<PAGE> 1
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24250
FELCOR SUITE HOTELS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 72-2541756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
The number of shares of Common Stock, par value $.01 per share, of
FelCor Suite Hotels, Inc. outstanding on November 10, 1997 was 36,594,733.
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<PAGE> 2
FELCOR SUITE HOTELS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. -- FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements.......................................................................... 3
FELCOR SUITE HOTELS, INC.
Consolidated Balance Sheets - September 30, 1997 (Unaudited)
and December 31, 1996................................................................. 3
Consolidated Statements of Operations -- For the Three and Nine Months
Ended September 30, 1997 and 1996 (Unaudited)......................................... 4
Consolidated Statements of Cash Flows -- For the Nine Months
Ended September 30, 1997 and 1996 (Unaudited)......................................... 5
Notes To Consolidated Financial Statements................................................. 6
DJONT OPERATIONS, L.L.C.
Consolidated Balance Sheets - September 30, 1997 (Unaudited)
and December 31, 1996................................................................. 13
Consolidated Statements of Operations -- For the Three and Nine Months
Ended September 30, 1997 and 1996 (Unaudited)......................................... 14
Consolidated Statements of Cash Flows -- For the Nine Months
Ended September 30, 1997 and 1996 (Unaudited)......................................... 15
Notes to Consolidated Financial Statements................................................. 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 19
General/Third Quarter Highlights........................................................... 19
Results of Operations...................................................................... 19
Liquidity and Capital Resources............................................................ 25
PART II. -- OTHER INFORMATION
Item 2. Changes in Securities......................................................................... 29
Item 5. Other Information............................................................................. 29
Item 6. Exhibits and Reports on Form 8-K.............................................................. 29
SIGNATURES................................................................................................ 31
</TABLE>
2
<PAGE> 3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR SUITE HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in hotels, net of accumulated depreciation of $72,607
and $36,718 at September 30, 1997 and December 31, 1996 respectively .............. $ 1,447,340 $ 899,691
Investment in unconsolidated partnerships ........................................... 127,606 59,867
Cash and cash equivalents ........................................................... 18,942 7,793
Deposits ............................................................................ 1,616 1,616
Due from Lessee ..................................................................... 13,419 5,526
Deferred expenses, net of accumulated amortization of $1,375
and $364 at September 30, 1997 and December 31, 1996 .............................. 3,793 3,235
Other assets ........................................................................ 3,771 1,060
------------ ------------
Total assets ............................................................. $ 1,616,487 $ 978,788
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Distributions payable ............................................................... $ 24,171 $ 16,090
Accrued expenses and other liabilities .............................................. 5,766 5,235
Debt ................................................................................ 406,650 226,550
Capital lease obligations ........................................................... 11,527 12,875
Minority interest in Operating Partnership, 2,904 and 2,786 units issued and
outstanding at September 30, 1997 and December 31, 1996, respectively ........... 74,175 76,112
Minority interest in other partnerships ............................................. 8,358
------------ ------------
Total liabilities ........................................................ 530,647 336,862
------------ ------------
Commitments and contingencies (Note 2)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized, 6,050 shares
issued and outstanding at September 30, 1997 and December 31, 1996 ............. 151,250 151,250
Common stock, $.01 par value, 50,000 shares authorized, 36,595 and
23,502 shares issued, including shares in treasury, at September 30, 1997
and December 31, 1996, respectively ............................................ 377 235
Additional paid in capital .......................................................... 1,003,049 505,082
Unearned officers' and directors' compensation ...................................... (1,942) (1,454)
Distributions in excess of earnings ................................................. (25,788) (13,187)
------------ ------------
1,126,946 641,926
Less common stock in treasury at cost, 1,200 shares at September 30, 1997 ........... (41,106)
------------ ------------
Total shareholders' equity ............................................... 1,085,840 641,926
------------ ------------
Total liabilities and shareholders' equity ............................... $ 1,616,487 $ 978,788
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
FELCOR SUITE HOTELS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Percentage lease revenue ........................................... $ 48,603 $ 25,263 $ 122,651 $ 72,648
Income from unconsolidated partnerships ............................ 2,338 927 5,765 1,412
Other income ....................................................... 112 163 283 937
---------- ---------- ---------- ----------
Total revenue ............................................. 51,053 26,353 128,699 74,997
---------- ---------- ---------- ----------
Expenses:
General and administrative ......................................... 897 458 2,743 1,307
Depreciation ....................................................... 14,238 7,529 35,969 17,833
Taxes, insurance and other ......................................... 6,155 3,260 16,912 9,859
Interest expense ................................................... 7,183 1,760 20,097 6,273
Minority interest in operating partnership ......................... 1,643 1,477 4,584 4,619
Minority interest in other partnerships ............................ 195 337
---------- ---------- ---------- ----------
Total expenses ............................................ 30,311 14,484 80,642 39,891
---------- ---------- ---------- ----------
Net income before extraordinary charge ............................... 20,742 11,869 48,057 35,106
Extraordinary charge from write off of deferred financing fees ....... 2,354 2,354
---------- ---------- ---------- ----------
Net income ........................................................... 20,742 9,515 48,057 32,752
Preferred dividends .................................................. 2,949 2,949 8,848 4,784
---------- ---------- ---------- ----------
Net income applicable to common shareholders ......................... $ 17,793 $ 6,566 $ 39,209 $ 27,968
========== ========== ========== ==========
Per common share information:
Net income applicable to common shareholders before
extraordinary charge ............................................. $ 0.49 $ 0.38 $ 1.33 $ 1.32
Extraordinary charge ............................................... (0.10) (0.10)
---------- ---------- ---------- ----------
Net income ......................................................... $ 0.49 $ 0.28 $ 1.33 $ 1.22
========== ========== ========== ==========
Weighted average number of common shares outstanding ............... 36,442 23,276 29,570 22,933
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
FELCOR SUITE HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................................... $ 48,057 $ 32,752
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation .............................................................. 35,969 17,833
Amortization of deferred financing fees and organization costs ............ 1,011 269
Amortization of unearned officers' and directors' compensation ............ 737 315
Income from unconsolidated partnerships ................................... (5,765) (1,412)
Cash distributions from unconsolidated partnerships ....................... 2,849 896
Extraordinary charge for write off of deferred financing fees ............. 2,354
Minority interest in Operating Partnership ................................ 4,584 4,619
Minority interest in other partnerships ................................... 337
Changes in assets and liabilities:
Due from Lessee ........................................................... (7,893) (1,359)
Deferred expenses and other assets ........................................ (4,362) (3,979)
Accrued expenses and other liabilities .................................... (966) (3,142)
------------ ------------
Net cash flow provided by operating activities .................. 74,558 49,146
------------ ------------
Cash flows from investing activities:
Acquisition of hotels ............................................................... (537,100) (287,715)
Acquisition of interests in unconsolidated partnerships ............................. (59,571) (28,204)
Improvements and additions to hotels ................................................ (38,413) (44,960)
------------ ------------
Net cash flow used in investing activities ...................... (635,084) (360,879)
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings ............................................................ 332,000 185,350
Repayment of borrowings ............................................................. (151,900) (190,954)
Proceeds from sale of common stock .................................................. 516,700 44,978
Proceeds from sale of preferred stock ............................................... 144,251
Costs associated with public offerings .............................................. (27,600)
Purchase of treasury stock .......................................................... (41,106)
Proceeds from exercise of stock options ............................................. 592
Distributions paid to limited partners .............................................. (4,432) (3,960)
Distributions paid to preferred shareholders ........................................ (8,848) (1,835)
Distributions paid to common shareholders ........................................... (43,731) (24,835)
------------ ------------
Net cash flow provided by financing activities .................. 571,675 152,995
------------ ------------
Net change in cash and cash equivalents ....................................................... 11,149 (158,738)
Cash and cash equivalents at beginning of periods ............................................. 7,793 166,821
------------ ------------
Cash and cash equivalents at end of periods ................................................... $ 18,942 $ 8,083
============ ============
Supplemental cash flow information --
Interest paid ....................................................................... $ 19,907 $ 6,971
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS
FelCor Suite Hotels, Inc., is a self-administered real estate investment
trust ("REIT"), which 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 "Operating
Partnership"), which owned six Embassy Suites(R) hotels (the "Initial Hotels")
with an aggregate of 1,479 suites. The Operating Partnership had acquired the
Initial Hotels through a merger with entities originally formed in 1991 and
controlled by Hervey A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the
Board of Directors and Chief Executive Officer of the Company, respectively.
At September 30, 1997, FelCor owned interests in 71 hotels with an
aggregate of 17,486 suites/rooms (collectively the "Hotels") through its 92.7%
aggregate ownership of the Operating Partnership and its subsidiaries
(collectively, the "Company"). FelCor also is the sole general partner of the
Operating Partnership. The Company owns 100% equity interests in 53 of the
Hotels (12,983 suites), a 90% or greater interest in partnerships owning four
hotels (1,041 suites), and 50% interests in separate partnerships that own 14
hotels (3,462 suites). At September 30, 1997, 51 of the Hotels were operated as
Embassy Suites hotels, 12 as Doubletree Guest Suites(R) hotels, one as a Hilton
Suites(R) hotel, one hotel was in the process of conversion to an Embassy Suites
hotel, four hotels were operated as Sheraton(R) hotels and two were operated as
Sheraton Suites(R) hotels. The Hotels are located in 26 states, with 31 hotels
in California, Florida and Texas. The following table provides certain
information regarding the Hotels through September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF HOTELS
ACQUIRED NUMBER OF SUITES
---------------- ----------------
<S> <C> <C>
1994 7 1,730
1995 13 2,649
1996 23 5,769
1ST QUARTER 1997 15 3,446
2ND QUARTER 1997 9 2,715
3RD QUARTER 1997 4 1,000
------ ------
71 17,309
======
Additional suites constructed by
the Company 177
------
17,486
======
</TABLE>
The Company completed construction and placed into service on July 1,
1997, 129 net additional suites, meeting rooms and other public area upgrades at
its Boston-Marlborough, Massachusetts hotel at a cost of $15.9 million. The
Company is constructing 67 additional suites at its Jacksonville, Florida hotel
and 67 additional suites at its Orlando (North), Florida hotel at an aggregate
projected cost of $10.2 million with an expected completion in early 1998.
The Company leases all of the Hotels to DJONT Operations, L.L.C.
("DJONT"), or a consolidated subsidiary thereof (collectively, the "Lessee"),
under operating leases providing for the payment of percentage rent (the
"Percentage Leases"). Hervey A. Feldman and Thomas J. Corcoran, Jr., the
Chairman of the Board and President of the Company, respectively, beneficially
own a 50% voting equity interest in DJONT. The remaining 50% non-voting equity
interest in DJONT is beneficially owned by the children of Charles N. Mathewson,
a director of the Company and major investor in the predecessor entities. The
Company's partners in partnerships owning 12 of the Hotels hold special purpose
non-voting equity interests in the consolidated subsidiary of DJONT which leases
such Hotels, which interests entitle them to 50% of such subsidiary's net income
before overhead with respect to such Hotels. In addition, the Company's partner
in a partnership owning three of the Hotels holds a 50% non-voting equity
interest in the consolidated subsidiary of DJONT leasing those Hotels. See Note
2 Commitments and Related Party Transactions for additional discussion regarding
Lessee consolidated subsidiaries. The Lessee has entered into management
agreements
6
<PAGE> 7
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS -- (CONTINUED)
pursuant to which 50 of the Hotels are managed by Promus Hotels, Inc.
("Promus"), 12 of the Hotels are managed by a subsidiary of Doubletree Hotel
Corporation ("Doubletree"), six of the hotels are managed directly by, or by a
subsidiary of, ITT Sheraton Corporation ("Sheraton"), the remaining three Hotels
are managed by two other management companies.
A brief discussion of the hotels acquired and other significant
transactions occurring in the third quarter of 1997 follows:
o On July 28, 1997 the Company acquired three Doubletree Guest Suites
hotels for an aggregate purchase price of $71.2 million in cash. The
hotels total 635 suites and are located in Lake Buena Vista, Florida;
Raleigh/Durham, North Carolina and Tampa (Rocky Point), Florida. These
hotels are managed by a subsidiary of Doubletree.
o On September 30, 1997 the Company acquired the partnership which owns the
365 room Sheraton Society Hill hotel in Philadelphia, Pennsylvania for
$51 million in cash. This hotel is managed by Sheraton.
o On September 30, 1997 the Company declared a third quarter dividend of
$0.55 per common share and $0.4875 per share on its $1.95 Series A
Cumulative Preferred Stock to shareholders of record on October 15, 1997.
This dividend is payable on October 31, 1997.
o On August 14, 1997 the Company announced that it had increased its
unsecured revolving line of credit from $400 million to $550 million,
extended the maturity for an additional year to September 30, 2000 and
reduced the effective interest rate.
o Following the end of the third quarter, the Company announced the
completion of a private placement of $300 million of long term senior
unsecured notes. The notes were issued in two maturities, consisting of
$175 million of 7 3/8% notes due 2004 and $125 million of 7 5/8% notes
due 2007. The proceeds were used to pay off the Company's $85 million
collateralized term loan and to pay down the Line of Credit. The Company
has filed a registration statement with the SEC, which has not yet been
declared effective, to exchange this privately placed debt for
registered debt with identical terms.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") and
should be read in conjunction with the financial statements and notes thereto of
the Company and the Lessee included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (the "10-K"). The notes to the
financial statements included herein highlight significant changes to the notes
included in the 10-K and present interim disclosures required by the SEC. The
statements for the three and nine months ended September 30, 1997 are unaudited;
however, in the opinion of management, all adjustments (which include only
normal recurring accruals) have been made which are considered necessary to
present fairly the operating results and financial position of the Company for
the unaudited periods.
2. SUPPLEMENTAL CASH FLOW INFORMATION
In the first nine months of 1997 the Company purchased certain assets and
assumed certain liabilities of hotels. These purchases were recorded under the
purchase method of accounting. The fair value of the acquired assets and
liabilities recorded at the date of acquisition are as follows:
<TABLE>
<S> <C>
Assets acquired................................................. $545,122
Minority interest contribution to other partnerships............ (8,022)
--------
Net cash paid by the Company............................. $537,100
========
</TABLE>
7
<PAGE> 8
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUPPLEMENTAL CASH FLOW INFORMATION -- (CONTINUED)
In the first nine months of 1997 the Company purchased interests in nine
unconsolidated partnerships that hold hotel properties. The hotels associated
with these unconsolidated subsidiaries are located in Atlanta (Perimeter), GA;
Austin, TX; Covina, CA; Kansas City (Country Club Plaza), MO; Overland Park, KS;
Raleigh, NC; San Antonio, TX; San Antonio (Airport), TX; and Secaucus, NJ.
These purchases were recorded under the equity method of accounting. The
value of the assets recorded at the date of acquisition are as follows:
<TABLE>
<S> <C>
Assets acquired................................................. $64,672
Operating partnership units issued.............................. (5,101)
-------
Net cash paid by the Company............................. $59,571
=======
</TABLE>
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Upon final completion of the conversion of one hotel, the Hotels will be
operated as Embassy Suites (52), Doubletree Guest Suites (12), Sheraton Suites
(2), Sheraton (4) and Hilton Suites (1) hotels. The Embassy Suites hotels and
Hilton Suites hotel will operate pursuant to franchise license agreements which
require the payment of fees based on a percentage of suite revenue. These fees
are paid by the Lessee. There are no separate franchise license agreements with
respect to the Doubletree Guest Suites hotels, Sheraton hotels or Sheraton
Suites hotels, which rights are included in the management agreement.
The Lessee generally pays the managers a base management fee based on a
percentage of total revenue and an incentive management fee based on the
Lessee's net income before overhead expenses. In certain instances, the hotel
managers have subordinated fees and committed to make subordinated loans to the
Lessee, if needed, to meet its rental and other obligations under the leases.
The Company is to receive rental income from the Lessee under the
Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels), 2006 (19
hotels) and 2007 (19 hotels). The rental income under the Percentage Leases
between the 14 unconsolidated partnerships, of which the Company owns 50%, and
the Lessee are payable to the respective partnerships and as such is not
included in the following schedule of future lease commitments to the Company.
Minimum future rental income (i.e., base rents) to the Company under these
noncancellable operating leases at September 30, 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR
<S> <C>
Remainder of 1997....................................... $ 26,150
1998.................................................... 104,600
1999.................................................... 104,600
2000.................................................... 104,600
2001.................................................... 104,600
2002 and thereafter..................................... 493,961
---------
$ 938,511
=========
</TABLE>
Minority equity interest in two of DJONT's consolidated subsidiaries,
relating to an aggregate of 15 Hotels, are held by unrelated third parties that
also own an equity interest in such Hotels. Messrs. Feldman and Corcoran, such
unrelated third party owners, and the managers of certain of the Hotels have
agreed, directly or through their affiliates, to make loans to the Lessee of up
to an aggregate of approximately $15.4 million, to the extent necessary to
enable the Lessee to pay rent and other obligations due under the respective
Percentage Leases relating to a total of 32 of the Hotels. Amounts so borrowed
by the Lessee, if any, will be subordinate in right of repayment to the prior
payment in full of rent and other obligations due under the Percentage Leases
relating to such Hotels. No loans were outstanding under such agreements at
September 30, 1997.
8
<PAGE> 9
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations at September 30, 1997 and December 31,
1996 consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
Line of Credit...................... $ 296,000 $ 115,000
Term loan........................... 85,000 85,000
Renovation loan .................... 25,000 25,000
Other debt payable.................. 650 1,550
------------ -----------
$ 406,650 $ 226,550
============ ===========
</TABLE>
In the third quarter of 1997, the Company increased the amount available
under its unsecured Line of Credit from $400 million to $550 million, extended
the term by one year to September 30, 2000 and reduced the effective interest
rate. Interest payable on borrowings under the Line of Credit is variable,
determined from a ratings-based pricing matrix, and is currently set at LIBOR
plus 140 basis points.
The Company had an $85 million collateralized term loan outstanding at
September 30, 1997 which bore interest at LIBOR plus 150 basis points. The $85
million collateralized term loan was repaid in full on October 1, 1997 from the
proceeds of the long term senior unsecured private placement debt. This senior
unsecured private placement debt, which the Company placed on October 1, 1997,
bears interest at 7 3/8% for the seven year notes and 7 5/8% for the ten year
notes. The Company has filed a registration statement with the SEC, which has
not yet been declared effective, to exchange privately placed debt for
registered debt with identical terms. Also outstanding at September 30, 1997 was
a renovation loan of $25 million that bears interest at LIBOR plus 45 basis
points. At September 30, 1997, 30 day LIBOR was 5.6563%.
Under its loan agreements the Company is required to satisfy various
affirmative and negative covenants. The Company was in compliance with these
covenants at September 30, 1997.
Capital lease obligations at September 30, 1997 and December 31, 1996
consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Capital land and building lease obligations ................ $ 9,419 $ 9,675
Capital equipment lease obligations ........................ 2,108 3,200
------------ ------------
$ 11,527 $ 12,875
============ ============
</TABLE>
5. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS
At September 30, 1997, the Company owned 50% interests in separate
partnerships owning 14 hotels, a parcel of undeveloped land and a condominium
management company. The Company is accounting for its investments in these
unconsolidated partnerships under the equity method.
9
<PAGE> 10
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS -- (CONTINUED)
Summarized combined financial information for unconsolidated partnerships, of
which the Company owns 50%, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Balance sheet information:
Partnership assets (primarily hotel assets) ........... $ 390,302 $ 138,972
Non-recourse mortgage debt ............................ 158,455 49,402
Equity ................................................ 255,212 119,734
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of operations information:
Percentage lease revenue .............................. $ 13,297 $ 3,889 $ 35,551 $ 6,011
Other income .......................................... 3,140 4,316
---------- ---------- ---------- ----------
Total revenue .................................. 16,437 3,889 39,867 6,011
Expenses:
Depreciation ..................................... 4,216 1,085 11,431 2,037
Taxes, insurance and other ....................... 3,436 195 6,314 358
Interest expense ................................. 3,215 689 8,216 689
---------- ---------- ---------- ----------
Total expenses ................................. 10,867 1,969 25,961 3,084
---------- ---------- ---------- ----------
Net income ............................................ $ 5,570 $ 1,920 $ 13,906 $ 2,927
========== ========== ========== ==========
50% of net income attributable to the Company ......... $ 2,785 $ 960 $ 6,953 $ 1,464
Amortization of cost in excess of book value .......... 447 33 1,188 52
---------- ---------- ---------- ----------
Income from unconsolidated partnerships ............... $ 2,338 $ 927 $ 5,765 $ 1,412
========== ========== ========== ==========
</TABLE>
6. TREASURY STOCK
In conjunction with the June 30, 1997 common stock offering of 11.2
million shares, the Company purchased, at the net offering price of $36.625, 1.2
million shares of its common stock from Promus. The stock was purchased at an
aggregate cost of $41.1 million (after allocation of offering expenses) and is
recorded using the cost method of accounting. All of the acquired shares are
held as common stock in treasury.
7. TAXES, INSURANCE AND OTHER
Taxes, insurance and other is comprised of the following for the three
and nine months ended September 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Real estate and personal property taxes ............... $ 5,015 $ 2,631 $ 13,848 $ 7,649
Property insurance .................................... 483 353 1,347 966
Land lease expense .................................... 459 268 1,119 869
State franchise taxes ................................. 198 4 498 333
Other ................................................. 4 100 42
------------ ------------ ------------ ------------
Total taxes, insurance and other ............... $ 6,155 $ 3,260 $ 16,912 $ 9,859
============ ============ ============ ============
</TABLE>
10
<PAGE> 11
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited Pro Forma Consolidated Statements of Operations
for the nine months ended September 30, 1997 and 1996 are presented as if the
acquisitions of all hotels owned by the Company at September 30, 1997, the
private placement of $300 million of senior unsecured notes and the equity
offerings consummated during 1996 and 1997 had occurred as of January 1, 1996
and the Hotels had all been leased to the Lessee pursuant to Percentage Leases.
Such pro forma information is based in part upon the Consolidated Statements of
Operations of the Company and pro forma Statements of Operations of the Lessee
included elsewhere in this Quarterly Report on Form 10-Q. In management's
opinion, all adjustments necessary to reflect the effects of these transactions
have been made.
The following unaudited Pro Forma Consolidated Statements of Operations
for the periods presented are not necessarily indicative of what actual results
of operations of the Company would have been assuming such transactions had been
completed on January 1, 1996, nor does it purport to represent the results of
operations for future periods.
11
<PAGE> 12
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Percentage lease revenue ........................................... $ 152,127 $ 132,487
Income from unconsolidated partnerships ............................ 5,681 2,859
---------- ----------
Total revenue ................................................. 157,808 135,346
Expenses:
General and administrative ......................................... 2,743 2,707
Depreciation ....................................................... 43,243 30,147
Taxes, insurance and other ......................................... 21,045 18,450
Interest expense ................................................... 28,244 25,642
Minority interest in Operating Partnership ......................... 4,577 3,870
Minority interest in other partnerships ............................ 427 242
---------- ----------
Total expenses ................................................ 100,279 81,058
---------- ----------
Net income ........................................................... 57,529 54,288
Preferred dividends .................................................. 8,848 8,848
---------- ----------
Net income applicable to common shareholders ......................... $ 48,681 $ 45,440
========== ==========
Per common share information:
Net income ......................................................... $ 1.33 $ 1.26
========== ==========
Weighted average number of common shares outstanding ............... 36,570 36,135
</TABLE>
12
<PAGE> 13
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents ........................................................... $ 29,171 $ 5,208
Accounts receivable, net ............................................................ 23,970 8,700
Inventories ......................................................................... 3,065 2,105
Prepaid expenses .................................................................... 2,444 255
Other assets ........................................................................ 2,144 2,203
------------ ------------
Total assets .............................................................. $ 60,794 $ 18,471
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable, trade ............................................................. $ 7,409 $ 1,273
Accounts payable, other ............................................................. 15,162 2,398
Due to FelCor Suite Hotels, Inc. .................................................... 13,419 5,526
Due to other partnerships ........................................................... 6,156 2,588
Accrued expenses and other liabilities .............................................. 26,639 13,089
------------ ------------
Total liabilities ......................................................... 68,785 24,874
------------ ------------
Shareholders' deficit:
Capital ............................................................................. 1 1
Accumulated losses and distributions in excess of earnings .......................... (7,992) (6,404)
------------ ------------
Total shareholders' deficit ............................................... (7,991) (6,403)
------------ ------------
Total liabilities and shareholders' deficit ............................... $ 60,794 $ 18,471
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
13
<PAGE> 14
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Suite revenue ............................... $ 128,461 $ 63,393 $ 330,545 $ 168,950
Food and beverage revenue ................... 10,387 3,091 20,576 11,235
Food and beverage rent ...................... 1,315 743 3,338 1,742
Other revenue ............................... 9,488 4,617 26,209 12,457
---------- ---------- ---------- ----------
Total revenues ......................... 149,651 71,844 380,668 194,384
---------- ---------- ---------- ----------
Expenses:
Property operating costs and expenses ....... 37,076 18,427 93,442 46,878
General and administrative .................. 11,377 5,292 27,694 14,033
Advertising and promotion ................... 10,720 4,957 26,243 12,807
Repair and maintenance ...................... 7,345 4,044 18,417 10,031
Utilities ................................... 6,625 3,654 15,316 8,801
Management fee .............................. 2,832 1,747 8,121 4,761
Franchise fee ............................... 3,644 1,631 9,828 3,852
Food and beverage expenses .................. 8,770 3,336 17,459 11,748
Percentage lease expenses ................... 61,362 29,152 158,436 78,307
Lessee overhead expenses .................... 574 421 1,618 1,148
Liability insurance ......................... 996 476 2,496 1,276
Conversion costs ............................ 69 787 113 2,174
Other ....................................... 798 608 2,636 1,460
---------- ---------- ---------- ----------
Total expenses ......................... 152,188 74,532 381,819 197,276
---------- ---------- ---------- ----------
Income before minority interest .................. (2,537) (2,688) (1,151) (2,892)
Minority interest ........................... 63 437
---------- ---------- ---------- ----------
Net income (loss) ................................ $ (2,600) $ (2,688) $ (1,588) $ (2,892)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
14
<PAGE> 15
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................................... $ (1,588) $ (2,892)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Changes in assets and liabilities:
Accounts receivable .................................................. (15,270) (5,722)
Inventories .......................................................... (960) (208)
Prepaid expenses ..................................................... (2,189) (434)
Other assets ......................................................... 59 (157)
Due to FelCor Suite Hotels, Inc. ..................................... 7,892 1,359
Accounts payable, accrued expenses and other liabilities ............. 36,019 11,187
---------- ----------
Net cash flow provided by operating activities .................. 23,963 3,133
---------- ----------
Net change in cash and cash equivalents ........................................ 23,963 3,133
Cash and cash equivalents at beginning of periods .............................. 5,208 5,345
---------- ----------
Cash and cash equivalents at end of periods .................................... $ 29,171 $ 8,478
========== ==========
</TABLE>
The accompany notes are an integral part of these
consolidated financial statements.
15
<PAGE> 16
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
DJONT Operations, L.L.C. is a Delaware limited liability company
("DJONT") which began operations on July 28, 1994. All of the voting Class A
membership interest in DJONT (representing a 50% equity interest) is
beneficially 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 DJONT. All of the non-voting Class B membership
interest in DJONT (representing the remaining 50% equity interest) is owned by
RGC Leasing, Inc., a Nevada corporation owned by the children of Mr. Mathewson,
a director of the Company and major investor in the Company's predecessor
entities. Each of the 71 hotels in which FelCor Suites Limited Partnership (the
"Operating Partnership") had an ownership interest at September 30, 1997 (the
"Hotels"), is leased to DJONT or a consolidated subsidiary thereof
(collectively, the "Lessee") pursuant to percentage leases ("Percentage
Leases"). The Company's partners in partnerships owning interests in 12 of the
Hotels hold special purpose non-voting equity interests in the consolidated
subsidiary of DJONT which leases such Hotels, which interests entitle them to
50% of such subsidiary's net income before overhead with respect to such Hotels.
In addition, the Company's partner in a partnership owning three of the Hotels
holds a 50% non-voting equity interest in the consolidated subsidiary of DJONT
leasing those Hotels. Messrs. Feldman and Corcoran, such partners, and the
managers of certain of the Hotels have agreed, directly or through their
affiliates, to make loans to the Lessee of up to an aggregate of approximately
$15.4 million, to the extent necessary to enable the Lessee to pay rent and
other obligations due under the respective Percentage Leases relating to a total
of 32 of the Hotels. Amounts so borrowed by the Lessee, if any, will subordinate
in right of repayment to the prior payment in full of rent and other obligations
due under the Percentage Leases relating to such Hotels. No loans were
outstanding under such agreements at September 30, 1997.
Messrs. Feldman and Corcoran, as the beneficial owners of an aggregate
50% of DJONT, have entered into an agreement with the Company pursuant to which
they have agreed that, for a period of ten years from April 15, 1995, any
distributions received by them from DJONT (in excess of their tax liabilities
with respect to the income of DJONT) will be utilized to purchase common stock
from the Company or units of limited partner interest in the Operating
Partnership at then current market prices. The agreement stipulates that Messrs.
Feldman and Corcoran are restricted from selling any stock or units so acquired
for a period of two years from the date of purchase. RGC Leasing, Inc., which
owns the other 50% of DJONT, may elect to purchase common stock or units upon
similar terms, at its option. The independent directors of the Company may
suspend or terminate such agreement at any time.
Fifty-one of the Hotels are, and the Radisson at Kingston Plantation
in Myrtle Beach, South Carolina will be converted by year end to, Embassy
Suites(R) hotels, 50 of which are being managed for the Lessee by a subsidiary
of Promus Hotel Corporation ("Promus"). Two Embassy Suites hotels are managed
for the Lessee by two other management companies. Twelve of the Hotels are
Doubletree Guest Suites(R) hotels and are managed by a subsidiary of Doubletree
Hotels Corporation ("Doubletree"). Six of the Hotels are Sheraton Suites (2) or
Sheraton hotels (4) and are being managed for the Lessee directly by, or by a
subsidiary of, ITT Sheraton Corporation ("Sheraton"). One of the Hotels is
operated under a Hilton Suites(R) hotel franchise and managed by an independent
management company that also manages one of the Company's Embassy Suites.
16
<PAGE> 17
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Lessee has future lease commitments under the Percentage Leases
which expire in 2004 (7 hotels), 2005 (13 hotels) 2006 (23 hotels) and 2007 (28
hotels). Minimum future rental payments are computed based on the base rent as
defined under these noncancellable operating leases and are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ----------
<S> <C>
Remainder of 1997 ........................... $ 32,896
1998 ........................................ 131,586
1999 ........................................ 131,586
2000 ........................................ 131,586
2001 ........................................ 131,586
2002 and thereafter ......................... 627,134
----------
$1,186,374
==========
</TABLE>
The Lessee pays a franchise fee ranging from 4% 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 100% subject to, in certain cases, a maximum annual
payment of between 2% and 3% of applicable hotel revenues in addition to the
base management fee. In many cases managers and franchisors have agreed to
subordinate all or a portion of their fees at a specific hotel or group of
hotels either for a set period of time, or until the hotel or group of hotels
provides a predetermined return to the Lessee, or both.
3. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited Pro Forma Consolidated Statements of
Operations for the nine months ended September 30, 1997 and 1996 are presented
as if Lessee had leased and operated all of the Hotels, beginning on January 1,
1996. Such information should be read in conjunction with the financial
statements listed in the Index on page 2. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made. The Pro Forma Consolidated Statements of Operations do not purport to
present what actual results of operations would have been if such hotels had
been operated by Lessee pursuant to the Percentage Leases since such date or to
project the results of operations for any future periods.
17
<PAGE> 18
DJONT OPERATIONS, L.L.C.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenue:
Suite revenue ............................... $ 400,079 $ 368,557
Food and beverage revenue ................... 40,289 46,355
Food and beverage rent ...................... 3,393 2,552
Other revenue ............................... 31,545 25,972
---------- ----------
Total revenues ......................... 475,306 443,436
---------- ----------
Expenses:
Property operating costs and expenses ....... 112,007 104,744
General and administrative .................. 35,066 33,490
Advertising and promotion ................... 32,222 30,265
Repair and maintenance ...................... 22,587 22,528
Utilities ................................... 18,988 18,597
Management fee .............................. 11,172 9,823
Franchise fee ............................... 12,160 11,593
Food and beverage expenses .................. 33,227 40,214
Percentage lease payments ................... 191,008 168,011
Lessee overhead expenses .................... 1,618 1,151
Liability insurance ......................... 3,011 2,922
Other ....................................... 4,595 6,523
---------- ----------
Total expenses ......................... 477,661 449,861
---------- ----------
Loss before minority interest .................... (2,355) (6,425)
Minority interest ........................... 413 505
---------- ----------
Net loss ......................................... $ (1,942) $ (5,920)
========== ==========
</TABLE>
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
For background information relating to the Company and the definitions
of certain capitalized terms used herein, reference is made to Note 1 of Notes
to Consolidated Financial Statements of FelCor Suite Hotels, Inc. appearing
elsewhere herein.
THIRD QUARTER HIGHLIGHTS:
o FFO of $39.2 million or $0.89 per share and unit sets a new record for
the Company and represents a 27% increase in FFO per share and unit for
the quarter. Revenues increased from $26.4 million in the third quarter
of 1996 to $51.1 million in the current quarter.
o Net income before extraordinary charges increased from $0.38 per share
to $0.49 per share, an increase of 28.9%.
o RevPAR for the Company's total portfolio increased 7.3% over the third
quarter of 1996. Excluding the Company's four hotels located in
Atlanta, which were impacted by the Olympics in 1996, RevPAR for the
third quarter increased 9.8% over the third quarter of 1996. In
addition, on a comparable basis excluding the twelve hotels undergoing
rebranding, renovation or room additions, RevPAR increased 12.3% for
the quarter.
o The 18 fully renovated Crown Sterling Suites(R) hotels ("CSS Hotels")
experienced a 22.2 % increase in RevPAR as compared to the third
quarter of 1996.
o The Company acquired four hotels (one Sheraton(R) hotel and three
Doubletree Guest Suites(R) hotels) during the quarter, representing a
gross investment of approximately $122 million and 1,000 suites/rooms.
o On August 18, 1997 the Company amended and restated its existing
unsecured line of credit in order to increase availability from $400
million to $550 million, extend the term by one year to September 30,
2000 and reduce pricing.
o On September 30, 1997 the Company announced that it would increase its
Common Stock dividend by 10% to an annual rate of $2.20 per share,
beginning with a third quarter 1997 dividend of $0.55 per share.
o Following the end of the quarter, the Company announced the completion
of a private placement of $300 million of long term senior unsecured
notes. The notes were issued in two maturities, consisting of $175
million of 73/8% notes due 2004 and $125 million of 75/8% notes due
2007. Upon application of the proceeds, the Company had only $12
million of secured indebtedness and more than $1.6 billion of
unencumbered assets.
RESULTS OF OPERATIONS
The Company -- Actual
Nine Months Ended September 30, 1997 and 1996
For the nine months ended September 30, 1997 and 1996, the Company had
revenues of $128.7 million and $75.0 million, respectively, consisting of
Percentage Lease revenues of $122.7 million and $72.6 million, income in
unconsolidated partnerships of $5.8 million and $1.4 million and other revenue
(made up primarily of interest income) of $283,000 and $937,000, respectively.
Percentage Lease revenue is computed as a percentage of suite revenues, food and
beverage revenues and food and beverage rents of the Hotels. For the nine months
ended September 30, 1997, 97.3% of Percentage Lease revenue was derived from
suite revenues. A more detailed discussion of hotel suite revenue begins at "The
Hotels - Actual" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The increase in Percentage Lease revenue is attributed primarily to the
increased number of hotels owned at September 30, 1997 compared to the same
period in 1996 and increased suite revenue at the comparable hotels (those
hotels owned for the entire nine months in both 1996 and 1997). The increase in
the number of hotels accounted for
19
<PAGE> 20
approximately $43.0 million of the increase (86%) while Percentage Lease revenue
for the nineteen comparable hotels increased by $7.1 million (14%).
Suite revenues for the Original Hotels increased 9.3% and the CSS
Hotels increased suite revenue by 21.4% for this nine month period.
The increase in income from unconsolidated partnerships is principally
attributed to the increase in unconsolidated partnership hotels from five hotels
at September 30, 1996 to 14 at September 30, 1997.
Total expenses increased $40.7 million in the nine months ended
September 30, 1997 from $39.9 million to $80.6 million over the same period in
1996. The primary components of the dollar increase are: depreciation; taxes,
insurance and other; and interest expense. The primary reason for these
increases relate to the increased number of hotels owned by the Company. Those
expenses that made up the majority of the increase, as a percentage of total
revenue, were depreciation (27.9% of total revenue for the nine months ended
September 30, 1997 compared to 23.8% in the same period 1996), and interest
expense (15.6% of total revenue in 1997 compared to 8.4% in 1996).
Depreciation, as a percentage of total revenue, increased primarily as
a result of the major renovation projects which were placed in service and
started depreciating in late 1996 or early 1997.
The increased interest expense, as a percentage of total revenue, is
reflective of the additional borrowings during the end of 1996 and first nine
months of 1997 to finance hotel acquisitions and the renovation program.
Minority interest in the Operating Partnership decreased as a
percentage of total revenue due to the additional 14.2 million shares of common
stock issued during 1997 which decreases the Operating Partnership's unit
holders interest in the operations of the Company.
Preferred dividends increased from $4.8 million for the nine months in
1996 to $8.8 million for the same period in 1997. This increase is due to the
preferred stock, issued in May 1996, which accrued a full nine months of
dividends in 1997.
Net income applicable to common shareholders for the nine months ended
September 30, 1997 and 1996 was $39.2 million and $28.0 million respectively.
Three Months Ended September 30, 1997 and 1996
For the three months ended September 30, 1997 and 1996, the Company had
revenues of $51.1 million and $26.4 million, respectively, consisting primarily
of Percentage Lease revenues of $48.6 million and $25.3 million respectively,
income from unconsolidated partnerships of $2.3 million and $927,000, and other
income of $112,000 and $163,000, respectively. A more detailed discussion of
hotel suite revenue begins at "The Hotels -- Actual" section of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The increases in Percentage Lease revenues of $23.3 million is
attributable primarily to the hotels acquired since the third quarter of 1996
coupled with increased suite revenues at the 36 hotels that are comparable
(those hotels owned for the entire quarter in both 1997 and 1996). The increase
in hotels accounted for $17.2 million of the increase while the comparable
hotels contributed $6.1 million of the increase.
The increase in income from unconsolidated partnerships is principally
attributed to the increase in unconsolidated partnership hotels from five hotels
at September 30, 1996 to 14 at September 30, 1997.
Total expenses increased $15.8 million in the three months ended
September 30, 1997, from $14.5 million to $30.3 million. This represents an
increase in expenses as a percentage of total revenue of 4.4 percentage points
from 55.0% to 59.4%. The primary components of this increase in dollars were:
depreciation; taxes, insurance and other; and interest expense. The primary
reason for this increase is related to the increased number of hotels owned by
the Company. The expense that made up the majority of the increase, as a
percentage of total revenue, was interest expense (14.1% of total revenue in
1997 compared to 6.7% in 1996).
20
<PAGE> 21
The increased interest expense, as a percentage of total revenue, is
reflective of the additional borrowings during the end of 1996 and first nine
months of 1997 to finance hotel acquisitions and the renovation program.
Minority interest in the Operating Partnership decreased as a
percentage of total revenue because the additional 14.2 million shares of common
stock issued during 1997 which decreases the Operating Partnership's unit
holders interest in the operations of the Company.
Net income applicable to common shareholders before extraordinary
charge for the quarter was $17.8 million, or 34.9% of total revenue, as compared
to $8.9 million, or 33.8% of total revenue, for the third quarter of 1996.
Funds From Operations
The Company considers Funds From Operations to be a key measure of a
REIT's performance and should be considered along with, but not as an
alternative to, net income and cash flow as a measure of the Company's operating
performance and liquidity.
The following table computes Funds From Operations under the National
Association of Real Estate Investment Trusts ("NAREIT") definition. Funds From
Operations under the NAREIT definition consists of net income, computed in
accordance with generally accepted accounting principles, excluding gains or
losses from debt restructuring and sales of property, plus depreciation of real
property (including furniture and equipment) and after adjustments for
unconsolidated partnerships and joint ventures (in thousands, except per share
and unit data).
21
<PAGE> 22
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Funds From Operations (FFO):
Net income ................................................................ $ 20,742 $ 9,515 $ 48,057 $ 32,752
Less preferred dividends .................................................. 2,949 2,949 8,848 4,784
---------- ---------- ---------- ----------
Net income applicable to common shareholders .............................. 17,793 6,566 39,209 27,968
Add back:
Extraordinary charge for write-off of deferred
financing .............................................................. 2,354 2,354
Minority interest in Operating Partnership ............................. 1,643 1,477 4,584 4,619
Depreciation ........................................................... 14,238 7,529 35,969 17,833
Depreciation for unconsolidated partnerships ........................... 2,555 575 6,904 1,070
---------- ---------- ---------- ----------
FFO available to common shares and units .................................. 36,229 18,501 86,666 53,844
Add preferred dividends ................................................... 2,949 2,949 8,848 4,784
---------- ---------- ---------- ----------
FFO diluted for conversion of preferred stock ............................. $ 39,178 $ 21,450 $ 95,514 $ 58,628
========== ========== ========== ==========
Weighted average common shares outstanding ................................ 36,442 23,276 29,570 22,933
Weighted average units outstanding ........................................ 2,905 2,896 2,842 3,020
---------- ---------- ---------- ----------
Weighted average common shares and units outstanding ...................... 39,347 26,172 32,412 25,953
Weighted average common shares and units outstanding,
diluted for conversion of preferred stock ............................ 44,037 30,862 37,102 28,555
Per share and unit data:
FFO per common share and unit outstanding ................................. $ 0.92 $ 0.71 $ 2.67 $ 2.07
FFO per common share and unit outstanding, diluted for
conversion of preferred stock ........................................ $ 0.89 $ 0.70 $ 2.57 $ 2.05
</TABLE>
Included in the Funds From Operations described above is the Company's
share of FFO from its interest in fourteen unconsolidated partnerships. The FFO
contribution from these unconsolidated partnerships is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of operations information:
Percentage Lease revenue .................................................. $ 13,297 $ 3,889 $ 35,551 $ 6,011
Other income .............................................................. 3,140 4,316
---------- ---------- ---------- ----------
Total revenue .................................. 16,437 3,889 39,867 6,011
Expenses:
Depreciation ...................................................... 4,216 1,085 11,431 2,037
Taxes, insurance and other ........................................ 3,436 195 6,314 358
Interest expense .................................................. 3,215 689 8,216 689
---------- ---------- ---------- ----------
Total expenses ................................. 10,867 1,969 25,961 3,084
---------- ---------- ---------- ----------
Net income ................................................................ $ 5,570 $ 1,920 $ 13,906 $ 2,927
========== ========== ========== ==========
50% of net income attributable to the Company ............................. $ 2,785 $ 960 $ 6,953 $ 1,464
Amortization of cost in excess of book value .............................. (447) (33) (1,188) (52)
---------- ---------- ---------- ----------
Income from unconsolidated partnerships ................................... 2,338 927 5,765 1,412
Add back: Depreciation ................................................... 2,108 542 5,715 1,018
Amortization of cost in excess of book value ............ 447 33 1,189 52
---------- ---------- ---------- ----------
FFO contribution of unconsolidated partnerships ........................... $ 4,893 $ 1,502 $ 12,669 $ 2,482
========== ========== ========== ==========
</TABLE>
22
<PAGE> 23
The Lessee -- Actual
The Nine Months Ended September 30, 1997 and 1996
Total revenues increased from $194.4 million in the first nine months of
1996 to $380.7 million for the same period 1997. The primary reasons for this
increase are the number of hotels operated by the Lessee which increased from 41
hotels at September 30, 1996 to 71 hotels at September 30, 1997 and the
increases in revenues at the hotels owned in both the first nine months of 1997
and 1996. Percentage Lease expense, property operating costs, and other hotel
expenses increased in the first nine months of 1997 compared to the same period
of 1996 and relate primarily to the increased number of hotels operated by the
Lessee. The increase in percentage lease expense is also attributable in part to
the increase in the suite revenues. The Lessee had net losses of $1.6 million
and $2.9 million for the nine months ended September 30, 1997 and 1996,
respectively. Except as otherwise noted each of such hotels is operated as an
Embassy Suites hotel.
The Three Months Ended September 30, 1997 and 1996
Total revenues increased from $71.8 million in the third quarter of
1996 to $149.7 million for the same period of 1997. The primary reasons for this
increase are the number of hotels operated by the Lessee which increased from 41
hotels at September 30, 1996 to 71 hotels at September 30, 1997 and the
increases in revenues at the hotels owned in both the third quarter of 1997 and
1996. Percentage Lease expense, property operating costs and other hotel
expenses increased in the third quarter of 1997 compared to the same period of
1996 and relate primarily to the increased number of hotels operated by the
Lessee. The increase in percentage lease expense is also attributable in part to
the increase in suite revenues. The Lessee had net losses of $2.6 million and
$2.7 million for the three months ended September 30, 1997 and 1996,
respectively.
23
<PAGE> 24
The Hotels -- Actual
The following table sets forth historical suite revenue and percentage
changes therein between the periods presented for the 71 hotels which the Lessee
operated at September 30, 1997. The following table also presents comparative
information with respect to percentage of occupied rooms ("Occupancy"), average
daily rate ("ADR") and revenue per available room ("RevPAR") for the 13 Original
Hotels, the 18 CSS Hotels, the 12 1996 Acquisitions and the 28 1997
Acquisitions, regardless of ownership, through September 30, 1997. Except as
otherwise noted below, each of such hotels is operated as an Embassy Suites
hotel.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 VARIANCE 1997 1996 VARIANCE
--------- --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Room Revenue (in thousands):
Original Hotels (13)........... $ 21,958 $ 19,828 10.7% $ 64,876 $ 59,353 9.3%
CSS Hotels (18)................. 35,816 29,317 22.2% 108,379 89,287 21.4%
1996 Acquisitions (12).......... 24,007 22,749 5.5% 69,493 64,782 7.3%
1997 Acquisitions (28).......... 51,266 50,874 0.8% 157,331 155,134 1.4%
--------- --------- --------- -------
Total (71)...................... $ 133,047 $ 122,768 8.4% $ 400,079 $368,557 8.6%
========= ========= ========= ========
Occupancy:
Original Hotels................ 76.9% 77.8% (0.9) pts 77.4% 77.7% (0.3) pts
CSS Hotels...................... 74.5% 68.3% 6.2 pts 74.5% 68.4% 6.1 pts
1996 Acquisitions............... 77.0% 76.6% 0.4 pts 76.2% 74.6% 1.6 pts
1997 Acquisitions............... 71.8% 73.9% (2.1) pts 72.9% 75.2% (2.3) pts
Total........................... 74.2% 73.5% 0.7 pts 74.6% 73.7% 0.9 pts
ADR:
Original Hotels................ $ 107.50 $ 101.13 6.3% $ 109.29 $ 102.11 7.0%
CSS Hotels...................... 113.40 101.30 11.9% 115.67 103.21 12.1%
1996 Acquisitions............... 120.34 115.66 4.0% 118.69 112.74 5.3%
1997 Acquisitions............... 108.51 104.55 3.8% 110.25 105.18 4.8%
Total........................... 111.61 105.04 6.3% 112.92 105.42 7.1%
RevPAR:
Original Hotels................ $ 82.70 $ 78.69 5.1% $ 84.61 $ 79.39 6.6%
CSS Hotels...................... 84.49 69.14 22.2% 86.16 70.60 22.0%
1996 Acquisitions............... 92.70 88.62 4.6% 90.44 84.07 7.6%
1997 Acquisitions............... 77.89 77.29 0.8% 80.42 79.13 1.6%
Total........................... 82.81 77.17 7.3% 84.24 77.70 8.4%
</TABLE>
ORIGINAL HOTELS: Boston - Marlborough, MA; Brunswick, GA; Chicago - Lombard,
IL; Corpus Christi, TX; Dallas (Love Field), TX; Dallas
(Park Central), TX; Flagstaff, AZ; Jacksonville, FL;
Nashville, TN; New Orleans, LA; Orlando (North), FL; Orlando
(South), FL; Tulsa, OK.
CSS HOTELS: Anaheim, CA; Baton Rouge, LA; Birmingham, AL; Boca Raton, FL
(1); Deerfield Beach, FL; Ft. Lauderdale, FL; Los Angeles
(LAX South), CA; Miami, FL; Milpitas, CA; Minneapolis
(Airport), MN; Minneapolis (Downtown), MN; Napa, CA; Oxnard
(Mandalay Beach), CA; Phoenix, AZ; San Francisco (Airport
North), CA; San Francisco (Airport South), CA; St. Paul, MN;
Tampa (Busch Gardens), FL(1).
1996 ACQUISITIONS: Atlanta-Buckhead, GA; Beaver Creek Resort (Avon-Vail), CO;
Boca Raton, FL; Charlotte, NC; Cleveland, OH; Deerfield, IL;
Indianapolis, IN; Kingston Plantation (Myrtle Beach), SC(3);
Lexington, KY(2); Parsippany, NJ; Piscataway, NJ; San Rafael
(Marin County) CA.
1997 ACQUISITIONS: Atlanta, GA; Atlanta Galleria, GA(4); Atlanta Gateway,
GA(4); Austin, TX; Austin (Downtown), TX(1); Bloomington,
MN(1); BWI Airport, MD(1); Chicago O'Hare, IL(4); Covina,
CA; Dallas Market Center, TX; Dallas Park Central(4); Dana
Point, CA(1); Kansas City, MO; Lake Buena Vista, FL(1); LAX
North, CA; Nashville, TN; Nashville, TN(1); Omaha, NE(1);
Overland Park, KS; Phoenix Crescent, AZ(4); Raleigh, NC; San
Antonio, TX; San Antonio (Airport), TX; Secaucus, NJ;
Society Hill, PA (4) ;Syracuse, NY; Tampa Rocky Point,
FL(1); Troy, MI(1).
(1) Operating as a Doubletree Guest Suites hotel
(2) Operating as a Hilton Suites hotel
(3) In the process of conversion to Embassy Suites hotels
(4) Operating as a Sheraton hotel
24
<PAGE> 25
Comparison of The Hotels' Suite Revenues for the Nine Months Ended
September 30, 1997 and 1996
Suite revenues from the 71 Hotels, included without regard to
ownership, increased 8.6% for the nine months ended September 30, 1997 from the
same period of 1996. The Original Hotels increased 9.3%, the CSS Hotels
increased 21.4%, the 1996 Acquisition Hotels increased 7.3% and the 1997
Acquisition Hotels increased 1.4% for the nine months ended September 30, 1997
as compared to the same period of 1996.
The Original Hotels were owned by the Company throughout all of the
first nine months of both 1997 and 1996. Suite revenue for these hotels
increased $5.5 million over the same period in 1996. This improvement in suite
revenue resulted from increased average daily rates ("ADR") of 7.0%. The hotels
in this group recorded increases in ADR ranging from 2.5% to 12.5%. The
increases in ADR at these hotels are attributed to the strength of the markets
in which these hotels operate as well as aggressive rate management.
For the nine months of 1997 over 1996 the CSS Hotels experienced an
increase in ADR of 12.1% to $115.67 and a 6.1 percentage point increase in
Occupancy to 74.5%. The strength of the improvement in the CSS Hotels is
partially reflective of the $54 million suite renovation program that was
completed in the first quarter of 1997. This program made substantial upgrades
and improvements to these former Crown Sterling Suites hotels. This group of
hotels were also converted to the Embassy Suites (16) or Doubletree Guest Suites
(2) brand during 1996. The increase in both occupancy and ADR is also
attributable in part, to the stronger marketing presence of the Embassy Suites
and Doubletree Guest Suites brands.
The 1996 Acquisition Hotels increased ADR by 5.3% to $118.69 and
occupancy increased 1.6 percentage points which resulted in suite revenue
increases for these hotels of $4.7 million in the first nine months of 1997
compared to the same period in 1996. Some of the 1996 Acquisition Hotels
benefitted from suite renovations completed in 1996 or during the first quarter
of 1997. The Company has committed to reserving 4% of suite revenue for ongoing
capital replacements and improvements for all of its Hotels, in addition to
making normal repair and maintenance expenditures and any necessary renovations
for hotels acquired.
The 1997 Acquisition hotels, collectively, increased ADR by 3.8% and
4.8%, respectively for the three and nine months ended September 30, 1997
compared to the same period of 1996. Certain of the individual 1997 Acquisition
hotels, however, had decreases in ADR and/or Occupancy for such comparable
periods. These decreases are primarily the result of temporary declines
attributed to disruptions from rebranding, repositioning and/or renovation of
certain hotels and in the case of those hotels located in Atlanta, Georgia,
decreased demand in 1997 compared to 1996 due to the 1996 Summer Olympics which
were held in Atlanta.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to stockholders, is its share of the Operating
Partnership's cash flow from the Percentage Leases. For the nine months ended
September 30, 1997, cash flow provided by operating activities, consisting
primarily of Percentage Lease revenue, was $74.6 million and funds from
operations diluted for the conversion preferred stock, which is the sum of net
income, minority interest, and depreciation of real property (including
furniture and equipment), was $95.5 million. The Lessee's obligations under the
Percentage Leases are unsecured. The Lessee's ability to make lease payments
under the Percentage Leases and the Company's liquidity, including its ability
to make distributions to stockholders, are substantially dependent on the
ability of the Lessee to generate sufficient cash flow from the operation of the
Hotels.
At September 30, 1997, the Lessee had paid all amounts then due the
Company under the Percentage Leases. During the nine months ended 1997, the
Lessee realized a net loss of $1.6 million. The Lessee's accumulated
shareholders' deficit of $8.0 million at September 30, 1997 resulted primarily
from losses during 1996 as a consequence of the one-time costs of converting the
CSS Hotels to the Embassy Suites and Doubletree Guest Suites brands and the
substantial number of suite nights lost during the year due to renovation. It is
anticipated that a substantial portion of any future profits of the Lessee will
be retained until a positive shareholders' equity is restored. Although it is
currently anticipated that the Lessee could sustain a loss during 1997, it is
anticipated that its future earnings will be sufficient to enable it to continue
to make its lease payments under the Percentage Leases when due.
25
<PAGE> 26
Minority equity interest in two of DJONT's consolidated subsidiaries,
relating to an aggregate of 15 Hotels, are held by unrelated third parties that
also own an equity interest in such Hotels. Messrs. Feldman and Corcoran, such
unrelated third party owners, and the managers of certain of the Hotels have
agreed, directly or through their affiliates, to make loans to the Lessee of up
to an aggregate of approximately $15.4 million, to the extent necessary to
enable the Lessee to pay rent and other obligations due under the respective
Percentage Leases relating to a total of 32 of the Hotels. Amounts so borrowed
by the Lessee, if any, will be subordinate in right of repayment to the prior
payment in full of rent and other obligations due under the Percentage Leases
relating to such Hotels. No loans were outstanding under such agreements at
September 30, 1997.
The 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.
At September 30, 1997, the Company had $18.9 million of cash and cash
equivalents and had utilized $296 million of the amount available under the
Company's $550 million unsecured revolving Line of Credit. On October 1, 1997,
the Company placed $300 million in long term senior unsecured private placement
debt. This senior unsecured private placement debt, bears interest at 73/8% for
the notes due 2004, and 75/8% for the notes due 2007. The Company has filed a
registration statement with the SEC, which has not yet been declared effective,
to exchange privately placed debt for registered debt with identical terms.
To manage the relative mix of its debt between fixed and variable rate
instruments, the Company has entered into two separate interest rate swap
agreements. These interest rate swap agreements modify a portion of the interest
characteristics of the Company's outstanding debt without an exchange of the
underlying principal amount and effectively convert variable rate debt to a
fixed rate. The fixed rates to be paid, the effective fixed rate, and the
initial variable rate to be received by the Company at September 30, 1997 are
summarized in the following table:
<TABLE>
<CAPTION>
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 9/30/97 MATURITY
--------------- ------------ ---------- ------- --------
<S> <C> <C> <C> <C>
$50 million 6.11125% 7.61125% 6.47625% October 1999
$25 million 5.95500% 7.45500% 6.19100% November 1999
</TABLE>
After application of the $300 million senior unsecured privately placed
debt, and taking into consideration the $75 million in interest rate swaps, the
Company has reduced its variable rate debt to about 10% of total debt
outstanding. The fixed rate debt held by the Company bears interest at a
weighted average rate of 7.6%.
The differences to be paid or received by the 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 are limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
To provide for additional flexibility, the Company has registered up to
an aggregate of $1.0 billion in common stock, preferred stock, debt securities
and/or common stock warrants pursuant to two shelf registration statements. One
shelf registration statement for $500 million, was declared effective by the
Securities Exchange Commission during 1996 and the second shelf registration
statement for $500 million was declared effective during the second quarter of
1997. The terms and conditions of the stock or debt securities issued thereunder
are determined by the Company based upon 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 and 3,000,000 shares of common stock
at $35.50 were issued during the first quarter of 1997 pursuant to the shelf
registration declared effective in 1996 leaving approximately $242.3 million
available under that shelf registration. With regard to the shelf registration
declared effective in 1997, the Company issued 11,200,000 shares of common stock
at $36.625 leaving approximately $89.8 million available under that shelf
registration. On October 22, 1997 a Special Meeting of Shareholders approved an
amendment to the Company's Charter increasing the number of authorized shares of
Common Stock from 50 million shares to 100 million shares. The
26
<PAGE> 27
amendment was adopted by the affirmative vote of shareholders owning more than
77% of the shares of common stock outstanding at the close of business on
September 8, 1997.
The Company completed construction and placed into service on July 1,
1997, 129 net additional suites, meeting rooms and other public area upgrades at
its Boston-Marlborough, Massachusetts hotel at a cost of $15.9 million. The
Company is constructing an additional 67 suites at its Jacksonville, Florida
hotel and 67 additional suites at its Orlando (North), Florida hotel at an
aggregate projected cost of $10.2 million with an expected completion in early
1998.
The Company's cash flow from financing activities of approximately
$571.7 million for the nine months ended September 30, 1997 resulted from the
following: The sale of an aggregate of 14.2 million shares of common stock with
net proceeds of $448.0 million; (3.0 million shares in the first quarter of 1997
at $35.50 per share and 11.2 million shares at September 30, 1997 at $36.625)
net of 1.2 million shares of common stock repurchased from Promus net borrowings
under the Company's line of credit of $180.1 million; distributions paid to
common shareholders, preferred shareholders and limited partners of $57.0
million; and proceeds from the exercise of stock options by former employees of
$592,000.
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 the cash flow from
operations are 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.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128"), No. 129 "Disclosure of Information About Capital Structure" ("SFAS 129"),
No. 130 "Reporting Comprehensive Income" ("SFAS 130"), and No. 131 "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131"), all of
which are effective for fiscal years beginning after December 15, 1997.
SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 129 establishes standards for
disclosing information about an entity's capital structure such as information
about securities, liquidation preference of preferred stock and redeemable
stock. SFAS 130 specifies the presentation and disclosure requirements for
reporting comprehensive income which includes those items which have been
formerly reported as a component of shareholders' equity. SFAS 131 establishes
the disclosure requirements for reporting segment information.
Management believes that, when adopted, SFAS 128, 129, 130 and 131 will
not have a significant impact on the Company's financial statements.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Quarterly Report on Form 10-Q include forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended ("1933 Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended ("1934 ACT"). Although the 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
27
<PAGE> 28
are disclosed herein and in the Company's other filings under the 1933 Act and
1934 Act (collectively, "Cautionary Disclosures"). The forward looking
statements included herein, and all subsequent written and oral forward looking
statements attributable to the Company or persons acting on its behalf, are
expressly qualified in their entirety by the Cautionary Statements.
28
<PAGE> 29
PART II. -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
The Indenture filed as Exhibit 4.1 hereto, covering the issuance of
$175 million in 73/8% Senior Notes Due 2004 and $125 million in 75/8% Senior
Notes Due 2007, contains various affirmative and negative covenants binding upon
the Company, to which Indenture reference is hereby made for a complete
statement of such provisions. Among the negative covenants contained in such
Indenture is a limitation upon restricted payments, including dividends, with
respect to the capital stock of the Company. In general terms, this limitation
would limit the Company's payment of cash dividends, purchases of outstanding
capital stock and certain other payments or investments (collectively,
"Restricted Payments"), following October 1, 1997, if at the time of or after
giving effect to any such Restricted Payment, (A) a default or event of default
shall have occurred and be continuing under the Indenture, (B) the Company could
not incur at least $1.00 of additional indebtedness under the limitation on
indebtedness set forth in the Indenture or (C) the aggregate amount of all such
Restricted Payments made after October 1, 1997 would exceed, in the case of the
payment of dividends, the sum of (1) $80 million, (2) 95% of the Company's Funds
From Operations, on a cumulative basis, during the period beginning on October
1, 1997 and ending on the last day of the fiscal quarter ending immediately
preceding such payment for which reports have been filed with the Securities &
Exchange Commission or provided to the trustee, (3) the aggregate net proceeds
from the Company's sale to unrelated third parties of its capital stock (other
than certain disqualified stock), (4) the net reduction in certain investments
included within Restricted Payments; provided, however, that in any event the
Company may declare or pay any dividend that is necessary to enable it to
maintain its REIT status, so long as (i) the aggregate amount of its outstanding
indebtedness is less than 60% of its adjusted total assets and (ii) no default
or event of default shall have occurred and be continuing under the Indenture.
Accordingly, at October 1, 1997 the Company had $80 million available for the
payment of dividends under the Indenture.
ITEM 5. OTHER INFORMATION.
For information relating to hotel acquisitions and certain other
transactions by the Company through September 30, 1997, see Note 1 of Notes to
Consolidated Financial Statements of FelCor Suite Hotels, Inc. contained in Item
1 of Part I of this Quarterly Report on Form 10-Q. Such information is
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description
4.2 - Indenture dated as of October 1, 1997 by and among FelCor
Suites Limited Partnership, FelCor Suite Hotels, Inc., the
Subsidiary Guarantors named therein and SunTrust Bank,
Atlanta, Georgia, as Trustee (filed as Exhibit 4.1 to the
registration statement filed by FelCor Suites Limited
Partnership, FelCor Suite Hotels, Inc., FelCor/CSS Hotels,
L.L.C., FelCor/LAX Hotels, L.L.C., FelCor Eight Hotels,
L.L.C., FelCor/CSS Holdings, L.P., FelCor/St. Paul Holdings,
L.P. and FelCor/LAX Holdings, L.P. on Form S-4 (File No.
333-39595) (the "1997 S-4 Registration Statement") and
incorporated herein by reference).
10.2.2 - Schedule of executed Lease Agreements identifying
material variations from the form of Lease Agreement with
respect to hotels acquired by the Company through September
30, 1997 (filed as Exhibit 10.2.2 to the 1997 S-4
Registration Statement and incorporated herein by
reference).
29
<PAGE> 30
10.23 - Third Amended and Restated Revolving Credit Agreement
dated as of August 14, 1997 among FelCor Suite Hotels, Inc.
and FelCor Suites Limited Partnership, as Borrower, the
Lenders party thereto, The Chase Manhattan Bank, as
Administrative Agent, and Wells Fargo Bank, National
Association, as Documentation Agent (filed as Exhibit 10.23
to the 1997 S-4 Registration Statement and incorporated
herein by reference).
10.25 - Registration Rights Agreement dated as of September 26,
1997 among FelCor Suite Hotels, Inc., FelCor Suites Limited
Partnership, Morgan Stanley & Co. Incorporated, NationsBank
Capital Markets, Inc. and Salomon Brothers Inc (filed as
Exhibit 10.25 to the 1997 S-4 Registration Statement and
incorporated herein by reference).
27 - Financial Data Schedule
(b) Reports on Form 8-K:
-- Current Report on Form 8-K, filed by the Company on July 11,
1997. This filing reported, under Item 2, the purchase of
five Sheraton hotels on June 30, 1997 for an aggregate
purchase price of approximately $200 million.
-- Current Report on Form 8-K/A, filed by the Company on August
13, 1997. This filing reported:
(1) under Item 7(a), the audited financial statements
for the Sheraton Acquisition Hotels, including a combined
balance sheet for the Sheraton Acquisition Hotels as of
December 31, 1996 and March 31, 1997 (unaudited), the
related combined statements of revenues over expenses,
combined statements of cash flows for the year ended
December 31, 1996 and three months ended March 31, 1997 and
1996 (unaudited), and combined statements of equity for the
year ended December 31, 1996 and the three months ended
March 31, 1997 (unaudited); and
(2) under Item 7(b), unaudited pro forma statements of
operations of the Company and the Lessee, presented as if
(i) the acquisitions of all hotels owned by the Company at
December 31, 1996; (ii) those hotels acquired in 1997
through July 31, 1997; (iii) the equity offerings
consummated during 1996 and 1997; and (iv) related
transactions had occurred as of January 1, 1996 and all of
the Hotels had been leased to the Lessee pursuant to the
Percentage Leases. The unaudited consolidated balance sheet
of the Company is presented as if the acquisition of the
hotels acquired subsequent to March 31, 1997 and the
consummation of the June 1997 equity offering and related
transactions had occurred on March 31, 1997.
-- Current Report on Form 8-K, filed by the Company on
September 19, 1997. Under Item 5, the Company filed a press
release dated September 19, 1997. In this press release, the
Company announced a proposed private placement of $150
million in senior unsecured notes by the Operating
Partnership.
-- Current Report on Form 8-K, filed by the Company on October
8, 1997. Under Item 5, the Company filed a press release
dated October 1, 1997. In this press release, the Company
announced the completion of a $300 million private placement
of senior unsecured notes by the Operating Partnership.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1997
FELCOR SUITE HOTELS, INC.
By: /s/ Lester C. Johnson
---------------------------------
Lester C. Johnson
Vice President and Controller
(Chief Accounting Officer)
31
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
27 FINANCIAL DATA SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,942
<SECURITIES> 0
<RECEIVABLES> 13,419
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,361
<PP&E> 1,519,947
<DEPRECIATION> 72,607
<TOTAL-ASSETS> 1,616,487
<CURRENT-LIABILITIES> 29,937
<BONDS> 418,177
0
151,250
<COMMON> 377
<OTHER-SE> 934,213
<TOTAL-LIABILITY-AND-EQUITY> 1,616,487
<SALES> 0
<TOTAL-REVENUES> 51,053
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,183
<INCOME-PRETAX> 20,742
<INCOME-TAX> 0
<INCOME-CONTINUING> 20,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,742
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>