<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-46357
PROSPECTUS SUPPLEMENT (Subject to Completion, Issued April 24, 1998)
(To Prospectus dated March 3, 1998)
5,000,000 Shares
(FELCOR SUITES HOTELS, INC. LOGO)
DEPOSITARY SHARES
EACH REPRESENTING 1/100 OF A SHARE OF % SERIES B
CUMULATIVE REDEEMABLE PREFERRED STOCK
(Par Value $.01 Per Share)
(Liquidation Preference Equivalent to $25 Per Depositary Share)
------------------------
EACH OF THE 5,000,000 DEPOSITARY SHARES (THE "DEPOSITARY SHARES") OFFERED HEREBY
(THE "OFFERING") REPRESENTS A 1/100 FRACTIONAL INTEREST IN A SHARE OF %
SERIES B CUMULATIVE REDEEMABLE PREFERRED STOCK, PAR VALUE $.01 PER SHARE
(COLLECTIVELY, THE "SERIES B PREFERRED STOCK"), OF FELCOR SUITE HOTELS, INC.
("FELCOR"), DEPOSITED WITH SUNTRUST BANK, ATLANTA, AS DEPOSITARY, AND ENTITLES
THE HOLDER TO ALL PROPORTIONAL RIGHTS AND PREFERENCES OF THE SERIES B PREFERRED
STOCK (INCLUDING DIVIDEND, VOTING, REDEMPTION AND LIQUIDATION RIGHTS AND
PREFERENCES). THE LIQUIDATION PREFERENCE OF EACH SHARE OF SERIES B PREFERRED
STOCK IS $2,500 (EQUIVALENT TO $25 PER DEPOSITARY SHARE). SEE "DESCRIPTION OF
SERIES B PREFERRED STOCK AND DEPOSITARY SHARES."
DIVIDENDS ON THE SERIES B PREFERRED STOCK REPRESENTED BY THE DEPOSITARY SHARES
OFFERED HEREBY WILL BE CUMULATIVE FROM THE DATE OF ORIGINAL ISSUE AND WILL BE
PAYABLE QUARTERLY ON OR ABOUT THE LAST DAY OF JANUARY, APRIL, JULY AND OCTOBER
OF EACH YEAR, COMMENCING ON JULY 31, 1998, AT THE RATE OF % OF THE LIQUIDATION
PREFERENCE PER ANNUM (EQUIVALENT TO $ PER ANNUM PER DEPOSITARY SHARE). SEE
"DESCRIPTION OF SERIES B PREFERRED STOCK AND DEPOSITARY SHARES -- DIVIDENDS."
THE SERIES B PREFERRED STOCK AND THE DEPOSITARY SHARES REPRESENTING SUCH SERIES
B PREFERRED STOCK ARE NOT REDEEMABLE PRIOR TO , 2003. ON AND AFTER
, 2003, THE SERIES B PREFERRED STOCK MAY BE REDEEMED AT THE OPTION OF
FELCOR IN WHOLE OR IN PART, AT A REDEMPTION PRICE OF $2,500 PER SHARE
(EQUIVALENT TO $25 PER DEPOSITARY SHARE), PLUS ACCRUED AND UNPAID DIVIDENDS, IF
ANY, THEREON. THE REDEMPTION PRICE OF THE SERIES B PREFERRED STOCK (OTHER THAN
ANY PORTION THEREOF CONSISTING OF ACCRUED AND UNPAID DIVIDENDS) MAY BE PAID ONLY
FROM THE SALE PROCEEDS OF OTHER CAPITAL STOCK OF FELCOR, WHICH MAY INCLUDE OTHER
CLASSES OR SERIES OF PREFERRED STOCK, AND FROM NO OTHER SOURCE. THE SERIES B
PREFERRED STOCK HAS NO STATED MATURITY AND WILL NOT BE SUBJECT TO ANY SINKING
FUND OR MANDATORY REDEMPTION PROVISIONS AND WILL NOT BE CONVERTIBLE INTO ANY
OTHER SECURITIES OF FELCOR. IN ORDER TO MAINTAIN ITS QUALIFICATION AS A REAL
ESTATE INVESTMENT TRUST ("REIT") FOR FEDERAL INCOME TAX PURPOSES, FELCOR'S
ARTICLES OF AMENDMENT AND RESTATEMENT ("CHARTER") IMPOSE LIMITATIONS ON THE
NUMBER OF SHARES OF CAPITAL STOCK, INCLUDING SERIES B PREFERRED STOCK, THAT MAY
BE OWNED BY ANY SINGLE PERSON OR AFFILIATED GROUP. SEE "CERTAIN CHARTER, BYLAW
AND STATUTORY PROVISIONS -- CHARTER AND BYLAW PROVISIONS -- RESTRICTIONS ON
OWNERSHIP AND TRANSFER" IN THE ACCOMPANYING PROSPECTUS.
------------------------
APPLICATION WILL BE MADE TO LIST THE DEPOSITARY SHARES ON THE NEW YORK STOCK
EXCHANGE. TRADING OF THE DEPOSITARY SHARES
ON THE NEW YORK STOCK EXCHANGE IS EXPECTED TO COMMENCE WITHIN THE 30-DAY PERIOD
AFTER THE
INITIAL DELIVERY OF THE DEPOSITARY SHARES. SEE "UNDERWRITING."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-7 HEREIN AND ON PAGE 5 OF THE
ACCOMPANYING PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS RELATING TO AN
INVESTMENT IN THE DEPOSITARY SHARES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $25 A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC (1) COMMISSIONS (2) COMPANY (1)(3)
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Per Depositary Share.............. $25.00 $ $
Total............................. $125,000,000 $ $
</TABLE>
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(1) Plus accrued dividends, if any, from the date of original issuance.
(2) FelCor has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by FelCor estimated at $125,000.
------------------------
The Depositary Shares are offered, subject to prior sale, when, as and if
accepted by the Underwriters and subject to approval of certain legal matters by
King & Spalding, counsel for the Underwriters. It is expected that delivery of
the Depositary Receipts evidencing the Depositary Shares will be made on or
about , 1998, at the office of Morgan Stanley & Co. Incorporated, New
York, N.Y., against payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
April , 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. NEITHER THIS
PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS SHALL CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE> 2
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY FELCOR OR BY ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITY OTHER THAN THE DEPOSITARY SHARES OFFERED HEREBY,
NOR DO THEY CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
------------------------
TABLE OF CONTENTS
<TABLE>
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PROSPECTUS SUPPLEMENT
PAGE
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Prospectus Supplement Summary..................... S-3
Risk Factors...................................... S-7
Business and Properties........................... S-8
Recent Developments............................... S-9
Use of Proceeds................................... S-13
Capitalization.................................... S-13
Selected Consolidated Pro Forma and Historical
Financial Data.................................. S-14
Description of Series B Preferred Stock and
Depositary Shares............................... S-19
Federal Income Tax Considerations................. S-23
Underwriting...................................... S-28
Legal Matters..................................... S-29
Experts........................................... S-30
Pro Forma Financial Information................... F-1
</TABLE>
<TABLE>
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PROSPECTUS
PAGE
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<S> <C>
Available Information............................. 2
Incorporation of Certain Documents by Reference... 2
The Company....................................... 4
Risk Factors...................................... 5
Use of Proceeds................................... 15
Ratios of Earnings to Fixed Charges............... 15
Distribution Policy............................... 15
Description of Debt Securities.................... 15
Description of Preferred Stock.................... 27
Description of Series A Preferred Stock........... 32
Description of Depositary Shares.................. 37
Description of Common Stock....................... 40
Description of Common Stock Warrants.............. 41
Certain Charter, Bylaw and Statutory Provisions... 42
Partnership Agreement............................. 46
Federal Income Tax Considerations................. 48
Plan of Distribution.............................. 61
Legal Matters..................................... 62
Experts........................................... 62
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEPOSITARY SHARES
OFFERED HEREBY. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE OFFERING AND MAY BID FOR, AND PURCHASE, THE DEPOSITARY SHARES IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein and therein by reference.
THE COMPANY
FelCor is a REIT that, at April 23, 1998, owned interests in 76 hotels with
an aggregate of 18,596 suites and rooms in 28 states (the "FelCor Hotels")
through its 92.7% general partner interest in FelCor Suites Limited Partnership
(the "Operating Partnership"). Fifty-two of the FelCor Hotels are operated as
Embassy Suites(R) hotels (of which 28 were converted from other brands), 14 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),
two are operated as traditional non-suite Doubletree(R) hotels (one of which is
in the process of conversion to the Doubletree brand) and one is operated as a
Hilton Suites(R) hotel. Sixty-six of the FelCor Hotels are managed by
subsidiaries of Promus Hotel Corporation ("Promus") which, following its recent
merger with Doubletree Corporation, includes 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 FelCor Hotels, seven
are managed by a subsidiary of ITT Sheraton Corporation ("Sheraton") and three
are managed by independent management companies. FelCor is the owner of the
largest number of Embassy Suites hotels in the world.
FelCor seeks to increase operating cash flow and enhance stockholder value
through both internal growth and acquisitions. It seeks to acquire, at less than
replacement cost, existing hotels that are underperforming, due to the need for
capital improvements or poor management or franchise affiliation, and to add
value through its active asset management and strategic investment of capital.
FelCor also may add suites at its existing hotels where demand warrants and
expects to acquire 90% interests in four to seven new Embassy Suites hotels to
be developed by Promus and in which Promus will own the remaining interest.
Subject to reaching agreement on specific sites and budgets for development of
these new hotels, the first of these hotels is expected to open in late 1999.
FelCor's internal growth strategy is to utilize its asset management expertise
to improve the quality of its hotels by renovating, upgrading and repositioning,
thereby improving the revenue performance of its hotels, and to participate
through percentage leases in any resulting growth in revenues.
RECENT DEVELOPMENTS
Recent Acquisitions. During the period from January 1, 1998, to April 23,
1998, FelCor acquired three hotels with an aggregate of 596 suites and rooms for
approximately $57.4 million in cash and limited partner units ("Units") in the
Operating Partnership. These three hotels are (i) a 194-suite Doubletree Guest
Suites hotel located in downtown Columbus, Ohio, (ii) a traditional 154-room
upscale full-service hotel with approximately 13,000 sq. ft. of meeting space
located in Wilmington, Delaware which is scheduled to be expanded by
approximately 100 rooms and converted into a Doubletree hotel during 1999, and
(iii) a traditional 248-room upscale full-service Doubletree hotel with
approximately 11,000 sq. ft. of meeting space located in Aurora, Colorado.
Pending Acquisition. FelCor has entered into an agreement to purchase eight
upscale full-service, all-suite hotels from Starwood Hotels & Resorts
("Starwood") for an aggregate cash purchase price of approximately $245 million.
See "Use of Proceeds". These hotels have a total of 1,898 suites and consist of
five Embassy Suites hotels and three Doubletree Guest Suites hotels located in
seven states. Following the acquisition, six of the eight hotels are expected to
be operated as Embassy Suites hotels and be managed by Promus. The two remaining
hotels are expected to be operated as Sheraton Suites hotels and will continue
to be managed by Starwood Hotels & Resorts Worldwide, Inc. FelCor is currently
evaluating a number of other potential hotel acquisition opportunities.
Pending Merger With Bristol. On March 23, 1998, FelCor entered into a
Merger Agreement (the "Merger Agreement") with Bristol Hotel Company ("Bristol")
under which the owned and leased hotel assets of Bristol will be merged with and
into FelCor (the "Merger). As a consequence of the Merger,
S-3
<PAGE> 4
Bristol's stockholders will acquire approximately 44% of the FelCor common stock
outstanding immediately following the Merger and FelCor's board of directors
will be reconstituted. In anticipation of the Merger, Bristol will spin-off (the
"Spin-Off") its hotel operating business as a separate public company named
Bristol Hotels & Resorts ("BHR"). The Bristol hotels acquired in the Merger will
be leased to BHR.
The proposed Merger with Bristol, in addition to being accretive to
FelCor's forecasted funds from operations ("FFO") in each of the years 1998
through 2000, will provide FelCor with a number of perceived advantages, such as
(i) providing FelCor with further diversification into a new segment of the
lodging industry, with a resulting increase in acquisition and growth
opportunities, (ii) making FelCor the owner of the largest number of Holiday
Hospitality branded hotels (including the Crowne Plaza and Holiday Inn brands,
the latter of which is one of the most recognized brand names in America), (iii)
creating a new strategic alliance with BHR, which will be the nation's largest
operator of third party owned and branded hotels, (iv) establishing an
independent third party lessee for the Bristol hotels acquired by FelCor and (v)
enhancing FelCor's critical mass and market presence. In addition, these
perceived benefits may be obtained without impairing or diminishing FelCor's
long-standing relationship with Promus or its more recent relationship with
Sheraton.
Bristol is one of the largest owner/operators of full-service hotels in the
United States, currently operating 101 hotels containing over 29,306 rooms, of
which 89 hotels are owned or leased by Bristol. Bristol's hotels are primarily
full-service hotels that operate in the mid-scale to upscale segments of the
lodging industry. Bristol is the largest franchisee of Holiday Hospitality
Corporation ("Holiday Hospitality") brands of hotels, including Crowne Plaza(R),
Holiday Inns(R) and Holiday Inns Select(R) hotels, and also operates 19 hotels
under other hotel brands, including Hampton Inn(R), Courtyard by Marriott(R) and
Fairfield Inn(R). Bristol's hotels are located in 22 states and Canada, with
hotels concentrated in major metropolitan areas of the South, East, Southwest
and Pacific regions of the United States. For additional information regarding
the hotels to be acquired by FelCor in the Merger, see "Recent
Developments -- Pending Merger with Bristol -- FelCor/Bristol Combined."
Expanded Credit Facility. FelCor has entered into negotiations with its
lenders (i) to increase its existing $550 million unsecured revolving credit
facility up to $1 billion, and (ii) to provide a $200 million unsecured term
loan facility. The purposes of these facilities will be to fund investments in
existing and additional hotel properties, to refinance a portion of the debt
assumed by FelCor from Bristol pursuant to the Merger and for general corporate
purposes.
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THE OFFERING
Securities Offered......... 5,000,000 Depositary Shares, each representing a
1/100 interest in a share of FelCor's % Series B
Cumulative Redeemable Preferred Stock. Each owner
of a Depositary Share is entitled to all
proportional rights, preferences, privileges and
obligations of an owner of Series B Preferred
Stock. See "Description of Series B Preferred Stock
and Depositary Shares."
Ranking.................... With respect to the payment of dividends and
amounts upon liquidation, the Series B Preferred
Stock will rank pari passu with FelCor's
outstanding $1.95 Series A Cumulative Convertible
Preferred Stock (the "Series A Preferred Stock")
and senior to FelCor's outstanding common stock
(the "Common Stock"). See "Description of Series B
Preferred Stock and Depositary Shares."
Use of Proceeds............ The net proceeds from the sale of the Depositary
Shares will be used to repay borrowings under
FelCor's unsecured revolving credit facility used
to acquire eight hotels on April , 1998. See "Use
of Proceeds" and "Recent Developments -- Pending
Acquisition."
Dividends.................. Dividends on the Series B Preferred Stock are
cumulative from the date of original issuance, with
each Depositary Share receiving dividends at the
rate of % of the liquidation preference per annum
(equivalent to $ per annum per Depositary Share).
Dividends will be payable quarterly on or before
the last day of January, April, July, October (or,
if not a business day, on the next succeeding
business day) commencing on July 31, 1998. The
first dividend will be prorated to reflect the
original issuance of such Depositary Shares during
a dividend period. Dividends on the Series B
Preferred Stock will accrue from the date of the
original issuance of the Depositary Shares
regardless of whether FelCor (i) is prohibited by
contract from the current payment of dividends,
(ii) has sufficient earnings or funds otherwise
legally available for the payment of dividends or
(iii) has declared any such dividends. See
"Description of Series B Preferred Stock and
Depositary Shares -- Dividends."
Liquidation Preference..... The Series B Preferred Stock will have a
liquidation preference of $2,500 per share
(equivalent to $25 per Depositary Share), plus an
amount equal to accrued and unpaid dividends. See
"Description of Series B Preferred Stock and
Depositary Shares -- Liquidation Preference."
Redemption................. The Series B Preferred Stock is not redeemable
prior to , 2003. On and after
, 2003, the Series B Preferred Stock
may be redeemed for cash at the option of FelCor,
in whole or in part, at an amount equal to $25 per
Depositary Share, plus all accrued and unpaid
dividends thereon to the date of redemption. The
redemption price (other than the portion consisting
of accrued and unpaid dividends) shall be payable
solely out of the sale proceeds of other capital
stock of FelCor, which may include other series of
preferred stock. See "Description of Series B
Preferred Stock and Depositary
Shares -- Redemption."
S-5
<PAGE> 6
Voting Rights.............. Holders of Depositary Shares generally will not
have any voting rights, except as required by law.
However, in the event dividends on the Series B
Preferred Stock are in arrears for six or more
quarterly periods, whether or not consecutive, the
holders of Depositary Shares (voting together, as a
single class, with the holders of Series A
Preferred Stock and of any other series of FelCor's
preferred stock having like voting rights that are
then exercisable) will be entitled to vote for the
election of a total of two directors to FelCor's
board of directors until all dividends accumulated
on such shares of Series B Preferred Stock have
been fully paid or set aside for payment. See
"Description of Series B Preferred Stock and
Depositary Shares -- Voting Rights."
No Conversion Rights....... The Series B Preferred Stock is not convertible
into or exchangeable for any other securities of
FelCor. Under certain transfer restrictions
contained in FelCor's Charter, however, the shares
of Series B Preferred Stock may become excess
shares in order, among other things, to ensure that
FelCor remains qualified as a REIT for Federal
income tax purposes. See "Certain Charter, Bylaw
and Statutory Provisions -- Charter and Bylaw
Provisions -- Restrictions on Ownership and
Transfer " in the accompanying Prospectus.
Restrictions on
Ownership.................. To ensure that FelCor can satisfy certain ownership
limitations applicable to REITs, no person may own
(including ownership attributed to such person for
Federal income tax purposes) more than 9.9% of any
class of FelCor's capital stock. See "Certain
Charter, Bylaw and Statutory Provisions -- Charter
and Bylaw Provisions -- Restrictions on Ownership
and Transfer " in the accompanying Prospectus.
Listing.................... FelCor is applying to list the Depositary Shares
for trading on the New York Stock Exchange
("NYSE"). If FelCor receives approval for the
listing of such shares, trading on the NYSE is
expected to commence within the 30-day period
following the initial delivery of the Depositary
Shares.
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RISK FACTORS
An investment in the Series B Preferred Stock involves various risks.
Investors should carefully consider the matters discussed below and beginning on
page 5 of the accompanying Prospectus.
RISK THAT PENDING ACQUISITION AND MERGER WILL NOT CLOSE
FelCor has agreed to acquire eight hotels from Starwood, provided that
certain conditions are met. If these conditions are not met, it is possible that
FelCor will not acquire these hotels. If FelCor does not acquire the eight
hotels from Starwood, then the net proceeds from the Offering would be used, at
least temporarily, to pay a portion of FelCor's other existing indebtedness. In
addition, a number of conditions must be satisfied before completion of the
Merger with Bristol, including stockholder approval of the transaction by both
FelCor and Bristol. The holders of a majority of Bristol's common shares have
agreed to vote in favor of the transaction. If the conditions to the Merger are
not satisfied before September 30, 1998, either FelCor or Bristol may choose to
terminate the Merger Agreement.
INTEGRATION OF BRISTOL'S ASSETS; REALIZATION OF ANTICIPATED BENEFITS
If the Merger is completed, it will more than double the number of hotels
owned by FelCor. Although the newly acquired hotels will be operated by BHR
under long-term leases, FelCor will be required to integrate these hotels into
its hotel portfolio and may need additional people and resources to handle the
increased work load. If FelCor is unable to successfully integrate the newly
acquired hotels into its portfolio, FelCor's business, financial condition and
results of operations could suffer. A large number of the Bristol hotels to be
acquired by FelCor in the Merger are in the process of, or awaiting, substantial
renovation, modernization and repositioning. The exchange ratio was established,
in part, based on the anticipated effects of such renovations, modernization and
repositioning plans. If the implementation of these plans does not yield the
anticipated results, FelCor may have paid too much for the Bristol hotels.
RISKS OF LEVERAGE, FLOATING RATE DEBT AND INABILITY TO RETAIN EARNINGS
Bristol is more highly leveraged than FelCor, which will result in an
increase in FelCor's leverage following the Merger. At December 31, 1997, on a
pro forma basis, FelCor would have had outstanding indebtedness of $1.5 billion,
46% of which would have been secured. FelCor's pro forma ratio of EBITDA to
interest paid for the year ended December 31, 1997 was 3.4x. Of FelCor's pro
forma indebtedness at December 31, 1997, $434.2 million provided for the payment
of interest at floating rates. Most of this floating rate debt bears interest at
a rate equal to between 0.45% and 1.75% plus the 30-day LIBOR. At December 31,
1997, the 30-day LIBOR was 5.71875%. Changes in economic conditions could result
in higher interest rates, thereby increasing FelCor's interest expense on its
floating rate debt and reducing funds available for distribution to FelCor's
stockholders. In order to qualify as a REIT, FelCor must distribute to its
stockholders, annually, at least 95% of its net taxable income (excluding
capital gains) and, accordingly, cannot retain any substantial portion of its
earnings to meet its capital needs.
After the Merger, FelCor anticipates refinancing a substantial portion of
Bristol's long-term debt. However, the capital markets are volatile, and there
can be no assurance that FelCor will be successful in refinancing Bristol's
debt.
TAX RISKS
Failure to Distribute Bristol's Earnings and Profits in 1998 Would Cause
FelCor to Fail to Qualify as a REIT. At the end of any taxable year, a REIT may
not have any accumulated earnings and profits (described generally for federal
income tax purposes as cumulative undistributed net income) from a non-REIT
corporation. Accordingly, by the end of 1998, FelCor must pay out to its
stockholders an amount equal to accumulated earnings and profits through the
date of the Merger. If FelCor failed to pay out such amount for its 1998 taxable
year, it would fail to qualify as a REIT.
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Sale of Assets Acquired from Bristol Within Ten Years After the Merger Will
Result in Corporate Tax. If FelCor sells any asset acquired from Bristol within
ten years after the Merger and recognizes gain, FelCor will be taxed at the
highest corporate rate on an amount equal to the fair market value of the asset
minus the adjusted basis of the asset as of the Merger.
BUSINESS AND PROPERTIES
FelCor is a REIT that, at April 23, 1998, owned interests in 76 hotels with
a aggregate of 18,596 suites/ rooms in 28 states through its 92.7% general
partner interest in the Operating Partnership. Fifty-two of the FelCor Hotels
are operated as Embassy Suites hotels (of which 28 were converted from other
brands), 14 are operated as Doubletree Guest Suites hotels, seven are operated
as Sheraton hotels (five of which are upscale, full-service traditional
non-suite hotels), two are operated as traditional non-suite Doubletree hotels
(one of which is in the process of conversion to a Doubletree hotel) and one is
operated as a Hilton Suites hotel. Sixty-six of the FelCor Hotels are managed by
Promus, which includes Doubletree. Promus is the largest operator of all-suite,
full-service hotels in the United States. Of the remaining FelCor Hotels, seven
are managed by Sheraton and three are managed by independent management
companies. FelCor is the owner of the largest number of Embassy Suites hotels in
the world. FelCor has historically focused upon the acquisition of hotels in the
upscale all-suite and full-service segments of the lodging industry. For
additional information regarding the FelCor Hotels, see "Recent
Developments -- Pending Merger With Bristol -- FelCor/Bristol Combined."
To enable FelCor to satisfy certain requirements for qualification as a
REIT, neither it nor the Operating Partnership can operate the hotels in which
they invest. Accordingly, the Operating Partnership and its subsidiaries
typically lease the FelCor Hotels to DJONT Operations, L.L.C., or one of its
consolidated subsidiaries (collectively, "DJONT"), pursuant to leases
("Percentage Leases") generally with initial terms of ten years that provide for
rent equal to the greater of a minimum base rent ("Base Rent") or a percentage
rent ("Percentage Rent") based on hotel suite/room revenues and food and
beverage revenues and rents.
All of the voting interests in DJONT (constituting a 50% equity interest)
are beneficially owned by Hervey A. Feldman and Thomas J. Corcoran, Jr. Mr.
Feldman and Mr. Corcoran are co-founders of FelCor, serve on its Board of
Directors and, respectively, are the Chairman of the Board and the President and
Chief Executive Officer of FelCor. The remaining non-voting 50% equity interest
in DJONT is beneficially owned by the children of Charles N. Mathewson, a
director of FelCor.
FelCor seeks to increase operating cash flow and enhance stockholder value
through both internal growth and acquisitions. It seeks to acquire, at less than
replacement cost, existing hotels that are underperforming, due to the need for
capital improvements or poor management or franchise affiliation, and to add
value through its active asset management and strategic investment of capital.
FelCor also may add suites at its existing hotels where demand warrants and
expects to acquire 90% interests in four to seven new Embassy Suites hotels to
be developed by Promus and in which Promus will own the remaining interest.
Subject to reaching agreement on specific sites and budgets for development of
these new hotels, the first of these hotels is expected to open in late 1999.
FelCor's internal growth strategy is to utilize its asset management expertise
to improve the quality of its hotels by renovating, upgrading and repositioning,
thereby improving the revenue performance of its hotels, and to participate
through the Percentage Leases in any resulting growth in revenues.
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RECENT DEVELOPMENTS
RECENT ACQUISITIONS
During the period from January 1, 1998, to April 23, 1998, FelCor acquired
three hotels with an aggregate of 596 suites and rooms for approximately $57.4
million in cash and Units in the Operating Partnership. These three hotels are
(i) a 194-suite Doubletree Guest Suites hotel located in downtown Columbus,
Ohio, (ii) a traditional 154-room upscale full-service hotel with approximately
13,000 sq. ft. of meeting space located in Wilmington, Delaware which is
scheduled to be expanded by approximately 100 rooms and converted into a
Doubletree hotel during 1999, and (iii) a traditional 248-room upscale full-
service Doubletree hotel with approximately 11,000 sq. ft. of meeting space
located in Aurora, Colorado.
PENDING ACQUISITION
FelCor has entered into an agreement to purchase eight upscale
full-service, all-suite hotels from Starwood for an aggregate cash purchase
price of approximately $245 million (see "Use of Proceeds"). These hotels have a
total of 1,898 suites and consist of five Embassy Suites hotels and three
Doubletree Guest Suites hotels located in seven states. Following the
acquisition, six of the eight hotels are expected to be operated as Embassy
Suites hotels and be managed by Promus. The two remaining hotels are expected to
be operated as Sheraton Suites hotels and will continue to be managed by
Starwood Hotels & Resorts Worldwide, Inc. FelCor is currently evaluating a
number of other potential hotel acquisition opportunities.
PENDING MERGER WITH BRISTOL
General
On March 23, 1998, FelCor entered into a Merger Agreement with Bristol
under which the owned and leased hotel assets of Bristol will be merged with and
into FelCor. As a consequence of the Merger, Bristol's stockholders will acquire
approximately 44% of the FelCor Common Stock outstanding immediately following
the Merger and FelCor's board of directors will be reconstituted. In
anticipation of the Merger, Bristol will spin-off its hotel operating business
as a separate public company named Bristol Hotels & Resorts. The Bristol hotels
acquired in the Merger will be leased to BHR.
The proposed Merger with Bristol, in addition to being accretive to
FelCor's forecasted FFO in each of the years 1998 through 2000, will provide
FelCor with a number of perceived advantages, such as (i) providing FelCor with
further diversification into a new segment of the lodging industry, with a
resulting increase in acquisition and growth opportunities, (ii) making FelCor
the owner of the largest number of Holiday Hospitality branded hotels (including
the Crowne Plaza and Holiday Inn brands, the latter of which is one of the most
recognized brand names in America), (iii) creating a new strategic alliance with
BHR, which will be the nation's largest operator of third party owned and
branded hotels, (iv) establishing an independent third party lessee for the
Bristol hotels acquired by FelCor and (v) enhancing FelCor's critical mass and
market presence. In addition, these perceived benefits may be obtained without
impairing or diminishing FelCor's long-standing relationship with Promus or its
more recent relationship with Sheraton.
Bristol is one of the largest owner/operators of full-service hotels in the
United States, currently operating 101 hotels containing over 29,306 rooms, of
which 89 hotels are owned or leased by Bristol. Bristol's hotels are primarily
full-service hotels that operate in the mid-scale to upscale segments of the
lodging industry. Bristol is the largest franchisee of Holiday Hospitality
brands of hotels, including Crowne Plaza(R), Holiday Inns(R) and Holiday Inns
Select(R) hotels, and also operates 19 hotels under other hotel brands,
including Hampton Inn(R), Courtyard by Marriott(R) and Fairfield Inn(R).
Bristol's hotels are located in 22 states and Canada, with hotels concentrated
in major metropolitan areas of the South, East, Southwest and Pacific regions of
the United States. For additional information regarding the hotels to be
acquired by FelCor in the Merger, see "-- FelCor/Bristol Combined."
On February 2, 1998, Bristol announced a definitive agreement to acquire 20
midwestern hotels with a total of 3,456 rooms (the "Omaha Acquisition"), through
a merger with Omaha Hotel, Inc. and the purchase
S-9
<PAGE> 10
of an individual hotel. Consummation of the Omaha Acquisition, which is
scheduled to close prior to the Merger, is subject to certain conditions and
there can be no assurance that it will be consummated if any such condition is
not satisfied. The hotels included in the Omaha Acquisition consist of nine
full-service Holiday Inn hotels, five Holiday Inn Express(R) hotels, five
Hampton Inn hotels and one Homewood Suites(R) hotel, with locations in Omaha,
Nebraska; Moline, Illinois; Davenport, Iowa; central Kansas and Midland/Odessa,
Texas. Seven of the nine full-service hotels have undergone major property
improvement plans over the past 24 months. Of the five Holiday Inn Express
hotels, one is a new construction project set to open for business in mid-1998
and two others are newly built hotels that opened in the past two years.
Assuming that the Omaha Acquisition and the Merger close as currently
contemplated, the hotels that are the subject of the Omaha Acquisition will be
acquired by FelCor in the Merger.
In November 1997, Bristol initiated a comprehensive redevelopment and
rebranding program (the "Redevelopment and Rebranding Program") which entails
exterior and interior reconstruction of and renovations to 41 of its hotels that
were acquired from Holiday Inns, Inc. in April 1997, three hotels acquired
during 1997, as well as the rebranding of seven hotels operated under Bristol's
own brand names to Crowne Plaza and Holiday Inn & Suites properties. The
Redevelopment and Rebranding Program is expected to be substantially complete by
the end of 1999. FelCor currently expects to continue and fund the Redevelopment
and Rebranding Program following the Merger.
In addition to the renovations, Bristol expects to rebrand 13 of its 41
Holiday Inn hotels primarily to the Crowne Plaza brand. Bristol believes the
conversions to the Crowne Plaza brand will enable the hotels to more effectively
compete in the markets in which they operate.
FelCor/Bristol Combined
As a result of the Merger, Bristol will be merged into FelCor, which will
be the surviving corporation and which will change its name to "FelCor Lodging
Trust Incorporated." FelCor will succeed to the ownership, either directly or
through Bristol's subsidiaries, of Bristol's 89 owned or leased hotels, and of
the 20 hotels to be acquired by Bristol in the Omaha Acquisition (collectively,
the "Bristol Hotels"). Following the Merger, FelCor will continue to operate as
a REIT. It is expected that FelCor will contribute ownership of the Bristol
Hotels to the Operating Partnership, in which, following such contribution,
FelCor will have a 95.7% general partner interest, on a pro forma basis.
S-10
<PAGE> 11
Following the Merger, FelCor will own interests in 193 hotels (assuming
completion of FelCor's purchase of eight hotels from Starwood, the Omaha
Acquisition and the Redevelopment and Rebranding Program), with an aggregate of
49,255 suites/rooms in 34 states and Canada, as shown in the following table.
COMBINED HOTEL PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
FELCOR HOTELS BRISTOL HOTELS COMBINED HOTELS
---------------- ---------------- ----------------
BRAND HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
- ----- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Upscale All Suite
Embassy Suites................ 58 14,265 58 14,265
Doubletree Guest Suites....... 14 2,713 14 2,713
Sheraton Suites............... 4 984 4 984
Hilton Suites................. 1 174 1 174
Crowne Plaza suites........... 1 295 1 295
Homewood Suites............... 1 108 1 108
Bristol House................. 1 127 1 127
-- ------ --- ------ --- ------
Subtotal................. 77 18,136 3 530 80 18,666
Upscale Full Service
Crowne Plaza.................. 19 6,814 19 6,814
Doubletree Hotel.............. 2 402 2 402
Harvey Hotel.................. 5 1,486 5 1,486
Sheraton...................... 5 1,956 5 1,956
-- ------ --- ------ --- ------
Subtotal................. 7 2,358 24 8,300 31 10,658
Full Service
Holiday Inn................... 48 13,139 48 13,139
Holiday Inn Select............ 6 2,145 6 2,145
Ramada........................ 1 220 1 220
Days Inn...................... 1 157 1 157
Courtyard by Marriott......... 2 420 2 420
Holiday Inn & Suites.......... 1 285 1 285
Independent................... 1 181 1 181
--- ------ --- ------
Subtotal................. 60 16,547 60 16,547
Limited Service
Holiday Inn Express........... 8 1,113 8 1,113
Fairfield Inn................. 5 931 5 931
Hampton Inn................... 9 1,310 9 1,310
--- ------ --- ------
Subtotal................. 22 3,354 22 3,354
-- ------ --- ------ --- ------
Total................. 84 20,494 109 28,731 193 49,225
</TABLE>
The FelCor Hotels will continue to be leased by the Operating Partnership
to DJONT. DJONT is currently considering the possibility of transferring its
leasehold interests to unrelated third parties, including the possible transfer
of leases covering ten hotels to BHR. The Bristol Hotels will be leased by the
Operating Partnership to BHR, pursuant to leases similar to the Percentage
Leases. BHR and FelCor will be independent public companies with no overlap in
management or boards of directors. However, BHR's two largest stockholders,
following the Merger, will have significant ownership interests in FelCor and
will have representatives on the Boards of Directors of both FelCor and BHR,
including the Chairman of the Board of FelCor. Because of this ownership and the
substantial relationship between the two companies arising out of BHR's leasing
and operation of the Bristol Hotels following the Merger, it is anticipated that
the two companies will have a strategic alliance in the acquisition and
redevelopment of additional hotels. FelCor will maintain its existing
headquarters facilities in Dallas, and BHR will assume responsibility for
Bristol's employees and existing headquarters facilities in Dallas.
S-11
<PAGE> 12
At December 31, 1997, on a pro forma basis, FelCor would have had
outstanding indebtedness of $1.5 billion, as compared to $477 million in actual
total indebtedness for FelCor alone. FelCor's pro forma ratio of EBITDA to
interest paid for the year ended December 31, 1997 would have been 3.4x. Of
FelCor's pro forma indebtedness at December 31, 1997, $434.2 million would have
provided for the payment of interest at floating rates. See "Selected
Consolidated Pro Forma and Historical Financial Data."
Following the Merger, FelCor anticipates refinancing a substantial portion
of Bristol's debt through the issuance of debt and equity securities. FelCor
will seek to refinance a portion of the Bristol debt to reduce interest cost and
replace certain existing secured debt of Bristol with unsecured debt or equity
financing. No assurance can be given that FelCor will be successful in effecting
any such refinancing.
In connection with the Merger, the Board of Directors of FelCor will be
reconstituted. The number of directors will increase from seven to 10 members.
The seven directors of FelCor will continue as directors of FelCor following the
Merger, but their terms of office will be revised as a result of the Merger.
Hervey A. Feldman, a co-founder of FelCor and its Chairman of the Board, will
retire from the FelCor Board at FelCor's 1998 Annual Meeting and will assume the
title of Chairman Emeritus. The following three Bristol directors will be added
to the Board of Directors of FelCor in connection with the Merger: Donald J.
McNamara (who will become Chairman of the Board of FelCor), Robert L. Lutz, Jr.,
and Richard C. North. In connection with the Merger, each of Bass America, Inc.
and Holiday Corporation (the "Holiday Entities"), and United/Harvey Holdings,
L.P. ("Holdings"), who together are the majority stockholders of Bristol, will
agree to vote their FelCor Common Stock to elect one designee of each of the
Holiday Entities and Holdings to the Board of Directors of FelCor, so long as
each of the Holiday Entities and their affiliates, on the one hand, and Holdings
and its affiliates, on the other hand, continue to own at least 25% of the
FelCor Common Stock obtained by them in the Merger.
Other than Mr. Feldman's retirement and the appointment of Mr. McNamara as
Chairman of the Board of FelCor, the officers of FelCor are not expected to
change as a result of the Merger.
S-12
<PAGE> 13
USE OF PROCEEDS
The net proceeds to FelCor from the sale of the Depositary Shares offered
hereby is expected to be approximately $121.0 million. FelCor will contribute
the net proceeds to the Operating Partnership in exchange for preferred units
having economic terms substantially identical with the Series B Preferred Stock
("Series B Preferred Units"). The Operating Partnership will apply such proceeds
to the repayment of borrowings under FelCor's $550 million unsecured line of
credit (the "Line of Credit") used to fund the acquisition of eight hotels from
Starwood announced on April 20, 1998. See "Recent Developments -- Pending
Acquisition." On April 20, 1998, approximately $182 million of indebtedness was
outstanding on FelCor's Line of Credit, which bore interest at a weighted
average interest rate of 8.4%.
CAPITALIZATION
The following table sets forth the capitalization of FelCor as of December
31, 1997 and on a pro forma basis assuming that each of the following occurred
as of December 31, 1997: (i) the Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds," (ii) the acquisition of
the 11 hotels described under "Recent Developments -- Recent Acquisitions" and
"-- Pending Acquisition," (iii) the Omaha Acquisition, (iv) the Spin-Off and (v)
the Merger.
The capitalization table should be read in conjunction with (i)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and FelCor's financial statements and notes hereto included in
FelCor's Annual Report on Form 10-K for the year ended December 31, 1997 and
(ii) the unaudited pro forma financial statements of FelCor included elsewhere
herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
HISTORICAL PRO FORMA
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Line of Credit............................................ $ 136,000 $ 483,308
$175M Senior unsecured notes, net of discount............. 174,122 174,122
$125M Senior unsecured notes, net of discount............. 124,023 124,023
Senior mortgage notes payable............................. 599,834
Renovation loan........................................... 25,000 25,000
Collateralized mortgage notes............................. 5,931 59,520
Capitalized leases........................................ 11,093 15,491
Other..................................................... 650 650
---------- ----------
Total debt........................................ 476,819 1,481,948
---------- ----------
Minority interest in Operating Partnership................ 73,451 92,334
---------- ----------
Shareholders' equity:
Preferred Stock, $0.01 par value, 10,000 shares
authorized:
Series A Preferred Stock............................... 151,250 151,250
Series B Preferred Stock............................... 125,000
Common Stock.............................................. 378 689
Additional paid-in capital................................ 1,003,501 2,136,472
Unearned officers' and directors' compensation............ (1,754) (881)
Distributions in excess of earnings....................... (33,771) (33,771)
Less common stock in treasury, at cost.................... (41,106) (41,106)
---------- ----------
1,078,498 2,337,653
---------- ----------
Total capitalization.............................. $1,628,768 $3,911,935
========== ==========
Cash and cash equivalents................................... $ 17,543 $ 17,543
========== ==========
</TABLE>
S-13
<PAGE> 14
SELECTED CONSOLIDATED PRO FORMA AND HISTORICAL FINANCIAL DATA
The following tables set forth selected pro forma and historical operating
and financial data for FelCor and DJONT. The selected historical financial data
for FelCor and DJONT for the years ended December 31, 1997, 1996 and 1995 has
been derived from the historical financial statements of FelCor and DJONT and
the notes thereto, audited by Coopers & Lybrand, L.L.P., independent
accountants. The selected historical financial data for FelCor and DJONT is
qualified in its entirety by, and should be read in conjunction with, the
Consolidated Financial Statements and Notes of FelCor and DJONT contained in
FelCor's Annual Report on Form 10-K for the year ended December 31, 1997.
The pro forma operating and other data is presented as if the following
occurred on January 1, 1997: (i) the Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds," (ii) the acquisition of
interests in 30 hotels acquired by FelCor in 1997, (iii) the common stock
offerings made by FelCor in 1997, (iv) the issuance of $300 million in senior
unsecured notes in 1997, (v) the acquisition of the 11 hotels described under
"Recent Developments -- Recent Acquisitions" and "-- Pending Acquisition," (vi)
the Omaha Acquisition, (vii) the Spin-Off and (viii) the Merger.
The pro forma balance sheet data is presented as if the following
transactions occurred as of December 31, 1997: (i) the Offering and the
application of the net proceeds therefrom as described under "Use of Proceeds,"
(ii) the acquisition of the 11 hotels described under "Recent
Developments -- Recent Acquisitions" and "-- Pending Acquisition," (iii) the
Omaha Acquisition, (iv) the Spin-Off and (v) the Merger.
The FelCor selected pro forma operating and financial data set forth below
is qualified in its entirety by, and should be read in conjunction with, the
unaudited pro forma financial statements of FelCor. See "Pro Forma Financial
Information." The pro forma financial information is not necessarily indicative
of what the actual financial position and results of operations of FelCor would
have been as of and for the periods indicated, nor does it purport to represent
the future financial position and results of operations of FelCor.
S-14
<PAGE> 15
FELCOR SUITE HOTELS, INC.
SELECTED CONSOLIDATED PRO FORMA AND HISTORICAL OPERATING AND
FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
PRO FORMA -----------------------------------
(UNAUDITED) YEAR ENDED DECEMBER 31,
----------- -----------------------------------
1997 1997 1996 1995
----------- ---------- -------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
REVENUE
Percentage lease revenue............................ $ 441,768 $ 169,114 $ 97,950 $ 23,787
Equity in income from unconsolidated entities....... 8,788 6,963 2,010 513
Other revenue....................................... 574 984 1,691
---------- ---------- -------- ---------
TOTAL REVENUE......................................... 450,556 176,651 100,944 25,991
---------- ---------- -------- ---------
EXPENSES
General and administrative.......................... 5,163 3,743 1,819 870
Depreciation........................................ 122,907 50,798 26,544 5,232
Taxes, insurance and other.......................... 68,206 23,093 13,897 2,563
Interest expense.................................... 112,656 28,792 9,803 2,004
Minority interest in Operating Partnership.......... 6,022 5,817 5,590 3,131
Minority interest in other partnerships............. 1,157 573
---------- ---------- -------- ---------
TOTAL EXPENSES........................................ 316,111 112,816 57,653 13,800
---------- ---------- -------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE.................... 134,445 63,835 43,291 12,191
Extraordinary charge from write off of deferred
financing fees.................................... 185 2,354
---------- ---------- -------- ---------
NET INCOME............................................ 134,445 63,650 40,937 12,191
Preferred dividends................................. 22,891 11,797 7,734
---------- ---------- -------- ---------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS.......... $ 111,554 $ 51,853 $ 33,203 $ 12,191
========== ========== ======== =========
BASIC EARNINGS PER SHARE(1)
Income applicable to common shareholders before
extraordinary charge.............................. $ 1.65 $ 1.67 $ 1.54 $ 1.71
Extraordinary charge................................ (0.01) (0.10)
---------- ---------- -------- ---------
Net income applicable to common shareholders........ $ 1.65 $ 1.66 $ 1.44 $ 1.71
========== ========== ======== =========
Weighted average common shares outstanding.......... 67,630 31,269 23,023 7,137
========== ========== ======== =========
DILUTED EARNINGS PER SHARE(1)
Income applicable to common shareholders before
extraordinary charge.............................. $ 1.63 $ 1.65 $ 1.53 $ 1.69
Extraordinary charge................................ (0.01) (0.10)
---------- ---------- -------- ---------
Net income.......................................... $ 1.63 $ 1.64 $ 1.43 $ 1.69
========== ========== ======== =========
Weighted average common shares outstanding.......... 68,627 31,610 23,218 7,199
========== ========== ======== =========
</TABLE>
S-15
<PAGE> 16
FELCOR SUITE HOTELS, INC.
SELECTED CONSOLIDATED PRO FORMA AND HISTORICAL OPERATING AND
FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
HISTORICAL
PRO FORMA -----------------------------------
(UNAUDITED) YEAR ENDED DECEMBER 31,
----------- -----------------------------------
1997 1997 1996 1995
----------- ---------- -------- ---------
<S> <C> <C> <C> <C>
OTHER DATA:
Cash dividends per common share(2).................. $ 2.10 $ 2.10 $ 1.92 $ 1.84
Funds From Operations(3)............................ 262,452 129,815 77,141 20,707
Weighted average common shares and units
outstanding(4).................................... 76,217 39,157 29,306 8,989
EBITDA(5)........................................... 379,016 153,496 86,583 22,203
Ratio of EBITDA to interest paid.................... 3.4x 7.2x 9.4x 15.1x
Ratio of earnings to combined fixed charges and
preferred dividends(6)............................ 2.0x 2.4x 3.1x 8.6x
Cash provided by financing activities............... -- 600,132 251,906 407,897
Cash provided by operating activities............... -- 97,478 67,494 17,003
Cash used in investing activities................... -- (687,860) (478,428) (259,197)
BALANCE SHEET DATA:
Cash and short term investments..................... $ 17,543 $ 17,543 $ 7,793 $ 166,821
Investment in hotel properties, net................. 3,814,398 1,489,764 899,691 325,155
Investment in unconsolidated entities............... 145,387 132,991 59,867 13,819
Total assets........................................ 4,026,918 1,673,364 978,788 548,359
Debt and capital lease obligations.................. 1,481,948 476,819 239,425 19,666
Minority interest in Operating Partnership.......... 92,334 73,451 76,112 58,837
Shareholders' equity................................ 2,337,653 1,078,498 641,926 461,386
</TABLE>
- ---------------
(1) In 1997, FelCor 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 of FelCor.
(2) Pro forma cash dividends per common share do not include a one-time
distribution of the accumulated earnings and profits of Bristol.
(3) The White Paper on Funds From Operations approved in March 1995 by the Board
of Governors of the National Association of Real Estate Investment Trusts
("NAREIT"), 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 FelCor's portion of these
items related to unconsolidated entities and joint ventures. FelCor 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 FelCor to incur and service
debt, to make capital expenditures and to fund other cash needs. FelCor
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 FelCor. 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 FelCor's financial performance or to cash flow
from operating activities
S-16
<PAGE> 17
FELCOR SUITE HOTELS, INC.
SELECTED CONSOLIDATED PRO FORMA AND HISTORICAL OPERATING AND
FINANCIAL DATA -- (CONTINUED)
(determined in accordance with GAAP) as a measure of FelCor's liquidity, nor
is it indicative of funds available to fund FelCor'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.
The following is a reconciliation of net income to Funds From Operations:
<TABLE>
<CAPTION>
HISTORICAL
------------------------------
PRO FORMA YEAR ENDED DECEMBER 31,
(UNAUDITED) ------------------------------
1997 1997 1996 1995
----------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income.................................. $134,445 $ 63,650 $40,937 $12,191
Less: Dividends on Series B Preferred
Stock..................................... (11,094)
Add:
Minority interest in Operating
Partnership............................... 6,022 5,817 5,590 3,131
Depreciation................................ 122,907 50,798 26,544 5,232
Depreciation from unconsolidated entities... 10,172 9,365 1,716 153
Extraordinary charge from write off of
deferred financing fees................... 185 2,354
-------- -------- ------- -------
Funds From Operations (FFO)................. $262,452 $129,815 $77,141 $20,707
======== ======== ======= =======
</TABLE>
(4) Weighted average common shares and units are computed including dilutive
options, unvested restricted stock grants and assuming conversion of
convertible preferred stock to common stock.
(5) EBITDA is computed by adding net income, minority interest in the Operating
Partnership, interest expense, FelCor'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 and equity in
income from unconsolidated entities. A reconciliation of Funds From
Operations to EBITDA is as follows (in thousands):
<TABLE>
<CAPTION>
HISTORICAL
------------------------------
PRO FORMA YEAR ENDED DECEMBER 31,
(UNAUDITED) ------------------------------
1997 1997 1996 1995
----------- -------- ------- -------
<S> <C> <C> <C> <C>
Funds From Operations................... $262,452 $129,815 $77,141 $20,707
Add back:
Interest expense................... 112,656 28,792 9,803 2,004
Interest expense from
unconsolidated entities.......... 6,453 5,896 819
Amortization expense............... 1,110 1,110 592 158
Cash distributions from
unconsolidated entities.......... 4,211 4,211 1,954
Dividends on Series B Preferred
Stock............................ 11,094
Deduct:
Equity in income from
unconsolidated entities.......... (8,788) (6,963) (2,010) (513)
Depreciation from unconsolidated
entities......................... (10,172) (9,365) (1,716) (153)
-------- -------- ------- -------
EBITDA.................................. $379,016 $153,496 $86,583 $22,203
======== ======== ======= =======
</TABLE>
(6) For purpose of computing the ratio of earnings to combined fixed charges and
preferred dividends, 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.
S-17
<PAGE> 18
DJONT OPERATIONS, L.L.C.
SELECTED CONSOLIDATED HISTORICAL OPERATING AND FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Suite revenue............................................... $456,614 $234,451 $65,649
Food and beverage rent...................................... 4,393 2,334 534
Food and beverage revenue................................... 34,813 15,119 2,462
Other revenue............................................... 38,690 17,340 3,924
-------- -------- -------
Total revenue..................................... 534,510 269,244 72,569
Hotel expenses.............................................. 128,077 66,236 18,455
Operating expenses.......................................... 189,783 98,727 26,575
Percentage lease expenses................................... 216,990 107,935 26,945
Lessee overhead expense..................................... 2,332 1,776 834
-------- -------- -------
Net loss.......................................... $ (2,672) $ (5,430) $ (240)
======== ======== =======
</TABLE>
S-18
<PAGE> 19
DESCRIPTION OF SERIES B PREFERRED STOCK
AND DEPOSITARY SHARES
This description of the particular terms of the Series B Preferred Stock
and the Depositary Shares offered hereby supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Preferred Stock and Depositary Shares set forth in the
accompanying Prospectus, to which description reference is hereby made.
GENERAL
FelCor is authorized to issue up to 10,000,000 shares of preferred stock,
$.01 par value per share ("Preferred Stock"), in one or more series, with such
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption in each case, if any, as the Board of Directors of FelCor may
determine by adoption of applicable articles supplementary (an "Articles
Supplementary") to FelCor's Charter, without any further vote or action by the
stockholders. See "Description of Preferred Stock -- Terms" in the accompanying
Prospectus.
On April 20, 1998, a form of Articles Supplementary was adopted determining
the terms of a series of Preferred Stock consisting of 50,000 shares, designated
% Series B Cumulative Redeemable Preferred Stock ("Series B Articles
Supplementary"). The following summary of the terms and provisions of the Series
B Preferred Stock does not purport to be complete and is qualified in its
entirety by reference to the pertinent sections of the Charter and the Series B
Articles Supplementary, each of which is available from FelCor.
FelCor intends to contribute or otherwise transfer the net proceeds of the
sale of the Depositary Shares to the Operating Partnership in exchange for
Series B Preferred Units in the Operating Partnership, the economic terms of
which will be substantially identical to the Series B Preferred Stock. The
Operating Partnership will be required to make all required distributions on the
Series B Preferred Units (which will mirror the payments of dividends, including
accrued and unpaid dividends upon redemption, and of the liquidation preference
amount of the Series B Preferred Stock) prior to any distribution of cash or
assets to the holders of the Units or to the holders of any other interests in
the Operating Partnership, except for any other series of preference units
ranking on a parity with the Series B Preferred Units as to distributions and/or
liquidation rights and except for distributions required to enable FelCor to
maintain its qualification as a REIT.
Each Depositary Share represents a 1/100 fractional interest in a share of
Series B Preferred Stock. The shares of Series B Preferred Stock will be
deposited with SunTrust Bank Atlanta, Georgia, as Depositary (the "Preferred
Stock Depositary"), under a Deposit Agreement (the "Depositary Agreement") among
FelCor, the Preferred Stock Depositary and the holders from time to time of the
depositary receipts (the "Depositary Receipts") issued by the Preferred Stock
Depositary thereunder. The Depositary Receipts will evidence the Depositary
Shares. Subject to the terms of the Deposit Agreement, each holder of a
Depositary Receipt evidencing a Depositary Share will be entitled to all the
rights and preferences of a 1/100 fractional interest in a share of Series B
Preferred Stock (including dividend, voting, redemption and liquidation rights
and preferences). See "Description of Depositary Shares" in the accompanying
Prospectus.
RANKING
The Series B Preferred Stock ranks pari passu with FelCor's outstanding
Series A Preferred Stock and senior to the Common Stock with respect to the
payment of dividends and amounts upon liquidation, dissolution or winding up of
FelCor.
While any shares of Series B Preferred Stock are outstanding, FelCor may
not authorize, create or increase the authorized amount of any class or series
of stock that ranks senior to the Series B Preferred Stock with respect to the
payment of dividends or amounts upon liquidation, dissolution or winding up
without the consent of the holders of two-thirds of the outstanding shares of
Series B Preferred Stock. However, FelCor may create additional classes of
stock, increase the authorized number of shares of Preferred Stock or issue
series of Preferred Stock ranking junior to or on a parity with the Series B
Preferred Stock with respect, in
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each case, to the payment of dividends and amounts upon liquidation, dissolution
and winding up without the consent of any holder of Series B Preferred Stock.
See "-- Voting Rights" below.
DIVIDENDS
Holders of Series B Preferred Stock are entitled to receive, when, as and
if declared by the Board of Directors of FelCor, out of funds legally available
for payment, cash distributions declared or paid for the corresponding period
payable at the rate of % of the liquidation preference per annum (equivalent
to $ per annum per Depositary Share). Dividends on the Series B Preferred
Stock are payable quarterly in arrears on the last calendar day of January,
April, July and October of each year, commencing July 31, 1998 (and, in the case
of any accrued but unpaid dividends, at such additional times and for such
interim periods, if any, as determined by the Board of Directors). Each such
dividend is payable to holders of record as they appear on the stock records of
FelCor at the close of business on such record dates, not exceeding 60 days
preceding the payment dates thereof, as shall be fixed by the Board of
Directors. Dividends will be cumulative, whether or not in any dividend period
or periods there shall be funds of FelCor legally available for the payment of
such dividends and whether or not such dividends are authorized. Accumulations
of dividends on the Series B Preferred Stock will not bear interest. Dividends
payable on the Series B Preferred Stock will be computed on the basis of a
360-day year consisting of twelve 30-day months.
Except as provided in the next sentence, no dividend will be declared or
paid on any Parity Stock (as herein defined) unless full cumulative dividends
have been or contemporaneously are declared and paid, or declared and a sum
sufficient for the payment thereof is set apart for such payment, on the Series
B Preferred Stock for all prior dividend periods and the then current dividend
period. If accrued dividends on the Series B Preferred Stock and any Parity
Stock for all prior dividend periods have not been paid in full, then any
dividend declared on the Series B Preferred Stock and any Parity Stock for any
dividend period will be declared ratably in proportion to accrued and unpaid
dividends on the Series B Preferred Stock and such Parity Stock.
Unless all dividends then required to be paid on the Series B Preferred
Stock and any Parity Stock have been or contemporaneously are declared and paid,
or declared and a sum sufficient for the payment thereof is set apart for
payment, FelCor will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Stock (as herein
defined) or (ii) except as set forth in the following sentence, redeem, purchase
or otherwise acquire for consideration any Junior Stock (subject to certain
exceptions), through a sinking fund or otherwise. Notwithstanding the foregoing
limitations, FelCor may, at any time, acquire shares of its capital stock,
without regard to rank, for the purpose of preserving its status as a REIT or
for purposes of an employee benefit plan of FelCor.
As used herein, (i) the term "dividend" does not include dividends payable
solely in shares of Junior Stock on Junior Stock, or in options, warrants or
rights to holders of Junior Stock to subscribe for or purchase any Junior Stock
and (ii) the term "Junior Stock" means the Common Stock, and any other class of
capital stock of FelCor now or hereafter issued and outstanding that ranks
junior to the Series B Preferred Stock as to the payment of dividends or amounts
upon liquidation, dissolution or winding up of FelCor and (iii) the term "Parity
Stock" means any other class or series of capital stock of FelCor now or
hereafter issued and outstanding (including the Series A Preferred Stock) that
ranks equally with the Series B Preferred Stock as to the payment of dividends
and amounts upon liquidation, dissolution or winding up of FelCor.
The Operating Partnership will be required to make all required
distributions to FelCor on the Series B Preferred Units that will mirror
FelCor's payment of dividends on the Series B Preferred Stock (including accrued
and unpaid dividends upon redemption, and of the liquidation preference amount
of the Series B Preferred Stock) prior to any distribution of cash or assets to
the holders of the Units or to the holders of any other interests in the
Operating Partnership, except for distributions required in connection with any
other shares of FelCor ranking senior to or on a parity with the Series B
Preferred Stock as to dividends and/or liquidation rights and except for
distributions required to enable FelCor to maintain its qualification as a REIT.
FelCor's Line of Credit and the indenture under which FelCor's senior notes
are issued include covenants that restrict the ability of FelCor to declare and
pay dividends. In general, these agreements contain exceptions
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to the limitations to allow the Operating Partnership to make distributions
necessary to allow FelCor to maintain its status as a REIT. FelCor does not
believe that these covenants will adversely affect the ability of the Operating
Partnership to make distributions in an amount sufficient to permit FelCor to
pay dividends with respect to the Series B Preferred Stock.
REDEMPTION
Shares of Series B Preferred Stock are not redeemable by FelCor prior to
, 2003. On and after , 2003, FelCor at its option upon
not less than 30 nor more than 60 days' written notice, may redeem the Series B
Preferred Stock (and the Preferred Stock Depositary will redeem the number of
Depositary Shares representing the shares of Series B Preferred Stock so
redeemed upon not less than 30 days' written notice to the holders thereof), in
whole or in part, at any time or from time to time, at a redemption price of
$2,500.00 per share (equivalent to $25.00 per Depositary Share), plus all
accrued and unpaid distributions thereon to the date fixed for redemption
(except as provided below), without interest, to the extent FelCor has funds
legally available therefor. The redemption price of the Series B Preferred Stock
(other than any portion thereof consisting of accrued and unpaid distributions)
may be paid solely from the sale proceeds of other capital stock of FelCor and
not from any other source. For purposes of the preceding sentence, "capital
stock" means any common stock, preferred stock, depositary shares, interests,
participations, or other ownership interests (however designated) and any rights
(other than debt securities convertible into or exchangeable for equity
securities) or options to purchase any of the foregoing. Holders of Depositary
Receipts evidencing Depositary Shares to be redeemed shall surrender such
Depositary Receipts at the place designated in such notice and shall be entitled
to the redemption price and any accrued and unpaid distributions payable upon
such redemption following such surrender. If notice of redemption of any
Depositary Shares has been given and if the funds necessary for such redemption
have been set aside by FelCor in trust for the benefit of the holders of any
Depositary Shares so called for redemption, then from and after the redemption
date distributions will cease to accrue on such Depositary Shares, such
Depositary Shares shall no longer be deemed outstanding and all rights of the
holders of such shares will terminate, except the right to receive the
redemption price. If fewer than all of the outstanding Depositary Shares are to
be redeemed, the Depositary Shares to be redeemed shall be selected pro rata (as
nearly as may be practicable without creating fractional Depositary Shares) or
by any other equitable method determined by FelCor. See "Description of
Preferred Stock -- Redemption" in the accompanying Prospectus.
Notice of redemption will be given by mail or by publication (with
subsequent prompt notice by mail) in The Wall Street Journal or The New York
Times or, if neither is then being published, in any other daily newspaper of
national circulation, not less than 30 business days nor more than 60 days prior
to the redemption date. A similar notice furnished by FelCor will be mailed by
the Preferred Stock Depositary, by first class mail, postage prepaid, not less
than 30 nor more than 60 days prior to the redemption date, addressed to the
respective holders of record of the Depositary Receipts evidencing the
Depositary Shares to be redeemed at their respective addresses as they appear on
the share transfer records of the Preferred Stock Depositary. No failure to give
such notice or any defect thereto or in the mailing thereof shall affect the
validity of the proceedings for the redemption of any shares of Series B
Preferred Stock or Depositary Shares except as to the holder to whom notice was
defective or not given. Each notice shall state: (i) the redemption date; (ii)
the redemption price; (iii) the number of shares of Series B Preferred Stock to
be redeemed (and the corresponding number of Depositary Shares); (iv) the place
or places where the Depositary Receipts evidencing the Depositary Shares are to
be surrendered for payment of the redemption price; and (v) that distributions
on the shares to be redeemed will cease to accrue on such redemption date. If
fewer than all the Depositary Shares held by any holder are to be redeemed, the
notice mailed to such holder shall also specify the number of Depositary Shares
to be redeemed from such holder.
The holders of Depositary Receipts at the close of business on a Dividend
Record Date will be entitled to receive the dividend payable with respect to the
Depositary Shares evidenced by such Depositary Receipts on the corresponding
Dividend Payment Date notwithstanding the redemption thereof between such
Dividend Record Date and the corresponding Dividend Payment Date or FelCor's
default in the payment of the dividend due. Except as provided above, FelCor
will make no payment or allowance for unpaid dividends, whether or not in
arrears, on shares of Series B Preferred Stock or Depositary Shares to be
redeemed.
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The shares of Series B Preferred Stock have no stated maturity and will not
be subject to any sinking fund or mandatory redemption provisions (except as
provided under "Description of Preferred Stock -- Restrictions on Ownership and
Transfers" in the accompanying Prospectus).
Unless all dividends then required to be paid on the Series B Preferred
Stock and any Parity Stock have been or contemporaneously are declared and paid,
or declared and a sum sufficient for the payment thereof set apart for payment,
the Series B Preferred Stock and any Parity Stock may not be redeemed in whole
or in part and FelCor may not, except as set forth in the following sentence,
redeem, purchase or otherwise acquire for consideration any shares of Series B
Preferred Stock and any Parity Stock, otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of Series B Preferred Stock
and any Parity Stock. Notwithstanding the foregoing limitations, FelCor may, at
any time, acquire shares of its capital stock, without regard to rank, for the
purpose of preserving its status as a REIT or for purposes of an employee
benefit plan of FelCor.
LIQUIDATION PREFERENCE
The holders of shares of Series B Preferred Stock are entitled to receive
in the event of any liquidation, dissolution or winding up of FelCor, whether
voluntary or involuntary, $2,500 per share of Series B Preferred Stock
(equivalent to $25 per Depositary Share) plus an amount per share of Series B
Preferred Stock equal to all dividends (whether or not earned or declared)
accrued and unpaid thereon to the date of final distribution to such holders
("Liquidation Preference"), and no more.
Until the holders of the Series B Preferred Stock have been paid the
Liquidation Preference in full, no payment will be made to any holder of Junior
Stock upon the liquidation, dissolution or winding up of FelCor. If, upon any
liquidation, dissolution or winding up of FelCor, the assets of FelCor, or
proceeds thereof, distributable among the holders of the shares of Series B
Preferred Stock and any Parity Stock are insufficient to pay in full the
Liquidation Preference and the liquidation preference applicable with respect to
any such Parity Stock, then such assets, or the proceeds thereof, will be
distributed among the holders of shares of Series B Preferred Stock and any such
Parity Stock, ratably, in accordance with the respective amounts which would be
payable on such shares of Series B Preferred Stock and any such Parity Stock if
all amounts payable thereon were to be paid in full. Neither a consolidation or
merger of FelCor with another corporation, a statutory share exchange by FelCor,
nor a sale, lease or transfer of all or substantially all of FelCor's assets
will be considered a liquidation, dissolution or winding up, voluntary or
involuntary, of FelCor.
VOTING RIGHTS
In any matter in which the Series B Preferred Stock is entitled to vote (as
expressly described herein or as may be required by law), including any action
by written consent, each share of Series B Preferred Stock shall be entitled to
100 votes, each of which 100 votes may be directed separately by the holder
thereof (or by any proxy or proxies of such holder). With respect to each share
of Series B Preferred Stock, the holder thereof may designate up to 100 proxies,
with each such proxy having the right to vote a whole number of votes (totaling
100 votes per share of Series B Preferred Stock). As a result, each Depositary
Share will be entitled to one vote.
If six quarterly dividends (whether or not consecutive) payable on the
Series B Preferred Stock, or any Parity Stock, are in arrears, whether or not
earned or declared, the number of directors then constituting the Board of
Directors of FelCor will be increased by two and the holders of the Depositary
Shares representing the Series B Preferred Stock and any other Parity Stock,
voting together as a single class ("Voting Preferred Shares"), will have the
right to elect two additional directors to serve on the Board of Directors at an
annual meeting of stockholders or a properly called special meeting of the
holders of the Voting Preferred Shares and at each subsequent annual meeting of
stockholders until all such dividends, together with the dividends for the
current quarterly period, on the Voting Preferred Shares have been paid or
declared and set aside for payment.
The approval of two-thirds of the outstanding Depositary Shares
representing the Series B Preferred Stock and any Parity Stock similarly
affected, voting together as a single class, is required in order to (i) amend
the Charter to affect materially and adversely the rights, preferences or voting
power of the holders
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of the Series B Preferred Stock and such Parity Stock, (ii) enter into a share
exchange that affects the Series B Preferred Stock, consolidate with or merge
into another entity, or permit another entity to consolidate with or merge into
FelCor, unless in each such case, each share of Series B Preferred Stock remains
outstanding without a material and adverse change to its terms and rights or is
converted into or exchanged for a share of preferred stock of the surviving
entity having preferences, rights, voting powers, restrictions, limitations as
to distributions, qualifications and terms and conditions of redemption
identical to those of a share of Series B Preferred Stock (except for changes
that do not materially and adversely affect the holders of the Series B
Preferred Stock) or (iii) amend the Charter to authorize, reclassify, create or
increase the authorized amount of any class of stock having rights senior to the
Series B Preferred Stock and such Parity Stock with respect to the payment of
dividends or amounts upon the liquidation, dissolution or winding up of FelCor.
However, FelCor may increase the authorized number of shares of Preferred Stock
and may create additional classes of Parity Stock and Junior Stock, increase the
authorized number of shares of Parity Stock and Junior Stock and issue
additional series of Parity Stock and Junior Stock, all without the consent of
any holder of Series B Preferred Stock.
CONVERSION RIGHTS
Shares of Series B Preferred Stock are not convertible into or exchangeable
for any other property or securities of FelCor.
EXCHANGE LISTING
FelCor intends to make application to list the Depositary Shares on the
NYSE, subject to official notice of issuance. If so approved, trading of the
Depositary Shares on the NYSE is expected to commence within a 30-day period
after the date of initial delivery of the Depositary Shares. See "Underwriting."
The Series B Preferred Stock will not be so listed, and FelCor does not expect
that there will be any trading market for the Series B Preferred Stock except as
represented by Depositary Shares.
TRANSFER AGENT
The transfer agent and registrar for the Depositary Shares is SunTrust
Bank, Atlanta, Georgia.
FEDERAL INCOME TAX CONSIDERATIONS
The following, together with the information set forth in the accompanying
Prospectus under "Federal Income Tax Considerations," is a summary of the
material federal income tax considerations relevant to a prospective holder of
Series B Preferred Stock who is a U.S. stockholder. As used herein, the term
"U.S. stockholder" means a holder of Series B Preferred Stock that for U.S.
federal income tax purposes is (i) a citizen or resident of the United States,
(ii) a corporation, partnership, or other entity created or organized in or
under the laws of the United States, any state thereof, or the District of
Columbia. (iii) an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United States,
or (iv) any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or more
U.S. persons have the authority to control all substantial decisions of the
trust. This discussion does not purport to deal with all aspects of taxation
that may be relevant to a holder of Series B Preferred Stock in light of his
personal investment or tax circumstances, or to certain types of stockholders
subject to special treatment under the federal income tax laws (including
insurance companies, tax-exempt organizations (except as discussed below),
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States).
The statements of law in this discussion are based on current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing, temporary,
and currently proposed Treasury Regulations promulgated under the Code, the
legislative history of the Code, existing administrative rulings and practices
of the Internal Revenue Service (the "Service") and judicial decisions. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect
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the accuracy of any statements in this Prospectus Supplement with respect to the
transactions entered into or contemplated prior to the effective date of such
changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF
THE SERIES B PREFERRED STOCK, OF FELCOR'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAX CONSEQUENCES OF THE MERGER
Jenkens & Gilchrist, counsel to FelCor, will deliver an opinion to FelCor
on the closing date of the Merger (the "Closing Date") to the effect that, based
upon certain representations, assumptions, and conditions, the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of section 368(a) of the Code. In addition, Hunton & Williams, special tax
counsel to FelCor, will deliver an opinion to FelCor on the Closing Date to the
effect that FelCor qualified to be taxed as a REIT pursuant to sections 856
through 860 of the Code for its taxable years ended December 31, 1994 through
December 31, 1997, and the Merger will not adversely affect FelCor's continued
qualification as a REIT.
To maintain its qualification as a REIT, following the Merger, FelCor will
be required to distribute by the end of 1998 any current or accumulated earnings
and profits ("Bristol's E&P") (as determined for federal income tax purposes) of
Bristol remaining at the effective time of the Merger. At least 21 days before
the Closing Date, Bristol will deliver to FelCor an estimate of Bristol's E&P as
of the Closing Date, together with a confirmation of that estimate from Arthur
Andersen LLP (the "E&P Statement"). Within three months after the Closing Date,
Arthur Andersen LLP will prepare a final computation of Bristol's E&P as of the
Closing Date (the "Final Statement"). In determining the amount that it must
distribute by December 31, 1998, FelCor will rely on both the E&P Statement and
the Final Statement. If FelCor fails to distribute all of Bristol's E&P by
December 31, 1998 (or by January 31, 1999, if certain declaration and record
date requirements are met), it will fail to qualify as a REIT.
At the time of the Merger, FelCor intends to make an election pursuant to
IRS Notice 88-19 to defer recognition of any "built-in gain" associated with the
assets acquired from Bristol in the Merger (the "Bristol Assets"). As a result
of such election, if FelCor sells any Bristol Asset within ten years after the
Closing Date and recognizes gain upon such sale, FelCor will be subject to tax
at the highest corporate rate on an amount equal to the lesser of (i) the
recognized gain or (ii) the excess of (A) the fair market value of the Bristol
Asset on the Closing Date over (B) the adjusted basis of the Bristol Asset on
the Closing Date. Any such tax would reduce the amount available for
distribution to stockholders.
TAXATION OF FELCOR
Hunton & Williams has acted as special tax counsel to FelCor in connection
with the Offering. In the opinion of Hunton & Williams, FelCor qualified to be
taxed as a REIT pursuant to sections 856 through 860 of the Code for its taxable
years ended December 31, 1994 through December 31, 1997, and FelCor's
organization and current and proposed method of operation will enable it to
continue to qualify to be taxed as a REIT under the Code. Investors should be
aware, however, that opinions of counsel are not binding upon the Internal
Revenue Service or any court. It must be emphasized that Hunton & Williams'
opinion is based on various assumptions and is conditioned upon certain
representations made by FelCor as to factual matters, including representations
regarding the nature of FelCor's properties and the future conduct of its
business. Moreover, such qualification and taxation as a REIT depend upon
FelCor's ability to meet on a continuing basis, through actual annual operating
results, distribution levels, and stock ownership, the various qualification
tests imposed under the Code. No assurance can be given that the actual results
of FelCor's operations for any particular taxable year will satisfy such
requirements. For a discussion of the consequences of failure to qualify as a
REIT, see "Federal Income Tax Considerations -- Failure to Qualify" in the
accompanying Prospectus.
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TAXATION OF STOCKHOLDERS OF FELCOR
Tax Treatment of Depositary Shares. An owner of Depositary Shares will be
treated for federal income tax purposes as owning the portion of the Series B
Preferred Stock represented by such Depositary Shares.
Distributions to Holders. As long as FelCor qualifies as a REIT,
distributions with respect to the Preferred Stock, including the Series B
Preferred Stock offered hereby, will be taxable as ordinary income (to the
extent such distributions are not designated as capital gain dividends or
retained capital gains) to the extent of FelCor's current or accumulated
earnings and profits as determined for federal income tax purposes ("E&P") and
will not be eligible for the dividends received deduction generally available to
corporations. For purposes of determining whether distributions are out of E&P,
the E&P of FelCor will be allocated first to FelCor's outstanding Preferred
Stock, including the Series B Preferred Stock, and then to FelCor's outstanding
Common Stock. Distributions with respect to the Series B Preferred Stock in
excess of FelCor's E&P (an "excess distribution") will be treated first as a
tax-free return of capital to the holder, to the extent of the holder's basis in
such stock (and will correspondingly reduce such stock basis) and then as
capital gain, to the extent of any excess distribution over the holder's basis
(assuming the holder holds the Preferred Stock as a capital asset). Any
distribution declared by FelCor in October, November or December of any year and
payable to a stockholder of record on a specified date in any such month shall
be treated as both paid by FelCor and received by the stockholder on December 31
of such year, provided that the distribution is actually paid by FelCor during
January of the following taxable year.
Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed FelCor's net
capital gain for the taxable year) without regard to the period for which the
stockholder has held his Series B Preferred Stock. However, corporate holders
may be required to treat up to 20% of certain capital gain dividends as ordinary
income. FelCor may elect to treat all or a portion of the net long-term capital
gain it receives in a taxable year as having been distributed to FelCor's
stockholders. In that case, FelCor's stockholders would include in income their
proportionate share of FelCor's undistributed long-term capital gain. In
addition, the stockholders would be deemed to have paid their proportionate
share of the tax paid by FelCor, which would be credited or refunded to the
stockholders. Each stockholder's basis in his Series B Preferred Stock would be
increased by the amount of the undistributed long-term capital gain included in
the stockholder's income less the stockholder's share of the tax paid by FelCor.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of FelCor. Instead, such losses would be
carried over by FelCor for potential offset against its future income (subject
to certain limitations). Taxable distributions from FelCor and gain from the
disposition of the Series B Preferred Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a stockholder is a limited partner) against such income.
In addition, taxable distributions from FelCor generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of Series B Preferred Stock (or distributions treated
as such), however, will be treated as investment income only if the stockholder
so elects, in which case such capital gains will be taxed at ordinary income
rates.
FelCor will notify stockholders after the close of FelCor's taxable year as
to the portions of the distributions attributable to that year that constitute
ordinary income, return of capital and capital gain.
Sale of Series B Preferred Stock. Upon the sale or exchange of Series B
Preferred Stock, the holder will recognize gain or loss equal to the difference
between the amount realized on such sale and the tax basis of such Series B
Preferred Stock. Assuming such stock is held as a capital asset, such gain or
loss will be a long-term capital gain or loss if the Series B Preferred Stock
has been held for more than one year. Otherwise, such capital gain or loss will
be short-term. The tax rate applicable to such capital gain is described below
under "-- Capital Gains and Losses." However, any loss recognized by a holder on
the sale or exchange of a share of Series B Preferred Stock held for not more
than six months (after applying certain holding period rules) will be treated as
a long-term capital loss to the extent of distributions from FelCor required to
be treated by such holder as long-term capital gain. All or a portion of any
loss realized upon a taxable disposition of Series B
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Preferred Stock may be disallowed if other shares of Series B Preferred Stock
are purchased within 30 days before or after the disposition.
Redemption of Series B Preferred Stock for Cash. The tax treatment accorded
to any redemption by FelCor (as distinguished from a sale, exchange, or other
disposition) of Series B Preferred Stock can only be determined on the basis of
particular facts as to each holder at the time of redemption. In general, a
holder of Series B Preferred Stock will recognize ordinary income to the extent
of accrued but unpaid dividends and will recognize capital gain or loss measured
by the difference between the amount received (less the amount attributable to
accrued but unpaid dividends) by the holder upon the redemption and such
holder's adjusted tax basis in the Series B Preferred Stock redeemed (provided
the Series B Preferred Stock is held as a capital asset) if, taking into account
the constructive ownership rules of Section 318 of the Code, such redemption (i)
results in a "complete termination" of the holder's interest in all classes of
FelCor stock under Section 302(b)(3) of the Code, (ii) is "substantially
disproportionate" with respect to the holder's interest in FelCor under Section
302(b)(2) of the Code, or (iii) is "not essentially equivalent to a dividend"
with respect to the holder under Section 302(b)(1) of the Code. A holder of
Series B Preferred Stock that has held such stock as a capital asset and that
owns no stock of FelCor, actually or constructively under Section 318 of the
Code, immediately after FelCor's redemption of his Series B Preferred Stock will
have a "complete termination" of such holder's interest in FelCor and such
stockholder should therefore recognize capital gain or loss. A distribution to a
holder will be "not essentially equivalent to a dividend" if it results in a
"meaningful reduction" in the holder's stock interest in FelCor. If a holder of
Series B Preferred Stock owns (actually or constructively) no FelCor Common
Stock or an insubstantial percentage of the outstanding Common Stock, based upon
current law, a redemption of Series B Preferred Stock from such holder generally
should be considered "not essentially equivalent to a dividend." However,
whether a distribution is "not essentially equivalent to a dividend" depends on
all of the facts and circumstances and a holder of Series B Preferred Stock
intending to rely on any of these tests at the time of the redemption should
consult his own tax advisor to determine their application to his particular
situation.
If the redemption does not meet any of the three tests under Section 302 of
the Code described above, then the redemption proceeds received for the Series B
Preferred Stock will be treated as a distribution with respect to such stock as
described above under "Distributions to Holders." In such a case, the holder's
remaining adjusted tax basis in the redeemed Series B Preferred Stock will be
transferred to any other stock of such holder in FelCor. If the holder of Series
B Preferred Stock owns no other stock of FelCor, under certain circumstances,
such basis may be transferred to a related party or it may be lost entirely.
Redemption Premium. Under Section 305(c) of the Code and applicable
Treasury Regulations, if the redemption price of the Series B Preferred Stock
exceeds its issue price by more than a de minimis amount (as determined under
such regulations) then, in certain circumstances, the amount of such excess (the
"redemption premium") may be deemed to be a constructive distribution (treated
as a dividend to the extent of FelCor's E&P and otherwise subject to the
treatment described above for distributions) which is taxable to the holder
based on a constant yield method (as if it was original issue discount on a debt
instrument) over the period the Series B Preferred Stock cannot be redeemed.
However, the constant yield method, described above, which must be used to
take into account the redemption premium on preferred stock, only applies if the
subject preferred stock is (i) mandatorily redeemable, (ii) redeemable at the
holder's option, or (iii) redeemable at the issuer's option if at the time of
issue, based on all the facts and circumstances, it is more likely than not that
the issuer will exercise such option. The applicable Treasury Regulations
provide a "safe harbor" under which a right to redeem will not be treated as
more likely than not to occur if (i) the issuer and the stockholder are not
related within the meaning of such regulations; (ii) there are no plans,
arrangements, or agreements that effectively require or are intended to compel
the issuer to redeem the stock (disregarding, for this purpose, a separate
mandatory redemption), and (iii) exercise of the right to redeem would not
reduce the yield of the stock, as determined under such regulations. With
respect to situation (iii) above, the Treasury Regulations further provide that,
even if the redemption is more likely than not to occur, the constant yield
method will not apply if the redemption premium is solely in the nature of a
penalty for premature redemption. A redemption premium is
S-26
<PAGE> 27
considered to be a penalty for premature redemption only if it is paid as a
result of changes in economic or market conditions over which neither the issuer
of the stock nor the holder has legal or practical control.
Redemption of the Series B Preferred Stock is not mandatory, such stock is
not redeemable at the holder's option, and FelCor does not believe that at the
time of issue it is more likely than not that the Series B Preferred Stock will
be redeemed. Accordingly, FelCor does not believe that the existence of its
optional redemption right will result in a constructive distribution to the
holders of Series B Preferred Stock. However, no assurance can be given that the
Service will not take a contrary position.
Capital Gains and Losses. The highest marginal individual income tax rate
is 39.6%. The maximum tax rate on net capital gains applicable to noncorporate
taxpayers is 28% for sales and exchanges of assets held for more than one year
but not more than 18 months, and 20% for sales and exchanges of assets held for
more than 18 months. The maximum tax rate on long-term capital gain from the
sale or exchange of "section 1250 property" (i.e., depreciable real property)
held for more than 18 months is 25% to the extent that such gain would have been
treated as ordinary income if the property were "section 1245 property." With
respect to distributions designated by FelCor as capital gain dividends and any
retained capital gains that FelCor is deemed to distribute, FelCor may designate
(subject to certain limits) whether such a distribution is taxable to its
noncorporate stockholders at a 20%, 25%, or 28% rate. Thus, the tax rate
differential between capital gain and ordinary income for noncorporate taxpayers
may be significant. In addition, the characterization of income as capital or
ordinary may affect the deductibility of capital losses. Capital losses not
offset by capital gains may be deducted against a noncorporate taxpayer's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
Taxation of Tax-Exempt Holders of Series B Preferred Stock. Tax-exempt
entities, including qualified employee pension and profit sharing trusts and
individual retirement accounts ("Exempt Organizations"), generally are exempt
from federal income taxation. However, they are subject to taxation on their
unrelated business taxable income ("UBTI"). While many investments in real
estate generate UBTI, amounts distributed by FelCor to Exempt Organizations
generally should not constitute UBTI, provided that the Series B Preferred Stock
is not otherwise used in an unrelated trade or business of the Exempt
Organization. However, if an Exempt Organization finances its acquisition of
Series B Preferred Stock with debt, a portion of its income from FelCor will
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefits associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of
Code Section 501(c) are subject to different UBTI rules, which generally will
require them to characterize dividends from FelCor as UBTI.
A pension trust that owns more than 10% (by value) of the outstanding stock
of FelCor is required to treat a percentage of the dividends from FelCor as UBTI
("UBTI Percentage") in certain circumstances. The UBTI Percentage is the gross
income derived by FelCor from an unrelated trade or business (determined as if
FelCor were a pension trust) divided by the gross income of FelCor for the year
in which the dividends are paid. The UBTI rule applies only if (i) the UBTI
Percentage is at least 5%, (ii) FelCor satisfies the 5/50 Rule by reason of the
modification of such rule that allows the beneficiaries of the pension trust to
be treated as holding shares of FelCor in proportion to their actuarial
interests in the pension trust, and (iii) either (A) one pension trust owns more
than 25% of the value of FelCor's stock or (B) a group of pension trusts
individually holding more than 10% of the value of FelCor's stock collectively
owns more than 50% of the value of FelCor's stock. Accordingly, exempt pension
trusts should consult their tax advisors regarding the advisability of acquiring
(subject to the restrictions on transfer and ownership of FelCor's stock
contained in the Charter) more than 10% (by value) of the outstanding stock of
FelCor.
Backup Withholding. Under the backup withholding provisions of the Code and
applicable Treasury Department regulations thereunder, a holder of Series B
Preferred Stock may be subject to backup withholding at the rate of 31% with
respect to dividends paid on, or the proceeds of a sale or redemption of, such
stock unless (i) such holder is a corporation or comes within certain other
exempt categories and when
S-27
<PAGE> 28
required demonstrates this fact, or (ii) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup withholding
rules. The amount of any backup withholding from a payment to a holder will be
allowed as a credit against the holder's federal income tax liability and may
entitle such holder to a refund, provided that the required information is
furnished to the Service. Recently promulgated Treasury Regulations, effective
for distributions made after December 31, 1999, modify the backup withholding
rules with respect to non-U.S. stockholders. Holders of Series B Preferred Stock
should consult their own tax advisors regarding the qualification for exemption
from backup withholding and the procedure for obtaining any applicable
exemption.
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
(the "Underwriting Agreement"), FelCor has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Prudential Securities Incorporated and Smith Barney Inc. are
acting as representatives (the "Representatives"), has severally agreed to
purchase from FelCor, the respective number of Depositary Shares set forth below
opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
DEPOSITARY
UNDERWRITER SHARES
----------- ----------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Prudential Securities Incorporated..........................
Smith Barney Inc............................................
---------
Total............................................. 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Depositary Shares offered
hereby are subject to the approval of certain legal matters by their counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all Depositary Shares offered hereby if any such Depositary Shares are taken.
The Representatives have advised FelCor that the Underwriters propose
initially to offer the Depositary Shares to the public at the public offering
price set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share on sales to certain other dealers. After the initial offering
of the Depositary Shares, the public offering price and other selling terms may
be changed, from time to time, by the Representatives.
FelCor has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
FelCor has agreed that for a period of 30 days from the date hereof, FelCor
will not, without the prior written consent of the Representatives, directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of any Depositary Shares or any other preferred stock ranking on a
parity with the Series B Preferred Stock and the related Depositary Shares.
S-28
<PAGE> 29
Application will be made to list the Depositary Shares on the NYSE. Trading
of the Depositary Shares on the New York Stock Exchange is expected to commence
within the 30-day period after the initial delivery of the Depositary Shares.
The Representatives have advised FelCor that they intend to make a market in the
Depositary Shares prior to the commencement of trading on the NYSE. The
Representatives will have no obligation to make a market in the Depositary
Shares, however, and may cease market making activities, if commenced, at any
time.
In order to facilitate the offering of the Depositary Shares, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Depositary Shares. Specifically, the Underwriters may
overallot in connection with the offering, creating a short position in the
Depositary Shares for their own account. In addition, to cover overallotments or
to stabilize the price of the Depositary Shares, the Underwriters may bid for,
and purchase, the Depositary Shares in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an underwriter
or a dealer for distributing the Depositary Shares in the Offering, if the
syndicate repurchases previously distributed Depositary Shares in transactions
to cover syndicate short positions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
Depositary Shares above independent market levels. The Underwriters are not
required to engage in these activities and may end any of these activities at
any time.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it discourages resales of the security by purchasers in the
Offering.
Neither FelCor nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Depositary Shares. In addition,
neither FelCor nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Representatives from time to time provide investment banking and
financial advisory services to Felcor and the Operating Partnership. Certain of
the Representatives have also acted as representatives of various underwriters
in connection with offerings of FelCor's equity securities and the Operating
Partnership's debt securities.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
FelCor by Jenkens & Gilchrist, a Professional Corporation, Dallas, Texas. In
addition, the description of federal income tax consequences contained in the
sections of the Prospectus and Prospectus Supplement entitled "Federal Income
Tax Considerations" is based on the opinion of Hunton & Williams, Richmond,
Virginia. The validity of the securities offered hereby will be passed upon for
the Underwriters by King & Spalding, Atlanta, Georgia. Jenkens & Gilchrist and
King & Spalding will rely on the opinion of Miles & Stockbridge P.C., Baltimore,
Maryland, with respect to all matters involving Maryland law.
S-29
<PAGE> 30
EXPERTS
The consolidated financial statements of FelCor as of December 31, 1997 and
1996 and for the years ended December 31, 1997, 1996 and 1995 and the
consolidated financial statements of DJONT as of December 31, 1997 and 1996 and
for the years ended December 31, 1997, 1996 and 1995, have been incorporated in
this Prospectus Supplement by reference to FelCor's Annual Report on Form 10-K
for the year ended December 31, 1997. Such financial statements have been so
incorporated in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Bristol as of December 31, 1997
and 1996 and for the years ended December 31, 1997 and 1996, incorporated by
reference in this Prospectus Supplement by reference to the Current Report on
Form 8-K of FelCor dated March 24, 1998, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in accounting and auditing in giving such reports.
The consolidated statements of income, of changes in stockholders' equity
and of cash flows for Bristol for the eleven months ended December 31, 1995 and
the combined statements of income and cash flows for Harvey Hotel Companies
("Predecessor") for the one month ended January 31, 1995 have been incorporated
in this Prospectus Supplement by reference to the Current Report on Form 8-K of
FelCor dated March 24, 1998 in reliance on the reports of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
S-30
<PAGE> 31
PRO FORMA FINANCIAL INFORMATION
FELCOR SUITE HOTELS, INC.
INTRODUCTION TO
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BACKGROUND
FelCor is a self-administered real estate investment trust formed to own
hotel properties. At December 31, 1997, FelCor owned interests in 73 hotels with
an aggregate of 17,933 suites/rooms through its 92.7% general partnership
interest in the Operating Partnership. The following table sets forth
information regarding the acquisitions of the FelCor Hotels:
<TABLE>
<CAPTION>
HOTELS NUMBER OF
ACQUIRED SUITES/ ROOMS
-------- -------------
<S> <C> <C>
1994.................................. 7 1,730
1995.................................. 13 2,649
1996.................................. 23 5,769
1997.................................. 30 7,608
Suites constructed since
acquisition......................... 177
-- ------
73 17,933
== ======
</TABLE>
FelCor owns 100% equity interests in 55 of the FelCor Hotels (13,430
suites/rooms), a 90% or greater interest in partnerships owning four of the
FelCor Hotels (1,041 suites/rooms), and 50% interests in separate unconsolidated
entities that own 14 of the FelCor Hotels (3,462 suites/rooms). At December 31,
1997, 52 of the FelCor Hotels were operated as Embassy Suites hotels, 13 as
Doubletree Guest Suites Hotels, five as Sheraton hotels, two as Sheraton Suites
hotels, and one as a Hilton Suites hotel. The FelCor Hotels are located in 27
states, with 31 hotels in California, Florida and Texas.
FelCor leases all of the FelCor Hotels to DJONT or a consolidated
subsidiary thereof under the Percentage Leases. DJONT is a Delaware limited
liability company, of which all the voting interests (constituting a 50% equity
interest) are beneficially owned by Hervey A. Feldman and Thomas J. Corcoran,
Jr., who are directors and officers of FelCor, and the non-voting interests
(constituting the remaining 50% equity interest) are owned by RGC Leasing, Inc.,
a Nevada corporation owned by the children of Charles N. Mathewson, a major
investor in and a director of FelCor. DJONT has entered into management
agreements pursuant to which, at December 31, 1997, 63 of the FelCor Hotels were
managed by subsidiaries of Promus, seven were managed by subsidiaries of
Sheraton, and three were managed by two independent management companies.
1998 ACQUISITIONS
Since January 1, 1998, FelCor has completed the acquisitions of three
hotels and announced the pending acquisition of eight hotels. On February 17,
1998, FelCor acquired a 194-suite Doubletree Guest Suites Hotel in Columbus,
Ohio for total consideration of approximately $19.1 million (approximately $14.1
million in cash and approximately 134,000 Units valued at $37.06 each). On March
23, 1998, FelCor completed the acquisition of a 90% interest in a 154-room
Radisson Hotel in Wilmington, Delaware (to be converted to a Doubletree Hotel)
for approximately $14.0 million in cash. On April 14, 1998, FelCor completed the
acquisition of a 90% interest in a 248 room Doubletree Hotel located in Denver,
Colorado for approximately $24.3 million in cash.
On April 20, 1998, FelCor announced the pending acquisition of eight hotels
with an aggregate of 1,898 suites for a total purchase price of $245 million in
cash. Five of the eight hotels are currently operated under the Embassy Suites
brand and three are operated under the Doubletree Guest Suites brand. It is
anticipated that one of the Doubletree Guest Suites will be converted to an
Embassy Suites hotel and the other two will be converted to Sheraton Suites
hotels. The acquisition is expected to close at the end of April 1998.
F-1
<PAGE> 32
1997 AND ANTICIPATED 1998 FINANCING TRANSACTIONS
During 1997, FelCor completed two secondary equity offerings of 3.0 million
common shares at $35.50 per share on February 3, 1997 and of 11.2 million common
shares at $36.625 per share on June 30, 1997. Proceeds from these offerings
amounted to approximately $489 million, net of offering costs, and were used to
fund acquisitions, reduce amounts outstanding under FelCor's unsecured revolving
Line of Credit, and repurchase 1.2 million FelCor common shares from Promus at
$36.625 per share less the related offering costs.
On October 1, 1997, FelCor completed a 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 7 3/8% senior notes
due 2004 priced at 99.489% to yield 7.47% and $125 million of 7 5/8% senior
notes due 2007 priced at 99.209% to yield 7.74%. The proceeds from the notes
were used to fund acquisitions and reduce amounts outstanding under the Line of
Credit. On March 21, 1998, FelCor completed an exchange offering for the notes,
issuing new notes which were identical in amount and terms except that the new
notes were registered under the Securities Act.
In order to fund the 1998 Acquisitions previously discussed, FelCor
currently intends to issue the Series B Preferred Stock offered hereby at an
assumed dividend rate of 8 7/8%. See "Use of Proceeds."
THE BRISTOL MERGER
On March 24, 1998, FelCor and Bristol announced a proposed merger whereby
FelCor will acquire all the real estate assets and related liabilities of
Bristol existing at the merger date. Pursuant to the Merger Agreement and the
transactions contemplated thereby, each of Bristol's outstanding common shares
and equivalents will be exchanged for 0.685 newly issued FelCor Common Shares
and Bristol will merge with and into FelCor, with FelCor being the surviving
corporation. Prior to the Merger, Bristol will spin-off, as a taxable dividend,
all of its non-real estate holdings into BHR. In connection with the Merger, all
of Bristol's hotels will be leased to BHR under Percentage Leases.
F-2
<PAGE> 33
The Bristol Hotels, upon completion of Bristol's Redevelopment and
Rebranding Program, will include three upscale all-suite hotels, 24 upscale
full-service hotels, 60 full-service hotels and 22 limited-service hotels. The
Bristol Hotels will be operated under the following franchise affiliations:
<TABLE>
<CAPTION>
HOTELS PENDING TOTAL
FRANCHISE OWNED ACQUISITIONS BRISTOL HOTELS ROOMS
- --------- ------ ------------ -------------- ------
<S> <C> <C> <C> <C>
Upscale All Suite:
Crowne Plaza suites.................... 1 0 1 295
Homewood suites........................ 0 1 1 108
Bristol House.......................... 1 0 1 127
Upscale Full Service:
Crowne Plaza........................... 19 0 19 6,814
Harvey Hotel........................... 5 0 5 1,486
Full Service:
Holiday Inn............................ 39 9 48 13,139
Holiday Inn Select..................... 6 0 6 2,145
Courtyard by Marriott.................. 2 0 2 420
Independent............................ 1 0 1 181
Ramada................................. 1 0 1 220
Holiday Inn and Suites................. 1 0 1 285
Days Inn............................... 1 0 1 157
Limited Service:
Hampton Inn............................ 4 5 9 1,310
Holiday Inn Express.................... 3 5 8 1,113
Fairfield Inn.......................... 5 0 5 931
-- -- --- ------
89 20 109 28,731
== == === ======
</TABLE>
F-3
<PAGE> 34
FELCOR SUITE HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
The following unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 1997 is based in part upon:
(i) the Consolidated Statement of Operations of FelCor for the year
ended December 31, 1997 incorporated by reference herein;
(ii) the Consolidated Statement of Operations of Bristol for the year
ended December 31, 1997 incorporated by reference herein;
The Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1997 assumes that all the following occurred on January 1, 1997 (i)
the Offering, (ii) the acquisition of the interests in 30 hotels acquired by
FelCor in 1997 (the "1997 Acquisitions"), (iii) the common stock offerings made
by FelCor in 1997 (the "1997 Offerings"), (iv) the issuance of $300 million in
senior unsecured notes (the "Notes") in 1997, (v) the acquisition of the 11
hotels described under "Recent Developments -- Recent Acquisitions" and
"-- Pending Acquisition" (the "1998 Acquisitions"), (vi) the Omaha Acquisition,
(vii) the Spin-Off, and (viii) the Merger.
In management's opinion, all material adjustments necessary to reflect the
effects of the foregoing transactions have been made. The following unaudited
pro forma consolidated statement of operations is not necessarily indicative of
what the actual results of operations of FelCor would have been assuming such
transactions had been completed as of January 1, 1997, nor do they purport to
represent the results of operations for future periods.
F-4
<PAGE> 35
FELCOR SUITE HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FELCOR 1997 1998 BRISTOL
HISTORICAL TRANSACTIONS ACQUISITIONS MERGER OTHER PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS TOTAL
---------- ------------ ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Percentage lease revenue..... $169,114 $34,808(E) $35,345(E) $202,501(E) $441,768
Equity in income of
unconsolidated entities.... 6,963 (26)(F) 1,851(F) 8,788
Other revenue................ 574 (574)(G)
-------- ------- ------- -------- --------
Total revenue.......... $176,651 $34,208 $35,345 $204,352 $450,556
======== ======= ======= ======== ========
Expenses:
General and administrative... 3,743 420(H) 1,000(H) 5,163
Depreciation................. 50,798 8,389(I) 8,470(I) 55,250(I) 122,907
Taxes, insurance and other... 23,093 2,840(J) 3,940(J) 38,333(J) 68,206
Interest..................... 28,792 8,735(K) 20,843(K) 54,286(K) 112,656
Minority interest in
Operating Partnership...... 5,817 325(L) $ (120)(M) 6,022
Minority interest in other
partnerships............... 573 90(N) 494(N) 1,157
-------- ------- ------- -------- -------- --------
Total expenses......... 112,816 20,799 33,747 148,869 (120) 316,111
-------- ------- ------- -------- -------- --------
Net income..................... 63,835 $13,409 $ 1,598 $ 55,483 120 134,445
======= ======= ======== ========
Preferred dividends............ 11,797 11,094(O) 22,891
-------- -------- --------
Net income applicable to common
shareholders................. $ 52,038 $(10,974) $111,554
======== ======== ========
Net income per common share --
basic........................ $ 1.66 $ 1.65
======== ========
Weighted average common shares
outstanding -- basic......... 31,269 5,227 31,134 67,630
======== ======= ======== ========
Net income per common share --
diluted...................... $ 1.65 $ 1.63
======== ========
Weighted average common shares
outstanding -- diluted....... 31,610 5,228 31,789 68,627
======== ======= ======== ========
</TABLE>
See notes on following page.
F-5
<PAGE> 36
NOTES TO FELCOR PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1997
(A)Represents FelCor's historical results of operations (excluding a
$185,000 extraordinary charge from write off of deferred financing fees)
for the year ended December 31, 1997
(B)Represents adjustment to FelCor's historical results of operations
assuming the 1997 Acquisitions, the 1997 Offerings, and the placement of
the Notes had occurred as of January 1, 1997.
(C)Represents adjustment to FelCor's historical results of operations
assuming the 1998 Acquisitions had occurred as of January 1, 1997.
(D)Represents adjustment to FelCor's results of operations assuming the
Omaha Acquisition, the Spin-Off and the Merger and related transactions
had been consummated as of January 1, 1997.
(E)Represents pro forma lease revenue from DJONT or BHR to FelCor
calculated by applying the contractual or anticipated rent provisions of
the Percentage Leases to the historical suite/room revenues, food and
beverage rents, food and beverage revenues, and other revenues of all
the FelCor Hotels and Bristol Hotels which are consolidated for
financial reporting purposes. The equity in income of unconsolidated
entities is included as a separate line item in the accompanying Pro
Forma Consolidated Statement of Operations as described in Note (F).
Historical suite revenues for the time period prior to the acquisition
by FelCor and the contractual or anticipated pro forma Percentage Lease
revenue for the time period prior to acquisition by FelCor for the year
ended December 31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
PERCENTAGE LEASE REVENUE
SUITE REVENUE FOR THE PERIOD FOR THE PERIOD
PRIOR TO ACQUISITION PRIOR TO ACQUISITION
---------------------------- ------------------------
<S> <C> <C>
Consolidated hotels:
1997 Acquisitions............. $ 73,113 $ 34,808
1998 Acquisitions............. 65,841 35,345
Merger........................ 503,099 202,501
-------- --------
Total consolidated
hotels.............. $642,053 $272,654
======== ========
Unconsolidated entity hotels:
1997 Acquisitions............. $ 7,053 $ 3,071
======== ========
</TABLE>
(F)Represents pro forma equity in income of unconsolidated entities of
FelCor calculated by applying FelCor's pro rata ownership percentage to
the net earnings of the unconsolidated partnerships, computed using the
contractual or anticipated rent provisions of the Percentage Leases to
the historical suite/room revenues, food and beverage rents, food and
beverage revenues and other revenues of the FelCor Hotels and the
Bristol Hotels; historical taxes, insurance, and other; historical
depreciation expense; and historical interest expense. The amortization
of FelCor's cost in excess of book value of the partnership assets is
deducted to arrive at equity in income of unconsolidated entities. The
computation is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Statements of operations information:
Percentage lease revenue................................. $3,071
Depreciation............................................. 1,262
Taxes, insurance and other............................... 509
Interest expense......................................... 1,115
------
Net income............................................... 185
50% of income attributable to the Company................ 93
Amortization of cost in excess of net book value......... (119)
------
Loss from unconsolidated entities........................ $ (26)
------
</TABLE>
F-6
<PAGE> 37
In addition, the pro forma adjustment of $1,851,000 for the Bristol
Merger relates to the equity in income of unconsolidated entities
acquired from Bristol.
(G)Represents elimination of historical interest income earned on excess
cash.
(H)Pro forma general and administrative expenses represent executive
compensation, legal, audit and other expenses. These amounts are based
on historical general and administrative expenses as well as probable
1998 expenses.
(I)Represents depreciation on the FelCor Hotels and the Bristol Hotels.
Depreciation is computed based on estimated useful lives of 40 years for
buildings and improvements and five years for furniture, fixtures and
equipment. These estimated useful lives are based on management's
knowledge of the properties and the hotel industry in general. The pro
forma depreciation adjustment for 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
ASSET COST PRO FORMA DEPRECIATION EXPENSE
--------------------------------------------------- -------------------------------------
BUILDING AND FURNITURE BUILDING AND FURNITURE
LAND IMPROVEMENTS AND FIXTURES TOTAL IMPROVEMENTS AND FIXTURES TOTAL
-------- ------------ ------------ ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Hotels:
1997
Acquisitions..... $ 64,233 $ 492,369 $26,488 $ 583,090 $ 5,830 $ 2,559 $ 8,389
1998
Acquisitions..... 27,064 266,215 9,071 302,350 6,656 1,814 8,470
Merger............. 199,098 1,732,156 59,730 1,990,984 43,304 11,946 55,250
-------- ---------- ------- ---------- ------- ------- -------
Total Consolidated
Hotels............. $290,395 $2,490,740 $95,289 $2,876,424 $55,790 $16,319 $72,109
======== ========== ======= ========== ======= ======= =======
</TABLE>
(J)Pro forma real and personal property taxes, property insurance, ground
lease and other expenses for the year ended December 31, 1997 represent
expenses to be paid by the Operating Partnership. Such amounts were
primarily derived from historical amounts paid with respect to the 1997
Acquisitions, 1998 Acquisitions and the Bristol Hotels. A schedule of
pro forma adjustments for property taxes, insurance, and ground leases
and other derived from the historical amounts paid for the Hotels during
the year ended December 31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
GROUND LEASES
PROPERTY TAXES PROPERTY INSURANCE AND OTHER TOTAL
-------------- ------------------ ------------- -------
<S> <C> <C> <C> <C>
Consolidated hotels:
1997 Acquisitions...... $ 2,706 $ 402 $ (268) $ 2,840
1998 Acquisitions...... 3,610 214 116 3,940
Merger................. 20,065 2,827 15,441 38,333
------- ------ ------- -------
Total
consolidated
hotels....... $26,381 $3,443 $15,289 $45,113
======= ====== ======= =======
Unconsolidated entity
hotels acquired during
1997................... $ 419 $ 28 $ 62 $ 509
======= ====== ======= =======
</TABLE>
F-7
<PAGE> 38
(K)Represents both historical and pro forma interest expense computed based
on borrowings multiplied by the applicable fixed or variable interest
rate as stated in the applicable debt instruments. The pro forma
adjustment assumes additional borrowings against the Line of Credit in
the amount of $323.1 million (after reduction for the net proceeds of
the 1998 Offering) were required in order to finance the 1997 and 1998
Acquisitions and the Merger as well as debt assumed from Bristol, and
includes additional pro forma interest expense incurred prior to the
acquisition date by FelCor. The variable interest rates used to
calculate the pro forma adjustment to interest expense were the same as
the historical rates used to calculate the outstanding borrowings on the
Line of Credit for the year ended December 31, 1997. The year end pro
forma debt balances, average interest rates and pro forma interest
expense for the year ended December 31, 1997 follows (dollars in
thousands):
<TABLE>
<CAPTION>
DEBT INTEREST INTEREST
BALANCE RATE EXPENSE(1)
---------- -------- ----------
<S> <C> <C> <C>
Line of Credit............................... $ 483,308 7.10% $ 34,154
Senior mortgage note payable................. 455,000 7.66 34,835
Senior mortgage note payable................. 144,834 7.46 10,802
$175M Senior unsecured notes, net of
discount................................... 174,122 7.47 13,612
$125M Senior unsecured notes, net of
discount................................... 124,023 7.74 10,017
Renovation loan.............................. 25,000 6.40 1,610
Mortgage note payable -- Harvey Hotels....... 16,126 8.55 1,379
Mortgage note payable -- Philadelphia........ 13,400 9.00 1,206
Mortgage note payable -- St. Louis........... 8,365 9.50 795
Mortgage note payable -- Omaha Central....... 6,776 11.25 762
Mortgage note payable -- Salina.............. 5,196 10.38 539
Mortgage note payable -- Express Moline I.... 2,009 13.13 264
Mortgage note payable -- Express Moline II... 785 12.00 94
Mortgage note payable -- Hays & Hampton...... 932 9.75 91
Collateralized mortgage note................. 5,931 10.22 612
Other........................................ 650 7.97 52
Capital leases............................... 15,491 10.70 1,832
---------- --------
$1,481,948 $112,656
========== ========
</TABLE>
-----------------------
(1) Pro forma interest expense represents interest expense applicable to
the pro forma weighted average borrowings outstanding during the
period presented which at times differs from the pro forma
borrowings outstanding at the end of the period.
(L)Represents pro forma adjustment to minority interest in the Operating
Partnership to reflect the ownership percentage in the Operating
Partnership at December 31, 1997, calculated as approximately 7.3% of
income before minority interest.
(M)Represents pro forma adjustment to minority interest in the Operating
Partnership to reflect FelCor's increased ownership in the Operating
Partnership following the Merger, calculated as approximately 4.3% of
income before minority interest.
(N)Represents pro forma adjustment to minority interest related to six
hotels (four of the 1997 Acquisitions and two of the 1998 Acquisitions)
in which FelCor has a 90% general partnership interest. Minority
interest is calculated as 10% of net income computed using the rent
provisions of the Percentage Leases to the historical suite/room
revenues, food and beverage rents, food and beverage revenues and other
revenues; historical taxes, insurance and other; historical depreciation
F-8
<PAGE> 39
expense; and historical interest expense. This computation for the year
ended December 31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
ACQUISITIONS ACQUISITIONS
------------ ------------
<S> <C> <C>
Statement of operations information:
Percentage lease revenue................... $2,040 $5,307
Depreciation............................... 671 301
Taxes, insurance and other................. 251 64
Interest expense........................... 217
------ ------
Net income before minority interest........ $ 901 $4,942
====== ======
Minority interest expense -- 10% of net
income.................................. $ 90 $ 494
====== ======
</TABLE>
(O) Represents pro forma dividends on the preferred stock issued in the
1998 Offering.
F-9
<PAGE> 40
FELCOR SUITE HOTELS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
The following unaudited Pro Forma Consolidated Balance Sheet assumes that
(i) the Offering, (ii) the 1998 Acquisitions, (iii) the Omaha Acquisition, (iv)
the Spin-Off and (v) the Merger all occurred as of December 31, 1997.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Consolidated Balance Sheet is derived
from FelCor's and Bristol's Consolidated Balance Sheets as of December 31, 1997
and should be read in conjunction with the consolidated financial statements of
FelCor and Bristol incorporated by reference herein.
The following Pro Forma Consolidated Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of December 31, 1997, nor does it purport to
represent the future financial position of FelCor.
F-10
<PAGE> 41
FELCOR SUITE HOTELS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
FELCOR 1998 BRISTOL
HISTORICAL ACQUISITIONS MERGER OTHER PRO FORMA
(A) (B) (C) ADJUSTMENTS TOTAL
---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net investment in hotel
properties....................... $1,489,764 $302,350 $2,022,284(E) $3,814,398
Investment in unconsolidated
entities......................... 132,991 12,396(E) 145,387
Cash and cash equivalents.......... 17,543 17,543
Cash held in escrow................ 7,639(F) 7,639
Due from DJONT..................... 18,908 18,908
Deferred expenses, net............. 10,593 10,593
Other assets....................... 3,565 8,885(G) 12,450
---------- -------- ---------- ----------
Total assets................ $1,673,364 $302,350 $2,051,204 $4,026,918
========== ======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt and capital lease
obligations...................... $ 476,819 $293,559 $ 832,570(H) $(121,000)(L) $1,481,948
Accrued expenses and other
liabilities...................... 11,331 66,562(I) 77,893
Distributions payable.............. 24,671 24,671
Minority interest in Operating
Partnership...................... 73,451 4,966 13,917(M) 92,334
Minority interest in other
partnerships..................... 8,594 3,825(D) 12,419
---------- -------- ---------- --------- ----------
Total liabilities........ 594,866 302,350 899,132 (107,083) 1,689,265
---------- -------- ---------- --------- ----------
Shareholders equity:
Preferred stock.................. 151,250 125,000(L) 276,250
Common stock..................... 378 311(J) 689
Additional paid-in capital....... 1,003,501 1,150,888(J) (17,917)(N) 2,136,472
Unearned officers' and
directors' compensation..... (1,754) 873(K) (881)
Distributions in excess of
earnings...................... (33,771) (33,771)
Less common stock in treasury, at
cost.......................... (41,106) (41,106)
---------- ---------- --------- ----------
Total shareholders'
equity................... 1,078,498 1,152,072 107,083 2,337,653
---------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity... $1,673,364 $302,350 $2,051,204 $4,026,918
========== ======== ========== ==========
</TABLE>
See notes on following page.
F-11
<PAGE> 42
NOTES TO FELCOR PRO FORMA CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997:
(A) Represents the historical financial position of FelCor as of December 31,
1997.
(B) Represents adjustments to reflect the acquisition of the 1998 Acquisitions
as of December 31, 1997 with borrowings against FelCor's Line of Credit of
$293.6 million and issuance of Units valued at $5.0 million.
(C) Represents adjustments to reflect (i) the Omaha Acquisition, (ii) the
Spin-Off and (iii) the Merger and related transactions as if the
transactions were consummated as of December 31, 1997.
(D) Represents adjustment for 10% minority interests in two of the 1998
Acquisitions.
(E) Represents adjustment for the allocation of the purchase price of the
Bristol Hotels and unconsolidated entities.
(F) Represents adjustment for cash held in escrow acquired from Bristol. These
amounts are on deposit with lenders pursuant to the borrowing agreements
discussed in Note (H).
(G) Represents adjustment for receivables and other deposits acquired related
to the Bristol Hotels.
(H) Represents adjustment for borrowings of Bristol assumed by FelCor in
connection with the acquisition of the Bristol Hotels.
(I) Represents adjustment for accrued interest, accrued real and personal
property taxes and other liabilities assumed related to the Bristol Hotels.
(J) Represents adjustment for the aggregate value of the FelCor Common Stock
issued to Bristol shareholders in connection with the Merger.
(K) Represents adjustment for the unearned compensation of Mr. Feldman,
FelCor's current chairman of the board, who will become Chairman Emeritus
following the 1998 annual meeting of stockholders.
(L) Represents adjustment for the issuance of preferred stock in connection
with the Offering. The net proceeds of $121 million will be used to reduce
borrowings on FelCor's Line of Credit.
(M) Represents adjustment to reflect consolidated minority interest in the
Operating Partnership at 4.3%.
(N) Represents adjustments to additional paid in capital as follows (in
thousands):
<TABLE>
<S> <C>
Adjustment for minority interest (see note (M).... $13,917
Adjustment for the Offering expenses.............. 4,000
-------
$17,917
=======
</TABLE>
F-12
<PAGE> 43
COMBINED LESSEES
INTRODUCTION TO
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
FelCor leases each of the 73 hotels owned at December 31, 1997, and leases
or will lease its 1998 Acquisitions, to DJONT. Additionally, FelCor intends to
lease the Bristol Hotels to BHR. DJONT and BHR are collectively referred to as
the "Combined Lessees".
The Combined Lessees' unaudited Pro Forma Combined Statements of Operations
for the year ended December 31, 1997 is presented as if the 73 hotels and the
1998 Acquisitions that FelCor leases to DJONT and the Bristol Hotels (that will
be leased to BHR pursuant to Percentage Leases) had been leased as of January 1,
1997. The pro forma information is based in part upon the Consolidated
Statements of Operations of DJONT and the Consolidated Statement of Operations
of Bristol for the year ended December 31, 1997, both incorporated by reference
herein. In management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made.
The unaudited Pro Forma Condensed Combined Statement of Operations is not
necessarily indicative of what the actual results of operations of the Combined
Lessees would have been assuming such transactions had been completed as of
January 1, 1997, nor do they purport to represent the results of operations for
future periods.
F-13
<PAGE> 44
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DJONT 1997 1998 COMBINED
HISTORICAL TRANSACTIONS ACQUISITIONS BHR PRO FORMA
(A) (B) (C) (D) TOTAL
---------- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Suite/room revenue............ $456,614 $ 80,166 $65,841 $503,099 $1,105,720
Food and beverage revenue..... 34,813 27,460 12,427 122,766 197,466
Other revenue................. 43,083 2,167 7,237 37,203 89,690
-------- -------- ------- -------- ----------
Total revenue......... $534,510 $109,793 $85,505 $663,068 $1,392,876
-------- -------- ------- -------- ----------
Expenses:
Property operating costs........ 161,196 39,860 29,133 289,091 519,280
Other operating costs........... 124,079 24,815 19,061 106,769 274,724
Management and franchise fees... 25,286 4,372 1,505 24,506 55,669
Taxes, insurance and other...... 7,299 1,414 828 6,685 16,226
Percentage lease................ 216,990 37,732 35,345 202,501 492,568
Lessee overhead................. 2,332 146 54 22,858 25,390
-------- -------- ------- -------- ----------
Total expenses........ 537,182 108,339 85,926 652,410 1,383,857
-------- -------- ------- -------- ----------
Net income (loss) before
taxes......................... (2,672) 1,454 (421) 10,658 9,019
Income tax provision............ 4,253 4,253
-------- -------- ------- -------- ----------
Net income (loss)............... $ (2,672) $ 1,454 $ (421) $ 6,405 $ 4,766
======== ======== ======= ======== ==========
</TABLE>
- ---------------
(A) Represents DJONT's historical results of operations for the year ended
December 31, 1997.
(B) Represents adjustments to DJONT's historical results of operations assuming
1997 Acquisitions had occurred as of January 1, 1997 and the related hotels
were leased to DJONT pursuant to the Percentage Leases beginning on January
1, 1997.
(C) Represents adjustments to DJONT's historical results of operations assuming
the 1998 Acquisitions had occurred as of January 1, 1997 and the related
hotels were leased to DJONT pursuant to the Percentage Leases beginning on
January 1, 1997.
(D) Represents BHR's pro forma results of operations (relating only to the
Bristol Hotels) assuming the Omaha Acquisition, the Spin-Off and the Merger
and related transactions occurred as of January 1, 1997 and the Bristol
Hotels were leased to BHR pursuant to the Percentage Leases beginning on
January 1, 1997.
F-14
