<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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
------------------- ---------------------
<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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<PAGE> 2
FELCOR SUITE HOTELS, INC.
INDEX
<TABLE>
<CAPTION>
FORM 10-K
REPORT
ITEM NO. PAGE
- -------- ---------
<S> <C>
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters .............................. 3
6. Selected Financial Data ............................................................................ 5
7. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 11
8. Financial Statements and Supplementary Data ........................................................ 21
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............... 21
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................... 22
</TABLE>
2
<PAGE> 3
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>
3
<PAGE> 4
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.
4
<PAGE> 5
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.
5
<PAGE> 6
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>
6
<PAGE> 7
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
7
<PAGE> 8
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.
8
<PAGE> 9
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>
9
<PAGE> 10
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>
10
<PAGE> 11
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 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%
</TABLE>
11
<PAGE> 12
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
acquisition of 90% to 100% interests in 21 hotels during 1997 and 19 hotels in
1996. The 21 hotels acquired in 1997 consist of 11 Doubletree Guest Suites, five
Sheraton, three Embassy Suites and two Sheraton Suites hotels. The 19 hotels
acquired in 1996 consist of 18 Embassy Suites hotels and one Hilton Suites
hotel.
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%.
12
<PAGE> 13
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.
13
<PAGE> 14
The following table details the computation of Funds From
Operations (in thousands):
<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
======== ======== ========
Weighted average common shares and units outstanding (a) ............................ 39,157 29,306 8,989
</TABLE>
(a) Weighted average common shares and units 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>
14
<PAGE> 15
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),
15
<PAGE> 16
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.
16
<PAGE> 17
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.
17
<PAGE> 18
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
18
<PAGE> 19
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
19
<PAGE> 20
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.
THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any computer
program that has date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has recently assessed its internal computer systems and
believes that the current systems used will properly utilize dates beyond
December 31, 1999. The Company has been informed that companies leasing and
managing the hotels owned by it are in the process of studying the Year 2000
issue, including inquiries of their vendors. Upon the completion of these
studies, which is expected in late 1998, the Company will determine the extent
to which it may be vulnerable to third parties' failure to remedy their Year
2000 issues and potential effects of any such failures. The Company estimates
that the expense associated with the Year 2000 issue will not be material to
the Company's business, operations or financial condition.
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.
20
<PAGE> 21
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.
21
<PAGE> 22
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>
22
<PAGE> 23
<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>
23
<PAGE> 24
<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>
24
<PAGE> 25
<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.(1)
27 - Financial Data Schedule.
</TABLE>
(1) Exhibit filed herewith, all other exhibits have been previously filed.
(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.
25
<PAGE> 26
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: May 29, 1998
26
<PAGE> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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)
F-17
<PAGE> 44
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PRO FORMA INFORMATION (UNAUDITED) -- (CONTINUED)
As discussed in Note 1, the Company completed acquisitions of
interests in 23 hotels during 1996 and 30 hotels during 1997 for aggregate
purchase prices of $540.3 million and $658.4 million respectively. The
acquisitions are accounted for using the purchase method and the results
of operations for the hotels acquired are included in the Company's historical
Statements of Operations from the date of acquisition. As such, the historical
results of operations may not be indicative of future results of operations and
net income per common share.
The following unaudited Pro Forma Consolidated Statements of Operations
for the years ended December 31, 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 at the beginning of the periods presented, 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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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:
Departmental Expenses:
Suites ........................................ 111,827 58,953 16,807
Food and beverage.............................. 33,119 15,701 2,723
Other.......................................... 16,250 7,283 1,648
Undistributed Operating Expenses:
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
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
<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> 61
<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.(1)
27 - Financial Data Schedule.
</TABLE>
(1) Exhibit filed herewith, all other exhibits have been previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
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-8 (File
No. 333-32579) of (i) our report dated January 20, 1998, except for Note 14 as
to which the date is February 17, 1998, on our audits of the consolidated
financial statements and financial statement schedule of FelCor Suite Hotels,
Inc. 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/A.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
May 29, 1998
