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UNITED STATES
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, 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 1-14236
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:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
COMMON STOCK NEW YORK STOCK EXCHANGE, INC.
$1.95 SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
</TABLE>
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 and non-voting common stock held
by non-affiliates of the registrant, as of March 10, 1998, was approximately
$1.3 billion.
As of March 10, 1998, the registrant had issued and outstanding 36,591,080
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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FELCOR SUITE HOTELS, INC.
INDEX
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FORM 10-K
REPORT
ITEM NO. PAGE
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PART I
1. Business ........................................................................................... 3
2. Properties ......................................................................................... 10
3. Legal Proceedings .................................................................................. 15
4. Submission of Matters to a Vote of Security Holders ................................................ 15
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters .............................. 15
6. Selected Financial Data ............................................................................ 17
7. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 23
8. Financial Statements and Supplementary Data ........................................................ 33
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............... 33
PART III
10. Directors and Executive Officers of the Company .................................................... 34
11. Executive Compensation ............................................................................. 37
12. Security Ownership of Certain Beneficial Owners and Management ..................................... 42
13. Certain Relationships and Related Transactions ..................................................... 43
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................... 44
</TABLE>
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PART I
ITEM 1. BUSINESS
FelCor Suite Hotels, Inc. ("FelCor") is a real estate investment trust
("REIT") which, at December 31, 1997, owned interests in 73 hotels with an
aggregate of 17,933 suites/rooms in 27 states (collectively the "Hotels")
through its 92.7% general partner interest in FelCor Suites Limited Partnership
(the "Operating Partnership"). FelCor, the Operating Partnership and its
subsidiaries, are herein referred to, collectively, as the "Company". Fifty-two
of the Hotels are operated as Embassy Suites(R) hotels (of which 28 were
converted from other brands), 13 are operated as Doubletree Guest Suites(R)
hotels, seven are operated as Sheraton(R) hotels (five of which are upscale,
full-service traditional non-suite hotels) and one is operated as a Hilton
Suites(R) hotel. Sixty-three of the Hotels are managed by subsidiaries of Promus
Hotel Corporation ("Promus") which, following its recent merger with Doubletree
Corporation, includes Doubletree Hotel Corporation and its subsidiaries
("Doubletree"). Promus is the largest operator of all-suite, full-service hotels
in the United States. Of the remaining Hotels, seven are managed by a subsidiary
of ITT Sheraton Corporation ("Sheraton") and three are managed by independent
management companies. At December 31, 1997, the Company was the owner of the
largest number of Embassy Suites hotels in the world.
To enable FelCor to satisfy certain requirements for qualifications as
a REIT, neither it nor the Operating Partnership can operate the hotels in which
they invest. Accordingly, the Company typically leases the Hotels to DJONT
Operations, L.L.C., or a consolidated subsidiary thereof (collectively, the
"Lessee"), pursuant to leases with terms 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/room revenues and food and beverage
revenues and rents ("Percentage Leases"). See "Item 2. Properties" for
information regarding the terms of the Percentage Leases. DJONT Operations
L.L.C. is a Delaware limited liability company, of which all the voting
interests (constituting a 50% equity interest) are beneficially owned by Hervey
A. Feldman and Thomas J. Corcoran, Jr., who are directors and officers of the
Company, and the non-voting interests (constituting the remaining 50% equity
interest) is owned by RGC Leasing, Inc., a Nevada corporation owned by the
children of Charles N. Mathewson, a major investor in the Company and a director
of the Company.
Growth Strategies
The Company's primary business objectives are to (i) identify hotel
investments that are underperforming due to lack of sufficient capital
improvements, poor management or franchise affiliation, (ii) add value to its
hotels through active asset management and the strategic investment of capital,
and (iii) build solid working relationships with, and be the "owner-of-choice"
for, selected premium, full-service hotel brand owners/managers who are willing
to commit to the on-going success of the Company's hotels they license and
manage. The Company seeks to increase operating cash flow and enhance its value
through both internal growth and acquisitions. The Company's internal growth
strategy is to utilize its asset management expertise to improve the quality of
its hotels by renovating, upgrading and repositioning, thereby improving the
revenue performance of the hotels, and to participate, through the Percentage
Leases, in any growth in revenues at its hotels. The Company's acquisition
growth strategy remains focused substantially upon the purchase of additional
existing and a limited number of newly developed hotels that meet the Company's
investment criteria.
Strategic Relationships
The Company currently maintains strategic brand owner/manager
relationships with Promus and Sheraton. Promus recently completed the merger of
its company with Doubletree. The combined Promus company constitutes the lodging
industry's third largest entity based on annual revenue. The Company believes
that this merger will increase the Company's flexibility in branding its
all-suite hotels to capitalize on local market conditions and brand
representation. ITT Corporation, the parent of ITT Sheraton Corporation, was
recently acquired by Starwood Hotels and Resorts Worldwide, Inc. ("Starwood").
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o Promus Hotel Corporation is the largest operator of full-service,
all-suite hotels in the United States. Promus is also the owner of
the Embassy Suites, Doubletree(R) and Doubletree Guest Suites
brands and the manager of 63 of the Company's Hotels. In addition,
based on the closing price of the Common Stock on the NYSE on
December 31, 1997, Promus owned Common Stock of FelCor and units
of partnership interest ("Units") of the Operating Partnership
with an aggregate value of more than $50 million. The relationship
with Promus has provided the foundation for the Company's
historical growth.
o ITT Sheraton Corporation is the owner of the Sheraton brand and a
wholly owned subsidiary of Starwood with more than 460 hotels in
over 60 countries. This newest strategic alliance, coupled with
the purchase of seven Sheraton hotels in 1997 (including a total
of five non-suite hotels), provided the Company with its initial
entry into the upscale, full-service, non-suite hotel market and
may provide the Company with opportunities for future growth.
The strength of the Company's strategic relationships with the
foregoing brand owner/managers are evidenced by their (i) significant equity
investments in 15 of the Company's Hotels, (ii) agreements to make subordinated
loans to the Lessee (in support of the Lessee's obligations under certain
Percentage Leases with respect to certain hotels), (iii) subordination of
certain customary fees to the Lessee's obligations under applicable Percentage
Leases, (iv) grants of certain performance-based termination rights by the
managers to the Lessees, and (v) in one case, guarantee of a $25 million loan to
the Company.
Hotel Acquisition and Expansion
At December 31, 1997, the Company owned interests in 73 hotels with an
aggregate of 17,933 suites/rooms. Of the Hotels, the Company owns 100% equity
interests in 55 hotels (13,430 suites), a 90% or greater interest in entities
owning four hotels (1,041 suites) and 50% interests in separate entities that
own 14 hotels (3,462 suites). The Hotels are located in 27 states, with 31
hotels in California, Florida and Texas. The following table provides certain
information regarding the Hotels acquired through December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF HOTELS NUMBER OF
HOTELS ACQUIRED SUITES/ROOMS
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<S> <C> <C>
1994 7 1,730
1995 13 2,649
1996 23 5,769
1997
1st Quarter 15 3,446
2nd Quarter 9 2,715
3rd Quarter 4 1,000
4th Quarter 2 447
-- ------
73 17,756
Additional suites constructed == 177
------
17,933
======
</TABLE>
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 and, in many instances, incurs the
cost of converting such hotels into national brands like Embassy Suites,
Doubletree Guest Suites or Sheraton. For the year ended December 31, 1997, the
Company spent approximately $22.0 million on renovations and upgrading 35 of its
Hotels. Additionally, the Company is planning to spend approximately $36.9
million for additional renovations and upgrades in 1998 for those hotels owned
at December 31, 1997.
During 1997 the Company completed construction in July on a net of 129
suites, additional meeting rooms and other public area upgrades at its
Boston-Marlborough, Massachusetts Embassy Suites hotel at a cost of
approximately $16.0 million. Additionally, during 1997 the Company started
construction of an aggregate of 134
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suites at its Jacksonville and Orlando (North), Florida Embassy Suites hotels
which are to open in the first quarter of 1998, at an aggregate projected cost
of $10.2 million. At December 31, 1997, an aggregate of approximately $7.4
million had been spent on these two hotels.
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 $19.3 million (approximately
4.2% of suite revenues) during 1997 and 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 $26.2 million (approximately 5.7% of suite
revenues) during 1997 and 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.
Financing Transactions
FelCor has approximately $89.9 million of common stock, preferred
stock, debt securities and/or common stock warrants available for offerings
under a shelf registration statement declared effective in 1997.
On February 17, 1998 the Company filed a $1 billion omnibus shelf
registration statement with the Securities and Exchange Commission which will
enable the Company to provide offerings from time to time of up to $1 billion in
securities, which may include common stock, preferred stock, depository shares,
debt securities and/or common stock warrants.
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. In 1996, the Company issued 6,050,000 shares of its
Preferred Stock designated as its $1.95 Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock") at $25 per share. The Series A
Preferred Stock bears an annual dividend equal to the greater of $1.95 per share
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. 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, 1997, all dividends then payable on the Series A Preferred Stock
had been paid.
The Board of Directors has adopted a policy which limits the Company's
indebtedness to not more than 40% of its investment in hotel assets, at cost,
which at December 31, 1997, would allow the Company to borrow up to
approximately $690 million under this policy. This policy may be modified by the
Board of Directors at any time. At December 31, 1997, the Company had a $550
million unsecured revolving line of credit ("Line of Credit"), under which it
had borrowed $136 million. In addition, the Company had other indebtedness of an
unsecured term loan of $25 million (guaranteed by Promus) ("Renovation Loan"),
$298 million in unsecured senior notes (net of discount) and approximately
$650,000 of other unsecured indebtedness. The Company also had, at December 31,
1997, an additional $17.0 million in secured debt, including capitalized lease
obligations. At December 31, 1997, the total Indebtedness of the Company was
28.5% of Adjusted Total Assets and its ratio of EBITDA to interest paid for the
year ended December 31, 1997 was 7.2 to 1. The Company believes that its current
debt limitation policy, its preference for unsecured debt and its success in
raising equity capital for expansion, demonstrate the Company's commitment to
the maintenance of a conservative but flexible capital structure.
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Hotel Operating Performance
The Company's 43 hotels owned at both December 31, 1997 and 1996, which
reflect the effect of the Company's ownership and management of strategic
partners, produced outstanding results with RevPAR increasing 12.9% over 1996.
The largest portion of this increase came from the 18 former Crown Sterling
Suites(R) hotels ("CSS Hotels") which continued their trend of improved RevPAR
throughout 1997, achieving a RevPAR of $85.01 in 1997 compared to $70.05 for
1996, an increase of approximately 21.4%. The Company attributes this dramatic
increase to the renovation and repositioning of these hotels in 1996 and early
1997.
The following table sets forth historical suite revenue, occupancy
percentage ("Occupancy"), average daily rate ("ADR") and revenue per available
room ("RevPAR") and the percentage changes therein between the periods presented
for the 73 hotels which the Lessee operated at December 31, 1997. This
information is presented regardless of ownership. Except as otherwise noted
below, each of the hotels is operated as an Embassy Suites hotel.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1997 1996 VARIANCE
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<S> <C> <C> <C>
Suite Revenue (in thousands):
Original Hotels (13) ............................................. $ 85,944 $ 78,622 9.3 %
CSS Hotels (18) .................................................. 143,012 118,300 20.9 %
1996 Acquisitions (12) ........................................... 90,162 83,920 7.4 %
----------- -----------
Subtotal-- Hotels owned at both December 31, 1997 and 1996 (43) .. 319,118 280,842 13.6 %
1997 Acquisitions (30) ........................................... 217,662 210,570 3.4 %
----------- -----------
Total (73) ........................................................ $ 536,780 $ 491,412 9.2 %
=========== ===========
Occupancy:
Original Hotels .................................................. 76.1% 76.5% (0.5)%
CSS Hotels ....................................................... 73.4% 67.8% 8.3 %
1996 Acquisitions ................................................ 74.0% 73.0% 1.4 %
Subtotal-- Hotels owned at both December 31, 1997 and 1996 ....... 74.3% 71.6% 3.8 %
1997 Acquisitions ................................................. 71.8% 73.1% (1.8)%
Total ............................................................. 73.2% 72.2% 1.4 %
Average Daily Rate (ADR):
Original Hotels .................................................. $ 109.35 $ 102.82 6.4 %
CSS Hotels ....................................................... $ 115.85 $ 103.31 12.1 %
1996 Acquisitions ................................................ $ 118.61 $ 111.54 6.3 %
Subtotal-- Hotels owned at both December 31, 1997 and 1996 ....... $ 114.77 $ 105.50 8.8 %
1997 Acquisitions ................................................. $ 109.20 $ 103.69 5.3 %
Total ............................................................. $ 112.44 $ 104.72 7.4 %
Revenue Per Available Suite (RevPAR):
Original Hotels .................................................. $ 83.17 $ 78.65 5.7 %
CSS Hotels ....................................................... $ 85.01 $ 70.05 21.4 %
1996 Acquisitions ................................................ $ 87.73 $ 81.46 7.7 %
Subtotal-- Hotels owned at both December 31, 1997 and 1996 ....... $ 85.25 $ 75.52 12.9 %
1997 Acquisitions ................................................. $ 78.39 $ 75.80 3.4 %
Total ............................................................. $ 82.33 $ 75.64 8.8 %
</TABLE>
ORIGINAL HOTELS: Flagstaff, AZ, Jacksonville, FL, Orlando (North), FL,
Orlando (South), FL, Brunswick, GA, Chicago -
Lombard, IL, New Orleans, LA, Boston - Marlborough,
MA, Tulsa, OK, Nashville, TN, Corpus Christi, TX,
Dallas (Love Field), TX, Dallas (Park Central), TX.
CSS HOTELS: Birmingham, AL, Phoenix (Camelback), AZ, Anaheim, CA,
El Segundo (LAX South), CA, Milpitas, CA, Napa, CA,
Oxnard (Mandalay Beach), CA, San Francisco (Airport
North), CA, San Francisco (Airport South), CA, Boca
Raton, FL(1), Deerfield Beach, FL, Ft. Lauderdale,
FL, Miami, FL, Tampa (Busch Gardens), FL(1), Baton
Rouge, LA, Minneapolis (Airport), MN, Minneapolis
(Downtown), MN, St. Paul, MN.
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1996 ACQUISITIONS: San Rafael (Marin County), CA, Avon (Beaver Creek),
CO, Boca Raton, FL, Atlanta (Buckhead), GA,
Deerfield, IL, Indianapolis (North), IN, Lexington,
KY(2), Charlotte, NC, Parsippany, NJ, Piscataway, NJ,
Cleveland, OH, Myrtle Beach (Kingston Plantation),
SC(3).
1997 ACQUISITIONS: Phoenix (Crescent), AZ(3), Covina, CA, Dana Point,
CA(1), Los Angeles (LAX North), CA, Lake Buena Vista
(Disney World), FL(1), Tampa (Rocky Point), FL(1),
Atlanta (Airport), GA(4), Atlanta (Galleria)(3), GA,
Atlanta (Perimeter Center), GA, Chicago (O'Hare),
IL(4), Overland Park, KS, Baltimore, MD(1), Troy,
MI(1), Bloomington, MN(1), Kansas City (Country Club
Plaza), MO, Raleigh, NC, Raleigh/Durham, NC(1),
Omaha, NE(1), Secaucus, NJ, Syracuse, NY, Dayton,
OH(1), Philadelphia (Society Hill), PA(3), Nashville
(Airport), TN(1), Austin (Airport North), TX, Austin
(Downtown), TX(1), Dallas (Market Center), TX, Dallas
(Park Central), TX (3), San Antonio (Airport), TX,
San Antonio (Northwest), TX, Burlington, VT (3).
(1) Operating as a Doubletree Guest Suites hotel.
(2) Operating as a Hilton Suites hotel.
(3) Operating as a Sheraton hotel.
(4) Operating as a Sheraton Suites hotel.
The principal factors affecting the Company's results of operations are
continued growth in the number of hotels through acquisitions and improvements
in the suite revenues measured by RevPAR. Improvements in suite revenue
significantly impacts the Company because the Company's principal source of
revenue 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. The portion of the
Percentage Lease revenue derived from suite revenues was approximately 97% for
each of the three years ended December 31, 1997, 1996 and 1995.
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 Percentage Rent revenue, particularly during the fourth
quarter. 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 generally be able to accept more risk than the Company
can prudently manage. Competition may generally reduce the number of suitable
investment opportunities offered to the Company and may increase the bargaining
power of owners seeking to sell their hotels.
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Environmental Matters
Under various federal, state and local laws and regulations, a current
or previous 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 Hotels, both the Company and the Lessee 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 obtained
by the Company with respect to 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 studied 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.
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 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.
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 ("ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While management of the Company believes
that, based upon an examination thereof and consultation with professionals, the
Hotels are substantially in compliance with these requirements, a determination
that the Company is not in compliance with the ADA could result in the
imposition of fines or an award of damages to private litigants. If the Company
were required to make substantial modifications at the Hotels to comply with the
ADA, the Company's ability to make
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required payments of principal and interest on indebtedness and to make
distributions to its equity owners could be adversely affected.
Property Taxes
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase as property tax rates change and as the properties are assessed or
reassessed by taxing authorities.
Tax Status
FelCor 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, FelCor (subject to
certain exceptions) will not be subject to federal income taxation, at the
corporate level, on its taxable income that is distributed to its shareholders.
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. FelCor may, however, be subject to certain state and local taxes on its
income and property. In connection with FelCor's election to be taxed as a REIT,
FelCor's Charter imposes restrictions on the transfer of shares of Common Stock.
FelCor 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% equity interest in the Lessee, have entered into an agreement with the
Company pursuant to which they have agreed that, through April 15, 2005, 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 or Units 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.
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.
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Employees
Messrs. Feldman and Corcoran have each entered into employment
agreements with the Company through 1999. In addition, the Company had 27 other
full-time employees at December 31, 1997. 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. During 1997 approximately $1.3 million (approximately 38%
of all allocable expenses) was borne by the Company under this arrangement.
ITEM 2. PROPERTIES
The Hotels
Of the 73 Hotels owned by the Company at December 31, 1997, 52 were
operated under 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.
Thirteen of the Hotels owned by the Company at December 31, 1997 were
operated as Doubletree Guest Suites hotels, five were operated as Sheraton
hotels and two were operated as Sheraton Suites hotels pursuant to management
agreements with Doubletree and Sheraton. 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
agreements. One of the Hotels was operated as a Hilton Suites hotel under a
franchise license agreement with Hilton Inns, Inc.
10
<PAGE> 11
The following table sets forth certain additional descriptive
information regarding the Hotels in which the Company had ownership interests at
December 31, 1997:
<TABLE>
<CAPTION>
YEAR
ACQUIRED NUMBER RESTAURANT BANQUET/
FRANCHISE YEAR BY THE OF AND MEETING
LOCATION BRAND OPENED COMPANY SUITES LOUNGE SEATS(1) SPACE (2)
- -------- ----- ------ --------- ------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
Birmingham, AL .......................... Embassy Suites 1987 1996 242 250(3) 5,600
Flagstaff, AZ ........................... Embassy Suites 1988 1995 119 70 1,300
Phoenix (Camelback), AZ ................. Embassy Suites 1985 1996 233 205(3) 8,000
Phoenix, (Crescent), AZ ................. Sheraton 1986 1997 342 180 28,000
Anaheim, CA ............................. Embassy Suites 1987 1996 222 270(3) 6,500
Burlingame (S.F. Airport So.), CA(4) .... Embassy Suites 1986 1995 339 595(3) 10,900
Covina, CA(5) ........................... Embassy Suites 1981 1997 264 300(3) 9,000
Dana Point, CA .......................... Doubletree Guest Suites 1992 1997 198 70 7,000
El Segundo (LAX Airport South), CA ...... Embassy Suites 1985 1996 350 320(3) 6,600
Los Angeles (LAX Airport North), CA ..... Embassy Suites 1990 1997 215 99 4,200
Milpitas, CA ............................ Embassy Suites 1987 1996 267 190 7,000
Napa, CA ................................ Embassy Suites 1985 1996 205 170(3) 6,900
Oxnard (Mandalay Beach), CA ............. Embassy Suites 1986 1996 249 235(3) 16,600
San Rafael (Marin Co.), CA(5) ........... Embassy Suites 1990 1996 235 255(3) 12,000
South San Francisco (Airport North), CA.. Embassy Suites 1988 1996 312 200 11,700
Avon (Beaver Creek Resort), CO .......... Embassy Suites 1990 1996 72 70 1,600
Boca Raton (Doubletree), FL ............. Doubletree Guest Suites 1989 1995 182 85 3,000
Boca Raton (Embassy), FL ................ Embassy Suites 1989 1996 263 175(3) 14,000
Deerfield Beach, FL ..................... Embassy Suites 1987 1996 244 270(3) 8,500
Ft. Lauderdale, FL ...................... Embassy Suites 1986 1996 359 220(3) 14,000
Jacksonville, FL ........................ Embassy Suites 1985 1994 210 95(3) 8,000
Lake Buena Vista (Disney World), FL(4) .. Doubletree Guest Suites 1987 1997 229 125 3,500
Miami (Airport), FL ..................... Embassy Suites 1987 1996 314 365(3) 11,200
Orlando (North), FL ..................... Embassy Suites 1985 1994 210 165(3) 9,000
Orlando (South), FL ..................... Embassy Suites 1985 1994 244 110(3) 5,200
Tampa (Busch Gardens), FL ............... Doubletree Guest Suites 1985 1995 129 55 2,200
Tampa (Rocky Point), FL ................. Doubletree Guest Suites 1986 1997 203 100 3,000
Atlanta (Airport), GA ................... Sheraton Suites 1990 1997 278 120 4,000
Atlanta (Buckhead), GA .................. Embassy Suites 1988 1996 317 210(3) 10,700
Atlanta (Gateway), GA ................... Sheraton 1986 1997 395 140 13,000
Atlanta (Perimeter Center), GA(5) ....... Embassy Suites 1985 1997 241 62(3) 3,500
Brunswick, GA ........................... Embassy Suites 1988 1995 130 85 6,000
Chicago-Lombard, IL(5) .................. Embassy Suites 1990 1995 262 205(3) 4,200
Chicago (O'Hare), IL .................... Sheraton Suites 1994 1997 297 230 12,500
Deerfield, IL ........................... Embassy Suites 1987 1996 237 120(3) 3,700
Indianapolis (North), IN(5) ............ Embassy Suites 1985 1996 222 155 5,000
Overland Park, KS(5) .................... Embassy Suites 1984 1997 199 180(3) 11,000
Lexington, KY ........................... Hilton Suites 1987 1996 174 150 1,700
Baton Rouge, LA ......................... Embassy Suites 1985 1996 224 170 5,800
New Orleans, LA ......................... Embassy Suites 1984 1994 282 130 10,000
Boston-Marlborough, MA .................. Embassy Suites 1988 1995 229 60 800
Baltimore, MD ........................... Doubletree Guest Suites 1987 1997 251 270 5,800
Troy, MI ................................ Doubletree Guest Suites 1987 1997 251 250 5,800
Bloomington, MN ......................... Doubletree Guest Suites 1980 1997 219 235(3) 10,000
Minneapolis (Airport), MN ............... Embassy Suites 1986 1995 311 175(3) 12,300
Minneapolis (Downtown), MN .............. Embassy Suites 1984 1995 218 200 3,600
St. Paul, MN(6) ......................... Embassy Suites 1983 1995 210 190(3) 3,300
Kansas City (Country Club), MO (4)(5) ... Embassy Suites 1978 1997 266 155(3) 1,800
Charlotte, NC(5) ........................ Embassy Suites 1989 1996 274 215(3) 9,200
Raleigh/Durham, NC ...................... Doubletree Guest Suites 1987 1997 203 100 5,000
Raleigh, NC(5) .......................... Embassy Suites 1988 1997 225 183(3) 3,200
Omaha, NE ............................... Doubletree Guest Suites 1973 1997 189 110 3,000
Parsippany, NJ .......................... Embassy Suites 1989 1996 274 285(3) 5,800
Piscataway, NJ .......................... Embassy Suites 1988 1996 225 95 6,900
Secaucus, NJ (4)(5) ..................... Embassy Suites 1986 1997 261 95(3) 3,200
Syracuse, NY ............................ Embassy Suites 1989 1997 215 160(3) 3,200
Cleveland, OH ........................... Embassy Suites 1990 1995 268 175 8,200
Dayton, OH .............................. Doubletree Guest Suites 1987 1997 138 45 1,100
Tulsa, OK ............................... Embassy Suites 1985 1994 240 195(3) 3,300
Philadelphia (Society Hill), PA ......... Sheraton 1986 1997 365 240 20,500
Myrtle Beach (Kingston Plantation), SC .. Embassy Suites 1987 1996 255 275(3) 25,600
Nashville, TN ........................... Embassy Suites 1986 1994 296 210(3) 14,000
Nashville (Airport), TN ................. Doubletree Guest Suites 1988 1997 138 65 2,500
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
YEAR
ACQUIRED NUMBER RESTAURANT BANQUET/
FRANCHISE YEAR BY THE OF AND MEETING
LOCATION BRAND OPENED COMPANY SUITES LOUNGE SEATS(1) SPACE (2)
- -------- ----- ------ ------- ------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Austin (Downtown), TX ........... Doubletree Guest Suites 1987 1997 189 100 5,000
Austin (Airport North), TX(5) ... Embassy Suites 1984 1997 261 140 5,600
Corpus Christi, TX .............. Embassy Suites 1984 1995 150 130 3,900
Dallas (Love Field), TX ......... Embassy Suites 1986 1995 248 200 3,500
Dallas (Market Center), TX ...... Embassy Suites 1980 1997 244 150(3) 4,000
Dallas (Park Central), TX ....... Sheraton 1983 1997 545 88(3) 28,000
Dallas (Park Central), TX ....... Embassy Suites 1985 1994 279 100 7,800
San Antonio (Airport), TX(5) .... Embassy Suites 1985 1997 261 90 2,500
San Antonio (Northwest), TX(5) .. Embassy Suites 1981 1997 217 101 6,600
Burlington, VT .................. Sheraton 1967 1997 309 300 30,000
------ ------ -------
TOTALS ....................... 17,993 12,583 570,600
====== ====== =======
</TABLE>
- -----------
(1) Approximate, excluding atrium area seating.
(2) In approximate number of square feet.
(3) At December 31, 1997, these restaurants and lounges were subleased to
unrelated third party lessees, who also provide guest room service and
catering service to the meeting rooms.
(4) Situated on land leased under a long-term ground lease.
(5) This hotel is one of 14 hotels owned by unconsolidated entities in which the
Company owns a 50% equity interest.
(6) Owned subject to a capitalized industrial revenue bond lease which expires
in 2011 and permits the Company to purchase the fee interest at expiration
for a nominal amount.
On February 17, 1998, the Company announced the acquisition of a
194-suite Doubletree Guest Suites hotel in Columbus, Ohio.
The Percentage Leases
Each of the Hotels is leased to the Lessee pursuant to a Percentage
Lease, typically having a stated 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 the Company's Independent Directors.
Rent. The annual Base Rent is typically set at approximately 60% of the
initial year's anticipated total rent. The Percentage Rent is calculated in two
tiers, a first tier typically equal to 17% of suite revenues up to a specified
amount ("Suite Revenue Breakpoint") and a second tier typically equal to 65% of
suite revenues above such Suite Revenue Breakpoint. In addition, the Lessee
typically pays the Company 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 Suite Revenue Breakpoint is established at the time the Percentage
Lease is entered into, based upon the historical and anticipated operations of
the particular hotel, in a manner expected to provide the Company with
approximately 95% of the anticipated operating profits of the hotels in which it
invests.
The amount of Base Rent and of the Suite Revenue Breakpoint in each
Percentage Lease formula is subject to adjustment, annually, based upon a
formula taking into account 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 may not
exceed 7%. The CPI adjustments made in January 1998, 1997 and 1996 were 0.50%,
1.42% and 0.73%, respectively.
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.
12
<PAGE> 13
Insurance and Property Taxes. The Company is responsible for paying real
estate and personal property taxes and property 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 responsible for the cost of 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.
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.
13
<PAGE> 14
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 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.
14
<PAGE> 15
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 and indebtedness subordinated in right to
repayment to the rent due under the Percentage 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
There is no litigation pending or known to be threatened against the
Company or affecting any of its Hotels other than claims arising in the ordinary
course of business or which are not considered to be material. Furthermore, most
of such claims are substantially covered by insurance. 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
On October 22, 1997 a Special Meeting of Shareholders was held to vote
on an amendment to the Company's Charter to increase the number of authorized
shares of common stock from 50 million to 100 million shares. The 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 record date for the meeting. The results of the vote were: FOR -
28,425,615; AGAINST - 2,462,947; and ABSTAIN - 85,350. Authority to vote was not
withheld on any proxy received and there were no broker non-votes.
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>
1996
----
First quarter .............................................. $32 $27 1/8
Second quarter ............................................. 31 5/8 28 1/2
Third quarter .............................................. 32 1/2 27 3/4
Fourth quarter ............................................. 36 3/4 30 3/8
1997
----
First quarter .............................................. $37 1/2 $33 1/2
Second quarter ............................................. 37 3/4 34 1/2
Third quarter .............................................. 41 1/2 36
Fourth quarter ............................................. 42 7/8 34 15/16
</TABLE>
15
<PAGE> 16
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 10, 1998, the Company had approximately 250 holders of record
of its Common Stock and approximately 40 holders of record of the Series A
Preferred Stock (which is convertible into Common Stock). It is estimated that
there were approximately 15,000 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.
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 during 1996 and 1997.
<TABLE>
<CAPTION>
QUARTER TO DISTRIBUTION DISTRIBUTION PER SHARE
WHICH DISTRIBUTION RECORD PAYMENT DISTRIBUTION
RELATES DATE DATE AMOUNT
------------------ ------------ ------------ ------------
<S> <C> <C> <C>
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 1/30/97 $0.50
1997
----
First quarter .................................................. 4/15/97 4/30/97 $0.50
Second quarter ................................................. 7/15/97 7/30/97 $0.50
Third quarter .................................................. 10/15/97 10/31/97 $0.55
Fourth quarter ................................................. 12/30/97 1/30/98 $0.55
</TABLE>
The foregoing distributions represent an approximate 6.0% return of
capital in 1997 and an approximate 11.5% return of capital in 1996. In order to
maintain its qualification as a REIT, FelCor 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, 1996 and December 31, 1997,
FelCor had distributions totaling $1.92 and $2.10 per share, respectively, of
which only $1.61 and $1.88 per share, respectively, were required to satisfy the
95% REIT distribution test. Under certain circumstances FelCor may be required
to make distributions in excess of cash available for distribution in order to
meet such REIT distribution requirements. In such event, FelCor 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.
FelCor 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 FelCor will be at the discretion of the
Board of Directors and will depend on the actual cash flow of FelCor, 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 deems relevant.
16
<PAGE> 17
Recent Sales of Unregistered Securities
During 1997, FelCor issued an aggregate of 25,412 shares of its Common
Stock in redemption of a like number of outstanding Units. 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.
As of May 16, 1997 the Operating Partnership issued an aggregate of
139,286 Units to PMB Associates, Ltd., in exchange for its 50% interest in a
partnership owning one hotel. Neither the Units nor the like number of shares of
Common Stock for which they may be redeemed, 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.
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 predecessor of the Company (the "Initial Hotels"). The
selected historical financial data for the Company and Lessee for the years
ended December 31, 1997, 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 and the notes thereto,
audited by Coopers & Lybrand, L.L.P., independent accountants. Such data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto.
The selected combined historical financial statements for the Initial
Hotels are presented for the year ended December 31, 1993 and the period from
January 1, 1994 to July 27, 1994 and represents the operations of the six hotels
acquired by the Company upon completion of FelCor's initial public offering of
common stock ("IPO") in July 1994. The Initial Hotels data is derived by
combining the selected combined historical financial data of five hotels for
periods prior to their acquisition by a FelCor affiliate (the "E-5 Hotels") and
the selected combined historical financial data of a FelCor affiliate prior to
the IPO (the "FelCor Hotels") and represents the selected combined historical
financial data of all six hotels for the entire periods presented. The E-5
Hotels include the operations of five hotels prior to the acquisition by a
FelCor affiliate on July 15, 1993 and the FelCor Hotels include operations of
all six hotels from the date of acquisition by the FelCor affiliate. The
selected combined historical financial data for the E-5 Hotels and the FelCor
Hotels have been derived from the historical financial statements and notes
thereto, audited by Coopers & Lybrand L.L.P., independent accountants.
17
<PAGE> 18
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)
1997 1996 1995 THROUGH DECEMBER 31, 1994
--------- --------- --------- -------------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
REVENUE
Percentage lease revenue ....................... $ 169,114 $ 97,950 $ 23,787 $ 6,043
Equity in income from unconsolidated entities .. 6,963 2,010 513
Other revenue .................................. 574 984 1,691 207
--------- --------- --------- ---------
TOTAL REVENUE ..................................... 176,651 100,944 25,991 6,250
--------- --------- --------- ---------
EXPENSES
General and administrative ..................... 3,743 1,819 870 355
Depreciation ................................... 50,798 26,544 5,232 1,487
Taxes, insurance and other ..................... 23,093 13,897 2,563 881
Interest expense ............................... 28,792 9,803 2,004 109
Minority interest in Operating Partnership ..... 5,817 5,590 3,131 907
Minority interest in other partnerships ........ 573
--------- --------- --------- ---------
TOTAL EXPENSES .................................... 112,816 57,653 13,800 3,739
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE ................ 63,835 43,291 12,191 2,511
Extraordinary charge from write off
of deferred financing fees .................. 185 2,354
--------- --------- --------- ---------
NET INCOME ........................................ 63,650 40,937 12,191 2,511
Preferred dividends ............................ 11,797 7,734
--------- --------- --------- ---------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS ...... $ 51,853 $ 33,203 $ 12,191 $ 2,511
========= ========= ========= =========
BASIC EARNINGS PER SHARE (1)
Income applicable to common shareholders
before extraordinary charge .................. $ 1.67 $ 1.54 $ 1.71 $ 0.54
Extraordinary charge ........................... (0.01) (0.10)
--------- --------- --------- ---------
Net income applicable to common shareholders ... $ 1.66 $ 1.44 $ 1.71 $ 0.54
========= ========= ========= =========
Weighted average common shares outstanding ..... 31,269 23,023 7,137 4,690
========= ========= ========= =========
DILUTED EARNINGS PER SHARE (1)
Income applicable to common shareholders
before extraordinary charge .................. $ 1.65 $ 1.53 $ 1.69 $ 0.54
Extraordinary charge ........................... (0.01) (0.10)
--------- --------- --------- ---------
Net income ..................................... $ 1.64 $ 1.43 $ 1.69 $ 0.54
========= ========= ========= =========
Weighted average common shares outstanding ..... 31,610 23,218 7,199 4,690
========= ========= ========= =========
</TABLE>
18
<PAGE> 19
FELCOR SUITE HOTELS, INC.
SELECTED HISTORICAL OPERATING AND FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM JULY 28, 1994
--------------------------------------- (INCEPTION OF OPERATIONS)
1997 1996 1995 THROUGH DECEMBER 31, 1994
--------- --------- --------- -------------------------
<S> <C> <C> <C> <C>
OTHER DATA:
Cash dividends per common share ............. 2.10 1.92 1.84 0.66
Funds From Operations (2) ................... 129,815 77,141 20,707 4,905
EBITDA (3) .................................. 153,496 86,583 22,203 5,014
Ratio of EBITDA to interest paid ............ 7.2x 9.4x 15.1x
Ratio of earnings to fixed charges (4) ...... 3.3x 5.3x 8.6x 32.4x
Cash provided by financing activities ....... 600,132 251,906 407,897 97,952
Cash provided by operating activities ....... 97,478 67,494 17,003 3,959
Cash used in investing activities ........... (687,860) (478,428) (259,197) (100,793)
BALANCE SHEET DATA:
Cash and short term investments ............. $ 17,543 $ 7,793 $ 166,821 $ 1,118
Investment in hotel properties, net ......... 1,489,764 899,691 325,155 104,800
Investment in unconsolidated entities ....... 132,991 59,867 13,819
Total assets ................................ 1,673,364 978,788 548,359 108,305
Debt and capital lease obligations .......... 476,819 239,425 19,666 8,750
Minority interest in Operating Partnership .. 73,451 76,112 58,837 25,685
Shareholders' equity ........................ 1,078,498 641,926 461,386 69,255
</TABLE>
- --------------------
(1) In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per share" which established new standards
for computing and presenting earnings per share. Earnings per share for
all periods presented have been calculated according to this standard.
Basic earnings per share have been computed by dividing net income
applicable to common shares by the weighted average number of common
shares outstanding. Diluted earnings per share have been computed by
dividing net income applicable to common shares by the weighted average
number of common shares and equivalents outstanding. Common share and
unit equivalents that have a dilutive effect represent stock options
issued to officers and key employees and unvested restricted stock
grants issued to certain officers.
(2) The White Paper on Funds From Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 defines Funds From Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of properties, plus real estate
related depreciation and amortization and after comparable adjustments
for the Company's portion of these items related to unconsolidated
entities and joint ventures. The Company believes that Funds From
Operations is helpful to investors as a measure of the performance of
an equity REIT because, along with cash flow from operating activities,
financing activities and investing activities, it provides investors
with an indication of the ability of the Company to incur and service
debt, to make capital expenditures and to fund other cash needs. The
Company computes Funds From Operations in accordance with standards
established by NAREIT which may not be comparable to Funds From
Operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the
current NAREIT definition differently than the Company. Funds From
Operations does not represent cash generated from operating activities
determined by GAAP and should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating
activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make cash
distributions. Funds From Operations may include funds that may not be
available for management's
19
<PAGE> 20
discretionary use due to functional requirements to conserve funds for
capital expenditures and property acquisitions, and other commitments
and uncertainties.
The following is a reconciliation between net income and Funds From
Operations (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JULY 28, 1994
(INCEPTION OF
OPERATIONS)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------------- DECEMBER 31,
1997 1996 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income .................................. $ 63,650 $ 40,937 $ 12,191 $ 2,511
Add:
Minority interest in Operating Partnership .. 5,817 5,590 3,131 907
Depreciation ................................ 50,798 26,544 5,232 1,487
Depreciation from unconsolidated entities ... 9,365 1,716 153
Extraordinary charge from write off of
deferred financing fees ............... 185 2,354
-------- -------- -------- --------
Funds From Operations (FFO) ................. $129,815 $ 77,141 $ 20,707 $ 4,905
======== ======== ======== ========
</TABLE>
(3) EBITDA is computed by adding net income, minority interest in the
Operating Partnership, interest expense, the Company's portion of
interest expense from unconsolidated entities, income taxes,
depreciation expense, amortization expense, extraordinary expenses and
cash distributions paid by unconsolidated entities and deducting
extraordinary income, equity in income from unconsolidated entities and
the Company's portion of depreciation from unconsolidated entities. A
reconciliation of Funds From Operations to EBITDA is as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JULY 28, 1994
(INCEPTION OF
OPERATIONS)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------------ DECEMBER 31,
1997 1996 1995 1994
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Funds From Operations ................................. $ 129,815 $ 77,141 $ 20,707 $ 4,905
Add back:
Interest expense ................................. 28,792 9,803 2,004 109
Interest from unconsolidated entities ............ 5,896 819
Amortization expense ............................. 1,110 592 158
Cash distributions from unconsolidated entities .. 4,211 1,954
Deduct:
Equity in income from unconsolidated entities .... (6,963) (2,010) (513)
Depreciation from unconsolidated entities ........ (9,365) (1,716) (153)
--------- --------- --------- -------
EBITDA ................................................ $ 153,496 $ 86,583 $ 22,203 $ 5,014
========= ========= ========= =======
</TABLE>
(4) For purpose of computing the ratio of earnings to fixed charges,
earnings consist of net income plus fixed charges and minority interest
in the Operating Partnership, excluding capitalized interest, and fixed
charges consist of interest, whether expensed or capitalized, and
amortization of loan costs.
20
<PAGE> 21
DJONT OPERATIONS, L.L.C.
SELECTED HISTORICAL OPERATING AND FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM JULY 28, 1994
--------------------------------------- (INCEPTION OF OPERATIONS)
1997 1996 1995 THROUGH DECEMBER 31, 1994
--------- --------- --------- -------------------------
<S> <C> <C> <C> <C>
Suite revenue .............. $ 456,614 $ 234,451 $ 65,649 $ 16,094
Food and beverage rent ..... 4,393 2,334 534 61
Food and beverage revenue .. 34,813 15,119 2,462 1,112
Other revenue .............. 38,690 17,340 3,924 1,020
--------- --------- --------- ---------
Total revenue .............. 534,510 269,244 72,569 18,287
Hotel expenses ............. 128,077 66,236 18,455 4,699
Operating expenses ......... 189,783 98,727 26,575 7,330
Percentage lease expenses .. 216,990 107,935 26,945 6,043
Lessee overhead expense .... 2,332 1,776 834 106
--------- --------- --------- ---------
Net income (loss) .......... $ (2,672) $ (5,430) $ (240) $ 109
========= ========= ========= =========
</TABLE>
INITIAL HOTELS
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1994
THROUGH YEAR ENDED
JULY 27, 1994 DECEMBER 31, 1993
--------------- -----------------
<S> <C> <C>
Statement of Operations Data:
Suite revenue ................................. $21,884 $33,550
Other revenue ................................. 1,307 2,002
------- -------
Total revenue ............................ 23,191 35,552
Hotel expenses ................................ 15,238 22,048
Depreciation .................................. 2,325 4,092
Interest expense .............................. 3,446 5,437
Other corporate expenses ...................... 620 3,260
------- -------
Net income ............................... $ 1,562 $ 715
======= =======
</TABLE>
21
<PAGE> 22
FELCOR HOTELS
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1994
THROUGH YEAR ENDED
JULY 27, 1994 DECEMBER 31, 1993
-------------- ----------------
<S> <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
Depreciation .................................. 2,325 1,761
Interest expense .............................. 3,446 2,822
Other corporate expenses ...................... 620 1,590
------- -------
Net income ............................... $ 1,562 $ 743
======= =======
</TABLE>
E-5 HOTELS
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
-----------------
<S> <C>
Statement of Operations Data:
Suite revenue .............................................. $ 15,684
Other revenue .............................................. 910
--------
Total revenue ......................................... 16,594
Hotel expenses ............................................. 10,006
Depreciation ............................................... 2,331
Interest expense ........................................... 2,615
Other corporate expenses ................................... 1,670
--------
Net (loss) ............................................ $ (28)
========
</TABLE>
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
At December 31, 1997, FelCor owned interests in 73 hotels with an
aggregate of 17,933 suites/rooms through its 92.7% aggregate ownership of the
Operating Partnership and its subsidiaries. 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 and improvements
in the suite revenues measured by RevPAR. Improvements in suite revenue
significantly impacts the Company because the Company's principal source of
revenue 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. The portion of the
Percentage Lease revenue derived from suite revenues was approximately 97% for
each of the three years ended December 31, 1997, 1996 and 1995.
In 1997 the Company acquired interests in 30 hotels at a gross
investment of approximately $700 million. The acquired hotels included 12
Embassy Suites, 11 Doubletree Guest Suites and seven Sheraton hotels.
The Company's 43 hotels owned at both December 31, 1997 and 1996, which
reflect the effect of the Company's ownership and management of strategic
partners, produced outstanding results with RevPAR increasing 12.9% over 1996.
The largest portion of this increase came from the 18 former Crown Sterling
Suites hotels which continued their trend of improved RevPAR throughout 1997,
achieving a RevPAR of $85.01 in 1997 compared to $70.05 for 1996, an increase of
approximately 21.4%. The Company attributes this dramatic increase to the
renovation and repositioning of these hotels in 1996 and early 1997.
The Company's growth has been financed though unsecured debt, preferred
stock and common equity. The Company's market capitalization at December 31,
1997 totaled approximately $2.1 billion, an increase of 75% over December 31,
1996. During 1997 the Company issued to the public approximately $450 million of
common stock as well as a private placement of $300 million of long-term
unsecured notes.
Actual historical results of operations for the years ended December
31, 1997, 1996 and 1995 are summarized as follows (in millions, except
percentages, per share data and hotel counts):
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
-----------------
1997 1996 1995 97 VS 96 96 VS 95
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Hotels ownership interests at year end ........ 73 43 20 69.8% 115.0%
Revenues ...................................... $ 176.7 $ 100.9 $ 26.0 75.1% 288.1%
Income before extraordinary charge ............ $ 63.8 $ 43.3 $ 12.2 47.3% 254.9%
Net income available to common shareholders ... $ 51.9 $ 33.2 $ 12.2 56.3% 172.1%
Funds From Operations (FFO) ................... $ 129.8 $ 77.1 $ 20.7 68.4% 272.5%
FFO per share and unit outstanding (a) ........ $ 3.32 $ 2.63 $ 2.30 26.2% 14.3%
</TABLE>
(a) Conversion of Series A Preferred Stock to Common Stock, unvested
restricted stock grants and dilutive stock options are assumed for
purposes of computing weighted average shares and units outstanding
for FFO per share and unit outstanding.
23
<PAGE> 24
RESULTS OF OPERATIONS
THE COMPANY -- ACTUAL
Comparison of the Years Ended December 31, 1997 and 1996
For the years ended December 31, 1997 and 1996 the Company had total
revenues of $176.7 million and $100.9 million, respectively, consisting
primarily of Percentage Lease revenues of $169.1 million and $98.0 million. The
increase in total revenue is primarily attributed to the Company's acquisition
and subsequent leasing, pursuant to Percentage Leases, of interests in 30 hotels
during 1997. This increase represents nearly a 70% increase in the number of
hotel interests owned by the Company. Percentage Lease revenues for the 20
hotels which were owned for all of 1997 and 1996 increased 16.5% for the year
ended December 31, 1997 over the corresponding period in 1996 (an increase of
$8.8 million). The increase in Percentage Lease revenues is attributable to a
10% increase in RevPAR and to the addition of 177 new suites at three existing
hotels. Furthermore, RevPAR for the 43 hotels owned by the Company at December
31, 1997 and 1996 increased 12.9%.
Management believes that the hotels it acquires will generally
experience increases in suite revenue and RevPAR (and accordingly, provide the
Company with increases in Percentage Lease revenue) after completion of
renovation upgrade and possible rebranding; however, as individual hotels
undergo such renovation and/or rebranding, 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.)
Equity in income from unconsolidated entities increased approximately
$5.0 million in 1997 over the corresponding period in 1996 resulting primarily
from an increase in hotels owned through unconsolidated entities from five at
December 31, 1996 to 14 hotels at December 31, 1997.
Total expenses increased $55.2 million in 1997 over the corresponding
period in 1996 resulting primarily from increased expenses related to the
additional hotels acquired in 1997 and 1996.
As a percentage of total revenue, depreciation increased from 26.3% in
1996 to 28.8% in 1997. The relative increase in depreciation is primarily a
result of capital improvements made during 1996 and 1997 and the resultant
depreciation, as well as the increase of short lived assets relative to total
fixed assets (short lived assets made up 9.8% of fixed assets at December 31,
1997 and 9.0% at December 31, 1996).
General and administrative expenses and taxes, insurance and other
remained relatively constant as a percentage of total revenue in 1997 and 1996.
Interest expense increased as a percentage of total revenue from 9.7%
in 1996 to 16.3% in 1997. This relative increase in interest expense is
attributed to the increased use of debt to finance acquisitions and renovations.
Debt as a percentage of total assets increased from 24.5% at December 31, 1996
to 28.6% at December 31, 1997.
Comparison of the Years Ended December 31, 1996 and 1995
For the years ended December 31, 1996 and 1995, the Company had total
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 increase in
total revenue is primarily attributable to the Company's acquisition and
subsequent leasing, pursuant to Percentage Leases, of interests in 23 hotels
during 1996. Percentage Lease revenues for the seven hotels which were owned for
all of 1996 and 1995 increased 13.9% for the year ended December 31, 1996 over
the corresponding period in 1995 (an increase of $2.7 million). Furthermore,
RevPAR for the 20 hotels owned by the Company at December 31, 1996 and 1995
increased 8.1%.
24
<PAGE> 25
Total expenses increased $43.9 million in 1996 over the corresponding
period in 1995 resulting primarily from increased expenses related to the
additional hotels acquired in 1996 and 1995.
As a percentage of total revenues, depreciation increased from 20.0%
in 1995 to 26.0% in 1996. The relative increase in depreciation is primarily a
result of capital expenditures made during 1995 and 1996 and the resultant
depreciation as well as the increase of short lived assets relative to total
fixed assets (short lived assets made up 84.7% of total fixed assets at December
31, 1996 and 81.7% at December 31, 1995.
Taxes, insurance and other increased as a percentage of total revenue
from 10.0% in 1995 to 14.0% in 1996. 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.
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 White Paper on Funds From Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") defines Funds From Operations as net income or loss (computed in
accordance with GAAP), excluding gains or losses from debt restructuring and
sales of properties, plus; real estate related depreciation and amortization and
after comparable adjustments for the Company's portion of these items related to
unconsolidated entities and joint ventures. The Company believes that Funds From
Operations is helpful to investors as a measure of the performance of an equity
REIT because, along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds From
Operations in accordance with standards established by NAREIT which may not be
comparable to Funds From Operations reported by other REITs that do not define
the term in accordance with the current NAREIT definition or that interpret the
current NAREIT definition differently than the Company. Funds From Operations
does not represent cash generated from operating activities determined by GAAP
and should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company 's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
Funds From Operations may include funds that may not be available for
management's discretionary use due to functional requirements to conserve funds
for capital expenditures and property acquisitions, and other commitments and
uncertainties.
25
<PAGE> 26
The following table details the computation of Funds From
Operations (in thousands, except per share and unit data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
FUNDS FROM OPERATIONS (FFO):
Net income .......................................................................... $ 63,650 $ 40,937 $ 12,191
Add back:
Extraordinary charge from write off of deferred financing fees .................. 185 2,354
Minority interest ................................................................ 5,817 5,590 3,131
Depreciation ..................................................................... 50,798 26,544 5,232
Depreciation for unconsolidated entities ......................................... 9,365 1,716
153
-------- -------- --------
FFO ................................................................................. $129,815 $ 77,141 $ 20,707
======== ======== ========
FFO PER COMMON SHARE AND UNIT DATA:
FFO per common share and unit ....................................................... $ 3.32 $ 2.63 $ 2.30
======== ======== ========
Weighted average common shares and units outstanding (a) ............................ 39,157 29,306 8,989
</TABLE>
(a) Weighted average common shares and units for FFO are computed including
dilutive options, unvested restricted stock grants and assuming
conversion of preferred stock to common stock.
Included in the Funds From Operations described above is the Company's
share of FFO from its interest in fourteen unconsolidated entities at December
31, 1997, five unconsolidated entities at December 31, 1996 and one
unconsolidated partnership at December 31, 1995. The FFO contribution from these
unconsolidated entities was derived as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statement of operations information:
Percentage Lease revenue .................... $ 47,720 $ 9,974 $ 1,420
Depreciation ................................ $ 15,611 $ 1,543 $ 141
Taxes, insurance and other .................. $ 5,667 $ 915 $ 229
Interest expense ............................ $ 11,791 $ 1,638
Net income .................................. $ 17,044 $ 4,366 $ 1,050
50% of net income attributable to the Company $ 8,522 $ 2,183 $ 525
Amortization of cost in excess of book value (1,559) (173) (12)
-------- -------- --------
Equity in income from unconsolidated entities 6,963 2,010 513
Add back: Depreciation ..................... 7,806 1,543 141
Amortization of excess cost 1,559 173 12
-------- -------- --------
FFO contribution of unconsolidated entities . $ 16,328 $ 3,726 $ 666
======== ======== ========
</TABLE>
26
<PAGE> 27
THE HOTELS -- ACTUAL
The following table sets forth historical suite revenue, occupancy,
ADR and RevPAR and the percentage changes therein between the periods presented
for the 73 hotels which the Lessee operated at December 31, 1997. This
information is presented regardless of ownership. Except as otherwise noted
below, each of the hotels is operated as an Embassy Suites hotel.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 VARIANCE
---- ---- --------
<S> <C> <C> <C>
Suite Revenue (in thousands):
Original Hotels (13) .......................................... 85,944 78,622 9.3 %
CSS Hotels (18) ............................................... 143,012 118,300 20.9 %
1996 Acquisitions (12) ........................................ 90,162 83,920 7.4 %
------- -------
Subtotal-- Hotels owned at both December 31, 1997 and 1996 (43) 319,118 280,842 13.6 %
1997 Acquisitions (30) ........................................ 217,662 210,570 3.4 %
------- -------
Total (73) ..................................................... 536,780 491,412 9.2 %
======= =======
Occupancy:
Original Hotels ............................................... 76.1% 76.5% (0.5)%
CSS Hotels .................................................... 73.4% 67.8% 8.3 %
1996 Acquisitions ............................................. 74.0% 73.0% 1.4 %
Subtotal-- Hotels owned at both December 31, 1997 and 1996 .... 74.3% 71.6% 3.8 %
1997 Acquisitions .............................................. 71.8% 73.1% (1.8)%
Total .......................................................... 73.2% 72.2% 1.4 %
Average Daily Rate (ADR):
Original Hotels ............................................... $ 109.35 $ 102.82 6.4 %
CSS Hotels .................................................... $ 115.85 $ 103.31 12.1 %
1996 Acquisitions ............................................. $ 118.61 $ 111.54 6.3 %
Subtotal-- Hotels owned at both December 31, 1997 and 1996 .... $ 114.77 $ 105.50 8.8 %
1997 Acquisitions .............................................. $ 109.20 $ 103.69 5.3 %
Total .......................................................... $ 112.44 $ 104.72 7.4 %
Revenue Per Available Suite (RevPAR):
Original Hotels ............................................... $ 83.17 $ 78.65 5.7 %
CSS Hotels .................................................... $ 85.01 $ 70.05 21.4 %
1996 Acquisitions ............................................. $ 87.73 $ 81.46 7.7 %
Subtotal-- Hotels owned at both December 31, 1997 and 1996 .... $ 85.25 $ 75.52 12.9 %
1997 Acquisitions .............................................. $ 78.39 $ 75.80 3.4 %
Total .............................................................. $ 82.33 $ 75.64 8.8 %
</TABLE>
ORIGINAL HOTELS: Flagstaff, AZ, Jacksonville, FL, Orlando
(North), FL, Orlando (South), FL, Brunswick, GA,
Chicago - Lombard, IL, New Orleans, LA, Boston -
Marlborough, MA, Tulsa, OK, Nashville, TN, Corpus
Christi, TX, Dallas (Love Field), TX, Dallas (Park
Central), TX.
CSS HOTELS: Birmingham, AL, Phoenix (Camelback), AZ,
Anaheim, CA, El Segundo (LAX South), CA, Milpitas, CA,
Napa, CA, Oxnard (Mandalay Beach), CA, San Francisco
(Airport North), CA, San Francisco (Airport South),
CA, Boca Raton, FL(1), Deerfield Beach, FL, Ft.
Lauderdale, FL, Miami, FL, Tampa (Busch Gardens),
FL(1), Baton Rouge, LA, Minneapolis (Airport), MN,
Minneapolis (Downtown), MN, St. Paul, MN.
1996 ACQUISITIONS: San Rafael (Marin County), CA, Avon
(Beaver Creek), CO, Boca Raton, FL, Atlanta
(Buckhead), GA, Deerfield, IL, Indianapolis (North),
IN, Lexington, KY(2), Charlotte, NC, Parsippany, NJ,
Piscataway, NJ, Cleveland, OH, Myrtle Beach (Kingston
Plantation), SC(3).
1997 ACQUISITIONS: Phoenix (Crescent), AZ(3), Covina, CA, Dana Point,
CA(1), Los Angeles (LAX North), CA, Lake Buena Vista
(Disney World), FL(1), Tampa (Rocky Point), FL(1),
Atlanta (Airport), GA(4), Atlanta (Galleria)(3), GA,
Atlanta (Perimeter Center), GA, Chicago (O'Hare),
IL(4), Overland Park, KS, Baltimore, MD(1), Troy,
MI(1), Bloomington, MN(1),
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<PAGE> 28
Kansas City (Country Club Plaza), MO, Raleigh, NC,
Raleigh/Durham, NC(1), Omaha, NE(1), Secaucus, NJ,
Syracuse, NY, Dayton, OH(1), Philadelphia (Society
Hill), PA(3), Nashville (Airport), TN(1), Austin
(Airport North), TX, Austin (Downtown), TX(1),
Dallas (Market Center), TX, Dallas (Park Central),
TX (3), San Antonio (Airport), TX, San Antonio
(Northwest), TX, Burlington, VT (3).
(1) Operating as a Doubletree Guest Suites hotel.
(2) Operating as a Hilton Suites hotel.
(3) Operating as a Sheraton hotel.
(4) Operating as a Sheraton Suites hotel.
Comparison of the Hotels' Suite Revenue for the Years Ended December
31, 1997 and 1996
Pro forma suite revenues for the 73 hotels that the Company had
ownership interests at December 31, 1997, increased 9.2% for the year ended
December 31, 1997 over the corresponding period in 1996.
The Company owned 43 hotels at both December 31, 1997 and 1996, these
hotels experienced increased room revenue of 13.6% for 1997 compared to 1996.
Within this group of 43 hotels are the Original Hotels, the CSS Hotels and the
1996 Acquisition Hotels.
The Original Hotels consist of hotels purchased from the inception of
the Company in July 1994 through September 1995. The Original Hotels increased
suite revenue by 9.3% for the year ended December 31, 1997 compared to 1996. ADR
increased 6.4% to $109.35 and Occupancy declined 0.5% from 76.5% to 76.1%. The
decrease in occupancy was principally attributed to room additions at three of
the Original Hotels, where the Company added 177 suites during 1996 and 1997.
This resulted in an increase of RevPAR of 5.7% over 1996 RevPAR.
The CSS Hotels are made up of 18 former Crown Sterling Suites Hotels
which the Company acquired in late 1995 and early 1996. The Company spent more
than $50 million renovating these hotels during 1996 and completed the
renovation in early 1997. The CSS Hotels experienced increases in revenue of
20.9%, for the year ended December 31, 1997 compared to 1996. Occupancy
increased by 8.3% to 73.4% and ADR increased 12.1% to $115.85. The Company
attributes the dramatic increase in revenues to the renovation and repositioning
of these hotels.
The 1996 Acquisition Hotels, which includes 12 hotels, had a 7.4%
increase in suite revenue for the year ended December 31, 1997 compared to the
corresponding period in 1996. Occupancy increased 1.4% to 74.0% and ADR
increased 6.3% to $118.61. These hotels experienced increases in revenue and
Occupancy in the midst of renovation and upgrading. The changes in RevPAR ranges
from a decrease of 1.6% in Atlanta, GA (resulting from a comparison to 1996
revenues when the Summer Olympics were held in Atlanta) to increases of 150% at
Cleveland, OH.
Management believes that the 43 hotels owned at both December 31, 1997
and 1996 benefitted from capital improvements and upgrades, rebranding in some
instances, strong professional management and detailed asset management.
The 1997 Acquisition Hotels, which includes 30 hotels, experienced
suite revenue increases of 3.4% during 1997. Occupancy at these hotels decreased
1.8% from 73.1% to 71.8% while ADR increased 5.3% to $109.20. Since these hotels
were acquired during 1997, the impact of the Company's ownership programs were
not fully realized. Management believes that its renovation and upgrading, and
professional asset management will enable this group of hotels to experience
positive operating results in the future.
28
<PAGE> 29
THE LESSEE -- ACTUAL
Comparison of the Years Ended December 31, 1997 and 1996
Total revenues increased to $534.5 million in 1997 from $269.2 million
in 1996, an increase of 98.5%. Total revenues consisted primarily of suite
revenue of $456.6 million and $234.5 million in 1997 and 1996, respectively.
The increase in total revenues is primarily a result of the increase in
the number of hotels leased to 73 hotels at December 31, 1997 from 43 hotels at
December 31, 1996. Suite revenues for the 20 hotels which were leased for all of
1997 and 1996 increased 12.2% or $14.6 million. The increase in revenues at
these hotels is due primarily to improved occupancy and average daily room rates
of 74.7% and $110.20, respectively, for the year ended December 31, 1997, as
compared to 72.9% and $102.62 for the year ended December 31, 1996.
The Lessee income before Percentage Lease rent increased in 1997 to
40.1% from 38.1% of total revenues in 1996 primarily as a result of higher
revenue earned per available room. The net loss of approximately $2.7 million
during 1997 was half that incurred in 1996 and resulted primarily from the
one-time costs of converting the last of 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.
Comparison of the Years Ended December 31, 1996 and 1995
For the years ended December 31, 1996 and 1995, the Lessee had total
revenues of $269.2 million and $72.6 million respectively, consisting primarily
of suite revenues of $234.5 million and $65.6 million, respectively.
The increase in total revenues 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 corresponding 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.
RENOVATIONS AND CAPITAL EXPENDITURES
The Company believes that one factor that differentiates it from other
hotel companies is its commitment to make capital expenditures at the Hotels to
improve their performance and maintain the Company's high standards. The Company
approaches this in four different ways: (i) an aggressive renovation and upgrade
program as hotels are acquired to bring them up to the Company's standards, (ii)
contributions of at least 4% of annual suite/room revenue (on a cumulative
basis) for capital improvements (the "Capital Reserve"), (iii) insuring that the
Lessee maintains an aggressive maintenance and repair program for the Hotels and
(iv) after the initial renovation/upgrade, construction of additional suites,
meeting rooms and public areas where the market conditions indicate.
29
<PAGE> 30
Renovation/Upgrade Program
In 1997 the Company spent approximately $22.0 million on renovation
and upgrades related to 35 hotels acquired in 1996 and 1997. The Company has
committed to spend an additional $36.9 million related to renovation and
upgrades for the Hotels owned at December 31, 1997 during fiscal 1998.
Capital Reserve
It is the Company's policy to contribute a minimum of 4% of suite/room
revenue to the Capital Reserve account to provide funds for necessary ongoing
capital improvements after the initial renovation or upgrade. During 1997 the
Company contributed approximately $18.9 million (4% of suite/room revenue) to
the Capital Reserve and approximately $19.3 million was spent on such
improvements in addition to the renovation and upgrade expenditures referenced
above.
Repair and Maintenance
During the year ended December 31, 1997 the Lessee spend $26.2 million
on routine repair and maintenance. This represents approximately 5.7% of hotel
suite/room revenue.
Room Additions
During 1997 the Company completed construction in July on a net of 129
suites, additional meeting rooms and other public area upgrades at its
Boston-Marlborough, Massachusetts Embassy Suites hotel at a cost of
approximately $16.0 million. Additionally, during 1997 the Company started
construction of an aggregate of 134 suites at its Jacksonville and Orlando
(North), Florida Embassy Suites hotels which are to open in the first quarter of
1998, at an aggregate projected cost of $10.2 million. At December 31, 1997, an
aggregate of approximately $7.4 million had been spent on these two hotels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders and repayments of indebtedness, is its
share of the Operating Partnership's cash flow from the Percentage Leases. For
the year ended December 31, 1997, cash flow provided by operating activities,
consisting primarily of Percentage Lease revenue, was $97.5 million and Funds
From Operations (as previously defined) was $129.8 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 equity owners and repayments of
indebtedness, are substantially dependent on the ability of the Lessee to
generate sufficient cash flow from the operation of the Hotels.
At December 31, 1997, the Lessee had paid all amounts then due the
Company under the Percentage Leases. During 1997 and 1996, the Lessee
experienced net losses of approximately $2.7 million and $5.4 million,
respectively, and, at December 31, 1997, had a cumulative shareholders' deficit
of approximately $9.1 million. The losses in 1997 and 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. It is anticipated that the Lessee's future
earnings will be sufficient to enable it to continue to make its lease payments
under the Percentage Leases when due.
Messrs. Feldman and Corcoran and the managers and other equity owners
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 $16.0 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 34 of the
Hotels. Amounts so borrowed by the Lessee, if any, will be
30
<PAGE> 31
subordinate in right of repayment to the prior payment in full of rent and other
obligations due under the Percentage Leases for such Hotels. No loans were
outstanding under such agreements at December 31, 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 December 31, 1997, the Company had a $550 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 ending on October 1, 2000. 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 plus an
applicable margin of 0% to 0.25%, or (ii) at a Eurodollar rate based upon the
30, 60, or 90 day or 6-month LIBOR rate plus an applicable margin of 1.0% to
1.75%. The applicable margin varies depending upon the Company's long-term
senior unsecured actual or implied debt rating and its leverage ratio and, at
December 31, 1997, was 0.00% in the case of Base Rate borrowings and 1.4% in the
case of Eurodollar Rate borrowings. The Company paid interest on its Line of
Credit at the weighted average interest rate of 7.6% for the year ended December
31, 1997. 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 50% of the aggregate value of the
Company's eligible hotels, which generally include hotels that are unencumbered.
At December 31, 1997, the aggregate amount borrowed under the Line of Credit was
$136 million. Assuming the Company purchases qualifying hotel assets, it would
have up to an additional $414 million available under the existing Line of
Credit. 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, 1997, the Company was in compliance
with all such covenants.
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, 1997,
the Company had drawn the full $25 million under this loan facility.
On October 1, 1997 the Company completed the private placement of $300
million in aggregate principal amount of its long term senior unsecured notes.
The notes were issued in two maturities, consisting of $175 million of 73/8%
senior notes due 2004 priced at 99.489% to yield 7.47% and $125 million of 75/8%
senior notes due 2007 priced at 99.209% to yield 7.74%. The $300 million senior
notes are discounted and accrete over the maturity of the notes (7 years for the
$175 million senior notes and 10 years for the $125 million senior notes) using
the interest method. On February 12, 1998 the Company announced an offer to
exchange these notes for new notes which were identical in amount and terms
except that the new notes have been registered under the Securities Act. The
Company expects to complete the exchange for the new notes by March 31, 1998.
At December 31, 1997, the Company had $17.5 million of cash and cash
equivalents and had utilized $136 million under its $550 million unsecured
revolving Line of Credit.
To provide for additional financing flexibility the Company has
approximately $89.1 million of common stock, preferred stock, debt securities
and/or common stock warrants available for offerings under a shelf registration
statement declared effective in 1997. In February 1998 the Company registered an
additional $1 billion in common stock, preferred stock, depository shares, debt
securities and/or common stock warrants pursuant to a new shelf registration
statement.
The Company's cash flow from financing activities of approximately
$600.1 million for the year ended December 31, 1997 resulted from the following:
the sale of an aggregate of 14.2 million shares of common stock with net
proceeds of $449.0 million (3.0 million shares in the first quarter of 1997 at
$35.50 per share and
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<PAGE> 32
11.2 million shares at $36.625 in the third quarter of 1997) net of the
repurchase of 1.2 million shares of stock held in treasury; net repayments on
the Company's Line of Credit of $57.7 million; net proceeds from the private
placement of $300.0 million in senior unsecured notes of $290.9 million;
distributions paid to common shareholders, preferred shareholder and limited
partners of $81.7 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 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 equity
holders.
On a pro forma basis, suite revenue by quarter for the years ended
December 31, 1997 and 1996 is as follows (in millions, except percentages):
<TABLE>
<CAPTION>
1997 1996
----------------------- --------------------
SUITE PERCENTAGE SUITE PERCENTAGE
REVENUE OF TOTAL REVENUE OF TOTAL
------- --------- ------- ----------
<S> <C> <C> <C> <C>
First Quarter......................... $132.7 24.7% $123.1 25.1%
Second Quarter........................ 139.0 25.9 124.1 25.2
Third Quarter......................... 136.6 25.5 125.6 25.6
Fourth Quarter........................ 128.5 23.9 118.6 24.1
------ ------- ------ ------
Total........................... $536.8 100.0% $491.4 100.0%
====== ======= ====== ======
</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.
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.
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<PAGE> 33
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("SFAS 130") and No. 131 "Disclosures About Segments of an Enterprise an
Related Information" ("SFAS 131"), both of which are effective for fiscal years
beginning after December 15, 1997.
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. The Company
believes that the adoption of SFAS 130 and 131 will not have a material impact
on previously reported financial statements.
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.
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<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Board of Directors currently consists of seven members, four of
whom are not officers or employees of the Company or any subsidiary or Lessee
thereof ("Independent Directors"). 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.
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 2000
Richard O. Jacobson........... Independent Director 1994 Class III 2000
Charles A. Ledsinger, Jr...... Independent Director 1997 Class II 1999
Charles N. Mathewson.......... Director 1994 Class I 1998
Thomas A. McChristy........... Independent Director 1994 Class III 2000
Randall L. Churchey........... Senior Vice President, Chief 1997 -- --
Financial Officer and Treasurer
Lawrence D. Robinson.......... Senior Vice President, General 1996 -- --
Counsel and Secretary
William P. Stadler............ Senior Vice President, Director of 1995 -- --
Corporate Acquisitions
Jack Eslick................... Vice President, Director of 1996 -- --
Asset Management
June H. McCutchen............. Vice President, Director of 1995 -- --
Design and Construction
Larry J. Mundy................ Vice President/Director of Hotel 1998 -- --
Acquisitions
</TABLE>
--------------------
Hervey A. Feldman (age 60) 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 49) 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
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<PAGE> 35
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.
Richard S. Ellwood (age 66) 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, Apartment Investment
and Management Company and Corporate Realty Income Trust.
Richard O. Jacobson (age 61) 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 30 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 A. Ledsinger, Jr. (age 48) was recently elected as a director of
the Company to fill the vacancy created by the resignation of Donald J.
McNamara. Mr. Ledsinger has served as an officer of St. Joe Corporation since
May 1997. He has served as President and Chief Operating Officer since February
1998 and as Senior Vice President an Chief Financial Officer prior to that. From
June 1995 until May 1997, Mr. Ledsinger was Senior Vice President and Chief
Financial Officer of Harrah's Entertainment, Inc. For more than three years
prior, Mr. Ledsinger served as Senior Vice President and Chief Financial Officer
of The Promus Companies Incorporated, the former parent of Harrah's
Entertainment, Inc. Mr. Ledsinger is also a director of TBC Corporation, Perkins
Management Company, Inc. and Friendly Ice Cream Corporation. He is a member and
a past chairman of the Real Estate Financial Advisory Council of the American
Hotel and Motel Association.
Charles N. Mathewson (age 69) 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 71) was the President of T.A. McChristy Co. Inc.,
a real estate investment company, from 1957 to 1996. 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.
Randall L. Churchey (age 37) has served as Senior Vice President, Chief
Financial Officer and Treasurer of the Company since November 1997. For
approximately 15 years prior to joining the Company, Mr. Churchey held various
positions with Coopers & Lybrand, L.L.P. Most recently, Mr. Churchey served as
the Chairman of the Hospitality and Real Estate Practice of that firm for the
Southwestern United States.
Lawrence D. Robinson (age 54) 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.
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<PAGE> 36
William P. Stadler (age 43) began his employment with the Company in July
1995 as Vice President, Director of Acquisition and Development. On January 14,
1998, Mr. Stadler was promoted to Senior Vice President, Director of Corporate
Acquisitions. 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.
Jack Eslick (age 46) 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 42) 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.
Larry J. Mundy (age 47) joined the Company in January 1998 as Vice
President/Director of Hotel Acquisitions. From 1995 until he joined the Company
he was Vice President of Franchise Development for Motel 6. From 1987 to 1995 he
was vice president of development in the South/Southeast for Hilton Hotels and
prior to 1987 he served as corporate counsel for Residence Inns and Embassy
Suites.
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, 1997
applicable to its officers, directors and greater than ten percent (10%)
beneficial owners were satisfied.
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<PAGE> 37
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, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information, for the fiscal years ended
December 31, 1997, 1996 and 1995, regarding the compensation of the Company's
Chief Executive Officer and the four other most highly compensated executive
officers ("Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ---------------------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION STOCK OPTIONS/ COMPENSATION
YEAR SALARY ($) BONUS ($) ($) AWARDS($)(4) SARS(#) ($)(13)
---- ---------- --------- ----- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas J. Corcoran, Jr........ 1997 200,000 250,000 None 525,000 (5) 201,000 (12) 14,250
President and Chief 1996 123,240 None None None None 4,875
Executive Officer 1995 120,000 None None 194,625 (6) 150,000 4,875
243,000 (7)
Hervey A. Feldman............. 1997 150,000 None None 525,000 (5) 151,000 (12) 9,000
Chairman of the Board 1996 123,240 None None None None 4,875
1995 120,000 None None 194,625 (6) 150,000 4,875
243,000 (7)
Lawrence D. Robinson.......... 1997 115,500 47,500 None 87,500 (8) 70,000 (12) None
Senior Vice President 1996 (2) 66,667 None None 349,500 (9) 100,000 None
General Counsel
William S. McCalmont.......... 1997 140,291 34,500 None None 20,000 (12) 38,733
Senior Vice President 1996 67,708 None None 457,500 (10) 92,500 55,524
Chief Financial Officer (1)
William P. Stadler ........... 1997 99,383 115,000 None None 25,000 (12) 14,250
Vice President, Director 1996 79,020 100,000 None None None 4,875
of New Development 1995(3) 34,125 45,000 None 66,100 (11) 25,000 2,438
</TABLE>
- ---------------------------
(1) Mr. McCalmont was employed as the Company's Chief Financial Officer from
August 14, 1996 until October 31, 1997. The information for 1996 includes
compensation only during the period from August 14, 1996 through December
31, 1996 and for 1997 includes compensation through the date of his
resignation.
(2) Includes compensation only during the period from the date of commencement
of Mr. Robinson's employment (May 1996) through December 31, 1996.
(3) Includes compensation only during the periods from the date of
commencement of Mr. Stadler's employment (July 1995) through December 31,
1995.
(4) An aggregate of 37,500 shares of restricted stock were awarded in the 1997
fiscal year. An aggregate of 35,000 of these restricted stock grants vest
over a five-year period and 2,500 shares vest fully within two months of
issuance. Holders of restricted stock are entitled to vote and receive
dividends on such shares from the date of grant. The amount reported in
this 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, 1997, the aggregate
unvested restricted stock holdings by the Named Executive Officers
consisted of 65,200 shares as set forth below, with a then current
aggregate market value, determined in the same manner as of December 31,
1997, of $1,924,000, as follows: Mr. Corcoran (25,800 shares, $758,604
value); Mr. Feldman (25,800 shares, $758,604 value); Mr. Robinson (12,100
shares, $367,132 value); and Mr. Stadler (1,500 shares, $39,660 value).
(5) Represents an award of 15,000 shares of restricted stock on February 19,
1997 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 $35.00 per share.
(6) Represents an award of 9,000 shares of restricted stock on February 16,
1995 which becomes 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.
37
<PAGE> 38
(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 as of February 19,
1997, 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 $35.00 per share.
(9) Represents an award of 12,000 shares of restricted stock as of May 1, 1996
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 $29.125 per share.
(10) Represents an award of 15,000 shares of restricted stock as of August 14,
1996 of which 2,500 shares vested on January 1, 1997 and 2,500 shares
vested on August 14, 1997. The unvested shares were forfeited upon the
termination of Mr. McCalmont's employment on October 31, 1997. The value
is based upon the closing price of the Common Stock on the date of grant
of $30.50 per share.
(11) 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.
(12) Represent shares purchasable pursuant to options granted in 1997. See
"--Option Grants" below.
(13) These amounts represent the Company's contributions to the Company's
employee savings and investment plan in the amount of up to $14,250 to
each executive officer and, in the case of Mr. McCalmont, a moving
allowance of $77,382 paid to Mr. McCalmont in connection with the
commencement of his employment with the Company, $26,733 of which was paid
in 1997.
The executive officers receive health and disability insurance
benefits which do not exceed 10% of their respective salaries. These benefits
are also provided to all other employees of the Company.
Option Grants
The following table sets forth information regarding grants of stock
options to the Company's Named Executive Officers during the 1997 fiscal year.
The options were granted pursuant to either the Company's 1994 Restricted Stock
and Stock Option Plan (the "1994 Plan") or the 1995 Restricted Stock and Stock
Option Plan (the "1995 Plan"). No stock appreciation rights ("SARs") were
granted during the 1997 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------------------
% of Total Potential Realizable Value at
Number of Options Market Price Assumed Annual Rate of Stock
Securities Under- Granted to Exercise or on Date Price Appreciation for Option Term
lying Options Employees in Base Price of Grant Expiration ----------------------------------
Name Granted (#) Fiscal Year ($/Share) ($/Share) Date 0% 5% ($) 10% ($)
- ---- --------------- ------------ ------------ ------------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas J. Corcoran, Jr. 46,000 6.2% 29.50 35.00 2/19/07 253,000 3,979,520 5,532,925
30,000 4.0% 35.50 35.00 2/19/07 0 2,775,339 3,788,430
10,000 1.3% 35.00 35.00 2/19/07 0 920,113 1,257,810
65,000 8.8% 36.63 36.63 6/24/07 0 6,259,267 8,556,521
50,000 6.7% 37.56 37.56 8/13/07 0 4,937,064 6,749,048
Hervey A. Feldman 46,000 6.2% 29.50 35.00 2/19/07 253,000 3,979,520 5,532,925
30,000 4.0% 35.50 35.00 2/19/07 0 2,775,339 3,788,430
10,000 1.3% 35.00 35.00 2/19/07 0 920,113 1,257,810
65,000 8.8% 36.63 36.63 6/24/07 0 6,259,267 8,556,521
Lawrence D. Robinson 10,000 1.3% 35.00 35.00 2/19/07 0 920,113 1,257,810
10,000 1.3% 36.63 36.63 6/24/07 0 962,964 1,316,388
50,000 6.7% 37.56 37.56 8/13/07 0 4,937,064 6,749,048
William S. McCalmont 10,000 1.3% 35.00 35.00 2/19/07 (1) 0 0 0
10,000 1.3% 36.63 36.63 6/24/07 (1) 0 0 0
William P. Stadler 10,000 1.3% 35.00 35.00 2/19/07 0 920,113 1,257,810
5,000 0.7% 36.63 36.63 6/24/07 0 481,482 658,194
10,000 1.3% 37.56 37.56 8/13/07 0 987,413 1,349,810
</TABLE>
(1) All of the options awarded to Mr. McCalmont during 1997 expired
upon the termination of his employment on October 31, 1997.
38
<PAGE> 39
Each of the aforementioned 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, 1997 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, 1997 December 31, 1997(1)
-------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas J. Corcoran, Jr....................... 150,000 351,000 $1,822,500 $1,946,000
Hervey A. Feldman............................ 150,000 301,000 1,822,500 1,946,000
Lawrence D. Robinson......................... 20,000 150,000 127,600 515,400
William S. McCalmont......................... 18,500 0 (2) 92,500 (2) 0 (2)
William P. Stadler........................... 10,000 40,000 90,600 140,900
</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, 1997, which was $35.50 per share.
(2) Mr. McCalmont's unvested options expired upon the termination of his
employment.
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 $10,000 per month in 1995, $10,270 in 1996 and in 1997 Mr. Feldman
received $12,500 per month and Mr. Corcoran received $16,667 per month.
Effective January 1, 1998, Mr. Feldman is to receive $12,500 per month and Mr.
Corcoran is to receive $20,833 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.
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.
39
<PAGE> 40
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, 433,500 shares were designated for grant to the officers and
employees of the Company, of which 33,500 shares could be granted as Restricted
Stock. The remaining 16,500 shares of Common Stock were designated for grant to
Independent Directors, all of which shares could be granted as Restricted Stock.
At March 10, 1998, there were no 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 which was subsequently
amended to 1,500,000 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 amended 1995 Plan, 1,450,000 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 50,000
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 10, 1998,
there remained available under the 1995 Plan only 65,167 shares available for
grants of options and 17,833 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 Operating Partnership)
or designated affiliates, are selected by the Compensation Committee.
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
40
<PAGE> 41
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 March 5, 1998, the Company granted to
each of the Independent Directors, except Mr. Ledsinger, 1,500 shares of
Restricted Stock under the 1994 Plan or 1995 Plan for serving as a director of
the Company during 1997. Mr. Ledsinger was granted 375 shares of restricted
stock from the 1995 Plan, reflecting the partial year he served as an
Independent Director. The Company intends to provide a similar grant to each
Independent Director in lieu of cash compensation for service during 1998. None
of the other directors received any compensation for their service as directors
of the Company during 1997 and 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 1997, the Company's Compensation Committee of the Board of
Directors consisted of Donald J. McNamara (from January 1, 1997 through the date
of his resignation at September 30, 1997), Charles A. Ledsinger (from his
appointment as an Independent Director at October 1, 1997 through December 31,
1997), Richard S. Ellwood, Richard O. Jacobson and Thomas A. McChristy,
constituting all of the Independent Directors, none of whom was, prior to or
during 1997, an officer or employee of the Company. None of such persons had any
relationships requiring disclosure under applicable rules and regulations. The
Company did not have a policy during 1997 prohibiting its executive officers
from participating in deliberations of the Compensation Committee regarding
executive compensation. Consequently, Mr. Corcoran, who is the President, Chief
Executive Officer and a director of the Company, and Mr. Robinson, as Secretary
of the Company, were present during certain deliberations of the Compensation
Committee regarding executive compensation during 1997, to provide information
to, and to record the actions of, the Compensation Committee.
See "Item 13. Certain Relationships and Related Transactions" herein
for information regarding the interests of Mr. Corcoran and Mr. Ellwood in
certain transactions with the Company.
41
<PAGE> 42
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 10, 1998,
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>
FMR Corp.............................................. 3,182,956(2) 8.7%
82 Devonshire Street
Boston, Massachusetts 02109
Franklin Resources, Inc............................... 4,426,800(3) 12.1%
777 Mariners Island Blvd.
San Mateo, California 94403
</TABLE>
- ---------------------------
(1) Based upon 36,591,080 shares outstanding as of March 10, 1998.
(2) Based solely upon information contained in Schedule 13G, dated February 14,
1998. FMR Corp. reported that, through its subsidiaries, it had sole
dispositive power with respect to such shares and sole voting power with
respect to 566,070 of such shares.
(3) Based solely upon information contained in Schedule 13G, dated January 16,
1998. Franklin Resources, Inc. reported that, through its subsidiaries, it
had sole dispositive power and sole voting power with respect to 4,302,072
shares. Includes 1,446,601 shares of Common Stock issuable upon conversion
of 1,866,100 shares of the Company's Series A Preferred Stock.
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 10, 1998, 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................... 511,515 (2)(3) 1.4% 3,000 (10) *
Thomas J. Corcoran, Jr.............. 511,615 (2)(4) 1.4% 3,000 *
Richard S. Ellwood.................. 6,000 * 0 0
Richard O. Jacobson................. 15,000 * 0 0
Charles A. Ledsinger, Jr............ 375 0 0
Charles N. Mathewson................ 609,777 (5) 1.7% 90,000 (11) 1.5%
Thomas A. McChristy................. 47,400 (6) * 0 0
Lawrence D. Robinson................ 38,500 (7) * 0 0
William S. McCalmont................ 23,500 (8) * 0 0
William P. Stadler.................. 14,577 (9) * 100 *
All executive officers and
directors as a group (11 persons)... 1,781,259 4.9% 96,100 1.6%
</TABLE>
- ----------
* Represents less than 1% of the outstanding shares of such class
(1) Based upon 36,591,080 shares outstanding as of March 10, 1998.
42
<PAGE> 43
(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 and of which
167,200 shares are fully vested, (ii) 167,200 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 283,800 shares issuable to Mr. Feldman pursuant to outstanding
stock and 333,800 shares issuable to Mr. Corcoran 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 4,400
shares owned of record by his spouse's individual retirement account.
(7) Includes (i) 14,500 shares issued pursuant to stock grants, which shares
vest over a five-year period from the date of grant at the rate of 20% per
year and of which 2,900 shares are fully vested, and (ii) 22,000 shares
issuable pursuant to currently exercisable stock options. Does not include
148,000 shares issuable pursuant to outstanding stock options which are not
currently exercisable.
(8) Represents (i) 5,000 shares issued in August 1996 pursuant to a stock
grant, which shares were fully vested prior to the termination of Mr.
McCalmont's employment on October 31, 1997, and (ii) 18,500 shares issuable
pursuant to currently exercisable stock options. Does not include shares
covered by stock grants or stock options which were forfeited or expired
upon the termination of Mr. McCalmont's employment with the Company.
(9) Represents (i) 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 of which 1,000 shares are fully vested, (ii) 12,000
shares issuable pursuant to currently exercisable stock options and (iii)
77 shares issuable upon conversion of 100 shares of Series A Preferred
Stock. Does not include 38,000 shares issuable pursuant to outstanding
stock options which are not currently exercisable.
(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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and the Operating 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. The terms of the Percentage Leases
were not negotiated on an arms-length basis and, accordingly, may not reflect
fair market values or terms. management of the Company believes, however, that
the terms of such agreements are fair to the Company, and when entered into,
were upon terms as favorable to the Company as could then be obtained from a
financially responsible unrelated third party. Lease rent paid by the Lessee
under the Percentage Leases totaled approximately $217.0 million for the year
ended December 31, 1997. 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
43
<PAGE> 44
Board, and Mr. Corcoran serves as President and Chief Executive Officer, of the
Company. Each was paid a base salary of $10,000 per month in 1995 and $10,270 in
1996 and in 1997 Mr. Feldman received $12,500 per month and Mr. Corcoran
received $16,667 per month. Effective January 1, 1998, Mr. Corcoran is to
receive $20,833 per month and Mr. Feldman is to receive $12,500 per month. 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.
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
1997, the Company paid approximately $1.3 million (approximately 38%) of the
allocable expenses under this arrangement.
Compensation of Director for Special Services
In connection with the Company's acquisition, in 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-22
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, Articles of Amendment dated August 8, 1996,
Articles of Amendment dated June 16, 1997 and Articles of Amendment
dated October 30, 1997.
</TABLE>
44
<PAGE> 45
<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 Registrant's Form 10-Q for the quarter ended June 30, 1996 (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 - Indenture dated as of October 1, 1997 by and among FelCor Suites
Limited Partnership, the Registrant, the Subsidiary Guarantors
named therein and Sun Trust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4.1 to the Registration Statement on Form S-4
(File No. 333-39595) filed by the Registrant and the other
co-registrants named therein (the "1997 Form S-4") and incorporated
herein by reference).
4.4 - 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 (filed
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C>
as Exhibit 10.1.6 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (the "1996 10-K") and
incorporated herein by reference).
10.1.7 - Seventh Amendment to Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of May 16,
1997, by and among the Registrant, PMB Associates, Ltd. and
all of the persons or entities who are or shall in the future
become limited partners of the Partnership.
10.1.8 - Eighth Amendment to Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of February 6,
1998, by and among the Registrant, Columbus/Front Ltd. 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 December 31, 1997.
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).
10.5 - 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 - 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).
10.12 - 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).
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C>
10.13 - 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).
10.14 - Third Amended and Restated Revolving Credit Agreement dated as of
August 14, 1997 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 10.23 to the 1997 Form S-4
and incorporated herein by reference).
10.15 - Contract for Purchase and Sale of Hotels dated as of June 5, 1997
by and among ITT Sheraton Corporation, Sheraton Savannah Corp.,
Sheraton Peachtree Corp., Sheraton Crescent Corp., Sheraton Dallas,
Corp., Sheraton Gateway Suites O'Hare Investment Partnership, and
the Partnership (filed as Exhibit 10.24 to the Registrant's Current
Report on Form 8-K dated June 4, 1997 and incorporated herein by
reference).
10.16 - Registration Rights Agreement dated as of September 26, 1997 among
the Registrant, the Partnership, Morgan Stanley & Co. Incorporated,
NationsBank Capital Markets, Inc. and Salomon Brothers Inc. (filed
as Exhibit 10.25 to the 1997 Form S-4 and incorporated herein by
reference).
21.1 - List of Subsidiaries of the Registrant.
23.1 - Consent of Coopers & Lybrand L.L.P.
27 - Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
During the fourth quarter of 1997, the Registrant filed a Current
Report on Form 8-K dated October 1, 1997 to file as an exhibit the Registrant's
press release of October 1, 1997 regarding the completion of the private
placement of $300 million in aggregate principal amount of the Operating
Partnership's long-term senior unsecured notes.
47
<PAGE> 48
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/ Randall L. Churchey
----------------------------
Randall L. Churchey
Senior Vice President, Chief Financial Officer & Treasurer
Date: March 20, 1998
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.
<TABLE>
<CAPTION>
Date Signature
---- ---------
<S> <C>
March 17, 1998 /s/ Hervey A. Feldman
------------------------------
Hervey A. Feldman
Chairman of the Board and Director
March 17, 1998 /s/ Thomas J. Corcoran, Jr.
-------------------------------
Thomas J. Corcoran, Jr.
President and Director
(Chief Executive Officer)
March 17, 1998 /s/ Randall L. Churchey
-------------------------------
Randall L. Churchey
Senior Vice President
(Chief Financial Officer)
March 17, 1998 /s/ Lester C. Johnson
-------------------------------
Lester C. Johnson
Vice President and Controller
(Principal Accounting Officer)
March 17, 1998 /s/ Richard S. Ellwood
-------------------------------
Richard S. Ellwood
Director
March 17, 1998 /s/ Richard O. Jacobson
-------------------------------
Richard O. Jacobson
Director
March 17, 1998 /s/ Charles A. Ledsinger, Jr.
-------------------------------
Charles A. Ledsinger, Jr.
Director
/s/ Charles N. Mathewson
March 19, 1998 -------------------------------
Charles N. Mathewson
Director
March 17, 1998 /s/ Thomas A. McChristy
-------------------------------
Thomas A. McChristy
Director
</TABLE>
48
<PAGE> 49
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, 1997 and 1996..........................................................F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995........................F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995............. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995........................F-6
Notes to Consolidated Financial Statements........................................................................F-7
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1997..................................F-22
DJONT OPERATIONS, L.L.C.
Report of Independent Accountants................................................................................F-24
Consolidated Balance Sheets - December 31, 1997 and 1996.........................................................F-25
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995.......................F-26
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995.............F-27
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.......................F-28
Notes to Consolidated Financial Statements.......................................................................F-29
</TABLE>
F-1
<PAGE> 50
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, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years
then ended 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,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
January 20, 1998
except for Note 14 as to which
the date is February 17, 1998
F-2
<PAGE> 51
FELCOR SUITE HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Investment in hotels, net of accumulated depreciation of
$87,400 in 1997 and $36,718 in 1996 .......................................... $ 1,489,764 $ 899,691
Investment in unconsolidated entities ........................................... 132,991 59,867
Cash and cash equivalents ....................................................... 17,543 7,793
Due from Lessee ................................................................. 18,908 5,526
Deferred expenses, net of accumulated amortization of
$1,987 in 1997 and $364 in 1996 ............................................. 10,593 3,235
Other assets .................................................................... 3,565 2,676
----------- -----------
Total assets ............................................................... $ 1,673,364 $ 978,788
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt, net of discount of $1,855 at December 31, 1997 ............................ $ 465,726 $ 226,550
Distributions payable ........................................................... 24,671 16,090
Accrued expenses and other liabilities .......................................... 11,331 5,235
Capital lease obligations ....................................................... 11,093 12,875
Minority interest in Operating Partnership, 2,900 and 2,786 units issued and
outstanding at December 31, 1997 and 1996, respectively ...................... 73,451 76,112
Minority interest in other partnerships ......................................... 8,594
----------- -----------
Total liabilities .......................................................... 594,866 336,862
----------- -----------
Commitments and contingencies (Notes 5 and 8)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized, 6,050 shares issued
and outstanding at December 31, 1997 and 1996 ................................ 151,250 151,250
Common stock, $.01 par value, 100,000 shares authorized, 37,802 and 23,502 shares
issued at December 31, 1997
and 1996, respectively ....................................................... 378 235
Additional paid in capital ...................................................... 1,003,501 505,082
Unearned officers' and directors' compensation .................................. (1,754) (1,454)
Distributions in excess of earnings ............................................. (33,771) (13,187)
----------- -----------
1,119,604 641,926
Less common stock in treasury, at cost, 1,200 shares ............................ (41,106)
----------- -----------
Total shareholders' equity ................................................. 1,078,498 641,926
----------- -----------
Total liabilities and shareholders' equity ................................. $ 1,673,364 $ 978,788
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 52
FELCOR SUITE HOTELS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Percentage lease revenue................................................. $ 169,114 $ 97,950 $ 23,787
Equity in income from unconsolidated entities............................ 6,963 2,010 513
Other revenue............................................................ 574 984 1,691
---------- ---------- ----------
Total revenues.............................................. 176,651 100,944 25,991
---------- ---------- ----------
Expenses:
General and administrative............................................... 3,743 1,819 870
Depreciation............................................................. 50,798 26,544 5,232
Taxes, insurance and other............................................... 23,093 13,897 2,563
Interest expense......................................................... 28,792 9,803 2,004
Minority interest in Operating Partnership............................... 5,817 5,590 3,131
Minority interest in other partnerships.................................. 573
---------- ---------- ----------
Total expenses.............................................. 112,816 57,653 13,800
---------- ----------- ---------
Income before extraordinary charge............................................ 63,835 43,291 12,191
Extraordinary charge from write off of deferred financing fees................ 185 2,354
---------- ---------- ----------
Net income.................................................................... 63,650 40,937 12,191
Preferred dividends........................................................... 11,797 7,734
---------- ---------- ----------
Net income applicable to common shareholders.................................. $ 51,853 $ 33,203 $ 12,191
========== ========== =========
Per common share data:
Basic:
Net income applicable to common shareholders
before extraordinary charge......................................... $ 1.67 $ 1.54 $ 1.71
Extraordinary charge..................................................... ( 0.01) ( 0.10)
------- ------- -------
Net income applicable to common shareholders............................. $ 1.66 $ 1.44 $ 1.71
======= ======= =======
Weighted average common shares outstanding............................... 31,269 23,023 7,137
======= ======= =======
Diluted:
Net income applicable to common shareholders
before extraordinary charge......................................... $ 1.65 $ 1.53 $ 1.69
Extraordinary charge..................................................... (0.01) ( 0.10)
------- ------- -------
Net income applicable to common shareholders............................. $ 1.64 $ 1.43 $ 1.69
======= ======= =======
Weighted average common shares outstanding............................... 31,610 23,218 7,199
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 53
FELCOR SUITE HOTELS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- UNEARNED
NUMBER ADDITIONAL OFFICERS'
PREFERRED OF PAID-IN AND DIRECTORS'
STOCK SHARES AMOUNT CAPITAL COMPENSATION
----- ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 4,690 $ 47 $ 69,776
Issuance of common shares, net of
offering expenses and allocation to
minority interest 16,411 164 393,009
Issuance of officers' and directors'
shares 34 739 $ (631)
Distributions/dividends declared:
$1.84 per common share
Amortization of unearned officers' and
directors' compensation 158
Net income
-------- ------ ---- ----------- --------
BALANCE AT DECEMBER 31, 1995 21,135 211 463,524 (473)
Issuance of common shares, net of
offering expenses and allocation to
minority interest 1,913 19 38,911
Issuance of officers' and directors'
shares 53 1 1,486 (1,487)
Conversion of Operating Partnership
units to common shares 401 4 8,159
Issuance of 6,050 shares of preferred
stock, net of offering expenses $151,250 (6,998)
Distributions/dividends declared:
$1.92 per common share
$1.2783 per preferred share
Amortization of unearned officers' and
directors' compensation 506
Net income
-------- ------ ---- ----------- --------
BALANCE AT DECEMBER 31, 1996 151,250 23,502 235 505,082 (1,454)
Issuance of common shares, net of
offering expenses and allocation to
minority interest 14,200 142 495,911
Repurchase of common shares
held in treasury
Issuance of officers' and directors' shares 44 1 1,317 (1,317)
Conversion of Operating Partnership
units to common shares 25 599
Stock options exercised 31 592
Distributions/dividends declared:
$2.10 per common share
$1.95 per preferred share
Amortization of unearned officers' and
directors' compensation 1,017
Net income
-------- ------ ---- ----------- --------
BALANCE AT DECEMBER 31, 1997 $151,250 37,802 $378 $ 1,003,501 $(1,754)
======== ====== ==== =========== ========
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TOTAL
IN EXCESS OF TREASURY SHAREHOLDERS'
EARNINGS STOCK EQUITY
-------- ----- ------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ (568) $ 69,255
Issuance of common shares, net of
offering expenses and allocation to
minority interest 393,173
Issuance of officers' and directors'
shares 108
Distributions/dividends declared:
$1.84 per common share (13,499) (13,499)
Amortization of unearned officers' and
directors' compensation 158
Net income 12,191 12,191
--------- --------- -----------
Balance at December 31, 1995 (1,876) 461,386
Issuance of common shares, net of
offering expenses and allocation to
minority interest 38,930
Issuance of officers' and directors'
shares
Conversion of Operating Partnership
units to common shares 8,163
Issuance of 6,050 shares of preferred
stock, net of offering expenses 144,252
Distributions/dividends declared:
$1.92 per common share (44,514) (44,514)
$1.2783 per preferred share (7,734) (7,734)
Amortization of unearned officers' and
directors' compensation 506
Net income 40,937 40,937
--------- --------- -----------
Balance at December 31, 1996 (13,187) 641,926
Issuance of common shares, net of
offering expenses and allocation to
minority interest 496,053
Repurchase of common shares
held in treasury $ (41,106) (41,106)
Issuance of officers' and directors' shares 1
Conversion of Operating Partnership
units to common shares 599
Stock options exercised 592
Distributions/dividends declared:
$2.10 per common share (72,437) (72,437)
$1.95 per preferred share
(11,797) (11,797)
Amortization of unearned officers' and
directors' compensation 1,017
Net income 63,650 63,650
--------- --------- -----------
Balance at December 31, 1997 $ (33,771) $ (41,106) $ 1,078,498
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 54
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 63,650 $ 40,937 $ 12,191
Adjustments to reconcile net income to net cash provided
by operating activities, net of effects of acquisitions:
Depreciation............................................................ 50,798 26,544 5,232
Amortization of deferred financing fees and organization costs........... 1,468 554 228
Amortization of unearned officers' and directors' compensation........... 1,017 506 158
Equity in income from unconsolidated entities............................ (6,963) (2,010) (513)
Extraordinary charge for write off of deferred financing fees............ 185 2,354
Fully vested officer stock grant......................................... 108
Minority interest in Operating Partnership............................... 5,817 5,590 3,131
Minority interest in other partnerships.................................. 573
Changes in assets and liabilities:
Due from Lessee.......................................................... (13,382) (3,130) (1,137)
Deferred financing fees.................................................. (8,825) (4,484) (1,072)
Deferred costs and other assets.......................................... (1,175) 353 (2,064)
Accrued expenses and other liabilities................................... 4,315 280 741
----------- ---------- ----------
Net cash flow provided by operating activities................. 97,478 67,494 17,003
----------- ---------- ----------
Cash flows from investing activities:
Acquisition of hotels.................................................... (574,100) (365,907) (219,164)
Prepayments under purchase agreements.................................... (21,701)
Acquisition of unconsolidated entities................................... (65,271) (43,424) (13,166)
Improvements and additions to hotels..................................... (52,700) (71,051) (5,166)
Cash distributions from unconsolidated entities........................ 4,211 1,954
----------- ---------- ----------
Net cash flow used in investing activities................... (687,860) (478,428) (259,197)
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from borrowings................................................. 679,144 303,350 128,600
Repayment of borrowings.................................................. (445,900) (193,954) (129,850)
Proceeds from sale of common stock....................................... 516,700 44,978 426,502
Proceeds from sale of preferred stock.................................... 151,250
Costs associated with public offerings................................... (27,600) (6,998) (27,874)
Purchase of treasury stock............................................... (41,106)
Proceeds from sale of partnership units.................................. 25,000
Proceeds from exercise of stock options.................................. 592
Distributions paid to limited partners................................... (6,026) (5,353) (2,993)
Distributions paid to common shareholders................................ (63,875) (36,583) (11,488)
Dividends paid to preferred shareholders................................. (11,797) (4,784)
----------- ---------- ----------
Net cash flow provided by financing activities................ 600,132 251,906 407,897
----------- ---------- ----------
Net change in cash and cash equivalents.......................................... 9,750 (159,028) 165,703
Cash and cash equivalents at beginning of years.................................. 7,793 166,821 1,118
----------- ---------- ----------
Cash and cash equivalents at end of years........................................ $ 17,543 $ 7,793 $ 166,821
=========== ========== ==========
Supplemental cash flow information - interest paid............................... $ 21,414 $ 9,168 $ 1,467
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 55
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
FelCor Suite Hotels, Inc., ("FelCor") is a real estate investment trust
("REIT") which at December 31, 1997, owned interests in 73 hotels with an
aggregate of 17,933 suites/rooms (collectively the "Hotels") through its 92.7%
general partner interest in FelCor Suites Limited Partnership ("the Operating
Partnership") and its consolidated subsidiaries (collectively, the "Company").
FelCor is the sole general partner of the Operating Partnership. The Company
owns 100% equity interests in 55 of the hotels (13,430 suites/rooms), a 90% or
greater interest in partnerships owning four hotels (1,041 suites) and 50%
interests in separate unconsolidated entities that own fourteen hotels (3,462
suites). At December 31, 1997, 52 of the Hotels were operated as Embassy
Suites(R) hotels, 13 as Doubletree Guest Suites(R) hotels, five as Sheraton(R)
hotels, two as Sheraton Suites hotels, and one as a Hilton Suites(R) hotel. The
Hotels are located in 27 states, with 31 hotels in California, Florida and
Texas. The following table provides certain information regarding the Company's
Hotels acquired through December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF HOTELS NUMBER OF
ACQUIRED SUITES/ROOMS
---------------- ------------
<S> <C> <C>
1994 7 1,730
1995 13 2,649
1996 23 5,769
1997
1st Quarter 15 3,446
2nd Quarter 9 2,715
3rd Quarter 4 1,000
4th Quarter 2 447
-- ------
73 17,756
==
Additional suites constructed 177
------
17,933
======
</TABLE>
The Company leases all of the Hotels to DJONT Operations, L.L.C. 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 of
Directors and Chief Executive Officer of the Company, respectively, beneficially
own a 50% voting equity interest in the Lessee. The remaining 50% non-voting
equity interest is beneficially owned by the children of Charles N. Mathewson, a
director of and major initial investor in the Company. The Lessee has entered
into management agreements pursuant to which, at December 31, 1997, 63 of the
Hotels were managed by subsidiaries of Promus Hotel Corporation ("Promus"),
seven of the Hotels are managed by subsidiaries of ITT Sheraton Corporation
("Sheraton"), and three of the Hotels are managed by two independent management
companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of FelCor, the Operating Partnership and its consolidated
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
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
F-7
<PAGE> 56
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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 periodically 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 Entities --The Company owns a 50% interest
in various partnerships or limited liability companies in which the partners
jointly make all material decisions concerning the business affairs and
operations. Accordingly, the Company does not control the entities and carries
its investment in unconsolidated entities 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.
Deferred Expenses -- Deferred expenses are recorded at cost and consist
of the following at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Organization costs............................................... $ 349 $ 349
Deferred financing fees.......................................... 12,231 3,250
-------- -------
12,580 3,599
Accumulated amortization......................................... (1,987) (364)
-------- --------
$ 10,593 $3,235
======== ========
</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 notes.
Revenue Recognition -- Percentage lease revenue is recognized when
earned from the Lessee under the Percentage Lease agreements. The Lessee is in
compliance with its obligations under the Percentage Leases.
Net Income Per Common Share -- The Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" in the fourth
quarter of 1997, which established new standards for computing and presenting
F-8
<PAGE> 57
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
earnings per share and requires restatement of prior years' comparative amounts.
Basic earnings per share have been computed by dividing net income by the
weighted average number of common shares outstanding.
Diluted earnings per share have been computed by dividing net income by
the weighted average number of common shares and equivalents outstanding. Common
stock equivalents represent shares issuable upon assumed exercise of stock
options.
Net income applicable to common shareholders before extraordinary
charges for both basic earnings per share and diluted earnings per share
includes a deduction for preferred dividends of $11.8 million and $7.7 million
for the years ended December 31, 1997 and 1996 respectively. Weighted average
common shares outstanding used in the computation of diluted earnings per share
includes the dilutive effect of employee stock options and unvested officer
restricted stock grants of 341 thousand, 195 thousand and 62 thousand shares at
December 31, 1997, 1996 and 1995 respectively.
At December 31, 1997 and 1996 the Company's convertible preferred stock
if converted to common shares would be anti-dilutive, accordingly the
convertible preferred stock is not assumed to be converted in the computation of
diluted earnings per share.
Distributions and Dividends -- The Company pays regular quarterly
distributions on its common stock which are dependent on receipt of quarterly
distributions from the Operating Partnership to FelCor and the limited partners
in the Operating Partnership. Additionally, the Company pays regular quarterly
dividends on preferred stock in accordance with its preferred stock dividend
requirements.
Minority Interest in Operating Partnership -- Minority interest in the
Operating Partnership represents the limited partners' proportionate share of
the equity in the Operating 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 1997 and 1996 represent approximately a 6.0% and 11.5%
return of capital, respectively, for federal income tax purposes.
F-9
<PAGE> 58
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT IN HOTELS
Investment in hotels at December 31, 1997 and 1996 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land.......................................................... $ 157,554 $ 89,106
Building and improvements..................................... 1,257,247 744,758
Furniture, fixtures and equipment............................. 147,923 77,526
Construction in progress...................................... 14,440 25,019
------------ ----------
1,577,164 936,409
Accumulated depreciation...................................... (87,400) (36,718)
------------ ----------
$ 1,489,764 $ 899,691
============ ==========
</TABLE>
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company owned 50% interests in separate partnerships or limited
liability companies owning fourteen hotels, a parcel of undeveloped land and a
condominium management company at December 31, 1997, 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 entities under the equity method.
Summarized combined financial information for 100% of these unconsolidated
entities is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Balance sheet information:
Investment in hotels................................... $256,032 $ 110,394
Non-recourse mortgage debt............................. $138,956 $ 49,402
Equity................................................. $126,324 $ 91,156
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
Statement of operations information: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Percentage lease revenue............................... $ 47,720 $ 9,974 $ 1,420
Net income............................................. $ 17,044 $ 4,366 $ 1,050
</TABLE>
5. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt at December 31, 1997 and 1996 consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Senior unsecured notes, net of discount...................... $298,145
Line of Credit............................................... 136,000 $115,000
Term loan.................................................... 85,000
Renovation loan.............................................. 25,000 25,000
Collateralized mortgage note................................. 5,931
Other........................................................ 650 1,550
-------- --------
$465,726 $226,550
======== ========
</TABLE>
On October 1, 1997 the Company completed the private placement of $300
million in aggregate principal amount of its long term senior unsecured notes.
The notes were issued in two maturities, consisting of $175 million of 73/8%
senior notes due 2004 priced at 99.489% to yield 7.47% and $125 million of 75/8%
senior notes due 2007 priced at 99.209% to
F-10
<PAGE> 59
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT AND CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
yield 7.74%. The discount on the $300 million senior notes accrete using the
interest method over the maturity of the notes.
The Company has an unsecured line of credit facility ("Line of Credit")
of up to $550 million which matures on October 1, 2000. Interest payable on
borrowings under the Line of Credit is variable, determined from a ratings and
leverage-based pricing matrix, and is currently set at LIBOR (5.71875% at
December 31, 1997) plus 140 basis points. Additionally, the Company is required
to pay an unused commitment fee which is variable, determined from a ratings
based pricing matrix, currently set at 20 basis points. The Company paid unused
commitment fees of approximately $560,000 and $164,000 during 1997 and 1996,
respectively. For the years ended December 31, 1997 and 1996, the Company paid
interest on its Line of Credit at the weighted average interest rate of 7.6% and
7.4%, respectively. 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 50% of the aggregate value of
the Company's eligible hotels, which generally includes hotels that are
unencumbered. At December 31, 1997, the aggregate amount borrowed under the Line
of Credit was $136 million. Assuming the Company purchases qualifying hotel
assets, it would have up to an additional $414 million available under the
existing Line of Credit. 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, 1997, the Company was
in compliance with all such covenants.
The Company has a $25 million loan facility ("Renovation Loan") which
is guaranteed by Promus, bears interest at LIBOR plus 45 basis points, requires
monthly interest payments, and quarterly principal payments of $1.25 million
beginning June 1999 and matures in June 2000. The weighted average interest rate
for 1997 and 1996 was 6.4% and 6.1%, respectively.
On December 4, 1997, the Company assumed an existing collateralized
mortgage note when it acquired the Dayton, Ohio Doubletree Guest Suites hotel.
The mortgage note bears interest at 10.22 % per annum, requires monthly
installment payments and matures on March 31, 2003. The outstanding principal
balance at December 31, 1997 was approximately $5.9 million. The note prohibits
any prepayment of the outstanding principal before May 1, 1998 upon which there
is a prepayment penalty fee of at least 1% of the then outstanding principal
balance.
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, 1997.
Future scheduled principal payments on debt at December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR
<S> <C>
1998............................................................ $ 116
1999............................................................ 3,879
2000............................................................ 157,393
2001............................................................ 158
2002............................................................ 175
2003 and thereafter............................................. 305,860
---------
467,581
Discount accretion over term.................................... (1,855)
----------
$ 465,726
=========
</TABLE>
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
F-11
<PAGE> 60
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT AND CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
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 the Company at
December 31, 1997 are summarized in the following table:
<TABLE>
<CAPTION>
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 12/31/97 MATURITY
-------------- ----------- ---------- ------------ --------
<S> <C> <C> <C> <C>
$50 million 6.11125% 7.51125% 5.78125% October 1999
$25 million 5.95500% 7.35500% 5.75000% 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.
Capital lease obligations at December 31, 1997 and 1996 consists of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Capital land and building lease obligations................. $ 9,330 $ 9,675
Capital equipment lease obligations......................... 1,763 3,200
--------- ---------
$ 11,093 $ 12,875
========= =========
</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 has assumed various capital equipment leases associated
with hotels purchased. 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, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1998.................................................................... $ 2,820
1999.................................................................... 1,502
2000.................................................................... 1,336
2001.................................................................... 1,217
2002.................................................................... 1,217
2003 and thereafter..................................................... 10,552
--------
18,644
Executory costs......................................................... (788)
Imputed interest........................................................ (6,763)
--------
Present value of net minimum lease payments............................. $ 11,093
========
</TABLE>
Included in investment in hotels at December 31, 1997 and 1996, are
assets under capital leases with a net book value of approximately $10.7 million
and $12.5 million, respectively.
F-12
<PAGE> 61
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITAL STOCK
On October 22, 1997, the Company announced shareholder approval of an
amendment to the Company's Charter increasing the number of authorized shares of
common stock from 50 million shares to 100 million shares.
As of December 31, 1997 the Company had approximately $332.1 million of
common stock, preferred stock, debt securities and/or common stock warrants
available for offerings under two shelf registration statements declared
effective in 1996 and 1997.
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. In 1996, the Company issued its $1.95 Series A Cumulative
Preferred Stock ("Series A Preferred Stock") at $25 per share. The Series A
Preferred Stock bears an annual dividend equal to the greater of $1.95 per share
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. 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, 1997, all dividends then payable on the Preferred Stock had been
paid.
Operating Partnership Units
The outstanding units of limited partnership interest in the Operating
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.
In 1997, an aggregate of 139,286 Units were issued to sellers in
conjunction with the purchases of interests in one hotel and, in 1996, an
aggregate of 491,703 Units were issued to sellers in conjunction with the
purchase of interests in four hotels.
7. TAXES, INSURANCE AND OTHER
Taxes, insurance and other is comprised of the following for the years
ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Real estate and personal property taxes......................................... $18,976 $11,110 $2,233
Property insurance.............................................................. 1,627 1,312 155
Land lease expense.............................................................. 1,610 952
State franchise taxes........................................................... 718 472 175
Other........................................................................... 162 51
------- ------- ------
Total taxes, insurance and other....................................... $23,093 $13,897 $2,563
======= ======= ======
</TABLE>
8. COMMITMENTS AND RELATED PARTY TRANSACTIONS
At December 31, 1997 the Company owned interests in 52 Embassy Suites
hotels, 13 Doubletree Guest Suites hotels, five Sheraton hotels, two Sheraton
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, Sheraton hotels or Sheraton Suites hotels,
which rights are included in the management agreements.
F-13
<PAGE> 62
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Lessee generally pays the Hotel 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. 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 Percentage 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 (21 hotels). The rental income under the Percentage Leases
between the 14 unconsolidated entities, 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 (i.e., base rents) to the Company under these
noncancellable operating leases at December 31, 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR
<S> <C>
1998................................................................... $ 108,182
1999................................................................... 108,182
2000................................................................... 108,182
2001................................................................... 108,182
2002................................................................... 108,182
2003 and thereafter.................................................... 385,106
---------
$926,016
=========
</TABLE>
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 1998, 1997 and 1996 were
0.50%, 1.42% and 0.73% respectively.
Under the Percentage Leases, the Operating 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
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. Included in cash and cash equivalents at December 31,
1997 and 1996 were cash balances held by the Hotel managers for these capital
expenditures of $7.3 million and $3.5 million, respectively. 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.
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 expenses to the
Company must be approved by a majority of the independent directors. During
1997, 1996 and 1995, the Company paid approximately $1.3 million (approximately
38%), $807,000 (approximately 38%) and $387,000 (approximately 38%),
respectively, of the allocable expenses under this agreement.
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. Each
was paid a base salary of $10,000 per month in 1995 and $10,270 per month in
1996 and in 1997 Mr. Feldman received $12,500 per month and Mr. Corcoran
received $16,667 per month. Effective January 1, 1998, Mr. Feldman is to receive
$12,500 per month and Mr. Corcoran is to receive $20,833 per month.
Additionally, the Company is required to maintain a comprehensive medical plan
for such persons.
F-14
<PAGE> 63
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Company has a capital upgrade and renovation program for the Hotels
and has committed approximately $55 million to be invested in 1998 under this
program for those hotels which are wholly owned and approximately $11 million
for the unconsolidated entities. The Company is also 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
(of which $7.4 million had been spent as of December 31, 1997) with an expected
completion in early 1998.
9. 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Assets acquired....................................................... $ 588,053 $ 494,354 $ 221,213
Prepayments assumed................................................... 13,616
Liabilities assumed................................................... (5,932) (108,744) (910)
Capital land lease assumed............................................ (10,045)
Capital equipment leases assumed...................................... (2,823) (1,211)
Common stock issued................................................... (6,000) (3,499)
Minority interest contribution........................................ (8,021)
Units issued.......................................................... (10,880)
--------- --------- ---------
Net cash paid................................................ $ 574,100 $ 365,907 $ 219,164
========= ========= =========
</TABLE>
The Company purchased interests in unconsolidated entities during 1997,
1996 and 1995. These unconsolidated entities separately own fourteen hotels, a
parcel of undeveloped land and a condominium management company. 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Acquisition of interests in unconsolidated entities................... $70,372 $45,992 $13,166
Units issued.......................................................... (5,101) (2,568)
-------- ------ -------
Net cash paid................................................ $65,271 $43,424 $13,166
======== ======= =======
</TABLE>
Approximately $24.7 million, $16.1 million, and $3.8 million of
aggregate preferred stock dividends and common stock distributions had been
declared as of December 31, 1997, 1996, and 1995, respectively. These amounts
were paid in January following each year.
10. STOCK BASED COMPENSATION PLANS
The Company sponsors two restricted stock and stock option plans, (the
"Plans"). The Company applies APB Opinion 25 and related interpretations in
accounting for the Plans. In 1995, the Financial Accounting Standards Board
("FASB") issued FASB Statement No. 123 Accounting for Stock-Based Compensation
("SFAS 123") which, if fully adopted by the Company, would change the methods
the Company applies in recognizing the cost of the Plans. 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 are required by SFAS
123 and are presented below.
F-15
<PAGE> 64
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
Stock Options
The Company is authorized to issue 1,950,000 shares of common stock
under the Plans pursuant to awards granted in the form of incentive stock
options, 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.
A summary of the status of the Company's nonqualified stock options as
of December 31, 1997, 1996 and 1995 and the changes during the years are
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ------------------------ ----------------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
------------- ----------- ------------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year.. 1,047,500 $25.67 745,000 $23.58 400,000 $20.94
Granted............................... 742,000 $35.66 327,500 $30.08 345,000 $26.64
Exercised............................. (31,000) $19.11
Forfeited............................. (98,000) $31.56 (25,000) $21.00
------------- ------------- -------------
Outstanding at end of year............ 1,660,500 $29.91 1,047,500 $25.67 745,000 $23.58
Exercisable at end of year............ 411,500 $24.42 225,665 $22.71 86,665 $20.77
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD AVG. EXERCISABLE WGTD. AVG.
EXERCISE PRICES AT 12/31/97 LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
--------------- ----------- ----- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$18.75 to $30.00 962,000 7.61 $25.47 383,000 $23.95
$30.50 to $38.56 698,500 9.41 $36.03 28,500 $30.81
- ---------------- -------- ---- ------ ------- ------
$18.75 to $38.56 1,660,500 8.36 $29.91 411,500 $24.42
</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 5.6% to 6.2%; the expected lives of
options are 6 years; and volatility of 22.7% for 1997 grants and 24.4% for all
grants issued in 1996 and 1995. The weighted average fair value of options
granted during 1997, 1996 and 1995 was $4.31, $3.76 and $3.13 per share,
respectively.
Restricted Stock
A summary of the status of the Company's restricted stock grants as of
December 31, 1997, 1996 and 1995 and the changes during the years are presented
below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ------------------------ ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
FAIR MARKET FAIR MARKET FAIR MARKET
VALUE VALUE VALUE
# SHARES AT GRANT # SHARES AT GRANT # SHARES AT GRANT
-------- ------------ --------- ---------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year..... 84,500 $26.04 51,500 $24.03
Granted:
With 5 year pro rata vesting.......... 35,000 $35.00 24,500 $28.93 42,500 $24.53
Vest 100% at grant date............... 6,000 $35.00 6,000 $30.46 9,000 $21.63
Vest 100% within 12 months of grant... 2,500 $36.94 2,500 $28.75
Total granted............................ 43,500 $35.11 33,000 $29.19 51,500 $24.03
Outstanding at end of year............... 113,000 $29.79 84,500 $26.04 51,500 $24.03
Vested at end of year.................... 42,900 $26.71 23,500 $24.93 9,000 $21.63
</TABLE>
F-16
<PAGE> 65
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. 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 1997, 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 AS REPORTED PRO FORMA
12/31/97 12/31/97 12/31/96 12/31/96 12/31/95 12/31/95
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SFAS 123 charge.................... $ 1,447 $ 867 $ 300
APB 25 charge...................... $ 1,017 $ 507 $ 158
Net income......................... $ 51,853 $ 51,423 $ 33,203 $ 32,843 $ 12,191 $ 12,049
Net income per common share........ $ 1.66 $ 1.64 $ 1.44 $ 1.42 $ 1.70 $ 1.69
</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.
11. 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,
--------------------------
1997 1996
------ -----
<S> <C> <C>
Balance Sheet Information:
Cash and cash equivalents.............................. $ 25,684 $ 5,208
Total assets........................................... $ 54,702 $ 18,471
Due to FelCor Suite Hotels, Inc........................ $ 18,908 $ 5,526
Shareholders' deficit.................................. $ (9,075) $ (6,403)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Statement of Operations Information:
Suite revenue.......................................... $ 456,614 $ 234,451 $ 65,649
Percentage lease expenses.............................. $ 216,990 $ 107,935 $ 26,945
Net loss............................................... $ (2,672) $ (5,430) $ (240)
</TABLE>
Messrs. Feldman and Corcoran, certain entities owning partnership
interests in the Lessee and managers for certain hotels, have agreed to make
loans to the Lessee of up to an aggregate of approximately $16.0 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 34 of these
Hotels. No such loans were outstanding at December 31, 1997.
12. PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the acquisition of hotels in 1997 and 1996, the
historical results of operations may not be indicative of future results of
operations and net income per common share.
F-17
<PAGE> 66
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PRO FORMA INFORMATION (UNAUDITED) -- (CONTINUED)
The following unaudited Pro Forma Consolidated Statements of Operations
for the years ended December 31, 1997 and 1996 (in thousands, except per share
data) are presented as if the acquisitions of all 73 hotels owned at December
31, 1997, the private placement of $300 million of senior unsecured notes and
the consummation of the 1997 and 1996 public offerings and the application of
the net proceeds therefrom had occurred on January 1, 1996, and all of the
hotels had been leased to the Lessee pursuant to the 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.
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.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Percentage lease revenue..................................................... $ 203,922 $ 177,741
Income from unconsolidated entities........................................ 6,937 4,540
--------- ---------
Total revenues.......................................................... 210,859 182,281
--------- ---------
Expenses:
General and administrative................................................... 4,163 3,394
Depreciation................................................................. 59,187 44,149
Taxes, insurance and other................................................... 25,933 24,962
Interest expense............................................................. 37,527 31,528
Minority interest in Operating Partnership................................... 6,142 6,436
Minority interest in other partnerships...................................... 663 236
--------- ---------
Total expenses......................................................... 133,615 110,705
--------- -------
Net income...................................................................... 77,244 71,576
Preferred dividends............................................................. 11,797 11,797
--------- ---------
Net income applicable to common shareholders.................................... $ 65,447 $ 59,779
========= =========
Per common share data:
Basic:
Net income applicable to common shareholders................................. $ 1.79 $ 1.65
========= =========
Weighted average number of common shares outstanding......................... 36,496 36,184
========= =========
Diluted:
Net income applicable to common shareholders................................. $ 1.78 $ 1.64
========= =========
Weighted average number of common shares outstanding......................... 36,838 36,379
========= =========
</TABLE>
F-18
<PAGE> 67
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income
("SFAS130") and No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), both of which are effective for fiscal years
beginning after December 15, 1997.
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. The Company
believes that the adoption of SFAS 130 and 131 will not have a material impact
on previously reported financial statements.
14. Subsequent Events
On January 15, 1998 the Company announced the closing of $114 million
of fixed rate nonrecourse secured debt associated with nine Embassy Suites
hotels in which the Company and Promus each own a 50% unconsolidated interest.
The new debt carries a coupon of 6.988%, matures in ten years and amortizes over
25 years. The proceeds were used to repay higher interest rate debt associated
with unconsolidated entities jointly owned with Promus and to repay other
corporate debt.
On February 12, 1998, the Company announced an exchange offer for the
73/8% Senior Notes due 2004 and 75/8% Senior Notes due 2007 issued and sold on
October 1, 1997 in a transaction exempt from the registration requirements of
the Securities Act of 1993, as amended, and accordingly are subject to certain
restrictions upon transfer. The new notes offered in exchange for these notes
are identical in amount and terms, except the new notes have been registered
under the Securities Act pursuant to a registration statement declared effective
on February 10, 1998.
On February 17, 1998, the Company filed a $1 billion omnibus shelf
registration with the Securities and Exchange Commission. This registration
statement will enable the Company to provide offerings from time to time up to
an additional $1 billion in securities, which may include debt securities,
preferred stock, depository shares, common stock and/or common stock warrants.
On February 17, 1998, the Company announced the acquisition of the
194-suite Doubletree Guest Suites hotel in Columbus, Ohio. The purchase price
includes $14.1 million in cash and approximately 134,000 Units each valued at
$37.06. The hotel is managed by a wholly owned subsidiary of Promus.
F-19
<PAGE> 68
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY OPERATING RESULTS (UNAUDITED)
The Company's unaudited consolidated quarterly operating data for the
years ended December 31, 1997 and 1996 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.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Percentage lease revenue................................. $ 35,370 $ 38,677 $ 48,603 $ 46,464
Equity in income from unconsolidated entities............ 1,127 2,300 2,338 1,198
Other revenue............................................ 95 76 112 291
-------- -------- -------- --------
Total revenues......................... 36,592 41,053 51,053 47,953
-------- -------- -------- --------
Expenses:
General and administrative............................... 972 874 897 1,000
Depreciation............................................. 10,417 11,314 14,238 14,829
Taxes, insurance and other............................... 5,207 5,549 6,155 6,182
Interest expense......................................... 5,601 7,313 7,183 8,695
Minority interest in Operating Partnership............... 1,417 1,524 1,643 1,233
Minority interest in other partnerships.................. 21 121 195 236
-------- -------- -------- --------
Total expenses......................... 23,635 26,695 30,311 32,175
-------- -------- -------- --------
Income before extraordinary charge................................ 12,957 14,358 20,742 15,778
Extraordinary charge from write off of deferred financing fees.... 185
-------- -------- -------- --------
Net income........................................................ 12,957 14,358 20,742 15,593
Preferred dividends............................................... 2,949 2,949 2,949 2,950
-------- -------- -------- --------
Net income applicable to common shareholders...................... $ 10,008 $ 11,409 $ 17,793 $ 12,643
======== ======== ======== ========
Earnings per share information:
Basic:
Income applicable to common shareholders
before extraordinary charge.............................. $ 0.39 $ 0.43 $ 0.49 $ 0.36
Extraordinary charge..................................... (0.01)
-------- -------- -------- --------
Net income applicable to common shareholders............. $ 0.39 $ 0.43 $ 0.49 $ 0.35
======== ======== ======== ========
Weighted average number of common shares outstanding..... 25,391 26,623 36,358 36,517
======== ======== ======== ========
Diluted:
Income applicable to common shareholders
before extraordinary charge.............................. $ 0.39 $ 0.42 $ 0.48 $ 0.35
Extraordinary charge..................................... (0.01)
-------- -------- -------- --------
Net income applicable to common shareholders............. $ 0.39 $ 0.42 $ 0.48 $ 0.34
======== ======== ======== ========
Weighted average number of common shares outstanding..... 25,691 26,999 36,744 36,884
======== ======== ======== ========
</TABLE>
F-20
<PAGE> 69
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. 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 entities .............................. 320 165 927 598
Other revenue .................................................... 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 in Operating Partnership ....................... 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
======== ======== ======== ========
Earnings per share information:
Basic:
Net income applicable to common shareholders
before extraordinary charge ................................... $ 0.53 $ 0.41 $ 0.38 $ 0.22
Extraordinary charge ............................................. (0.10)
-------- -------- -------- --------
Net income applicable to common shareholders ..................... $ 0.53 $ 0.41 $ 0.28 $ 0.22
======== ======== ======== ========
Weighted average number of common shares outstanding ............. 22,568 22,851 23,201 23,438
======== ======== ======== ========
Diluted:
Net income applicable to common shareholders
before extraordinary charge ................................... $ 0.53 $ 0.40 $ 0.38 $ 0.22
Extraordinary charge ............................................. (0.10)
-------- -------- -------- --------
Net income applicable to common shareholders ..................... $ 0.53 $ 0.40 $ 0.28 $ 0.22
======== ======== ======== ========
Weighted average number of common shares outstanding ............. 22,713 23,148 23,353 23,763
======== ======== ======== ========
</TABLE>
F-21
<PAGE> 70
FELCOR SUITE HOTELS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cost Capitalized Subsequent Gross Amounts at Which
Initial Cost to Acquisition Carried at Close of Period
------------------------------ ------------------------------- --------------------------
Buildings Furniture Buildings Furniture Buildings
and and and and and
Description of Property Land Improvements Fixtures Land Improvements Fixtures Land Improvements
- ----------------------- ---- ------------ -------- ---- ------------ -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Birmingham, AL $ 2,843 $29,286 $ 160 -- $ 730 $ 3,174 $ 2,843 $30,015
Flagstaff, AZ 900 6,825 268 -- 1,561 1,115 900 8,386
Phoenix (Camelback), AZ -- 38,998 613 $ 4,695 826 4,808 4,694 39,824
Phoenix (Crescent), AZ 3,608 29,583 2,886 -- -- 326 3,608 29,583
Anaheim, CA 2,548 14,832 607 -- 554 3,163 2,548 15,386
Burlingame (SF Airport So.), CA -- 39,929 818 -- 60 2,998 -- 39,802
Dana Point, CA 1,787 15,545 536 -- 71 883 1,787 15,616
El Segundo (LAX Airport South), CA 2,660 17,997 798 -- 809 4,705 2,660 18,807
Los Angeles (LAX Airport North), CA 2,207 18,764 1,104 -- -- 445 2,207 18,764
Milpitas, CA 4,021 23,677 562 -- 943 3,474 4,021 24,620
Napa, CA 3,287 14,205 494 -- 813 2,801 3,287 15,019
Oxnard (Mandalay Beach), CA 2,930 22,125 879 -- 617 4,595 2,930 22,742
So. San Francisco (Airport N.), CA 3,418 31,737 527 -- 768 3,831 3,418 32,506
Avon (Beaver Creek Resort), CO 1,134 9,864 340 -- 186 1,293 1,134 10,050
Boca Raton (Doubletree), FL 5,327 3,066 304 -- 41 1,012 5,333 3,102
Boca Raton (Embassy), FL 1,868 16,253 561 -- 186 2,876 1,868 16,438
Deerfield Beach, FL 4,523 29,443 918 -- 1,159 3,676 4,541 30,583
Ft. Lauderdale, FL 5,329 47,850 903 -- 1,604 4,301 5,374 49,409
Jacksonville, FL 1,130 9,608 456 -- 28 865 1,130 9,636
Lake Buena Vista (Disney World), FL 2,896 25,196 869 -- -- -- 2,896 25,196
Miami (Airport), FL 4,135 24,950 1,171 -- 728 4,309 4,135 25,679
Orlando (North), FL 1,673 14,218 684 -- 28 939 1,673 14,246
Orlando (South), FL 1,632 13,870 799 -- 28 1,504 1,632 13,898
Tampa (Busch Gardens), FL 772 12,387 226 -- 57 621 772 12,444
Tampa (Rocky Point), FL 2,142 18,639 643 -- -- 33 2,142 18,639
Atlanta (Airport), GA 5,113 22,857 2,105 -- -- 16 5,113 22,857
Atlanta (Buckhead), GA 7,303 38,996 2,437 -- 13 50 7,303 39,009
Atlanta (Galleria), GA 5,052 28,507 2,526 -- -- 113 5,052 28,507
Brunswick, GA 705 6,067 247 -- -- 720 705 6,067
Chicago (O'Hare), IL 8,178 37,043 2,886 -- -- 89 8,178 37,043
Deerfield, IL 2,305 20,054 692 -- 162 684 2,305 20,216
Lexington, KY 1,955 13,604 587 -- -- 1,280 1,955 13,604
Baton Rouge, LA 2,350 19,092 525 -- 521 3,322 2,350 19,612
New Orleans, LA 2,570 22,300 895 -- 3,854 2,369 2,569 26,154
Boston - Marlborough, MA 948 8,143 325 761 12,394 4,442 1,709 20,537
Baltimore, MD 2,568 22,433 770 -- -- 505 2,568 22,433
Troy, MI 2,968 25,905 909 -- -- 246 2,968 25,905
Bloomington, MN 2,038 17,731 611 -- -- 8 2,038 17,732
Minneapolis (Airport), MN 5,416 36,508 602 -- 78 2,683 5,417 36,396
Minneapolis (Downtown), MN 818 16,820 505 -- 66 3,043 818 16,809
St. Paul, MN 1,156 17,315 849 -- 40 2,876 1,156 17,264
Raleigh/Durham, NC 2,124 18,476 637 -- -- 31 2,124 18,476
Omaha, NE 1,877 16,328 563 -- 10 140 1,877 16,338
<CAPTION>
Gross Amounts at Which Accumulated Net Book
Carried at Close of Period Depreciation Value Life Upon
-------------------------- Buildings and Buildings and Which
Furniture Improvements; Improvements; Depreciation
and Furniture & Furniture & Date of Date in Statement
Description of Property Fixtures Total Fixtures Fixtures Construction Acquired is Computed
- ----------------------- -------- ----- -------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Birmingham, AL $ 3,334 $36,192 $ 2,188 $34,005 1987 01-03-96 5 - 40 Yrs
Flagstaff, AZ 1,383 10,669 1,171 9,497 1988 02-16-95 5 - 40 Yrs
Phoenix (Camelback), AZ 5,420 49,939 3,290 46,649 1985 01-03-96 5 - 40 Yrs
Phoenix (Crescent), AZ 3,212 36,403 666 35,736 1986 06-30-97 5 - 40 Yrs
Anaheim, CA 3,770 21,704 1,982 19,722 1987 01-03-96 5 - 40 Yrs
Burlingame (SF Airport So.), CA 4,003 43,805 3,290 40,515 1986 11-06-95 5 - 40 Yrs
Dana Point, CA 1,419 18,822 433 18,389 1992 02-21-97 5 - 40 Yrs
El Segundo (LAX Airport South), CA 5,503 26,969 2,901 24,068 1985 03-27-96 5 - 40 Yrs
Los Angeles (LAX Airport North), CA 1,549 22,520 590 21,930 1990 02-18-97 5 - 40 Yrs
Milpitas, CA 4,036 32,677 2,452 30,225 1987 01-03-96 5 - 40 Yrs
Napa, CA 3,295 21,601 1,227 20,374 1985 05-08-96 5 - 40 Yrs
Oxnard (Mandalay Beach), CA 5,474 31,146 1,984 29,162 1986 05-08-96 5 - 40 Yrs
So. San Francisco (Airport N.), CA 4,358 40,281 2,794 37,488 1988 01-03-96 5 - 40 Yrs
Avon (Beaver Creek Resort), CO 1,633 12,816 831 11,986 1989 02-20-96 5 - 40 Yrs
Boca Raton (Doubletree), FL 1,316 9,750 598 9,152 1989 11-15-95 5 - 40 Yrs
Boca Raton (Embassy), FL 3,436 21,743 1,700 20,043 1989 02-28-96 5 - 40 Yrs
Deerfield Beach, FL 4,593 39,718 2,643 37,075 1987 01-03-96 5 - 40 Yrs
Ft. Lauderdale, FL 5,204 59,986 3,870 56,117 1986 01-03-96 5 - 40 Yrs
Jacksonville, FL 1,321 12,088 1,648 10,440 1986 07-28-94 5 - 40 Yrs
Lake Buena Vista (Disney World), FL 869 28,960 335 28,626 1987 07-28-97 5 - 40 Yrs
Miami (Airport), FL 5,479 35,293 2,793 32,500 1987 01-03-96 5 - 40 Yrs
Orlando (North), FL 1,624 17,543 2,568 14,974 1985 07-28-94 5 - 40 Yrs
Orlando (South), FL 2,303 17,832 2,581 15,251 1985 07-28-94 5 - 40 Yrs
Tampa (Busch Gardens), FL 848 14,063 804 13,260 1985 11-15-95 5 - 40 Yrs
Tampa (Rocky Point), FL 676 21,458 248 21,210 1986 07-28-97 5 - 40 Yrs
Atlanta (Airport), GA 2,121 30,091 498 29,593 1986 06-30-97 5 - 40 Yrs
Atlanta (Buckhead), GA 2,487 48,799 1,707 47,092 1988 10-17-96 5 - 40 Yrs
Atlanta (Galleria), GA 2,639 36,198 610 35,588 1990 06-30-97 5 - 40 Yrs
Brunswick, GA 967 7,739 631 7,108 1988 07-19-95 5 - 40 Yrs
Chicago (O'Hare), IL 2,975 48,196 757 47,439 1994 06-30-97 5 - 40 Yrs
Deerfield, IL 1,376 23,897 1,006 22,891 1987 06-20-96 5 - 40 Yrs
Lexington, KY 1,866 17,425 1,059 16,366 1987 01-10-96 5 - 40 Yrs
Baton Rouge, LA 3,847 25,810 1,920 23,890 1985 01-03-96 5 - 40 Yrs
New Orleans, LA 3,265 31,989 2,932 29,057 1984 12-01-94 5 - 40 Yrs
Boston - Marlborough, MA 4,767 27,014 1,292 25,721 1988 06-30-95 5 - 40 Yrs
Baltimore, MD 1,275 26,276 621 25,655 1987 03-20-97 5 - 40 Yrs
Troy, MI 1,155 30,028 700 29,329 1987 03-20-97 5 - 40 Yrs
Bloomington, MN 619 20,389 471 19,918 1980 02-01-97 5 - 40 Yrs
Minneapolis (Airport), MN 3,475 45,288 3,060 42,228 1986 11-06-95 5 - 40 Yrs
Minneapolis (Downtown), MN 3,625 21,252 2,018 19,234 1984 11-15-95 5 - 40 Yrs
St. Paul, MN 3,815 22,236 2,251 19,985 1983 11-15-95 5 - 40 Yrs
Raleigh/Durham, NC 668 21,267 246 21,022 1987 07-28-97 5 - 40 Yrs
Omaha, NE 703 18,918 436 18,481 1973 02-01-97 5 - 40 Yrs
</TABLE>
F-22
<PAGE> 71
FELCOR SUITE HOTELS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
<TABLE>
<CAPTION>
Cost Capitalized Subsequent Gross Amounts at Which
Initial Cost to Acquisition Carried at Close of Period
------------------------------ ------------------------------- --------------------------
Buildings Furniture Buildings Furniture Buildings
and and and and and
Description of Property Land Improvements Fixtures Land Improvements Fixtures Land Improvements
- ----------------------- ---- ------------ -------- ---- ------------ -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Piscataway, NJ 1,755 17,563 527 -- 463 2,296 1,755 18,026
Syracuse, NY 1,597 14,812 1,330 -- -- -- 1,597 14,812
Cleveland, OH 1,755 15,329 527 -- 1,259 1,511 1,755 16,588
Dayton, OH 1,140 9,924 342 -- -- -- 1,140 9,924
Tulsa, OK 525 7,344 3,117 -- 140 1,644 525 7,483
Philadelphia (Society Hill), PA 4,542 45,121 1,536 -- -- -- 4,542 45,121
Myrtle Beach (Kingston
Plantation), SC 2,940 24,988 1,470 -- 268 832 2,940 25,256
Nashville (Airport), TN 1,073 9,331 322 -- 20 1,073 9,331 341
Nashville, TN 1,118 9,506 961 -- 28 1,222 1,118 9,534
Austin (Downtown), TX 2,508 21,908 752 -- 137 2,508 21,908 890
Corpus Christi, TX 1,112 9,618 390 51 -- 1,461 1,164 9,618
Dallas (Love Field), TX 1,934 16,674 757 -- 168 1,177 1,934 16,841
Dallas (Market Center), TX 2,619 24,298 2,182 -- -- -- 2,619 24,298
Dallas (Park Central ES), TX 1,497 12,722 647 -- 28 1,415 1,497 12,750
Dallas (Park Central SH), TX 4,513 43,125 2,507 -- -- 195 4,513 43,125
Burlington, VT 3,136 27,283 941 -- -- -- 3,136 27,283
--------- ---------- -------- ------- -------- -------- --------- ----------
Total $ 151,978 $1,226,572 $ 55,105 $ 5,507 $ 31,289 $ 92,274 $ 157,554 $1,257,247
========= ========== ======== ======= ======== ======== ========= ==========
<CAPTION>
Gross Amounts at Which Accumulated Net Book
Carried at Close of Period Depreciation Value Life Upon
-------------------------- Buildings and Buildings and Which
Furniture Improvements; Improvements; Depreciation
and Furniture & Furniture & Date of Date in Statement
Description of Property Fixtures Total Fixtures Fixtures Construction Acquired is Computed
- ----------------------- -------- ----- -------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Piscataway, NJ 2,822 22,603 1,343 21,260 1988 01-10-96 5 - 40 Yrs
Syracuse, NY 1,331 17,739 318 17,421 1989 06-30-97 5 - 40 Yrs
Cleveland, OH 2,037 20,380 1,237 19,143 1990 11-17-95 5 - 40 Yrs
Dayton, OH 342 11,406 11,406 1987 12-30-97 5 - 40 Yrs
Tulsa, OK 4,762 12,770 4,673 8,097 1985 07-28-94 5 - 40 Yrs
Philadelphia (Society Hill), PA 1,536 51,199 361 50,838 1986 10-01-97 5 - 40 Yrs
Myrtle Beach (Kingston
Plantation), SC 2,302 30,498 945 29,553 1987 12-05-96 5 - 40 Yrs
Nashville (Airport), TN 10,745 149 10,596 1988 06-05-97 5 - 40 Yrs
Nashville, TN 2,183 12,836 2,911 9,925 1985 07-28-94 5 - 40 Yrs
Austin (Downtown), TX 25,305 585 24,720 1987 03-20-97 5 - 40 Yrs
Corpus Christi, TX 1,852 12,634 1,222 11,412 1984 07-19-95 5 - 40 Yrs
Dallas (Love Field), TX 1,934 20,710 1,923 18,787 1986 03-29-95 5 - 40 Yrs
Dallas (Market Center), TX 2,183 29,100 522 28,578 1980 06-30-97 5 - 40 Yrs
Dallas (Park Central ES), TX 2,062 16,309 2,534 13,774 1985 07-28-94 5 - 40 Yrs
Dallas (Park Central SH), TX 2,702 50,340 802 49,537 1983 06-30-97 5 - 40 Yrs
Burlington, VT 941 31,360 73 31,287 1967 12-04-97 5 - 40 Yrs
--------- ---------- -------- ----------
Total $ 147,923 $1,562,724 $ 87,400 $1,475,325
========= ========== ======== ==========
</TABLE>
<TABLE>
<S> <C> <C> <C>
(a) Balance at December 31, 1995 $ 343,398 (b) Balance at December 31, 1994 $ 5,026
Additions during the period 568,073 Depreciation expense during the period 5,371
Dispositions during the period (81) -------
---------- Balance at December 31, 1995 10,397
Balance at December 31, 1996 911,390 Depreciation expense during the period 26,321
Additions during the period 651,334 -------
---------- Balance at December 31, 1996 36,718
Balance at December 31, 1997 $1,562,724 Depreciation expense during the period 50,682
-------
Balance at December 31, 1997 $87,400
</TABLE>
F-23
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
FelCor Suite Hotels, Inc.
We have audited the accompanying consolidated balance sheets of DJONT
Operations, L.L.C. as of December 31, 1997 and 1996 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years then ended. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DJONT
Operations, L.L.C. as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the three years then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 13, 1998
F-24
<PAGE> 73
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
ASSETS
1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents ............................................ $ 25,684 $ 5,208
Accounts receivable, net ............................................. 20,274 8,700
Inventories .......................................................... 3,466 2,105
Prepaid expenses ..................................................... 1,307 255
Other assets ......................................................... 3,971 2,203
-------- --------
Total assets ................................................ $ 54,702 $ 18,471
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade .............................................. $ 9,426 $ 1,273
Accounts payable, other .............................................. 4,625 2,398
Due to FelCor Suite Hotels, Inc. ..................................... 18,908 5,526
Accrued expenses and other liabilities ............................... 30,818 15,677
-------- --------
Total liabilities ........................................... 63,777 24,874
-------- --------
Commitments and contingencies (Note 4)
Shareholders' equity:
Capital .............................................................. 1 1
Distributions in excess of earnings .................................. (9,076) (6,404)
-------- --------
Total shareholders' deficit ................................. (9,075) (6,403)
-------- --------
Total liabilities and shareholders' equity .................. $ 54,702 $ 18,471
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-25
<PAGE> 74
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
Revenues:
<S> <C> <C> <C>
Suite revenue ...................................... $ 456,614 $ 234,451 $ 65,649
Food and beverage revenue .......................... 34,813 15,119 2,462
Food and beverage rent ............................. 4,393 2,334 534
Other revenue ...................................... 38,690 17,340 3,924
--------- --------- ---------
Total revenues ............................ 534,510 269,244 72,569
--------- --------- ---------
Expenses:
Property operating costs and expenses .............. 128,077 66,236 18,455
General and administrative ......................... 39,147 20,123 5,547
Advertising and promotion .......................... 37,333 18,520 5,410
Repair and maintenance ............................. 26,236 14,453 4,010
Utilities .......................................... 21,363 12,248 3,384
Management and incentive fees ...................... 11,879 6,077 1,561
Franchise fee ...................................... 13,407 5,693 2,473
Food and beverage expenses ......................... 33,119 15,701 2,723
Percentage lease expenses .......................... 216,990 107,935 26,945
Lessee overhead expenses ........................... 2,332 1,776 834
Liability insurance ................................ 3,202 1,818 468
Conversion cost .................................... 340 2,165 297
Other expenses ..................................... 3,757 1,929 702
--------- --------- ---------
Total expenses ............................ 537,182 274,674 72,809
--------- --------- ---------
Net loss ................................................... $ (2,672) $ (5,430) $ (240)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-26
<PAGE> 75
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
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)
Net loss ......................................... (2,672)
-------
Balance at December 31, 1997 ..................... $(9,075)
=======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-27
<PAGE> 76
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................... $ (2,672) $ (5,430) $ (240)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Changes in assets and liabilities:
Accounts receivable .................................... (11,574) (5,571) (2,003)
Inventories ............................................ (1,361) (1,573) (205)
Prepaid expenses ....................................... (1,052) 33 (262)
Other assets ........................................... (1,768) (1,898) (141)
Due to FelCor Suite Hotels, Inc. ....................... 13,382 3,130 1,137
Accounts payable, accrued expenses and other liabilities 25,521 11,372 4,000
-------- -------- --------
Net cash flow provided by operating activities 20,476 63 2,286
-------- -------- --------
Cash flows from financing activities:
Distributions paid .......................................... (200) (200)
-------- -------- --------
Net cash flow used in financing activities ... (200) (200)
-------- -------- --------
Net change in cash and cash equivalents ............................. 20,476 (137) 2,086
Cash and cash equivalents at beginning of years ..................... 5,208 5,345 3,259
-------- -------- --------
Cash and cash equivalents at end of years ........................... $ 25,684 $ 5,208 $ 5,345
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-28
<PAGE> 77
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
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 Operations, L.L.C., a Delaware limited liability company
("DJONT"), own all of the voting Class A membership interest in DJONT
(representing a 50% equity interest). 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. Charles N.
Mathewson, a director of the Company. Each of the 73 hotels in which FelCor
Suites Limited Partnership (the "Operating Partnership") had an ownership
interest at December 31, 1997 (the "Hotels"), is leased to DJONT or a
consolidated subsidiary thereof ("collectively, the "Lessee") pursuant to
percentage leases ("Percentage Leases"). Messrs. Feldman and Corcoran 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
$16.0 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 34 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 December 31, 1997.
Messrs. Feldman and Corcoran have entered into an agreement with the
Company pursuant to which they have agreed that through April 15, 2005, 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 of the Company
or Operating Partnership units upon similar terms, at its option. The
independent directors of the Company may suspend or terminate such agreement at
any time.
Fifty-two of the Hotels are operated as Embassy Suites(R) hotels (of
which 28 were converted from other brands), 13 are operated as Doubletree Guest
Suites(R) hotels, seven are operated as Sheraton(R) hotels (five of which are
upscale, full-service traditional non-suite hotels) and one is operated as a
Hilton Suites(R) hotel. Sixty-three of the Hotels are managed by subsidiaries of
Promus Hotel Corporation ("Promus") which, following the recent merger of Promus
with Doubletree Corporation, include Doubletree Hotels Corporation and its
subsidiaries ("Doubletree"). Promus is the largest operator of all-suite,
full-service hotels in the United States. Of the remaining Hotels, seven are
managed by a subsidiary of ITT Sheraton Corporation ("Sheraton") and three are
managed by independent management companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 approximates fair value due to the
short maturity of these instruments.
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.
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.
F-29
<PAGE> 78
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principals requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. ACCUMULATED DEFICIT
During 1997 and 1996, the Lessee incurred net losses of approximately
$2.7 million and $5.4 million and at December 31, 1997 a cumulative
shareholders' deficit of approximately $9.1 million. Management's analyses
indicate that a significant portion of such losses are attributable 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 renovations which might mitigate losses for the Lessee during such
renovation periods.
At December 31, 1997 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
shareholders' equity is restored. Management anticipates that future earnings
will be sufficient to enable the Lessee to continue to make necessary payments
when due. 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), 2006 (23 hotels) and 2007 (30
hotels). Minimum future rental payments are computed based on the base rent as
defined under the noncancellable operating leases and are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998.......................................................... $ 135,099
1999.......................................................... 135,099
2000.......................................................... 135,099
2001.......................................................... 135,098
2002.......................................................... 135,098
2003 and thereafter........................................... 490,984
----------
$1,166,477
==========
</TABLE>
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 ("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 1998, 1997 and 1996 are 0.50%, 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> 79
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 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 applicable hotel revenues.
Incentive management fees are based upon the hotel's net income before overhead
and typically range from 50% to 100% 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 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.
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 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 expenses to the
Company must be approved by a majority of the independent directors. During
1997, 1996 and 1995, the Lessee paid approximately $2.1 million (approximately
61%), $1.3 million (approximately 61%) and $532,000 (approximately 52%),
respectively, of the allocable expenses under this agreement.
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, 1997 and 1996 (in thousands) are presented as if the
Lessee leased and operated all Hotels owned by the Partnership at December 31,
1997, from January 1, 1996.
The Pro Forma Statements of Operations does not purport to present what
actual results of operations would have been if the 73 hotels were operated by
the Lessee pursuant to the Percentage Leases from January 1, 1996 or to project
results for any future period.
F-31
<PAGE> 80
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PRO FORMA INFORMATION (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Suite revenue ............................... $ 536,780 $ 491,412
Food and beverage rent ...................... 4,448 3,280
Food and beverage revenue ................... 57,825 66,619
Other revenue ............................... 45,250 35,961
--------- ---------
Total revenues ..................... 644,303 597,272
Property operating costs and expenses ....... 201,056 195,500
Other operating costs ....................... 148,894 145,273
Management and franchise fees ............... 29,658 23,820
Taxes, insurance and other .................. 8,713 10,671
Percentage lease expenses ................... 254,722 224,423
Lessee overhead expenses .................... 2,332 1,540
--------- ---------
Net loss ........................... $ (1,072) $ (3,956)
========= =========
</TABLE>
F-32
<PAGE> 81
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, Articles of Amendment dated
August 8, 1996, Articles of Amendment dated June 16, 1997 and
Articles of Amendment dated October 30, 1997.
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 Registrant's Form 10-Q for the quarter ended June 30,
1996 (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 - Indenture dated as of October 1, 1997 by and among FelCor
Suites Limited Partnership, the Registrant, the Subsidiary
Guarantors named therein and Sun Trust Bank, Atlanta, Georgia, as
Trustee (filed as Exhibit 4.1 to the Registration Statement on
Form S-4 (File No. 333-39595) filed by the Registrant and the
other co-registrants named therein (the "1997 Form S-4") and
incorporated herein by reference).
4.4 - 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
</TABLE>
<PAGE> 82
<TABLE>
<S> <C>
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 (filed as Exhibit 10.1.6 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (the "1996 10-K") and incorporated herein by
reference).
10.1.7 - Seventh Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of May 16, 1997, by and
among the Registrant, PMB Associates, Ltd. and all of the persons
or entities who are or shall in the future become limited
partners of the Partnership.
10.1.8 - Eighth Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of February 6, 1998, by
and among the Registrant, Columbus/Front Ltd. 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 December 31, 1997.
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).
10.5 - 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).
10.8 - Savings and Investment Plan of the Registrant (filed as Exhibit
10.10 to the 1994 10-K/A and incorporated herein by reference).
</TABLE>
<PAGE> 83
<TABLE>
<S> <C>
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 - 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).
10.12 - 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).
10.13 - 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).
10.14 - Third Amended and Restated Revolving Credit Agreement dated as
of August 14, 1997 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 10.23 to
the 1997 Form S-4 and incorporated herein by reference).
10.15 - Contract for Purchase and Sale of Hotels dated as of June 5,
1997 by and among ITT Sheraton Corporation, Sheraton Savannah
Corp., Sheraton Peachtree Corp., Sheraton Crescent Corp.,
Sheraton Dallas, Corp., Sheraton Gateway Suites O'Hare Investment
Partnership, and the Partnership (filed as Exhibit 10.24 to the
Registrant's Current Report on Form 8-K dated June 4, 1997 and
incorporated herein by reference).
10.16 - Registration Rights Agreement dated as of September 26, 1997
among the Registrant, the Partnership, Morgan Stanley & Co.
Incorporated, NationsBank Capital Markets, Inc. and Salomon
Brothers Inc. (filed as Exhibit 10.25 to the 1997 Form S-4 and
incorporated herein by reference).
21.1 - List of Subsidiaries of the Registrant.
23.1 - Consent of Coopers & Lybrand L.L.P.
27 - Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.1
STATE OF MARYLAND 370884
DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: JUNE 22, 1995
THIS IS TO ADVISE YOU THAT THE ARTICLES OF AMENDMENT AND RESTATEMENT FOR
FELCOR SUITE HOTELS, INC. WERE RECEIVED AND APPROVED FOR RECORD ON JUNE 22,
1995 AT 11:22 AM.
FEE PAID: 50.00
[SEAL]
HARRY J. NOONAN
CHARTER SPECIALIST
<PAGE> 2
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
FELCOR SUITE HOTELS, INC.
Felcor Suite Hotels, Inc., a Maryland corporation (the "Corporation"),
certifies as follows:
FIRST: The Corporation desires to amend and restate its Charter as
currently in effect, and, upon acceptance for record of these Articles of
Amendment and Restatement by the State Department of Assessments and Taxation
of the State of Maryland, the provisions set forth in these Articles of
Amendment and Restatement will be all of the provisions of the Charter of the
Corporation as currently in effect.
SECOND: The Charter of the Corporation is hereby amended and restated in
its entirety to read as set forth in Exhibit A attached hereto.
THIRD: The amendment and restatement of the charter of the Corporation
set forth in these Articles of Amendment and Restatement was advised by the
Board of Directors of the Corporation and was approved by the sole stockholder
of the Corporation.
FOURTH: The current address of the principal office of the Corporation
is 11 East Chase Street, Baltimore, Maryland 21202.
FIFTH: The name and address of the current resident agent of the
Corporation is CSC-Lawyers Incorporating Service Company, 11 East Chase Street,
Baltimore, Maryland 21202.
SIXTH: The current number of directors of the Corporation is one (1),
which number may be increased or decreased from time to
<PAGE> 3
time pursuant to the Charter and the Bylaws of the Corporation. The name of the
current sole director of the Corporation is Thomas J. Corcoran, Jr.
SEVENTH: The amendment set forth in these Articles of Amendment and
Restatement does not increase the authorized capital stock of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
and Restatement to be executed in its name and on its behalf as of the 22nd day
of June 1995, by its President, who acknowledges that these Articles of
Amendment and Restatement are the act of the Corporation and certifies that, to
the best of his knowledge, information and belief and under penalties for
perjury, all matters and facts contained in these Articles of Amendment and
Restatement are true in all material respects.
ATTEST: FELCOR SUITE HOTELS, INC.
/s/ NICHOLAS R. PETERSON By: /s/ THOMAS J. CORCORAN, JR. [SEAL]
------------------------ ---------------------------
Nicholas R. Peterson Thomas J. Corcoran, Jr.
Assistant Secretary President
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<PAGE> 4
EXHIBIT A
ARTICLE I.
I, David A. Gibbons, whose post office address is 10 Light Street,
Baltimore, Maryland 21202, being at least 18 years of age, hereby form a
corporation under the Maryland General Corporation Law.
ARTICLE II.
NAME
The name of the Corporation is:
FelCor Suite Hotels, Inc.
ARTICLE III.
NATURE OF BUSINESS OR PURPOSES
The nature of the business or purposes to be conducted or
promoted by the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the Maryland General Corporation Law.
In addition to the powers and privileges conferred upon the
Corporation by law and those incidental thereto, the Corporation shall possess
and may exercise all the powers and privileges which are necessary or
convenient to the conduct, promotion or attainment of the business or purposes
of the Corporation.
Without limiting the generality of the foregoing purpose, at such time
or times as the Board of Directors determines that it is in the interest of the
Corporation and its stockholders that the Corporation engage in the business
of, and conduct its business and affairs so as to qualify as, a real estate
investment trust (as that phrase is defined in the Internal Revenue Code of
1986, as amended (the "Code")), the purpose of the Corporation shall include
engaging in the business of a real estate investment trust ("REIT"). This
reference to such purpose shall not make unlawful or unauthorized any otherwise
lawful act or activity that the Corporation may take that is inconsistent with
such purpose.
ARTICLE IV.
PRINCIPAL OFFICE AND RESIDENT AGENT
The address of the Corporation's principal office in the State
of Maryland is 11 East Chase Street, Baltimore, Maryland 21202. The name and
address of its resident agent is CSC-Lawyers Incorporating Service Company, 11
East Chase Street, Baltimore, Maryland 21202.
<PAGE> 5
ARTICLE V.
CAPITAL STOCK
A. Authorized Shares. The total number of shares of capital
stock that the Corporation shall have authority to issue is Sixty Million
(60,000,000) shares, consisting of Fifty Million (50,000,000) shares of Common
Stock, of the par value of One Cent ($0.01) each, and Ten Million (10,000,000)
shares of Preferred Stock, of the par value of One Cent ($0.01) each, amounting
in aggregate par value of $600,000.
B. The following is a description of each class of the capital
stock that the Corporation shall have authority to issue, including the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption thereof to the extent applicable thereto:
Common Stock.
(1) Dividend Rights. Subject to the rights of any series
of Preferred Stock created pursuant to the further provisions of this Section B
of this Article and subject to the terms of Article V hereto, the holders of
shares of Common Stock shall be entitled to receive such dividends as may be
declared thereon by the Board of Directors out of funds legally available
therefor.
(2) Voting Rights. Subject to the rights of the holders
of any series of Preferred Stock created pursuant to the further provisions of
this Section B of this Article, the holders of shares of the Common Stock shall
possess all of the voting power of the capital stock of the Corporation and
shall have the exclusive right to vote upon, authorize and approve any and all
matters which may properly come before the stockholders of the Corporation.
Each holder of shares of Common Stock shall be entitled to one vote for each
share of Common Stock held by such stockholder.
(3) Rights Upon Liquidation. Subject to the rights of
any series of Preferred Stock created pursuant to the further provisions of
this Section B of this Article and subject to the terms of Article V hereto, in
the event of any voluntary or involuntary liquidation, dissolution or winding
up of, or any distribution of the assets of, the Corporation, each holder of
shares of Common Stock shall be entitled to receive, ratably with each other
holder of shares of Common Stock, that portion of the assets of the Corporation
available for distribution to the holders of its Common Stock.
Preferred Stock.
Subject to the provisions of sections D. and E. of this
Article V, the Board of Directors of the Corporation is hereby authorized and
empowered to classify or reclassify, in one or more series, any of the unissued
shares of the Preferred Stock of the Corporation by establishing the number of
shares of such series and by setting, changing or eliminating any of the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms and condition of
redemption of such shares, all of which shall be set forth in articles
supplementary to this Charter executed, acknowledged, filed and
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<PAGE> 6
recorded in the manner required by the Maryland General Corporation Law
("Articles Supplementary"), and as may be permitted by the Maryland General
Corporation Law.
C. Issuance of Stock. The Board of Directors is hereby
authorized and empowered to authorize the issuance by the Corporation from time
to time of shares of any class of capital stock of the Corporation, whether now
or hereafter authorized, or securities convertible into shares of capital stock
of any class or classes, whether now or hereafter authorized, for such
consideration and on such terms and conditions as may be deemed advisable by
the Board of Directors and without any action by the stockholders.
D. Restrictions on Transfer; Designation of Shares-in-Trust.
(1) Definitions. For purposes of this Section D, the
following terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Equity
Stock by a Person who would be treated as an owner of such shares of Equity
Stock either directly or indirectly through the application of Section 544 of
the Code, as modified by Section 856(h)(1)(B) of the Code. The terms
"Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have
correlative meanings.
"Beneficiary" shall mean, with respect to any Trust,
one or more organizations described in each of Section 170(b)(1)(A) and Section
170(c) of the Code which are named by the Corporation as the beneficiary or
beneficiaries of such Trust, in accordance with the provisions of subsection
E.(1) of this Article V.
"Board of Directors" shall mean the Board of
Directors of the Corporation.
"Bylaws" shall mean the Bylaws of the Corporation, as
amended.
"Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time.
"Constructive Ownership" shall mean ownership of
Equity Stock by a Person who would be treated as an owner of such shares of
Equity Stock either directly or indirectly through the application of Section
318 of the Code, as modified by Section 856(d)(5) of the Code. The terms
"Constructive Owner," "Constructively Owns" and "Constructively Owned" shall
have correlative meanings.
"Equity Stock" shall mean authorized capital stock of
the Corporation that is either Preferred Stock or Common Stock and shall
include all shares of Preferred Stock or Common Stock that are held as
Shares-in-Trust in accordance with the provisions of section E. of this Article
V.
"Market Price" shall mean, on any date and with
respect to any Equity Stock, the average of the Closing Price for the five
consecutive Trading Days ending on such
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<PAGE> 7
date. The "Closing Price" shall mean, on any date and with respect to any
Equity Stock, the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular
way, of such Equity Stock, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if such Equity Stock is
not listed or admitted to trading on the New York Stock Exchange, as reported
in the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which such
Equity Stock is listed or admitted to trading or, if such Equity Stock is not
listed or admitted to trading on any national securities exchange, the last
quoted price, or if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System or, if such system is no
longer in use, the principal other automated quotations system that may then be
in use or, if such Equity Stock is not quoted by any such organization, the
average of the closing bid and asked prices of such Equity Stock as furnished
by a professional market maker, selected by the Board of Directors of the
Company, then making a market in such Equity Stock. "Trading Day" shall mean a
day on which the principal national securities exchange on which such Equity
Stock is listed or admitted to trading is open for the transaction of business
or, if such Equity Stock is not listed or admitted to trading on any national
securities exchange, shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Merger" shall mean the merger of FelCor Suite
Hotels, Inc., a Delaware corporation, with and into the Corporation.
"Ownership Limit" shall mean, with respect to each
class of Equity Stock of the Corporation outstanding as of any particular time,
9.9% of the total number of such shares of such class of Equity Stock
outstanding as of such time.
"Non-Transfer Event" shall mean an event other than a
purported Transfer that would cause any Person to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership Limit,
including, but not limited to, the granting of any option or entering into any
agreement for the sale, transfer or other disposition of Equity Stock or the
sale, transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for Equity Stock.
"Permitted Transferee" shall mean any Person
designated as a Permitted Transferee in accordance with the provisions of
subsection E.(5) of this Article V.
"Person" shall mean an individual, corporation,
partnership, limited liability company, estate, trust, association, joint stock
company, government or agency or subdivision thereof, charitable organization,
or other entity and also includes a group as that term is used for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
-4-
<PAGE> 8
"Prohibited Owner" shall mean, with respect to any
purported Transfer or Non-Transfer Event, any Person who, but for the
provisions of subsection D.(3) of this Article V, would own record title to
shares of Equity Stock.
"REIT" shall mean a Real Estate Investment Trust
under Section 856 of the Code.
"Restriction Termination Date" shall mean the first
day after the date of the Merger on which the Board of Directors and the
stockholders of the Corporation determine, in accordance with the provisions of
Article VII hereof, that it is no longer in the best interests of the
Corporation to attempt to, or continue to, qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift,
assignment, devise or other disposition of Equity Stock, whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise.
"Trust" shall mean any separate trust created
pursuant to subsection D.(3) of this Article V and administered in accordance
with the terms of section E. of this Article V, for the exclusive benefit of
any Beneficiary.
"Trustee" shall mean any person or entity
unaffiliated with both the Corporation and any Prohibited Owner, such Trustee
to be designated by the Corporation to act as trustee of any Trust, or any
successor trustee thereof.
(2) Restriction on Transfers.
(a) Except as provided in subsection D.(9) of
this Article V, from the date of the Merger and prior to the
Restriction Termination Date, no Person shall Beneficially Own or
Constructively Own shares of the outstanding Equity Stock in excess of
the Ownership Limit.
(b) Except as provided in subsection D.(9) of
this Article V, from the date of the Merger and prior to the
Restriction Termination date, any Transfer that, if effective, would
result in any Person Beneficially Owning or Constructively Owning
Equity Stock in excess of the Ownership Limit shall be void ab initio
as to the Transfer of that number of shares of Equity Stock which
would be otherwise Beneficially Owned or Constructively Owned by such
Person in excess of the Ownership Limit; and the intended transferee
shall acquire no rights in such excess shares of Equity Stock.
(c) Notwithstanding any other provision herein,
from the date of the Merger and prior to the Restriction Termination
Date, any Transfer that, if effective, would result in the Equity
Stock being directly or indirectly owned by fewer than 100 Persons
(determined without reference to any rules of attribution) shall be
void ab initio in its entirety; and the intended transferee shall
acquire no rights in such shares of Equity Stock.
-5-
<PAGE> 9
(d) Notwithstanding any other provision herein,
from the date of the Merger and prior to the Restriction Termination
Date, any Transfer of shares of Equity Stock that, if effective, would
result in the Corporation being "closely held" within the meaning of
Section 856(h) of the Code shall be void ab initio as to the Transfer
of that number of shares of Equity Stock which would cause the
Corporation to be "closely held" within the meaning of Section 856(h)
of the Code; and the intended transferee shall acquire no rights in
such excess shares of Equity Stock.
(e) Notwithstanding any other provision herein,
from the date of the Merger and prior to the Restriction Termination
Date, any Transfer of shares of Equity Stock that, if effective, would
result in the Corporation Constructively Owning 10% or more of the
ownership interests in any tenant or subtenant of the Corporation's
real property (including the real property held by FelCor Suites
Limited Partnership and any other partnership in which the Corporation
owns an interest subsequent to the Merger), within the meaning of
Section 856(d)(2)(B) of the Code, shall be void ab initio as to the
Transfer of that number of shares of Equity Stock in excess of the
number that could have been Transferred without such result; and the
intended transferee shall acquire no rights in such excess shares of
Equity Stock.
(f) Notwithstanding any other provision herein,
from the date of the Merger and prior to the Restriction Termination
Date, any Transfer of shares of Equity Stock that, if effective,
would cause the Corporation to fail to qualify as a REIT shall be void
ab initio as to the Transfer of that number of shares of Equity Stock
in excess of the number that could have been Transferred without such
result; and the intended transferee shall acquire no rights in such
excess shares of Equity Stock.
(3) Transfer in Trust.
(a) If, notwithstanding the other provisions
contained in this Article V, at any time after the date of the Merger
and prior to the Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event such that any Person would either
Beneficially Own or Constructively Own Equity Stock in excess of the
Ownership Limit, then, (i) except as otherwise provided in subsection
D.(9) of this Article V, the purported transferee shall acquire no
right or interest (or, in the case of a Non-Transfer Event, the person
holding record title to the Equity Stock Beneficially Owned or
Constructively Owned by such Beneficial Owner or Constructive Owner,
shall cease to own any right or interest) in such number of shares of
Equity Stock which would cause such Beneficial Owner or Constructive
Owner to Beneficially Own or Constructively Own shares of Equity Stock
in excess of the Ownership Limit; and (ii) such number of shares of
Equity Stock in excess of the Ownership Limit (rounded up to the
nearest whole share) shall be designated Shares-in-Trust and, in
accordance with the provisions of section E. of this Article V,
transferred automatically and by operation of law to and held in a
Trust. Such transfer to a Trust and the designation of the shares as
Shares-in-Trust shall be effective as of the close of business on the
business day next preceding the date of the purported Transfer or
Non-Transfer Event, as the case may be.
-6-
<PAGE> 10
(b) If, notwithstanding the other provisions
contained in this Article V, at any time after the date of the Merger
and prior to the Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event that, if effective, would cause the
Corporation either to become "closely held" within the meaning of
Section 856(h) of the Code, to Constructively Own 10% or more of the
ownership interests in any tenant or subtenant of the Corporation's
real property (including the real property held by FelCor Suites
Limited Partnership and any other partnership in which the Corporation
owns an interest subsequent to the Merger) within the meaning of
Section 856(d)(2)(B) of the Code, or otherwise to fail to qualify as a
REIT (other than as a result of a violation of the requirement,
contained in Section 856 (a)(5) of the Code, that a REIT have at
least 100 shareholders), then (i) the purported transferee shall
acquire no right or interest (or, in the case of a Non-Transfer Event,
the person holding record title to the Equity Stock with respect to
which such Non-Transfer Event occurred, shall cease to own any right
or interest) in such number of shares of Equity Stock, the ownership
of which by such purported transferee or record holder would cause the
Corporation either to be "closely held" within the meaning of Section
856(h) of the Code, to violate the 10% limitation of Section
856(d)(2)(B) of the Code or otherwise to fail to qualify as a REIT
(other than as a result of a violation of the 100 shareholder
requirement of Section 865(a)(5) of the Code; and (ii) such number of
shares of Equity Stock (rounded up to the nearest whole share) shall
be designated Shares-in-Trust and, in accordance with the provisions
of section E. of this Article V, transferred automatically and by
operation of law to a Trust to be held therein in accordance with that
section E. Such transfer to a Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the
business day next preceding the date of the Transfer or Non-Transfer
Event, as the case may be.
(4) Remedies For Breach. If the Corporation or its
designees at any time shall determine in good faith that a Transfer has taken
place in violation of subsection D.(2) of this Article V or that a Person
intends to acquire or has attempted to acquire Beneficial Ownership or
Constructive Ownership of any shares of Equity Stock in violation of subsection
D.(2) of this Article V, the Board of Directors shall be authorized and
empowered to take such action as it deems advisable to refuse to give effect to
or to prevent such Transfer or acquisition, including, but not limited to,
refusing to give effect to such Transfer on the books of the Corporation or
instituting proceedings to enjoin such Transfer or acquisition.
(5) Notice of Restricted Transfer. Any Person who
attempts to acquire or acquires shares of Equity Stock in violation of
subsection D.(2) of this Article V, or any Person who holds record title to any
shares of Equity Stock that were transferred to a Trust pursuant to the
provisions of subsection D.(3) of this Article V, shall immediately give
written notice to the Corporation of such event and shall provide to the
Corporation such other information as the Corporation may request in order to
determine the effect, if any, of such purported Transfer or the Non-Transfer
Event, as the case may be, on the Corporation's status as a REIT.
-7-
<PAGE> 11
(6) Owners Required To Provide Information. From the
date of the Merger and prior to the Restriction Termination Date:
(a) Each person who is a Beneficial Owner or
Constructive Owner of more than 5% (or such lower percentage as may be
required pursuant to the Code or regulations issued under the Code) of
the outstanding Equity Stock of the Corporation shall, no later than
January 30 of each year, give written notice to the Corporation
stating the name and address of such Beneficial Owner or Constructive
Owner, the number of shares of Equity Stock Beneficially Owned or
Constructively Owned, and a description of how such shares are held.
Each such Beneficial Owner or Constructive Owner shall provide to the
Corporation such additional information as the Corporation may request
in order to determine the effect, if any, of such Beneficial Ownership
on the Corporation's status as a REIT and to ensure compliance with
the Ownership Limit.
(b) Each Person who is a Beneficial Owner or
Constructive Owner of Equity Stock and each Person (including a
stockholder of record) who is holding Equity Stock for a Beneficial
Owner or Constructive Owner shall provide to the Corporation, promptly
following any request therefor, such information as the Corporation
may deem necessary in order to determine the Corporation's status as a
REIT and to ensure compliance with the Ownership Limit.
(7) Remedies Not Limited. Nothing contained in this
Article V shall limit the authority of the Board of Directors to take any and
all lawful actions, whether or not specifically set forth herein, as it deems
necessary or advisable to protect the Corporation and the interests of its
stockholders by preserving the Corporation's status as a REIT and by ensuring
compliance with the Ownership Limit.
(8) Ambiguity. In the case of an ambiguity in the
application of any of the provisions of sections D. or E., including but not
limited to any definition contained in subsection D.(1), of this Article V, the
Board of Directors shall have the power to finally resolve such ambiguity and
interpret the provisions hereof with respect to any situation, based on the
facts known to it.
(9) Exception. The ownership limitations set forth in
subsections D.(2) and/or D.(3) of this Article V shall not apply to the
acquisition of shares of Equity Stock of the Corporation by an underwriter in a
public offering of those shares or in any transaction involving the issuance of
shares of Equity Stock by the Corporation in which the Board of Directors
determines that the underwriter or other person or party initially acquiring
those shares will timely distribute those shares to or among others so that,
following such distribution, the ownership of those shares will not be in
violation of subsections D.(2) and/or D.(3) of this Article V. The Board of
Directors, in the exercise of its sole and absolute discretion, may exempt from
the operation of subsections D.(2) and/or D.(3) of this Article V certain
specified shares of Equity Stock of the Corporation proposed to be transferred
to, and/or owned by, a person who has provided the Board of Directors with
such evidence, undertakings and assurances as the Board of Directors may
require that such transfer to, and/or ownership by, such person of the
specified shares will not prevent the continued qualification of the
Corporation as a REIT under the Code and the regulations issued under the Code.
The Board
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<PAGE> 12
of Directors may, but shall not be required, to condition the grant of any such
exemption upon the obtaining of an opinion of counsel, a ruling from the
Internal Revenue Service or such other assurances as the Board of Directors
shall deem to be satisfactory.
(10) Legend. Each certificate for Equity Stock, in
addition to any other legend that may be placed thereon, shall bear the
following legend:
"The shares of Equity Stock represented by this certificate
are subject to restrictions on transfer for the purpose of maintaining
the Corporation's status as a real estate investment trust under the
Internal Revenue Code of 1986, as amended (the "Code"). No Person may
at any time (1) Beneficially Own or Constructively Own shares of any
class of Equity Stock in excess of 9.9% (or such other percentage as
may be determined by the Board of Directors of the Corporation) of the
total number of shares of such class of Equity Stock outstanding as of
such time; (2) Beneficially Own Equity Stock which would result in the
Corporation being "closely held" under Section 856(h) of the Code; or
(3) Constructively Own Equity Stock which would result in the
Corporation Constructively Owning 10% or more of the ownership
interests in any tenant or subtenant of the Corporation's real
property (including the real property held by FelCor Suites Limited
Partnership and any other partnership in which the Corporation owns an
interest), within the meaning of Section 856(d)(2)(B) of the Code.
Any Person who attempts to Beneficially Own or Constructively Own
shares of Equity Stock in excess of the above limitations must
immediately notify the Corporation in writing. If the restrictions
above are violated, the shares of Equity Stock represented hereby will
be transferred automatically and by operation of law to a Trust and
shall be designated Shares-in-Trust. All capitalized terms in this
legend have the meanings assigned to them in the Corporation's
Charter, as the same may be further amended from time to time. The
shares of Equity Stock represented by this certificate are subject to
all of the provisions of the Charter and Bylaws of the Corporation,
each as amended from time to time, to all of which the holder, by
acceptance hereof, assents.
The Corporation will furnish to any stockholder, upon request
and without charge, a copy of its Charter and Bylaws, and all
amendments thereto, setting forth the restrictions on transfer and a
statement of (i) the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption of
the stock of each class which the Corporation is authorized to issue,
(ii) the differences in the relative rights and preferences between
the shares of each series of each class of the stock which the
Corporation is authorized to issue to the extent they have been set by
the Board of Directors and (iii) the authority of the Board of
Directors to set the relative rights and preferences of subsequent
series of stock of the Corporation."
(11) Severability. If any provision of this Article V or
any application of any such provision is determined to be invalid by any
Federal or state court having jurisdiction over the issues, the validity of the
remaining provisions shall not be affected and other applications
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<PAGE> 13
of such provision shall be affected only to the extent necessary to comply with
the determination of such court.
E. Shares-in-Trust.
(1) Trust. Any shares of Equity Stock transferred to a
Trust and designated Shares-in-Trust pursuant to subsection D.(3) of this
Article V shall be held by the Trustee for the exclusive benefit of the
Beneficiary. The Corporation shall name a beneficiary or beneficiaries of each
Trust within five (5) business days after receipt of written notice of the
existence thereof. Any transfer to a Trust and designation of shares of Equity
Stock as Shares-in-Trust, pursuant to subsection D.(3) of this Article V, shall
be effective as of the close of business on the business day next preceding the
date of the purported Transfer or Non-Transfer Event that results in the
transfer to such Trust. Shares-in-Trust shall remain issued and outstanding
shares of Equity Stock of the Corporation and shall be entitled to the same
rights and privileges on identical terms and conditions as are all other issued
and outstanding shares of Equity Stock of the same class and series. When
transferred to a Permitted Transferee, in accordance with the provisions of
subsection E.(5) of this Article V, such Shares-in-Trust shall be released from
the Trust and cease to be designated as Shares-in-Trust.
(2) Dividend Rights. The Trustee, as the record holder
of Shares-in-Trust, shall be entitled to receive all dividends and
distributions as may be declared by the Board of Directors of the Corporation
on such shares of Equity Stock and shall hold such dividends or distributions
in trust for the benefit of the Beneficiary. The Prohibited Owner with respect
to Shares-in-Trust shall repay to the Trustee the amount of any dividends or
distributions received by it that (i) are attributable to any shares of Equity
Stock designated Shares-in-Trust and (ii) the record date of which was on or
after the date that such shares became Shares-in-Trust. The Corporation shall
take all lawful measures that the Board of Directors determines to be
reasonably necessary to recover the amount of any such dividend or distribution
paid to a Prohibited Owner, including, if necessary, withholding any portion of
future dividends or distributions payable on shares of Equity Stock
Beneficially Owned or Constructively Owned by the Person who, but for the
provisions of subsection D.(3) of this Article V, would Constructively Own or
Beneficially Own the Shares-in-Trust; and, as soon as reasonably practicable
following the Corporation's receipt or withholding thereof, shall pay over to
the Trustee for the benefit of the Beneficiary the dividends so received or
withheld, as the case may be.
(3) Rights Upon Liquidation. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of, or any
distribution of the assets of, the Corporation, each Trustee of Shares-in-Trust
shall be entitled to receive, ratably with each other holder of Equity Stock of
the same class or series, that portion of the assets of the Corporation which
is available for distribution to the holders of such class and series of Equity
Stock. The Trustee shall distribute to the Prohibited Owner the amounts
received upon such liquidation, dissolution, or winding up, or distribution;
provided, however, that the Prohibited Owner shall not be entitled to receive
amounts pursuant to this subsection E.(3) in excess of, in the case of a
purported Transfer in which the Prohibited Owner gave value for shares of
Equity Stock and which Transfer resulted in the transfer of the shares to the
Trust, the price per share, if any, such Prohibited Owner paid for the Equity
Stock and, in the case of a Non-Transfer Event or
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<PAGE> 14
Transfer in which the Prohibited Owner did not give value for such shares
(e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Trust, the price per share equal to the Market Price on the date
of such Non-Transfer Event or purported Transfer. Any remaining amount in such
Trust shall be distributed to the Beneficiary.
(4) Voting Rights. The Trustee shall be entitled to vote
all Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of
Equity Stock prior to the discovery by the Corporation that the shares of
Equity Stock are Shares-in-Trust shall, subject to applicable law, be rescinded
and shall be void ab initio with respect to such Shares-in-Trust and the
Prohibited Owner shall be deemed to have given, as of the close of business on
the business day prior to the date of the purported Transfer or Non-Transfer
Event that results in the transfer to the Trust of the shares of Equity Stock
under subsection E.(3) of this Article V, an irrevocable proxy to the Trustee
to vote the Shares-in-Trust in the manner in which the Trustee, in its sole and
absolute discretion, desires.
(5) Designation of Permitted Transferee. The Trustee
shall have the exclusive and absolute right to designate a Permitted Transferee
of any and all Shares-in-Trust. As soon as reasonably practicable, but in an
orderly fashion so as not to materially adversely affect the Market Price of
the Shares-in-Trust, the Trustee shall designate one or more Persons as
Permitted Transferees, provided, however, that (i) each such Permitted
Transferee so designated shall purchase for valuable consideration (whether in
a public or private sale) the Shares-in-Trust and (ii) each such Permitted
Transferee so designated may acquire such Shares-in-Trust without such
acquisition resulting in a transfer to a Trust and the redesignation of such
shares of the Equity Stock so acquired as Shares-in-Trust pursuant to the
provisions of subsection D.(3) of this Article V. Upon the designation by the
Trustee of a Permitted Transferee in accordance with the provisions of this
subsection E.(5), the Trustee of a Trust shall (i) cause to be transferred to
the Permitted Transferee that number of Shares-in-Trust acquired by the
permitted Transferee; (ii) cause to be recorded on the books of the Corporation
that the Permitted Transferee is the holder of record of such number of shares
of Equity Stock; and (iii) distribute to the Beneficiary any and all amounts
held with respect to the Shares-in-Trust after making payment to the Prohibited
Owner of the amount determined pursuant to subsection E.(6) of this Article V.
(6) Compensation to Record Holder of Shares of Equity
Stock that Become Shares-In-Trust. Any Prohibited Owner shall be entitled
(after giving written notice to the Corporation of the existence of
Shares-in-Trust and following the designation of the Permitted Transferee in
accordance with subsection D.(5) of this Article V) to receive from the
Trustee, in respect of such Shares-in-Trust, the lesser of (i) in the case of
(a) a purported Transfer in which the Prohibited Owner gave value for shares of
Equity Stock and which Transfer resulted in the transfer of the shares to a
Trust, the price per share, if any, such Prohibited Owner paid for the Equity
Stock, or (b) a Non-Transfer Event or purported Transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the shares were
received through a gift or devise) and which Non-Transfer Event or purported
Transfer, as the case may be, resulted in the transfer of shares to the Trust,
the price per share equal to the Market Price on the date of such Non-Transfer
Event or purported Transfer or (ii) the price per share received by the Trustee
of the Trust from the sale or other disposition of such Shares-in-Trust in
accordance with subsection E.(5) of this Article V. Any amounts received by
the Trustee in respect of such
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<PAGE> 15
Shares-in-Trust and in excess of such amounts to be paid to the Prohibited
Owner pursuant to this subsection E.(6) shall be distributed to the Beneficiary
in accordance with the provisions of subsection E.(5) of this Article V. Each
Beneficiary and Prohibited Owner waive any and all claims that it may have
against the Trustee and the Corporation arising out of the transfer of any
Equity Stock to a Trust, the designation of any Equity Stock as Shares-in-Trust
and the disposition of any Shares-in-Trust, except for claims arising out of
the gross negligence or willful misconduct of, or any failure to make payments
in accordance with section E. of this Article V by, such Trustee or the
Corporation.
(7) Purchase Right in Shares-in-Trust. Shares-in-Trust
shall be deemed to have been offered for sale to the Corporation, or its
designee, at a price per share equal to the lesser of (i) the price per share
in the transaction that resulted in such shares being designated as
Shares-in-Trust (or, in the case of devise, gift or Non- Transfer Event, the
Market Price at the time of such devise, gift or Non-Transfer Event) and (ii)
the Market Price on the date the Corporation, or its designee, accepts such
offer. The Corporation shall have the right to accept such offer for a period
of ninety days after the later of (A) the date of the Non-Transfer Event or
purported Transfer which resulted in such Shares-in-Trust and (B) the date the
Corporation determines in good faith that a purported Transfer or Non-Transfer
Event resulting in the designation of any Equity Stock as Shares-in-Trust has
occurred, if the Corporation does not receive a written notice of such
purported Transfer or Non-Transfer Event pursuant to subsection D.(5) of this
Article V.
F. Preemptive Rights. No holder of any stock or any other
securities of the Corporation, whether now or hereafter authorized, shall have
any preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or prices
and upon such other terms as the Board of Directors, in its sole discretion,
may fix; and any stock or other securities which the Board of Directors may
determine to offer for subscription may, as the Board of Directors in its sole
discretion shall determine, be offered to the holders of any class or series of
stock or other securities at the time outstanding to the exclusion of the
holders of any or all other classes or series of stock or other securities at
the time outstanding.
G. Amendment of this Article. Notwithstanding any other
provisions of this Charter or the Bylaws of the Corporation (and
notwithstanding that some lesser percentage may be permitted by law, this
Charter or the Bylaws of the Corporation), no provision of sections D., E. or
G. of this Article V shall be amended, altered, changed or repealed unless such
amendment, alteration, change, or repeal shall have been advised and approved
by the affirmative vote of a majority of the members of the Board of Directors
and adopted by the affirmative vote of the holders of not less than 66 2/3% of
the outstanding shares of capital stock of the Corporation entitled to vote on
such matter, voting together as a single class.
ARTICLE VI.
DIRECTORS
A. Number. The business and affairs of the Corporation shall be
managed under the direction of a Board of Directors consisting of not less than
three (3) nor more than nine (9)
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directors, unless otherwise determined from time to time by resolution adopted
by the affirmative vote of at least 80% of the members of the Board of
Directors; provided, however, that in no event shall the number of directors be
less than the minimum number required by the Maryland General Corporation Law
and provided further that so long as the number of stockholders of the
Corporation shall be less than three, the number of directors may be less than
three but not less than the number of stockholders. The name of the person who
will serve as the sole director of the Corporation until the first annual
meeting of the stockholders of the Corporation and until his successor is
elected and qualifies is Thomas J. Corcoran, Jr.
B. Classification of Directors. At the first annual meeting of
the stockholders of the Corporation, the directors of the Corporation shall be
divided into three classes: Class I; Class II; and Class III; and the number of
such directors in each class shall be as nearly equal as the number of such
directors will permit. Each such director shall serve for a three-year term
ending on the date of the third annual meeting of stockholders following the
annual meeting of stockholders at which such director was elected; provided,
however, that each initial director elected to Class I at the first annual
meeting of stockholders shall serve for a term ending on the date of the annual
meeting of stockholders to be held in 1998, each initial director elected to
Class II at the first annual meeting of stockholders shall serve for a term
ending on the date of the annual meeting of stockholders to be held in 1996,
and each initial director elected to Class III at the first annual meeting of
stockholders shall serve for a term ending on the date of the annual meeting of
stockholders held in 1997.
C. Removal. Any director or the entire Board of Directors may be
removed by the holders of a majority of the shares entitled to vote at an
election of directors; provided, however, any such removal shall be for cause;
and provided, further, that if stockholders of any class of the capital stock
of the Corporation are entitled separately to elect one or more directors, such
directors may not be removed except by the affirmative vote of a majority of
all of the shares of such class or series entitled to vote for such directors.
D. Vacancies. Except with respect to any directors who have been
or may be elected separately by the holders of Preferred Stock as provided for
in any Articles Supplementary, should a vacancy in the Board of Directors occur
or be created (whether as a result of the death, retirement, resignation or
removal from office of one or more directors or an increase in the number of
authorized directors), such vacancy shall be filled by the affirmative vote of
a majority of the remaining directors, even though less than a quorum of the
Board of Directors, and each director so elected shall serve for the unexpired
term of the Class to which he is elected. Any director so elected by the
remaining directors to fill a vacancy may qualify as an Independent Director
(as hereinafter defined) only if such director has received the affirmative
vote of at least a majority of the remaining Independent Directors, if any.
E. Independent Directors. Notwithstanding anything herein to the
contrary, at all times (except during a period not to exceed sixty (60) days
following the death, retirement, resignation or removal from office of a
director prior to the expiration of the director's term of office), a majority
of the Board of Directors shall be comprised of "Independent Directors," being
persons who are not officers or employees of the Corporation or "Affiliates" of
(1) any advisor to the Corporation under an advisory agreement, (2) any lessee
or contract manager of
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<PAGE> 17
any property of the Corporation, any subsidiary of the Corporation or any
partnership which is an Affiliate of the Corporation.
For purposes of this subsection E., an "Affiliate" of a person
shall mean (1) any person that, directly or indirectly, controls or is
controlled by or is under common control with such person, (2) any other person
that beneficially owns, directly or indirectly, five percent (5%) or more of
the outstanding capital stock, shares or equity interests of such person, or
(3) any officer, director, employee, partner or trustee of such person or any
person controlling, controlled by or under common control with such person
(excluding trustees and persons serving in similar capacities who are not
otherwise an Affiliate of such person). For purposes of the definition of
Affiliate herein, (a) the term "person" shall mean and include individuals,
corporations, limited liability companies, general and limited partnerships,
stock companies or associations, joint ventures, associations, companies,
trusts, banks, trust companies, land trusts, business trusts, or other entities
and governments and agencies and political subdivisions thereof and (b) the
term "control" (including the correlative meanings of the terms "controlled by"
and "under common control with"), as used with respect to any person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such person, through the
ownership of voting securities, partnership interests or other equity
interests.
F. Ballots not Required. Elections of directors need not be by
ballot unless the Bylaws of the Corporation shall so provide.
G. Amendment of this Article. Notwithstanding any other
provisions of this Charter or the Bylaws of the Corporation (and
notwithstanding that some lesser percentage may be permitted by law, this
Charter or the Bylaws of the Corporation), the provisions of this Article VI
shall not be amended, altered, changed or repealed unless such amendment,
alteration, change, or repeal shall have been advised and approved by the
affirmative vote of at least 80% of the members of the Board of Directors and
approved by the affirmative vote of the holders of not less than 75% of the
outstanding shares of capital stock of the Corporation entitled to vote on such
matter, voting together as a single class.
ARTICLE VII.
REIT STATUS
The Corporation shall seek to elect and maintain its status as
a REIT under the Code. It shall be the duty of the Board of Directors to take
such actions as are permitted by law and as it may deem necessary or advisable
to cause the Corporation to satisfy the requirements for qualification as a
REIT under the Code, including, but not limited to, the requirements relating
to the ownership of its outstanding capital stock, the nature of its assets,
the sources of its income, and the amount and timing of its distributions to
its stockholders. The Board of Directors shall take no affirmative action to
cause the Corporation not to qualify as a REIT or to otherwise revoke the
Corporation's election to be taxed as a REIT without the affirmative vote of
the holders of 66 2/3% of the outstanding shares of capital stock of the
Corporation entitled to vote on such matter.
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ARTICLE VIII.
REGISTERED HOLDERS OF SHARES
Except as may be otherwise provided by applicable law, the
Corporation shall be entitled to treat the registered holder of any shares of
capital stock of the Corporation as the owner of such shares and of all rights
derived from or relating to such shares for all purposes, and the Corporation
shall not be obligated to recognize any equitable or other claim to or interest
in such shares or rights on the part of any other person, including, but
without limiting the generality of the term "person", a purchaser, pledgee,
assignee or transferee of such shares or rights, unless and until such person
becomes the registered holder of such shares. The foregoing shall apply
whether or not the Corporation shall have either actual or constructive notice
of the interest of such person.
ARTICLE IX.
LIMITATION ON INDEBTEDNESS
The Corporation may not incur or suffer to exist as of the end
of any month Indebtedness (as defined below) in an amount in excess of 40% of
the Corporation's investment in hotel properties, at its cost, after giving
effect to the Corporation's use of proceeds from any Indebtedness. The
Corporation's investment in hotel properties shall include all investments by
the Corporation constituting, evidencing or secured by an interest in property,
whether tangible or intangible and whether real, personal or mixed, that is
used or intended for use in, or in any manner connected with or relating to,
the ownership or leasing of hotels. In determining its cost of such
investments, there shall be included (1) the amount of all cash paid and the
value (as determined by the Board of Directors for purposes of such investment)
of any other property transferred therefor by the Corporation, (2) the amount
of all Indebtedness and other obligations assumed or incurred by the
Corporation or to which the Corporation takes subject, and (3) the value (as
determined by the Board of Directors for the purposes of such investment) of
all equity securities of which the issuer is an entity that is, or upon such
investment will be, included within the Corporation and which are issued
(otherwise than for cash) to, or retained by, any person other than the
Corporation in connection with such investment. For purposes of the foregoing
restrictions, (A) "Indebtedness" of the Corporation shall mean the consolidated
liabilities of the Corporation for borrowed money (including all notes payable
and drafts accepted representing extensions of credit) and all obligations
evidenced by bonds, debentures, notes or other similar instruments on which
interest charges are customarily paid, including obligations under capital
leases, and (B) "Corporation" shall mean this Corporation and any subsidiary
entity consolidated therewith, under generally accepted accounting principals.
ARTICLE X.
POWERS OF DIRECTORS; BYLAWS
A. Powers Vested in the Board of Directors. All of the
powers of the Corporation, insofar as the same may be lawfully vested by this
Charter in the Board of Directors, are hereby conferred upon the Board of
Directors. In furtherance and not in
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limitation of that power, the Board of Directors shall, in addition to those
powers specifically conferred upon the Board of Directors as set forth herein,
possess the following powers:
(1) The Board of Directors shall, in connection
with the exercise of its business judgment involving a Business Combination (as
defined in Section 3-601 of Title 3 of the Corporations and Associations
Article of the Annotated Code of Maryland) or any actual or proposed
transaction which would or may involve a change in control of the Corporation
(whether by purchases of shares of stock or any other securities of the
Corporation in the open market, or otherwise, tender offer, merger,
consolidation, dissolution, liquidation, sale of all or substantially all of
the assets of the Corporation, proxy solicitation or otherwise), in determining
what is in the best interests of the Corporation and its stockholders and in
making any recommendation to its stockholders, give due consideration to all
relevant factors, including, but not limited to (A) the economic effect, both
immediate and long-term, upon the Corporation's stockholders, including
stockholders, if any, who do not participate in the transaction; (B) the social
and economic effect on the employees, customers of, and other dealing with, the
Corporation and its subsidiaries and on the communities in which the
Corporation and its subsidiaries operate or are located; (C) whether the
proposal is acceptable based on the historical and current operating results or
financial condition of the Corporation; (D) whether a more favorable price
could be obtained for the Corporation's stock or other securities in the
future; (E) the reputation and business practices of the offeror and its
management and affiliates as they would affect the employees of the Corporation
and its subsidiaries; (F) the future value of the stock or any other securities
of the Corporation; (G) any antitrust or other legal and regulatory issues that
are raised by the proposal; and (H) the business and financial condition and
earnings prospects of the acquiring person or entity, including, but not
limited to, debt service and other existing financial obligations, financial
obligations to be incurred in connection with the acquisition, and other likely
financial obligations of the acquiring person or entity. If the Board of
Directors determines that any proposed Business Combination (as defined in
Section 3-601 of Title 3 of the Corporations and Associations Article of the
Annotated Code of Maryland) or actual or proposed transaction which would or
may involve a change in control of the Corporation should be rejected, it may
take any lawful action to defeat such transaction, including, but not limited
to, any or all of the following: advising stockholders not to accept the
proposal; instituting litigation against the party making the proposal; filing
complaints with governmental and regulatory authorities; acquiring the stock or
any of the securities of the Corporation; selling or otherwise issuing
authorized but unissued stock, other securities or granting options or rights
with respect thereto; acquiring a company to create an antitrust or other
regulatory problem for the party making the proposal; and obtaining a more
favorable offer from another individual or entity.
(2) The Board of Directors shall have the sole
and exclusive power and authority to make, alter or repeal the Bylaws of the
Corporation.
The enumeration and definition of particular powers of the Board of Directors
included in the foregoing shall in no way be limited to restricted by reference
to or inference from the terms of any other clause of this or any other Article
of the Charter of the Corporation, or construed as or deemed by inference or
otherwise in any manner to exclude or limit any powers conferred
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<PAGE> 20
upon the Board of Directors under the General Laws of the State of Maryland now
or hereafter in force.
ARTICLE XI.
INDEMNIFICATION; LIMITATION OF LIABILITY
A. Power to Indemnify. The Corporation may agree to the terms
and conditions upon which any director, officer, employee or agent accepts his
office or position and in its Bylaws, by contract or in any other manner may
agree to indemnify and protect any director, officer, employee or agent of the
Corporation, or any person who serves at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, to the fullest extent permitted from time
to time by the Maryland General Corporation Law., as the same exists or may be
hereafter amended or reenacted.
B. Obligation to Provide Indemnification. The Corporation, to
the fullest extent permitted by the Maryland General Corporation Law as the
same exists or may hereafter be amended or reenacted, shall indemnify, and
advance expenses on behalf of, any and all persons who it shall have the power
to indemnify under such law from and against any and all of the expenses,
liabilities or other matters referred to in or covered by such law and, in
addition thereto, shall indemnify, and advance expenses on behalf of, all such
persons to the extent permitted under any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action by any
such person in his director or officer capacity and as to action in another
capacity while holding any such office, and shall continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
C. Limitation of Liability. To the fullest extent permitted by
Maryland statutory or decisional law, as amended or interpreted, no director or
officer of the Corporation shall be personally liable to the Corporation or its
stockholders for money damages. No amendment of the Charter of the Corporation
or repeal of any of its provisions shall limit or eliminate the benefits
provided to directors and officers under this provision with respect to any act
or omission which occurred prior to such amendment or repeal. Any repeal or
modification of the foregoing sentence shall not adversely affect any right or
protection of a director of the Corporation existing hereunder with respect to
any act or omission occurring prior to such repeal or modification.
ARTICLE XII.
BUSINESS COMBINATIONS
The provisions of Section 3-602 of Title 3 of the Corporations
and Associations Article of the Annotated Code of the State of Maryland, as the
same may be amended or reenacted, or any successor statute thereto, shall not
apply to any Business Combination (as defined in Section 3-601 of Title 3 of
the Corporations and Associations Article of the Annotated
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<PAGE> 21
Code of the State of Maryland) involving the Corporation and FelCor Suite
Hotels, Inc., a Delaware corporation, Mr. Hervey A. Feldman or Thomas J.
Corcoran, Jr. (or any present or future affiliates or associates of Mr. Feldman
or Mr. Corcoran or other person acting in concert or as a group with either or
both of them).
ARTICLE XIII.
CONTROL SHARES
The provisions of Title 3, Subtitle 7 of the Maryland General
Corporation Law entitled "Voting Rights of Certain Control Shares," as amended
or reenacted from time to time, or any successor statute thereto, shall not
apply to any existing or future type or class of the capital stock of the
Corporation.
ARTICLE XIV.
REDUCED PERCENTAGE OF VOTES REQUIRED TO
APPROVE CERTAIN CORPORATE ACTIONS
Except as may be otherwise provided in the Charter of the
Corporation, notwithstanding any provision of law which may be applicable to
the Corporation which purports to require for any purpose the affirmative vote
of a greater proportion than a majority of all other votes entitled to be cast
on a particular matter by the holders of capital stock of the Corporation, the
affirmative vote of a majority of the votes entitled to be cast on any matter
upon which the holders of shares of the capital stock of the Corporation shall
be entitled to vote shall be, subject to the due authorization, approval or
advice or the Board of Directors, valid, sufficient and effective to approve or
authorize any such matter.
ARTICLE XV.
AMENDMENTS
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Charter, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
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<PAGE> 22
STATE OF MARYLAND 370965
DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: JUNE 23, 1995
THIS IS TO ADVISE YOU THAT THE ARTICLES OF MERGER FOR FELCOR SUITE HOTELS,
INC. (MD)-SURVIVOR AND FELCOR SUITE HOTELS, INC. (DE)-MERGING OUT WERE RECEIVED
AND APPROVED FOR RECORD ON JUNE 23, 1995 AT 12:24 PM.
FEE PAID: 50.00
[SEAL]
IRENE B WOZNY
CHARTER SPECIALIST
<PAGE> 23
ARTICLES OF MERGER
BETWEEN
FELCOR SUITE HOTELS, INC., A DELAWARE CORPORATION
AND
FELCOR SUITE HOTELS, INC., A MARYLAND CORPORATION
These ARTICLES OF MERGER are made and entered into as of the 23rd day of
June 1995, by and between FelCor Suite Hotels, Inc., a Delaware corporation
(the "Merging Corporation"), and FelCor Suite Hotels, Inc., a Maryland
corporation (the "Surviving Corporation"), each of which certify as follows:
FIRST: The Merging Corporation and the Surviving Corporation agree to
merge in accordance with the terms and conditions set forth herein and in the
Agreement and Plan of Merger dated as of May 30, 1995 by and between the
Surviving Corporation and the Merging Corporation (the "Merger").
SECOND: The Merger shall be effective upon the later of (i) the
acceptance of these Articles of Merger by the State Department of Assessments
and Taxation of the State of Maryland and (ii) the acceptance of a Certificate
of Merger by the Secretary of State of Delaware (the "Effective Date").
THIRD: The name of the Merging Corporation is "Felcor Suite Hotels,
Inc." which is incorporated under the laws of the State of Delaware. The name
of the Surviving Corporation is "Felcor Suite Hotels, Inc." which is
incorporated under the laws of the State of Maryland.
<PAGE> 24
FOURTH: The Merging Corporation was incorporated under the general laws
of the State of Delaware on May 16, 1994. The Merging Corporation is not
registered or qualified to do business in the State of Maryland.
FIFTH: The principal office in Maryland of the Surviving Corporation is
located in Baltimore City at 11 East Chase Street, Baltimore, Maryland, 21202.
The Merging Corporation does not have an office in Maryland.
SIXTH: Neither the Merging Corporation nor the Surviving Corporation
owns any interest in land in the State of Maryland, the title to which could be
affected by recording an instrument in the land records.
SEVENTH: The total number of shares of stock that the Merging Corporation
has authority to issue is 50,000,000 shares of Common Stock, par value $0.01
per share, and 10,000,000 shares of Preferred Stock, par value $0.01 per share.
The total number of shares of stock that the Surviving Corporation has
authority to issue is 50,000,000 shares of Common Stock, par value $0.01 per
share, and 10,000,000 shares of Preferred Stock, par value $0.01 per share.
EIGHTH: The Merging Corporation owns of record and beneficially all of
the issued and outstanding capital stock of the Surviving Corporation.
NINTH: The manner and basis of converting or exchanging issued stock of
the Merging Corporation and the Surviving Corporation into different stock of a
corporation or other
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<PAGE> 25
consideration and the treatment of any issued stock not to be converted or
exchanged shall be as follows:
(a) At the Effective Date, each issued share of the Common Stock of
the Merging Corporation shall be converted into and become one share of Common
Stock, par value $0.01 per share, of the Surviving Corporation.
(b) At the Effective Date, each issued share of the Common Stock of
the Surviving Corporation shall be cancelled and cease to exist.
TENTH: The other provisions necessary to effect the Merger are as
follows:
(a) At the Effective Date, each share of the Common Stock of the
Merging Corporation issued and outstanding or held as treasury shares on the
Effective Date shall, without any action on the part of either the Merging
Corporation or the Surviving Corporation or any holder of such stock, be
changed and converted into an equal number of fully paid and nonassessable
shares of the Common Stock of the Surviving Corporation.
(b) Each stock certificate which, prior to the Effective Date,
represented issued shares of the Common Stock of the Merging Corporation shall
be and become, on the Effective Date, a certificate representing an identical
number of shares of Common Stock of the Surviving Corporation automatically by
virtue of the Merger and without any action on the part of the holder thereof.
(c) Each stock option granted by the Merging Corporation (under or
subject to the Restricted Stock and Stock Option Plan of the Merging
Corporation (the "1994 Plan")) and outstanding
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<PAGE> 26
immediately prior to the Effective Date shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into and
become a stock option to purchase, upon the same terms and conditions, the
number of shares of the Surviving Corporation's Common Stock (subject to
further adjustment as may be provided in the 1994 Plan) which is equal to the
number of shares of the Merging Corporation's Common Stock which the holder
thereof would have received had such holder exercised the option in full
immediately prior to the Effective Date (whether or not such option was then
exercisable). The price per share payable upon exercise under each of said
options shall (subject to future adjustments as provided in the 1994 Plan) be
equal to the exercise price per share thereunder immediately prior to the
Effective Date. A number of shares of the Surviving Corporation's Common Stock
shall be reserved for issuance upon the exercise of options equal to the number
of shares of the Merging Corporation's Common Stock so reserved immediately
prior to the Effective Date.
(d) The 1994 Plan, and all outstanding stock options thereunder,
shall, immediately prior to the Effective Date of the Merger, be amended to the
extent necessary to permit continuance of the 1994 Plan and continuance and
convergence of said stock options into those of the Surviving Corporation
following the Merger, nothwithstanding any provisions heretofore contained in
such 1994 Plan.
(e) On the Effective Date, all of the shares of stock of the
Surviving Corporation issued and outstanding on the Effective
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<PAGE> 27
Date of the Merger shall be cancelled and returned to the status of authorized
but unissued shares.
(f) On the Effective Date, each employee benefit plan and incentive
compensation plan to which the Merging Corporation is then a party shall be
assumed by, and continue to be the plan of, the Surviving Corporation. To the
extent any employee benefit plan or incentive compensation plan of the Merging
Corporation or any of its subsidiaries provides for the issuance or purchase
of, or otherwise relates to, the Merging Corporation's Common Stock, after the
Effective Date such plan shall be deemed to provide for the issuance or
purchase of, or otherwise relate to, the Surviving Corporation's Common Stock
upon the same terms and conditions.
(g) The officers and directors of the Surviving Corporation on the
Effective Date shall be and continue to be the officers and directors of the
Surviving Corporation thereafter, until their successors are duly appointed or
elected and qualify.
(h) The Charter and Bylaws of the Surviving Corporation, as they
exist immediately prior to the Effective Date, shall remain in effect as the
Charter and Bylaws of the Surviving Corporation thereafter, unaffected by the
Merger.
(i) On the Effective Date, the Merging Corporation shall be merged
with and into the Surviving Corporation, which shall continue its corporate
existence under the laws of the State of Maryland. The separate existence and
corporate organization of the Merging Corporation shall cease upon the
Effective Date, and the Surviving Corporation shall possess all of the rights,
privileges, immunities and franchises, as well as those of a public or of a
- 5 -
<PAGE> 28
private nature, of each of the Merging Corporation and the Surviving
Corporation; and all property, real, personal and mixed, and all debts due on
whatever account, including subscriptions to shares, and all other choses in
action, and all and every other interest, of or belonging to or due to each of
the Merging Corporation or the Surviving Corporation, shall be taken and deemed
to be transferred to and vested in the Surviving Corporation without further
act or deed; and the title to any real estate or any interest therein, vested
in either of the Merging Corporation or the Surviving Corporation shall not
revert or be in any way impaired by reason of such Merger. The Surviving
Corporation shall thenceforth be responsible and liable for all the liabilities
and obligations of each of the Merging Corporation and the Surviving
Corporation, and any claims existing or action or proceeding pending by or
against the Merging Corporation or the Surviving Corporation may be prosecuted
to judgment as if such Merger had not taken place. Neither the rights of
creditors nor any liens upon the property of either the Merging Corporation or
the Surviving Corporation shall be impaired by the Merger.
ELEVENTH: The terms and conditions of the transaction set forth in these
Articles of Merger were advised, authorized and approved by the Merging
Corporation in the manner and by the vote required by its charter and by-laws
and the laws of the State of Delaware. The terms and conditions of the
transaction set forth in these Articles of Merger were advised, authorized and
approved by the Surviving Corporation in the manner and by the vote required by
its charter and by-laws and the laws of the State of Maryland. The
- 6 -
<PAGE> 29
manner of approval by the Merging Corporation and the Surviving Corporation of
the transaction set forth in these Articles of Merger was as follows:
(a) The board of directors of the Merging Corporation adopted a
resolution by unanimous vote consent on April 10, 1995, which declared that the
transaction set forth in these Articles of Merger is advisable and directed
that the transaction be submitted for consideration by the stockholders of the
Merging Corporation at the annual meeting of the stockholders of the Merging
Corporation held on May 30, 1995. Notice which stated that a purpose of the
annual meeting was to act on the Merger contemplated by these Articles of
Merger was given in the manner required by the applicable provisions of the
Delaware General Corporation Law to each stockholder entitled to such notice.
The transaction set forth in these Articles of Merger was approved by the
stockholders of the Merging Corporation at the annual meeting of the
stockholders of the Merging Corporation held on May 30, 1995 by the affirmative
vote of a majority of all the votes entitled to be cast on the matter in
accordance with the Charter of the Merging Corporation and the Delaware General
Corporation,Law.
(b) The sole director of the Surviving Corporation adopted a resolution
by written consent as of May 2, 1995, which declared that the transaction set
forth in these Articles of Merger is advisable and directed that the
transaction be submitted for consideration of the sole stockholder of the
Surviving Corporation. The transaction set forth in these Articles of Merger
was approved
- 7 -
<PAGE> 30
by the sole stockholder of the Surviving Corporation by written consent dated
as of May 2, 1995.
TWELFTH: No amendment to the charter of the Surviving Corporation, the
survivor in the Merger, will be affected by the Merger.
IN WITNESS WHEREOF, the Merging Corporation and the Surviving Corporation
have caused these Articles of Merger to be signed in their respective corporate
names and on their behalf by their respective Presidents and attested to by
their respective corporate Secretaries as of the 23rd day of June, 1995.
ATTEST: FELCOR SUITE HOTELS, INC.,
a Maryland corporation
/s/ NICHOLAS R. PETERSON By: THOMAS J. CORCORAN
---------------------------- ----------------------------
Nicholas R. Peterson Thomas J. Corcoran, Jr.
Assistant Secretary President
FELCOR SUITE HOTELS, INC.,
a Delaware corporation
/s/ NICHOLAS R. PETERSON By: THOMAS J. CORCORAN
---------------------------- ----------------------------
Nicholas R. Peterson Thomas J. Corcoran, Jr.
Assistant Secretary President
The undersigned, being the duly elected and acting President of Felcor
Suite Hotels, Inc., a Maryland corporation, hereby acknowledges that the
foregoing Articles of Merger, of which this Certificate is a part, are the act
of Felcor Suite Hotels, Inc., a Maryland corporation, and certifies that, to
the best of his knowledge, information and belief, and under penalties for
perjury, all matters and facts contained in these Articles of Merger relating
to Felcor Suite Hotels, Inc., a Maryland corporation, are true in all material
respects.
/s/ THOMAS J. CORCORAN, JR.
----------------------------
Thomas J. Corcoran, Jr.
- 8 -
<PAGE> 31
The undersigned, being the duly elected and acting President of Felcor
Suite Hotels, Inc., a Delaware corporation, hereby acknowledges that the
foregoing Articles of Merger, of which this Certificate is a part, are the act
of Felcor Suite Hotels, Inc., a Delaware corporation, and certifies that, to
the best of his knowledge, information and belief, and under penalties for
perjury, all matters and facts contained in these Articles of Merger relating
to Felcor Suits Hotels, Inc., a Delaware corporation, are true in all material
respects.
/s/ THOMAS J. CORCORAN, JR.
----------------------------
Thomas J. Corcoran, Jr.
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<PAGE> 32
STATE OF MARYLAND
441055
STATE DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: MAY 02, 1996
THIS IS TO ADVISE YOU THAT THE ARTICLES SUPPLEMENTARY FOR
FELCOR SUITE HOTELS, INC.
WERE RECEIVED AND APPROVED FOR RECORD ON MAY 2, 1996 AT 11:40 AM.
FEE PAID: 50.00
[SEAL]
HARRY J. NOONAN
CHARTER SPECIALIST
<PAGE> 33
ARTICLES SUPPLEMENTARY
OF
FELCOR SUITE HOTELS, INC.
FELCOR SUITE HOTELS, INC., a Maryland corporation (hereinafter
referred to as the "Company"), hereby certifies as follows:
FIRST: Under the authority set forth in Article V of the Charter of
the Company, the Board of Directors of the Company on April 11, 1996,
classified 6,900,000 unissued shares of the "$1.95 Series A Cumulative
Convertible Preferred Stock."
SECOND: A description of the $1.95 Series A Cumulative Convertible
Preferred Stock (the "Series A Preferred Stock"), including the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption as set or
changed by the Board of Directors of the Company is as follows:
Section 1. NUMBER OF SHARES AND DESIGNATION. This series of
preferred stock shall be designated as Series A Cumulative Convertible
Preferred Stock, and 6,900,000 shall be the number of shares of preferred stock
constituting of such series.
Section 2. DEFINITIONS. For purposes of the Series A Preferred
Stock, the following terms shall have the meanings indicated:
"Act" shall have the meaning set forth in paragraph (g) of Section 5 hereof.
"Board of Directors" shall mean the Board of Directors of the Company or any
committee authorized by such Board of Directors to perform any of its
responsibilities with respect to the Series A Preferred Stock.
"Business Day" shall mean any day other than a Saturday, Sunday or a day on
which state or federally chartered banking institutions in Texas or New York
are not required to be open.
"Call Date" shall have the meaning set forth in paragraph (c) of Section 5
hereof.
"Common Stock" shall mean the common stock of the Company, par value $0.01 per
share.
"Constituent Person" shall have the meaning set forth in paragraph (e) of
Section 7 hereof.
"Conversion Price" shall mean the conversion price per share of Common Stock
for which the Series A Preferred Stock is convertible, as such Conversion Price
may be adjusted pursuant to Section 7. The initial conversion price shall be
$32.25 (equivalent to a conversion rate of 0.7752 shares of Common Stock for
each share of Series A Preferred Stock).
<PAGE> 34
"Current Market Price" of publicly traded shares of Common Stock or any other
class of capital stock or other security of the Company or any other issuer for
any day shall mean the last reported sales price, regular way on such day, or,
if not sale takes place on such day, the average of the reported closing bid
and asked prices on such day, regular way, in either case as reported on the
New York Stock Exchange ("NYSE") or, if such security is not listed or admitted
for trading or, if not listed or admitted for trading on any national
securities exchange, on the National Market System of the National Association
of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or, if such
security is not quoted on such National Market System, the average of the
closing bid and asked prices on such day in the over the counter market as
reported by NASDAQ or, if bid and asked prices for such security on such day
shall not have been reported through NASDAQ, the average of the bid and asked
prices on such day as furnished by any NYSE member firm regularly making a
market in such security selected for such purpose by the Chief Executive
Officer or the Board of Directors.
"Dividend Payment Date" shall mean the last calendar day of January, April,
July and October in each year, commencing on July 31, 1996; PROVIDED, HOWEVER,
that if any Dividend Payment Date falls on any day other than a Business Day,
the dividend payment due on such Dividend Payment Date shall be paid on the
Business Day immediately following such Dividend Payment Date.
"Dividend Periods" shall mean quarterly dividend periods commencing January 1,
March 1, June 1 and September 1 of each year and ending on and including the
day preceding the first day of the next succeeding Dividend Period (other than
the initial Dividend Period, which shall commence on May 6, 1996 and end on and
include June 30, 1996).
"Fair Market Value" shall mean the average of the daily Current Market Prices
of a share of Common Stock during the five (5) consecutive Trading Days
selected by the Company commencing not more than 20 Trading Days before, and
ending not later than, the earlier of the day in question and the day before
the "ex" date with respect to the issuance or distribution requiring such
computation. The term "'ex' date," when used with respect to any issuance or
distribution, means the first day on which the Common Stock trades regular way,
without the right to receive such issuance or distribution, on the exchange or
in the market, as the case may be, used to determine that day's current Market
Price.
"Issue Date" shall mean the date on which the Company first issues a share of
Series A Preferred Stock.
"Junior Stock" shall mean the Common Stock and any other class or series of
shares of the Company over which the Series A Preferred Stock has preference or
priority in the payment of dividends or in the distribution of assets on any
liquidation, dissolution or winding up of the Company.
"Non-Electing Share" shall have the meaning set forth in paragraph (e) of
Section 7 hereof.
"Parity Stock" shall have the meaning set forth in paragraph (b) of Section 8
hereof.
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<PAGE> 35
"Permitted Common Stock Cash Distributions" means cash dividends and
distributions paid after December 31, 1995, not in excess of the Company's
cumulative undistributed net earnings at December 31, 1995, plus the cumulative
amount of funds from operations, as determined by the Board of Directors on a
basis consistent with the financial reporting practices of the Company, after
December 31, 1995, minus the cumulative amount of dividends accrued or paid on
the Series A Preferred Stock or any other class of Preferred Stock after
January 1, 1996.
"Person" shall mean any individual, partnership, limited liability company,
corporation or other entity, and shall include any successor (by merger or
otherwise) of such entity.
"Press Release" shall have the meaning set forth in paragraph (b) of Section 5
hereof.
"Securities" shall have the meaning set forth in paragraph (d) (iii) of Section
7 hereof.
"Series A Preferred Stock" shall have the meaning set forth in the Recitals
hereof.
"set apart for payment" shall be deemed to include, without any action other
than the following, the recording by the Company in its accounting ledgers of
any accounting or bookkeeping entry which indicates, pursuant to a declaration
of dividends or other distribution by the Board of Directors, the allocation of
funds to be so paid on any series or class of capital stock of the Company;
PROVIDED, HOWEVER, that if any funds for a class or series of Junior Stock or
any class or series of stock ranking on a parity with the Series A Preferred
Stock as to the payment of dividends are placed in a separate account of the
Company or delivered to a disbursing, paying or other similar agent, then "set
apart for payment" with respect to the Series A Preferred Stock shall mean
placing such funds in a separate account or delivering such funds to a
disbursing, paying or other similar agent.
"Trading Day" shall mean any day on which the securities in question are traded
on the NYSE, or if such securities are not listed or admitted for trading on
the NYSE, on the principal national securities exchange on which such
securities are listed or admitted, or if not listed or admitted for trading of
any national securities exchange, on the National Market System of NASDAQ, or
if such securities are not quoted on such National Market System, in the
applicable securities market in which the securities are traded.
"Transaction" shall have the meaning set forth in paragraph (e) of Section 7
hereof.
"Transfer Agent" means SunTrust Bank, Atlanta, Georgia, or such other agent or
agents of the Company as may be designated by the Board of Directors or their
designee as the transfer agent for the Series A Preferred Stock.
"Voting Preferred Stock" shall have the meaning set forth in Section 9(a)
hereof.
3
<PAGE> 36
Section 3. DIVIDENDS.
(a) The Holders of shares of the Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for that purpose, dividends payable in cash in an
amount per share of Series A Preferred Stock equal to the greater of $1.95 per
annum or the cash distributions declared or paid for the corresponding period
(determined on each Dividend Payment Date) on the number of shares of Common
Stock, or portion thereof, into which a share of Series A Preferred Stock is
convertible (under Section 7 hereof). Such dividends shall be cumulative from
May 6, 1996, whether or not in any Dividend Period or Periods there shall be
funds of the Company legally available for the payment of such dividends, and
shall be payable quarterly, when, as and if declared by the Board of Directors,
in arrears on Dividend Payment Dates, commencing on the first Dividend Payment
Date after the Issue Date. Each such dividend shall be payable in arrears to
the holders of record of shares of the Series A Preferred Stock, as they appear
on the stock records of the Company at the close of business on such record
dates, not more than 60 days preceding such Dividend Payment Dates thereof, as
shall be fixed by the Board of Directors. Accrued and unpaid dividends for any
past Dividend Periods may be declared and paid at any time, without reference
to any regular Dividend Payment Date, to holders of record on such date, not
exceeding 45 days preceding the payment date thereof, as may be fixed by the
Board of Directors.
(b) The amount of dividends payable for each full Dividend Period
for the Series A Preferred Stock shall be computed by dividing the annual
dividend rate by four. The amount of dividends payable for any period shorter
or longer than a full Dividend Period, on the Series A Preferred Stock shall be
computed on the basis of twelve 30-day months and a 360-day year. Holders of
the Preferred Stock shall not be entitled to any dividends, whether payable in
cash, property or stock, in excess of cumulative dividends, as herein provided,
on the Series A Preferred Stock. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
the Series A Preferred Stock that may be in arrears.
(c) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends, except as described in the immediately following
sentence, shall be declared or paid or set apart for payment on any class or
series of Parity Stock for any period unless full cumulative dividends have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment on the Series A
Preferred Stock for all Dividend Periods terminating on or prior to the
Dividend Payment Date on such class or series of Parity Stock. When dividends
are not paid in full or a sum sufficient for such payment is not set apart, as
aforesaid, all dividends declared upon shares of the Series A Preferred Stock
and all dividends declared upon any other class or series of Parity Stock shall
be declared ratably in proportion to the respective amounts of dividends
accumulated and unpaid on the Series A Preferred Stock and accumulated and
unpaid on such Parity Stock.
(d) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in shares
of, or options, warrants or rights to subscribe for or purchase shares of,
Junior Stock), shall be declared or paid or set apart for payment or other
distribution declared or made upon Junior Stock, nor shall Junior Stock be
redeemed, purchased or
4
<PAGE> 37
otherwise acquired (other than a redemption, purchase or other acquisition of
shares of Common Stock made for purposes of an employee incentive or benefit
plan of the Company or any subsidiary) for any consideration (or any moneys be
paid to or made available for a sinking fund for the redemption of any shares
of any such stock) by the Company, directly or indirectly (except by conversion
into or exchange for Junior Stock), unless in each case (i) the full cumulative
dividends on all outstanding shares of the Series A Preferred Stock and any
other Parity Stock of the Company shall have been paid or set apart for payment
for all past Dividend Periods with respect to the Series A Preferred Stock and
all past dividend periods with respect to such Parity Stock and (ii) sufficient
funds shall have been paid or set apart for the payment of the dividend for the
current Dividend Period with respect to the Series A Preferred Stock and the
current dividend period with respect to such Parity Stock. Notwithstanding the
foregoing limitations, the Company may at any time acquire shares of its
capital stock, without regard to rank, for the purpose of preserving its status
as a REIT.
Section 4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, before any payment or
distribution of the assets of the Company (whether capital or surplus) shall be
made to or set apart for the holders of Junior Stock, the holders of the shares
of Series A Preferred Stock shall be entitled to receive twenty-five dollars
($25.00) per share of Series A Preferred Stock plus an amount equal to all
dividends (whether or not earned or declared) accrued and unpaid thereon to the
date of final distribution to such holders, but such holders shall not be
entitled to any further payment. If, upon any liquidation, dissolution or
winding up of the Company, the assets of the Company, or proceeds thereof,
distributable among the holders of the shares of Series A Preferred Stock shall
be insufficient to pay in full the preferential amount aforesaid and
liquidating payments on any other shares of any class or series of Parity
Stock, then such assets, or the proceeds thereof, shall be distributed among
the holders of shares of Series A Preferred Stock and any such other Parity
Stock ratably in accordance with the respective amounts that would be payable
on such shares of Series A Preferred Stock and any such other Parity Stock if
all amounts payable thereon were paid in full. For the purposes of this
Section 4, (i) a consolidation or merger of the Company with one or more
corporations, (ii) a sale or transfer of all or substantially all of the
Company's assets, or (iii) a statutory share exchange shall not be deemed to be
a liquidation, dissolution or winding up, voluntary or involuntary, of the
Company.
(b) Subject to the rights of the holders of shares of any series
or class or classes of stock ranking on a parity with or prior to the Series A
Preferred Stock upon liquidation, dissolution or winding up, upon any
liquidation, dissolution or winding up of the Company, after payment shall have
been made in full to the holders of the Series A Preferred Stock, as provided
in this Section 4, any other series or class or classes of Junior Stock shall,
subject to the respective terms and provisions (if any) applying thereto, be
entitled to receive any and all assets remaining to be paid or distributed, and
the holders of the Series A Preferred Stock shall not be entitled to share
therein.
5
<PAGE> 38
Section 5. REDEMPTION AT THE OPTION OF THE COMPANY
(a) The Series A Preferred Stock shall not be redeemable by the
Company prior to April 30, 2001. On and after April 30, 2001, the Company, at
its option, may redeem the shares of Series A Preferred Stock in whole or in
part, as set forth herein, subject to the provisions described below.
(b) The Series A Preferred Stock may be redeemed, in whole or in
part, at the option of the Company, at any time, only if for 20 Trading Days,
within any period of 30 consecutive Trading Days, including the last Trading
Day of such period, the Current Market Price of the Common Stock on each of
such 20 Trading Days equals or exceeds the Conversion Price in effect on such
Trading Day. In order to exercise its redemption option, the Company must
issue a press release announcing the redemption (the "Press Release") prior to
the opening of business on the second Trading Day after the condition in the
preceding sentence has, from time to time, been met. The Company may not issue
a Press Release prior to April 30, 2001. The Press Release shall announce the
redemption and set forth the number of shares of Series A Preferred Stock which
the Company intends to redeem. The Call Date shall be selected by the Company,
shall be specified in the notice of redemption and shall be not less than 30
days or more than 60 days after the date on which the Corporation issues the
Press Release.
(c) Upon redemption of Series A Preferred Stock by the Corporation
on the date specified in the notice to holders required under subparagraph (e)
of this Section 5 (the "Call Date"), each share of Series A Preferred Stock so
redeemed shall, at the option of the Company (i) be converted into a number of
shares of Common Stock equal to the liquidation preference (excluding any
accrued and unpaid dividends) of the shares of Series A Preferred Stock being
redeemed divided by the Conversion Price as of the opening of business on the
Call Date or (ii) be redeemed in cash at a price per share equal the aggregate
market value (determined as of the date of the notice of redemption) of the
number of shares of Common Stock into which the Series A Preferred Stock is
then convertible divided by the then current Conversion Price.
Upon any redemption of Series A Preferred Stock, the Company shall pay
any accrued and unpaid dividends in arrears for any full Dividend Period ending
on or prior to the Call Date. If the Call Date falls after a dividend payment
record date and prior to the corresponding Dividend Payment Date, then each
holder of Series A Preferred Stock at the close of business on such dividend
payment record date shall be entitled to the dividend payable on such shares on
the corresponding Dividend Payment Date. Except as provided above, the Company
shall make no payment or allowance for unpaid dividends, whether or not in
arrears, on shares of Series A Preferred Stock called for redemption or on the
shares of Common Stock issued upon such redemption.
(d) If full cumulative dividends on the Series A Preferred Stock
and any other class or series of Parity Stock of the Company have not been paid
or declared and set apart for payment, the Series A Preferred Stock may not be
redeemed in part and the Company may not purchase or acquire shares of Series A
Preferred Stock, otherwise than pursuant to a purchase or exchange offer made
on the same terms to all holders of shares of Series A Preferred Stock.
6
<PAGE> 39
(e) If the Company shall redeem shares of Series A Preferred Stock
pursuant to paragraph (a) of this Section 5, notice of such redemption shall be
given not more than four Business Days after the date on which the Corporation
issues the Press Release to each holder of record of the shares to be redeemed.
Such notice shall be provided by first class mail, postage prepaid, at such
holder's address as the same appears on the stock records of the Company, or by
publication in THE WALL STREET JOURNAL or THE NEW YORK TIMES, or if neither
such newspaper is then being published, any other daily newspaper of national
circulation. If the Company elects to provide such notice of publication, it
shall also promptly mail notice of such redemption to the holders of the Series
A Preferred Stock to be redeemed. Neither the failure to mail any notice
required by this paragraph (e), nor any defect therein or in the mailing
thereof, to any particular holder, shall affect the sufficiency of the notice
or the validity of the proceedings for redemption with respect to the other
holders. Any notice which was mailed in the manner herein provided shall be
conclusively presumed to have been duly given on the date mailed whether or not
the holder receives the notice. Each such mailed or published notice shall
state, as appropriate: (1) the Call Date: (2) the number of shares of Series A
Preferred Stock to be redeemed and, if fewer than all the shares held by such
holder are to be redeemed, the number of such shares to be redeemed from such
holder; (3) the number of shares of Common Stock to be issued, or the cash
redemption price, as the case may be, with respect to each share of Series A
Preferred Stock; (4) the place or places at which certificates for such shares
are to be surrendered for certificates representing shares of Common Stock; (5)
the then-current Conversion Price; and (6) that dividends on the shares to be
redeemed shall cease to accrue on such Call Date except as otherwise provided
herein. Notice having been published or mailed as aforesaid, from and after
the Call Date (unless the Company shall fail to make available a number of
shares of Common Stock or amount of cash necessary to effect such redemption),
(i) except as otherwise provided herein, dividends on the shares of the Series
A Preferred Stock so called for redemption shall cease to accrue, (ii) said
shares shall no longer be deemed to be outstanding, and (iii) all rights of the
holders thereof as holders of Series A Preferred Stock of the Company shall
cease (except the rights to receive the shares of Common Stock and cash payable
upon such redemption, without interest thereon, upon surrender and endorsement
of their certificates if so required to receive any dividends payable thereon).
The Company's obligation to provide shares of Common Stock and cash in
accordance with the preceding sentence shall be deemed fulfilled if, on or
before the Call Date, the Corporation shall deposit with a bank or trust
company (which may be an affiliate of the Company) that has an office in the
Borough of Manhattan, City of New York and that has, or is an affiliate of a
bank or trust company that has, a capital and surplus of at least $50,000,000,
shares of Common Stock and/or any cash necessary for such redemption, in trust,
with irrevocable instructions that such shares of Common Stock and/or cash be
applied to the redemption of the shares of Series A Preferred Stock so called
for redemption. At the close of business on the Call Date, each holder of
Series A Preferred Stock to be redeemed pursuant to Section 5(c)(i) (unless the
Company defaults in the delivery of the shares of Common Stock or cash payable
on such Call Date) shall be deemed to be the record holder of the number of
shares of Common Stock into which such Series A Preferred Stock is to be
redeemed, regardless of whether such holder has surrendered the certificates
representing the Series A Preferred Stock. No interest shall accrue for the
benefit of the holders of Series A Preferred Stock to be redeemed on any cash
so set aside by the Company. Subject to applicable escheat laws, any such cash
unclaimed at the end of two years from the Call Date shall
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revert to the general funds of the Company, after which reversion the holders
of such shares so called for redemption shall look only to the general funds of
the Company for the payment of such cash.
As promptly as practicable after the surrender in accordance with said
notice of the certificates for any such shares so redeemed (properly endorsed
or assigned for transfer, if the Company shall so require and if the notice
shall so state), such shares shall be exchanged for certificates of shares of
Common Stock and any cash (without interest thereon) for which such shares have
been redeemed. If fewer than all the outstanding shares of Series A Preferred
Stock are to be redeemed, shares to be redeemed shall be selected by the
Company from outstanding shares of Series A Preferred Stock not previously
called for redemption by lot or pro rata (as nearly as may be) or by any other
method determine by the Company in its sole discretion to be equitable. If
fewer than all the shares of Series A Preferred Stock represented by any
certificate are redeemed, then new certificates representing the unredeemed
shares shall be issued without cost to the holder thereof.
(f) No fractional shares or scrip representing fractions of shares
of Common Stock shall be issued upon redemption of the Series A Preferred
Stock. Instead of any fractional interest in a share of Common Stock that
would otherwise be deliverable upon the redemption of a share of Series A
Preferred Stock, the Company shall pay to the holder of such share an amount in
cash (computed to the nearest cent) based upon the Current Market Price of
Common Stock on the Trading Day immediately preceding the Call Date. If more
than one share shall be surrendered for redemption at one time by the same
holder, the number of full shares of Common Stock issuable, or cash paid, upon
redemption thereof shall be computed on the basis of the aggregate number of
shares of Series A Preferred Stock so surrendered.
(g) The Company covenants that any shares of Common Stock issued
upon redemption of the Series A Preferred Stock shall be validly issued, fully
paid and non-assessable. The Company shall endeavor to list the shares of
Common Stock required to be delivered upon redemption to the Series A Preferred
Stock, prior to such redemption, upon each national securities exchange, if
any, upon which the outstanding Common Stock is listed at the time of such
delivery.
The Company shall endeavor to take any action necessary to ensure that
any shares of Common Stock issued upon the redemption of Series A Preferred
Stock are freely transferable and not subject to any resale restrictions under
the Securities Act of 1933, as amended (the "Act"), of any applicable state
securities or blue sky laws (other than any shares of Common Stock issued upon
redemption of any Series A Preferred Stock which are held by an "affiliate" (as
defined in Rule 144 under the Act) of the Company). Notwithstanding the
foregoing limitations, the Company may at any time acquire shares of its
capital stock, without regard to rank, for the purpose of preserving its status
as a REIT.
Section 6. SHARES TO BE RETIRED.
All shares of Series A Preferred Stock which shall have been issued
and reacquired in any manner by the Company shall be restored to the status of
authorized but unissued shares of Preferred Stock, without designation as to
series. The Company may also retire any unissued shares of
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Series A Preferred Stock, and such shares shall then be restored to the status
of authorized but unissued shares of Preferred Stock, without designation as to
series.
Section 7. CONVERSION.
Holders of shares of Series A Preferred Stock shall have the right to
convert all or a portion of such shares in to shares of Common Stock, as
follows:
(a) Subject to and upon compliance with the provisions of this
Section 7, a holder of shares of Series A Preferred Stock shall have the right,
at his or her option, at any time to convert such shares into the number of
fully paid and non-assessable shares of Common Stock obtained by dividing the
aggregate liquidation preference (excluding any accrued and unpaid dividends)
of such shares by the Conversion Price (as in effect at the time and on the
date provided for in the last paragraph or paragraph (b) of this Section 7) by
surrendering such shares to be converted, such surrender to be made in the
manner provided in Section 7, paragraph (b); PROVIDED, HOWEVER, that the right
to convert shares called for redemption pursuant to Section 5 shall terminate
at the close of business on the Call Date fixed for such redemption, unless the
Company shall default in making payment of the shares of Common Stock and any
cash payable upon such redemption under Section 5 hereof.
(b) In order to exercise the conversion right, the holder of each
share of Series A Preferred Stock to be converted shall surrender the
certificate representing such share, duly endorsed or assigned to the Company
or in blank, at the office of the Transfer Agent; accompanied by written notice
to the Company that the holder thereof elects to convert such Series A
Preferred Stock. Unless the shares issuable on conversion are to be issued in
the same name as the name in which such share of Series A Preferred Stock is
registered, each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Company, duly executed by
the holder or such holder's duly authorized attorney and an amount sufficient
to pay any transfer or similar tax (or evidence reasonably satisfactory to the
Company demonstrating that such taxes have been paid).
Holders of shares of Series A Preferred Stock at the close of business
on a dividend payment record date shall be entitled to receive the dividend
payable on such shares on the corresponding Dividend Payment Date
notwithstanding the conversion thereof following such dividend payment record
date and prior to such Dividend Payment date. However, shares of Series A
Preferred Stock surrendered for conversion during the period between the close
of business on any dividend payment record date and the opening of business on
the corresponding Dividend Payment Date (except shares converted after the
issuance of notice of redemption with respect to a Call Date during such
period, such shares of Series A Preferred Stock being entitled to such dividend
on the Dividend Payment Date) must be accompanied by a payment of an amount
equal to the dividend payable on such shares on such Dividend Payment Date. A
holder of shares of Series A Preferred Stock on a dividend payment record date
who (or whose transferee) tenders any such shares for conversion into shares of
Common Stock on such Dividend Payment Date will receive the dividend payable by
the Company on such shares of Series A Preferred Stock on such date, and the
converting holder need not include
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<PAGE> 42
payment of the amount of such dividend upon surrender of shares of Series A
Preferred Stock for conversion. Except as provided above, the Company shall
make no payment or allowance for unpaid dividends, whether or not in arrears,
on converted shares or for dividends on the shares of Common Stock issued upon
such conversion.
As promptly as practicable after the surrender of certificates for
shares of Series A Preferred Stock as aforesaid, the Company shall issue and
shall deliver at such office to such holder, or on his or her written order, a
certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of such shares in accordance with provisions of
this Section 7, and any factional interest in respect of a share of Common
Stock arising upon such conversion shall be settled as provided in paragraph
(c) of this Section 7.
Each conversion shall be deemed to have been effected immediately
prior to the close of business on the date on which certificates for shares of
Series A Preferred Stock shall have been surrendered and such notice (and if
applicable, payment of an amount equal to the dividend payable on such shares)
received by the Company as aforesaid, and the person or persons in whose name
or names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby at such time on such date
and such conversion shall be at the Conversion Price in effect at such time on
such date unless the stock transfer books of the Company shall be closed on
that date, in which event such person or persons shall be deemed to have become
holder or holders of record at the close of business on the next succeeding day
on which such stock transfer books are open, but such conversion shall be at
the Conversion Price in effect on the date on which such shares shall have been
surrendered and such notice received by the Company.
(c) No fractional shares of scrip representing of shares of Common
Stock shall be issued upon conversion of the Shares A Preferred Stock. Instead
of any fractional interest in a share of Common Stock that would otherwise be
deliverable upon the conversion of a share of Series A Preferred Stock, the
Company shall pay to the holder of such share an amount in cash based upon the
Current Market Price of Common Stock on the Trading Day immediately preceding
the date of conversion. If more than one share shall be surrendered for
conversion at one time by the same holder, the number of full shares of Common
Stock issuable upon conversion thereof shall be computed on the basis of the
aggregate number of shares of Series A Preferred Stock so surrendered.
(d) The Conversion Price shall be adjusted from time to time as
follows:
(i) If the Company shall after the Issue Date (A) pay a
dividend or make a distribution of its capital stock in shares of its Common
Stock, (B) subdivide its outstanding Common Stock into a greater number of
shares, (C) combine its outstanding Common Stock into a smaller number of
shares or (D) issue any shares of capital stock by reclassification of its
Common Stock, the Conversion Price in effect at the opening of business on the
following day following the date fixed for the determination of stockholders
entitled to receive such dividend or distribution or at the opening of business
on the day following the day on which such subdivision, combination or
reclassification becomes effective, as the case may be, shall be adjusted so
that the holder of any share
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of Series A Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock that such holder would
have owned or have been entitled to receive after the happening of any of the
events described above had such shares of Series A Preferred Stock been
converted immediately prior to the record date in the case of a dividend or
distribution or the effective date in the case of a subdivision, combination or
reclassification. An adjustment made pursuant to this subparagraph (i) shall
become effective immediately after the opening of business on the day next
following the record date (except as provided in paragraph (h) below) in the
case of a dividend or distribution and shall become effective immediately after
the opening of business on the day next following the effective date in the
case of a subdivision, combination or reclassification.
(ii) If the Company shall, after the Issue Date, issue
rights, options or warrants to all holders of Common Stock entitling them (for
a period expiring within 45 days after the record date mentioned below) to
subscribe for or purchase Common Stock at a price per share less than the Fair
Market Value per share of Common Stock on the record date for the determination
of stockholders entitled to receive such rights or warrants, then the
Conversion Price in effect at the opening of business on the day next following
such record date shall be adjusted to equal the price determined by multiplying
(I) the Conversion Price in effect immediately prior to the opening of business
on the day following the date fixed for such determination by (II) a fraction,
the numerator of which shall be the sums of (A) the number of shares of Common
Stock outstanding on the close of business on the date fixed for such
determination and (B) the number of shares that the aggregate proceeds to the
Company from the exercise of such rights or warrants for Common Stock would
purchase at such Fair Market Value, and the denominator of which shall be the
sums of (A) the number of Shares of Common Stock outstanding on the close of
business on the date fixed for such determination and (B) on the number of
additional shares of Common Stock offered for subscription or purchase pursuant
to such rights or warrants. Such adjustment shall become effective immediately
after the opening of business on the day next following such record date
(except as provided in paragraph (h) below). In determining whether any rights
or warrants entitle the holders of Common Stock to subscribe for or purchase
shares of Common Stock at less than such Fair Market Value, there shall be
taken into account any consideration received by the Company upon issuance and
upon exercise of such rights warrants, the value of such consideration, if
other than cash, to be determined by the Chief Executive Officer or the Board
of Directors.
(iii) If the Company shall distribute to all holders of its
Common Stock any shares of capital stock of the Company (other than Common
Stock) or evidence of its indebtedness or assets (excluding Permitted Common
Stock Cash Distributions) or rights warrants to subscribe for or purchase any
of its securities (excluding those rights and warrants issued to all holders of
Common Stock entitling them for a period expiring within 45 days after the
record date referred to in subparagraph (ii) above to subscribe for or purchase
Common Stock, which rights and warrants are referred to in and treated under
subparagraph (ii) above) (any of the foregoing being hereinafter in this
subparagraph (iii) called the "Securities"), then in each such case the
Conversion Price shall be adjusted so that it shall equal the price determined
by multiplying (I) the Conversion Price in effect immediately prior to the
close of business on the date fixed for the determination of stockholders
entitled to receive such distribution by (II) a fraction, the numerator of
which shall be the Fair Market Value per share of the Common Stock on the
record date mentioned below less the then fair market
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value (as determined by the Chief Executive Officer or the Board of Directors,
whose determination shall be conclusive), of the portion of the capital stock
or assets or evidences of indebtedness so distributed or of such rights or
warrants applicable to one share of Common Stock, and the denominator of which
shall be the Fair Market Value per share of the Common Stock on the record date
mentioned below. Such adjustment shall become effective immediately at the
opening of business on the Business Day next following (except as provided in
paragraph (h) below) the record date for the determination of shareholders
entitled to receive such distribution. For the purposes of this clause (iii),
the distribution of a Security, which is distributed not only to the holders of
the Common Stock on the date fixed for the determination of stockholders
entitled to such distribution of such Security, but also is distributed with
each share of Common Stock delivered to a Person converting a share of Series A
Preferred Stock after such determination date, shall not require an adjustment
of the Conversion Price pursuant to this clause (iii); PROVIDED that on the
date, if any, on which a person converting a share of Series A Preferred Stock
would no longer be entitled to receive such Security with a share of Common
Stock (other than as a result of the termination of all such Securities), a
distribution of such Securities shall be deemed to have occurred and the
Conversion Price shall be adjusted ass provided in this clause (iii) and such
day shall be deemed to be "the date fixed for the determination of the
stockholders entitled to receive such distribution" and "the record date"
within the meaning of the two preceding sentences.
(iv) No adjustment in the Conversion Price shall be
required unless such adjustment would require a cumulative increase or decrease
of at least 1% in such; PROVIDED, HOWEVER, that any adjustments that by reason
of this subparagraph (iv) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment until made; and PROVIDED,
FURTHER, that any adjustment shall be required and made in accordance with the
provisions of this Section 7 (other than this subparagraph (iv) not later than
such time as may be required in order to preserve the tax-free nature of a
distribution to the holders of shares of Common Stock. Notwithstanding any
other provisions of this Section 7, the Company shall not be required to make
any adjustment of the Conversion Price for the issuance of any shares of Common
Stock pursuant to any plan providing for the reinvestment of dividends or
interest payable on securities of the Company and the investment of additional
optional amounts in shares of Common Stock under such plan. All calculations
under this Section 7 shall be made to the nearest cent (with $.005 being
rounded upward) or to the nearest one-tenth of a share (with .05 of a share
being rounded upward), as the case may be. Anything in this paragraph (d) to
the contrary notwithstanding, the Company shall be entitled, to the extent
permitted by law, to make such reductions in the Conversion Price, in addition
to those required by this paragraph (d), as it in its discretion shall
determine to be advisable in order that any stock dividends, subdivision of
shares, reclassification or combination of shares, distribution of rights or
warrants to purchase stock or securities, or a distribution or other assets
(other than cash dividends) hereafter made by the Company to its stockholders
shall not be taxable, or if that is not possible, to diminish any income taxes
that are otherwise payable because of such event.
(e) If the Company shall be a party to any transaction (including
without limitation a merger, consolidation, statutory share exchange, self
tender offer for all or substantially all shares of Common Stock, sale of all
or substantially all of the Company's assets or recapitalization of the
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<PAGE> 45
Common Stock and excluding any transaction as to which subparagraph (d)(i) of
this Section 7 applies) (each of the foregoing being referred to herein as a
"Transaction"), in each case as a result of which shares of Common Stock shall
be converted into the right to receive stock, securities or other property
(including cash or any combination thereof), each share of Series A Preferred
Stock which is not converted into the right to receive stock, securities or
other property in connection with such Transaction shall thereafter be
convertible into the kind and amount of shares of stock, securities and other
property (including cash or any combination thereof) receivables upon the
consummation of such Transaction by a holder of that number of shares of Common
Stock into which one share of Series A Preferred Stock was convertible
immediately prior to such Transaction, assuming such holder of Common Stock (i)
is not a Person with which the Company consolidated or into which the Company
merged or which merged into the Company or to which such sale or transfer was
made, as the case may be ("Constituent Person"), or an affiliate of a
Constituent Person and (ii) failed to exercise his rights of election, if any,
as to the kind of amount of stock, securities and other property (including
cash) receivable upon such Transaction (provided that if the kind or amount of
stock, securities and other property (including cash) receivable upon such
Transaction is not the same for each share of Common Stock of the Company held
immediately prior to such Transaction by other than a Constituent Person or an
affiliate thereof and in respect of which such rights of election shall not
have been exercised ("Non-Electing Share"), then for the purpose of this
paragraph (e) the kind and amount of stock, securities and other property
(including cash) receivable upon such Transaction by each Non-electing Share
shall be deemed to be the kind and amount so receivable per share by a
plurality of the non-election shares). The Company shall not be a party to any
Transaction unless the terms of such Transaction are consistent with the
provisions of this paragraph (e), and it shall not consent or agree to the
occurrence of any Transaction until the Company has entered into an agreement
with the successor or purchasing entity, as the case may be, for the benefit of
the holders of the Series A Preferred Stock that will contain provisions
enabling the holders of the Series A Preferred Stock that remains outstanding
after such Transaction to convert into the consideration received by holders of
Common Stock at the Conversion Price in effect immediately prior to such
Transaction. The provisions of the paragraph (e) shall similarly apply to
successive Transactions.
(f) If:
(i) the Company shall declare a dividend (or any other
distribution) on the Common Stock (other than Permitted Common Stock Cash
Distributions); or
(ii) the Company shall authorize the granting to the
holders of the Common Stock of rights or warrants to subscribe for or purchase
any shares of any class or any other rights or warrants; or
(iii) there shall be any reclassification of the Common
Stock (other than any event to which subparagraph (d)(i) of this Section 7
applies) or any consolidation or merger to which the Company is a party and for
which approval of any stockholders of the Company is required, or a statutory
share exchange, or self tender offer by the Company for all or substantially
all of its outstanding shares of Common Stock or the sale or transfer of all
substantially all of the assets of the Company as an entity; or
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<PAGE> 46
(iv) there shall occur the involuntary liquidation,
dissolution or winding up of the Company,
then the Company shall cause to be filed with the Transfer Agent and shall
cause to be mailed to the holders of shares of the Service A Preferred Stock at
their addresses as shown on the stock records of the Company, as promptly as
possible, but at least 15 days prior to the applicable date hereinafter
specified, a notice stating (A) the date on which a record is to be taken for
the purpose of such dividend, distribution or rights or warrants, or, if a
record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution or rights or warrants are
to be determined or (B) the date on which such reclassification, consolidation,
merger, statutory share exchange, sale, transfer, liquidation, dissolution or
winding up is expected to become effective, and the date as of which it is
expected that holders of Common Stock record shall be entitled to exchange
their shares of Common Stock for securities or other property, if any,
deliverable upon such reclassification, consolidation, merger, statutory share
exchange, sale, transfer, liquidation, dissolution or winding up. Failure to
give or receive such notice of any defect therein shall not affect the legality
or validity of the proceedings described in this Section 7.
(g) Whenever the Conversion Price is adjusted as herein provided,
the Company shall promptly file with the Transfer Agent an officer's
certificate setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment which
certificate shall be conclusive evidence of the correctness of such adjustment
absent manifest error. Promptly after delivery of such certificate, the
Company shall prepare a notice of such adjustment of the Conversion Price
setting forth the adjusted Conversion Price and the effective date of such
adjustment becomes effective and shall mail such notice of such adjustment of
the Conversion Price to the holder of each share of Series A Preferred Stock at
such holder's last address as shown on the stock records of the Company.
(h) In any case in which paragraph (d) of this Section 7 provides
that an adjustment shall become effective on the day next following the record
date for an event, the Company may defer until the occurrence of such event (A)
issuing to the holder of any share of Series A Preferred Stock converted after
such record date and before the occurrence of such event the additional shares
of Common Stock issuable upon such conversion by reason of the adjustment
required by such event over and above the Common Stock issuable upon such
conversion before giving effect to such adjustment and (B) paying to such
holder any amount of cash in lieu of any fraction pursuant to paragraph (c) of
this Section 7.
(i) There shall be no adjustment of the Conversion Price in case
of the issuance of any stock of the Company in a reorganization, acquisition or
other similar transaction except as specifically set forth in this Section 7.
If any action or transaction would require adjustment of the Conversion Price
pursuant to more than one paragraph of this Section 7, only one adjustment
shall be made and such adjustment shall be the amount of adjustment that has
the highest absolute value.
(j) If the Company shall take any action affecting the Common
Stock, other than action described in this Section 7, that in the opinion of
the Board of Directors would materially adversely
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<PAGE> 47
affect the conversion rights of the holders of the shares of Series A Preferred
Stock, the Conversion Price for the Series A Preferred Stock may be adjusted,
to the extent permitted by law, in such manner, if any, and at such time, as
the Board of Directors, in its sole discretion, may determine to be equitable
in the circumstances.
(k) The Company covenants that it will at all times reserve and
keep available, free form preemptive rights, out the aggregate of its
authorized but unissued shares of Common Stock for the purpose of effecting
conversion of the Series A Preferred Stock, the full number of shares of Common
Stock deliverable upon the conversion of all outstanding shares of Series A
Preferred Stock not theretofore converted. For purposes of this paragraph (k),
the number of shares of Common Stock shall be deliverable upon the conversion
of all outstanding shares of Series A Preferred Stock shall be computed as if
at the time of computation all such outstanding shares were held by a single
holder.
The Company covenants that any shares of Common Stock issued upon the
conversion of the Series A Preferred Stock shall be validly issued, fully paid
and non-assessable.
The Company shall endeavor to list the shares of Common Stock required
to be delivered upon conversion of the Series A Preferred Stock, prior to such
delivery, upon each national securities exchange, if any, upon which the
outstanding Common Stock is listed at the time of such delivery.
Prior to the delivery of any securities that the Company shall be
obligated to deliver upon conversion of the Series A Preferred Stock, the
Company shall endeavor to comply with all federal and state laws and
regulations thereunder requiring the registration of such securities with, or
any approval of or consent to the delivery thereof, by any governmental
authority.
(l) The Company will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares
of Common Stock or other securities or property on conversion of the Series A
Preferred Stock pursuant hereto; PROVIDED, HOWEVER, that the Company shall not
be required to pay any tax that may be payable in respect of any transfer
involved in the issue or delivery of shares of Common Stock or other securities
or property in a name other than that of the holder of the Series A Preferred
Stock to be converted, and no such issue or delivery shall be made unless and
until the person requesting such issue or delivery has paid to the Company the
amount of any such tax or established, to the reasonable satisfaction of the
Company, that such tax has been paid.
Section 8. RANKING. Any class or series of stock of the Company
shall be deemed to rank:
(a) prior to the Series A Preferred Stock, as to the payment of
dividends and as to distribution of assets upon liquidation, dissolution or
winding up, if the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in preference or priority to the holders of
Series A Preferred Stock;
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(b) on a parity with the Series A Preferred Stock, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, whether or not the dividend rates, dividend payment
dates or redemption or liquidation prices per share thereof be different from
those of the Series A Preferred Stock, if the holders of such class of stock or
series and the Series A Preferred Stock shall be entitled to the receipt of
dividends and of amounts distributable upon liquidation, dissolution or winding
up in proportion to their respective amounts of accrued and unpaid dividends
per share or liquidation preferences, without preference or priority one over
the other ("Parity Stock"); the Series A Preferred Stock and the Series B
Preferred Stock shall be Parity Stock with respect to the Series A Preferred
Stock; and
(c) junior to the Series A Preferred Stock, as to the payment of
dividends or as to the distribution of assets upon liquidation, dissolution or
winding up, if such stock or series shall be Common Stock or if the holders of
Series A Preferred Stock shall be entitled to receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as the case
may be, in preference or priority to the holders of shares of such stock or
series.
Section 9. VOTING.
(a) If and whenever six quarterly dividends (whether or not
consecutive) payable on the Series A Preferred Stock or any series or class of
Parity Stock shall be in arrears (which shall, with respect to any such
quarterly dividend, mean that any such dividend has not been paid in full),
whether or not earned or declared, the number of directors then constituting
the Board of Directors shall be increased by two (if not already increased by
reason of a similar arrearage with respect to any Parity Stock) and the holders
of shares of Series A Preferred Stock, together with the holders of shares of
every other series of Parity Stock (any such other series, the "Voting
Preferred Stock"), voting as a single class regardless of series, shall be
entitled to elect the two additional directors to serve on the Board of
Directors at any annual meeting of stockholders or special meeting held in
place thereof, or at a special meeting of the holders of the Series A Preferred
Stock and the Voting Preferred Stock called as hereinafter provided. Whenever
all arrears in dividends on the Series A Preferred Stock and the Voting
Preferred Stock then outstanding shall have been paid and dividends thereon for
the current quarterly dividend period shall have been paid or declared and set
apart for payment, then the right of the holders of the Series A Preferred
Stock and the Voting Preferred Stock to elect such additional two directors
shall cease (but subject always to the same provision for the vesting of such
voting rights in the case of any similar future arrearages in six quarterly
dividends), and the terms of office of all persons elected as directors by the
holders of the Series A Preferred Stock and the Voting Preferred Stock shall
forthwith terminate and the number of the Board of Directors shall be reduced
accordingly. At any time after such voting power shall have been so vested in
the holders of shares of Series A Preferred Stock and the Voting Preferred
Stock, the secretary of the Company may, and upon the written request of any
holder of Series A Preferred Stock (addressed to the secretary at the principal
office of the corporation) shall, call a special meeting of the holders of the
Series A Preferred Stock and of the Voting Preferred Stock for the election of
the two directors to be elected by them as herein provided, such call to be
made by notice similar to that provided in the Bylaws of the Company for a
special meeting of the stockholders or as required by law. If any such special
meeting required to be called as above provided shall not be called by the
16
<PAGE> 49
secretary within 20 days after receipt of any such request, then any holder of
shares of Series A Preferred Stock may call such meeting, upon the notice above
provided, and for that purpose shall have access to the stock books of the
Company. The directors elected at any such special meeting shall hold office
until the next annual meeting of the stockholders or special meeting held in
lieu thereof if such office shall not have previously terminated as above
provided. If any vacancy shall occur among the directors elected by the
holders of the Series A Preferred Stock and the Voting Preferred Stock, a
successor shall be elected by the Board of Directors, upon the nomination of
the then- remaining director elected by the holders of the Series A Preferred
Stock and the Voting Preferred Stock or the successor of such remaining
director, to serve until the next annual meeting of the stockholders or special
meeting held in place thereof if such office shall not have previously
terminated as provided above.
(b) So long as any shares of Series A Preferred Stock are
outstanding, in addition to any other vote or consent of stockholders required
by law or by the Charter, as amended, the affirmative vote of at least 66 2/3%
of the votes entitled to be cast by the holders of the shares of Series A
Preferred Stock and the Voting Preferred Stock, at the time outstanding, acting
as a single class regardless of series, at any meeting called for the purpose,
shall be necessary for effecting or validation:
(i) Any amendment, alteration or repeal of any of the
provisions of these Articles Supplementary that materially adversely affects
the voting powers, rights or preferences of the holders of the Series A
Preferred Stock or the Voting Preferred Stock; PROVIDED, HOWEVER, that the
amendment of the provisions of the Charter so as to authorize or create, or to
increase the authorized amount, of any Junior Stock or any shares of any class
ranking on a parity with the Series A Preferred Stock or the Voting Preferred
Stock shall not be deemed to materially adversely affect the voting powers,
rights or preferences of the holders of Series A Preferred Stock, and PROVIDED,
FURTHER, that if any such amendment, alteration or repeal would materially
adversely affect any voting powers, rights of preferences of the Series A
Preferred Stock or another series of Voting Preferred Stock that are not
enjoyed by some or all of the other series which otherwise would be entitled to
vote in accordance herewith, the affirmative vote of least 66 2/3% of the votes
entitled to be cast by holders of all series similarly affected, similarly
given, shall be required in lieu of the affirmative vote of at least 66 2/3% of
the votes entitled to be cast by the holders of the shares of Series A
Preferred Stock and the Voting Preferred Stock which otherwise would be
entitled to vote in accordance herewith; or
(ii) The authorization or creation of, or the increase in
the authorized amount of, any shares of any class or any security convertible
into shares of any class ranking prior to the Series A Preferred Stock in the
distribution of assets on any liquidation, dissolution or winding up of the
Company or in the payment of dividends; PROVIDED, HOWEVER, that no such vote of
the holders of Series A Preferred Stock shall be required if, at or prior to
the time when such amendment, alteration or repeal is to take effect, or when
the issuance of any such prior shares of convertible security is to be made, as
the case may be, provision is made for the redemption of all shares of Series A
Preferred Stock at the time outstanding.
17
<PAGE> 50
For purposes of the foregoing provisions of this Section 9, each share
of Series A Preferred Stock shall have one (1) vote per share, except that when
any other series of preferred stock shall have the right to vote with the
Series A Preferred Stock as a single class on any matter, then the Series A
Preferred Stock and such other series shall have with respect to such matters
one (1) vote per $25.00 of stated liquidation preference. Except as otherwise
required by applicable law or as set forth herein, the shares of Series A
Preferred Stock shall not have any relative, participating, optional or other
special voting rights and powers other than as set forth herein, and the
consent of the holders thereof shall not be required for the taking of any
corporate action.
Section 10. RECORD HOLDERS. The Company and the Transfer Agent may
deem and treat the record holder of any shares of Series A Preferred Stock as
the true and lawful owner thereof for all purposes, and neither the Company nor
the Transfer Agent shall be affected by any notice to the contrary.
IN WITNESS WHEREOF, the Company has caused these Articles
Supplementary to be signed in its name and on its behalf on this 30th day of
April, 1996, by its President who acknowledges that these Articles
Supplementary are the act of the Company and that to the best of his knowledge,
information and belief and under penalties for perjury all matters and facts
contained in these Articles Supplementary are true in all material respects.
FELCOR SUITE HOTELS, INC.
By: /s/ THOMAS J. CORCORAN, JR.
---------------------------------
Name: Thomas J. Corcoran, Jr.
----------------------------
Title: President
---------------------------
Attest:
/s/ THOMAS L. WIESE
------------------------------------
Name: Thomas L. Wiese
----------------------------
Title: Secretary
----------------------------
(Corporate Seal)
18
<PAGE> 51
STATE OF MARYLAND
465025
STATE DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: AUGUST 09, 1996
THIS IS TO ADVISE YOU THAT THE ARTICLES OF AMENDMENT FOR
FELCOR SUITE HOTELS, INC.
WERE RECEIVED AND APPROVED FOR RECORD ON AUGUST 9, 1996 AT 10:10 AM.
FEE PAID: 50.00
[SEAL]
HARRY J. NOONAN
CHARTER SPECIALIST
<PAGE> 52
ARTICLES OF AMENDMENT
OF
FELCOR SUITE HOTELS, INC.
FelCor Suite Hotels, Inc., a Maryland corporation (the "Corporation"),
certifies as follows:
FIRST: The Corporation desires to amend its Charter as currently in
effect.
SECOND: Article V of the Charter of the Corporation is hereby amended
as set forth below:
(1) the phrase "Except as provided in subsection D.(9) of this
Article V," contained in section D.(2)(b) of Article V shall be
amended to read "Except as provided in subsections D.(9) and D.(12) of
this Article V,"; (2) the phrase "Notwithstanding any other provisions
herein," contained in each of sections D.(2)(c) through D.(2)(f) of
Article V shall be amended to read "Notwithstanding any other
provisions herein, except for subsection D.(12) of this Article V,";
(3) the phrase "Nothing contained in this Article V" contained in
section D.(7) of Article V shall be amended to read "Except for the
provisions of subsection D.(12), nothing contained in this Article V";
and (4) a new section D.(12) shall be added to Article V, providing in
its entirety as follows:
"(12) New York Stock Exchange Transactions.
Nothing in this amended and restated Charter shall prohibit
the settlement of any transaction entered into through the
facilities of the New York Stock Exchange. The immediately
preceding sentence shall not limit the authority of the Board
of Directors to take any and all actions it deems necessary or
advisable to protect the Corporation and the interests of its
stockholders in preserving the Corporation's status as a REIT,
so long as such actions do not prohibit the settlement of any
transactions entered into through the facilities of the New
York Stock Exchange."
THIRD: The amendment of the Corporation's Charter set forth in these
Articles of Amendment was advised by the Board of Directors of the Corporation
and was approved by the shareholders of the Corporation.
<PAGE> 53
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to be executed in its name and on its behalf on the 8th day of
August, 1996, by its Senior Vice President, who acknowledges that these
Articles of Amendment are the act of the Corporation and certifies that, to the
best of his knowledge, information and belief and under penalties for perjury,
all matters and facts contained in these Articles of Amendment are true in all
material respects.
ATTEST: FELCOR SUITE HOTELS, INC.
/s/ THOMAS L. WIESE By: /s/ LAWRENCE D. ROBINSON (SEAL)
- ----------------------------- -----------------------------
Thomas L. Wiese Lawrence D. Robinson
Assistant Secretary Senior Vice President
-2-
<PAGE> 54
STATE OF MARYLAND
544239
STATE DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: JUNE 24, 1997
THIS IS TO ADVISE YOU THAT THE ARTICLES OF AMENDMENT FOR
FELCOR SUITE HOTELS, INC.
WERE RECEIVED AND APPROVED FOR RECORD ON JUNE 24, 1997 AT 10:13 AM.
FEE PAID: 50.00
[SEAL]
JOSEPH V. STEWART
CHARTER SPECIALIST
<PAGE> 55
ARTICLES OF AMENDMENT
OF JUNE 24, 1997
FELCOR SUITE HOTELS INC.
FelCor Suite Hotels, Inc., a Maryland corporation (the "Corporation"),
certifies as follows:
FIRST: The Corporation desires to amend its Charter as currently in effect.
SECOND: Article IX of the Charter of the Corporation is hereby amended as
set forth below:
The following shall be deleted:
ARTICLE IX
Limitation on Indebtedness
The Corporation may not incur or suffer to exist as of the end of any
month Indebtedness (as defined below) in an amount in excess of 40% of the
Corporation's investment in hotel properties, at its cost, after giving
effect to the Corporation's use of proceeds from any Indebtedness. The
Corporation's investment in hotel properties shall include all investments
by the Corporation constituting, evidencing or secured by an interest in
property, whether tangible or intangible and whether real, personal or
mixed, that is used or intended for use in, or in any manner connected
with or relating to, the ownership or leasing of hotels. In determining
its cost of such investments, there shall be included (1) the amount of
all cash paid and the value (as determined by the Board of Directors for
purposes of such investment) of any other property transferred therefor
by the Corporation, (2) the amount of all Indebtedness and other
obligations assumed or incurred by the Corporation or to which the
Corporation takes subject, and (3) the value (as determined by the Board
of Directors for the purposes of such investment) of all equity securities
of which the issuer is an entity that is, or upon such investment will be,
included within the Corporation and which are issued (otherwise than for
cash) to, or retained by, any person other than the Corporation in
connection with such investment. For purposes of the foregoing
restriction, (A) "Indebtedness" of the Corporation shall mean the
consolidated liabilities of the Corporation for borrowed money (including
all notes payable and drafts accepted representing extensions of credit)
and all obligations evidenced by bonds, debentures, notes or similar
instruments on which interest charges are customarily paid, including
obligations under capital leases, and (B) "Corporation" shall mean this
Corporation and any subsidiary entity consolidated therewith, under
generally accepted accounting principals.
<PAGE> 56
THIRD: The amendment of the Corporation's Charter set forth in these
Articles of Amendment was advised by the Board of Directors of the Corporation
and was approved by the shareholders of the Corporation.
-2-
<PAGE> 57
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be executed in its name and on its behalf on the 16th day of June, 1997, by
its Senior Vice President, who acknowledges that these Articles of Amendment
are the act of the Corporation and certifies that, to the best of his
knowledge, information and belief and under penalties for perjury, all matters
and facts contained in these Articles of Amendment are true in all material
respects.
ATTEST: FELCOR SUITE HOTELS, INC.
/s/ THOMAS L. WIESE By: /s/ LAWRENCE D. ROBINSON (SEAL)
---------------------------- ----------------------------
Thomas L. Wiese Lawrence D. Robinson
Assistant Secretary Senior Vice President
3
<PAGE> 58
STATE OF MARYLAND
581905
STATE DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: NOVEMBER 13, 1997
THIS IS TO ADVISE YOU THAT THE ARTICLES OF AMENDMENT FOR
FELCOR SUITE HOTELS, INC.
WERE RECEIVED AND APPROVED FOR RECORD ON NOVEMBER 10, 1997 AT 7:38 AM.
FEE PAID: 140.00
[SEAL]
JOSEPH V. STEWART
CHARTER SPECIALIST
<PAGE> 59
ARTICLES OF AMENDMENT
TO
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
FELCOR SUITE HOTELS, INC.
The undersigned, on behalf of FelCor Suite Hotels, Inc., a Maryland
corporation, (the "Corporation"), hereby certifies as follows:
FIRST: The Corporation desires to amend its Charter as currently in
effect.
SECOND: Paragraph A of Article V of the Charter of the Corporation is
hereby amended to read in its entirety as follows:
"A. Authorized Shares. The total number of shares of capital stock
that the Corporation shall have authority to issue is One Hundred Ten
Million (110,000,000) shares, consisting of One Hundred Million
(100,000,000) shares of Common Stock, of the par value of One Cent ($0.01)
each, and Ten Million (10,000,000) shares of Preferred Stock, of the par
value of One Cent ($0.01) each, amounting in aggregate par value to One
Million One Hundred Thousand Dollars ($1,100,000.00)."
THIRD: The total number of shares of stock that the Corporation had
authority to issue immediately prior to this amendment is Sixty Million
(60,000,000) shares, consisting of Fifty Million (50,000,000) shares of Common
Stock, par value $.01 per share, and Ten Million Shares (10,000,000) shares of
Preferred Stock, par value $.01 per share, amounting in aggregate par value to
$600,000. The total number of shares of stock that the Corporation has
authority to issue immediately following this amendment is One Hundred and Ten
Million (110,000,000) shares, consisting of One Hundred Million (100,000,000)
shares of Common Stock, par value $.01 per share, and Ten Million Shares
(10,000,000) of Preferred Stock, par value $.01 per share, amounting in
aggregate par value to $1,100,000. The description of each class, including the
preferences,
<PAGE> 60
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption is not
changed by this amendment.
FOURTH: The amendment of the Corporation's Charter set forth in these
Articles of Amendment was advised by the Board of Directors of the Corporation
and was approved by the stockholders of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be executed in its name and on its behalf on the 30th day of October, 1997,
by Lawrence D. Robinson, its Senior Vice President, Secretary and General
Counsel, who acknowledges that these Articles of Amendment are the act of the
Corporation and certifies that, to the best of his knowledge, information and
belief and under penalties for perjury, all matters and facts contained in
these Articles of Amendment are true in all material respects.
ATTEST: FELCOR SUITE HOTELS, INC.
/s/ THOMAS L. WIESE By: /s/ LAWRENCE D. ROBINSON
- ---------------------------- -------------------------
Thomas L. Wiese Lawrence D. Robinson
Assistant Secretary Senior Vice President,
Secretary & General Counsel
-2-
<PAGE> 1
EXHIBIT 10.1.7
SEVENTH AMENDMENT TO
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF FELCOR SUITES LIMITED PARTNERSHIP
This Seventh Amendment to Amended and Restated Agreement of Limited
Partnership of FelCor Suites Limited Partnership is made and entered into
effective as of May 16, 1997, by and among FelCor Suite Hotels, Inc., a
Maryland corporation, as the General Partner ("General Partner"), PMB
Associates, Ltd., a Texas limited partnership ("PMB"), 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 subsequently amended (the "Partnership Agreement"), pursuant to
which they have formed a Delaware limited partnership under the name of "FelCor
Suites Limited Partnership" (the "Partnership").
B. The Partnership, the General Partner and PMB have executed
that certain Partnership Interest Contribution Agreement dated as of March 7,
1997 (the "Contribution Agreement") pursuant to which PMB has agreed to
contribute its general partner interest in Barshop-HII Joint Venture, a Texas
general partnership, in accordance with the terms and conditions set forth
therein, in exchange for 139,286 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 PMB 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. PMB 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 PMB 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 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 PMB had been one of the original partners to execute the Partnership
Agreement.
<PAGE> 2
2. Admission of Additional Partner. In accordance with the
provisions of Section 11.4 of the Partnership Agreement, PMB 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 PMB.
3. Amendment of Exhibit A. Exhibit A to the Partnership
Agreement is hereby amended to reflect the admission of PMB as an Additional
Limited Partner in the Partnership and the issuance of 139,286 Units to PMB
pursuant to the Contribution Agreement.
4. 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 Seventh 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/ LAWRENCE D. ROBINSON
-----------------------------------
Lawrence D. Robinson, Senior Vice
President
ADDITIONAL LIMITED PARTNER:
PMB ASSOCIATES LTD.,
a Texas limited partnership
By: /s/ PHILLIP M. BARSHOP
---------------------------------
Philip M. Barshop, its General
Partner
- 2 -
<PAGE> 3
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/ LAWRENCE D. ROBINSON
----------------------------
Lawrence D. Robinson,
Senior Vice President
- 3 -
<PAGE> 1
EXHIBIT 10.1.8
EIGHTH AMENDMENT TO
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF FELCOR SUITES LIMITED PARTNERSHIP
This Eighth Amendment to Amended and Restated Agreement of Limited
Partnership of FelCor Suites Limited Partnership is made and entered into
effective as of February 6, 1998, by and among FelCor Suite Hotels, Inc., a
Maryland corporation, as the General Partner ("General Partner"),
Columbus/Front Ltd., an Ohio limited partnership ("Columbus"), 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 of "FelCor
Suites Limited Partnership" (the "Partnership").
B. The Partnership, the General Partner and Columbus have
executed that certain Contribution Agreement dated as of February 6, 1998 (the
"Contribution Agreement"), pursuant to which Columbus has agreed to contribute
certain assets in accordance with the terms and conditions set forth therein,
in exchange for 134,360 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 Columbus 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. Columbus 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 Columbus 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 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 Columbus had been one of the original partners to execute
the Partnership Agreement.
<PAGE> 2
2. Admission of Additional Partner. In accordance with the
provisions of Section 11.4 of the Partnership Agreement, Columbus 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 Columbus.
3. Amendment of Exhibit A. Exhibit A to the Partnership
Agreement is hereby amended to reflect the admission of Columbus as an
Additional Limited Partner in the Partnership and the issuance of 134,360 Units
to Columbus pursuant to the Purchase Agreement.
4. 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.
5. Section 704(c) Allocations. General Partner covenants and
agrees to use the traditional method of making Section 704(c) allocations in
accordance with Treasury Regulation 1.704-3 with respect to any property
contributed to the Partnership by Columbus.
6. Capital Account Restoration. Notwithstanding anything in the
Partnership Agreement to the contrary, Columbus shall not be obligated to
restore any negative capital account balance in its Capital Account (as that
term is defined in the Partnership Agreement) pursuant to Section 14.8 of the
Partnership Agreement.
(Signatures on following page.)
- 2 -
<PAGE> 3
IN WITNESS WHEREOF, this Eighth 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/ WILLIAM P. STADLER
----------------------------------
William P. Stadler, Senior Vice
President
ADDITIONAL LIMITED PARTNER:
COLUMBUS/FRONT LTD.,
an Ohio limited partnership
By: CF Associates Ltd., an Ohio
limited partnership, its general
partner
By: Columbus/Front Limited Liability
Company, an Ohio limited
liability company, its general
partner
By: /s/ JAMES V. PICKETT
-------------------------
James V. Pickett, Member
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/ WILLIAM P. STADLER
-----------------------------
William P. Stadler
Senior Vice President
- 3 -
<PAGE> 1
EXHIBIT 10.2.2
SCHEDULE OF EXECUTED LEASE AGREEMENTS
SHOWING MATERIAL VARIATIONS FROM
FORM OF LEASE AGREEMENT
(AS OF DECEMBER 31, 1997)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Annual
Percentage Rent
Hotel Location/Franchise/ ------------------ Suite
- ------------------------- 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>
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 (8) 7/19/95 1,000 17% 65% 1,495
Brunswick, GA -- 7/19/95 1,000 17% 65% 1,350
Chicago-Lombard, IL (9) 8/1/95 1,900 17% 65% 3,270
Burlingame (SF Airport), CA (10) 11/6/95 3,147 17% 65% 3,174
Minneapolis (Airport) MN (10) 11/6/95 2,778 17% 65% 2,138
Minneapolis (Downtown), MN (10) 11/15/95 1,387 17% 65% 2,091
St. Paul, MN (11) 11/15/95 1,085 17% 65% 3,115
Boca Raton, FL (11) (10) 11/15/95 654 17% 65% 1,421
Tampa (Busch Gardens), FL (11) (10) 11/15/95 786 17% 65% 1,287
Cleveland, OH (10) 11/17/95 1,258 17% 65% 4,929
Anaheim, CA (10) 1/3/96 1,272 17% 65% 2,062
Baton Rouge, LA (10) 1/3/96 1,204 17% 65% 2,281
Birmingham, AL (10) 1/3/96 1,898 17% 65% 1,273
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
<CAPTION>
Annual
Percentage Rent
Hotel Location/Franchise/ ------------------ Suite
- ------------------------- 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>
Deerfield Beach, FL (10) 1/3/96 2,163 17% 65% 2,568
Ft. Lauderdale, FL (10) 1/3/96 3,228 17% 65% 1,969
Miami (Airport), FL (10) 1/3/96 2,222 17% 65% 2,882
Milpitas, CA (10) 1/3/96 2,143 17% 65% 1,402
Phoenix (Camelback), AZ (10) 1/3/96 2,812 17% 65% 1,428
South San Francisco (SF Airport), (10) 1/3/96 1,876 17% 65% 3,103
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 (14) 3/27/96 1,600 17% 65% 4,130
Mandalay Beach, CA (10) 5/8/96 1,927 17% 65% 2,909
Napa, CA (10) 5/8/96 1,215 17% 65% 3,145
Deerfield, IL (14) -- (16) 6/20/96 1,743 17% 65% 2,505
San Rafael, CA (18) (16) 7/18/96 2,107 17% 65% 2,917
Parsippany, NJ (19) (16) 7/31/96 2,440 17% 65% 3,930
Charlotte, NC (20) (16) 9/12/96 2,200 17% 65% 3,353
Indianapolis, IN (21) (16) 9/12/96 1,470 17% 65% 2,794
Atlanta (Buckhead), GA -- (16) 10/17/96 3,667 17% 65% 3,872
Myrtle Beach, SC -- (16) 12/5/96 1,963 17% 65% 6,236
San Antonio, TX (22) (17) 2/1/97 1,400 17% 65% 2,474
Raleigh, NC (23) (17) 2/1/97 2,100 17% 65% 2,711
Overland Park, KS (24) (17) 2/1/97 1,600 17% 65% 2,114
Secaucus, NJ (25) (17) 2/1/97 2,400 17% 65% 4,788
Kansas City, MO (26) (17) 2/1/97 2,100 17% 65% 2,976
Covina, CA (27) (17) 2/1/97 900 17% 65% 3,066
Austin, TX (28) (17) 2/1/97 2,200 17% 65% 2,378
Atlanta (Perimeter Center), GA (29) (17) 2/1/97 2,300 17% 65% 2,949
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Annual
Percentage Rent
Hotel Location/Franchise/ ------------------ Suite
- ------------------------- 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 (12) (17) 2/1/97 1,800 17% 65% 2,468
Omaha, NE (12) (17) 2/1/97 1,400 17% 65% 1,703
Los Angeles (LAX North), CA (17) 2/18/97 1,669 17% 65% 3,176
Dana Point, CA (12) (30) 2/20/97 992 17% 65% 2,211 (1997)
1,983 (1988)
Anne Arundel County (31) (30) 3/20/97 (33) 1,900 17% 65% 2,536
(BWI), MD (12)
Troy, MI (12) (32) (30) 3/20/97 (33) 2,100 17% 65% 1,936
Austin, TX (12) (32) (30) 3/20/97 (33) 1,900 17% 65% 1,961
San Antonio, TX (34) (17) 5/16/97 1,773 17% 65% 3,640
Nashville, TN (35) 6/05/97 900 17% 65% 1,585
Dallas (Market Center), TX (17) 6/30/97 2,300 17% 65% 2,896
Syracuse, NY (17) 6/30/97 1,400 17% 65% 3,245
Atlanta (Galleria), GA (33) (37) (36) 6/30/97 2,155 17% 65% 3,777
College Park (Atlanta Airport), (36) 6/30/97 2,426 17% 65% 5,033
GA (33) (40)
Dallas (Park Central), TX (32) (36) 6/30/97 5,091 17% 65% 6,490
(40)
Rosemont (O'Hare Airport), IL (36) 6/30/97 3,522 17% 65% 2,760
(33) (37)
Phoenix (Crescent), AZ (32) (40) (36) 6/30/97 2,908 17% 65% 6,218
Durham, NC (11) (35) 7/28/97 1,700 17% 65% 1,900
Lake Buena Vista, FL (11) (35) 7/28/97 2,900 17% 65% 2,272
Tampa (Rocky Point), FL (11) (35) 7/28/97 1,700 17% 65% 1,939
Philadelphia Society Hill, PA (33) (38) (36) 9/30/97 3,834 17% 65% 5,220
Burlington, VT (40) (2) (39) 12/4/97 2,252 17% 65% 3,181
Dayton, OH (12) (2) (35) 12/30/97 797 17% 65% 1,331
</TABLE>
- --------------------
(1) Unless otherwise noted, the hotels under each Lease Agreement are
operated as Embassy Suites(R) Hotels
-3-
<PAGE> 4
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 Lessee is FCOAM Inc.
(9) The Lessor as defined in this Lease Agreement is Embassy/GACL Lombard
Venture, a joint venture between the Partnership and Promus Hotels,
Inc.
(10) The Lessor as defined in these Lease Agreements is FelCor/CSS
Holdings, L.P., of which the Partnership is a 99% limited partner.
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) The Manager as defined in this Lease Agreement is Coastal Hotel Group,
Inc.
(16) 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.
(17) The Lessee as defined in the Lease Agreement for these hotels is DJONT
Leasing, L.L.C., a Delaware limited liability company.
(18) The Lessor as defined in this Lease Agreement is MHV Joint Venture, a
joint venture between the Partnership and Promus Hotels, Inc.
(19) The Lessor as defined in this Lease Agreement is Embassy/Shaw
Parsippany Venture, a joint venture between the Partnership and Promus
Hotels, Inc.
(20) 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.
-4-
<PAGE> 5
(21) 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.
(22) 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%.
(23) The Lessor as defined in this Lease Agreement is EPT Raleigh Limited
Partnership, of which the Partnership owns 49% and FelCor Eight owns
1%.
(24) 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%.
(25) The Lessor as defined in this Lease Agreement is EPT Meadowlands
Limited Partnership, of which the Partnership owns 49% and FelCor
Eight owns 1%.
(26) 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%.
(27) The Lessor as defined in this Lease Agreement is EPT Covina Limited
Partnership, of which the Partnership owns 49% and FelCor Eight owns
1%.
(28) The Lessor as defined in this Lease Agreement is EPT Austin Limited
Partnership, of which the Partnership owns 49% and FelCor Eight owns
1%.
(29) 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%.
(30) The Lessee as defined in the Lease Agreement for this hotel is FCH/DT
Leasing, L.L.C., a Delaware limited liability company.
(31) The Lessor as defined in the Lease Agreement is FCH/DT BWI Holdings,
L.P., a Delaware limited partnership.
(32) The Lessor as defined in these Lease Agreements is FCH/DT Holdings,
L.P., a Delaware limited partnership.
(33) The Lease is for a term of 15 years and 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.
(34) The Lessor is Promus/FelCor San Antonio Venture, a Texas general
partnership.
(35) The Lessee is FCH/DT Leasing II, L.L.C., a Delaware limited liability
company.
(36) The Lessee is FCH/SH Leasing, L.L.C., a Delaware limited liability
company.
(37) The hotel under this Lease Agreement is operated as a Sheraton Suites
Hotel.
(38) The Lessor is FCH/Society Hill, L.P., a Pennsylvania limited
partnership.
(39) The Lessee is FCH/SH Leasing II, L.L.C., A Delaware limited liability
company.
(40) The hotel under this Lease Agreement is operated as a Sheraton(R)
Hotel.
-5-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF FELCOR SUITE HOTELS, INC.
The following lists all of the subsidiaries of FelCor Suite Hotels, Inc. by
name, state of organization and type of entity:
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY ORGANIZATION TYPE OF ENTITY
------------------ ------------ --------------
<S> <C> <C>
FelCor Suites Limited Partnership Delaware Limited Partnership
FelCor/CSS Hotels, L.L.C. Delaware Limited Liability Company
FelCor/LAX Hotels, L.L.C. Delaware Limited Liability Company
FelCor/CSS Holdings, L.P. Delaware Limited Partnership
FelCor/St. Paul Holdings, L.P. Delaware Limited Partnership
FelCor/LAX Holdings, L.P. Delaware Limited Partnership
Los Angeles International Airport Hotel Texas Limited Partnership
Associates, a Texas limited partnership
Promus/FelCor Lombard Venture Illinois General Partnership
MHV Joint Venture Texas General Partnership
Promus/FelCor Parsippany Venture New Jersey General Partnership
E. S. Charlotte Limited Partnership Minnesota Limited Partnership
E.S. North, an Indiana Limited Partnership Indiana Limited Partnership
Promus/FCH Development Company, L.L.C. Delaware Limited Liability Company
Promus/FCH Condominium Company, L.L.C. Delaware Limited Liability Company
FelCor Eight Hotels, L.L.C. Delaware Limited Liability Company
EPT Atlanta-Perimeter Center Limited Partnership Delaware Limited Partnership
EPT Austin Limited Partnership Delaware Limited Partnership
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY ORGANIZATION TYPE OF ENTITY
------------------ ------------ --------------
<S> <C> <C>
EPT Covina Limited Partnership Delaware Limited Partnership
EPT Kansas City Limited Partnership Delaware Limited Partnership
EPT Meadowlands Limited Partnership Delaware Limited Partnership
EPT Overland Park Limited Partnership Delaware Limited Partnership
EPT Raleigh Limited Partnership Delaware Limited Partnership
EPT San Antonio Limited Partnership Delaware Limited Partnership
FCH/DT Hotels, L.L.C. Delaware Limited Liability Company
FCH/DT Holdings, L.P. Delaware Limited Partnership
FCH/DT BWI Holdings, L.P. Delaware Limited Partnership
Kingston Plantation Development Corp. Delaware Corporation
FCH/PSH, L.P. Pennsylvania Limited Partnership
FelCor/Charlotte Hotel, L.L.C. Delaware Limited Liability Company
FelCor/Indianapolis Hotel, L.L.C. Delaware Limited Liability Company
Promus/FelCor San Antonio Venture Texas General Partnership
Promus/FelCor Hotels, L.L.C. Delaware Limited Liability Company
Promus/FelCor Manager, Inc. Delaware Corporation
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
FelCor Suite Hotels, Inc.
We consent to the incorporation by reference in the registration statements on
Form S-3 (File Nos. 333-25717, 333-04947 and 333-46357) and Form S-4 (File No.
333-39595) and Form S-8 (File No. 333-32579) of (i) our report dated January
20, 1998 on our audits of the consolidated financial statements and financial
statement schedule of FelCor Suite Hotels as of December 31, 1997 and 1996, and
for the years ended December 31, 1997, 1996, 1995, and (ii) our report dated
March 13, 1998 on our audits of the consolidated financial statements of DJONT
Operations, L.L.C. as of December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996, and 1995, which reports are included herein in this
Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 19, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,543
<SECURITIES> 0
<RECEIVABLES> 18,908
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,451
<PP&E> 1,577,164
<DEPRECIATION> 87,400
<TOTAL-ASSETS> 1,673,364
<CURRENT-LIABILITIES> 36,002
<BONDS> 476,819
0
151,250
<COMMON> 378
<OTHER-SE> 967,976
<TOTAL-LIABILITY-AND-EQUITY> 1,673,364
<SALES> 0
<TOTAL-REVENUES> 176,651
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,792
<INCOME-PRETAX> 63,835
<INCOME-TAX> 0
<INCOME-CONTINUING> 63,835
<DISCONTINUED> 0
<EXTRAORDINARY> 185
<CHANGES> 0
<NET-INCOME> 63,650
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.64
</TABLE>
