $37.8 million, net borrowings
under the Line of Credit of $47.5 million and other borrowing facilities, net
of distributions of $4.9 million and additional loan costs of $875,000.
INFLATION
Operators of hotels, in general, possess the ability to adjust room rates
periodically. 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
Company's quarterly lease revenue 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
Company expects to
23
<PAGE> 24
SEASONALITY -- (CONTINUED)
utilize other cash on hand or borrowings under the Line of Credit to make such
distributions. The Company's use of the Line of Credit for working capital,
distributions and general corporate purposes is limited to 10% of the maximum
amount available under the Line of Credit.
24
<PAGE> 25
PART II. -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On April 25, 1996, the SEC declared effective the Company's omnibus shelf
registration statement ("Shelf Registration"), which provides for offerings by
the Company, from time to time of up to an aggregate of $500 million in
securities, which may include its debt securities, preferred stock, common stock
and/or common stock warrants. On May 6, 1996, the Company announced the closing
of an offering pursuant to the Shelf Registration of six million shares of its
Series A Preferred Stock at $25.00 per share. The Series A Preferred Stock will
pay an annual dividend equal to the greater of $1.95 per share (yielding 7.8%
based on the $25 purchase price) or the cash distributions declared or paid for
the corresponding period on the number of shares of common stock into which a
share of Series A Preferred Stock is then convertible and will be cumulative
from May 6, 1996. Each share of the Series A Preferred Stock is convertible at
the shareholder's option to 0.7752 shares of common stock, subject to certain
adjustments, and may not be redeemed by the Company for five years from the
closing date. The Company plans to use approximately $87.3 million of the
proceeds from the Series A Preferred Stock to pay down debt existing at March
31, 1996. The balance of the net proceeds will be used to acquire the two
remaining CSS Hotels in Mandalay Beach and Napa, California, to fund a portion
of the Company's $60 million renovation and conversion program, to provide funds
for future acquisitions and for general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
4.2 Indenture dated as of April 22, 1996 by and between the
Registrant and SunTrust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4-2 to the Registrant's Form 8-K dated May
1, 1996 ("1996 Form 8-K") and incorporated herein by
reference).
4.3 Articles Supplementary dated April 30, 1996 relating to the
Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") of the Registrant (filed as Exhibit 4.3 to
the 1996 Form 8-K and incorporated herein by reference).
4.4 Form of Share Certificate for Series A Preferred Stock (filed
as Exhibit 4.4 to the 1996 Form 8-K and incorporated herein by
reference).
10.1.2 Second Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of January 9, 1996
between the Registrant 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 Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995 ("1995 Form 10-K") and incorporated herein by
reference).
10.1.3 Third Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of January 10, 1996 by
and among the Registrant, 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 Form 10-K and incorporated herein by reference).
10.1.4 Fourth Amendment to the Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of January 10,
1996 by and among the Registrant, 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 Form 10-K and incorporated herein by reference).
25
<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -- (CONTINUED)
10.20.3 Letter agreement dated January 3, 1996, among Minnesota Hotel
Company, Inc. ("MHCI"), Crown Sterling Management, Inc.
("CSM"), Crown Sterling Incorporated ("CSI"), FelCor/CSS
Holdings, L.P. ("Holdings") and PFS Ventures, Inc. ("PFS")
relating to amendments to Master Agreement dated as of
September 19, 1995 between MHCI and Holdings ("Master
Agreement") and Asset Purchase Agreement dated as of September
19, 1995 among CSM, CSI and PFS ("Asset Purchase Agreement")
(filed as Exhibit 10.20.3 to the 1996 Form 8-K and
incorporated herein by reference).
10.20.4 Letter agreement dated March 26, 1996, among MHCI, Napa Wine
Country Hotel, a California Limited Partnership, Mandalay
Beach, California Hotel Associates, a California Limited
Partnership ("MBC"), CSM, CSI, Holdings and PFS relating to
amendments to Master Agreement, Asset Purchase Agreement and
Partnership Interests Purchase Agreement dated as of September
19, 1995 among MHCI, MBC, Robert E. Woolley and Holdings
("Partnership Interests Purchase Agreement") (filed as Exhibit
10.20.4 to the 1996 Form 8-K and incorporated herein by
reference).
10.21.1 Letter agreement dated March 27, 1996 among MHCI, MBC,
Holdings and PFS relating to amendments to Partnership
Interests Purchase Agreement (filed as Exhibit 10.21.1 to the
1996 Form 8-K and incorporated herein by reference).
10.21.2 Letter agreement dated March 27, 1996, among MHCI, MBC, CSM,
CSI, Holdings and PFS relating to amendments to Partnership
Interests Purchase Agreement and Asset Purchase Agreement
(filed as Exhibit 10.21.2 to the 1996 Form 8-K and
incorporated herein by reference).
10.28 Registration Rights Agreement dated as of January 3, 1996
between the Registrant and Robert E. Woolley and Charles M.
Sweeney (filed as Exhibit 10.28 to the 1995 Form 10-K and
incorporated herein by reference).
10.29 Credit Agreement dated as of January 31, 1996, by and among
Holdings, as borrower, the Partnership, the Registrant and The
Bank of Nova Scotia, New York Agency (filed as Exhibit 10.29
to the 1995 Form 10-K and incorporated herein by reference).
10.30 Credit Agreement dated as of February 6, 1996, by and among
the Partnership, as borrower, Holdings and the Registrant, as
guarantors, and Canadian Imperial Bank of Commerce, as agent
(filed as Exhibit 10.30 to the 1996 Form 8-K and incorporated
herein by reference).
27 Financial Data Schedule
(b) Reports on Form 8-K:
A current report on Form 8-K, dated May 1, 1996 was filed by the Company
on May 8, 1996 solely for the purpose of filing certain exhibits that are
incorporated herein by reference.
A current report on Form 8-K/A, dated December 29, 1995 was filed by the
Company on February 12, 1996 with respect to (i) the Partnership's acquisition
of substantially all of the equity interests in two limited partnerships owning
;an aggregate of seven hotels on December 29, 1995, (ii) the Partnerships'
acquisition of nine CSS Hotels and (iii) the Partnership's acquisition of two
additional hotels in Lexington, Kentucky and Piscataway, New Jersey. Included
in such Current Report on Form 8-K/A were: (i) audited financial statements for
the CSS Hotels, including a combined balance sheet for the CSS Hotels as of
December 31, 1994 and September 30, 1995 and the related combined statements of
operations, partners deficit and cash flows for the years ended December 31,
1994 and 1993 and nine months ended September 30, 1995; (ii) combined financial
statements for the Lexington and Piscataway hotels including audited combined
balance sheet as of December 31, 1994 and the related statements of operations,
equity and cash flows for the year then ended and unaudited combined financial
statements for the nine months ended September 30, 1995; and pro forma
financial information with respect to the Company at September 30, 1995 and for
the Company and Lessee for the year ended December 31, 1994 and the nine months
ended September 30, 1995.
26
<PAGE> 27
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: May 14, 1996
FELCOR SUITE HOTELS, INC.
By: \s\ Nicholas R. Peterson
----------------------------
Nicholas R. Peterson
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
27
<PAGE> 28
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
4.2 Indenture dated as of April 22, 1996 by and between the
Registrant and SunTrust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4-2 to the Registrant's Form 8-K dated May
1, 1996 ("1996 Form 8-K") and incorporated herein by
reference).
4.3 Articles Supplementary dated April 30, 1996 relating to the
Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") of the Registrant (filed as Exhibit 4.3 to
the 1996 Form 8-K and incorporated herein by reference).
4.4 Form of Share Certificate for Series A Preferred Stock (filed
as Exhibit 4.4 to the 1996 Form 8-K and incorporated herein by
reference).
10.1.2 Second Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of January 9, 1996
between the Registrant 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 Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995 ("1995 Form 10-K") and incorporated herein by
reference).
10.1.3 Third Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of January 10, 1996 by
and among the Registrant, 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 Form 10-K and incorporated herein by reference).
10.1.4 Fourth Amendment to the Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of January 10,
1996 by and among the Registrant, 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 Form 10-K and incorporated herein by reference).
10.20.3 Letter agreement dated January 3, 1996, among Minnesota Hotel
Company, Inc. ("MHCI"), Crown Sterling Management, Inc.
("CSM"), Crown Sterling Incorporated ("CSI"), FelCor/CSS
Holdings, L.P. ("Holdings") and PFS Ventures, Inc. ("PFS")
relating to amendments to Master Agreement dated as of
September 19, 1995 between MHCI and Holdings ("Master
Agreement") and Asset Purchase Agreement dated as of September
19, 1995 among CSM, CSI and PFS ("Asset Purchase Agreement")
(filed as Exhibit 10.20.3 to the 1996 Form 8-K and
incorporated herein by reference).
10.20.4 Letter agreement dated March 26, 1996, among MHCI, Napa Wine
Country Hotel, a California Limited Partnership, Mandalay
Beach, California Hotel Associates, a California Limited
Partnership ("MBC"), CSM, CSI, Holdings and PFS relating to
amendments to Master Agreement, Asset Purchase Agreement and
Partnership Interests Purchase Agreement dated as of September
19, 1995 among MHCI, MBC, Robert E. Woolley and Holdings
("Partnership Interests Purchase Agreement") (filed as Exhibit
10.20.4 to the 1996 Form 8-K and incorporated herein by
reference).
10.21.1 Letter agreement dated March 27, 1996 among MHCI, MBC,
Holdings and PFS relating to amendments to Partnership
Interests Purchase Agreement (filed as Exhibit 10.21.1 to the
1996 Form 8-K and incorporated herein by reference).
10.21.2 Letter agreement dated March 27, 1996, among MHCI, MBC, CSM,
CSI, Holdings and PFS relating to amendments to Partnership
Interests Purchase Agreement and Asset Purchase Agreement
(filed as Exhibit 10.21.2 to the 1996 Form 8-K and
incorporated herein by reference) .
28
<PAGE> 29
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.28 Registration Rights Agreement dated as of January 3, 1996
between the Registrant and Robert E. Woolley and Charles M.
Sweeney (filed as Exhibit 10.28 to the 1995 Form 10-K and
incorporated herein by reference).
10.29 Credit Agreement dated as of January 31, 1996, by and among
Holdings, as borrower, the Partnership, the Registrant and The
Bank of Nova Scotia, New York Agency (filed as Exhibit 10.29
to the 1995 Form 10-K and incorporated herein by reference).
10.30 Credit Agreement dated as of February 6, 1996, by and among
the Partnership, as borrower, Holdings and the Registrant, as
guarantors, and Canadian Imperial Bank of Commerce, as agent
(filed as Exhibit 10.30 to the 1996 Form 8-K and incorporated
herein by reference).
27 Financial Data Schedule
29
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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0
0
<OTHER-SE> 507,254
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