<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 75-2541756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 E. JOHN CARPENTER FRWY., SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
------------------- ON WHICH REGISTERED
COMMON STOCK --------------------------
$1.95 SERIES A CUMULATIVE NEW YORK STOCK EXCHANGE, INC.
CONVERTIBLE PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 18, 1997, was approximately $908 million.
As of March 18, 1997, the registrant had issued and outstanding
26,539,676 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
<PAGE> 2
FELCOR SUITE HOTELS, INC.
INDEX
<TABLE>
<CAPTION>
FORM 10-K
REPORT
ITEM NO. PAGE
-------- -----------
<S> <C> <C>
PART I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 18
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . 20
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 24
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . 34
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . 34
PART III
10. Directors and Executive Officers of the Company . . . . . . . . . . . 34
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 38
12. Security Ownership of Certain Beneficial Owners and Management . . . 42
13. Certain Relationships and Related Transactions . . . . . . . . . . . 44
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . 45
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
Formation Transactions
FelCor Suite Hotels, Inc. ("FelCor") was formed as a Delaware corporation
on May 16, 1994 and was reincorporated as a Maryland corporation on June 23,
1995. FelCor is a self administered equity real estate investment trust
("REIT") formed for the purpose of acquiring and holding interests in hotel
properties. On July 28, 1994, FelCor completed an initial public offering of
4,075,000 shares of its Common Stock and issued an additional 611,250 shares of
Common Stock on August 22, 1994 upon exercise of the underwriters' over-
allotment option ("IPO"). The offering price of all shares sold in the IPO was
$21.25 per share, resulting in net proceeds of approximately $91.6 million.
FelCor contributed all of the net proceeds of the IPO to FelCor Suites Limited
Partnership, a Delaware limited partnership of which FelCor is the sole general
partner ("Partnership"), in exchange for approximately 73.5% of the aggregate
equity interests therein. Unless the context otherwise requires, as used
herein the term "Company" shall mean and refer to the business and assets of
FelCor, the Partnership and their respective subsidiaries, on a combined basis.
Concurrently with the initial closing with respect to the IPO, the
Partnership acquired six existing Embassy Suites(R) hotels ("Initial Hotels")
through a merger with entities originally formed in 1991 and controlled by
Hervey A. Feldman and Thomas J. Corcoran, Jr. ("FelCor Affiliates") in exchange
for (i) 1,695,146 units of limited partner interest ("Units") then representing
approximately 26.5% of the equity interests in the Partnership and (ii) the
assumption and payment of mortgage indebtedness and other obligations relating
to the Initial Hotels of approximately $76.0 million. The Units are
exchangeable, subject to certain limitations, for a like number of shares of
the Common Stock of the Company or, at the option of the Company, for cash.
To enable the Company to qualify as a REIT, neither the Company nor the
Partnership can operate the hotels in which they invest. Accordingly, the
Partnership leases all of the hotels owned by it to DJONT Operations, L.L.C.,
or a consolidated subsidiary thereof (collectively, "Lessee"), pursuant to
leases with a term of ten years that provide for rent equal to the greater of a
minimum base rent ("Base Rent") or a percentage rent ("Percentage Rent") based
on hotel suite revenues and food and beverage revenues and rents ("Percentage
Leases"). See "Item 2. Properties" for information regarding the terms of the
Percentage Leases. The Lessee is a Delaware limited liability company, 25% of
which is beneficially owned by each of Messrs. Feldman and Corcoran, the
Chairman of the Board and the President of the Company, respectively, and 50%
of which is owned by RGC Leasing, Inc., a Nevada corporation owned by the
children of Charles N. Mathewson, a director of the Company. It is anticipated
that additional hotels acquired by the Company will be leased to the Lessee
upon similar terms. See "Item 13. Certain Relationships and Related
Transactions" for additional information regarding the interests of affiliates
arising out of the acquisition of the Initial Hotels, the Percentage Leases and
certain other transactions.
FelCor's Charter limits aggregate permitted indebtedness to 40% of its
investment in hotel properties, at cost. At December 31, 1996, the Company had
aggregate borrowings of $239.4 million outstanding. Reference is made to "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and to Note 5 of Notes to
Consolidated Financial Statements of FelCor Suite Hotels, Inc. referred to in
"Item 8. Financial Statements and Supplementary Data," for information
regarding the Company's Line of Credit (as defined therein) and other
outstanding indebtedness.
Growth Strategies
The Company's internal growth strategy is to utilize its asset management
role to improve the quality of its hotels through renovating, upgrading and
repositioning, thereby improving their revenue performance, and to participate,
through the Percentage Leases, in any growth in revenues at its hotels.
The Company's acquisition growth strategy is to increase cash flow and
enhance shareholder value by acquiring additional existing hotels that meet the
Company's current investment criteria. In addition, the Company may expand
certain of its hotel properties by constructing additional suites and/or
meeting space, if market and
3
<PAGE> 4
other conditions warrant. At present, the Company intends to continue to focus
its acquisition strategy primarily upon the acquisition of additional hotels
that may be converted to, or that are, Embassy Suites hotels or Doubletree
Guest Suites(R) hotels, although it may consider the acquisition of a limited
number of newly developed all-suite hotels or other up-scale or mid-scale hotel
properties in the future. The Company will consider investments in hotels of
the types described above that also meet one or more of the following
investment criteria: (i) properties in markets with projected growth potential;
(ii) properties which may be under-performing due to poor management, weak
franchise affiliation or a need for renovation; (iii) properties with
relatively stable operating histories; and (iv) properties with attractive
purchase prices below replacement cost.
Hotel Acquisition and Expansion
Subsequent to the Company's formation and the concurrent acquisition of
the Initial Hotels, the Company had completed the acquisition of interests in
37 additional hotels by December 31, 1996, with interests in an additional 15
hotels being acquired during the first quarter of 1997 (through March 20). At
December 31, 1996, FelCor owned interests in 43 hotels with an aggregate of
10,196 suites (collectively, "Hotels") through its then 89.4% aggregate
ownership interest in the Partnership. Of the Hotels, the Company owns 100%
equity interests in 37 hotels, a 97% interest in the partnership that owns the
El Segundo (LAX South), California hotel and 50% interests in separate
partnerships that own five hotels. At December 31, 1996, 39 of the Hotels were
operated as Embassy Suites hotels, two as Doubletree Guest Suites hotels, one
as a Hilton Suites(R) hotel, and one hotel was in the process of being
converted to the Embassy Suites brand. The Hotels are located in 19 states,
with 17 hotels in California and Florida. The following table provides certain
information regarding the Hotels acquired through December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF HOTELS AGGREGATE
ACQUIRED NUMBER OF SUITES ACQUISITION PRICE
------------------ ---------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
1994
Initial Hotels 6 1,479 $81.5
4th Quarter 1 251 25.8
1995
1st Quarter 2 350 27.4
2nd Quarter 1 100 9.4
3rd Quarter 3 542 31.3(1)
4th Quarter 7 1,657 169.0
1996
1st Quarter 14 3,501 383.5
2nd Quarter 3 691 68.1
3rd Quarter 4 1,005 30.8(2)
4th Quarter 2 572 78.1
--- -------- --------
43 10,148 904.9
===
Additional suites constructed
by the Company at Hotels 48(3) 5.3
-------- --------
10,196 $910.2
======== ======
</TABLE>
- --------------------
(1) Includes the purchase price of the Company's 50% interest in the
unconsolidated partnership owning the 262 suite, Chicago-Lombard, Illinois
hotel.
(2) Represents the purchase price of the Company's 50% interest in separate
unconsolidated partnerships owning hotels in Marin County, California;
Parsippany, New Jersey; Charlotte, North Carolina; and Indianapolis,
Indiana, with an aggregate of 1,005 suites.
(3) Does not include 129 net additional suites, meeting rooms and other
public area upgrades at one of the Hotels that were under construction at
December 31, 1996, at an estimated cost of $15.8 million.
In addition, during the first quarter of 1997 (through March 20), the
Company has acquired interests in 15 additional hotels ("1997 Acquisitions")
with an aggregate of 3,446 suites for an aggregate purchase price of
approximately $250 million, bringing the Company's total portfolio to 58 hotels
with an aggregate of 13,642 suites at March 20, 1997. Of the 1997
Acquisitions, eight consist of 50% interests in unconsolidated partnerships
owning
4
<PAGE> 5
an aggregate of eight Embassy Suites hotels, bringing to 11 the number of
hotels owned by joint ventures with Promus Hotel Corporation and its
subsidiaries ("Promus"). Of the remainder, one is and will remain an Embassy
Suites hotels, three are and will remain Doubletree Guest Suites hotels, and
three are in the process of conversion to the Doubletree Guest Suites brand.
Hotel Renovation and Conversion
The Company believes that its commitment to make the necessary capital
expenditures to upgrade and maintain its hotel properties in accordance with
its high standards differentiates it from many other hotel companies.
Typically, the Company renovates or upgrades hotels acquired by it and, in many
instances, incurs the cost of converting such hotels into Embassy Suites hotels
or to another national brand, like Doubletree Guest Suites. The Company made
capital expenditures of approximately $51 million during 1996, in the
conversion and upgrade of hotels acquired by it through December 31, 1996. The
majority of such expenditures were made in connection with the complete
renovation and upgrading of the 18 Crown Sterling Suites(R) hotels ("CSS
Hotels") acquired by the Company during late 1995 and early 1996. Management
currently anticipates that the Company will incur additional conversion and
upgrade costs of approximately $22 million during 1997, to complete renovation
and upgrade projects in progress at December 31, 1996. Significant additional
conversion and upgrade costs may be incurred by the Company with respect to any
additional hotels acquired by it.
In addition to the conversion and upgrade costs typically incurred by the
Company in connection with newly acquired hotels, the Company is required under
the Percentage Leases to provide a capital replacement reserve, consisting of
4% of suite revenues (on a cumulative basis), for recurring capital
improvements and replacements at its hotels. In addition to the capital
expenditures made, as described above, for the conversion and upgrade of newly
acquired hotels, the Company expended approximately $9.2 million (approximately
4.3% of suite revenues) during 1996 on recurring capital replacements. In
addition to such capital expenditures by the Company, the Lessee also expended
approximately $14.5 million (approximately 6.2% of suite revenues) during 1996
on routine maintenance and repair of the Hotels, for which the Lessee is
responsible under the Percentage Leases.
During 1996, the Company completed the construction of 17 additional
suites at its Flagstaff hotel and of 31 additional suites at its New Orleans
hotel at an aggregate cost of approximately $5.3 million. At December 31,
1996, the Company was in the process of adding a net of 129 suites, additional
meeting rooms and other public area improvements to its Boston-Marlborough
hotel (with completion scheduled for mid-1997) at an estimated cost of
approximately $15.8 million. Additionally, the Company intends to construct
during 1997 an aggregate of 134 additional suites at its Jacksonville and
Orlando (North), Florida Embassy Suites hotels, at an estimated cost of
approximately $10.2 million.
Equity Financing Transactions
During 1996, in conjunction with the acquisition by the Partnership of
the Lexington and Piscataway hotels, and of 50% interests in the Charlotte,
North Carolina and Indianapolis, Indiana hotels, an aggregate of 491,703 Units
were issued by the Partnership in satisfaction of approximately $13.4 million
of the aggregate purchase prices of those hotels. Such Units are redeemable on
a one-for-one basis for shares of Common Stock of the Company (or, at the
option of the Company, for cash), subject to certain limitations. Similarly,
in conjunction with the acquisition of the CSS Hotel located in Ft. Lauderdale,
an aggregate of 215,827 shares of Common Stock were delivered in satisfaction
of approximately $6.0 million of the purchase price of such hotel. The
proceeds of the issuance of such Common Stock were contributed by the Company
to the Partnership for an additional equity interest therein.
On April 25, 1996, the Securities and Exchange Commission ("SEC")
declared effective the Company's omnibus shelf registration statement ("Shelf
Registration"), which permits the Company to offer, from time to time, up to an
aggregate of $500 million in securities, including debt securities, preferred
stock, common stock and
5
<PAGE> 6
common stock warrants. On May 6, 1996, the Company sold 6,000,000 shares of
its $1.95 Series A Cumulative Convertible Preferred Stock ("Series A Preferred
Stock"), at $25.00 per share, pursuant to the Shelf Registration. An
additional 50,000 shares of Series A Preferred Stock was subsequently issued
pursuant to the exercise of the underwriters' over-allotment option. The
Series A Preferred Stock bears an annual dividend per share, cumulative from
May 6, 1996, equal to the greater of $1.95 and the cash distributions declared
or paid for the corresponding period on that number of shares of Common Stock
into which a share of Series A Preferred Stock is then convertible. Each share
of Series A Preferred Stock is convertible, at the option of the holder, into
0.7752 shares of Common Stock, subject to certain adjustments, and may not be
redeemed by the Company before April 30, 2001. At December 31, 1996, no
arrearages existed in dividends payable on the Series A Preferred Stock. The
net proceeds from the sale of the Series A Preferred Stock, of approximately
$144.3 million, were contributed to the Partnership for additional equity
interests therein and utilized to repay approximately $87.3 in indebtedness
incurred in connection with the acquisition of hotel properties and to fund the
cost of additional hotel acquisitions and a portion of cost of the renovation
and upgrading of certain of the Hotels.
As a result of the foregoing equity capital transactions, at December 31,
1996, FelCor owned approximately 89.4% of the equity interests in the
Partnership. In addition, at year end the Company also owned a 97% equity
interest in the partnership which owns the El Segundo (LAX South), California
hotel and 50% equity interests in separate partnerships owning a total of five
hotels.
On January 28, 1997 the Company offered an additional 3,000,000 shares of
Common Stock to the public pursuant to the Shelf Registration. The net
proceeds of this offering, consisting of approximately $100 million, were
contributed to the Partnership in exchange for additional equity interests
therein and used primarily to fund the purchase of interests in 10 of the
hotels acquired by the Company during the first quarter of 1997.
Hotel Operations
At December 31, 1996, 40 of the Hotels were, or were in the process of
being converted into, Embassy Suites hotels, two were Doubletree Guest Suites
hotels and one was a Hilton Suites hotel. Of the Hotels, 38 were being managed
by Promus, two were being managed by affiliates of Doubletree Hotels
Corporation ("Doubletree") and three were being managed by independent
management companies. Of the 1997 Acquisitions (through March 20, 1997), nine
are, and will remain, Embassy Suites hotels under the management of Promus and
six are, or will be converted to, Doubletree Guest Suites hotels under the
management of Doubletree.
During 1996, the average daily rate ("ADR") at the Hotels increased by
approximately 6.4% which, when combined with a decline in occupancy of
approximately 1.0 percentage point, resulted in an increase in revenue per
available suite ("RevPAR") of 4.8%. These figures reflect the adverse impact
of the loss of nearly 173,000 available suite nights (approximately 5.5% of
total available suite nights for the year) as a result of the temporary removal
of suites from service for renovation and upgrading during 1996. The
performance of the CSS Hotels and certain of the other hotels acquired during
1996, which underwent substantial renovation and upgrading during the year,
substantially offset the performance of the remaining Hotels, which experienced
an increase in RevPAR during 1996 of approximately 9.0% over 1995. However,
during the fourth quarter of 1996, the 10 CSS Hotels where renovations had been
substantially completed by early in the fourth quarter experienced an increase
in RevPAR in excess of 15% over the fourth quarter of 1995 and leads the
Company to believe that similar improvements in RevPAR for the remaining CSS
Hotels can be expected during 1997, since the renovation and upgrading of the
CSS Hotels had been substantially completed by December 31, 1996.
The following table sets forth historical operating data regarding the
Hotels owned by the Company at December 31, 1996, regardless of ownership.
6
<PAGE> 7
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
------------------------------------------------------------------------------------
ADR OCCUPANCY RevPAR
------------------------------------------------------------------------------------
LOCATION 1996 1995 1994 1996 1995 1994 1996 1995 1994
-------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dallas, (Park Central), TX . . $105.13 $ 95.50 $ 86.24 75.7% 77.7% 78.8% $ 79.63 $ 74.24 $ 68.00
Nashville, TN . . . . . . . . . 103.00 100.92 94.27 73.2 73.0 75.6 75.35 73.67 71.27
Jacksonville, FL . . . . . . . 106.17 96.43 84.40 76.7 75.4 75.8 81.40 72.75 64.01
Orlando (North), FL . . . . . . 103.56 97.49 93.47 83.6 80.0 79.2 86.58 77.97 74.04
Orlando (South), FL . . . . . . 114.74 109.37 103.61 84.2 78.8 79.0 96.66 86.19 81.83
Tulsa, OK . . . . . . . . . . . 88.11 82.14 80.15 73.7 72.4 72.6 64.92 59.51 58.18
------- -------- ------- ---- ---- ---- ------- ------- -------
Initial Hotels . . . . . . . 103.73 97.27 90.63 77.5 76.1 76.8 80.43 74.02 69.63
------- -------- ------- ---- ---- ---- ------- ------- -------
New Orleans, LA(2) . . . . . . 119.90 114.48 105.76 75.7 72.9 82.7 90.82 83.42 87.48
Flagstaff, AZ(2) . . . . . . . 92.04 89.98 89.13 69.8 67.0 69.3 64.23 60.31 61.80
Dallas (Love Field), TX . . . . 104.14 98.95 92.81 75.9 70.4 72.9 79.05 69.71 67.64
Boston - Marlborough, MA(2) . . 104.89 89.26 85.26 76.7 81.1 79.9 80.47 72.39 68.08
Corpus Christi, TX . . . . . . 82.96 77.66 77.54 73.3 77.6 83.6 60.80 60.24 64.81
Brunswick, GA(2) . . . . . . . 71.03 61.22 49.07 74.2 74.0 75.5 52.72 45.30 37.07
Chicago - Lombard, IL . . . . . 109.64 101.28 95.21 77.6 77.0 75.3 85.06 77.94 71.68
------- -------- ------- ---- ---- ---- ------- ------- -------
Pre CSS Hotels . . . . . . . 101.71 94.40 88.73 75.3 74.1 77.2 76.55 69.96 68.52
------- -------- ------- ---- ---- ---- ------- ------- -------
San Francisco (Airport So.), 114.58 102.42 99.41 77.7 78.7 76.2 89.06 80.66 75.72
CA(2) . . . . . . . . . . . . .
Tampa (Busch Gardens), FL(2) . 85.08 80.66 79.58 74.3 73.2 79.4 63.20 59.05 63.19
Boca Raton (Doubletree), FL(2) 78.26 79.83 83.02 52.8 50.4 48.4 41.32 40.19 40.19
Minneapolis (Airport), MN(2) . 114.54 102.65 99.08 69.3 73.6 76.0 79.38 75.52 75.27
Minneapolis (Downtown), MN(2) . 96.37 93.26 93.08 55.4 66.5 69.6 53.40 62.04 64.78
St. Paul, MN(2) . . . . . . . . 91.20 82.44 79.81 65.7 77.1 80.2 59.88 63.56 64.00
Anaheim, CA(2) . . . . . . . . 91.48 85.94 85.04 65.8 69.0 63.2 60.22 59.27 53.76
Baton Rouge, LA(2) . . . . . . 87.27 81.08 79.57 61.7 70.2 69.3 53.86 56.96 55.12
Birmingham, AL(2) . . . . . . . 101.33 94.13 88.49 64.3 68.3 68.5 65.20 64.30 60.62
Deerfield Beach, FL(2) . . . . 119.06 119.93 122.46 61.3 65.7 64.9 72.94 78.85 79.42
Ft. Lauderdale, FL(2) . . . . . 105.92 106.44 105.47 70.2 66.2 66.5 74.31 70.46 70.14
El Segundo (LAX South), CA(2) . 80.76 83.55 85.67 73.0 63.3 64.3 58.97 52.91 55.10
Miami, FL(2) . . . . . . . . . 86.07 88.52 84.99 74.4 76.1 77.0 64.02 67.41 65.43
Milpitas, CA(2) . . . . . . . . 108.11 93.57 88.03 75.4 79.6 73.4 81.47 74.44 64.58
Phoenix, AZ(2) . . . . . . . . 140.12 130.49 121.73 69.0 73.3 74.3 96.70 95.69 90.40
Oxnard (Mandalay Beach), CA(2) 120.36 117.25 116.73 62.7 62.9 66.7 75.43 73.72 77.91
Napa, CA(2) . . . . . . . . . . 115.84 111.52 112.72 67.1 65.0 67.8 77.78 72.53 76.48
San Francisco (Airport No.), 108.33 93.80 92.43 67.3 67.7 67.5 72.89 63.52 62.37
CA(2). . . . . . . . . . . . . ------- -------- ------- ---- ---- ---- ------- ------- -------
CSS Hotels . . . . . . . . . 103.31 97.75 95.89 67.8 69.6 69.7 70.05 68.01 66.87
------- -------- ------- ---- ---- ---- ------- ------- -------
Cleveland, OH(2) . . . . . . . 103.85 99.40 86.98 67.1 71.2 69.6 69.63 70.79 60.54
Piscataway, NJ(2) . . . . . . . 102.28 101.98 96.46 72.8 72.5 75.6 74.47 73.90 72.89
Boca Raton (Embassy Suites),
FL(2) . . . . . . . . . . . . 85.67 86.26 83.36 73.2 73.6 71.1 62.68 63.48 59.27
Beaver Creek, CO(2) . . . . . . 185.60 150.72 149.21 51.3 61.8 57.3 95.26 93.21 85.44
Deerfield, IL(2) . . . . . . . 100.96 96.74 90.90 74.3 77.4 74.3 75.05 74.85 67.53
Lexington, KY(2) . . . . . . . 96.71 88.12 82.70 77.5 79.6 79.1 74.99 70.16 65.38
San Rafael (Marin Co.), CA . . 111.78 108.49 101.64 77.0 78.8 78.6 86.04 85.46 79.92
Parsippany, NJ . . . . . . . . 126.09 116.02 109.42 76.5 74.0 73.5 96.45 85.89 80.39
Indianapolis (North), IN . . . 100.22 98.60 90.93 70.6 73.2 72.3 70.70 72.14 65.77
Charlotte, NC . . . . . . . . . 110.83 100.52 85.81 72.4 73.8 75.4 80.28 74.14 64.68
Atlanta (Buckhead), GA . . . . 138.39 120.82 94.56 74.9 81.2 82.2 103.66 98.12 77.74
Kingston Plantation, SC . . . . 119.33 110.10 106.27 74.3 75.6 74.8 88.62 83.27 79.52
------- -------- ------- ---- ---- ---- ------- ------- -------
1996 Acquisitions . . . . . 111.54 104.51 95.01 73.0 75.2 74.7 81.46 78.56 70.98
------- -------- ------- ---- ---- ---- ------- ------- -------
Total Hotels . . . . . . . . $105.50 $ 99.20 $ 93.91 71.6% 72.6% 73.1% $ 75.52 $ 72.05 $ 68.62
======= ======== ======= ==== ==== ==== ======= ======= =======
</TABLE>
- ----------
(1) The information included in this table with respect to the Hotels, for
periods prior to their acquisition by the Company or by FelCor
Affiliates, was obtained from the prior owners.
(2) This hotel underwent substantial renovation, upgrading or expansion
during 1996.
Each of the Hotels owned by the Company is leased to the Lessee pursuant
to a Percentage Lease. Accordingly, the Company derives substantially all of
its revenues from rents under the Percentage Leases, which rents are directly
affected by changes in suite revenue. See "Item 2. Properties" for
information regarding the terms of the Percentage Leases. The following table
sets forth comparative suite revenue information for each of the Hotels, and on
a consolidated basis, with respect to historical suite revenues, as if the
hotels had been owned by the Company throughout the periods presented.
7
<PAGE> 8
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGE CHANGE)
SUITE REVENUE PERCENTAGE CHANGE
----------------------------------------------------------------
LOCATION 1996 1995 1994 1996 VS. 1995 1995 vs. 1994
-------- ---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C>
Dallas, (Park Central), TX . . . . . . . . . $ 8,132 $ 7,560 $ 6,925 7.6% 9.2%
Nashville, TN . . . . . . . . . . . . . . . . 8,163 7,960 7,678 2.6% 3.7%
Jacksonville, FL . . . . . . . . . . . . . . 6,256 5,576 4,907 12.2% 13.6%
Orlando (North), FL . . . . . . . . . . . . . 6,654 5,976 5,675 11.3% 5.3%
Orlando (South), FL . . . . . . . . . . . . . 8,632 7,676 7,287 12.5% 5.3%
Tulsa, OK . . . . . . . . . . . . . . . . . . 5,703 5,213 5,097 9.4% 2.3%
---------- -------- ---------
Initial Hotels . . . . . . . . . . . . . . 43,540 39,961 37,569 9.0% 6.4%
---------- -------- ---------
New Orleans, LA(2) . . . . . . . . . . . . . 8,346 7,643 8,014 9.2% (4.6)%
Flagstaff, AZ(2) . . . . . . . . . . . . . . 2,614 2,245 2,301 16.4% (2.4)%
Dallas (Love Field), TX . . . . . . . . . . . 7,176 6,327 6,106 13.4% 3.6%
Boston - Marlborough, MA(2) . . . . . . . . . 2,945 2,650 2,485 11.1% 6.6%
Corpus Christi, TX . . . . . . . . . . . . . 3,338 3,298 3,549 1.2% (7.1)%
Brunswick, GA(2) . . . . . . . . . . . . . . 2,508 2,149 1,759 16.7% 22.2%
Chicago - Lombard, IL . . . . . . . . . . . . 8,156 7,454 6,855 9.4% 8.7%
---------- -------- ---------
Pre CSS Hotels . . . . . . . . . . . . . . 35,083 31,766 31,069 10.4% 2.2%
---------- -------- ---------
San Francisco (Airport So.), CA(2) . . . . . 11,070 9,948 9,355 11.3% 6.3%
Tampa (Busch Gardens), FL(2) . . . . . . . . 2,984 2,781 2,975 7.3% (6.5)%
Boca Raton (Doubletree), FL(2) . . . . . . . 2,753 2,670 2,670 3.1% 0.0%
Minneapolis (Airport), MN(2) . . . . . . . . 9,006 8,545 8,531 5.4% 0.2%
Minneapolis (Downtown), MN(2) . . . . . . . . 4,260 4,937 5,155 (13.7)% (4.2)%
St. Paul, MN(2) . . . . . . . . . . . . . . . 4,603 4,872 4,906 (5.5)% (0.7)%
Anaheim, CA(2) . . . . . . . . . . . . . . . 4,907 4,802 4,356 2.2% 10.2%
Baton Rouge, LA(2) . . . . . . . . . . . . . 4,428 4,657 4,506 (4.9)% 3.4%
Birmingham, AL(2) . . . . . . . . . . . . . . 5,790 5,680 5,371 1.9% 5.8%
Deerfield Beach, FL(2) . . . . . . . . . . . 6,531 7,023 7,073 (7.0)% (0.7)%
Ft. Lauderdale, FL(2) . . . . . . . . . . . . 9,788 9,233 9,180 6.0% 0.6%
El Segundo (LAX South), CA(2) . . . . . . . . 7,538 6,760 7,033 11.5% (3.9)%
Miami, FL(2) . . . . . . . . . . . . . . . . 7,388 7,726 7,498 (4.4)% 3.0%
Milpitas, CA(2) . . . . . . . . . . . . . . . 7,953 7,254 6,290 9.6% 15.3%
Phoenix, AZ(2) . . . . . . . . . . . . . . . 8,239 8,160 7,666 1.0% 6.4%
Oxnard (Mandalay Beach), CA(2) . . . . . . . 6,893 6,700 7,081 2.9% (5.4)%
Napa, CA(2) . . . . . . . . . . . . . . . . . 5,846 5,427 5,723 7.7% (5.2)%
San Francisco (Airport No.), CA(2) . . . . . 8,323 7,233 7,103 15.1% 1.8%
---------- -------- ---------
CSS Hotels . . . . . . . . . . . . . . . . 118,300 114,408 112,472 3.4% 1.7%
---------- -------- ---------
Cleveland, OH(2) . . . . . . . . . . . . . . 6,830 6,925 5,922 (1.4)% 16.9%
Piscataway, NJ(2) . . . . . . . . . . . . . . 6,132 6,069 5,986 1.0% 1.4%
Boca Raton (Embassy), FL(2) . . . . . . . . . 6,034 6,094 5,689 (1.0)% 7.1%
Beaver Creek, CO(2) . . . . . . . . . . . . . 2,480 2,415 2,214 2.7% 9.1%
Deerfield, IL(2) . . . . . . . . . . . . . . 6,510 6,457 5,825 0.8% 10.8%
Lexington, KY(2) . . . . . . . . . . . . . . 4,776 4,456 4,152 7.2% 7.3%
San Rafael (Marin Co.), CA . . . . . . . . . 7,400 7,330 6,857 1.0% 6.9%
Parsippany, NJ . . . . . . . . . . . . . . . 9,673 8,590 8,040 12.6% 6.8%
Indianapolis (North), IN . . . . . . . . . . 5,738 5,845 5,329 (1.8)% 9.7%
Charlotte, NC . . . . . . . . . . . . . . . . 8,051 7,415 6,468 8.6% 14.6%
Atlanta (Buckhead), GA . . . . . . . . . . . 12,026 11,353 9,307 5.9% 22.0%
Kingston Plantation, SC . . . . . . . . . . . 8,271 7,750 7,522 6.7% 3.0%
---------- -------- ---------
1996 Acquisitions . . . . . . . . . . . . 83,921 80,699 73,311 4.0% 10.1%
---------- -------- ---------
Total Hotels . . . . . . . . . . . . . . . $280,844 $266,834 $254,421 5.3% 4.9%
========== ======== =========
</TABLE>
- ----------
(1) The information included in this table with respect to suite revenues of
the Hotels, for periods prior to their acquisition by the Company or by
FelCor Affiliates, was obtained from the prior owners. Suite Revenue, as
shown, reflects the Lessee's 100% interest in the Hotels, even where the
Company owns less than a 100% interest in such hotels.
(2) This hotel underwent substantial renovation, upgrading or expansion
during 1996.
8
<PAGE> 9
The following table reflects comparative pro forma Percentage Lease
Revenue received by the Company pursuant to the Percentage Leases for the years
1996 and 1995, as if the Hotels were subject to the Percentage Leases for the
entire periods presented and the Company owned the entire interest therein.
<TABLE>
<CAPTION>
Pro Forma
Percentage Lease Revenue
(in thousands)
YEAR ENDED DECEMBER 31,
-----------------------
LOCATION 1996 1995
-------- ---- ----
<S> <C> <C>
Dallas, (Park Central), TX . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,609 $ 3,252
Nashville, TN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,360 3,237
Jacksonville, FL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,431 2,013
Orlando (North), FL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,162 2,732
Orlando (South), FL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,441 2,856
Tulsa, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,489 2,166
---------- ----------
Initial Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,492 16,256
---------- ----------
New Orleans, LA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,470 3,029
Flagstaff, AZ(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,139 903
Dallas (Love Field), TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,231 2,682
Boston - Marlborough, MA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,484 1,291
Corpus Christi, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,463 1,437
Brunswick, GA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982 751
Chicago - Lombard, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,767 3,311
---------- ----------
Pre CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,536 13,404
---------- ----------
San Francisco (Airport So.), CA(1) . . . . . . . . . . . . . . . . . . . . . . . 6,089 5,412
Tampa (Busch Gardens), FL(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,327 1,190
Boca Raton (Doubletree), FL(1) . . . . . . . . . . . . . . . . . . . . . . . . . 1,119 1,051
Minneapolis (Airport), MN(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 5,006 4,731
Minneapolis (Downtown), MN(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,797 2,239
St. Paul, MN(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,561 1,747
Anaheim, CA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,244 2,222
Baton Rouge, LA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,824 1,973
Birmingham, AL(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,333 3,276
Deerfield Beach, FL(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,208 3,528
Ft. Lauderdale, FL(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,594 5,205
El Segundo (LAX South), CA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,057 2,588
Miami, FL(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,499 3,725
Milpitas, CA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,615 4,152
Phoenix, AZ(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,707 4,679
Oxnard (Mandalay Beach), CA(1) . . . . . . . . . . . . . . . . . . . . . . . . . 3,257 3,157
Napa, CA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,335 2,105
San Francisco (Airport No.), CA(1) . . . . . . . . . . . . . . . . . . . . . . . 4,021 3,311
---------- ----------
CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,593 56,291
---------- ----------
Cleveland, OH(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,131 2,247
Piscataway, NJ(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,351 2,325
Boca Raton (Embassy), FL(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,240 2,279
Beaver Creek, CO(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546 509
Deerfield, IL(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,065 3,018
Lexington, KY(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,133 1,917
San Rafael (Marin Co.), CA . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,578 3,534
Parsippany, NJ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,474 3,799
Indianapolis (North), IN . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,453 2,590
Charlotte, NC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,834 3,455
Atlanta (Buckhead), GA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,019 5,580
Kingston Plantation, SC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,738 2,362
---------- ----------
1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,562 33,615
---------- ----------
Total Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 128,183 $ 119,566
========== ==========
</TABLE>
- ------------
(1) This hotel underwent substantial renovation, upgrading or expansion
during 1996.
9
<PAGE> 10
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, particularly during the fourth quarter, to
the extent that it receives Percentage Rent. To the extent cash flow from
operations is insufficient during any quarter, due to temporary or seasonal
fluctuations in lease revenue, the Company expects to utilize other cash on
hand or borrowings under the Line of Credit to make distributions to its
shareholders.
Competition
The hotel industry is highly competitive. Each of the Company's hotels
is located in a developed area that includes other hotel properties and
competes for guests primarily with other upscale hotels in its immediate
vicinity and secondarily with other full service hotel properties in its
geographic market. An increase in the number of competitive hotel properties
in a particular area could have a material adverse effect on the occupancy, ADR
and RevPAR of the Company's hotels in that area. The Company believes that
brand recognition, location, the quality of the hotel and services provided,
and price are the principal competitive factors affecting the Company's hotels.
The Company competes for investment opportunities with other entities,
some of which have substantially greater financial resources than the Company.
These larger entities may be able to accept more risk than the Company can
prudently manage. An increase in the number of purchasers for upscale hotel
properties may reduce the number of suitable investment opportunities offered
to the Company and may increase the bargaining power of owners seeking to sell
their hotels.
Environmental Matters
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner or operator knew of,
or was responsible for, the presence of hazardous or toxic substances on the
property. Furthermore, a person that arranges for the disposal or treatment
of, or transports for disposal or treatment, a hazardous or toxic substance at
any property may be liable for the costs of removal or remediation of hazardous
or toxic substances released into the environment at or from that property.
The costs of removal or remediation of such substances may be substantial, and
the presence of such substances, or the failure to promptly remediate such
substances, may adversely affect the owner's ability to fully utilize such
property without restriction, to sell such property or to borrow using such
property as collateral. In connection with the ownership and operation of the
Company's hotels, the Company, the Partnership and the Lessee, as the case may
be, may be potentially liable for any such costs.
Phase I environmental audits, by independent environmental engineers, are
customarily obtained with respect to hotels, prior to the acquisition thereof
by the Company. The principal purpose of Phase I audits is to identify
indications of potential environmental contamination for which such hotels may
be responsible and, secondarily, to assess, to a limited extent, the potential
for environmental regulatory compliance liabilities. The Phase I audits of the
Hotels were designed to meet the requirements of the then current industry
standards governing Phase I audits, and consistent with those requirements,
none of the audits involved testing of groundwater, soil or air. Accordingly,
they do not represent evaluations of conditions at the studied sites that would
be revealed only through such testing. In addition, their assessment of
environmental regulatory compliance issues was general in scope and was not a
detailed determination of the Hotels' complete compliance status. Similarly,
the audits did not involve comprehensive analysis of potential off-site
liability. The Phase I audit reports did not reveal any environmental
liability that management believes would have a material adverse effect on the
Company's business, assets or results of operations, nor is the Company aware
of any such liability. Nevertheless, it is possible that these reports do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware.
10
<PAGE> 11
No assurances can be given that (i) future or amended laws, ordinances or
regulations or more stringent interpretations or enforcement policies of
existing environmental requirements, will not impose any material environmental
liability or (ii) the environmental condition of the Hotels will not be
affected by changes (of which the Company is unaware) occurring subsequent to
the date of such audits, by the condition of properties in the vicinity of such
hotels (such as the presence of leaking underground storage tanks) or by third
parties unrelated to the Company.
The Company believes that its Hotels are in compliance, in all material
respects, with all federal, state and local ordinances and regulations
regarding hazardous or toxic substances and other environmental matters, the
violation of which would have a material adverse effect on the Company, the
Partnership or the Lessee. The Company has not been notified by any
governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental matters in
connection with any of its present or former properties.
Tax Status
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its initial taxable year ending December 31, 1994. As a REIT, the Company
(subject to certain exceptions) will not be subject to federal income taxation,
at the corporate level, on its taxable income that is distributed to the
shareholders of the Company. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 95% of its taxable income. The Company may, however, be
subject to certain state and local taxes on its income and property. In
connection with the Company's election to be taxed as a REIT, the Company's
Charter imposes restrictions on the transfer of shares of Common Stock. The
Company has adopted the calendar year as its taxable year.
Lessee Operations
The Lessee leases each of the Hotels under a Percentage Lease, pursuant
to which it is obligated to pay the Company the greater of a minimum Base Rent
or a Percentage Rent based on a percentage of revenues. See "Item 2.
Properties" for additional information regarding the terms of the Percentage
Leases. The Lessee has entered into, and is responsible for the payment of
all fees under, the franchise licenses and management agreements relating to
each of the Hotels, may hold the liquor licenses applicable to the Hotels, owns
and maintains the inventories required for the operation of the Hotels, pays
for normal maintenance and repair expenses, enters into various operating,
maintenance and service agreements with respect to the Hotels, and is
responsible for compliance with the license, management and other agreements
affecting hotel operations. In addition, the Lessee actively provides asset
management services to the Hotels, including the supervision of the day-to-day
operations of the Hotels by the management companies engaged to manage such
hotels and the establishment and implementation of capital expenditure
programs.
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 in an underwritten public offering or annually, at the then
current market prices. The agreement stipulates that Messrs. Feldman and
Corcoran are restricted from selling the 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 upon similar terms,
at its option. Pursuant to this agreement, each of Messrs. Feldman and
Corcoran purchased 3,775 shares of Common Stock in December 1995. The
Independent Directors (as herein defined) may suspend or terminate such
agreement at any time.
11
<PAGE> 12
The Lessee, as a related third party, has elected to provide its audited
financial statements to the Company for inclusion elsewhere in this Form 10-K,
although such statements are not generally required to be disclosed. See
"Index to Financial Statements" at page F-1.
Employees
Messrs. Feldman and Corcoran have each entered into employment agreements
with the Company, pursuant to which they have agreed to devote substantially
all of their time to the business of the Company through 1999. In addition,
the Company had 19 other employees at December 31, 1996. All persons employed
in the day-to-day operation of the Company's Hotels are employees of the
management companies engaged by the Lessee to operate such hotels.
Personnel and Office Sharing Arrangements
The Company shares executive offices with the Lessee and FelCor, Inc., a
corporation owned by Messrs. Feldman and Corcoran. Each entity bears an
allocated share of the costs thereof, including but not limited to rent,
salaries of all personnel (other than Messrs. Feldman and Corcoran, who are
compensated solely by the Company), office supplies and telephones. Such
allocations of shared costs are subject to the approval of a majority of the
independent directors of the Company. During 1996 approximately $807,000
(approximately 38% of all allocable expenses) was borne by the Company under
this arrangement.
ITEM 2. PROPERTIES
The Hotels
Of the 43 Hotels owned by the Company at December 31, 1996, 40 were
operated under (or were in the process of conversion to) the Embassy Suites
brand. Each Embassy Suites hotel operates under a franchise license agreement
from Promus and offers all of the guest services and amenities typical of an
Embassy Suites hotel. Embassy Suites hotels are upscale, full-service, all-
suite hotels typically providing, among other things, two-room suites, free
cooked-to-order breakfasts, complimentary cocktails during two hours in the
evenings (subject to local laws and regulations), as well as a fitness center,
indoor heated pool, saunas, whirlpool and steam room, all in an atrium
environment. Each suite usually contains two telephones (with voice mail), a
mini-refrigerator, coffee maker, microwave oven, wet bar, a 25" color
television in the living room and a 19" color television in the bedroom.
Restaurant, banquet and lounge facilities also are typically available at each
hotel.
Two of the Hotels owned by the Company at December 31, 1996 were operated
as Doubletree Guest Suites hotels pursuant to management agreements with
Doubletree. There are no separate franchise license agreements with respect to
the Doubletree Guest Suites hotels. One of the Hotels was operated under a
franchise license agreement with Hilton Inns, Inc.
The following table sets forth certain additional descriptive information
regarding the Hotels owned by the Company at December 31, 1996:
12
<PAGE> 13
<TABLE>
<CAPTION>
BANQUET/
YEAR NUMBER RESTAURANT AND MEETING
LOCATION OPENED OF SUITES LOUNGE SEATS(1) SPACE (3)
- -------- ------ --------- --------------- --------
<S> <C> <C> <C> <C>
Dallas (Park Central), TX . . . . . . . . . . . . 1985 279 100 7,800
Nashville, TN . . . . . . . . . . . . . . . . . . 1986 296 210(2) 14,000
Jacksonville, FL . . . . . . . . . . . . . . . . 1985 210 95(2) 8,000
Orlando (North), FL . . . . . . . . . . . . . . . 1985 210 165(2) 9,000
Orlando (South), FL . . . . . . . . . . . . . . . 1985 244 110(2) 5,200
Tulsa, OK . . . . . . . . . . . . . . . . . . . . 1985 240 195(2) 3,300
New Orleans, LA . . . . . . . . . . . . . . . . . 1984 282 130 10,000
Flagstaff, AZ . . . . . . . . . . . . . . . . . . 1988 119 70 1,300
Dallas (Love Field), TX . . . . . . . . . . . . . 1986 248 200 3,500
Boston-Marlborough, MA . . . . . . . . . . . . . 1988 100 60 800
Brunswick, GA . . . . . . . . . . . . . . . . . . 1988 130 85 6,000
Corpus Christi, TX . . . . . . . . . . . . . . . 1984 150 130 3,900
Chicago-Lombard, IL . . . . . . . . . . . . . . . 1990 262 205(2) 4,200
Burlingame (S.F. Airport So.), CA(4) . . . . . . 1986 339 595(2) 10,900
Minneapolis (Airport), MN . . . . . . . . . . . . 1986 311 175(2) 12,300
Boca Raton (Doubletree), FL . . . . . . . . . . . 1989 182 85 3,000
Minneapolis (Downtown), MN . . . . . . . . . . . 1984 218 200 3,600
St. Paul, MN(5) . . . . . . . . . . . . . . . . . 1983 210 190(2) 3,300
Tampa (Busch Gardens), FL . . . . . . . . . . . . 1985 129 55 2,200
Cleveland, OH . . . . . . . . . . . . . . . . . . 1990 268 175 8,200
Anaheim, CA . . . . . . . . . . . . . . . . . . . 1987 222 270(2) 6,500
Baton Rouge, LA . . . . . . . . . . . . . . . . . 1985 224 170 5,800
Birmingham, AL . . . . . . . . . . . . . . . . . 1987 242 250(2) 5,600
Deerfield Beach, FL . . . . . . . . . . . . . . . 1987 244 270(2) 8,500
Ft. Lauderdale, FL . . . . . . . . . . . . . . . 1986 359 220(2) 14,000
Miami (Airport), FL . . . . . . . . . . . . . . . 1987 314 365(2) 11,200
Milpitas, CA . . . . . . . . . . . . . . . . . . 1987 267 190 7,000
Phoenix (Camelback), AZ(4) . . . . . . . . . . . 1985 233 205(2) 8,000
South San Francisco (Airport North), CA . . . . . 1988 312 200 11,700
Lexington, KY . . . . . . . . . . . . . . . . . . 1987 174 150 1,700
Piscataway, NJ . . . . . . . . . . . . . . . . . 1988 225 95 6,900
Avon (Beaver Creek Resort), CO . . . . . . . . . 1990 72 70 1,600
Boca Raton (Embassy), FL . . . . . . . . . . . . 1989 263 175(2) 14,000
El Segundo (LAX South), CA . . . . . . . . . . . 1985 350 320(2) 6,600
Oxnard (Mandalay Beach), CA . . . . . . . . . . . 1986 249 235(2) 16,600
Napa, CA . . . . . . . . . . . . . . . . . . . . 1985 205 170(2) 6,900
Deerfield, IL . . . . . . . . . . . . . . . . . . 1987 237 120(2) 3,700
San Rafael (Marin Co.), CA . . . . . . . . . . . 1990 235 255(2) 12,000
Parsippany, NJ . . . . . . . . . . . . . . . . . 1989 274 285 5,800
Charlotte, NC . . . . . . . . . . . . . . . . . . 1989 274 215(2) 9,200
Indianapolis (North), IN . . . . . . . . . . . . 1985 222 155 5,000
Atlanta (Buckhead), GA . . . . . . . . . . . . . 1988 317 210(2) 10,700
Kingston Plantation, SC . . . . . . . . . . . . . 1987 255 275(2) 25,600
------ ------ -------
TOTALS 10,196 8,100 325,100
====== ====== =======
</TABLE>
- ---------
(1) Approximate, excluding atrium area seating.
(2) At December 31, 1996, these restaurants and lounges were subleased to
unrelated third party lessees, who also provide guest room service and
catering service to the meeting rooms.
(3) In approximate number of square feet.
(4) Situated on land leased under a long-term ground lease.
(5) Owned subject to a capitalized industrial revenue bond lease which
expires in 2011 and which permits the Company to purchase the fee
interest at expiration for a nominal amount.
13
<PAGE> 14
The Percentage Leases.
Each of the Hotels is leased to the Lessee pursuant to a Percentage Lease
having a term of 10 years and providing for rent equal to the greater of Base
Rent or Percentage Rent. The terms of each Percentage Lease is approved by
Company's Independent Directors. The following table sets forth the essential
economic terms of each Percentage Lease, as in effect at December 31, 1996,
with respect to each of the Hotels.
<TABLE>
<CAPTION>
PERCENTAGE LEASE SUMMARY
(DOLLAR AMOUNTS IN THOUSANDS)
ANNUAL PERCENTAGE RENT
----------------------
EXPIRATION ANNUAL FIRST SECOND SUITE REVENUE
LOCATION YEAR OF LEASE BASE RENT TIER (1) TIER (2) BREAKPOINT
-------- ------------- --------- ----- ----- ----------
<S> <C> <C> <C> <C> <C>
Dallas, (Park Central), TX . . . . . 2004 $ 1,488 17% 65% $ 3,616
Nashville,TN . . . . . . . . . . . . 2004 1,679 17% 65% 4,321
Jacksonville, FL . . . . . . . . . . 2004 888 17% 65% 3,516
Orlando (North), FL . . . . . . . . . 2004 1,583 19% 65% 2,669
Orlando (South), FL . . . . . . . . . 2004 1,423 17% 65% 4,614
Tulsa, OK . . . . . . . . . . . . . . 2004 1,277 19% 65% 2,790
New Orleans, LA . . . . . . . . . . . 2004 1,974 19% 65% 4,321
Flagstaff, AZ . . . . . . . . . . . . 2005 574 17% 65% 1,168
Dallas (Love Field), TX . . . . . . . 2005 1,849 17% 65% 3,082
Boston - Marlborough, MA . . . . . . 2005 725 19% 65% 947
Brunswick, GA . . . . . . . . . . . . 2005 370 17% 65% 1,350
Corpus Christi, TX . . . . . . . . . 2005 1,000 17% 65% 1,495
Chicago - Lombard, IL . . . . . . . . 2005 1,900 17% 65% 3,270
Boca Raton (Doubletree), FL . . . . . 2005 654 17% 65% 1,421
Burlingame (S. F. Airport So.), CA . 2005 3,147 17% 65% 3,174
Minneapolis (Airport), MN . . . . . . 2005 2,778 17% 65% 2,138
Minneapolis (Downtown), MN . . . . . 2005 1,387 17% 65% 2,091
St. Paul, MN . . . . . . . . . . . . 2005 1,085 17% 65% 3,115
Tampa (Busch Gardens), FL . . . . . . 2005 786 17% 65% 1,287
Cleveland, OH . . . . . . . . . . . . 2005 1,258 17% 65% 4,929
Anaheim, CA . . . . . . . . . . . . . 2006 1,272 17% 65% 2,062
Baton Rouge, LA . . . . . . . . . . . 2006 1,204 17% 65% 2,281
Birmingham, AL . . . . . . . . . . . 2006 1,898 17% 65% 1,273
Deerfield Beach, FL . . . . . . . . . 2006 2,163 17% 65% 2,568
Ft. Lauderdale, FL . . . . . . . . . 2006 3,228 17% 65% 1,969
Miami (Airport), FL . . . . . . . . . 2006 2,222 17% 65% 2,882
Milpitas, CA . . . . . . . . . . . . 2006 2,143 17% 65% 1,402
Phoenix (Camelback), AZ . . . . . . . 2006 2,812 17% 65% 1,428
S. San Francisco (Airport No.), CA . 2006 1,876 17% 65% 3,103
Lexington, KY . . . . . . . . . . . . 2006 1,149 17% 65% 2,135
Piscataway, NJ . . . . . . . . . . . 2006 1,355 17% 65% 3,574
Avon (Beaver Creek Resort), CO . . . 2006 375 17% 65% 2,284
Boca Raton (Embassy), FL . . . . . . 2006 1,368 17% 65% 3,670
El Segundo (LAX South), CA . . . . . 2006 1,600 17% 65% 4,130
Oxnard (Mandalay Beach), CA . . . . . 2006 1,927 17% 65% 2,909
Napa, CA . . . . . . . . . . . . . . 2006 1,215 17% 65% 3,145
Deerfield, IL . . . . . . . . . . . . 2006 1,743 17% 65% 2,505
San Rafael (Marin Co.), CA . . . . . 2006 2,107 17% 65% 2,917
Parsippany, NJ . . . . . . . . . . . 2006 2,440 17% 65% 3,930
Charlotte, NC . . . . . . . . . . . . 2006 2,200 17% 65% 3,353
Indianapolis (North), IN . . . . . . 2006 1,470 17% 65% 2,795
Atlanta (Buckhead), GA . . . . . . . 2006 3,667 17% 65% 3,872
Kingston Plantation, SC . . . . . . . 2006 1,963 17% 65% 6,236
</TABLE>
- -----------
(1) Represents percentage of suite revenues payable as Percentage Rent up to
and including the Suite Revenue Breakpoint.
(2) Represents percentage of suite revenues payable as Percentage Rent in
excess of the Suite Revenue Breakpoint.
14
<PAGE> 15
Each Percentage Lease also requires the Lessee to pay as rent 5% of the
food and beverage revenues from each Hotel in which the restaurant and bar
operations are conducted directly by the Lessee and 98% of the food and
beverage rent revenues from each Hotel in which the restaurant and bar
operations are subleased by the Lessee to an unrelated third party.
The amount of Base Rent and of the Suite Revenue Breakpoint in each
Percentage Lease formula described in the foregoing table is subject to
adjustment, annually, based upon a formula taking into account changes in the
Consumer Price Index over the preceding two years; however, the adjustment in
any year may not exceed 7%. An adjustment of 0.73% was effective January 1,
1996 for the 10 hotels acquired by the Company prior to July 1, 1995 and an
adjustment of 1.42% will be effective January 1, 1997 for the 37 Hotels
acquired prior to July 1, 1996. The adjustment is calculated at the beginning
of each calendar year, for those hotels acquired prior to July 1 of the
preceding year.
Maintenance and Modifications. Under the Percentage Leases, the Company
is required to maintain the underground utilities and the structural elements
of the improvements, including exterior walls (excluding plate glass) and the
roof of each leased hotel. In addition, the Percentage Leases obligate the
Company to fund periodic improvements (in addition to maintenance of structural
elements) to the buildings and grounds comprising the leased hotels, and the
periodic repair, replacement and refurbishment of furniture, fixtures and
equipment in the leased hotels, when and as required to meet the requirements
of the applicable franchise licenses, and to establish and maintain a reserve,
which is available to the Lessee for such purposes, in an amount equal to 4% of
hotel suite revenues, on a cumulative basis. The Company's obligation is not
limited to the amount in such reserve. Otherwise, the Lessee is required, at
its expense, to maintain the leased hotels in good order and repair, except for
ordinary wear and tear, and to make nonstructural repairs, whether foreseen or
unforeseen, ordinary or extraordinary, which may be necessary and appropriate
to keep the leased hotels in good order and repair.
Insurance and Property Taxes. The Company is responsible for paying real
estate and personal property taxes and property and casualty insurance premiums
on the leased hotels (except to the extent that personal property associated
with the leased hotels is owned by the Lessee). The Lessee is required to pay
for all liability insurance on the leased hotels, which must include extended
coverage, comprehensive general public liability, workers' compensation and
other insurance appropriate and customary for properties similar to the leased
hotels.
Indemnification. Under each of the Percentage Leases, the Lessee will
indemnify, and will be obligated to hold harmless, the Company from and against
all liabilities, costs and expenses (including reasonable attorneys' fees and
expenses) incurred by, imposed upon or asserted against the Company on account
of, among other things, (i) any accident or injury to person or property on or
about the leased hotels, (ii) any misuse by the Lessee or any of its agents of
the leased hotels, (iii) any environmental liability resulting from conditions
disclosed in the environmental audits received by the Company before it
acquired the leased hotels or caused or resulting thereafter from any action or
negligence of the Lessee, (iv) taxes and assessments in respect of the leased
hotels (other than real estate and personal property taxes and any income taxes
of the Company on income attributable to the leased hotels), (v) the sale or
consumption of alcoholic beverages on or in the real property or improvements
thereon, or (vi) any breach of the Percentage Leases by the Lessee; provided,
however, that such indemnification will not be construed to require the Lessee
to indemnify the Company against it's own grossly negligent acts or omissions
or willful misconduct.
Assignment and Subleasing. The Lessee is not permitted to sublet all or
substantially all of any one or more of the leased hotels or to assign its
interest under any of the Percentage Leases, other than to an affiliate of the
Lessee, without the prior written consent of the Company. The Lessee may,
however, sublet space to operators of gift shops, restaurants, lounges or other
amenities at the leased hotels. No assignment or subletting will release the
Lessee from any of its obligations under the Percentage Leases.
15
<PAGE> 16
Damage to Hotels. In the event of damage to or destruction of any leased
hotel covered by insurance which renders the leased hotel unsuitable for the
Lessee's use and occupancy, the Lessee is generally obligated to repair,
rebuild, or restore the leased hotel or offer to acquire the leased hotel on
the terms set forth in the applicable Percentage Lease. If the Lessee rebuilds
the leased hotel, the Company is obligated to disburse to the Lessee, from time
to time and upon satisfaction of certain conditions, any insurance proceeds
actually received by the Company as a result of such damage or destruction, and
any excess costs of repair or restoration will be paid by the Lessee. If the
Lessee decides not to rebuild and the Company rejects the Lessee's mandatory
offer to purchase the leased hotel on the terms set forth in the Percentage
Lease, the Percentage Lease will terminate and the insurance proceeds will be
retained by the Company. If the Company accepts the Lessee's offer to purchase
the leased hotel, the Percentage Lease will terminate and the Lessee will be
entitled to the insurance proceeds. In the event that damage to or destruction
of a leased hotel which is covered by insurance does not render the leased
hotel wholly unsuitable for the Lessee's use and occupancy, the Lessee
generally will be obligated to repair or restore the leased hotel. In the
event of material damage to or destruction of any leased hotel which is not
covered by insurance, the Lessee is obligated to either repair, rebuild, or
restore the leased hotel or offer to purchase the leased hotel on the terms and
conditions set forth in the Percentage Lease. The Percentage Lease shall remain
in full force and effect during the first three months of any period required
for repair or restoration of any damaged or destroyed leased hotel, after which
time, rent will be equitably abated.
Condemnation of Hotels. In the event of a total condemnation of a leased
hotel, the relevant Percentage Lease will terminate as of the date of taking,
and the Company and the Lessee will be entitled to their shares of the
condemnation award in accordance with the provisions of the Percentage Lease.
In the event of a partial taking which does not render the leased hotel
unsuitable for the Lessee's use, the Lessee shall restore the untaken portion
of the leased hotel to a complete architectural unit and the Company shall
contribute to the cost of such restoration that part of the condemnation award
specified for restoration.
Events of Default. Events of Default under the Percentage Leases
include, among others, the following:
(i) the occurrence of an Event of Default under any other
lease between the Company and the Lessee or any affiliate of the Lessee;
(ii) the failure by the Lessee to pay Base Rent when due and
the continuation of such failure for a period of 10 days thereafter;
(iii) the failure by the Lessee to pay the excess of Percentage
Rent over Base Rent within 90 days after the end of the calendar year in
which such payment was due;
(iv) the failure by the Lessee to observe or perform any other
term of a Percentage Lease and the continuation of such failure for a
period of 30 days after receipt by the Lessee of notice from the Company
thereof, unless such failure cannot be cured within such period and the
Lessee commences appropriate action to cure such failure within said 30
days and thereafter acts, with diligence, to correct such failure within
such time as is necessary;
(v) if the Lessee shall file a petition in bankruptcy or
reorganization pursuant to any federal or state bankruptcy law or any
similar federal or state law, or shall be adjudicated a bankrupt or shall
make an assignment for the benefit of creditors or shall admit in writing
its inability to pay its debts generally as they become due, or if a
petition or answer proposing the adjudication of the Lessee as a bankrupt
or its reorganization pursuant to any federal or state bankruptcy law or
any similar federal or state law shall be filed in any court and the
Lessee shall be adjudicated a bankrupt and such adjudication shall not be
vacated or set aside or stayed within 60 days after the entry of an order
in respect thereof, or if a receiver of the Lessee or of the whole or
substantially all of the assets of the Lessee shall be appointed in any
16
<PAGE> 17
proceeding brought by the Lessee or if any such receiver, trustee or
liquidator shall be appointed in any proceeding brought against the
Lessee and shall not be vacated or set aside or stayed within 60 days
after such appointment;
(vi) if the Lessee voluntarily discontinues operations of a
leased hotel for more than 30 days, except as a result of damage,
destruction, or condemnation; or
(vii) if the franchise agreement with respect to a leased hotel
is terminated by the franchisor as a result of any action or failure to
act by the Lessee or its agents.
If an Event of Default occurs and continues beyond any curative period,
the Company has the option of terminating the Percentage Lease or any or all
other Percentage Leases by giving the Lessee 10 days' prior written notice of
the date for termination of the Percentage Lease and, unless such Event of
Default is cured prior to the termination date set forth in said notice, the
specified Percentage Leases shall terminate on the date specified in the
Company's notice and the Lessee is required to surrender possession of the
affected leased hotels.
Termination of Percentage Leases on Disposition of the Hotels. In the
event the Company enters into an agreement to sell or otherwise transfer a
leased hotel, the Company has the right to terminate the Percentage Lease with
respect to such leased hotel upon 90 days' prior written notice upon either (i)
paying the Lessee the fair market value of the Lessee's leasehold interest in
the remaining term of the Percentage Lease to be terminated or (ii) offering to
lease to the Lessee a substitute hotel on terms that would create a leasehold
interest in such hotel with a fair market value equal to or exceeding the fair
market value of the Lessee's remaining leasehold interest under the Percentage
Lease to be terminated. The Company also is obligated to pay, or reimburse the
Lessee for, (x) any assignment fees, termination fees or other liabilities
arising under any franchise license agreement solely as a result of the
assignment or termination of such franchise license agreement in connection
with the Company's sale of a leased hotel and termination of the Percentage
Lease with respect thereto and (y) any termination fees payable under any
restaurant sublease solely as a result of the termination thereof upon
termination of the Percentage Lease with respect thereto.
Other Lease Covenants. The Lessee has agreed that during the term of the
Percentage Leases it will maintain a ratio of total debt to consolidated net
worth (as defined in the Percentage Leases) of less than or equal to 50%,
exclusive of capitalized leases. In addition, the Lessee has agreed that it
will not pay fees to any affiliate of the Lessee.
Breach by Company. If the Company fails to cure a breach on its part
under a Percentage Lease, the Lessee may purchase the relevant leased hotel
from the Company for a purchase price equal to the leased hotel's then fair
market value. Upon notice from the Lessee that the Company has breached the
Lease, the Company has 30 days to cure the breach or proceed to cure the
breach, which period may be extended in the event of certain specified,
unavoidable delays.
Inventory. The initial standard inventory of goods and supplies
necessary for the operation of the leased hotels has been acquired by the
Lessee. The Lessee is required to purchase, at its expense, any and all
replacements and additions to such inventory as may be necessary for the
continued operation of the leased hotels and, upon the termination of the
applicable Percentage Lease, to surrender such leased hotel to the Company.
ITEM 3. LEGAL PROCEEDINGS
The only litigation threatened against or affecting the Company's Hotels
are claims arising in the ordinary course of business. These claims, exclusive
of potential third party recoveries, are not considered to be material.
Furthermore, any such claims are substantially covered by insurance. One of
the partnerships in which the Company owns a 97% equity interest is subject to
the continuing jurisdiction of the United States Bankruptcy Court, Central
District of California, in an action initiated prior to the acquisition of such
interest by the Company
17
<PAGE> 18
and styled In re Los Angeles International Airport Hotel Associates, Case No.
LA92-39324-AA. A plan of reorganization has been confirmed by the court in
this action and all obligations thereunder of the owner of the interests in
such entity were satisfied in all material respects prior to acquisition by the
Company, except for those obligations expressly assumed by the Company.
Management does not believe that any claims known to it (individually or in the
aggregate) will have a material adverse effect on the Company, without regard
to any potential recoveries from insurers or other third parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of 1996, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information.
The Company's Common Stock was traded on The Nasdaq Stock Market from
July 22, 1994 until March 13, 1996 under the symbol "FLCO" and has been traded
on the New York Stock Exchange since March 13, 1996 under the symbol "FCH." The
following table sets forth for the indicated periods the high and low sale
prices for the Common Stock, as traded on such market and exchange.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
----
First quarter . . . . . . . . . . . . . . . . . . . . . . $ 24 1/4 $ 18 1/2
Second quarter . . . . . . . . . . . . . . . . . . . . . 27 22 3/4
Third quarter . . . . . . . . . . . . . . . . . . . . . . 30 24 5/8
Fourth quarter . . . . . . . . . . . . . . . . . . . . . 31 3/4 24 3/4
1996
----
First quarter . . . . . . . . . . . . . . . . . . . . . . $ 31 3/4 $ 27 1/4
Second quarter . . . . . . . . . . . . . . . . . . . . . 31 1/2 28 5/8
Third quarter . . . . . . . . . . . . . . . . . . . . . . 32 3/8 27 3/4
Fourth quarter . . . . . . . . . . . . . . . . . . . . . 36 5/8 30 5/8
</TABLE>
The foregoing market quotations for the period prior to March 13, 1996
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and may not necessarily represent actual transactions.
Stockholder Information.
At March 18, 1997, the Company had approximately 185 holders of record of
its Common Stock and approximately 35 holders of record of the Series A
Preferred Stock (which is convertible into Common Stock). It is estimated that
there were approximately 12,000 beneficial owners, in the aggregate, of the
Common Stock and Series A Preferred Stock at that date.
IN ORDER TO COMPLY WITH CERTAIN REQUIREMENTS RELATED TO QUALIFICATION OF
THE COMPANY AS A REIT, THE COMPANY'S CHARTER LIMITS THE NUMBER OF SHARES OF
COMMON STOCK THAT MAY BE OWNED BY ANY SINGLE PERSON OR AFFILIATED GROUP TO 9.9%
OF THE OUTSTANDING COMMON STOCK.
18
<PAGE> 19
Distribution Information.
The Company has adopted a policy of paying regular quarterly
distributions on its Common Stock, and cash distributions have been paid on the
Company's Common Stock with respect to each quarter since its inception. The
following table sets forth information regarding the declaration and payment of
distributions by the Company since its inception of operation on July 28, 1994.
<TABLE>
<CAPTION>
QUARTER TO Distribution DISTRIBUTION PER SHARE
WHICH DISTRIBUTION Record PAYMENT DISTRIBUTION
RELATES Date DATE AMOUNT
------------------------------ --------------- --------------- --------------
<S> <C> <C> <C>
1995
----
First quarter . . . . . . . . . . . . . . . . . . . . . . . 5/15/95 5/30/95 $0.46
Second quarter . . . . . . . . . . . . . . . . . . . . . . . 8/15/95 8/30/95 $0.46
Third quarter . . . . . . . . . . . . . . . . . . . . . . . 11/15/95 11/30/95 $0.46
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . 12/12/95 1/30/96 $0.46
1996
----
First quarter . . . . . . . . . . . . . . . . . . . . . . . . 4/11/96 4/30/96 $0.46
Second quarter . . . . . . . . . . . . . . . . . . . . . . . 7/15/96 7/30/96 $0.46
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . 10/15/96 10/31/96 $0.50
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . 12/30/96 1/30/96 $0.50
</TABLE>
The foregoing distributions represent an approximate 8.7% return of capital
in 1995 and an approximate 11.5% return of capital in 1996. In order to
maintain its qualification as a REIT, the Company must make annual
distributions to its shareholders of at least 95% of its taxable income (which
does not include net capital gains). For the years ended December 31, 1995 and
December 31, 1996, the Company had distributions totaling $1.84 and $1.92 per
share, respectively, of which only $1.60 and $1.61 per share, respectively,
were required to satisfy the 95% REIT distribution test. Under certain
circumstances the Company may be required to make distributions in excess of
cash available for distribution in order to meet such REIT distribution
requirements. In such event, the Company presently would expect to borrow
funds, or to sell assets for cash, to the extent necessary to obtain cash
sufficient to make the distributions required to retain its qualification as a
REIT for federal income tax purposes.
The Company currently anticipates that it will maintain at least the current
dividend rate for the immediate future, unless actual results of operations,
economic conditions or other factors differ from its current expectations.
Future distributions, if any, paid by the Company will be at the discretion of
the Board of Directors of the Company and will depend on the actual cash flow
of the Company, its financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the internal revenue
code and such other factors as the Board of Directors of the Company deem
relevant.
Recent Sales of Unregistered Securities
During 1996, in a series of transactions entered into pursuant to the
Subscription Agreement with Promus dated October 17, 1995, as amended, FelCor
sold to Promus, for cash, an aggregate of 1,697,036 shares of Common Stock at
$26.50 per share, providing proceeds to the Company of approximately $45
million. These sales to Promus were not registered under the Securities Act in
reliance upon certain exemptions from the registration requirements thereof,
including the exemption provided by section 4(2) of that act.
On January 3, 1996, FelCor issued an aggregate of 215,827 shares of
Common Stock to the seller of the Ft. Lauderdale hotel in satisfaction of
approximately $6 million of the purchase price of such hotel. This issuance
was not registered under the Securities Act in reliance upon certain exemptions
from the registration requirements thereof, including the exemption provided by
section 4(2) of that act.
19
<PAGE> 20
During 1996, FelCor issued an aggregate of 401,213 shares of its Common
Stock in redemption of a like number of outstanding Units of limited partner
interest in the Partnership. Neither the Units, nor the shares of Common Stock
issued in redemption thereof, were registered under the Securities Act in
reliance upon certain exemptions from the registration requirements thereof,
including the exemption provided by section 4(2) of that act.
On February 21, 1996, FelCor issued an aggregate of 6,000 shares of
Common Stock to its Independent Directors, in lieu of cash compensation for
their service in such capacity during 1995. These shares were issued in the
form of Restricted Stock under the Stock Plans (as hereinafter defined) and
were not registered under the Securities Act in reliance upon certain
exemptions from the registration requirements thereof, including the exemption
provided by section 4(2) of that act.
During 1996, FelCor issued an aggregate of 47,000 shares of Common Stock
to certain of its officers and employees pursuant to grants of Restricted Stock
under the Stock Plans. The issuance of such shares was not registered under
the Securities Act in reliance upon certain exemptions from the registration
requirements thereof, including the exemption provided by section 4(2) of that
act.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical operating and financial
data for the Company and Lessee and selected combined historical financial data
for the Initial Hotels. The selected historical financial data for the Company
and Lessee for the years ended December 31, 1996 and 1995 and the period from
July 28, 1994 (inception of operations) to December 31, 1994 has been derived
from the historical financial statements of the Company and Lessee, audited by
Coopers & Lybrand, L.L.P., independent accountants whose reports, with respect
thereto, are included herein (See Index to Financial Statements at page F-1).
Such data should be read in conjunction with the financial statements and notes
thereto which are contained herein (See Index to Financial Statements at page
F-1).
20
<PAGE> 21
The Initial Hotel data is derived by adding the selected combined historical
financial data of (i) five of the Initial Hotels held by Embassy Equity
Development Corporation ("EEDC") until their sale to FelCor Affiliates on July
15, 1993 (the "E-5 Hotels"), (ii) the Tulsa hotel during the period prior to
its acquisition by a FelCor Affiliate on December 29, 1992 (the "Tulsa Hotel")
and (iii) the Initial Hotels during the period they were owned by FelCor
Affiliates (the "FelCor Hotels"). The years ended December 31, 1992 and 1993
and the period from January 1, 1994 to July 27, 1994 include all Initial Hotels
for the entire periods.
FELCOR SUITE HOTELS, INC.
SELECTED HISTORICAL OPERATING AND FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended
December 31, Period from July 28, 1994
-------------------------------- (inception of operations)
1996 1995 THROUGH DECEMBER 31, 1994
-------------------------------- -------------------------
<S> <C> <C> <C>
Statement of Operations Data:
Percentage lease revenue . . . . . . . . . . . . . $ 97,950 $ 23,787 $ 6,043
Income from unconsolidated partnerships . . . . . 2,010 513
Interest income . . . . . . . . . . . . . . . . . 984 1,691 207
General and administrative . . . . . . . . . . . . 1,819 870 355
Depreciation . . . . . . . . . . . . . . . . . . . 26,544 5,232 1,487
Taxes, insurance and other . . . . . . . . . . . . 13,897 2,563 881
Interest expense . . . . . . . . . . . . . . . . . 9,803 2,004 109
Minority interest . . . . . . . . . . . . . . . . 5,590 3,131 907
Extraordinary charge from write off
of deferred financing fees . . . . . . . . . . 2,354
--------- --------- ----------
Net income . . . . . . . . . . . . . . . . . . . . 40,937 12,191 2,511
Preferred dividends . . . . . . . . . . . . . . . 7,734
--------- --------- ----------
Net income applicable to common shareholders . . . $ 33,203 $ 12,191 $ 2,511
========= ========= ==========
Net income per common share . . . . . . . . . . . $ 1.44 $ 1.70 $ 0.54
========= ========= ==========
Weighted average number of common
shares outstanding . . . . . . . . . . . . . . 23,076 7,165 4,690
Balance sheet data:
Investment in hotel properties, at cost . . . . . $936,409 $335,399 $109,826
Investment in unconsolidated partnerships . . . . 59,867 13,819
Total assets . . . . . . . . . . . . . . . . . . . 978,788 548,359 108,305
Debt and capital lease obligations . . . . . . . . 239,425 19,666 8,750
Minority interest in Partnership . . . . . . . . . 76,112 58,837 25,685
Shareholders' equity . . . . . . . . . . . . . . . 641,926 461,386 69,255
Other data:
Funds from operations . . . . . . . . . . . . . . 69,407 20,707 4,905
Cash provided from operating activities . . . . . 73,932 18,075 3,959
Cash provided by financing activities . . . . . . 247,422 406,825 97,952
Cash used in investing activities . . . . . . . . (480,382) (259,197) (100,793)
Cash available for distributions . . . . . . . . . 60,888 18,081 4,370
Weighted average number of shares
and units outstanding . . . . . . . . . . . . . 26,037 8,956 6,385
</TABLE>
21
<PAGE> 22
DJONT OPERATIONS, L.L.C.
SELECTED HISTORICAL OPERATING AND FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Period from July 28, 1994
December 31, December 31, (inception of operations)
1996 1995 THROUGH DECEMBER 31, 1994
-------------- --------------- -------------------------
<S> <C> <C> <C>
Suite revenue . . . . . . . . . . . . . . . . . $ 234,451 $ 65,649 $ 16,094
Food and beverage rent . . . . . . . . . . . . 2,334 534 61
Food and beverage revenue . . . . . . . . . . . 15,119 2,462 1,112
Other revenue . . . . . . . . . . . . . . . . . 17,340 3,924 1,020
--------- -------- ---------
Total revenue . . . . . . . . . . . . . . . 269,244 72,569 18,287
Hotel expenses . . . . . . . . . . . . . . . . 66,236 18,455 4,699
Operating expenses . . . . . . . . . . . . . . 98,727 26,575 7,330
Percentage lease expenses . . . . . . . . . . . 107,935 26,945 6,043
Lessee overhead expense . . . . . . . . . . . . 1,776 834 106
--------- -------- ---------
Net income . . . . . . . . . . . . . . . . . $ (5,430) $ (240) $ 109
========== ========= =========
</TABLE>
INITIAL HOTELS
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
January 1, 1994 December 31,
through ------------
July 27, 1994 1993 1992
------------- ---------- ----------
<S> <C> <C> <C>
Statement of Operations Data:
Suite revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,884 $ 33,550 $ 28,566
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,307 2,002 1,443
-------- --------- --------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . 23,191 35,552 30,009
Hotel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 15,238 22,048 20,797
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,325 4,092 4,989
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 3,446 5,437 4,764
Other corporate expenses . . . . . . . . . . . . . . . . . . . . . 620 3,260 3,189
-------- --------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 1,562 $ 715 $ (3,730)
======== ========= ========
</TABLE>
22
<PAGE> 23
FELCOR HOTELS
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
January 1, 1994 December 31,
through ------------
July 27, 1994 1993 1992
------------- --------------------
<S> <C> <C> <C>
Statement of Operations Data:
Suite revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,884 $ 17,866
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,307 1,092
-------- ---------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 23,191 18,958
Hotel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,238 12,042 $ 103
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,325 1,761 118
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 3,446 2,822 3
Other corporate expenses . . . . . . . . . . . . . . . . . . . . . . 620 1,590 16
-------- --------- -----
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 1,562 $ 743 $(240)
======== ========= ======
</TABLE>
E-5 HOTELS
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1993 1992
--------- --------
<S> <C> <C>
Statement of Operations Data:
Suite revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,684 $ 24,098
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910 1,284
--------- ---------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,594 25,382
Hotel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,006 17,389
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,331 4,216
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,615 4,761
Other corporate expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,670 2,810
--------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (28) $ (3,794)
========= ==========
</TABLE>
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
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. ("FelCor") acquired an equity interest of approximately 75% in
FelCor Suites Limited Partnership (the "Partnership"), which owned six Embassy
Suites(R) hotels (the "Initial Hotels") with an aggregate of 1,479 suites. The
Partnership had acquired the Initial Hotels 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 December 31, 1996, FelCor owned interests in 43 hotels with an aggregate
of 10,196 suites (collectively the "Hotels") through its 89.4% aggregate
ownership of the Partnership and its subsidiaries (collectively, the
"Company"). For additional background relating to the Company and the
definitions of certain capitalized terms used herein, reference is made to Note
1 of Notes to Consolidated Financial Statements of FelCor Suite Hotels, Inc.
appearing elsewhere herein.
The principal factors affecting the Company's results of operations are:
continued growth in the number of hotels through acquisitions; improvements in
the suite revenues measured by revenue per available suite ("RevPAR") and the
status of renovations to hotels acquired. Improvements in suite revenue
significantly impact the Company because the Company's principal source of
revenues is lease payments by the Lessee under the Percentage Leases. The
Percentage Leases are computed as a percentage of suite revenues, food and
beverage revenues and food and beverage rents of the Hotels. For the years
ended December 31, 1996 and 1995 the portion of the Percentage Lease revenue
derived from suite revenues was 97.2% and 97.6%, respectively.
At December 31, 1996, the Company owned interests in 43 all suite hotels, an
increase of 23 hotels over year end 1995 and 36 hotels over year end 1994.
Income from Percentage Leases increased $74.2 million for the year ended
December 31, 1996 over the year ended December 31, 1995, an increase of 312%.
RevPAR, on a pro forma basis (without regard to actual ownership of the
Hotels), increased nearly 5% in 1996 over 1995 with the majority of the
improvement occurring in those hotels acquired prior to 1996.
During 1996, the Company substantially completed major renovations on the 18
Crown Sterling Suites hotels acquired in late 1995 and early 1996. While the
renovations adversely impacted the suite revenue for these hotels in 1996, the
suite revenues for those hotels that had renovations completed by early in the
fourth quarter of 1996 indicate significant improvements in RevPAR over the
same period last year.
Actual historical results of operations for the years ended December 31,
1996 and 1995 and the period from July 28, 1994 (inception of operations)
through December 31, 1994 are summarized as follows (in millions, except
percentages and per share data):
<TABLE>
<CAPTION>
Percentage Change
-----------------
1996 1995 1994 96 vs 95 95 vs 94
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $100.9 $26.0 $ 6.3 288% 313%
Income before extraordinary charge . . . . . . . . . . . . 43.3 12.2 2.5 255 388
Net income available to common shareholders . . . . . . . . 33.2 12.2 2.5 172 388
Funds From Operations (FFO) (a) . . . . . . . . . . . . . . 77.1 20.7 4.9 272 322
FFO per share and unit outstanding (a) . . . . . . . . . . $ 2.65 $2.31 $0.77 15 200
Weighted average shares and units outstanding (a) . . . . . 29.1 9.0 6.4 223 41
</TABLE>
- ---------------
(a) Conversion of preferred stock to common stock is assumed for purposes of
computing FFO and weighted average shares and units outstanding.
24
<PAGE> 25
RESULTS OF OPERATIONS
THE COMPANY -- ACTUAL
Comparison of the Years Ended December 31, 1996 and 1995
For the years ended December 31, 1996 and 1995, the Company had revenues
of $100.9 million and $26.0 million, respectively, consisting primarily of
Percentage Lease revenues of $98.0 million and $23.8 million.
The 288% increase in total revenue is primarily attributable to the
Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of
36 hotels acquired over 1995 and 1996. There were seven hotels which were
owned for all of 1996 and 1995. Percentage Lease revenues for these hotels
increased 13.9% for the year ended December 31, 1996 over the same period in
1995 (an increase of $2.7 million). All of these hotels experienced increases
in RevPAR, ranging from 2.3% to 12.1% over the prior year.
Management believes that the hotels it acquires will generally experience
increases in suite revenues (and accordingly, provide the Company with
increases in Percentage Lease revenues) after the completion of the renovation
and upgrade programs; however, as individual hotels undergo such renovations,
their performance has been, and may continue to be, adversely affected by such
temporary factors as suites out of service and disruptions of 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.)
Total expenses increased by $43.9 million for the year ended December 31,
1996 from $13.8 million in 1995 to $57.7 million in 1996. The primary
components of this increase were: depreciation; taxes, insurance and other; and
interest. The primary reason for the increases are attributed to the
additional hotels acquired in 1996 and 1995.
Depreciation increased as a percentage of total revenue from 20% in 1995
to 26% in 1996. The relative increase in depreciation is primarily a result of
capital expenditures during 1995 and 1996 and the resultant depreciation as
well as a decrease in long lived fixed assets relative to total fixed assets
(long lived fixed assets at December 31, 1996 made up 81.7% of total fixed
assets and at December 31, 1995 84.7%).
Taxes, insurance and other increased as a percentage of total revenue
from 10% in 1995 to 14% in 1996. The largest single component in this category
is real and personal property taxes. In many instances upon purchase of a
hotel, the hotel is reassessed for tax purposes resulting in increased property
tax expenses.
Interest expense increased as a percentage of total revenue from 8% in
1995 to 10% in 1996. This relative increase is attributed to the increased use
of debt to finance acquisitions, the extensive renovations in 1996 and the
assumption of capital leases, for hotels purchased in late 1995 and during
1996.
In the third quarter of 1996, the Company recorded an extraordinary
charge for the write off of deferred financing fees of $2.4 million. This
extraordinary write off resulted from the early retirement of debt.
Comparison of the Year Ended December 31, 1995 and the Period from July
28, 1994 (Inception of Operations) through December 31, 1994
Percentage Lease revenue increased from $6.0 million in 1994 to $23.8
million in 1995, primarily because of the partial year of operations in 1994
and the increase in the number of hotels in which the Company owned an interest
(from seven to 20). Income before minority interest as a percent of total
revenues increased from 54.7% in 1994 to 58.5% in 1995, primarily as a result
of the decline in depreciation, as a percentage of total revenues, from 23.8%
in 1994 to 20.1% in 1995. The decrease in depreciation, as a percentage of
total revenues, resulted primarily from the relative increase in Percentage
Lease revenue to depreciation with respect to the seven hotels acquired in 1994
and a decrease in the percentage of long lived fixed assets relative to total
fixed assets.
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.
25
<PAGE> 26
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.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 28, 1994
YEAR ENDED (INCEPTION OF
DECEMBER 31, OPERATIONS) THROUGH
------------ DECEMBER 31,
1996 1995 1994
---- ---- ----
(in thousands, except per share and unit data)
<S> <C> <C> <C>
Funds From Operations (FFO):
- ----------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,937 $12,191 $ 2,511
Less preferred dividends . . . . . . . . . . . . . . . . . . 7,734
--------- ------- --------
Net income available for common shares . . . . . . . . . . . 33,203 12,191 2,511
Add back:
Extraordinary charge from write off
of deferred financing fees . . . . . . . . . . . . . . 2,354
Minority interest . . . . . . . . . . . . . . . . . . . . 5,590 3,131 907
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 26,544 5,232 1,487
Depreciation for unconsolidated partnerships . . . . . . . 1,716 153
--------- ------- --------
FFO available to common shares and units . . . . . . . . . . 69,407 20,707 4,905
Add preferred dividends . . . . . . . . . . . . . . . . . . . 7,734
--------- ------- --------
FFO diluted for conversion of preferred stock . . . . . . . . $ 77,141 $20,707 $ 4,905
========= ======= ========
Weighted average common shares outstanding . . . . . . . . . 23,076 7,165 4,690
Weighted average units outstanding . . . . . . . . . . . . . 2,961 1,791 1,695
--------- ------- --------
Weighted average common shares and units outstanding . . . . 26,037 8,956 6,385
Weighted average common shares and units outstanding,
diluted for conversion of preferred stock . . . . . . . . 29,164 8,956 6,385
Per share and unit data:
- ------------------------
FFO per common share and unit outstanding . . . . . . . . . . $ 2.67 $ 2.31 $ 0.77
FFO per common share and unit outstanding, diluted for
conversion of preferred stock . . . . . . . . . . . . . . $ 2.65 $ 2.31 $ 0.77
</TABLE>
Included in the Funds From Operations described above is the Company's share
of FFO from its interest in five unconsolidated partnerships. The FFO
contribution from these unconsolidated partnerships was as follows (in
thousands):
26
<PAGE> 27
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1996 1995
----------------- ----------------
<S> <C> <C>
Statement of operations information:
Percentage Lease revenue . . . . . . . . . . . . . . . . . . . . . . . $9,974 $ 1,420
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,543 $ 141
Taxes, insurance and other . . . . . . . . . . . . . . . . . . . . . . $ 915 $ 229
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,638
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,366 $ 1,050
50% of net income attributable to the Company . . . . . . . . . . . . $2,183 $ 525
Amortization of cost in excess of book value . . . . . . . . . . . . . (173) (12)
------ -------
Income from unconsolidated partnerships . . . . . . . . . . . . . . . 2,010 513
Add back: Depreciation . . . . . . . . . . . . . . . . . . . . . . . 1,543 141
Amortization of excess cost . . . . . . . . . . . . 173 12
------ -------
FFO contribution of unconsolidated partnerships . . . . . . . . . . . $3,726 $ 666
====== =======
</TABLE>
THE HOTELS -- ACTUAL
The following table presents comparative information with respect to
suite revenue, occupancy, average daily rate ("ADR") and revenue per available
suite for the six Initial Hotels, the seven Pre-CSS hotels, the 18 CSS Hotels
and the 12 1996 Acquisitions, regardless of ownership. The following figures
reflect the adverse impact of the loss of nearly 173,000 available suite nights
(approximately 5.5% of total available suite nights for the year) as a result
of the temporary removal of suites from service for renovation and upgrading
during 1996. The variance for suite revenue and RevPAR for the Hotels, as set
forth above, do not agree primarily because the leap year in 1996 added one
additional day.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 Variance
---- ---- --------
<S> <C> <C> <C>
Suite Revenue (in thousands):
Initial Hotels (6) . . . . . . . . . . . . . . . . . . . . . . . . $ 43,540 $ 39,961 9.0%
Pre-CSS Hotels (7) . . . . . . . . . . . . . . . . . . . . . . . . 35,083 31,766 10.4%
--------- ---------
Original Hotels (13) . . . . . . . . . . . . . . . . . . . . . . . 78,623 71,727 9.6%
CSS Hotels (18) . . . . . . . . . . . . . . . . . . . . . . . . . 118,300 114,408 3.4%
1996 Acquisitions (12) . . . . . . . . . . . . . . . . . . . . . . 83,921 80,699 4.0%
--------- ---------
Total (43) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 280,844 $ 266,834 5.3%
========= =========
Occupancy:
Initial Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . 77.5% 76.1% 1.4 pts
Pre-CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . 75.3% 74.1% 1.2 pts
Original Hotels . . . . . . . . . . . . . . . . . . . . . . . . . 76.5% 75.2% 1.3 pts
CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.8% 69.6% (1.8) pts
1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . 73.0% 75.2% (2.2) pts
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.6% 72.6% (1.0) pts
Average Daily Rate (ADR):
Initial Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . $103.73 $ 97.27 6.6%
Pre-CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . $101.71 $ 94.40 7.7%
Original Hotels . . . . . . . . . . . . . . . . . . . . . . . . . $102.82 $ 95.98 7.1%
CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . $103.31 $ 97.75 5.7%
1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . $111.54 $ 104.51 6.7%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105.50 $ 99.20 6.3%
Revenue Per Available Suite (RevPAR):
Initial Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80.43 $ 74.02 8.7%
Pre-CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76.55 $ 69.96 9.4%
Original Hotels . . . . . . . . . . . . . . . . . . . . . . . . . $ 78.65 $ 72.17 9.0%
CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70.05 $ 68.01 3.0%
1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . $ 81.46 $ 78.56 3.7%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75.52 $ 72.05 4.8%
</TABLE>
27
<PAGE> 28
INITIAL HOTELS: Dallas (Park Central), TX, Jacksonville, FL, Nashville, TN,
Orlando (North), FL, Orlando (South), FL, Tulsa, OK.
PRE-CSS HOTELS: Boston - Marlborough, MA, Brunswick, GA, Chicago - Lombard,
IL, Corpus Christi, TX, Dallas (Love Field), TX, Flagstaff,
AZ, New Orleans, LA.
ORIGINAL HOTELS: Initial Hotels and Pre-CSS Hotels combined.
CSS HOTELS: Anaheim, CA, Baton Rouge, LA, Birmingham, AL, Boca Raton,
FL(1), Deerfield Beach, FL, Ft. Lauderdale, FL, El Segundo
(LAX South), CA, Oxnard (Mandalay Beach), CA, Miami, FL,
Milpitas, CA, Minneapolis (Airport), MN, Minneapolis
(Downtown), MN, Napa, CA, Phoenix, AZ, San Francisco
(Airport North), CA, San Francisco (Airport South), CA, St.
Paul, MN, Tampa (Busch Gardens), FL(1).
1996 ACQUISITIONS: Beaver Creek (Avon-Vail), CO, Boca Raton, FL, Charlotte, NC,
Deerfield, IL, Cleveland, OH, Indianapolis, IN, Lexington,
KY(2), San Rafael (Marin County), CA, Parsippany, NJ,
Piscataway, NJ, Atlanta-Buckhead, GA, Kingston Plantation
(Myrtle Beach), SC(3).
(1) Operating as a Doubletree Guest Suites hotel.
(2) Operating as a Hilton Suites hotel.
(3) In the process of conversion to an Embassy Suites hotel.
Comparison of the Hotels' Suite Revenue for the Years Ended December 31,
1996 and 1995
Pro forma revenues for the 43 hotels that the Company owned at December
31, 1996, increased 5.3% over 1995. The majority of the increase came from the
Pre-CSS hotels (10.4%) and the Initial Hotels (9.0%). The CSS Hotels had only
a slight increase in suite revenue (3.4%) as did the 1996 Acquisitions (4.0%)
primarily as a result of the commencement of major renovations in the CSS
Hotels and some of the 1996 Acquisitions. As a result of these renovations,
the Company lost nearly 173,000 available suite nights, or 5.5% of the total
available suite nights for the year.
The Initial Hotels and the Pre-CSS Hotels experienced increases in both
occupied suites, as a percentage of available suites (including those
temporarily out of service for renovation) ("Occupancy") and average daily rate
over the prior year. The CSS Hotels increased ADR by 5.7% but dropped in
Occupancy by 1.8 percentage points. Similarly the 1996 Acquisitions increased
ADR by 6.7% but dropped in Occupancy by 2.2 percentage points.
The CSS Hotels revenues were adversely affected by the suites taken out
of service during 1996 for renovation. During 1996 the Company took more than
153,000 suite nights out of service in the CSS Hotels for renovation, this
represents more than 9% of the total available suite nights for these hotels.
This renovation adversely impacted the ADR at the hotels because of the
disruptions caused by the renovation and the Occupancy was adversely impacted
by reducing the available rooms. During the fourth quarter of 1996, the 10
CSS Hotels where renovations had been substantially completed by early in the
fourth quarter experienced an increase in suite revenue in excess of 15%
compared to the same period in 1995. Management believes that similar increases
in suite revenue should occur in 1997 for the CSS Hotels as the renovations
had been substantially completed by year end 1996.
The Company expects that the Initial Hotels and the Pre-CSS Hotels should
continue increased suite revenue growth in 1997. The CSS Hotels should start
to benefit from the extensive renovation that was substantially completed in
1996, and show solid revenue growth in 1997. The 1996 Acquisitions should also
start to benefit from renovations (many of which began in 1996) and show
improving suite revenues during 1997.
28
<PAGE> 29
THE COMPANY -- PRO FORMA
The following pro forma information is presented as if the acquisition of
the 43 hotels owned at December 31, 1996 had been acquired by January 1, 1995
and the various equity offerings had occurred at that date.
Pro Forma Years Ended December 31, 1996 and 1995
Total revenue would have increased by $7.9 million for the year ended
December 31, 1996 compared to 1995. The increase in revenue is principally a
result of the increase in suite revenues in 1996 versus 1995 of 5.3% and
resultant increases in Percentage Lease income.
Expenses would have increased by $7.2 million. The principal factors in
this increase are in depreciation and in taxes, insurance and other.
Depreciation would have increased by $4.5 million, an increase of 17%.
This increase is principally the result of depreciation associated with the
hotel renovations in 1996 and the addition of relatively short lived assets.
Taxes, insurance and other would have increased by $1.6 million or 12%.
The principal reason for this increase is the increased assessments of property
taxes during 1996.
THE LESSEE -- ACTUAL
Comparison of the Years Ended December 31, 1996 and 1995
For the years ended December 31, 1996 and 1995, the Lessee had revenues
of $269.2 million and $72.6 million respectively, consisting primarily of suite
revenues of $234.5 million and $65.6 million.
The 271% increase in total revenue is primarily attributable to the
increase in number of hotels leased, from 20 hotels at December 31, 1995 to 43
hotels at December 31, 1996. There were seven hotels which were leased for all
of 1996 and 1995. Suite revenues for these hotels increased 9.0% for the year
ended December 31, 1996 over the same period in 1995 (an increase of $4.3
million). All of these hotels experienced increases in suite revenues, ranging
from 2.6% to 12.5% over the prior year.
The Lessee recorded a net loss of $5.4 million for 1996, compared to a
net loss of $240,000 for 1995. The increased loss is reflected in the relative
increase in Percentage Lease expenses, from 37.1% of total revenue in 1995 to
40.1% of total revenue in 1996. Since Percentage Lease expense is principally
computed as a percentage of suite revenue, the losses of suite revenue from the
renovation and conversion of the CSS hotels (through suites taken out of
service and disruptions from the renovation) resulted in a larger portion of
the Percentage Lease expense to be fixed in nature and therefore increased as a
percentage of total revenue. The Lessee also incurred approximately $2.2
million in one-time conversion costs related to the CSS Hotels.
Year Ended December 31, 1995
For the year ended December 31, 1995, the Lessee had suite revenues of
$65.5 million. The Percentage Lease payments, hotel expenses and operating
expenses were $26.9 million, $18.5 million and $26.6 million respectively, and
net loss was $240,000. The Lessee distributed approximately $200,000 to two of
its shareholders in 1995 and these shareholders purchased shares of Common
Stock of the Company in an amount equal to such distributions.
29
<PAGE> 30
Period from July 28, 1994 (Inception of Operations) through December 31,
1994
For the period July 28, 1994 (inception of operations) through December
31, 1994 the Lessee had suite revenues of $16.1 million. The Percentage Lease
payments, hotel expenses and operating expenses were $6.0 million, $4.7 million
and $7.3 million, respectively, and net income was $109,000. The Lessee
distributed approximately $443,000 to its shareholders in 1994 and these
shareholders purchased shares of common stock of the Company in an amount equal
to such distributions.
Comparison of the Year Ended December 31, 1995 and the Period from July
28, 1994 (Inception of Operations) through December 31, 1994
Total revenues increased 297% from 1994 to 1995, primarily because of the
partial year of operations in 1994 and the increase in the number of hotels
leased (from seven to 20). The Lessee recorded a net loss of $240,000 for
1995, compared to net income of $109,000 in 1994, primarily as a result of the
relative increase in Percentage Lease payments, as a percentage of total
revenues, from 33.0% in 1994 to 37.1% in 1995, offset (in part) by a decline in
all other expenses, as a percentage of total revenues, from 66.4% in 1994 to
63.2% in 1995.
RENOVATIONS AND CAPITAL EXPENDITURES
The Company believes that one factor that differentiates it from many
other hotel companies is its commitment to make the necessary capital
expenditures on the Hotels to maintain them and improve them to the Company's
high standards. This is approached in three ways: annual investments of a
minimum of 4% of suite revenue for capital improvements; an aggressive
renovation and upgrade program for hotels acquired to bring them up to Company
standards; and the construction of additional suites, meeting rooms and public
areas where market conditions indicate.
Renovations
The Company committed approximately $70 million during 1996 to the
upgrade and renovation of the CSS Hotels and the wholly owned 1996
Acquisitions. Through December 31, 1996, the Company had spent approximately
$48 million on these renovations and upgrades and anticipates spending an
additional $22 million to complete these projects during 1997. Additionally, in
1996 the Company spent approximately $3 million on renovations to hotels owned
prior to the purchase of the CSS Hotels.
Room Additions
In 1996 the Company completed room additions at its hotels in Flagstaff,
Arizona and New Orleans, Louisiana at an approximate cost of $5.3 million. The
Company is currently in the process of adding a net of 129 suites, additional
meeting rooms and other public area upgrades at its Boston - Marlborough,
Massachusetts hotel with an estimated completion cost of $15.8 million. At
December 31, 1996 $4.8 million of this $15.8 million had been spent.
Additionally, the Company intends to start construction during 1997 on an
aggregate 134 suites at its Jacksonville and Orlando (North), Florida Embassy
Suites hotels, at a total projected cost of approximately $10.2 million
It is the Company's policy to invest approximately 4% of suite revenues
on annual capital improvements at its hotels. These investments are in
addition to the previously discussed renovations, room additions and in
addition to aggressive maintenance spending. During 1996 the Company spent
approximately $9.2 million on these type capital expenditures totaling 4.3% of
suite revenue of company owned hotels.
30
<PAGE> 31
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 year ended December 31, 1996, cash
flow provided by operating activities, consisting primarily of Percentage Lease
revenue, was $73.9 million and Funds From Operations (as previously defined)
was $77.1 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 operation of the Hotels.
At December 31, 1996, the Lessee had paid all amounts then due the
Company under the Percentage Leases. During 1996, the Lessee experienced a net
loss of approximately $5.4 million and, at December 31, 1996, had a cumulative
shareholders' deficit of approximately $6.4 million. The loss in 1996 resulted
primarily from 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 shareholder's equity is restored. Although it is currently
anticipated that the Lessee may sustain a smaller 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.
The Company intends to acquire additional hotels 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 at December 31, 1996, the Company's
investment in hotel properties at cost was $1 billion. Accordingly, the
Company's maximum permitted indebtedness would have been approximately $400
million (of which $239 million was borrowed at December 31, 1996). Assuming
all of this additional debt capacity, together with the Company's available
cash and cash equivalents, were used for the acquisition of additional hotel
properties, the Company's maximum borrowing capacity would increase to
approximately $525 million. The Board of Directors is currently considering
alternatives to provide the Company with greater flexibility in financing the
acquisition of hotels. Among the alternatives being considered is the
possibility of requesting approval by the shareholders of an amendment to the
Company's Charter to remove the 40% debt limitation therefrom. The Board of
Directors has indicated that, if such an amendment were to be approved by
shareholders, a substantially identical limitation would be adopted as a policy
of the Board of Directors.
In September 1996, the Company executed an Amended and Restated Loan
Agreement with Boatmen's National Bank of Oklahoma (formerly Bank IV Oklahoma,
National Association) as Agent, and certain other Lenders, which replaced a
$100 million collateralized revolving line of credit with a term loan of $85
million. The loan is collateralized by nine of the twelve hotels previously
collateralizing the $100 million line of credit. Interest accrues on the term
loan at a rate equal to 150 basis points over LIBOR (paid monthly) and the
Company must make payments of principal and interest, on a 15-year constant
payment amortization schedule commencing October 1997, adjusted annually to
reflect the then current LIBOR rate. This term loan matures on September 30,
2000.
31
<PAGE> 32
On September 30, 1996, the Company obtained a $250 million unsecured
revolving credit facility from a group of lenders co-arranged by The Chase
Manhattan Bank and Wells Fargo Bank, National Association ("Line of Credit").
The Line of Credit has a term of three years ending October 1, 1999.
Borrowings under the Line of Credit bear interest, at the Company's option, (i)
at the higher of the base rate announced from time to time by The Chase
Manhattan Bank or the Federal funds rate plus 0.5%, in either case plus an
applicable margin of 0% to 0.5%, or (ii) at a Eurodollar rate based upon the
30, 60, or 90 day or 6-month LIBOR rate plus an applicable margin of 1.25% to
2.0%. The applicable margin varies depending upon the Company's long-term
senior unsecured implied debt rating and, at December 31, 1996, was 0.25% in the
case of Base Rate borrowings and 1.75% in the case of Eurodollar Rate
borrowings. The interest rate in effect for borrowings under the Line of Credit
was 7.25% at December 31, 1996. Up to 10% of the amount available under the
Line of Credit may be used for general corporate or working capital purposes.
The total amount available under the Line of Credit is limited to 40% of the
aggregate value of the Company's eligible hotels, which generally includes
hotels that are unencumbered. At December 31, 1996, the aggregate amount
available under the Line of Credit was approximately $246 million, of which
approximately $115 million was outstanding. The agreements governing the Line
of Credit also contain various negative and affirmative covenants, including
limitations on total indebtedness, total secured indebtedness and cash
distributions, as well as obligations to maintain a certain minimum tangible net
worth and certain interest and debt service coverage ratios. At December 31,
1996, the Company was in compliance with all such covenants.
On March 10, 1997, the Company announced that it had increased its Line
of Credit from $250 million to $400 million and agreed upon a reduction in
unused commitment fees from 35 basis points to 25 basis points, under
substantially the same terms as the original Line of Credit.
The Company has a $25 million renovation loan facility which was used to
fund a portion of the renovation cost of the CSS Hotels that were converted to
Embassy Suites hotels. The facility is guaranteed by Promus, bears interest at
LIBOR plus 45 basis points, requires quarterly principal payments of $1.25
million beginning in June 1999 and matures in June 2000. At December 31, 1996,
the Company had drawn the full $25 million under this loan facility.
At December 31, 1996, the Company had $7.8 million of cash and cash
equivalents and had utilized $115 million under its $250 million unsecured
revolving Line of Credit.
To provide for additional financing flexibility, FelCor has registered up
to an aggregate of $500 million in common stock, preferred stock or debt
securities pursuant to a shelf registration declared effective by the
Securities Exchange Commission. The terms and conditions of the stock or debt
securities will be determined by market conditions at the time of issuance. A
total of 6,050,000 shares of preferred stock at $25.00 per share were issued in
the second quarter of 1996 pursuant to this Shelf Registration. At December
31, 1996, there was approximately $349 million available under this Shelf
Registration. In February 1997, an additional $107 million in common stock was
issued pursuant to the Shelf Registration, leaving available capacity of $242
million at February 28, 1997.
The Company has a capital upgrade and renovation program for the 18 CSS
Hotels and seven of the other hotels acquired since September 1995 and has
committed approximately $70 million to be invested in 1995, 1996 and 1997 under
this program. The Company had invested approximately $48 million on such
capital improvements through December 31, 1996, has substantially completed the
renovation of the CSS Hotels and expects to complete the renovation of the
other 1996 Acquisitions in 1997. These capital improvements will be funded
partially through the Company's Line of Credit. As individual hotels undergo
such upgrade and renovation, their performance may be adversely affected,
although such effects are expected to be temporary.
During 1996 the Company constructed and opened 17 additional suites at
its Flagstaff hotel and 31 additional suites at its New Orleans hotel at an
aggregate cost of approximately $5.3 million. Construction has commenced on a
net addition of 129 suites, additional meeting rooms and other public area
upgrades at the
32
<PAGE> 33
Company's Boston - Marlborough hotel at an estimated cost of approximately
$15.8 million. Additionally, the Company intents to construct 67 additional
suites at its Orlando (North) hotel and 67 suites at its Jacksonville hotel in
1997, for an aggregate cost of approximately $10.2 million.
During 1995, the Company and Promus entered into a subscription agreement
under which Promus purchased an aggregate of 1,886,792 shares of Common Stock
at a price per share of $26.50, the offering price per share in the Company's
public offering of common stock in December 1995. Such investment was made in
increments in conjunction with the Company's acquisition of the CSS Hotels and
other qualifying hotels. The Company issued an aggregate of 1,886,792 shares
of Common Stock to Promus pursuant to this subscription agreement for an
aggregate investment of approximately $50 million in cash, of which
approximately $5 million was received in 1995.
The Company's cash flow from financing activities of approximately
$247.4 million for the year ended December 31, 1996 resulted from the issuance
of the Series A Preferred Stock for $144.3 million, the sale of common stock
to Promus under a subscription agreement for approximately $45 million, net
borrowings of $109.4 million under a prior secured line of credit and other
borrowing facilities, distributions and dividends of $46.7 million and
additional loan costs of $4.5 million.
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
Company's quarterly lease revenue, particularly during the fourth quarter, to
the extent that it receives Percentage Rent. To the extent cash flow from
operations is insufficient during any quarter, due to temporary or seasonal
fluctuations in lease revenue, the Company expects to utilize other cash on
hand or borrowings under the Line of Credit to make distributions to its
shareholders.
On a pro forma basis, suite revenue by quarter for the years ended
December 31, 1996 and 1995 is as follows (in millions, except percentages):
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------
Suite Percentage Suite Percentage
Revenue of Total Revenue of Total
------- -------- ------- --------
<S> <C> <C> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . $ 71.8 25.6% $ 69.0 25.9%
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 69.7 24.8% 66.8 25.0%
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . 71.9 25.6% 67.9 25.4%
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . 67.4 24.0% 63.1 23.7%
------ ----- ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $280.8 100.0% $266.8 100.0%
====== ====== ====== ======
</TABLE>
The above schedule of quarterly suite revenues, may not be indicative of
future seasonality trends because of the impact of suites out of service due to
renovation, the location of hotels acquired in the future or other market
factors.
33
<PAGE> 34
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K include forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Although the Company 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 Company's current
expectations are disclosed in conjunction with the forward looking statements
included herein (the "Cautionary Disclosures"). Subsequent written and oral
forward looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Disclosures.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
SFAS No. 128, Earnings Per Share ("EPS"), was issued in October 1996.
this statement specifies the computation, presentation, and disclosure
requirements for EPS and is effective for financial statements issued for
periods ending after December 15, 1997. The statement requires restatement of
all prior period EPS data presented, including interim financial statements,
summaries of earnings, and selected financial data, after the effective date.
The Company has determined the effect of adoption will have an immaterial
impact on previously reported EPS numbers.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included herein at pages F-1 through F-32.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Board of Directors currently consists of seven members, four of whom
are Independent Directors. An "Independent Director" is a director of the
Company who is not an officer or employee of the Company, any affiliate of an
officer or employee or any affiliate of (i) any advisor to the Company under an
advisory agreement, (ii) any lessee of any property of the Company, (iii) any
subsidiary of the Company, or (iv) any partnership which is an affiliate of the
Company. The Board of Directors is divided into three classes who serve
staggered three-year terms with the term of each director expiring at the
annual meeting of shareholders held three years after his election.
34
<PAGE> 35
Set forth below is certain information regarding the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
YEAR
FIRST TERM
NAME POSITION ELECTED CLASS EXPIRES
- ---- -------- ------- ----- -------
<S> <C> <C> <C> <C>
Hervey A. Feldman . . . . . Chairman of the Board 1994 Class I 1998
Thomas J. Corcoran, Jr. . . President and Chief Executive 1994 Class II 1999
Officer, Director
Richard S. Ellwood . . . . Independent Director 1994 Class III 1997(1)
Richard O. Jacobson . . . . Independent Director 1994 Class III 1997(1)
Charles N. Mathewson . . . Director 1994 Class I 1998
Thomas A. McChristy . . . . Independent Director 1994 Class III 1997(1)
Donald J. McNamara . . . . Independent Director 1994 Class II 1999
William S. McCalmont . . . Senior Vice President, Chief 1996 -- --
Financial Officer and Treasurer
Lawrence D. Robinson . . . Senior Vice President, General 1996 -- --
Counsel and Secretary
Jack Eslick . . . . . . . . Vice President, Director of 1996 -- --
Asset Management (2)
June H. McCutchen . . . . . Vice President, Director of Design 1995 -- --
and Construction (2)
William P. Stadler . . . . Vice President, Director of 1995 -- --
Acquisition and Development (2)
</TABLE>
- ----------
(1) Nominated for reelection at the Company's 1997 annual meeting of
shareholders; if reelected, such director's term would continue until
2000.
(2) In recognition of the increasing responsibilities undertaken by Mr.
Eslick, Ms. McCutchen and Mr. Stadler in their respective offices, the
Company elevated these officers to executive officers in March 1997.
Hervey A. Feldman (age 59) is the Chairman of the Board of the Company and
has served in such capacity since its formation in May 1994. He is also a co-
founder of FelCor, Inc. and has served as its Chairman since its formation in
1991. Prior to that time, he held executive positions with Embassy Suites,
Inc., serving as its Chairman of the Board from June 1990 until January 1992,
and as its President and Chief Executive Officer from the founding of that
company in January 1983 to April 1990. Prior to 1990, Mr. Feldman had spent
over 25 years in the hotel industry, including serving in various management
positions with Brock Hotel Corporation during a period when that company was
one of the largest franchisees of Holiday Inn(R) hotels in the U.S.; as
Executive Vice President for North American Development of Holiday Inns, Inc.;
and President and Chief Executive Officer of Brock Residence Inns, Inc., which
founded the extended-stay, all-suite chain now known as Residence Inns by
Marriott(R).
Thomas J. Corcoran, Jr. (age 48) is the President and Chief Executive
Officer of the Company and has served in such capacity since its formation in
May 1994. He is also a co-founder of FelCor, Inc. and has served as its
President and Chief Executive Officer since its formation in 1991. From
October 1990 to December 1991, he served as the Chairman, President and Chief
Executive Officer of Fiesta Foods, Inc., a manufacturer of tortilla chips and
taco shells. From 1979 to 1990, Mr. Corcoran held various positions with
Integra - A Hotel and Restaurant Company (formerly Brock Hotel Corporation),
including serving as the President and Chief Executive Officer of that company
from 1986 to 1990, and with ShowBiz Pizza Time, Inc., an operator and
franchisor of family entertainment center/pizza restaurants.
35
<PAGE> 36
Richard S. Ellwood (age 65) is the founder and principal owner of R.S.
Ellwood & Co., Inc., a real estate investment banking firm which was organized
in 1987. Prior to 1987, as an investment banker, Mr. Ellwood was elected
successively in 1968 a general partner of White Weld & Co., in 1978 a managing
director of Warburg Paribas Becker, Incorporated and in 1984 a managing
director and senior banker of Merrill Lynch Capital Markets. Mr. Ellwood has
extensive experience in hotel financing. He was a founder of Hotel Investors
Trust, a REIT, and served as a Trustee from 1970 until its merger with another
REIT in 1987. He is currently a director of two additional REITs, namely
Apartment Investment and Management Company and Corporate Realty Income Trust.
Richard O. Jacobson (age 60) is the President and Chief Executive Officer of
Jacobson Warehouse Company, Inc., a privately-held warehouse company with
facilities in 15 locations in seven states, which Mr. Jacobson founded 29 years
ago. He is also President and Chief Executive Officer of Jacobson
Transportation Company, Inc., a truckload common carrier with authority to
operate in 48 states and Canada. Mr. Jacobson is a member of the Boards of
Directors of Advanced Oxygen Technology, Inc., AlaTenn Resources, Inc., Allied
Group, Inc., Firstar Bank Des Moines, N.A., Firstar Bank of Iowa, N.A. and
Heartland Express, Inc.
Charles N. Mathewson (age 68) has served, for more than the past five years,
in various positions with International Game Technology ("IGT"), a company
engaged in the design and manufacture of microprocessor based gaming products
and gaming monitoring systems. Since February 1988, he has served as the
Chairman of the Board of IGT. He has served as a director of IGT since
December 1985, as President from December 1986 to February 1988, and as Chief
Executive Officer from December 1986 until June 1993 and from February 1996
until the present. Mr. Mathewson also is a member of the Board of Directors of
Baron Asset Fund.
Thomas A. McChristy (age 70) is the President of T.A. McChristy Co. Inc., a
real estate investment company, and has served in that capacity since 1957.
Mr. McChristy also served as the President and Chief Operating Officer of
Syntech International, Inc., a lottery systems and equipment manufacturing
company, from 1986 to 1988 and as its Chief Executive Officer from 1989 to
1992.
Donald J. McNamara (age 44) is the founder and Chairman of The Hampstead
Group, a real estate investment company with substantial activities in the
hospitality and retirement housing industries. Prior to forming The Hampstead
Group in September 1987, Mr. McNamara served as Chairman and Chief Executive
Officer of Americana Hotels Corporation from 1985 to 1987, and as President and
Chief Financial Officer for Americana Hotels & Realty Corporation, a New York
Stock Exchange listed REIT, from 1985 to 1986. Mr. McNamara also is the
Chairman of the Board of Directors of Bristol Hotel Company, and the Chairman
of the Board of Forum Retirement, Inc., the general partner of Forum Retirement
Partners, L.P., a master limited partnership.
William S. McCalmont (age 41) has served as Senior Vice President, Chief
Financial Officer and Treasurer of the Company since August 1996. For
approximately 12 years prior to joining the Company, Mr. McCalmont had been
employed in various positions with The Promus Companies Incorporated and with
Harrah's Entertainment, Inc., which was created as a result of the spin-off of
Promus Hotel Corporation. During his 12-year career with these companies, Mr.
McCalmont served in various management positions in finance at the Embassy
Suites Hotel division, was Director of Finance, Corporate Director of Asset
Management and Project Finance, and Vice President and Treasurer of its parent,
and most recently served as the Vice President and Treasurer of Harrah's.
Lawrence D. Robinson (age 53) has served as Senior Vice President, General
Counsel and Secretary of the Company since May 1996. From 1972 to 1989, Mr.
Robinson was a partner in the Kansas City based law firm of Stinson, Mag &
Fizzell, for which he founded and managed a Dallas, Texas office from 1982 to
1989. From 1989 through April 1996, Mr. Robinson was a partner in the Houston
based law firm of Bracewell & Patterson, L.L.P., where he served as the
managing partner of its Dallas office until 1992, as the head of that office's
corporate and securities law section and as chairman of its firm-wide
hospitality group. Mr. Robinson continues to maintain an "of counsel"
relationship with that firm.
36
<PAGE> 37
Jack Eslick (age 45) joined the Company in April 1996 as its Vice President,
Director of Asset Management. Mr. Eslick has over 20 years experience in hotel
operations. From April 1991 until he joined the Company, Mr. Eslick served as
Vice President of Operations of Promus, where he had direct responsibility for
all operations in a region that grew from 14 hotels to 26 hotels. Prior to
April 1991, he served in various capacities with Holiday Inns, Inc., including
serving as general manager of various hotels and as a Regional Director of
Operations.
June H. McCutchen (age 41) joined the Company in October 1995 as Vice
President, Director of Design and Construction. Her most recent experience was
as Account Executive for Hospitality Restoration & Builders, Inc. since 1994.
From 1992 to 1994 she was Project Manager for American General Hospitality,
Inc. where she managed all capital improvement work for over 35 properties each
year. Prior to 1992, Ms. McCutchen was Project Manager for Hilton Hotels, Inc.
from 1987 to 1992, and prior to 1987, she served as design coordinator and
purchasing manager for Embassy Suites, Inc.
William P. Stadler (age 42) began his employment with the Company in July
1995 as Vice President, Director of Acquisition and Development. Mr. Stadler
has over 17 years of experience in hotel acquisition and development, having
served as Vice President-Development for Coastal Hotel Group from 1994 until he
joined the Company in 1995, as Vice President-Development for Embassy Suites,
Inc. from 1992 to 1994, as Senior Vice President-Development for Landmark
Hotels, Inc. from 1989 to 1991 and as Vice President-Development for Marriott
Corporation from 1985 to 1989.
TERMS OF OFFICE; RELATIONSHIPS
The officers of the Company are elected annually by the Board of
Directors at a meeting held following each annual meeting of shareholders, or
as soon thereafter as necessary and convenient in order to fill vacancies or
newly created offices. Each officer holds office until his successor is duly
elected and qualified or until death, resignation or removal, if earlier. Any
officer or agent elected or appointed by the Board of Directors may be removed
by the Board of Directors whenever in its judgement the best interests of the
Company will be served thereby, but such removal shall be without prejudice to
the contractual rights, if any, of the person so removed.
There are no family relationships among any of the directors or executive
officers of the Company. Except as described above, none of the Company's
directors hold directorships in any company with a class of securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act") or pursuant to Section 15 (d) of the Exchange Act or any
company registered as an investment company under the Investment Company Act of
1940. There are no arrangements or understandings between any director or
officer and any other person pursuant to which that director was nominated or
officer was selected.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires officers and directors, and
persons who beneficially own more than ten percent (10%) of the Company's
stock, to file initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than ten percent (10%) beneficial owners are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on a review of the copies furnished to the Company and
representations from the officers and directors, the Company believes that all
Section 16(a) filing requirements for the year ended December 31, 1996
applicable to its officers, directors and greater than ten percent (10%)
beneficial owners were satisfied.
Based on written representations from the officers and directors, the
Company believes that no Forms 5 for directors, officers and greater than ten
percent (10%) beneficial owners were required to be filed with the SEC for the
period ended December 31, 1996.
37
<PAGE> 38
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information, for the fiscal years ended
December 31, 1994, 1995 and 1996, regarding the compensation of the Company's
executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------------------
SECURITIES
NAME AND PRINCIPAL POSITION OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
- --------------------------- COMPENSATION STOCK OPTIONS/ COMPENSATION
YEAR SALARY ($) BONUS ($) ($) AWARDS($)(5) SARS(#) ($)(10)
---- ---------- --------- --------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas J. Corcoran, Jr . . . . 1996 123,240 None None None None 4,875
President and Chief 1995 120,000 None None 194,625 (6) 150,000 4,875
Executive Officer 243,000 (7)
1994(2) 26,774 None None None 150,000 None
Hervey A. Feldman . . . . . . . 1996 123,240 None None None None 4,875
Chairman of the Board 1995 120,000 None None 194,625 (7) 150,000 4,875
243,000 (8)
1994(2) 26,774 None None None 150,000 None
Nicholas R. Peterson . . . . . 1996 100,000(1) 80,000 None None None 4,875
Chief Financial Officer(1) 1995 100,000 165,219(4) None None None 29,375
1994(1) 3,788 None None None 50,000 None
William P. Stadler . . . . . . 1996 79,020 100,000 None None None 4,875
Vice President, Director 1995(3) 34,125 45,000 None 66,100 (8) 25,000 2,438
of New Development
June H. McCutchen . . . . . . . 1996 70,000 52,100 None None 20,000(9) 1,970
Vice President, Director 1995(3) 17,500 2,000 None None None None
of Design and Construction
</TABLE>
- ---------------
(1) Mr. Peterson was employed as the Company's Chief Financial Officer from
December 19, 1994 until May 31, 1996. The information for 1994 includes
compensation only during the period from December 19, 1994 through
December 31, 1994. The salary for 1996 includes the amount of $58,333
paid to Mr. Peterson upon the termination of his employment.
(2) Includes compensation only during the period from July 28, 1994
(inception of operations) through December 31, 1994.
(3) Includes compensation only during the periods from the date of
commencement of employment (July 1995 in the case of Mr. Stadler and
October 1995 in the case of Ms. McCutchen) through December 31, 1995.
(4) Includes a cash bonus of $62,500 and the fair market value of a stock
grant of 5,000 shares of Common Stock awarded to Mr. Peterson in February
1995, all of which shares were fully vested as of the date of the grant.
(5) An aggregate of 29,000 shares of restricted stock were awarded in the
1996 fiscal year, each with vesting occurring over a five-year period.
Holders of restricted stock are entitled to vote and receive dividends on
such shares from the date of grant. The amount reported in the table
represents the market value of the shares awarded on the date of grant,
determined by the closing price of the Common Stock on such date, without
giving effect to the diminution of value attributable to the restrictions
on such stock. As of December 31, 1996, the aggregate restricted stock
holdings by the above-named current executive officers consisted of
30,800 shares owned as set forth below, with a then current aggregate
market value, determined in the same manner as of such date, of
$1,089,550, as follows: Mr. Corcoran (14,400 shares, $509,400 value); Mr.
Feldman (14,400 shares, $509,400 value); and Mr. Stadler (2,000 shares,
$70,750 value).
(6) Represents an award of 9,000 shares of restricted stock on February 16,
1995 which become vested over a five-year period at the rate of 20% per
year. The value is based upon the closing price of the Common Stock on
the date of grant of $21.625 per share.
(7) Represents an award of 9,000 shares of restricted stock as of December
15, 1995, which become vested over a five-year period from the date of
grant at the rate of 20% per year. The value is based upon the closing
price of the Common Stock on the date of grant of $27.00 per share.
(8) Represents an award of 2,500 shares of restricted stock on July 24, 1995
which become vested over a five-year period at the rate of 20% per year.
The value is based upon the closing price of the Common Stock on the date
of grant of $26.44 per share.
(9) Represent shares purchasable pursuant to options granted February 21,
1996. See "--Option Grants" below.
(10) These amounts represent the Company's contributions to the Company's
employee savings and investment plan in the amount of up to $4,875 to
each executive officer and, in the case of Mr. Peterson, a moving
allowance of $25,000 paid to Mr. Peterson in connection with the
commencement of his employment with the Company.
38
<PAGE> 39
The executive officers receive health and disability insurance
benefits which do not exceed 10% of their respective salaries. These benefits
are also provided to all other employees of the Company.
Option Grants
The following table sets forth information regarding grants of stock
options to the Company's named executive officers during the 1996 fiscal year.
The options were granted pursuant to the Company's 1995 Restricted Stock and
Stock Option Plan (the "1995 Plan"). No stock appreciation rights ("SARs")
were granted during the 1996 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------------------------
% of Total Potential Realizable Value at
Number of Options Market Price Assumed Annual Rate of Stock
Securities Under- Granted to Exercise or on Date Price Appreciation for Option Term
lying Options Employees in Base Price of Grant Expiration ------------------------------------
Name Granted (#) Fiscal Year ($/Share) ($/Share) Date 0% ($) 5% ($) 10% ($)
- ---- ----------------- ---------------- ----------- --------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June H. McCutchen 20,000 6.1% $30.00 $30.00 2/21/06 $0 $377,337 $956,245
</TABLE>
The options granted to Ms. McCutchen were granted February 21, 1996, at an
exercise price of $30.00 per share, which was the closing price of the Common
Stock on such date. Each of such options becomes exercisable over a five year
period, with 20% of the total number of shares covered thereby becoming
exercisable on each of the first five anniversaries of the date of grant, and
expires on the tenth anniversary of the date of grant.
The unexpired stock options to purchase the Company's Common Stock held by
named executive officers of the Company at December 31, 1996, are summarized in
the following table:
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1996 December 31, 1996(1)
-------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas J. Corcoran, Jr. . . . . . . . . . 90,000 210,000 $1,113,750 $2,336,250
Hervey A. Feldman . . . . . . . . . . . . 90,000 210,000 1,113,750 2,336,250
Nicholas R. Peterson . . . . . . . . . . 20,000 10,000 332,500 116,250
William P. Stadler . . . . . . . . . . . 5,000 20,000 44,675 178,700
June H. McCutchen . . . . . . . . . . . . -- 20,000 -- 107,500
</TABLE>
- ---------------
(1) Based on the difference between the option exercise price and the closing
sales prices for the Common Stock on the New York Stock Exchange for
December 31, 1996, which was $35.375 per share.
Employment Agreements
The Company has entered into employment agreements with each of Messrs.
Feldman and Corcoran (each an "Employment Agreement") that will continue in
effect until December 31, 1999 and automatically be renewed for successive one
year terms, unless otherwise terminated. Pursuant to such Employment
Agreements, Mr. Feldman serves as Chairman of the Board, and Mr. Corcoran
serves as President and Chief Executive Officer, of the Company. Each was paid
a base salary of $5,000 per month through 1994, $10,000 per month in 1995 and
$10,270 in 1996. Effective January 1, 1997, Mr. Feldman is entitled to receive
$12,500 per month and Mr. Corcoran is entitled to receive $16,667 per month.
Messrs. Feldman and Corcoran have agreed to devote substantially all of their
time to the business of the Company. The Compensation Committee of the Board
may
39
<PAGE> 40
provide for additional compensation as a bonus should it determine, in its
discretion, based on merit, the Company's anticipated financial performance and
other criteria, that such additional compensation is appropriate. The Company
maintains a comprehensive medical plan for the benefit of Messrs. Feldman and
Corcoran and their dependents.
Savings Plan
The Company has established an employee savings and investment plan
("Savings Plan") covering substantially all employees, including executive
officers. The Savings Plan is designed to qualify under Section 401 (k) of the
Code. Each participant has the option to defer taxation of a portion of his or
her earnings by directing the Company to contribute a percentage of such
earnings to the Savings Plan. A participant may direct a minimum of 1% and a
maximum of 20% of eligible pre-tax earnings to the Savings Plan, subject to
certain limitations set forth in the Code. Participants may also elect after-
tax contributions to the Savings Plan in an amount not to exceed 10% of his or
her eligible earnings. A participant's contributions become distributable upon
the termination of his or her employment for any reason. The participants are
fully vested at all times in all amounts contributed by them to the Savings
Plan.
Restricted Stock and Stock Option Plans
The Company has adopted the 1994 Restricted Stock and Stock Option Plan
("1994 Plan") and the 1995 Restricted Stock and Stock Option Plan ("1995 Plan"
and, together with the 1994 Plan, "Stock Plans"). The Stock Plans were adopted
to provide incentives to attract and retain Independent Directors, executive
officers and key employees. The Stock Plans are administered by the Compensation
Committee or, in the case of grants to Independent Directors, by the Board of
Directors. The Compensation Committee generally has the authority, within
limitations set forth in the Stock Plans, (i) to establish rules and regulations
concerning the Stock Plans, (ii) to determine the persons to whom Options (as
defined below) and Restricted Stock (as defined below) may be granted, (iii) to
fix the number of shares of Common Stock to be covered by each Option and the
number of shares of Restricted Stock granted, and (iv) to set the terms and
provisions of each grant of Options or Restricted Stock to be granted. The
summary of the Stock Plans set forth below is qualified in its entirety by
reference to the text of the Stock Plans.
The Stock Plans provide for the grant of stock options to purchase a
specified number of shares of Common Stock ("Options") or grants of restricted
shares of Common Stock ("Restricted Stock"). Under the 1994 Plan the total
number of shares originally available for grant was equal to 450,000 shares of
Common Stock, of which not more than 50,000 shares were to be grants of
Restricted Stock. Of the shares of Common Stock, originally available under
the 1994 Plan, 431,500 shares were designated for grant to the officers and
employees of the Company, of which 31,500 shares could be granted as Restricted
Stock. The remaining 18,500 shares of Common Stock were designated for grant
to Independent Directors, all of which shares could be granted as Restricted
Stock. At March 18, 1997, there were only 20,000 shares remaining available
for the grant of options to officers and eligible employees of the Company and
2,500 shares remaining available for grants to independent directors of the
Company under the 1994 Plan. Under the 1995 Plan, the total number of shares
originally available for grant was equal to 1,200,000 shares of Common Stock,
of which not more than 133,333 shares could be grants of Restricted Stock. Of
the shares of Common Stock originally available under the 1995 Plan, 1,050,000
shares were designated for grants to the officers and eligible employees of the
Company, of which 83,333 shares could be granted as Restricted Stock. The
remaining 150,000 shares of Common Stock were designated for grant to the
Independent Directors, of which 50,000 shares could be granted as Restricted
Stock. At March 18, 1997, there remained available under the 1995 Plan only
59,667 shares available for grants of options and 5,333 shares available for
grants of Restricted Stock to officers and eligible employees of the Company.
All of the 150,000 shares originally available for grants to independent
directors remained available. Upon the occurrence of certain extraordinary
events, the Board of Directors or the Compensation Committee may make such
adjustments in the aggregate number and kind of shares reserved for issuance,
the number of shares and kind covered by outstanding awards and the exercise
prices specified therein as may be determined to be appropriate.
Participants in the Stock Plans, who may be directors, officers or
employees of the Company, its subsidiaries (including the Partnership) or
designated affiliates, are selected by the Compensation Committee.
40
<PAGE> 41
The Compensation Committee may amend any award theretofore granted,
prospectively or retroactively. No such amendment may impair the rights of any
participant under any award without the consent of such participant (except for
any amendment made to cause the plan to qualify for an exemption provided by
Rule 16b-3 under the Exchange Act).
Options granted under the Stock Plans may be incentive stock options
("ISOs") under Section 422 of the Code or non-qualified options, at the
discretion of the Compensation Committee, provided that no Independent Director
may receive a grant of ISOs. The Stock Plans provide that the exercise price
of an Option will be fixed by the Compensation Committee on the date of grant;
however, the exercise price of an ISO must be not less than the fair market
value of a share of Common Stock on the date of the grant. Any ISOs granted to
such participants also must expire within ten years from the date of adoption
of the Stock Plans. Moreover, Options granted under either Stock Plan will not
be ISOs to an individual participant to the extent that the aggregate fair
market value of the shares of Common Stock with respect to which such Options
under the respective Stock Plan (or under any other plan maintained by the
Company or a subsidiary thereof) first become exercisable by such participant
in any year exceeds $100,000. No Options shall be granted under the 1994 Plan
on or after March 31, 2004, or under the 1995 Plan on or after November 1,
2005.
No Option may be exercised within six months after the date of grant or
in such circumstances where exercise would violate Federal or State securities
laws. Options will be non-transferable and non-assignable; provided, however,
that the estate of a deceased holder can exercise Options. Options generally
will be exercisable by the holder thereof subject to terms fixed by the
Compensation Committee. The right of any participant to exercise an Option may
not be transferred in any way other than by will or the laws of descent and
distribution.
Grants of Restricted Stock under the Stock Plans are subject to the terms
and conditions imposed by the Compensation Committee. Except for such
restrictions on transfer as the Compensation Committee may impose, the
participants have all the rights of a holder of Common Stock as to such
Restricted Stock including the right to vote the shares and the right to
receive any cash distributions. Except as provided by the Compensation
Committee at the time of grant or otherwise, upon a termination of employment
for any reason during the Restriction Period, all unvested shares will be
forfeited by the participant.
The Stock Plans may be terminated and may be modified or amended by the
Board of Directors at any time; however, (i) any modification or amendment
either increasing the aggregate number of shares which may be issued under
Options, increasing materially the benefits accruing to participants under the
Stock Plans or materially modifying the requirements as to eligibility to
receive Options is subject to shareholder approval within one year of the
adoption of such amendment; and (ii) no such termination, modification or
amendment of the Stock Plans will alter or affect the terms of any then
outstanding Options or Restricted Stock without the consent of the holders
thereof.
COMPENSATION FOR DIRECTORS
In lieu of cash compensation, on February 19, 1997, the Company granted
to each Independent Director 1,500 shares of Restricted Stock under the 1994
Plan for serving as a director of the Company during 1996. The Company intends
to provide a similar grant to each Independent Director in lieu of cash
compensation for service during 1997. None of the other directors received any
compensation for their service as directors of the Company during 1996. The
Company reimburses directors for their out-of-pocket expenses incurred in
connection with their service on the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ON
COMPENSATION DECISIONS
During 1996, the Company's Compensation Committee of the Board of
Directors consisted of Donald J. McNamara, Richard S. Ellwood, Richard O.
Jacobson and Thomas A. McChristy, constituting all of the Independent
Directors, none of whom was, prior to or during 1996, an officer or employee of
the Company. None of such persons had any relationships requiring disclosure
under applicable rules and regulations. The Company
41
<PAGE> 42
did not have a policy during 1996 prohibiting its executive officers from
participating in deliberation of the Board of Directors regarding executive
compensation. Consequently, Messrs. Feldman and Corcoran, who are also
directors of the Company, and Mr. Robinson, as Secretary of the Company, were
present during deliberations of the Board of Directors regarding executive
compensation during 1996. Messrs. Feldman and Corcoran, in their capacities as
directors, participated in such deliberations.
In connection with the Company's acquisition, during February 1997, of
interests in 10 hotels at an aggregate cost of approximately $139 million
(including the Company's share of certain assumed indebtedness), Mr. Richard S.
Ellwood, an Independent Director of the Company, was paid a one-time fee in the
amount of $200,000 for his services in facilitating this transaction.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information, as of March 18, 1997,
regarding each person known to the Company to be the beneficial owner of more
than five percent (5%) of its Common Stock. Unless otherwise indicated, such
shares of Common Stock are owned directly and the indicated person has sole
voting and investment power with respect thereto.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP CLASS(1)
------------------- ----------- -----------
<S> <C> <C>
Capital Growth Management Limited Partnership . . . . . . . . . . 2,185,000(2) 8.2%
One International Place
Boston, Massachusetts 02110
Franklin Resources, Inc. . . . . . . . . . . . . . . . . . . . . 3,291,304(3) 11.7%
777 Mariners Island Blvd.
San Mateo, California 94404
FMR Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,332,001(4) 8.7%
82 Devonshire Street
Boston, Massachusetts 02109
LaSalle Advisors Limited Partnership. . . . . . . . . . . . . . . 1,643,600(5) 6.2%
100 East Pratt Street
Baltimore, Maryland 21202
Promus Hotels, Inc. . . . . . . . . . . . . . . . . . . . . . . . 2,886,792(6) 10.5%
755 Crossover Lane
Memphis, Tennessee 38117
</TABLE>
- ---------------
(1) Based upon 26,539,676 shares outstanding as of March 18, 1997.
(2) Based solely upon information contained in Schedule 13G, dated February
11, 1997. Capital Growth Management Limited Partnership reported that it
had sole voting power, but not sole dispositive power, with respect to
such shares, and disclaims any beneficial interest in these shares.
(3) Based solely upon information contained in Schedule 13G, dated February
12, 1997. Franklin Resources, Inc. reported that, through its
subsidiaries, it has sole voting and dispositive power with respect to
these shares. Includes 1,471,756 shares of Common Stock issuable upon
conversion of 1,898,550 shares of the Company's $1.95 Series A Preferred
Stock.
(4) Based solely upon information contained in Schedule 13G, dated February
14, 1997. FMR Corp. reported that, through its subsidiaries, it had sole
dispositive power with respect to such shares and sole voting power with
respect to 479,806 of such shares. Includes 220,961 shares of Common
Stock issuable upon conversion of 285,000 shares of Series A Preferred
Stock.
(5) Based solely upon information contained in Schedule 13G, dated February
11, 1997. Represents (i) 916,900 shares owned by LaSalle Advisors
Limited Partnership ("LaSalle"), as to which LaSalle reported it had sole
voting and dispositive power with respect to 448,100 shares, shared
voting power with respect to 174,500 shares and shared dispositive power
with respect to 468,800 shares, and (ii) 726,700 shares beneficially
owned by ABKB/LaSalle Securities
42
<PAGE> 43
Limited Partnership ("ABKB/LaSalle"), as to which ABKB/LaSalle reported
that it had sole voting and dispositive power with respect to 160,100
shares, shared voting power with respect to 448,870 shares and shared
dispositive power with respect to 566,600 shares.
(6) Based solely upon information contained in Schedule 13D, dated February
5, 1997. Includes 1,000,000 Units held by Promus Hotels, Inc. which are
currently redeemable for a like number of shares of Common Stock, subject
to the prohibitions contained in the Company's Charter which prohibit
ownership of more than 9.9% of any class of the Company's outstanding
capital stock by any person.
Security Ownership of Management
The following table sets forth the beneficial ownership of the Company's
Common Stock and Series A Preferred Stock, as of March 18, 1997, by (i) each
director and director nominee, (ii) each named executive officer and (iii) all
directors and executive officers as a group. Unless otherwise indicated, such
shares of Common Stock and Series A Preferred Stock are owned directly and the
indicated person has sole voting and investment power.
<TABLE>
<CAPTION>
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
BENEFICIAL PERCENT BENEFICIAL PERCENT
NAME OF OWNERSHIP OF OF OWNERSHIP OF OF
BENEFICIAL OWNER COMMON STOCK CLASS(1) PREFERRED STOCK CLASS(1)
- ---------------- ------------ -------- --------------- --------
<S> <C> <C> <C> <C>
Hervey A. Feldman . . . . . . . . 433,315(2)(3) 1.6% 3,000(10) (12)
Thomas J. Corcoran, Jr. . . . . . 433,415(2)(4) 1.6% 3,000 (12)
Richard S. Ellwood . . . . . . . 4,500 (9) 0 0
Richard O. Jacobson . . . . . . . 21,200 (9) 0 0
Charles N. Mathewson . . . . . . 609,777(5) 2.2% 90,000(11) 1.5%
Thomas A. McChristy . . . . . . . 45,900(6) (9) 0 0
Donald J. McNamara . . . . . . . 4,600 (9) 0 0
Nicholas R. Peterson . . . . . . 25,000(7) (9) 0 0
June H. McCutchen . . . . . . . . 0 0 0 0
William P. Stadler . . . . . . . 2,500(8) (9) 0 0
All executive officers and
directors as a group (12 persons) 1,296,292 4.7% 96,000 1.6%
</TABLE>
- ---------------
(1) Based upon 26,539,676 shares outstanding as of March 18, 1997.
(2) Includes 294,915 shares issuable to FelCor, Inc. upon exercise of
redemption rights with respect to Units issued to it in connection with
the IPO. Messrs. Feldman and Corcoran are the sole shareholders and
directors of FelCor, Inc. and each may be deemed to own beneficially all
of the Units owned by FelCor, Inc. Also includes (i) and aggregate of
33,000 shares issued pursuant to stock grants (9,000 in February 1995,
9,000 in December 1995, and 15,000 in February 1997), which shares vest
over a five-year period from the date of grant at the rate of 20% per
year, (ii) 90,000 shares issuable pursuant to currently exercisable stock
options, and (iii) 2,325 shares issuable upon the conversion of 3,000
shares of Series A Preferred Stock. Does not include 296,000 shares
issuable pursuant to outstanding stock options which are not currently
exercisable.
(3) Includes 200 shares owned of record by Mr. Feldman's minor children.
(4) Includes 300 shares owned of record by Mr. Corcoran's minor children.
(5) Includes 540,009 shares issuable to or for the benefit of Mr. Mathewson
upon exercise of redemption rights with respect to Units, which
represents Mr. Mathewson's pro rata interest in Units issued in
connection with the IPO to partnerships in which Mr. Mathewson is a
limited partner. Also includes 69,768 shares issuable upon conversion of
90,000 shares of Series A Preferred Stock.
(6) Includes 38,000 shares owned of record by the T.A. McChristy Living
Trust, over which Mr. McChristy has sole investment and voting power, and
3,000 shares owned of record by his spouse's individual retirement
account.
(7) Includes (i) 4,100 shares owned of record by family trusts of which Mr.
Peterson is trustee and over which he has sole investment and voting
power, and (ii) 20,000 shares issuable pursuant to currently exercisable
stock options. Does not include 10,000 shares issuable pursuant to
outstanding stock options which are not currently exercisable.
(8) Represents 2,500 shares issued in July 1995 pursuant to a stock grant,
which shares vest over a five-year period from the date of grant at the
rate of 20% per year.
(9) Represents less than 1% of the outstanding Common Stock.
(10) Includes 1,000 shares owned by Mr. Feldman's spouse and 1,000 shares
owned by trust for the benefit of his minor children.
(11) Represents shares owned of record by the Charles M. Mathewson Trust.
(12) Represents less than 1% of the outstanding Series A Preferred Stock.
43
<PAGE> 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and the Partnership have entered into a number of
transactions with the Lessee and certain other affiliates. Mr. Feldman and
Mr. Corcoran, who are officers and directors of the Company, control and are
also officers and directors of the Lessee.
The Percentage Leases
The Company and the Lessee have entered into the Percentage Leases, each
with a term of ten years, relating to each hotel owned by the Company. The
Company anticipates that similar Percentage Leases will be executed with
respect to any additional hotel properties acquired by it in the future.
Pursuant to the terms of the Percentage Leases, the Lessee is required to pay
the greater of Base Rent or Percentage Rent and certain other additional
charges, and is entitled to all profits from the operation of the hotels after
the payment of operating, management and other expenses. Lease rent paid by
the Lessee under the Percentage Leases totaled approximately $108 million for
the year ended December 31, 1996. The Lessee is a Delaware limited liability
company, all of the voting Class A membership interest in which (representing a
50% equity interest) is beneficially owned one half by Mr. Feldman and one half
by Mr. Corcoran. All of the non-voting Class B membership interest in the
Lessee (representing the remaining 50% equity interest) is owned by RGC
Leasing, Inc., a Nevada corporation owned by the children of Charles N.
Mathewson.
Employment Agreements
The Company has entered into the Employment Agreements with each of
Messrs. Feldman and Corcoran that will continue in effect until December 31,
1999 and automatically be renewed for successive one year terms, unless
otherwise terminated. Pursuant to such Employment Agreements, Mr. Feldman
serves as Chairman of the Board, and Mr. Corcoran serves as President and Chief
Executive Officer, of the Company. Each was paid a base salary of $5,000 per
month through 1994, $10,000 per month in 1995 and $10,270 in 1996. Effective
January 1, 1997, Mr. Feldman is entitled to receive $12,500 per month and Mr.
Corcoran is entitled to receive $16,667 per month. Messrs. Feldman and Corcoran
have agreed to devote substantially all of their time to the business of the
Company. The Compensation Committee of the Board may provide for additional
compensation as a bonus should it determine, in its discretion, based on merit,
the Company's anticipated financial performance and other criteria, that such
additional compensation is appropriate. The Company maintains a comprehensive
medical plan for the benefit of Messrs. Feldman and Corcoran and their
dependents.
Option and Right of First Refusal
In 1994, the Company was granted a two-year option to purchase, at fair
market value, and a right of first refusal with respect to an Embassy Suites
hotel located in St. Louis, Missouri that was developed by a FelCor Affiliate
and opened for business on December 21, 1994 under the management of Promus.
In anticipation of the December 21, 1996 expiration date of such option and
right of first refusal, the Independent Directors of FelCor, following an
inspection of the hotel and a through consideration of all matters deemed
relevant by them determined, at a meeting held at such hotel in June 1996, that
it would be in the best interests of the Company and its shareholders to allow
this option and right of first refusal to expire unexercised. Such decision was
based, in part, upon the fact that the Company had other purchase
opportunities, that the option was only exercisable at full fair market value
and that the hotel offered little opportunity for the Company to benefit from
additional capital expenditures, or changes in brand or management.
Accordingly, this option and right of first refusal was not exercised and
expired by its terms on December 21, 1996.
44
<PAGE> 45
Sharing of Offices and Employees
The Company shares the executive offices and certain employees with
FelCor, Inc. and the Lessee, and each company bears its share of the costs
thereof, including an allocated portion of the rent, salaries of certain
personnel (other than Messrs. Feldman and Corcoran, whose salaries are borne
solely by the Company), office supplies, telephones and depreciation of office
furniture, fixtures and equipment. Any such allocation of shared expenses to
the Company must be approved by a majority of the Independent Directors.
During 1996, the Company paid approximately $807,000 (approximately 38%) of the
allocable expenses under this arrangement.
Certain Relationships with Promus
As of February 5, 1997, Promus held of record 1,886,792 shares of Common
Stock and 1,000,000 Units which are currently redeemable, at the option of
Promus, subject to certain limitations, into a like number of shares of Common
Stock. Assuming all Units held by Promus were redeemed for Common Stock,
Promus would own approximately 10.5% of the Company's Common Stock. The
Company has numerous significant contractual relationships with Promus. See
"Item 1. Business" and "Item 12. Security Ownership of Certain Beneficial
Owners and Management."
Compensation of Director for Special Services
In connection with the Company's acquisition, during February 1997, of
interests in 10 hotels at an aggregate cost of approximately $139 million
(including the Company's share of certain assumed indebtedness), Mr. Richard S.
Ellwood, an Independent Director of the Company, was paid a one-time fee in the
amount of $200,000 for his services in facilitating this transaction.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included herein at pages F-1 through F-32.
2. Financial Statement Schedules
The following financial statement schedule is included herein at page
F-23:
Schedule III - Real Estate and Accumulated Depreciation for FelCor
Suite Hotels, Inc.
All other schedules for which provision is made in Regulation S-X are
either not required to be included herein under the related instructions or are
inapplicable or the related information is included in the footnotes to the
applicable financial statement and, therefore, have been omitted.
3. Exhibits
The following exhibits are filed as part of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
3.1 - Articles of Amendment and Restatement dated June 22, 1995, amending
and restating the Charter of Registrant, as amended or supplemented
by Articles of Merger dated June 23, 1995, Articles Supplementary
dated April 30, 1996 and Articles of Amendment dated August 8, 1996
(filed as Exhibit 3.1 to the Registrant's Form 10-Q for the quarter
ended June 30, 1996 (the "1996 Second Quarter 10-Q") and
incorporated herein by reference).
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C>
3.2 - Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-11 (File No. 33-98332)
(the "December 1995 Registration Statement") and incorporated
herein by reference).
4.1 - Form of Share Certificate for Common Stock (filed as Exhibit 4.1 to
the 1996 Second Quarter 10-Q and incorporated herein by reference).
4.2 - Indenture dated as of April 22, 1996 by and between the Registrant
and Sun trust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit
4.2 to the Registrant's Form 8-K dated May 1, 1996 (the "1996 Form
8-K") and incorporated herein by reference).
4.3 - Form of Share Certificate for $1.95 Series A Cumulative Convertible
Preferred Stock (filed as Exhibit 4.4 to the 1996 Form 8-K and
incorporated herein by reference).
10.1 - Amended and Restated Agreement of Limited Partnership of FelCor
Suites Limited Partnership (the "Partnership") (filed as Exhibit
10.1 to the Registrant'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).
10.1.1 - First Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of November 17, 1995 by and
among the Registrant, Promus Hotels, Inc. and all of the persons or
entities who are or shall in the future become of the limited
partners of the Partnership (filed as Exhibit 10.1.1 to the
Registrant'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)
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 1995 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 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 10-K and incorporated herein by
reference).
10.1.5 - Fifth Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of May 2, 1996, between the
Registrant and all of the persons or entities who are or shall in
the future become limited partners of the Partnership, 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 the 1996 Second Quarter 10-Q and incorporated
herein by reference).
10.1.6 - Sixth Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of September 16, 1996, by
and among the Registrant, John B. Urbahns, II and all of the persons
or entities who are or shall in the future become limited partners
of the Partnership.
10.2.1 - Form of Lease Agreement between the Partnership as Lessor and DJONT
Operations, L.L.C. ("DJONT") as Lessee (filed as Exhibit 10.2.1 to
the 1995 10-K and incorporated herein by reference).
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C>
10.2.2 - Schedule of executed Lease Agreements identifying material
variations from the form of Lease Agreement with respect to hotels
acquired by the Registrant through March 30, 1996.
10.3 - Amended and Restated Loan Agreement dated as of September 26, 1996,
among the Registrant and the Partnership, as Borrowers, Boatmen's
National Bank of Oklahoma, as Agent and Lender, and First Tennessee
Bank National Association, Liberty Bank and Trust Company of Tulsa,
National Association, Bank One, Texas, N.A., First National Bank of
Commerce, and AmSouth Bank of Alabama, as Lenders (filed as Exhibit
10.3.4 to the Registrant's Form 10-Q for the quarter ended
September 30, 1996 (the "1996 Third Quarter 10-Q") and incorporated
herein by reference).
10.4 - Agreement to Assign Incentive Management Fee dated as of May 19,
1994 between the Registrant and Embassy Suites, Inc. (filed as
Exhibit 10.14 to the Registrant's Registration Statement on Form S-
11 (File No. 33-79214) (the "IPO Registration Statement") and
incorporated herein by reference).
10.5 - Employment Agreement dated as of July 28, 1994 between the
Registrant and Hervey A. Feldman (filed as Exhibit 10.7 to the 1994
10-K/A and incorporated herein by reference).
10.6 - Employment Agreement dated as of July 28, 1994 between the
Registrant and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to
the 1994 10-K/A and incorporated herein by reference).
10.7.1 - Restricted Stock and Stock Option Plan of the Registrant (filed as
Exhibit 10.9 to the 1994 10-K/A and incorporated herein by
reference).
10.7.2 - 1995 Restricted Stock and Stock Option Plan of the Registrant (filed
as Exhibit 10.9.2 to the 1995 10-K and incorporated herein by
reference).
10.8 - Savings and Investment Plan of the Registrant (filed as Exhibit
10.10 to the 1994 10-K/A and incorporated herein by reference).
10.9 - Registration Rights Agreement dated as of July 21, 1994 between the
Registrant and the parties named therein (filed as Exhibit 10.11 to
the 1994 10-K/A and incorporated herein by reference).
10.10 - Agreement dated as of April 15, 1995 among the Registrant, the
Partnership, FelCor, Inc., Thomas J. Corcoran, Jr. and Hervey A.
Feldman relating to purchase of securities (filed as Exhibit 10.15
to the Registration Statement on Form S-11 (File No. 33-91870) (the
"May 1995 Registration Statement") and incorporated herein by
reference).
10.11.1 - Subscription Agreement dated as of May 3, 1995 among the Registrant,
the Partnership and Embassy Suites, Inc. (filed as Exhibit 10.16 to
the May 1995 Registration Statement and incorporated hereby by
reference).
10.11.2 - Subscription Agreement dated as of October 17, 1995 among the
Registrant, the Partnership and Promus Hotels, Inc. (filed as
Exhibit 10.27.1 to the December 1995 Registration Statement and
incorporated herein by reference).
10.11.3 - First Amendment to Subscription Agreements dated as of November 16,
1995 among the Registrant, the Partnership and Promus Hotels, Inc.
(filed as Exhibit 10.27.2 to the December 1995 Registration
Statement and incorporated herein by reference).
10.11.4 - Second Amendment to Subscription Agreements dated as of December 12,
1995 among the Registrant, the Partnership and Promus Hotels, Inc.
(filed as Exhibit 10.27.3 to the December 1995 Registration
Statement and incorporated herein by reference).
</TABLE>
47
<PAGE> 48
<TABLE>
<S> <C>
10.12.1 - Master Agreement with respect to the purchase of the CSS Hotels
between Minnesota Hotel Company, Inc. ("MHCI") and FelCor/CSS
Holdings, L.P. ("Holdings") dated as of September 19, 1995 (filed as
Exhibit 10.20.1 to the Registrant's Form 10-Q for the quarter ended
September 30, 1995 (the "1995 Third Quarter 10-Q") and incorporated
herein by reference).
10.12.2 - Letter agreement with respect to amendments to Master Agreement
between MHCI and Holdings dated as of November 6, 1995 (filed as
Exhibit 10.20.2 to the 1995 Third Quarter 10-Q and incorporated
herein by reference).
10.12.3 - Letter agreement dated January 3, 1996, among MHCI, Crown Sterling
Management, Inc. ("CSM"), Crown Sterling Incorporated ("CSI"),
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).
10.12.4 - 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).
10.13 - Partnership Interests Purchase Agreement with respect to the LAX
Airport and Mandalay Beach hotels among MHCI, MBC, Robert E. Woolley
and Holdings dated as of September 19, 1995 (filed as Exhibit 10.21
to the 1995 Third Quarter 10-Q and incorporated herein by
reference).
10.13.1 - 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).
10.13.2 - 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).
10.14.1 - Asset Purchase Agreement with respect to the CSS Hotels among CSM,
CSI and PFS dated as of September 19, 1995 (filed as Exhibit 10.22.1
to the 1995 Third Quarter 10-Q and incorporated herein by
reference).
10.14.2 - Letter agreement with respect to amendments to Asset Purchase
Agreement among CSM, CSI and PFS dated as of November 6, 1995 (filed
as Exhibit 10.22.2 to the 1995 Third Quarter 10-Q and incorporated
herein by reference).
10.15 - Escrow Agreement among MHCI, CSM, CSI, Robert E. Woolley,
Charles M. Sweeney, Holdings and PFS dated as of September 19, 1995
(filed as Exhibit 10.23 to the 1995 Third Quarter 10-Q and
incorporated herein by reference).
10.16 - Purchase Agreement relating to the purchase of all of the limited
partner interest in Holdings between the Partnership and DJONT/CSS
Holdings, Inc. dated as of September 19, 1995 (filed as Exhibit
10.24 to the 1995 Third Quarter 10-Q and incorporated herein by
reference).
10.17 - Purchase Agreement related to the purchase of all of the general
partner interest in Holdings between the Partnership and PFS dated
as of September 19, 1995 (filed as Exhibit 10.25 to the 1995 Third
Quarter 10-Q and incorporated herein by reference).
</TABLE>
48
<PAGE> 49
<TABLE>
<S> <C>
10.18 - Letter agreement among the Registrant, the Partnership, Holdings,
and Smith Barney Mortgage Capital Group, Inc. ("SBMCG") dated as of
September 28, 1995 with respect to the commitment of SBMCG to
provide up to $220 million principal amount of interim recourse
secured financing to Holdings (filed as Exhibit 10.26 to the 1995
Third Quarter 10-Q and incorporated herein by reference).
10.19 - Registration Rights Agreement dated as of November 17, 1995 between
the Registrant and Cleveland Finance Associates Limited Partnership
(filed as Exhibit 10.27 to the 1995 10-K and incorporated herein by
reference).
10.20 - 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 10-K and incorporated herein by
reference).
10.21 - 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
10-K and incorporated herein by reference).
10.22 - 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).
10.23 - Amended and Restated Revolving Credit Agreement dated as of October
18, 1996 among the Registrant 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 10.31 to the 1996 Third Quarter 10-Q and
incorporated herein by reference).
21.1 - List of Subsidiaries of the Registrant.
27 - Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
No Current Report on Form 8-K was filed by the Company during the fourth
quarter of 1996.
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FELCOR SUITE HOTELS, INC.
By: /s/ William S. McCalmont
-------------------------------------
William S. McCalmont
Senior Vice President, Chief Financial Officer & Treasurer
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date Signature
---- ---------
March 27, 1997 /s/ Hervey A. Feldman
-------------------------------------
Hervey A. Feldman
Chairman of the Board and Director
March 27, 1997 /s/ Thomas J. Corcoran, Jr.
-------------------------------------
Thomas J. Corcoran, Jr.
President and Director
(Chief Executive Officer)
March 27, 1997 /s/ William S. McCalmont
-------------------------------------
William S. McCalmont
Senior Vice President
(Chief Financial Officer)
March 27, 1997 /s/ Lester C. Johnson
-------------------------------------
Lester C. Johnson
Vice President and Controller
March 27, 1997 /s/ Richard S. Ellwood
-------------------------------------
Richard S. Ellwood
Director
March 27, 1997 /s/ Richard O. Jacobson
-------------------------------------
Richard O. Jacobson
Director
March __, 1997
-------------------------------------
Charles N. Mathewson
Director
March 27, 1997 /s/ Thomas A. McChristy
-------------------------------------
Thomas A. McChristy
Director
March 27, 1997 /s/ Donald J. McNamara
-------------------------------------
Donald J. McNamara
Director
50
<PAGE> 51
FELCOR SUITE HOTELS, INC.
INDEX TO FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
FELCOR SUITE HOTELS, INC.
<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets - December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 and the
period from July 28, 1994 (inception of operations) through December 31, 1994 . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996 and 1995 and the
period from May 16, 1994 through December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995 and the
period from July 28, 1994 (inception of operations) through December 31, 1994 . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996 . . . . . . . . . . . . . . . . . . F-23
DJONT OPERATIONS, L.L.C.
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24
Consolidated Balance Sheets - December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995
and the period from July 28, 1994 (inception of operations) through December 31, 1994 . . . . . . . . . . . . . F-26
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996 and 1995 and
the period from July 28, 1994 (inception of operations) through December 31, 1994 . . . . . . . . . . . . . . . F-27
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995
and the period from July 28, 1994 (inception of operations) through December 31, 1994 . . . . . . . . . . . . . F-28
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-29
</TABLE>
F-1
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of FelCor Suite Hotels, Inc.
We have audited the accompanying consolidated financial statements and
the financial statement schedule of FelCor Suite Hotels, Inc. listed in Item
14(a) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of FelCor Suite Hotels, Inc. as of December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception
of operations) through December 31, 1994 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
January 22, 1997
except as to the information
presented in the second paragraph
of Note 5, the first paragraph of
Note 6 and Note 17 for which the
date is March 10, 1997
F-2
<PAGE> 53
FELCOR SUITE HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1996 1995
--------- -------
<S> <C> <C>
Investment in hotels, net of accumulated depreciation of
$36,718 in 1996 and $10,244 in 1995 . . . . . . . . . . . . . . . . . . . . . . . $899,691 $325,155
Investment in unconsolidated partnerships . . . . . . . . . . . . . . . . . . . . . . 59,867 13,819
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,793 166,821
Deposits and prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,616 35,317
Due from Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,526 2,396
Deferred expenses, net of accumulated amortization of
$364 in 1996 and $252 in 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,235 1,713
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,060 3,138
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $978,788 $548,359
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Distributions payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,090 $ 4,918
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . 5,235 3,552
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,550 8,410
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,875 11,256
Minority interest in Partnership, 2,786 and 2,695 units issued and
outstanding at December 31, 1996 and 1995, respectively . . . . . . . . . . . . . 76,112 58,837
-------- -------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336,862 86,973
--------- -------
Commitments and contingencies (Notes 5 and 9)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized, 6,050 shares issued
and outstanding at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 151,250
Common stock, $.01 par value, 50,000 shares authorized, 23,502
and 21,135 shares issued and outstanding at December 31, 1996 and
1995, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 211
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505,082 463,524
Unearned officers' and directors' compensation . . . . . . . . . . . . . . . . . . . (1,454) (473)
Distributions in excess of earnings . . . . . . . . . . . . . . . . . . . . . . . . . (13,187) (1,876)
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 641,926 461,386
--------- --------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . $978,788 $548,359
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 54
FELCOR SUITE HOTELS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
------- --------- -------
<S> <C> <C> <C>
Revenues:
Percentage lease revenue . . . . . . . . . . . . . . . . . . . . . $97,950 $ 23,787 $ 6,043
Income from unconsolidated partnerships . . . . . . . . . . . . . 2,010 513
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . 984 1,691 207
----- ------- -----
Total revenues . . . . . . . . . . . . . . . . . . . . . . 100,944 25,991 6,250
------- --------- -------
Expenses:
General and administrative . . . . . . . . . . . . . . . . . . . . 1,819 870 355
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,544 5,232 1,487
Taxes, insurance and other . . . . . . . . . . . . . . . . . . . . 13,897 2,563 881
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 9,803 2,004 109
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . 5,590 3,131 907
------- ------- -----
Total expenses . . . . . . . . . . . . . . . . . . . . . . 57,653 13,800 3,739
-------- --------- -------
Income before extraordinary charge . . . . . . . . . . . . . . . . . . . . 43,291 12,191 2,511
Extraordinary charge from write off of deferred financing fees . . . . . . 2,354
-------- --------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,937 12,191 2,511
Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,734
-------- --------- -------
Net income applicable to common shareholders . . . . . . . . . . . . . . . $33,203 $ 12,191 $ 2,511
======= ======== =========
Per common share information:
Net income applicable to common shareholders
before extraordinary charge . . . . . . . . . . . . . . . . . . $ 1.54 $1.70 $0.54
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . 0.10
-------- --------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.44 $1.70 $0.54
======= ===== =====
Weighted average number of common shares outstanding . . . . . . . 23,076 7,165 4,690
====== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 55
FELCOR SUITE HOTELS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE PERIOD FROM MAY 16, 1994 THROUGH DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Unearned
Common Stock Officers' Distribu-
--------------- Additional and tions in Total
Preferred Number of Paid-in Directors' Excess of Shareholders'
Stock Shares Amount Capital Compensation Earnings Equity
-------- ------ ------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common shares, net of
offering expenses and allocation to
minority interest 4,686 $ 47 $ 69,691 $ 69,738
Issuance of directors' shares 4 85 $ (85)
Distributions declared:
$0.657 per common share $(3,079) (3,079)
Amortization of unearned
directors' compensation 85 85
Net income 2,511 2,511
-------- ------ ------- -------- -------- -------- ---------
Balance at December 31, 1994 4,690 47 69,776 (568) 69,255
Issuance of common shares, net of
offering expenses 16,411 164 402,124 402,288
Allocation to minority interest (9,115) (9,115)
Issuance of officers' and directors'
shares 34 739 (631) 108
Distributions declared:
$1.84 per common share (13,499) (13,499)
Amortization of unearned officers' and
directors' compensation 158 158
Net income 12,191 12,191
-------- ------ ------- -------- -------- -------- ---------
Balance at December 31, 1995 21,135 211 463,524 (473) (1,876) 461,386
Issuance of common shares 1,913 19 50,952 50,971
Issuance of officers' and directors' 1
shares 53 1,486 (1,487)
Conversion of Partnership units to
common shares 401 4 4
Issuance of preferred stock,
net of offering expenses $151,250 (6,998) 144,252
Distributions/dividends declared:
$1.92 per common share (44,514) (44,514)
$1.2783 per preferred share (7,734) (7,734)
Allocation to minority interest (3,882) (3,882)
Amortization of unearned officers' and
directors' compensation 506 506
Net income 40,937 40,937
-------- ------ ------- -------- -------- --------- ---------
Balance at December 31, 1996 $151,250 23,502 $ 235 $505,082 $ (1,454) $ (13,187) $ 641,926
======== ====== ======= ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 56
FELCOR SUITE HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) THROUGH DECEMBER
31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,937 $ 12,191 $ 2,511
Adjustments to reconcile net income to net cash provided
by operating activities, net of effects of acquisitions:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,544 5,385 1,487
Amortization of deferred financing fees and organization costs . . . . . 554 228 24
Amortization of unearned officers' and directors' compensation . . . . . 506 158 85
Income from unconsolidated partnerships . . . . . . . . . . . . . . . . (2,010) (513)
Cash distributions from unconsolidated partnerships . . . . . . . . . . 1,954
Extraordinary charge for write off of deferred financing fees . . . . . 2,354
Fully vested officer stock grant . . . . . . . . . . . . . . . . . . . . 108
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,590 3,131 907
Changes in assets and liabilities:
Due from Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,130) (1,137) (1,259)
Deferred costs and other assets . . . . . . . . . . . . . . . . . . . . 353 (2,217) (407)
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . 280 741 611
-------- -------- -------
Net cash flow provided by operating activities . . . . . . . . . . . . . 73,932 18,075 3,959
--------- -------- --------
Cash flows from investing activities:
Acquisition of hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . (365,907) (219,164) (23,550)
Prepayments under purchase agreements . . . . . . . . . . . . . . . . . . . . (21,701)
Acquisition of unconsolidated partnerships . . . . . . . . . . . . . . . . . (43,424) (13,166)
Improvements and additions to hotels . . . . . . . . . . . . . . . . . . . . (71,051) (5,166) (77,243)
--------- -------- --------
Net cash flow used in investing activities . . . . . . . . . . . . . . . . . (480,382) (259,197) (100,793)
--------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 303,350 128,600 8,800
Repayment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . (193,954) (129,850)
Deferred financing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,484) (1,072) (721)
Proceeds from sale of common stock . . . . . . . . . . . . . . . . . . . . . 44,978 426,502 99,583
Proceeds from sale of preferred stock . . . . . . . . . . . . . . . . . . . . 151,250
Costs associated with public offerings . . . . . . . . . . . . . . . . . . . (6,998) (27,874) (7,973)
Proceeds from sale of partnership units . . . . . . . . . . . . . . . . . . . 25,000
Distributions paid to limited partners . . . . . . . . . . . . . . . . . . . (5,353) (2,993) (462)
Distributions paid to common shareholders . . . . . . . . . . . . . . . . . . (36,583) (11,488) (1,275)
Dividends paid to preferred shareholders . . . . . . . . . . . . . . . . . . (4,784)
--------- -------- --------
Net cash flow provided by financing activities . . . . . . . . . . . . . 247,422 406,825 97,952
--------- -------- --------
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . (159,028) 165,703 1,118
Cash and cash equivalents at beginning of periods . . . . . . . . . . . . . . . 166,821 1,118
--------- -------- --------
Cash and cash equivalents at end of years . . . . . . . . . . . . . . . . . . . $ 7,793 $166,821 $ 1,118
======== ======== ========
Supplemental cash flow information - interest paid . . . . . . . . . . . . . . $ 9,168 $ 1,467
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 57
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
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. ("FelCor") acquired an equity interest of approximately 75% in
FelCor Suites Limited Partnership (the "Partnership"), which owned six Embassy
Suites(R) hotels (the "Initial Hotels") with an aggregate of 1,479 suites. The
Partnership had acquired the Initial Hotels 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 December 31, 1996, FelCor owned interests in 43 hotels with an
aggregate of 10,196 suites (collectively the "Hotels") through its 89.4%
aggregate ownership of the Partnership and its consolidated subsidiaries
(collectively, the "Company"). FelCor also acts as the sole general partner in
the Partnership. The Company owns 100% equity interests in 37 of the Hotels, a
97% interest in the partnership that owns the Los Angeles International Airport
hotel and 50% interests in separate partnerships that own five hotels. At
December 31, 1996, 39 of the Hotels are operated as Embassy Suites hotels, two
as Doubletree Guest Suites(R) hotels, one as a Hilton Suites(R) hotel and one
hotel is in the process of being converted to an Embassy Suites hotel. The
Hotels are located in 16 states, with 17 hotels in California and Florida. The
following table provides certain information regarding the Company's Hotels
acquired through December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF HOTELS AGGREGATE
ACQUIRED NUMBER OF SUITES ACQUISITION PRICE
------------ ---------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
1994
----
Initial Hotels 6 1,479 $81.5
4th Quarter 1 251 25.8
1995
----
1st Quarter 2 350 27.4
2nd Quarter 1 100 9.4
3rd Quarter 3 542 31.3*
4th Quarter 7 1,657 169.0
1996
----
1st Quarter 14 3,501 383.5
2nd Quarter 3 691 68.1
3rd Quarter 4 1,005 30.8**
4th Quarter 2 572 78.1
----- ------ ------
43 10,148 904.9
=====
Additional suites constructed by
the Company at Hotels 48 5.3
------ ------
10,196 $910.2
====== ======
</TABLE>
* Includes the purchase price of the Company's 50% interest in the
unconsolidated partnership owning the 262 suite, Chicago-Lombard,
Illinois hotel.
** Represents the purchase price of the Company's 50% interest in
separate unconsolidated partnerships owning hotels in Marin County,
California; Parsippany, New Jersey; Charlotte, North Carolina; and
Indianapolis, Indiana, with an aggregate 1,005 suites.
In addition, the Company has started construction on 129 net
additional suites, meeting rooms and other public area upgrades at one of the
Hotels, at an estimated cost of $15.8 million.
F-7
<PAGE> 58
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION -- (CONTINUED)
The Company leased all of the Hotels to DJONT Operations, L.L.C. or a
consolidated subsidiary (collectively the "Lessee") under operating leases
providing for the payment of percentage rent (the "Percentage Leases"). Messrs.
Feldman and Corcoran beneficially own 50% of the common equity interest in 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 38 of the Hotels are managed by
Promus Hotels, Inc. ("Promus"), two of the Hotels are managed by a subsidiary
of Doubletree Hotel Corporation ("Doubletree"), two of the Hotels are managed
by American General Hospitality, Inc. ("AGHI") and one is managed by Coastal
Hotel Group, Inc. ("Coastal").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of FelCor, the Partnership and the Holdings Partnerships
as described in Note 8. All significant intercompany balances and transactions
have been eliminated.
Investment in Hotels -- Hotels are stated at cost and are depreciated
using the straight-line method over estimated useful lives ranging from 31-40
years for buildings and improvements and 5 to 7 years for furniture, fixtures
and equipment.
The Company reviews the carrying value of each hotel to determine if
circumstances exist indicating an impairment in the carrying value of the
investment in the hotel or that depreciation periods should be modified. If
facts or circumstances support the possibility of impairment, the Company will
prepare a projection of the undiscounted future cash flows, without interest
charges, of the specific hotel and determine if the investment in such hotel
is recoverable based on the undiscounted future cash flows. If impairment is
indicated, an adjustment will be made to the carrying value of the hotel based
on discounted future cash flows. The Company does not believe that there are
any factors or circumstances indicating impairment of any of its investment in
hotels.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulated depreciation are removed from
the accounts, and the related gain or loss is included in operations.
Investment in Unconsolidated Partnerships --The Company carries its
investment in unconsolidated partnerships at cost, plus its equity in net
earnings, less distributions received since the date of acquisition. Equity in
net earnings is being adjusted for the straight-line amortization, over a 40
year period, of the difference between the Company's cost and its proportionate
share of the underlying net assets at date of acquisition.
Cash and Cash Equivalents -- All highly liquid investments with a
maturity of three months or less when purchased are considered to be cash
equivalents.
Deposits and Prepayments -- Deposits and prepayments at December 31,
1996 consist of deposits associated with the capitalized land and building
lease further described in Note 5. At December 31, 1995 the deposits and
prepayments consisted of the aforementioned deposits and prepayments associated
with hotel purchases.
F-8
<PAGE> 59
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Deferred Expenses -- Deferred expenses at December 31, 1996 and 1995
consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Organization costs . . . . . . . . . . . . . . . . . . . . . . $ 349 $ 172
Deferred financing fees . . . . . . . . . . . . . . . . . . . . 3,250 1,793
------- -------
3,599 1,965
Accumulated amortization . . . . . . . . . . . . . . . . . . . (364) (252)
------- -------
$3,235 $1,713
======= =======
</TABLE>
Amortization of organization costs is computed using the straight-line
method over three to five years. Amortization of deferred financing fees is
computed using the interest method over the maturity of the loans.
Revenue Recognition -- Percentage lease revenue is recognized when
earned from the Lessee under the Percentage Lease agreements (Note 9). The
Lessee is in compliance with its obligations under the Percentage Leases.
Net Income Per Common Share -- Net income per common share has been
computed by dividing net income applicable to common shareholders by the
weighted average number of common shares and equivalents outstanding. Common
share equivalents that have an immaterial dilutive effect include convertible
preferred stock and outstanding common stock options.
Distributions and Dividends -- The Company pays regular quarterly
distributions on its common stock which are dependent on receipt of
distributions from the Partnership. Additionally, the Company pays regular
quarterly dividends on preferred stock in accordance with its preferred stock
dividend requirements.
Minority Interest -- Minority interest in the Partnership represents
the limited partners' proportionate share of the equity in the Partnership.
Income is allocated to minority interest based on the weighted average
percentage ownership throughout the year.
Stock Based Compensation Plans -- The Company applies APB Opinion No.
25 and related interpretations in its accounting for stock based compensation
plans. Accordingly the Company has adopted the disclosure only provisions of
SFAS No. 123, "Accounting for Stock Based Compensation."
Income Taxes -- The Company is qualified as a REIT under Sections 856
to 860 of the Internal Revenue Code. Accordingly, no provision for federal
income taxes has been reflected in the financial statements.
Earnings and profits, which will determine the taxability of
distributions to shareholders, will differ from income reported for financial
reporting purposes primarily due to the differences for federal income tax
purposes in the estimated useful lives used to compute depreciation.
Distributions made in 1996 and 1995 represent approximately a 11.5% and 8.7%
return of capital, respectively, for federal income tax purposes.
F-9
<PAGE> 60
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT IN HOTELS
Investment in hotels at December 31, 1996 and 1995 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . $ 89,106 $ 31,123
Building and improvements . . . . . . . . . . . . 744,758 279,349
Furniture, fixtures and equipment . . . . . . . . 77,526 19,704
Construction in progress . . . . . . . . . . . . 25,019 5,223
-------- --------
936,409 335,399
Accumulated depreciation . . . . . . . . . . . . (36,718) (10,244)
--------- ---------
$899,691 $325,155
======== ========
</TABLE>
4. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS
The Company owned 50% interests in separate partnerships owning five
hotels, a parcel of undeveloped land and a condominium management company at
December 31, 1996 and one hotel at December 31, 1995. The Company is
accounting for its investments in these unconsolidated partnerships under the
equity method.
Summarized combined financial information for unconsolidated partnerships, of
which the Company owns 50%, is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
---- ----
<S> <C> <C>
Balance sheet information:
Investment in hotels . . . . . . . . . . . . . . . . . . . $ 110,394 $ 23,385
Non-recourse mortgage debt . . . . . . . . . . . . . . . . $ 49,402
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,156 $ 24,609
Statement of operations information:
Percentage lease revenue . . . . . . . . . . . . . . . . . $ 9,974 $ 1,420
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 4,366 $ 1,050
</TABLE>
5. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt at December 31, 1996 and 1995 consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
---- ----
<S> <C> <C>
Line of Credit . . . . . . . . . . . . . . . . . . . . . . . . . $115,000
Term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000
Renovation Loan . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Promus note related to CSS purchase . . . . . . . . . . . . . . . $7,500
Other debt payable . . . . . . . . . . . . . . . . . . . . . . . 1,550 910
-------- -----
$226,550 $8,410
======== ======
</TABLE>
On September 30, 1996 the Company obtained a $250 million unsecured
revolving credit facility ("Line of Credit"). Under this facility, the Company
has the right to borrow up to $250 million based upon its ownership of
qualifying unencumbered hotel assets until October 1, 1999, at which time the
principal amount then outstanding will be due and payable. Interest payable on
borrowings is variable, determined from a ratings based pricing matrix,
initially set at LIBOR plus 175 basis points and is paid current throughout the
year. Additionally, the Company is required to
F-10
<PAGE> 61
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT AND CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
pay an unused commitment fee which is variable, determined from a ratings based
pricing matrix, initially set at 35 basis points. The Company paid unused
commitment fees of approximately $164,000 during 1996. At December 31, 1996,
the line of credit interest rate was 7.25%.
On March 10, 1997 the Company announced that it increased its Line of
Credit from $250 million to $400 million which included a reduction in unused
commitment fees from 35 basis points to 25 basis points, under substantially
the same terms as the original Line of Credit.
Simultaneous with the closing of the Line of Credit in September,
1996, the Company retired a $65 million collateralized term loan and replaced
an existing $100 million collateralized revolving credit facility with an $85
million four-year collateralized term loan. This term loan bears interest at
LIBOR plus 150 basis points, interest is paid current throughout the year, and
the note is collateralized by interests in nine of the Company's hotels.
Principal payments commence on October 1, 1997 and are based on a 15 year
amortization schedule, adjusted annually for the then current interest rates.
All outstanding principal and accrued interest is due and payable on September
30, 2000. At December 31, 1996 the term loan interest rate was 7.125%.
The Company has a $25 million loan facility ("Renovation Loan") which
has been used to fund a portion of the renovation cost of the CSS Hotels (Note
8) converted to Embassy Suites hotels. The facility is guaranteed by Promus,
bears interest at LIBOR plus 45 basis points (6.08% at December 31, 1996),
requires monthly interest payments, and quarterly principal payments of $1.25
million beginning June 1999 and matures in June 2000.
Under its loan agreements, the Company is required to satisfy various
affirmative and negative covenants. The Company was in compliance with these
covenants at December 31, 1996.
During the fourth quarter of 1996, the Company entered into two
separate interest rate swap agreements to manage the relative mix of its debt
between fixed and variable rate instruments. These interest rate swap
agreements modify a portion of the interest characteristics of FelCor'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 variable rate to be received by FelCor
at December 31, 1996 are summarized in the following table:
<TABLE>
<CAPTION>
Swap Rate
Received
Swap Rate Effective (Variable) at Swap
Notional Amount Paid (Fixed) Fixed Rate 12/31/96 Maturity
--------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
$50 million 6.11125% 7.61125% 5.53516% October 1999
$25 million 5.95500% 7.45500% 5.5000% November 1999
</TABLE>
The differences to be paid or received by the Company 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 Company 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 Company
minimizes that risk by evaluating the creditworthiness of its counterparties,
which is limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
F-11
<PAGE> 62
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT AND CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
Capital lease obligations at December 31, 1996 and 1995 consists of
the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
---- ----
<S> <C> <C>
Capital land and building lease obligations . . . . . . . . . $ 9,675 $10,043
Capital equipment lease obligations . . . . . . . . . . . . . 3,200 1,213
------- -------
$12,875 $11,256
======= =======
</TABLE>
The Company assumed the obligation for a capital industrial revenue
bond lease for land and building associated with the purchase of the Embassy
Suites hotel - St. Paul in November 1995. The term of the lease is through
August 31, 2011 and contains a provision that allows the Company to purchase
the property at the termination of the lease, under certain conditions, for a
nominal amount.
The Company assumed various capital equipment leases associated with
hotels purchased in 1995 and 1996. These capital leases are generally for
telephones and televisions and vary in remaining terms from one year to four
years.
Minimum future lease payments under capital leases at December 31,
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,297
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,731
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,464
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,217
2002 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 11,770
--------
21,779
Executory costs . . . . . . . . . . . . . . . . . . . . . . . . . . . (846)
Imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . (8,058)
--------
Present value of net minimum lease payments . . . . . . . . . . . . . $12,875
=======
</TABLE>
The Company's charter limits consolidated indebtedness to 40% of the
Company's investment in hotels, 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 indebtedness includes borrowings
and capital lease obligations and consolidated investment in hotels, at cost,
is its investment, at cost, in hotels, 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 hotels. Under this
definition as of December 31, 1996, the Company's investment in hotels at cost
was $1.0 billion. Accordingly, the Company's maximum permitted indebtedness
would have been approximately $400 million (of which $239 million was borrowed
at December 31, 1996). Assuming all of this additional debt capacity, and the
Company's available cash and cash equivalents were used for the acquisition of
additional hotels, the Company's investment in hotels would increase to
approximately $1.3 billion and the maximum permitted indebtedness would
increase to approximately $525 million.
F-12
<PAGE> 63
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITAL STOCK
At December 31, 1996 the Company had completed the following public
offerings:
<TABLE>
<CAPTION>
Offering Price
Security Date Completed Per Share Shares Sold Net Proceeds
-------- -------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Common Stock (Initial Public Offering) July 28, 1994 $21.25 4,686,250 $91.6 million
Common Stock May 30, 1995 $25.00 3,450,000 $81.0 million
Common Stock December 20, 1995 $26.50 12,650,000 $312.6 million
Preferred Stock May 6, 1996 $25.00 6,050,000 $144.3 million
</TABLE>
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. The Company had issued
approximately $151 million under the Shelf Registration at December 31, 1996
leaving approximately $349 million available. In February 1997, the Company
issued approximately $107 million in common stock under the Shelf Registration.
Preferred Stock
The Board of Directors is authorized to provide for the issuance of up
to 10,000,000 shares of Preferred Stock in one or more series, to establish the
number of shares in each series and to fix the designation, powers preferences,
and rights of each such series and the qualifications, limitations or
restrictions thereof. On May 6, 1996, the Company completed 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 per
share. An additional fifty thousand shares of Series A Preferred Stock were
issued at $25 per share pursuant to the exercise of the underwriters' over-
allotment option. The Series A Preferred Stock bears 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 is 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. At December 31, 1996, all dividends then
payable on the Preferred Stock had been paid.
Common Stock
In addition to the aforementioned public offerings of Common Stock,
Promus purchased an aggregate of approximately 1.9 million shares of Common
Stock, pursuant to subscription agreements, during 1995 and 1996 at a
subscription price of $26.50 per share for an aggregate cost of $50 million.
Promus has satisfied its commitment to purchase Common Stock under the
aforementioned subscription agreements.
Partnership Units
The outstanding units of limited partnership interests in the
Partnership ("Units") are redeemable at the option of the holder for a like
number of shares of Common Stock or, at the option of the Company, for the cash
equivalent thereof.
Pursuant to a subscription agreement with Promus, the Partnership
issued an aggregate 1.0 million Units to Promus in November and December 1995,
at the subscription price of $25.00 per Unit. An aggregate of 491,703
additional Partnership Units were issued to sellers in conjunction with the
purchase of two hotels and the acquisition of partnership interests in two
additional hotels in 1996. Promus has satisfied its commitment to purchase
Units under the aforementioned subscription agreement.
F-13
<PAGE> 64
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. TAXES, INSURANCE AND OTHER
Taxes, insurance and other is comprised of the following for the years
ended December 31, 1996 and 1995 and for the period from July 28, 1994
(inception of operations) through December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Real estate and personal property taxes . . . . . . . . . . . . . . . . . . . $11,110 $2,233 $620
Property insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,312 155 69
Land lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 952
State franchise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472 175 192
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
------- ------ ----
Total taxes, insurance and other . . . . . . . . . . . . . . . . . . $13,897 $2,563 $881
======= ====== ====
</TABLE>
8. BUSINESS COMBINATION
On December 29, 1995 the Partnership acquired approximate 99% limited
partnership interests in entities ("Holdings Partnerships") formed to
facilitate the acquisition and financing of up to 18 Crown Sterling Suites(R)
hotels ("CSS Hotels") and certain other hotels pending the completion of a
common stock offering. Such common stock offering was completed on December
20, 1995 and at that date the Holdings Partnerships had acquired six of the CSS
Hotels and one additional hotel.
A summary of the fair values of the acquired assets and liabilities of
the Holdings Partnerships recorded at the date of acquisition, at December 29,
1995, is as follows (in thousands):
<TABLE>
<S> <C>
Investment in hotels . . . . . . . . . . . . . . . . . . . . . . . . $166,307
Prepayments under Purchase Agreements . . . . . . . . . . . . . . . . 13,616
Due from Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . 908
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 715
---------
181,546
Debt and capital lease obligations . . . . . . . . . . . . . . . . . 11,266
Accrued expenses and other liabilities . . . . . . . . . . . . . . . 1,657
---------
12,923
---------
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . $168,623
=========
</TABLE>
The acquisition has been accounted for as a purchase and, accordingly,
the results of operations of the Holdings Partnerships since acquisition have
been included in the Company's consolidated statements of operations.
9. COMMITMENTS AND RELATED PARTY TRANSACTIONS
After conversion of the Myrtle Beach hotel acquired in December 1996,
the Company will own interests in 40 Embassy Suites hotels, 2 Doubletree Guest
Suites hotels and one Hilton Suites hotel. The Embassy Suites hotels and the
Hilton Suites hotel 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 for
the Doubletree Guest Suites hotels.
The Hotels are managed by Promus, Doubletree, AGHI or Coastal on
behalf of the Lessee. The Lessee pays the managers a base management fee based
on a percentage of suite revenue and an incentive management fee based on the
Lessee's income before overhead expenses for each hotel.
F-14
<PAGE> 65
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Company is to receive rental income from the Lessee under the
Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels) and 2006
(19 hotels). The rental income under the Percentage Leases between the
partnerships owning five hotels, of which the Company owns 50%, and the Lessee
is 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 (base rents) under these noncancellable operating leases
(excluding hotels owned by the previously noted partnerships) at December 31,
1996 is as follows (in thousands):
<TABLE>
<CAPTION>
Year
----
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,996
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,996
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,996
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,996
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,996
2002 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . 240,386
--------
$550,366
========
</TABLE>
At December 31, 1996 and 1995, the Lessee owed the Company
approximately $5.5 million and $2.4 million, respectively, for such Percentage
Lease rent to be paid in March of the subsequent year.
The Percentage Lease revenue is based on a percentage of suite
revenues, food and beverage revenues, and food and beverage rents of the
Hotels. Both the base rent and the threshold suite revenue in each lease
computation are subject to adjustments for changes in the Consumer Price Index
("CPI"). The adjustment is calculated at the beginning of each calendar year,
for the hotels acquired prior to July of the previous year. The adjustment in
any lease year may not exceed 7%. The CPI adjustments made in January 1997 and
1996 are 1.42% and 0.73% respectively.
Under the Percentage Leases, the Partnership is obligated to pay the
costs of real estate and personal property taxes, property insurance,
maintenance of underground utilities and structural elements of the Hotels, and
to set aside 4% of suite revenues per month, on a cumulative basis, to fund
therefrom (or from other sources) capital expenditures for the periodic
replacement or refurbishment of furniture, fixtures and equipment required for
the retention of the franchise licenses with respect to the Hotels. In
addition, the Company will incur certain additional capital expenditures in
connection with the conversion and upgrade of acquired hotels, which may be
funded from cash on hand or borrowings under its line of credit.
At December 31, 1996 the Company is committed to fund capital
improvements to certain of its hotels of approximately $22 million pursuant to
product improvements plans as required by the franchisors. These capital
improvements are expected to be funded in 1997.
The Company has entered into employment contracts with Messrs. Feldman
and Corcoran, that will continue in effect until December 31, 1999 and, unless
terminated, will be automatically renewed for successive one year terms.
Pursuant to such agreements, Messrs. Feldman and Corcoran each received $5,000
per month during 1994, $10,000 per month during 1995 and $10,270 per month in
1996. Effective January 1, 1997, Mr. Feldman is entitled to receive $12,500
per month and Mr. Corcoran is entitled to receive $16,667 per month. In
addition, the Company is required to maintain a comprehensive medical plan for
such persons.
The Company shares the executive offices and certain employees with
FelCor, Inc. and the Lessee, and each company bears its share of the costs
thereof, including an allocated portion of the rent, compensation of certain
personnel (other than Messrs. Feldman and Corcoran, whose compensation is borne
solely by the Company), office supplies, telephones and depreciation of office
furniture, fixtures and equipment. Any such allocation of shared
F-15
<PAGE> 66
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
expenses to the Company must be approved by a majority of the independent
directors. During 1996 and 1995, the Company paid approximately $807,000
(approximately 38%) and $316,000 (approximately 31%), respectively, of the
allocable expenses under this agreement.
10. SUPPLEMENTAL CASH FLOW DISCLOSURE
The Company purchased certain assets and assumed certain liabilities
in connection with the acquisition of hotels. These purchases were recorded
under the purchase method of accounting. The fair values of the acquired
assets and liabilities recorded at the date of acquisition are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . $494,354 $221,213 $25,750
Prepayments assumed . . . . . . . . . . . . . . . . . . . . . . . . 13,616
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . (108,744) (910) (2,200)
Capital land lease assumed . . . . . . . . . . . . . . . . . . . . (10,045)
Capital equipment leases assumed . . . . . . . . . . . . . . . . . (2,823) (1,211)
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . (6,000) (3,499)
Partnership units issued . . . . . . . . . . . . . . . . . . . . . (10,880)
-------- -------- -------
Net cash paid . . . . . . . . . . . . . . . . . . . . . . $365,907 $219,164 $23,550
======== ======== =======
</TABLE>
The Company purchased interests in unconsolidated partnerships during
1996 and 1995. These unconsolidated partnerships separately own five hotels
located in Chicago-Lombard, Illinois; Marin County, California; Parsippany, New
Jersey; Charlotte, North Carolina; and Indianapolis, Indiana, a parcel of
undeveloped land in Myrtle Beach, South Carolina and a condominium management
company in Myrtle Beach, South Carolina. These purchases were recorded under
the equity method of accounting. The value of the assets recorded at the date
of acquisition is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Acquisition of interests in unconsolidated partnerships $45,992 $13,166
Partnership units issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,568)
------- -------
Net cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,424 $13,166
======= =======
</TABLE>
In 1994, limited partnership Units in the Partnership with a net book
value of $25,237 were issued in exchange for the Initial Hotels. In exchange
for the limited partnership Units, the Partnership acquired hotels for
approximately $79,439 (recorded on an historical cost basis) and assumed debt
of approximately $75,992 resulting in a net surplus of approximately $3,447.
Approximately $16,090, $3,813 and $1,804 of aggregate preferred stock
dividends and common stock distributions had been declared as of December 31,
1996, 1995 and 1994, respectively. These amounts were paid in January
following each such year.
11. STOCK BASED COMPENSATION PLANS
The Company sponsors the FelCor Suite Hotels, Inc. 1994 Restricted
Stock and Stock Option Plan ("1994 Plan"), and the FelCor Suite Hotels, Inc.
1995 Restricted Stock and Stock Option Plan (the "1995 Plan" and collectively,
the "Plan"), which are stock based incentive compensation plans as described
below. The Company applies APB Opinion 25 and related interpretations in
accounting for the Plan. In 1995, the Financial Accounting Standards Board
("FASB") issued FASB Statement No. 123 Accounting for Stock-Based Compensation
("SFAS 123") which, if fully
F-16
<PAGE> 67
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plan. Adoption of the cost recognition provisions
of SFAS 123 is optional and the Company has decided not to adopt these
provisions of SFAS 123. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 in 1995 are required by
SFAS 123 and are presented below.
Stock Options
The Company is authorized to issue 450,000 shares of common stock
under the 1994 Plan and 1,200,000 shares of common stock under the 1995 Plan
pursuant to awards granted in the form of incentive stock options qualified
under Section 422 of the Internal Revenue Code of 1986, as amended,
non-qualified stock options and restricted stock. All options have 10 year
contractual terms and vest over five years, (20% per year), beginning in the
year following the date of grant. Awards may be made to key executives and
other key employees of the Company, including officers of the Company and its
subsidiaries.
A total of 50,000 shares of stock may be issued as restricted stock
under the 1994 Plan and a total of 133,333 shares of stock may be issued as
restricted stock under the 1995 Plan.
Under the Plan, the Company granted a total of 345,000 nonqualified
stock options in 1995 and 327,500 nonqualified stock options in 1996.
A summary of the status of the Company's nonqualified stock options as
of December 31, 1996 and the changes during the year ended on that date is
presented below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
Weighted Weighted
# Shares of Average # Shares of Average
Underlying Exercise Underlying Exercise
Options Prices Options Prices
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year . . . 515,000 $24.72 170,000 $20.81
Granted . . . . . . . . . . . . . . . . . . 327,500 $30.08 345,000 $26.64
Exercised . . . . . . . . . . . . . . . . . 0 n/a 0 n/a
Forfeited . . . . . . . . . . . . . . . . . 5,000 $30.00 0 n/a
Expired . . . . . . . . . . . . . . . . . . 0 n/a 0 n/a
Outstanding at end of year . . . . . . . . 837,500 $26.78 515,000 $24.72
Exercisable at end of year . . . . . . . . 155,000 $23.17 38,000 $20.59
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Wgtd. Avg. Number
Range of Outstanding Remaining Wgtd Avg. Exercisable Wgtd. Avg.
Exercise Prices at 12/31/96 Contr. Life Exercise Price at 12/31/96 Exercise Price
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$18.75 to $22.00 170,000 6.76 $20.81 86,000 $20.38
$22.00 to $31.37 667,500 9.12 $28.30 69,000 $26.64
- ---------------- ------- ---- ------ ------ ------
$18.75 to $31.37 837,500 8.64 $26.78 155,000 $23.17
</TABLE>
The fair value of each stock option granted is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: dividend yield of 8.00%; risk free interest rates
are different for each grant and range from 5.57% to 6.47%; the expected lives
of options are 6 years; and volatility of 24.42% for all grants. The weighted
average fair value of options granted during 1996 was $3.76 per share and the
weighted average fair value of options granted during 1995 was $3.13 per share.
F-17
<PAGE> 68
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
Restricted Stock
The Company may grant restricted (i.e., nonvested) shares of common
stock under the 1994 Plan and 1995 Plan. Under the 1994 Plan, the Company may
grant to employees (including officers and directors who also are employees and
independent directors), as restricted common stock all or a portion of the
50,000 shares of common stock reserved under the 1994 Plan. Under the 1995
Plan, the Company may grant to employees (including officers and directors who
also are employees and independent directors), as restricted common stock all
or a portion of the 133,333 shares of common stock reserved under the 1995
Plan.
In 1995, the Company issued 46,500 shares of restricted common stock
under the Plan. A total of 42,500 shares vest over a five year period (20% per
year, beginning in the year following the date of grant), and the remaining
4,000 shares, granted to independent directors in lieu of cash compensation,
vested immediately on the date of grant.
In 1996, the Company issued 33,000 shares of restricted common stock
under the Plan. A total of 26,500 of the shares vest over a five year period
(20% per year, beginning in the year following the first anniversary date of
the grant), 4,000 shares granted to independent directors in lieu of cash
compensation, vested immediately on the date of grant, and the remaining 2,500
shares vest 100% on January 1, 1997.
In accordance with APB 25, upon the issuance of restricted shares of
common stock under the Plan, the Company recognized a compensation cost for the
restricted common stock in the amount of $1.5 million for 1996 and $631,000 for
1995. This cost is charged to shareholders' equity and recognized as
amortization expense ratably over the applicable vesting period, in the amount
of $507,000 for 1996 and $158,000 for 1995. The weighted average share price
at the date of grant for 33,000 restricted shares of common stock issued in
1996 is $29.99. The weighted average share price at the date of grant for
46,500 restricted shares of common stock issued in 1995 is $24.09.
A summary of the status of the Company's restricted stock grants as of
December 31, 1996 and the changes during the year ended on that date is
presented below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
Weighted Weighted
Average Average
Fair Market Fair Market
# Shares Value at Grant # Shares Value at Grant
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year . . . . . . . . 46,500 $24.09 0 n/a
Granted:
With 5 year graded vesting . . . . . . . . . . . . 26,500 $29.94 42,500 $24.32
Vest 100% at grant date . . . . . . . . . . . . . 4,000 $30.00 4,000 $21.63
Vest 100% within 12 months of grant . . . . . . . 2,500 $30.50 0 n/a
Total granted . . . . . . . . . . . . . . . . . . . . 33,000 $29.99 46,500 $24.09
Outstanding at end of year . . . . . . . . . . . . . 79,500 $26.54 46,500 $24.09
Vested at end of year . . . . . . . . . . . . . . . . 16,500 $25.05 4,000 $21.63
</TABLE>
F-18
<PAGE> 69
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
Pro Forma Net Income and Net Income Per Common Share
Had the compensation cost for the Company's stock based compensation
plans been determined in accordance with SFAS 123, the Company's net income and
net income per common share for 1996 and 1995 would approximate the pro forma
amounts below (in thousands, except per share data):
<TABLE>
<CAPTION>
As Reported Pro Forma As Reported Pro Forma
12/31/96 12/31/96 12/31/95 12/31/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SFAS 123 charge . . . . . . . . . . . . . . . . . . $ 882 $ 176
APB 25 charge . . . . . . . . . . . . . . . . . . . $ 507 $ 158
Net income . . . . . . . . . . . . . . . . . . . . $33,203 $32,828 $12,191 $12,173
Net income per common share . . . . . . . . . . . . $ 1.44 $ 1.42 $1.70 $1.70
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its stock based
compensation plans.
12. LESSEE
All of the Company's percentage lease revenues is derived from the
Percentage Leases with the Lessee. Certain information related to the Lessee's
financial statements is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1996 1995
---------- ----------
<S> <C> <C>
Balance Sheet Information:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 5,208 $5,345
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 18,471 $9,599
Due to FelCor Suite Hotels, Inc. . . . . . . . . . . . . $ 5,526 $2,396
Shareholders' deficit . . . . . . . . . . . . . . . . . $ (6,403) $ (773)
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31
----------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Statement of Operations Information:
Suite revenue . . . . . . . . . . . . . . . . . . . . . $234,451 $65,649 $16,094
Percentage lease expenses . . . . . . . . . . . . . . . $107,935 $26,945 $ 6,043
Net income (loss) . . . . . . . . . . . . . . . . . . . $ (5,430) $ (240) $ 109
</TABLE>
13. PREDECESSOR COMPANY
The Initial Hotels have been determined to be the Predecessor of the
Company and represent the hotels acquired upon the completion of the initial
public offering of Common Stock. Certain information related to the Initial
Hotels financial statements for the period from January 1, 1994 through July
27, 1994 (before the Company's initial public offering) is as follows (in
thousands):
<TABLE>
<S> <C>
Suite revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,884
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,562
Cash flows provided by operating activities . . . . . . . . . . . . $ 3,995
Cash flows used in investing activities . . . . . . . . . . . . . . $(1,327)
Cash flows used in financing activities . . . . . . . . . . . . . . $(1,640)
</TABLE>
F-19
<PAGE> 70
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") 107 requires all
entities to disclose the fair value of certain financial instruments in their
financial statements. Accordingly, the Company reports the carrying amount of
cash and cash equivalents, amounts due from the Lessee, accounts payable and
accrued expenses at cost which approximates fair value due to the short
maturity of these instruments. The carrying amount of the Company's borrowings
approximates fair value due to the Company's ability to obtain such borrowings
at comparable interest rates.
15. PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the acquisition of hotels in 1996 and 1995, the
historical results of operations may not be indicative of future results of
operations and net income per common share.
The following unaudited Pro Forma Consolidated Statements of
Operations for the years ended December 31, 1996 and 1995 are presented as if
the acquisition of all 43 hotels owned at December 31, 1996, and the
consummation of the public offerings and the application of the net proceeds
therefrom had occurred by January 1, 1995, and all of the hotels had been
leased to the Lessee pursuant to the Percentage Leases.
The pro forma consolidated statements of operations do not purport to
present what actual results of operations would have been if the acquisition of
all 43 hotels owned at December 31, 1996 and the consummation of the public
offerings had occurred on such date or to project results for any future
period. For instance, in accordance with SEC regulations, the following
unaudited Pro Forma Consolidated Statements of Operations do not include pro
forma earnings associated with the Company's pro forma cash and short-term
investments.
<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues:
Percentage lease revenue . . . . . . . . . . . . . . . . . . . . . . . . $110,077 $102,878
Income from unconsolidated partnerships . . . . . . . . . . . . . . . . . 2,815 2,160
-------- --------
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,892 105,038
Expenses:
General and administrative . . . . . . . . . . . . . . . . . . . . . . . 1,895 1,783
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,103 26,617
Taxes, insurance and other . . . . . . . . . . . . . . . . . . . . . . . 15,189 13,617
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,903 15,004
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,173 5,090
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,629 42,927
Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,798 11,798
-------- --------
Net income applicable to common shareholders . . . . . . . . . . . . . . . $ 31,831 $ 31,129
======== =========
Net income per common share . . . . . . . . . . . . . . . . . . . . . . . . $ 1.36 $ 1.33
======== ========
Weighted average number of common shares outstanding . . . . . . . . . . . 23,482 23,443
======== ========
</TABLE>
16. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
SFAS No. 128, "Earnings Per Share" ("EPS"), was issued in October 1996.
This statement specifies the computation, presentation, and disclosure
requirements for EPS and is effective for financial statements issued for
periods ending after December 15, 1997. The statement requires restatement of
all prior period EPS data presented, including interim financial statement,
summaries of earnings, and selected financial data, after the effective date.
The Company has determined the effect of adoption will have an immaterial
impact on previously reported EPS numbers.
F-20
<PAGE> 71
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS
On February 3, 1997 the Company announced the closing of a common
stock offering pursuant to the Company's $500 million Shelf Registration,
covering a variety of debt and equity securities. The offering was for 3
million shares of common stock to the public at $35.50 per share, providing the
Company with net proceeds of approximately $100.7 million.
The Company used the majority of the proceeds of this common stock
offering to purchase 50% joint venture interests in eight existing Embassy
Suite hotels and to acquire full ownership of two additional hotels. Promus
continues to own the remaining 50% interest in the eight joint venture hotels,
which will continue to operate as Embassy Suites under management by Promus.
The two wholly-owned hotels will be converted to Doubletree Guest Suites hotels
by the end of the second quarter of 1997 and are being managed by a subsidiary
of Doubletree Hotels Corporation. The aggregate purchase price for the
Company's interest in these 10 hotels was approximately $139 million, including
the Company's pro rata share of approximately $86 million in non-recourse debt
held by the joint ventures.
On February 18, 1997 the Company purchased the 215-suite Embassy
Suites Los Angeles Airport (LAX) North hotel for approximately $22 million
cash. Promus will continue to manage the hotel as an Embassy Suites hotel.
On February 20, 1997 the Company purchased a 198-suite hotel in Dana
Point, CA for approximately $17.2 million cash. The Dana Point hotel will be
converted to a Doubletree Guest Suites hotel and will be managed by a
subsidiary of Doubletree Hotels Corporation.
18. QUARTERLY OPERATING RESULTS (UNAUDITED)
The Company's unaudited consolidated quarterly operating data for the
years ended December 31, 1996 and 1995 follows (in thousands, except per share
data). In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of quarterly results have
been reflected in the data. It is also management's opinion, however, that
quarterly operating data for hotel enterprises are not indicative of results to
be achieved in succeeding quarters or years. In order to obtain a more
accurate indication of performance, there should be a review of operating
results, changes in shareholders' equity and cash flows for a period of several
years. The data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere herein.
F-21
<PAGE> 72
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY OPERATING RESULTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Percentage lease revenue . . . . . . . . . . . . . . . . . . $23,976 $23,409 $25,263 $25,302
Income from unconsolidated partnerships . . . . . . . . . . 320 165 927 598
Other income . . . . . . . . . . . . . . . . . . . . . . . . 146 628 163 47
-------- --------- -------- --------
Total revenues . . . . . . . . . . . . . . 24,442 24,202 26,353 25,947
-------- --------- -------- --------
Expenses:
General and administrative . . . . . . . . . . . . . . . . . 382 466 458 513
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 4,516 5,788 7,529 8,711
Taxes, insurance and other . . . . . . . . . . . . . . . . . 3,529 3,070 3,260 4,038
Interest expense . . . . . . . . . . . . . . . . . . . . . . 2,424 2,089 1,760 3,530
Minority interest . . . . . . . . . . . . . . . . . . . . . 1,620 1,523 1,477 970
-------- --------- -------- --------
Total expenses . . . . . . . . . . . . . . 12,471 12,936 14,484 17,762
-------- --------- -------- --------
Income before extraordinary charge . . . . . . . . . . . . . . . . . 11,971 11,266 11,869 8,185
Extraordinary charge from write off of deferred financing fees . . . 2,354
-------- --------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,971 11,266 9,515 8,185
Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . 1,835 2,949 2,950
-------- --------- -------- --------
Net income applicable to common shareholders . . . . . . . . . . . . $11,971 $ 9,431 $ 6,566 $ 5,235
======= ========= ======== ========
Per common share information:
Net income applicable to common shareholders
before extraordinary charge . . . . . . . . . . . . . . . $ 0.53 $ 0.41 $ 0.38 $ 0.22
Extraordinary charge . . . . . . . . . . . . . . . . . . . . (0.10)
-------- --------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.53 $ 0.41 $ 0.28 $ 0.22
======= ======= ======= =======
Weighted average number of common shares outstanding . . . . 22,614 22,905 23,276 23,502
======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Percentage lease revenue . . . . . . . . . . . . . . . . . . $ 5,372 $ 5,977 $ 6,138 $ 6,300
Income from unconsolidated partnerships . . . . . . . . . . 290 223
Other income . . . . . . . . . . . . . . . . . . . . . . . . 8 209 215 1,259
-------- --------- -------- --------
Total revenues . . . . . . . . . . . . . . 5,380 6,186 6,643 7,782
------- ------- ------- -------
Expenses:
General and administrative . . . . . . . . . . . . . . . . . 184 240 215 231
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 1,058 1,178 1,455 1,541
Taxes, insurance and other . . . . . . . . . . . . . . . . . 559 580 616 808
Interest expense . . . . . . . . . . . . . . . . . . . . . . 353 566 143 942
Minority interest . . . . . . . . . . . . . . . . . . . . . 854 814 724 739
-------- --------- -------- --------
Total expenses . . . . . . . . . . . . . . 3,008 3,378 3,153 4,261
-------- --------- -------- --------
Net income applicable to common shareholders . . . . . . . . . . . . $ 2,372 $ 2,808 $ 3,490 $ 3,521
======== ========= ========= ========
Per common share information:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.50 $ 0.48 $ 0.43 $ 0.36
======= ======= ======= =======
Weighted average number of common shares outstanding . . . . 4,707 5,850 8,170 9,867
======= ======= ======= =======
</TABLE>
F-22
<PAGE> 73
FELCOR SUITE HOTELS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO ACQUISITION
----------------- ------------------
BUILDINGS FURNITURE BUILDINGS FURNITURE
AND AND AND AND
DESCRIPTION OF PROPERTY LAND IMPROVEMENTS FIXTURES LAND IMPROVEMENTS FIXTURES
- ----------------------- ---- ------------ -------- ---- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
DALLAS (PARK CENTRAL), TX $ 1,497 $ 12,722 $ 647 $ 28 1,091
NASHVILLE, TN 1,118 9,506 961 28 1,093
JACKSONVILLE, FL 1,130 9,608 456 28 627
ORLANDO (NORTH), FL 1,673 14,218 684 28 664
ORLANDO (SOUTH), FL 1,632 13,870 799 28 967
TULSA, OK 525 7,344 3,117 139 1,523
NEW ORLEANS, LA 2,570 22,300 895 523 890
FLAGSTAFF, AZ 900 6,825 268 1,523 993
DALLAS (LOVE FIELD), TX 1,934 16,674 757 167 899
BOSTON - MARLBOROUGH, MA 948 8,143 325 $761 721
BRUNSWICK, GA 705 6,067 247 431
CORPUS CHRISTI, TX 1,113 9,618 390 51 1,268
BURLINGAME (SF AIRPORT SO.), CA 39,929 818 55 2,041
MINNEAPOLIS (AIRPORT), MN 5,417 36,508 602 62 2,052
BOCA RATON (DOUBLETREE), FL 5,427 3,066 304 29 503
MINNEAPOLIS (DOWNTOWN), MN 818 16,820 505 56 2,462
ST. PAUL, MN 1,156 17,315 849 27 2,210
TAMPA (BUSCH GARDENS), FL 672 12,387 226 5
CLEVELAND, OH 1,755 15,329 527 129 236
ANAHEIM, CA 2,548 14,832 607 491 2,517
BATON ROUGE, LA 2,350 19,092 525 497 2,140
BIRMINGHAM, AL 2,843 29,286 160 706 2,140
DEERFIELD BEACH, FL 4,523 29,443 917 849 2,088
FT. LAUDERDALE, FL 5,329 47,850 903 1,142 2,558
MIAMI (AIRPORT), FL 4,135 24,950 1,171 684 2,658
MILPITAS, CA 4,021 23,677 562 912 2,920
PHOENIX (CAMELBACK), AZ 39,003 612 810 2,604
SO. SAN FRANCISCO (AIRPORT N.), CA 3,418 31,737 527 769 3,378
LEXINGTON, KY 1,955 13,604 587 79
PISCATAWAY, NJ 1,755 17,563 527 12 168
AVON (BEAVER CREEK RESORT), CO 1,134 9,864 340 162 568
BOCA RATON (EMBASSY), FL 1,868 16,253 560 1,604
EL SEGUNDO (LAX SOUTH), CA 2,660 17,997 798 179 2,595
OXNARD (MANDALAY BEACH), CA 2,930 22,125 879 529 441
NAPA, CA 3,287 14,205 494 398 245
DEERFIELD, IL 2,305 20,054 692 2
ATLANTA (BUCKHEAD), GA 7,303 38,996 2,437
KINGSTON PLANTATION, SC 2,940 24,988 1,470
------- -------- ------- ---- ------- -------
TOTAL $88,294 $733,768 $28,145 $812 $10,990 $49,381
======= ======== ======= ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
GROSS AMOUNTS AT WHICH
CARRIED AT CLOSE OF PERIOD
---------------------------------
BUILDINGS FURNITURE
AND AND
DESCRIPTION OF PROPERTY LAND IMPROVEMENTS FIXTURES TOTAL
- ----------------------- ---- ------------ -------- -----
<S> <C> <C> <C> <C>
DALLAS (PARK CENTRAL), TX 1,497 $ 12,750 $ 1,738 $15,985
NASHVILLE, TN 1,118 9,534 2,054 12,706
JACKSONVILLE, FL 1,130 9,636 1,083 11,849
ORLANDO (NORTH), FL 1,673 14,246 1,348 17,267
ORLANDO (SOUTH), FL 1,632 13,898 1,766 17,296
TULSA, OK 525 7,483 4,640 12,648
NEW ORLEANS, LA 2,570 22,823 1,785 27,178
FLAGSTAFF, AZ 900 8,348 1,261 10,509
DALLAS (LOVE FIELD), TX 1,934 16,841 1,656 20,431
BOSTON - MARLBOROUGH, MA 1,709 8,143 1,046 10,898
BRUNSWICK, GA 705 6,067 678 7,450
CORPUS CHRISTI, TX 1,164 9,618 1,658 12,440
BURLINGAME (SF AIRPORT SO.), CA 39,984 2,859 42,843
MINNEAPOLIS (AIRPORT), MN 5,417 36,570 2,654 44,641
BOCA RATON (DOUBLETREE), FL 5,427 3,095 807 9,329
MINNEAPOLIS (DOWNTOWN), MN 818 16,876 2,967 20,661
ST. PAUL, MN 1,156 17,342 3,059 21,557
TAMPA (BUSCH GARDENS), FL 672 12,387 231 13,290
CLEVELAND, OH 1,755 15,458 763 17,976
ANAHEIM, CA 2,548 15,323 3,124 20,995
BATON ROUGE, LA 2,350 19,589 2,665 24,604
BIRMINGHAM, AL 2,843 29,992 2,300 35,135
DEERFIELD BEACH, FL 4,523 30,292 3,005 37,820
FT. LAUDERDALE, FL 5,329 48,992 3,461 57,782
MIAMI (AIRPORT), FL 4,135 25,634 3,829 33,598
MILPITAS, CA 4,021 24,589 3,482 32,092
PHOENIX (CAMELBACK), AZ 39,813 3,216 43,029
SO. SAN FRANCISCO (AIRPORT N.), CA 3,418 32,506 3,905 39,829
LEXINGTON, KY 1,955 13,604 666 16,225
PISCATAWAY, NJ 1,755 17,575 695 20,025
AVON (BEAVER CREEK RESORT), CO 1,134 10,026 908 12,068
BOCA RATON (EMBASSY), FL 1,868 16,253 2,164 20,285
EL SEGUNDO (LAX SOUTH), CA 2,660 18,176 3,393 24,229
OXNARD (MANDALAY BEACH), CA 2,930 22,654 1,320 26,904
NAPA, CA 3,287 14,603 739 18,629
DEERFIELD, IL 2,305 20,054 694 23,053
ATLANTA (BUCKHEAD), GA 7,303 38,996 2,437 48,736
KINGSTON PLANTATION, SC 2,940 24,988 1,470 29,398
------- -------- ------- --------
TOTAL $89,106 $744,758 $77,526 $911,390
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
DEPRECIATION VALUE LIFE UPON
BUILDINGS AND BUILDINGS AND WHICH
IMPROVEMENTS; IMPROVEMENTS; DEPRECIATION
FURNITURE & FURNITURE & DATE OF IN STATEMENT
DESCRIPTION OF PROPERTY FIXTURES FIXTURES CONSTRUCTION IS COMPUTED
- ----------------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
DALLAS (PARK CENTRAL), TX $1,840 $14,145 1985 5 - 40 YRS
NASHVILLE, TN 2,230 10,476 1986 5 - 40 YRS
JACKSONVILLE, FL 1,171 10,678 1985 5 - 40 YRS
ORLANDO (NORTH), FL 1,916 15,351 1985 5 - 40 YRS
ORLANDO (SOUTH), FL 1,823 15,473 1985 5 - 40 YRS
TULSA, OK 3,485 9,163 1985 5 - 40 YRS
NEW ORLEANS, LA 1,699 25,479 1984 5 - 40 YRS
FLAGSTAFF, AZ 687 9,822 1988 5 - 40 YRS
DALLAS (LOVE FIELD), TX 1,118 19,313 1986 5 - 40 YRS
BOSTON - MARLBOROUGH, MA 495 10,403 1988 5 - 40 YRS
BRUNSWICK, GA 317 7,133 1988 5 - 40 YRS
CORPUS CHRISTI, TX 628 11,812 1984 5 - 40 YRS
BURLINGAME (SF AIRPORT SO.), CA 1,514 41,329 1986 5 - 40 YRS
MINNEAPOLIS (AIRPORT), MN 1,378 43,263 1986 5 - 40 YRS
BOCA RATON (DOUBLETREE), FL 234 9,095 1989 5 - 40 YRS
MINNEAPOLIS (DOWNTOWN), MN 845 19,816 1984 5 - 40 YRS
ST. PAUL, MN 895 20,662 1983 5 - 40 YRS
TAMPA (BUSCH GARDENS), FL 383 12,907 1985 5 - 40 YRS
CLEVELAND, OH 511 17,465 1990 5 - 40 YRS
ANAHEIM, CA 813 20,182 1987 5 - 40 YRS
BATON ROUGE, LA 681 23,923 1985 5 - 40 YRS
BIRMINGHAM, AL 804 34,331 1987 5 - 40 YRS
DEERFIELD BEACH, FL 981 36,839 1987 5 - 40 YRS
FT. LAUDERDALE, FL 1,629 56,153 1986 5 - 40 YRS
MIAMI (AIRPORT), FL 1,031 32,567 1987 5 - 40 YRS
MILPITAS, CA 991 31,101 1987 5 - 40 YRS
PHOENIX (CAMELBACK), AZ 1,208 41,821 1985 5 - 40 YRS
SO. SAN FRANCISCO (AIRPORT N.), CA 1,085 38,744 1988 5 - 40 YRS
LEXINGTON, KY 403 15,822 1987 5 - 40 YRS
PISCATAWAY, NJ 484 19,541 1988 5 - 40 YRS
AVON (BEAVER CREEK RESORT), CO 291 11,777 1990 5 - 40 YRS
BOCA RATON (EMBASSY), FL 481 19,804 1989 5 - 40 YRS
EL SEGUNDO (LAX SOUTH), CA 1,394 22,835 1985 5 - 40 YRS
OXNARD (MANDALAY BEACH), CA 512 26,392 1986 5 - 40 YRS
NAPA, CA 318 18,311 1985 5 - 40 YRS
DEERFIELD, IL 321 22,732 1987 5 - 40 YRS
ATLANTA (BUCKHEAD), GA 122 48,614 1988 5 - 40 YRS
KINGSTON PLANTATION, SC 29,398 1987 5 - 40 YRS
------- --------
TOTAL $36,718 $874,672
======= ========
</TABLE>
<TABLE>
<CAPTION>
(A) RECONCILIATION OF REAL ESTATE: (B) RECONCILIATION OF ACCUMULATED DEPRECIATION:
<S> <C> <C> <C>
BALANCE AT JULY 28, 1994 $ 82,979 BALANCE AT JULY 28, 1994
ADDITIONS DURING THE PERIOD 26,847 ACCUMULATED DEPRECIATION ASSUMED WITH
--------- PREDECESSOR HISTORICAL COST BASIS $ 3,540
BALANCE AT DECEMBER 31, 1994 109,826 DEPRECIATION EXPENSE DURING THE PERIOD 1,486
ADDITIONS DURING THE PERIOD 233,572 -------
---------- BALANCE AT DECEMBER 31, 1994 5,026
BALANCE AT DECEMBER 31, 1995 343,398 DEPRECIATION EXPENSE DURING THE PERIOD 5,371
ADDITIONS DURING THE PERIOD 568,073 -------
DISPOSITIONS DURING THE PERIOD (81) BALANCE AT DECEMBER 31, 1995 10,397
-------- DEPRECIATION EXPENSE DURING THE PERIOD 26,321
BALANCE AT DECEMBER 31, 1996 $911,390 BALANCE AT DECEMBER 31, 1996 $36,718
======== =======
</TABLE>
F-23
<PAGE> 74
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
FelCor Suite Hotels, Inc.
We have audited the accompanying balance sheets of DJONT Operations,
L.L.C. as of December 31, 1996 and 1995 and the related statements of
operations, shareholders' equity, and cash flows for the years ended December
31, 1996 and 1995 and the period from July 28, 1994 (inception of operations)
through December 31, 1994. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of DJONT Operations,
L.L.C. as of December 31, 1996 and 1995 and the results of its operations and
its cash flows for the years ended December 31, 1996 and 1995 and the period
from July 28, 1994 (inception of operations) through December 31, 1994 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
January 22, 1997
except as to the information
presented in Note 7 for which
the date is February 21, 1997
F-24
<PAGE> 75
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,208 $ 5,345
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,700 3,129
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,105 532
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 288
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,203 305
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,471 $ 9,599
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable, trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,273 $ 1,393
Accounts payable, other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,398 605
Due to FelCor Suite Hotels, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,526 2,396
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . 15,677 5,978
------- -------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,874 10,372
------- -------
Commitments and contingencies (Note 4)
Shareholders' deficit:
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Distributions in excess of earnings . . . . . . . . . . . . . . . . . . . . . . . . . (6,404) (774)
------- -------
Total shareholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . (6,403) (773)
------- -------
Total liabilities and shareholders' deficit . . . . . . . . . . . . . . . . $18,471 $ 9,599
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 76
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Suite revenue . . . . . . . . . . . . . . . . . . . . . . $234,451 $65,649 $16,094
Food and beverage revenue . . . . . . . . . . . . . . . . 15,119 2,462 1,112
Food and beverage rent . . . . . . . . . . . . . . . . . 2,334 534 61
Other revenue . . . . . . . . . . . . . . . . . . . . . . 17,340 3,924 1,020
-------- -------- -------
Total revenues . . . . . . . . . . . . . . . . . 269,244 72,569 18,287
--------- ------- --------
Expenses:
Property operating costs and expenses . . . . . . . . . . 66,236 18,455 4,699
General and administrative . . . . . . . . . . . . . . . 20,123 5,547 1,506
Advertising and promotion . . . . . . . . . . . . . . . . 18,520 5,410 1,572
Repair and maintenance . . . . . . . . . . . . . . . . . 14,453 4,010 994
Utilities . . . . . . . . . . . . . . . . . . . . . . . . 12,248 3,384 866
Management fee . . . . . . . . . . . . . . . . . . . . . 6,077 1,561 333
Franchise fee . . . . . . . . . . . . . . . . . . . . . . 5,693 2,473 642
Food and beverage expenses . . . . . . . . . . . . . . . 15,701 2,723 1,143
Percentage lease payments . . . . . . . . . . . . . . . . 107,935 26,945 6,043
Lessee overhead expenses . . . . . . . . . . . . . . . . 1,776 834 106
Liability insurance . . . . . . . . . . . . . . . . . . . 1,818 468 106
Conversion cost . . . . . . . . . . . . . . . . . . . . . 2,165 297
Other expenses . . . . . . . . . . . . . . . . . . . . . 1,929 702 168
-------- ----- ------
Total Expenses . . . . . . . . . . . . . . . . . 274,674 72,809 18,178
--------- -------- -------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (5,430) $ (240) $ 109
========= ========= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 77
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Capital contributions . . . . . . . . . . . . . . . . . . . $ 1
Distributions declared . . . . . . . . . . . . . . . . . . (443)
Net income . . . . . . . . . . . . . . . . . . . . . . . . 109
-----
Balance at December 31, 1994 . . . . . . . . . . . . . . . (333)
Distributions declared . . . . . . . . . . . . . . . . . . (200)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . (240)
------
Balance at December 31, 1995 . . . . . . . . . . . . . . . (773)
Distributions declared . . . . . . . . . . . . . . . . . . (200)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . (5,430)
--------
Balance at December 31, 1996 . . . . . . . . . . . . . . . $(6,403)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 78
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,430) $ (240) $ 109
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . (5,571) (2,003) (1,126)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,573) (205) (327)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . 33 (262) (26)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (1,898) (141) (164)
Due to FelCor Suite Hotels, Inc. . . . . . . . . . . . . . . . . 3,130 1,137 1,259
Accounts payable, accrued expenses and other liabilities . . . . 11,372 4,000 3,976
-------- ------- --------
Net cash flow provided by operating activities . . . . . . . . . 63 2,286 3,701
-------- ------- --------
Cash flows from financing activities:
Capital contributions . . . . . . . . . . . . . . . . . . . . . . . 1
Distributions paid . . . . . . . . . . . . . . . . . . . . . . . . (200) (200) (443)
-------- ------- --------
Net cash flow used in financing activities . . . . . . . . . . . (200) (200) (442)
-------- ------- --------
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . (137) 2,086 3,259
Cash and cash equivalents at beginning of periods . . . . . . . . . . . . . 5,345 3,259
-------- ------- --------
Cash and cash equivalents at end of years . . . . . . . . . . . . . . . . . $ 5,208 $5,345 $ 3,259
======== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 79
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 consolidated subsidiaries, the "Lessee") which was formed on
June 29, 1994 and began operations on July 28, 1994. All of the voting Class A
membership interest in the 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
the Lessee (representing the remaining 50% equity interest) is owned by RGC
Leasing, Inc., a Nevada corporation owned by the children of Mr. Charles N.
Mathewson, a director of the Company. The Lessee leases each of the 43 hotels
(the "Hotels") in which FelCor Suites Limited Partnership (the "Partnership")
had an ownership interest at December 31, 1996, 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 of the Company 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 of the Company or Partnership units
upon similar terms, at its option. The independent directors of the Company
may suspend or terminate such agreement at any time.
At December 31, 1996, 39 of the Hotels are operated as Embassy Suites(R)
hotels, two as Doubletree Guest Suites(R) hotels, one as a Hilton Suites(R)
hotel and one hotel is in the process of being converted to an Embassy Suites
hotel. The Lessee has entered into management agreements pursuant to which 38
of the Hotels are managed by Promus Hotels, Inc. ("Promus"), two of the Hotels
are managed by a subsidiary of Doubletree Hotel Corporation ("Doubletree"), two
of the Hotels are managed by American General Hospitality, Inc. ("AGHI") and
one is managed by Coastal Hotel Group, Inc. ("Coastal").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents -- All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Inventories -- Inventories are stated at the lower of cost or market.
Revenue Recognition -- Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible. Such losses have been within management's expectations.
Franchise Costs -- The cost of obtaining the franchise licenses is paid
by the Partnership and the ongoing franchise fees are paid by the Lessee.
These fees are generally computed as a percentage of suite revenue for each
hotel in accordance with franchise agreements.
Income Taxes -- The Lessee is a limited liability Company which is taxed
for federal income taxes purposes as a limited partnership and, accordingly,
all taxable income or loss flows through to the shareholders.
3. ACCUMULATED DEFICIT
During 1996, the Lessee incurred a net loss of approximately $5.4
million and a cumulative shareholder's deficit of approximately $6.4 million.
Management's analyses indicate that a significant portion of such loss is
attributable
F-29
<PAGE> 80
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCUMULATED DEFICIT -- (CONTINUED)
to the one-time costs of converting the Crown Sterling Suites(R) hotels to
Embassy Suites and Doubletree Guest Suites, and operations of hotels during
periods of substantial renovation. Such renovations are required under the
terms of the related franchise agreements. In accordance with the terms of the
Percentage Leases, although a portion of the suites are not available for
guests to rent, the Lessee is required to pay the full required lease payment.
In addition, during periods of renovation, management believes, and operating
data indicates, that overall the performances of the hotels is impacted as
evidenced by improved operating performances immediately following completion
of renovations. Management is exploring several options to anticipate negative
operating cash flow during renovations, including potential changes to the
terms of leases for future renovation hotels which might mitigate losses for
the Lessee during such renovation periods.
At December 31, 1996 the Lessee had paid all amounts then due the
Company under the Percentage Leases. It is anticipated that a substantial
portion of any future profits of the Lessee will be retained until a positive
shareholder's equity is restored. Although it is currently anticipated that
the lessee may sustain a smaller loss during 1997, it is anticipated that its
future earnings will be sufficient to enable it to continue to make necessary
payments when due. Accordingly, management deems the Lessee to be a viable
going concern and, as such, no adjustments are required to the accompanying
financial statements.
4. 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 (23 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>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,140
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,140
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,140
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,140
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,140
2002 and thereafter . . . . . . . . . . . . . . . . . . . . 285,928
--------
$646,628
========
</TABLE>
The Lessee recognized Percentage Lease rent expense of approximately
$107,935,000, $26,945,000 and $6,043,000 for the years ended December 31, 1996
and 1995 and for the period from July 28, 1994 (inception of operations)
through December 31, 1994 respectively. At December 31, 1996 and 1995, the
Lessee owed the Company $5,526,000 and $2,396,000 for such lease rent. In
accordance with the terms of the lease, the Lessee intends to pay such balances
by March of each subsequent year.
The Percentage Lease expense is based on a percentage of suite revenues,
food and beverage revenues and food and beverage rents of the Hotels. Both the
base rent and the threshold suite revenue in each lease computation is subject
to adjustments in the Consumer Price Index. The adjustment is calculated at
the beginning of each calendar year for the hotels acquired prior to July of
the previous year. The adjustment in any lease year may not exceed 7%. The
adjustments made in January 1997 and 1996 are 1.42% and 0.73% respectively.
Other than real estate and personal property taxes, casualty insurance,
capital improvements and maintenance of underground utilities and structural
elements, which are obligations of the Partnership, the Percentage Leases
require the Lessee to pay rent, liability insurance premiums, all costs,
expenses, utilities and other charges incurred in the operation of the leased
hotels.
F-30
<PAGE> 81
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Lessee is also obligated to indemnify and hold harmless the
Partnership from and against all liabilities, costs and expenses incurred by or
asserted against the Partnership in the normal course of operating the Hotels.
The Lessee is not permitted to sublet all or any substantial part of the
Hotels or assign its interest under any of the Percentage Leases without the
prior written consent of the Partnership.
The Lessee has agreed that during the term of the Percentage Leases it
will maintain a ratio of total debt to consolidated net worth (as defined in
the Percentage Leases) of less than or equal to 50%, exclusive of capital
leases. In addition, the Lessee has agreed that it will not pay fees to any
affiliate of the Lessee.
The Lessee typically pays a franchise fee ranging from 0% to 5% of suite
revenue, and marketing and reservation fees ranging from 1% to 3.5% of suite
revenue. In the cases where there is not a separate franchise agreement, the
right to use the brand name is included in the management agreement. Base
management fees typically range from 2% to 3% of total revenues. Incentive
management fees are based upon the hotel's net income before overhead and
typically range from 50% to 75% subject to a maximum annual payment of between
2% and 3% of total revenues. In many cases managers and franchisors have
agreed to subordinate all or a portion of their fees at a specific hotel either
for a set period of time, or until the hotel provides a predetermined return to
the Lessee, or both.
In the event the Company enters into an agreement to sell or otherwise
transfer a leased hotel, the Company has the right to terminate the Percentage
Lease with respect to such leased hotel upon 90 days' prior written notice upon
either (1) paying the Lessee the fair market value of the Lessee's leasehold
interest in the remaining term of the Percentage Lease to be terminated or (2)
offering to lease to the Lessee a substitute hotel on terms that would create a
leasehold interest in such hotel with a fair market value equal to or exceeding
the fair market value of the Lessee's remaining leasehold interest under the
Percentage Lease to be terminated. The Company also is obligated to pay or
reimburse the Lessee for any assignment fees, termination fees or other
liabilities arising under any franchise license agreement and restaurant
sublease agreements.
The Lessee and the Company share executive offices and the services of
certain employees. Each Company bears its share of the costs including an
allocated portion of the rent, salaries of personnel (other than Messrs.
Feldman and Corcoran), office supplies and telephones.
5. PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the additional hotels operated by the Lessee
pursuant to the Percentage Leases discussed in Note 1, historical results of
operations may not be indicative of future results of operations.
The following unaudited Pro Forma Statements of Operations for the years
ended December 31, 1996 and 1995 are presented as if the Lessee leased and
operated all Hotels owned by the Partnership at December 31, 1996, from January
1, 1995.
The Pro Forma Statement of Operations does not purport to present what
actual results of operations would have been if the 43 hotels were operated by
the Lessee pursuant to the Percentage Leases from the beginning of the periods
presented or to project results for any future period.
F-31
<PAGE> 82
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PRO FORMA INFORMATION (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Suite revenue . . . . . . . . . . . . . . . . . . . . . . $280,844 $266,834
Food and beverage rent . . . . . . . . . . . . . . . . . 2,742 2,967
Food and beverage revenue . . . . . . . . . . . . . . . . 23,313 26,160
Other revenue . . . . . . . . . . . . . . . . . . . . . . 20,142 19,463
-------- --------
Total revenues . . . . . . . . . . . . . . . . . 327,041 315,424
Property operating costs and expenses . . . . . . . . . . 78,653 74,894
Other operating costs . . . . . . . . . . . . . . . . . . 101,227 96,731
Management and franchise fees . . . . . . . . . . . . . . 17,261 16,225
Taxes, insurance and other . . . . . . . . . . . . . . . 5,050 6,830
Percentage lease expenses . . . . . . . . . . . . . . . . 128,183 119,566
Lessee overhead expenses . . . . . . . . . . . . . . . . 1,540 1,446
-------- --------
Net income (loss) . . . . . . . . . . . . . . . . $ (4,873) $ (268)
========== ========
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the Lessee reports the carrying amount of cash and
cash equivalents, accounts payable and accrued expenses at cost which
approximate fair value due to the short maturity of these instruments.
7. SUBSEQUENT EVENTS
On February 3, 1997, DJONT entered into 10-year operating leases with
partnerships owning eight hotel properties, of which the Partnership
concurrently acquired a 50% joint venture partnership interest. These
properties are located in Atlanta, Georgia (241 suites); Austin, Texas (261
suites); Covina, California (264 suites); Kansas City - Overland Park, Kansas
(199 suites); Kansas City - Plaza, Missouri (266 suites); Raleigh, North
Carolina (255 suites); San Antonio, Texas (217 suites); and Secaucus -
Meadowlands, New Jersey (261 suites). On February 3, 1997 the Lessee also
entered into 10-year operating leases with the Partnership with respect to
hotels located in Omaha, Nebraska and Bloomington, Minnesota. On February 19,
1997 the Lessee and the Partnership entered into a ten year operating lease on
the 215 suite Embassy Suite - Los Angeles Airport (LAX) North. On February 21,
1997 the Lessee and the Partnership entered into a ten year operating lease on
a 198 suite hotel in Dana Point, California. The leases are substantially
similar to the leases with the Partnership for the other hotels owned by the
Partnership, with a 10-year term and rental payments according to a formula
based on restaurant rents, food and beverage and suite revenues of the hotels.
F-32
<PAGE> 83
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
3.1 - Articles of Amendment and Restatement dated June 22, 1995, amending
and restating the Charter of Registrant, as amended or supplemented
by Articles of Merger dated June 23, 1995, Articles Supplementary
dated April 30, 1996 and Articles of Amendment dated August 8, 1996
(filed as Exhibit 3.1 to the Registrant's Form 10-Q for the quarter
ended June 30, 1996 (the "1996 Second Quarter 10-Q") and
incorporated herein by reference).
3.2 - Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-11 (File No. 33-98332)
(the "December 1995 Registration Statement") and incorporated
herein by reference).
4.1 - Form of Share Certificate for Common Stock (filed as Exhibit 4.1 to
the 1996 Second Quarter 10-Q and incorporated herein by reference).
4.2 - Indenture dated as of April 22, 1996 by and between the Registrant
and Sun trust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit
4.2 to the Registrant's Form 8-K dated May 1, 1996 (the "1996 Form
8-K") and incorporated herein by reference).
4.3 - Form of Share Certificate for $1.95 Series A Cumulative Convertible
Preferred Stock (filed as Exhibit 4.4 to the 1996 Form 8-K and
incorporated herein by reference).
10.1 - Amended and Restated Agreement of Limited Partnership of FelCor
Suites Limited Partnership (the "Partnership") (filed as Exhibit
10.1 to the Registrant'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).
10.1.1 - First Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of November 17, 1995 by and
among the Registrant, Promus Hotels, Inc. and all of the persons or
entities who are or shall in the future become of the limited
partners of the Partnership (filed as Exhibit 10.1.1 to the
Registrant'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)
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 1995 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 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 10-K and incorporated herein by
reference).
</TABLE>
1
<PAGE> 84
<TABLE>
<S> <C>
10.1.5 - Fifth Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of May 2, 1996, between the
Registrant and all of the persons or entities who are or shall in
the future become limited partners of the Partnership, 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 the 1996 Second Quarter 10-Q and incorporated
herein by reference).
10.1.6* - Sixth Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of September 16, 1996, by
and among the Registrant, John B. Urbahns, II and all of the persons
or entities who are or shall in the future become limited partners
of the Partnership.
10.2.1 - Form of Lease Agreement between the Partnership as Lessor and DJONT
Operations, L.L.C. ("DJONT") as Lessee (filed as Exhibit 10.2.1 to
the 1995 10-K 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 Registrant through March 30, 1996.
10.3 - Amended and Restated Loan Agreement dated as of September 26, 1996,
among the Registrant and the Partnership, as Borrowers, Boatmen's
National Bank of Oklahoma, as Agent and Lender, and First Tennessee
Bank National Association, Liberty Bank and Trust Company of Tulsa,
National Association, Bank One, Texas, N.A., First National Bank of
Commerce, and AmSouth Bank of Alabama, as Lenders (filed as Exhibit
10.3.4 to the Registrant's Form 10-Q for the quarter ended
September 30, 1996 (the "1996 Third Quarter 10-Q") and incorporated
herein by reference).
10.4 - Agreement to Assign Incentive Management Fee dated as of May 19,
1994 between the Registrant and Embassy Suites, Inc. (filed as
Exhibit 10.14 to the Registrant's Registration Statement on Form S-
11 (File No. 33-79214) (the "IPO Registration Statement") and
incorporated herein by reference).
10.5 - Employment Agreement dated as of July 28, 1994 between the
Registrant and Hervey A. Feldman (filed as Exhibit 10.7 to the 1994
10-K/A and incorporated herein by reference).
10.6 - Employment Agreement dated as of July 28, 1994 between the
Registrant and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to
the 1994 10-K/A and incorporated herein by reference).
10.7.1 - Restricted Stock and Stock Option Plan of the Registrant (filed as
Exhibit 10.9 to the 1994 10-K/A and incorporated herein by
reference).
10.7.2 - 1995 Restricted Stock and Stock Option Plan of the Registrant (filed
as Exhibit 10.9.2 to the 1995 10-K and incorporated herein by
reference).
10.8 - Savings and Investment Plan of the Registrant (filed as Exhibit
10.10 to the 1994 10-K/A and incorporated herein by reference).
10.9 - Registration Rights Agreement dated as of July 21, 1994 between the
Registrant and the parties named therein (filed as Exhibit 10.11 to
the 1994 10-K/A and incorporated herein by reference).
10.10 - Agreement dated as of April 15, 1995 among the Registrant, the
Partnership, FelCor, Inc., Thomas J. Corcoran, Jr. and Hervey A.
Feldman relating to purchase of securities (filed as Exhibit 10.15
to the Registration Statement on Form S-11 (File No. 33-91870) (the
"May 1995 Registration Statement") and incorporated herein by
reference).
</TABLE>
2
<PAGE> 85
<TABLE>
<S> <C>
10.11.1 - Subscription Agreement dated as of May 3, 1995 among the Registrant,
the Partnership and Embassy Suites, Inc. (filed as Exhibit 10.16 to
the May 1995 Registration Statement and incorporated hereby by
reference).
10.11.2 - Subscription Agreement dated as of October 17, 1995 among the
Registrant, the Partnership and Promus Hotels, Inc. (filed as
Exhibit 10.27.1 to the December 1995 Registration Statement and
incorporated herein by reference).
10.11.3 - First Amendment to Subscription Agreements dated as of November 16,
1995 among the Registrant, the Partnership and Promus Hotels, Inc.
(filed as Exhibit 10.27.2 to the December 1995 Registration
Statement and incorporated herein by reference).
10.11.4 - Second Amendment to Subscription Agreements dated as of December 12,
1995 among the Registrant, the Partnership and Promus Hotels, Inc.
(filed as Exhibit 10.27.3 to the December 1995 Registration
Statement and incorporated herein by reference).
10.12.1 - Master Agreement with respect to the purchase of the CSS Hotels
between Minnesota Hotel Company, Inc. ("MHCI") and FelCor/CSS
Holdings, L.P. ("Holdings") dated as of September 19, 1995 (filed as
Exhibit 10.20.1 to the Registrant's Form 10-Q for the quarter ended
September 30, 1995 (the "1995 Third Quarter 10-Q") and incorporated
herein by reference).
10.12.2 - Letter agreement with respect to amendments to Master Agreement
between MHCI and Holdings dated as of November 6, 1995 (filed as
Exhibit 10.20.2 to the 1995 Third Quarter 10-Q and incorporated
herein by reference).
10.12.3 - Letter agreement dated January 3, 1996, among MHCI, Crown Sterling
Management, Inc. ("CSM"), Crown Sterling Incorporated ("CSI"),
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).
10.12.4 - 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).
10.13 - Partnership Interests Purchase Agreement with respect to the LAX
Airport and Mandalay Beach hotels among MHCI, MBC, Robert E. Woolley
and Holdings dated as of September 19, 1995 (filed as Exhibit 10.21
to the 1995 Third Quarter 10-Q and incorporated herein by
reference).
10.13.1 - 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).
10.13.2 - 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).
10.14.1 - Asset Purchase Agreement with respect to the CSS Hotels among CSM,
CSI and PFS dated as of September 19, 1995 (filed as Exhibit 10.22.1
to the 1995 Third Quarter 10-Q and incorporated herein by
reference).
</TABLE>
3
<PAGE> 86
<TABLE>
<S> <C>
10.14.2 - Letter agreement with respect to amendments to Asset Purchase
Agreement among CSM, CSI and PFS dated as of November 6, 1995 (filed
as Exhibit 10.22.2 to the 1995 Third Quarter 10-Q and incorporated
herein by reference).
10.15 - Escrow Agreement among MHCI, CSM, CSI, Robert E. Woolley,
Charles M. Sweeney, Holdings and PFS dated as of September 19, 1995
(filed as Exhibit 10.23 to the 1995 Third Quarter 10-Q and
incorporated herein by reference).
10.16 - Purchase Agreement relating to the purchase of all of the limited
partner interest in Holdings between the Partnership and DJONT/CSS
Holdings, Inc. dated as of September 19, 1995 (filed as Exhibit
10.24 to the 1995 Third Quarter 10-Q and incorporated herein by
reference).
10.17 - Purchase Agreement related to the purchase of all of the general
partner interest in Holdings between the Partnership and PFS dated
as of September 19, 1995 (filed as Exhibit 10.25 to the 1995 Third
Quarter 10-Q and incorporated herein by reference).
10.18 - Letter agreement among the Registrant, the Partnership, Holdings,
and Smith Barney Mortgage Capital Group, Inc. ("SBMCG") dated as of
September 28, 1995 with respect to the commitment of SBMCG to
provide up to $220 million principal amount of interim recourse
secured financing to Holdings (filed as Exhibit 10.26 to the 1995
Third Quarter 10-Q and incorporated herein by reference).
10.19 - Registration Rights Agreement dated as of November 17, 1995 between
the Registrant and Cleveland Finance Associates Limited Partnership
(filed as Exhibit 10.27 to the 1995 10-K and incorporated herein by
reference).
10.20 - 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 10-K and incorporated herein by
reference).
10.21 - 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
10-K and incorporated herein by reference).
10.22 - 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).
10.23 - Amended and Restated Revolving Credit Agreement dated as of October
18, 1996 among the Registrant 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 10.31 to the 1996 Third Quarter 10-Q and
incorporated herein by reference).
21.1* - List of Subsidiaries of the Registrant.
27* - Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
4
<PAGE> 1
EXHIBIT 10.1.6
SIXTH AMENDMENT TO
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF FELCOR SUITES LIMITED PARTNERSHIP
This Sixth Amendment to Amended and Restated Agreement of Limited
Partnership of FelCor Suites Limited Partnership is made and entered into
effective as of September 16, 1996, by and among FelCor Suite Hotels, Inc., a
Maryland corporation, as the General Partner ("General Partner"), John B.
Urbahns, II, an individual resident in the State of Indiana ("Contributor"), as
an Additional Limited Partner, and all of the persons and entities who are or
shall in the future become Limited Partners of this limited partnership in
accordance with the provisions of the Partnership Agreement (as hereinafter
defined).
R E C I T A L S:
A. The General Partner and the existing Limited Partners have
previously executed and delivered that certain Amended and Restated Agreement
of Limited Partnership of FelCor Suites Limited Partnership dated as of July
25, 1994, as previously amended (the "Partnership Agreement"), pursuant to
which they have formed a Delaware limited partnership under the name "FelCor
Suites Limited Partnership" (the "Partnership").
B. The Partnership, the General Partner and the Contributor have
executed that certain Asset Contribution Agreement dated as of September 16,
1996 (the "Contribution Agreement") pursuant to which the Contributor has
agreed to contribute certain assets to the Partnership in exchange for 81,186
units of limited partnership interest ("Units") of the Partnership.
C. The parties hereto desire to amend the Partnership Agreement
to reflect the foregoing issuance of Units and the admission of the Contributor
as an Additional Limited Partner to the Partnership in connection therewith.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the agreements and obligations of
the parties set forth herein and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Acceptance of Partnership Agreement. The Contributor does
hereby accept and agree to be bound by all of the terms and conditions of the
Partnership Agreement, including without limitation, the power of attorney set
forth in Section 1.4 thereof. Each of the Contributor and its Assignees hereby
constitutes and appoints the General Partner and the other parties named in
Section 1.4, with full power of substitution, as its true and lawful agent and
attorney- in-fact, with full
<PAGE> 2
power and authority in its name, place and stead, to take the actions set forth
in Section 1.4 of the Partnership Agreement, with the same effect as if the
Contributor had been one of the original partners to execute the Partnership
Agreement.
2. Admission of Additional Limited Partner. In accordance with
the provisions of Section 11.4 of the Partnership Agreement, the Contributor is
hereby admitted as an Additional Limited Partner of the Partnership entitled to
all rights and benefits of Limited Partners therein as set forth in the
Partnership Agreement with respect to the Units acquired by the Contributor.
3. Amendment of Section 7.5. Section 7.5(a) of the Partnership
Agreement is hereby amended such that, with respect to the Units issued to the
Contributor, the first clause of such section shall read as follows: "Subject
to Section 7.5(c), on or after the date which is one (1) year after the date of
issuance of the Units, . . . ."
4. Amendment of Exhibit A. Exhibit A to the Partnership
Agreement is hereby amended to reflect the admission of the Contributor as an
Additional Limited Partner in the Partnership and the issuance of 81,186 Units
to the Contributor pursuant to the Contribution Agreement.
5. Defined Terms; Effect Upon Partnership Agreement. All
initially capitalized terms used without definition herein shall have the
meanings set forth therefor in the Partnership Agreement. Except as expressly
amended hereby, the Partnership Agreement shall remain in full force and effect
and each of the parties hereto hereby reaffirms the terms and provisions
thereof.
IN WITNESS WHEREOF, this Sixth Amendment to Agreement of Limited
Partnership is executed and entered into as of the date first above written.
GENERAL PARTNER:
FELCOR SUITE HOTELS, INC., a Maryland
corporation
By: /s/ Thomas J. Corcoran, Jr.
---------------------------------------
Thomas J. Corcoran, Jr., President
<PAGE> 3
ADDITIONAL LIMITED PARTNER:
/s/ John B. Urbahns, II
---------------------------------------
John B. Urbahns, II, Individually
LIMITED PARTNERS (for all the Limited Partners now
and hereafter admitted as Limited Partners of the
Partnership, pursuant to the powers of attorney in
favor of the General Partner contained in Section
1.4 of the Partnership Agreement):
By: FELCOR SUITE HOTELS, INC.,
acting as General Partner and as
duly authorized attorney-in-fact
By: /s/ Thomas J. Corcoran, Jr.
---------------------------------------
Thomas J. Corcoran, Jr., President
<PAGE> 1
EXHIBIT 10.2.2
SCHEDULE OF EXECUTED LEASE AGREEMENTS
SHOWING MATERIAL VARIATIONS FROM
FORM OF LEASE AGREEMENT
(AS OF MARCH 30, 1997)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Annual
Percentage Rent
-----------------
Suite
Hotel Location/Franchise/ Commencement Annual First Second Revenue
Manager (1) Lessor (2) Lessee (3) Date Base Rent (4) Tier (5) Tier (6) Breakpoint (4)
----------- --------- ---------- ---------- --------------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Dallas (Park Central), TX - 7/28/94 $ 1,477 17% 65% $3,590
Jacksonville, FL - 7/28/94 882 17% 65% 3,490
Nashville, TN - 7/28/94 1,667 17% 65% 4,290
Orlando (North), FL - 7/28/94 1,571 19% 65% 2,650
Orlando (South), FL - 7/28/94 1,413 17% 65% 4,580
Tulsa, OK - 7/28/94 1,268 19% 65% 2,770
New Orleans, LA - 12/1/94 1,960 19% 65% 4,290
Flagstaff, AZ - 2/15/95 570 17% 65% 1,160
Dallas (Love Field), TX (7) - 3/29/95 1,836 17% 65% 3,060
Boston-Marlborough, MA - 6/30/95 720 19% 65% 940
Corpus Christi, TX - 7/19/95 1,000 17% 65% 1,495
Brunswick, GA - 7/19/95 370 17% 65% 1,350
Chicago-Lombard, IL (8) 8/1/95 1,900 17% 65% 3,270
Burlingame (SF Airport), CA (9) 11/6/95 3,147 17% 65% 3,174
Minneapolis (Airport) MN (9) 11/6/95 2,778 17% 65% 2,138
Minneapolis (Downtown), MN (9) 11/15/95 1,387 17% 65% 2,091
St. Paul, MN (10) 11/15/95 1,085 17% 65% 3,115
Boca Raton, FL (11) (9) 11/15/95 654 17% 65% 1,421
Tampa (Busch Gardens), FL (11) (9) 11/15/95 786 17% 65% 1,287
Cleveland, OH (9) 11/17/95 1,258 17% 65% 4,929
Anaheim, CA (9) 1/3/96 1,272 17% 65% 2,062
Baton Rouge, LA (9) 1/3/96 1,204 17% 65% 2,281
Birmingham, AL (9) 1/3/96 1,898 17% 65% 1,273
Deerfield Beach, FL (9) 1/3/96 2,163 17% 65% 2,568
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Annual
Percentage Rent
-----------------
Suite
Hotel Location/Franchise/ Commencement Annual First Second Revenue
Manager (1) Lessor (2) Lessee (3) Date Base Rent (4) Tier (5) Tier (6) Breakpoint (4)
----------- --------- ---------- ---------- --------------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ft. Lauderdale, FL (9) 1/3/96 3,228 17% 65% 1,969
Miami (Airport), FL (9) 1/3/96 2,222 17% 65% 2,882
Milpitas, CA (9) 1/3/96 2,143 17% 65% 1,402
Phoenix (Camelback), AZ (9) 1/3/96 2,812 17% 65% 1,428
South San Francisco (SF (9) 1/3/96 1,876 17% 65% 3,103
Airport), CA
Piscataway, NJ - 1/10/96 1,355 17% 65% 3,574
Lexington, KY (12) - 1/10/96 1,149 17% 65% 2,135
Beaver Creek, CO - 2/20/96 375 17% 65% 2,284
Boca Raton, FL - 2/28/96 1,368 17% 65% 3,670
Los Angeles (LAX), CA (13) 3/27/96 1,600 17% 65% 4,130
Mandalay Beach, CA (9) 5/8/96 1,927 17% 65% 2,909
Napa, CA (9) 5/8/96 1,215 17% 65% 3,145
Deerfield, IL (14) - (15) 6/20/96 1,743 17% 65% 2,505
San Rafael, CA (17) (15) 7/18/96 2,107 17% 65% 2,917
Parsippany, NJ (18) (15) 7/31/96 2,440 17% 65% 3,930
Charlotte, NC (19) (15) 9/12/96 2,200 17% 65% 3,352
Indianapolis, IN (20) (15) 9/12/96 1,470 17% 65% 2,794
Atlanta (Buckhead), GA - (15) 10/17/96 3,667 17% 65% 3,872
Myrtle Beach, SC - (15) 12/5/96 1,963 17% 65% 6,236
San Antonio, TX (21) (16) 2/1/97 1,400 17% 65% 2,474
Raleigh, NC (22) (16) 2/1/97 2,100 17% 65% 2,711
Overland Park, KS (23) (16) 2/1/97 1,600 17% 65% 2,114
Secaucus, NJ (24) (16) 2/1/97 2,400 17% 65% 4,788
Kansas City, MO (25) (16) 2/1/97 2,100 17% 65% 2,976
Covina, CA (26) (16) 2/1/97 900 17% 65% 3,066
Austin, TX (27) (16) 2/1/97 2,200 17% 65% 2,378
Atlanta (Perimeter Center), GA (28) (16) 2/1/97 2,300 17% 65% 2,949
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Annual
Percentage Rent
-----------------
Suite
Hotel Location/Franchise/ Commencement Annual First Second Revenue
Manager (1) Lessor (2) Lessee (3) Date Base Rent (4) Tier (5) Tier (6) Breakpoint (4)
----------- --------- ---------- ---------- --------------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bloomington, MN (11) (16) 2/1/97 1,800 17% 65% 2,468
Omaha, NE (11) (16) 2/1/97 1,400 17% 65% 1,703
Los Angeles (LAX North), CA (16) 2/18/97 1,669 17% 65% 3,176
Dana Point, CA (11) (29) 2/20/97 999 17% 65% 2,211 (1997)
1,983 (1998)
Anne Arundel County (11) (30) (29) 3/20/97 (32) 1,900 17% 65% 2,536
(BWI), MD
Troy, MI (11) (31) 3/20/97 (32) 2,100 17% 65% 1,935
(29)
Austin, TX (11) (31) (29) 3/20/97 (32) 1,900 17% 65% 1,961
</TABLE>
____________________
(1) Unless otherwise noted, the hotels under each Lease Agreement are
operated as Embassy Suites(R) Hotels under a commitment or license
agreement with Promus Hotels, Inc., and the Manager as defined in each
Lease Agreement is Promus Hotels, Inc. or an affiliate thereof.
(2) Unless otherwise noted, Lessor as defined in each Lease Agreement is
FelCor Suites Limited Partnership ("Partnership").
(3) Unless otherwise noted, Lessee as defined in each Lease Agreement is
DJONT Operations, L.L.C., a Delaware limited liability company.
(4) The amount shown represents the amount set forth in each Lease
Agreement as the annual Base Rent and the threshold suite revenue
amount. Both of these amounts are subject to adjustment for changes in
the consumer price index and may not represent the actual amount
currently required under each Lease Agreement.
(5) Represents percentage of suite revenue payable as Percentage Rent up to
suite revenue breakpoint.
(6) Represents percentage of suite revenue payable as Percentage Rent in
excess of suite revenue breakpoint.
(7) The Manager as defined in this Lease Agreement is American General
Hospitality, Inc.
(8) The Lessor as defined in this Lease Agreement is Embassy/GACL Lombard
Venture, a joint venture between the Partnership and Promus Hotels,
Inc.
(9) The Lessor as defined in these Lease Agreements is FelCor/CSS Holdings,
L.P., of which the Partnership is a 99% limited partner.
(10) The Lessor as defined in this Lease Agreement is FelCor/St. Paul
Holdings, L.P., of which the Partnership is a 99% limited partner and
another subsidiary of the Company is a 1% general partner.
(11) The hotels under these Lease Agreements are operated as Doubletree
Guest Suites(R) Hotels; the Manager as defined in these Lease
Agreements is DT Management, Inc.
(12) The hotel under this Lease Agreement is operated as a Hilton Suites(R)
Hotel under a franchise or license agreement with Hilton Inns, Inc.,
and the Manager as defined in this Lease Agreement is American General
Hospitality, Inc.
-3-
<PAGE> 4
(13) The Lessor as defined in this Lease Agreement is Los Angeles
International Airport Hotel Associates, a limited partnership of which
the Partnership is the sole general partner and of which the
Partnership has an approximate 97 % partnership interest.
(14) The Manager as defined in this Lease Agreement is Coastal Hotel Group,
Inc.
(15) The Lessee as defined in the Lease Agreement for these hotels is DJONT
Leasing, L.L.C., a Delaware limited liability company, pursuant to an
assignment of the applicable Lease Agreement from DJONT Operations,
L.L.C.
(16) The Lessee as defined in the Lease Agreement for these hotels is DJONT
Leasing, L.L.C., a Delaware limited liability company.
(17) The Lessor as defined in this Lease Agreement is MHV Joint Venture, a
joint venture between the Partnership and Promus Hotels, Inc.
(18) The Lessor as defined in this Lease Agreement is Embassy/Shaw
Parsippany Venture, a joint venture between the Partnership and Promus
Hotels, Inc.
(19) The Lessor as defined in this Lease Agreement is E.S. Charlotte, a
Minnesota limited partnership, of which the Partnership owns a 49%
limited partner interest and FelCor/CSS Hotels, L.L.C., a Delaware
limited liability company, owns a 1% general partner interest.
(20) The Lessor as defined in this Lease Agreement is E.S. North, a Indiana
Limited Partnership, an Indiana limited partnership, of which the
Partnership owns a 49% limited partner interest and FelCor/CSS Hotels,
L.L.C., a Delaware limited liability company, owns a 1% general partner
interest.
(21) The Lessor as defined in this Lease Agreement is EPT San Antonio
Limited Partnership, of which the Partnership owns 49% and FelCor Eight
Hotels, L.L.C. ("FelCor Eight") owns 1%.
(22) The Lessor as defined in this Lease Agreement is EPT Raleigh Limited
Partnership, of which the Partnership owns 49% and FelCor Eight owns
1%.
(23) The Lessor as defined in this Lease Agreement is EPT Overland Park
Limited Partnership, of which the Partnership owns 49% and FelCor Eight
owns 1%.
(24) The Lessor as defined in this Lease Agreement is EPT Meadowlands
Limited Partnership, of which the Partnership owns 49% and FelCor Eight
owns 1%.
(25) The Lessor as defined in this Lease Agreement is EPT Kansas City
Limited Partnership, of which the Partnership owns 49% and FelCor Eight
owns 1%.
(26) The Lessor as defined in this Lease Agreement is EPT Covina Limited
Partnership, of which the Partnership owns 49% and FelCor Eight owns
1%.
(27) The Lessor as defined in this Lease Agreement is EPT Austin Limited
Partnership, of which the Partnership owns 49% and FelCor Eight owns
1%.
(28) The Lessor as defined in this Lease Agreement is EPT Atlanta-Perimeter
Center Limited Partnership, of which the Partnership owns 49% and
FelCor Eight owns 1%.
(29) The Lessee as defined in the Lease Agreement for this hotel is FCH/DT
Leasing, L.L.C., a Delaware limited liability company.
(30) The Lessor as defined in the Lease Agreement is FCH/DT BWI Holdings,
L.P., a Delaware limited partnership.
(31) The Lessor as defined in these Lease Agreements is FCH/DT Holdings,
L.P., a Delaware limited partnership.
(32) The Lease contains an automatic renewal provision, pursuant to which
the Lease shall be extended for an additional five-year term if the
corresponding Management Agreement is extended pursuant to the terms
thereof for an additional five-year period.
-4-
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE REGISTRANT
(AS OF MARCH 7, 1997)
<TABLE>
<CAPTION>
STATE AND FORM OF
NAME ORGANIZATION OWNERSHIP INTEREST
- ----------------- ------------------------- -------------------------
<S> <C> <C>
FelCor/CSS Hotels, L.L.C. Delaware; Limited 1% owned by Felcor;
("FelCor/CSS Hotels") Liability Company 99% owned by FelCor LP
FelCor/LAX Hotels, L.L.C. ("FelCor/LAX Delaware; Limited 1% owned by Felcor;
Hotels") Liability Company 99% owned by FelCor LP
FelCor/CSS Holdings, L.P. ("FelCor/CSS Delaware; 1% GP interest owned by
Holdings") Limited Partnership FelCor/CSS Hotels; 99% LP
interest owned by FelCor LP
FelCor/St. Paul Holdings, L.P. Delaware; 1% GP interest owned by
("FelCor/St. Paul Holdings") Limited Partnership FelCor/CSS Hotels; 99% LP
interest owned by FelCor LP
FelCor/LAX Holdings, L.P. ("FelCor/LAX Delaware; 1% GP Interest owned by
Holdings") Limited Partnership FelCor/LAX Hotels; 99% LP
interest owned by FelCor LP
Los Angeles International Airport Hotel Texas; 50% GP interest and
Associates Limited Partnership 47.2% LP interest owned by
FelCor/LAX Holdings
FelCor Eight Hotels, L.L.C. Delaware; Limited 1% owned by FelCor;
("FelCor Eight Hotels") Liability Company 99% owned by FelCor LP
</TABLE>
# # # #
THE PERCENTAGE INTERESTS REFLECTED ABOVE REPRESENT THE PERCENTAGES OF AGGREGATE
EQUITY INTEREST IN THE RESPECTIVE ENTITIES. EACH OF THE GP INTERESTS REFLECTED
ABOVE REPRESENTS THE ENTIRE GENERAL PARTNER INTEREST IN SUCH ENTITY.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FELCOR SUITE
HOTELS, INC. CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1996 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,793
<SECURITIES> 0
<RECEIVABLES> 5,526
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 936,409
<DEPRECIATION> 36,718
<TOTAL-ASSETS> 978,788
<CURRENT-LIABILITIES> 21,325
<BONDS> 239,425
0
151,250
<COMMON> 235
<OTHER-SE> 490,441
<TOTAL-LIABILITY-AND-EQUITY> 978,788
<SALES> 0
<TOTAL-REVENUES> 100,944
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,803
<INCOME-PRETAX> 43,291
<INCOME-TAX> 0
<INCOME-CONTINUING> 43,291
<DISCONTINUED> 0
<EXTRAORDINARY> 2,354
<CHANGES> 0
<NET-INCOME> 40,937
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.44
</TABLE>
