<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14236
FELCOR SUITE HOTELS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 75-2541756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 E. JOHN CARPENTER FRWY., SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
COMMON STOCK NEW YORK STOCK EXCHANGE, INC.
$1.95 SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common stock held
by non-affiliates of the registrant, as of March 10, 1998, was approximately
$1.3 billion.
As of March 10, 1998, the registrant had issued and outstanding 36,591,080
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE> 2
FELCOR SUITE HOTELS, INC.
INDEX
<TABLE>
<CAPTION>
FORM 10-K
REPORT
ITEM NO. PAGE
- -------- ---------
<S> <C>
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................... 3
</TABLE>
2
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included herein at pages F-1 through F-32.
2. Financial Statement Schedules
The following financial statement schedule is included herein at page
F-22
Schedule III - Real Estate and Accumulated Depreciation for FelCor
Suite Hotels, Inc.
All other schedules for which provision is made in Regulation S-X are
either not required to be included herein under the related instructions or are
inapplicable or the related information is included in the footnotes to the
applicable financial statement and, therefore, have been omitted.
3. Exhibits
The following exhibits are filed as part of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
3.1 - Articles of Amendment and Restatement dated June 22, 1995, amending
and restating the Charter of Registrant, as amended or supplemented
by Articles of Merger dated June 23, 1995, Articles Supplementary
dated April 30, 1996, Articles of Amendment dated August 8, 1996,
Articles of Amendment dated June 16, 1997 and Articles of Amendment
dated October 30, 1997.
</TABLE>
3
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<TABLE>
<S> <C>
3.2 - Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-11 (File No.
33-98332) (the "December 1995 Registration Statement") and
incorporated herein by reference).
4.1 - Form of Share Certificate for Common Stock (filed as Exhibit 4.1 to
the Registrant's Form 10-Q for the quarter ended June 30, 1996 (the
"1996 Second Quarter 10-Q) and incorporated herein by reference).
4.2 - Indenture dated as of April 22, 1996 by and between the Registrant
and Sun trust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit
4.2 to the Registrant's Form 8-K dated May 1, 1996 (the "1996 Form
8-K") and incorporated herein by reference).
4.3 - Indenture dated as of October 1, 1997 by and among FelCor Suites
Limited Partnership, the Registrant, the Subsidiary Guarantors
named therein and Sun Trust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4.1 to the Registration Statement on Form S-4
(File No. 333-39595) filed by the Registrant and the other
co-registrants named therein (the "1997 Form S-4") and incorporated
herein by reference).
4.4 - Form of Share Certificate for $1.95 Series A Cumulative Convertible
Preferred Stock (filed as Exhibit 4.4 to the 1996 Form 8-K and
incorporated herein by reference).
10.1 - Amended and Restated Agreement of Limited Partnership of FelCor
Suites Limited Partnership (the "Partnership") (filed as Exhibit
10.1 to the Registrant's Annual Report on Form 10-K/A Amendment No.
1 for the fiscal year ended December 31, 1994 (the "1994 10-K/A")
and incorporated herein by reference).
10.1.1 - First Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of November 17, 1995 by and
among the Registrant, Promus Hotels, Inc. and all of the persons or
entities who are or shall in the future become of the limited
partners of the Partnership (filed as Exhibit 10.1.1 to the
Registrant's Annual Report on Form 10-K, as amended, for the fiscal
year ended December 31, 1995 (the "1995 10-K") and incorporated
herein by reference)
10.1.2 - Second Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of January 9, 1996 between
the Registrant and all of the persons or entities who are or shall
in the future become limited partners of the Partnership (filed as
Exhibit 10.1.2 to the 1995 10-K and incorporated herein by
reference).
10.1.3 - Third Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of January 10, 1996 by
and among the Registrant, MarRay-LexGreen, Inc. and all of the
persons and entities who are or shall in the future become
limited partners of the Partnership (filed as Exhibit 10.1.3
to the 1995 10-K and incorporated herein by reference).
10.1.4 - Fourth Amendment to the Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of January 10,
1996 by and among the Registrant, Piscataway-Centennial
Associates Limited Partnership and all of the persons or
entities who are or shall in the future become limited
partners of the Partnership (filed as Exhibit 10.1.4 to the
1995 10-K and incorporated herein by reference).
10.1.5 - Fifth Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of May 2, 1996,
between the Registrant and all of the persons or entities who
are or shall in the future become limited partners of the
Partnership, adopting Addendum No. 2 to Amended and Restated
Agreement of Limited Partnership of the Partnership dated as
of May 2, 1996 (filed as Exhibit 10.1.5 to the 1996 Second
Quarter 10-Q and incorporated herein by reference).
10.1.6 - Sixth Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of September 16, 1996,
by and among the Registrant, John B. Urbahns, II and all of
the persons or entities who are or shall in the future become
limited partners of the Partnership (filed
</TABLE>
4
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<TABLE>
<S> <C>
as Exhibit 10.1.6 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (the "1996 10-K") and
incorporated herein by reference).
10.1.7 - Seventh Amendment to Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of May 16,
1997, by and among the Registrant, PMB Associates, Ltd. and
all of the persons or entities who are or shall in the future
become limited partners of the Partnership.
10.1.8 - Eighth Amendment to Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of February 6,
1998, by and among the Registrant, Columbus/Front Ltd. and all
of the persons or entities who are or shall in the future
become limited partners of the Partnership.
10.2.1 - Form of Lease Agreement between the Partnership as Lessor
and DJONT Operations, L.L.C. ("DJONT") as Lessee (filed as
Exhibit 10.2.1 to the 1995 10-K and incorporated herein by
reference).
10.2.2 - Schedule of executed Lease Agreements identifying material
variations from the form of Lease Agreement with respect to
hotels acquired by the Registrant through December 31, 1997.
10.3 - Amended and Restated Loan Agreement dated as of September 26, 1996,
among the Registrant and the Partnership, as Borrowers, Boatmen's
National Bank of Oklahoma, as Agent and Lender, and First Tennessee
Bank National Association, Liberty Bank and Trust Company of Tulsa,
National Association, Bank One, Texas, N.A., First National Bank of
Commerce, and AmSouth Bank of Alabama, as Lenders (filed as Exhibit
10.3.4 to the Registrant's Form 10-Q for the quarter ended
September 30, 1996 (the "1996 Third Quarter 10-Q") and incorporated
herein by reference).
10.5 - Employment Agreement dated as of July 28, 1994 between the
Registrant and Hervey A. Feldman (filed as Exhibit 10.7 to the 1994
10-K/A and incorporated herein by reference).
10.6 - Employment Agreement dated as of July 28, 1994 between the
Registrant and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to
the 1994 10-K/A and incorporated herein by reference).
10.7.1 - Restricted Stock and Stock Option Plan of the Registrant (filed as
Exhibit 10.9 to the 1994 10-K/A and incorporated herein by
reference).
10.7.2 - 1995 Restricted Stock and Stock Option Plan of the Registrant
(filed as Exhibit 10.9.2 to the 1995 10-K and incorporated herein
by reference).
10.8 - Savings and Investment Plan of the Registrant (filed as Exhibit
10.10 to the 1994 10-K/A and incorporated herein by reference).
10.9 - Registration Rights Agreement dated as of July 21, 1994 between the
Registrant and the parties named therein (filed as Exhibit 10.11 to
the 1994 10-K/A and incorporated herein by reference).
10.10 - Agreement dated as of April 15, 1995 among the Registrant, the
Partnership, FelCor, Inc., Thomas J. Corcoran, Jr. and Hervey A.
Feldman relating to purchase of securities (filed as Exhibit 10.15
to the Registration Statement on Form S-11 (File No. 33-91870) (the
"May 1995 Registration Statement") and incorporated herein by
reference).
10.11 - Registration Rights Agreement dated as of November 17, 1995 between
the Registrant and Cleveland Finance Associates Limited Partnership
(filed as Exhibit 10.27 to the 1995 10-K and incorporated herein by
reference).
10.12 - Registration Rights Agreement dated as of January 3, 1996 between
the Registrant and Robert E. Woolley and Charles M. Sweeney (filed
as Exhibit 10.28 to the 1995 10-K and incorporated herein by
reference).
</TABLE>
5
<PAGE> 6
<TABLE>
<S> <C>
10.13 - Credit Agreement dated as of February 6, 1996, by and among the
Partnership, as borrower, Holdings and the Registrant, as
guarantors, and Canadian Imperial Bank of Commerce, as agent (filed
as Exhibit 10.30 to the 1996 Form 8-K and incorporated herein by
reference).
10.14 - Third Amended and Restated Revolving Credit Agreement dated as of
August 14, 1997 among the Registrant and the Partnership, as
Borrower, the Lenders party thereto, The Chase Manhattan Bank, as
Administrative Agent , and Wells Fargo Bank, National Association,
as Documentation Agent (filed as Exhibit 10.23 to the 1997 Form S-4
and incorporated herein by reference).
10.15 - Contract for Purchase and Sale of Hotels dated as of June 5, 1997
by and among ITT Sheraton Corporation, Sheraton Savannah Corp.,
Sheraton Peachtree Corp., Sheraton Crescent Corp., Sheraton Dallas,
Corp., Sheraton Gateway Suites O'Hare Investment Partnership, and
the Partnership (filed as Exhibit 10.24 to the Registrant's Current
Report on Form 8-K dated June 4, 1997 and incorporated herein by
reference).
10.16 - Registration Rights Agreement dated as of September 26, 1997 among
the Registrant, the Partnership, Morgan Stanley & Co. Incorporated,
NationsBank Capital Markets, Inc. and Salomon Brothers Inc. (filed
as Exhibit 10.25 to the 1997 Form S-4 and incorporated herein by
reference).
21.1 - List of Subsidiaries of the Registrant.
23.1(1) - Consent of Coopers & Lybrand L.L.P.
27 - Financial Data Schedule.
</TABLE>
(1) Exhibit filed herewith, all other exhibits have been previously filed.
(b) Reports on Form 8-K.
During the fourth quarter of 1997, the Registrant filed a Current
Report on Form 8-K dated October 1, 1997 to file as an exhibit the Registrant's
press release of October 1, 1997 regarding the completion of the private
placement of $300 million in aggregate principal amount of the Operating
Partnership's long-term senior unsecured notes.
6
<PAGE> 7
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FELCOR SUITE HOTELS, INC.
By: /s/ Randall L. Churchey
----------------------------
Randall L. Churchey
Senior Vice President, Chief Financial Officer & Treasurer
Date: June 16, 1998
7
<PAGE> 8
FELCOR SUITE HOTELS, INC.
INDEX TO FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
FELCOR SUITE HOTELS, INC.
<TABLE>
<S> <C>
Report of Independent Accountants.................................................................................F-2
Consolidated Balance Sheets - December 31, 1997 and 1996..........................................................F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995........................F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995............. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995........................F-6
Notes to Consolidated Financial Statements........................................................................F-7
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1997..................................F-22
DJONT OPERATIONS, L.L.C.
Report of Independent Accountants................................................................................F-24
Consolidated Balance Sheets - December 31, 1997 and 1996.........................................................F-25
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995.......................F-26
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995.............F-27
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.......................F-28
Notes to Consolidated Financial Statements.......................................................................F-29
</TABLE>
F-1
<PAGE> 9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of FelCor Suite Hotels, Inc.
We have audited the accompanying consolidated financial statements and
the financial statement schedule of FelCor Suite Hotels, Inc. listed in Item
14(a) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
FelCor Suite Hotels, Inc. as of December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years
then ended in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
January 20, 1998
except for Note 14 as to which
the date is February 17, 1998
F-2
<PAGE> 10
FELCOR SUITE HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Investment in hotels, net of accumulated depreciation of
$87,400 in 1997 and $36,718 in 1996 .......................................... $ 1,489,764 $ 899,691
Investment in unconsolidated entities ........................................... 132,991 59,867
Cash and cash equivalents ....................................................... 17,543 7,793
Due from Lessee ................................................................. 18,908 5,526
Deferred expenses, net of accumulated amortization of
$1,987 in 1997 and $364 in 1996 ............................................. 10,593 3,235
Other assets .................................................................... 3,565 2,676
----------- -----------
Total assets ............................................................... $ 1,673,364 $ 978,788
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt, net of discount of $1,855 at December 31, 1997 ............................ $ 465,726 $ 226,550
Distributions payable ........................................................... 24,671 16,090
Accrued expenses and other liabilities .......................................... 11,331 5,235
Capital lease obligations ....................................................... 11,093 12,875
Minority interest in Operating Partnership, 2,900 and 2,786 units issued and
outstanding at December 31, 1997 and 1996, respectively ...................... 73,451 76,112
Minority interest in other partnerships ......................................... 8,594
----------- -----------
Total liabilities .......................................................... 594,866 336,862
----------- -----------
Commitments and contingencies (Notes 5 and 8)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized, 6,050 shares issued
and outstanding at December 31, 1997 and 1996 ................................ 151,250 151,250
Common stock, $.01 par value, 100,000 shares authorized, 37,802 and 23,502 shares
issued at December 31, 1997
and 1996, respectively ....................................................... 378 235
Additional paid in capital ...................................................... 1,003,501 505,082
Unearned officers' and directors' compensation .................................. (1,754) (1,454)
Distributions in excess of earnings ............................................. (33,771) (13,187)
----------- -----------
1,119,604 641,926
Less common stock in treasury, at cost, 1,200 shares ............................ (41,106)
----------- -----------
Total shareholders' equity ................................................. 1,078,498 641,926
----------- -----------
Total liabilities and shareholders' equity ................................. $ 1,673,364 $ 978,788
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 11
FELCOR SUITE HOTELS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Percentage lease revenue................................................. $ 169,114 $ 97,950 $ 23,787
Equity in income from unconsolidated entities............................ 6,963 2,010 513
Other revenue............................................................ 574 984 1,691
---------- ---------- ----------
Total revenues.............................................. 176,651 100,944 25,991
---------- ---------- ----------
Expenses:
General and administrative............................................... 3,743 1,819 870
Depreciation............................................................. 50,798 26,544 5,232
Taxes, insurance and other............................................... 23,093 13,897 2,563
Interest expense......................................................... 28,792 9,803 2,004
Minority interest in Operating Partnership............................... 5,817 5,590 3,131
Minority interest in other partnerships.................................. 573
---------- ---------- ----------
Total expenses.............................................. 112,816 57,653 13,800
---------- ----------- ---------
Income before extraordinary charge............................................ 63,835 43,291 12,191
Extraordinary charge from write off of deferred financing fees................ 185 2,354
---------- ---------- ----------
Net income.................................................................... 63,650 40,937 12,191
Preferred dividends........................................................... 11,797 7,734
---------- ---------- ----------
Net income applicable to common shareholders.................................. $ 51,853 $ 33,203 $ 12,191
========== ========== =========
Per common share data:
Basic:
Net income applicable to common shareholders
before extraordinary charge......................................... $ 1.67 $ 1.54 $ 1.71
Extraordinary charge..................................................... ( 0.01) ( 0.10)
------- ------- -------
Net income applicable to common shareholders............................. $ 1.66 $ 1.44 $ 1.71
======= ======= =======
Weighted average common shares outstanding............................... 31,269 23,023 7,137
======= ======= =======
Diluted:
Net income applicable to common shareholders
before extraordinary charge......................................... $ 1.65 $ 1.53 $ 1.69
Extraordinary charge..................................................... (0.01) ( 0.10)
------- ------- -------
Net income applicable to common shareholders............................. $ 1.64 $ 1.43 $ 1.69
======= ======= =======
Weighted average common shares outstanding............................... 31,610 23,218 7,199
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 12
FELCOR SUITE HOTELS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- UNEARNED
NUMBER ADDITIONAL OFFICERS'
PREFERRED OF PAID-IN AND DIRECTORS'
STOCK SHARES AMOUNT CAPITAL COMPENSATION
----- ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 4,690 $ 47 $ 69,776
Issuance of common shares, net of
offering expenses and allocation to
minority interest 16,411 164 393,009
Issuance of officers' and directors'
shares 34 739 $ (631)
Distributions/dividends declared:
$1.84 per common share
Amortization of unearned officers' and
directors' compensation 158
Net income
-------- ------ ---- ----------- --------
BALANCE AT DECEMBER 31, 1995 21,135 211 463,524 (473)
Issuance of common shares, net of
offering expenses and allocation to
minority interest 1,913 19 38,911
Issuance of officers' and directors'
shares 53 1 1,486 (1,487)
Conversion of Operating Partnership
units to common shares 401 4 8,159
Issuance of 6,050 shares of preferred
stock, net of offering expenses $151,250 (6,998)
Distributions/dividends declared:
$1.92 per common share
$1.2783 per preferred share
Amortization of unearned officers' and
directors' compensation 506
Net income
-------- ------ ---- ----------- --------
BALANCE AT DECEMBER 31, 1996 151,250 23,502 235 505,082 (1,454)
Issuance of common shares, net of
offering expenses and allocation to
minority interest 14,200 142 495,911
Repurchase of common shares
held in treasury
Issuance of officers' and directors' shares 44 1 1,317 (1,317)
Conversion of Operating Partnership
units to common shares 25 599
Stock options exercised 31 592
Distributions/dividends declared:
$2.10 per common share
$1.95 per preferred share
Amortization of unearned officers' and
directors' compensation 1,017
Net income
-------- ------ ---- ----------- --------
BALANCE AT DECEMBER 31, 1997 $151,250 37,802 $378 $ 1,003,501 $(1,754)
======== ====== ==== =========== ========
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TOTAL
IN EXCESS OF TREASURY SHAREHOLDERS'
EARNINGS STOCK EQUITY
-------- ----- ------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ (568) $ 69,255
Issuance of common shares, net of
offering expenses and allocation to
minority interest 393,173
Issuance of officers' and directors'
shares 108
Distributions/dividends declared:
$1.84 per common share (13,499) (13,499)
Amortization of unearned officers' and
directors' compensation 158
Net income 12,191 12,191
--------- --------- -----------
Balance at December 31, 1995 (1,876) 461,386
Issuance of common shares, net of
offering expenses and allocation to
minority interest 38,930
Issuance of officers' and directors'
shares
Conversion of Operating Partnership
units to common shares 8,163
Issuance of 6,050 shares of preferred
stock, net of offering expenses 144,252
Distributions/dividends declared:
$1.92 per common share (44,514) (44,514)
$1.2783 per preferred share (7,734) (7,734)
Amortization of unearned officers' and
directors' compensation 506
Net income 40,937 40,937
--------- --------- -----------
Balance at December 31, 1996 (13,187) 641,926
Issuance of common shares, net of
offering expenses and allocation to
minority interest 496,053
Repurchase of common shares
held in treasury $ (41,106) (41,106)
Issuance of officers' and directors' shares 1
Conversion of Operating Partnership
units to common shares 599
Stock options exercised 592
Distributions/dividends declared:
$2.10 per common share (72,437) (72,437)
$1.95 per preferred share
(11,797) (11,797)
Amortization of unearned officers' and
directors' compensation 1,017
Net income 63,650 63,650
--------- --------- -----------
Balance at December 31, 1997 $ (33,771) $ (41,106) $ 1,078,498
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 63,650 $ 40,937 $ 12,191
Adjustments to reconcile net income to net cash provided
by operating activities, net of effects of acquisitions:
Depreciation............................................................ 50,798 26,544 5,232
Amortization of deferred financing fees and organization costs........... 1,468 554 228
Amortization of unearned officers' and directors' compensation........... 1,017 506 158
Equity in income from unconsolidated entities............................ (6,963) (2,010) (513)
Extraordinary charge for write off of deferred financing fees............ 185 2,354
Fully vested officer stock grant......................................... 108
Minority interest in Operating Partnership............................... 5,817 5,590 3,131
Minority interest in other partnerships.................................. 573
Changes in assets and liabilities:
Due from Lessee.......................................................... (13,382) (3,130) (1,137)
Deferred financing fees.................................................. (8,825) (4,484) (1,072)
Deferred costs and other assets.......................................... (1,175) 353 (2,064)
Accrued expenses and other liabilities................................... 4,315 280 741
----------- ---------- ----------
Net cash flow provided by operating activities................. 97,478 67,494 17,003
----------- ---------- ----------
Cash flows from investing activities:
Acquisition of hotels.................................................... (574,100) (365,907) (219,164)
Prepayments under purchase agreements.................................... (21,701)
Acquisition of unconsolidated entities................................... (65,271) (43,424) (13,166)
Improvements and additions to hotels..................................... (52,700) (71,051) (5,166)
Cash distributions from unconsolidated entities........................ 4,211 1,954
----------- ---------- ----------
Net cash flow used in investing activities................... (687,860) (478,428) (259,197)
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from borrowings................................................. 679,144 303,350 128,600
Repayment of borrowings.................................................. (445,900) (193,954) (129,850)
Proceeds from sale of common stock....................................... 516,700 44,978 426,502
Proceeds from sale of preferred stock.................................... 151,250
Costs associated with public offerings................................... (27,600) (6,998) (27,874)
Purchase of treasury stock............................................... (41,106)
Proceeds from sale of partnership units.................................. 25,000
Proceeds from exercise of stock options.................................. 592
Distributions paid to limited partners................................... (6,026) (5,353) (2,993)
Distributions paid to common shareholders................................ (63,875) (36,583) (11,488)
Dividends paid to preferred shareholders................................. (11,797) (4,784)
----------- ---------- ----------
Net cash flow provided by financing activities................ 600,132 251,906 407,897
----------- ---------- ----------
Net change in cash and cash equivalents.......................................... 9,750 (159,028) 165,703
Cash and cash equivalents at beginning of years.................................. 7,793 166,821 1,118
----------- ---------- ----------
Cash and cash equivalents at end of years........................................ $ 17,543 $ 7,793 $ 166,821
=========== ========== ==========
Supplemental cash flow information - interest paid............................... $ 21,414 $ 9,168 $ 1,467
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 14
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
FelCor Suite Hotels, Inc., ("FelCor") is a real estate investment trust
("REIT") which at December 31, 1997, owned interests in 73 hotels with an
aggregate of 17,933 suites/rooms (collectively the "Hotels") through its 92.7%
general partner interest in FelCor Suites Limited Partnership ("the Operating
Partnership") and its consolidated subsidiaries (collectively, the "Company").
FelCor is the sole general partner of the Operating Partnership. The Company
owns 100% equity interests in 55 of the hotels (13,430 suites/rooms), a 90% or
greater interest in partnerships owning four hotels (1,041 suites) and 50%
interests in separate unconsolidated entities that own fourteen hotels (3,462
suites). At December 31, 1997, 52 of the Hotels were operated as Embassy
Suites(R) hotels, 13 as Doubletree Guest Suites(R) hotels, five as Sheraton(R)
hotels, two as Sheraton Suites hotels, and one as a Hilton Suites(R) hotel. The
Hotels are located in 27 states, with 31 hotels in California, Florida and
Texas. The following table provides certain information regarding the Company's
Hotels acquired through December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF HOTELS NUMBER OF
ACQUIRED SUITES/ROOMS
---------------- ------------
<S> <C> <C>
1994 7 1,730
1995 13 2,649
1996 23 5,769
1997
1st Quarter 15 3,446
2nd Quarter 9 2,715
3rd Quarter 4 1,000
4th Quarter 2 447
-- ------
73 17,756
==
Additional suites constructed 177
------
17,933
======
</TABLE>
The Company leases all of the Hotels to DJONT Operations, L.L.C. or a
consolidated subsidiary thereof (collectively the "Lessee") under operating
leases providing for the payment of percentage rent (the "Percentage Leases").
Hervey A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board of
Directors and Chief Executive Officer of the Company, respectively, beneficially
own a 50% voting equity interest in the Lessee. The remaining 50% non-voting
equity interest is beneficially owned by the children of Charles N. Mathewson, a
director of and major initial investor in the Company. The Lessee has entered
into management agreements pursuant to which, at December 31, 1997, 63 of the
Hotels were managed by subsidiaries of Promus Hotel Corporation ("Promus"),
seven of the Hotels are managed by subsidiaries of ITT Sheraton Corporation
("Sheraton"), and three of the Hotels are managed by two independent management
companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of FelCor, the Operating Partnership and its consolidated
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Fair Value of Financial Instruments -- Statement of Financial
Accounting Standards ("SFAS") 107 requires all entities to disclose the fair
value of certain financial instruments in their financial statements.
Accordingly, the Company reports the carrying amount of cash and cash
equivalents, amounts due from the Lessee, accounts payable and accrued
F-7
<PAGE> 15
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
expenses at cost which approximates fair value due to the short maturity of
these instruments. The carrying amount of the Company's borrowings approximates
fair value due to the Company's ability to obtain such borrowings at comparable
interest rates.
Investment in Hotels -- Hotels are stated at cost and are depreciated
using the straight-line method over estimated useful lives ranging from 31-40
years for buildings and improvements and 5 to 7 years for furniture, fixtures
and equipment.
The Company periodically reviews the carrying value of each Hotel to
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the hotel or that depreciation periods should be modified.
If facts or circumstances support the possibility of impairment, the Company
will prepare a projection of the undiscounted future cash flows, without
interest charges, of the specific hotel and determine if the investment in such
hotel is recoverable based on the undiscounted future cash flows. If impairment
is indicated, an adjustment will be made to the carrying value of the hotel
based on discounted future cash flows. The Company does not believe that there
are any factors or circumstances indicating impairment of any of its investment
in Hotels.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulated depreciation are removed from the
accounts, and the related gain or loss is included in operations.
Investment in Unconsolidated Entities --The Company owns a 50% interest
in various partnerships or limited liability companies in which the partners
jointly make all material decisions concerning the business affairs and
operations. Accordingly, the Company does not control the entities and carries
its investment in unconsolidated entities at cost, plus its equity in net
earnings, less distributions received since the date of acquisition. Equity in
net earnings is being adjusted for the straight-line amortization, over a 40
year period, of the difference between the Company's cost and its proportionate
share of the underlying net assets at date of acquisition.
Cash and Cash Equivalents -- All highly liquid investments with a
maturity of three months or less when purchased are considered to be cash
equivalents.
Deferred Expenses -- Deferred expenses are recorded at cost and consist
of the following at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Organization costs............................................... $ 349 $ 349
Deferred financing fees.......................................... 12,231 3,250
-------- -------
12,580 3,599
Accumulated amortization......................................... (1,987) (364)
-------- --------
$ 10,593 $3,235
======== ========
</TABLE>
Amortization of organization costs is computed using the straight-line
method over three to five years. Amortization of deferred financing fees is
computed using the interest method over the maturity of the notes.
Revenue Recognition -- Percentage lease revenue is recognized when
earned from the Lessee under the Percentage Lease agreements. The Lessee is in
compliance with its obligations under the Percentage Leases.
Net Income Per Common Share -- The Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" in the fourth
quarter of 1997, which established new standards for computing and presenting
F-8
<PAGE> 16
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
earnings per share and requires restatement of prior years' comparative amounts.
Basic earnings per share have been computed by dividing net income by the
weighted average number of common shares outstanding.
Diluted earnings per share have been computed by dividing net income by
the weighted average number of common shares and equivalents outstanding. Common
stock equivalents represent shares issuable upon assumed exercise of stock
options.
Net income applicable to common shareholders before extraordinary
charges for both basic earnings per share and diluted earnings per share
includes a deduction for preferred dividends of $11.8 million and $7.7 million
for the years ended December 31, 1997 and 1996 respectively. Weighted average
common shares outstanding used in the computation of diluted earnings per share
includes the dilutive effect of employee stock options and unvested officer
restricted stock grants of 341 thousand, 195 thousand and 62 thousand shares at
December 31, 1997, 1996 and 1995 respectively.
At December 31, 1997 and 1996 the Company's convertible preferred stock
if converted to common shares would be anti-dilutive, accordingly the
convertible preferred stock is not assumed to be converted in the computation of
diluted earnings per share.
Distributions and Dividends -- The Company pays regular quarterly
distributions on its common stock which are dependent on receipt of quarterly
distributions from the Operating Partnership to FelCor and the limited partners
in the Operating Partnership. Additionally, the Company pays regular quarterly
dividends on preferred stock in accordance with its preferred stock dividend
requirements.
Minority Interest in Operating Partnership -- Minority interest in the
Operating Partnership represents the limited partners' proportionate share of
the equity in the Operating Partnership. Income is allocated to minority
interest based on the weighted average percentage ownership throughout the year.
Stock Based Compensation Plans -- The Company applies APB Opinion No.
25 and related interpretations in its accounting for stock based compensation
plans. Accordingly the Company has adopted the disclosure only provisions of
SFAS No. 123, "Accounting for Stock Based Compensation."
Income Taxes -- The Company is qualified as a REIT under Sections 856
to 860 of the Internal Revenue Code. Accordingly, no provision for federal
income taxes has been reflected in the financial statements.
Earnings and profits, which will determine the taxability of
distributions to shareholders, will differ from income reported for financial
reporting purposes primarily due to the differences for federal income tax
purposes in the estimated useful lives used to compute depreciation.
Distributions made in 1997 and 1996 represent approximately a 6.0% and 11.5%
return of capital, respectively, for federal income tax purposes.
F-9
<PAGE> 17
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT IN HOTELS
Investment in hotels at December 31, 1997 and 1996 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land.......................................................... $ 157,554 $ 89,106
Building and improvements..................................... 1,257,247 744,758
Furniture, fixtures and equipment............................. 147,923 77,526
Construction in progress...................................... 14,440 25,019
------------ ----------
1,577,164 936,409
Accumulated depreciation...................................... (87,400) (36,718)
------------ ----------
$ 1,489,764 $ 899,691
============ ==========
</TABLE>
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company owned 50% interests in separate partnerships or limited
liability companies owning fourteen hotels, a parcel of undeveloped land and a
condominium management company at December 31, 1997, five hotels, a parcel of
undeveloped land and a condominium management company at December 31, 1996 and
one hotel at December 31, 1995. The Company is accounting for its investments in
these unconsolidated entities under the equity method.
Summarized combined financial information for 100% of these unconsolidated
entities is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Balance sheet information:
Investment in hotels................................... $256,032 $ 110,394
Non-recourse mortgage debt............................. $138,956 $ 49,402
Equity................................................. $126,324 $ 91,156
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
Statement of operations information: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Percentage lease revenue............................... $ 47,720 $ 9,974 $ 1,420
Net income............................................. $ 17,044 $ 4,366 $ 1,050
</TABLE>
5. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt at December 31, 1997 and 1996 consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Senior unsecured notes, net of discount...................... $298,145
Line of Credit............................................... 136,000 $115,000
Term loan.................................................... 85,000
Renovation loan.............................................. 25,000 25,000
Collateralized mortgage note................................. 5,931
Other........................................................ 650 1,550
-------- --------
$465,726 $226,550
======== ========
</TABLE>
On October 1, 1997 the Company completed the private placement of $300
million in aggregate principal amount of its long term senior unsecured notes.
The notes were issued in two maturities, consisting of $175 million of 73/8%
senior notes due 2004 priced at 99.489% to yield 7.47% and $125 million of 75/8%
senior notes due 2007 priced at 99.209% to
F-10
<PAGE> 18
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT AND CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
yield 7.74%. The discount on the $300 million senior notes accrete using the
interest method over the maturity of the notes.
The Company has an unsecured line of credit facility ("Line of Credit")
of up to $550 million which matures on October 1, 2000. Interest payable on
borrowings under the Line of Credit is variable, determined from a ratings and
leverage-based pricing matrix, and is currently set at LIBOR (5.71875% at
December 31, 1997) plus 140 basis points. Additionally, the Company is required
to pay an unused commitment fee which is variable, determined from a ratings
based pricing matrix, currently set at 20 basis points. The Company paid unused
commitment fees of approximately $560,000 and $164,000 during 1997 and 1996,
respectively. For the years ended December 31, 1997 and 1996, the Company paid
interest on its Line of Credit at the weighted average interest rate of 7.6% and
7.4%, respectively. Up to 10% of the amount available under the Line of Credit
may be used for general corporate or working capital purposes. The total amount
available under the Line of Credit is limited to 50% of the aggregate value of
the Company's eligible hotels, which generally includes hotels that are
unencumbered. At December 31, 1997, the aggregate amount borrowed under the Line
of Credit was $136 million. Assuming the Company purchases qualifying hotel
assets, it would have up to an additional $414 million available under the
existing Line of Credit. The agreements governing the Line of Credit also
contain various negative and affirmative covenants, including limitations on
total indebtedness, total secured indebtedness and cash distributions, as well
as obligations to maintain a certain minimum tangible net worth and certain
interest and debt service coverage ratios. At December 31, 1997, the Company was
in compliance with all such covenants.
The Company has a $25 million loan facility ("Renovation Loan") which
is guaranteed by Promus, bears interest at LIBOR plus 45 basis points, requires
monthly interest payments, and quarterly principal payments of $1.25 million
beginning June 1999 and matures in June 2000. The weighted average interest rate
for 1997 and 1996 was 6.4% and 6.1%, respectively.
On December 4, 1997, the Company assumed an existing collateralized
mortgage note when it acquired the Dayton, Ohio Doubletree Guest Suites hotel.
The mortgage note bears interest at 10.22 % per annum, requires monthly
installment payments and matures on March 31, 2003. The outstanding principal
balance at December 31, 1997 was approximately $5.9 million. The note prohibits
any prepayment of the outstanding principal before May 1, 1998 upon which there
is a prepayment penalty fee of at least 1% of the then outstanding principal
balance.
Under its loan agreements, the Company is required to satisfy various
affirmative and negative covenants. The Company was in compliance with these
covenants at December 31, 1997.
Future scheduled principal payments on debt at December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR
<S> <C>
1998............................................................ $ 116
1999............................................................ 3,879
2000............................................................ 157,393
2001............................................................ 158
2002............................................................ 175
2003 and thereafter............................................. 305,860
---------
467,581
Discount accretion over term.................................... (1,855)
----------
$ 465,726
=========
</TABLE>
To manage the relative mix of its debt between fixed and variable rate
instruments, the Company has entered into two separate interest rate swap
agreements. These interest rate swap agreements modify a portion of the interest
characteristics of the Company's outstanding debt without an exchange of the
underlying principal amount and effectively
F-11
<PAGE> 19
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT AND CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
convert variable rate debt to a fixed rate. The fixed rates to be paid, the
effective fixed rate, and the variable rate to be received by the Company at
December 31, 1997 are summarized in the following table:
<TABLE>
<CAPTION>
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 12/31/97 MATURITY
-------------- ----------- ---------- ------------ --------
<S> <C> <C> <C> <C>
$50 million 6.11125% 7.51125% 5.78125% October 1999
$25 million 5.95500% 7.35500% 5.75000% November 1999
</TABLE>
The differences to be paid or received by the Company under the terms
of the interest rate swap agreements are accrued as interest rates change and
recognized as an adjustment to interest expense by the Company pursuant to the
terms of its interest rate agreement and will have a corresponding effect on its
future cash flows. Agreements such as these contain a credit risk that the
counterparties may be unable to meet the terms of the agreement. The Company
minimizes that risk by evaluating the creditworthiness of its counterparties,
which is limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
Capital lease obligations at December 31, 1997 and 1996 consists of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Capital land and building lease obligations................. $ 9,330 $ 9,675
Capital equipment lease obligations......................... 1,763 3,200
--------- ---------
$ 11,093 $ 12,875
========= =========
</TABLE>
The Company assumed the obligation for a capital industrial revenue
bond lease for land and building associated with the purchase of the Embassy
Suites hotel - St. Paul in November 1995. The term of the lease is through
August 31, 2011 and contains a provision that allows the Company to purchase the
property at the termination of the lease, under certain conditions, for a
nominal amount.
The Company has assumed various capital equipment leases associated
with hotels purchased. These capital leases are generally for telephones and
televisions and vary in remaining terms from one year to four years.
Minimum future lease payments under capital leases at December 31, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1998.................................................................... $ 2,820
1999.................................................................... 1,502
2000.................................................................... 1,336
2001.................................................................... 1,217
2002.................................................................... 1,217
2003 and thereafter..................................................... 10,552
--------
18,644
Executory costs......................................................... (788)
Imputed interest........................................................ (6,763)
--------
Present value of net minimum lease payments............................. $ 11,093
========
</TABLE>
Included in investment in hotels at December 31, 1997 and 1996, are
assets under capital leases with a net book value of approximately $10.7 million
and $12.5 million, respectively.
F-12
<PAGE> 20
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITAL STOCK
On October 22, 1997, the Company announced shareholder approval of an
amendment to the Company's Charter increasing the number of authorized shares of
common stock from 50 million shares to 100 million shares.
As of December 31, 1997 the Company had approximately $332.1 million of
common stock, preferred stock, debt securities and/or common stock warrants
available for offerings under two shelf registration statements declared
effective in 1996 and 1997.
Preferred Stock
The Board of Directors is authorized to provide for the issuance of up
to 10,000,000 shares of Preferred Stock in one or more series, to establish the
number of shares in each series and to fix the designation, powers preferences,
and rights of each such series and the qualifications, limitations or
restrictions thereof. In 1996, the Company issued its $1.95 Series A Cumulative
Preferred Stock ("Series A Preferred Stock") at $25 per share. The Series A
Preferred Stock bears an annual dividend equal to the greater of $1.95 per share
or the cash distributions declared or paid for the corresponding period on the
number of shares of common stock into which the Series A Preferred Stock is then
convertible. Each share of the Series A Preferred Stock is convertible at the
shareholder's option to 0.7752 shares of common stock, subject to certain
adjustments, and may not be redeemed by the Company before April 30, 2001. At
December 31, 1997, all dividends then payable on the Preferred Stock had been
paid.
Operating Partnership Units
The outstanding units of limited partnership interest in the Operating
Partnership ("Units") are redeemable at the option of the holder for a like
number of shares of Common Stock or, at the option of the Company, for the cash
equivalent thereof.
In 1997, an aggregate of 139,286 Units were issued to sellers in
conjunction with the purchases of interests in one hotel and, in 1996, an
aggregate of 491,703 Units were issued to sellers in conjunction with the
purchase of interests in four hotels.
7. TAXES, INSURANCE AND OTHER
Taxes, insurance and other is comprised of the following for the years
ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Real estate and personal property taxes......................................... $18,976 $11,110 $2,233
Property insurance.............................................................. 1,627 1,312 155
Land lease expense.............................................................. 1,610 952
State franchise taxes........................................................... 718 472 175
Other........................................................................... 162 51
------- ------- ------
Total taxes, insurance and other....................................... $23,093 $13,897 $2,563
======= ======= ======
</TABLE>
8. COMMITMENTS AND RELATED PARTY TRANSACTIONS
At December 31, 1997 the Company owned interests in 52 Embassy Suites
hotels, 13 Doubletree Guest Suites hotels, five Sheraton hotels, two Sheraton
Suites hotels and one Hilton Suites hotel. The Embassy Suites hotels and the
Hilton Suites hotel operate pursuant to franchise license agreements, which
require the payment of fees based on a percentage of suite revenue. These fees
are paid by the Lessee. There are no separate franchise license agreements for
the Doubletree Guest Suites hotels, Sheraton hotels or Sheraton Suites hotels,
which rights are included in the management agreements.
F-13
<PAGE> 21
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Lessee generally pays the Hotel managers a base management fee
based on a percentage of suite revenue and an incentive management fee based on
the Lessee's income before overhead expenses for each hotel. In certain
instances, the hotel managers have subordinated fees and committed to make
subordinated loans to the Lessee, if needed, to meet its rental and other
obligations under the Percentage Leases.
The Company is to receive rental income from the Lessee under the
Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels), 2006 (19
hotels) and 2007 (21 hotels). The rental income under the Percentage Leases
between the 14 unconsolidated entities, of which the Company owns 50%, and the
Lessee is payable to the respective partnerships and as such is not included in
the following schedule of future lease commitments to the Company. Minimum
future rental income (i.e., base rents) to the Company under these
noncancellable operating leases at December 31, 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR
<S> <C>
1998................................................................... $ 108,182
1999................................................................... 108,182
2000................................................................... 108,182
2001................................................................... 108,182
2002................................................................... 108,182
2003 and thereafter.................................................... 385,106
---------
$926,016
=========
</TABLE>
The Percentage Lease revenue is based on a percentage of suite
revenues, food and beverage revenues, and food and beverage rents of the Hotels.
Both the base rent and the threshold suite revenue in each lease computation are
subject to adjustments for changes in the Consumer Price Index ("CPI"). The
adjustment is calculated at the beginning of each calendar year, for the hotels
acquired prior to July of the previous year. The adjustment in any lease year
may not exceed 7%. The CPI adjustments made in January 1998, 1997 and 1996 were
0.50%, 1.42% and 0.73% respectively.
Under the Percentage Leases, the Operating Partnership is obligated to
pay the costs of real estate and personal property taxes, property insurance,
maintenance of underground utilities and structural elements of the Hotels, and
to set aside 4% of suite revenues per month, on a cumulative basis, to fund
capital expenditures for the periodic replacement or refurbishment of furniture,
fixtures and equipment required for the retention of the franchise licenses with
respect to the Hotels. Included in cash and cash equivalents at December 31,
1997 and 1996 were cash balances held by the Hotel managers for these capital
expenditures of $7.3 million and $3.5 million, respectively. In addition, the
Company will incur certain additional capital expenditures in connection with
the conversion and upgrade of acquired hotels, which may be funded from cash on
hand or borrowings under its Line of Credit.
The Company shares the executive offices and certain employees with
FelCor, Inc. and the Lessee, and each company bears its share of the costs
thereof, including an allocated portion of the rent, compensation of certain
personnel (other than Messrs. Feldman and Corcoran, whose compensation is borne
solely by the Company), office supplies, telephones and depreciation of office
furniture, fixtures and equipment. Any such allocation of shared expenses to the
Company must be approved by a majority of the independent directors. During
1997, 1996 and 1995, the Company paid approximately $1.3 million (approximately
38%), $807,000 (approximately 38%) and $387,000 (approximately 38%),
respectively, of the allocable expenses under this agreement.
The Company has entered into employment contracts with Messrs. Feldman
and Corcoran, that will continue in effect until December 31, 1999 and, unless
terminated, will be automatically renewed for successive one year terms. Each
was paid a base salary of $10,000 per month in 1995 and $10,270 per month in
1996 and in 1997 Mr. Feldman received $12,500 per month and Mr. Corcoran
received $16,667 per month. Effective January 1, 1998, Mr. Feldman is to receive
$12,500 per month and Mr. Corcoran is to receive $20,833 per month.
Additionally, the Company is required to maintain a comprehensive medical plan
for such persons.
F-14
<PAGE> 22
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Company has a capital upgrade and renovation program for the Hotels
and has committed approximately $55 million to be invested in 1998 under this
program for those hotels which are wholly owned and approximately $11 million
for the unconsolidated entities. The Company is also constructing an additional
67 suites at its Jacksonville, Florida hotel and 67 additional suites at its
Orlando (North), Florida hotel at an aggregate projected cost of $10.2 million
(of which $7.4 million had been spent as of December 31, 1997) with an expected
completion in early 1998.
9. SUPPLEMENTAL CASH FLOW DISCLOSURE
The Company purchased certain assets and assumed certain liabilities in
connection with the acquisition of hotels. These purchases were recorded under
the purchase method of accounting. The fair values of the acquired assets and
liabilities recorded at the date of acquisition are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Assets acquired....................................................... $ 588,053 $ 494,354 $ 221,213
Prepayments assumed................................................... 13,616
Liabilities assumed................................................... (5,932) (108,744) (910)
Capital land lease assumed............................................ (10,045)
Capital equipment leases assumed...................................... (2,823) (1,211)
Common stock issued................................................... (6,000) (3,499)
Minority interest contribution........................................ (8,021)
Units issued.......................................................... (10,880)
--------- --------- ---------
Net cash paid................................................ $ 574,100 $ 365,907 $ 219,164
========= ========= =========
</TABLE>
The Company purchased interests in unconsolidated entities during 1997,
1996 and 1995. These unconsolidated entities separately own fourteen hotels, a
parcel of undeveloped land and a condominium management company. These purchases
were recorded under the equity method of accounting. The value of the assets
recorded at the date of acquisition is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Acquisition of interests in unconsolidated entities................... $70,372 $45,992 $13,166
Units issued.......................................................... (5,101) (2,568)
-------- ------ -------
Net cash paid................................................ $65,271 $43,424 $13,166
======== ======= =======
</TABLE>
Approximately $24.7 million, $16.1 million, and $3.8 million of
aggregate preferred stock dividends and common stock distributions had been
declared as of December 31, 1997, 1996, and 1995, respectively. These amounts
were paid in January following each year.
10. STOCK BASED COMPENSATION PLANS
The Company sponsors two restricted stock and stock option plans, (the
"Plans"). The Company applies APB Opinion 25 and related interpretations in
accounting for the Plans. In 1995, the Financial Accounting Standards Board
("FASB") issued FASB Statement No. 123 Accounting for Stock-Based Compensation
("SFAS 123") which, if fully adopted by the Company, would change the methods
the Company applies in recognizing the cost of the Plans. Adoption of the cost
recognition provisions of SFAS 123 is optional and the Company has decided not
to adopt these provisions of SFAS 123. However, pro forma disclosures as if the
Company adopted the cost recognition provisions of SFAS 123 are required by SFAS
123 and are presented below.
F-15
<PAGE> 23
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
Stock Options
The Company is authorized to issue 1,950,000 shares of common stock
under the Plans pursuant to awards granted in the form of incentive stock
options, non-qualified stock options and restricted stock. All options have 10
year contractual terms and vest over five years (20% per year), beginning in the
year following the date of grant.
A summary of the status of the Company's nonqualified stock options as
of December 31, 1997, 1996 and 1995 and the changes during the years are
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ------------------------ ----------------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
------------- ----------- ------------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year.. 1,047,500 $25.67 745,000 $23.58 400,000 $20.94
Granted............................... 742,000 $35.66 327,500 $30.08 345,000 $26.64
Exercised............................. (31,000) $19.11
Forfeited............................. (98,000) $31.56 (25,000) $21.00
------------- ------------- -------------
Outstanding at end of year............ 1,660,500 $29.91 1,047,500 $25.67 745,000 $23.58
Exercisable at end of year............ 411,500 $24.42 225,665 $22.71 86,665 $20.77
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD AVG. EXERCISABLE WGTD. AVG.
EXERCISE PRICES AT 12/31/97 LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
--------------- ----------- ----- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$18.75 to $30.00 962,000 7.61 $25.47 383,000 $23.95
$30.50 to $38.56 698,500 9.41 $36.03 28,500 $30.81
- ---------------- -------- ---- ------ ------- ------
$18.75 to $38.56 1,660,500 8.36 $29.91 411,500 $24.42
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions: dividend yield of 8.00%; risk free interest rates are
different for each grant and range from 5.6% to 6.2%; the expected lives of
options are 6 years; and volatility of 22.7% for 1997 grants and 24.4% for all
grants issued in 1996 and 1995. The weighted average fair value of options
granted during 1997, 1996 and 1995 was $4.31, $3.76 and $3.13 per share,
respectively.
Restricted Stock
A summary of the status of the Company's restricted stock grants as of
December 31, 1997, 1996 and 1995 and the changes during the years are presented
below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ------------------------ ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
FAIR MARKET FAIR MARKET FAIR MARKET
VALUE VALUE VALUE
# SHARES AT GRANT # SHARES AT GRANT # SHARES AT GRANT
-------- ------------ --------- ---------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year..... 84,500 $26.04 51,500 $24.03
Granted:
With 5 year pro rata vesting.......... 35,000 $35.00 24,500 $28.93 42,500 $24.53
Vest 100% at grant date............... 6,000 $35.00 6,000 $30.46 9,000 $21.63
Vest 100% within 12 months of grant... 2,500 $36.94 2,500 $28.75
Total granted............................ 43,500 $35.11 33,000 $29.19 51,500 $24.03
Outstanding at end of year............... 113,000 $29.79 84,500 $26.04 51,500 $24.03
Vested at end of year.................... 42,900 $26.71 23,500 $24.93 9,000 $21.63
</TABLE>
F-16
<PAGE> 24
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
Pro Forma Net Income and Net Income Per Common Share
Had the compensation cost for the Company's stock based compensation
plans been determined in accordance with SFAS 123, the Company's net income and
net income per common share for 1997, 1996 and 1995 would approximate the pro
forma amounts below (in thousands, except per share data):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
12/31/97 12/31/97 12/31/96 12/31/96 12/31/95 12/31/95
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SFAS 123 charge.................... $ 1,447 $ 867 $ 300
APB 25 charge...................... $ 1,017 $ 507 $ 158
Net income......................... $ 51,853 $ 51,423 $ 33,203 $ 32,843 $ 12,191 $ 12,049
Net income per common share........ $ 1.66 $ 1.64 $ 1.44 $ 1.42 $ 1.70 $ 1.69
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its stock based
compensation plans.
11. Lessee
All of the Company's percentage lease revenues is derived from the
Percentage Leases with the Lessee. Certain information, related to the Lessee's
financial statements, is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------ -----
<S> <C> <C>
Balance Sheet Information:
Cash and cash equivalents.............................. $ 25,684 $ 5,208
Total assets........................................... $ 54,702 $ 18,471
Due to FelCor Suite Hotels, Inc........................ $ 18,908 $ 5,526
Shareholders' deficit.................................. $ (9,075) $ (6,403)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Statement of Operations Information:
Suite revenue.......................................... $ 456,614 $ 234,451 $ 65,649
Percentage lease expenses.............................. $ 216,990 $ 107,935 $ 26,945
Net loss............................................... $ (2,672) $ (5,430) $ (240)
</TABLE>
Messrs. Feldman and Corcoran, certain entities owning partnership
interests in the Lessee and managers for certain hotels, have agreed to make
loans to the Lessee of up to an aggregate of approximately $16.0 million to the
extent necessary to enable the Lessee to pay rent and other obligations due
under the respective Percentage Leases relating to a total of 34 of these
Hotels. No such loans were outstanding at December 31, 1997.
12. PRO FORMA INFORMATION (UNAUDITED)
F-17
<PAGE> 25
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PRO FORMA INFORMATION (UNAUDITED) -- (CONTINUED)
As discussed in Note 1, the Company completed acquisitions of
interests in 23 hotels during 1996 and 30 hotels during 1997 for aggregate
purchase prices of $540.3 million and $658.4 million respectively. The
acquisitions are accounted for using the purchase method and the results
of operations for the hotels acquired are included in the Company's historical
Statements of Operations from the date of acquisition. As such, the historical
results of operations may not be indicative of future results of operations and
net income per common share.
The following unaudited Pro Forma Consolidated Statements of Operations
for the years ended December 31, 1997 and 1996 (in thousands, except per share
data) are presented as if the acquisitions of all 73 hotels owned at December
31, 1997, the private placement of $300 million of senior unsecured notes and
the consummation of the 1997 and 1996 public offerings and the application of
the net proceeds therefrom had occurred at the beginning of the respective
periods presented, and all of the hotels had been leased to the Lessee pursuant
to the Percentage Leases. Such pro forma information is based in part upon the
Consolidated Statements of Operations of the Company and pro forma Statements of
Operations of the Lessee. In management's opinion, all adjustments necessary to
reflect the effects of these transactions have been made.
The following unaudited Pro Forma Consolidated Statements of Operations
for the periods presented are not necessarily indicative of what actual results
of operations of the Company would have been assuming such transactions had been
completed at the beginning of the respective periods presented, nor does it
purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Percentage lease revenue..................................................... $ 203,922 $ 177,741
Income from unconsolidated entities........................................ 6,937 4,540
--------- ---------
Total revenues.......................................................... 210,859 182,281
--------- ---------
Expenses:
General and administrative................................................... 4,163 3,394
Depreciation................................................................. 59,187 44,149
Taxes, insurance and other................................................... 25,933 24,962
Interest expense............................................................. 37,527 31,528
Minority interest in Operating Partnership................................... 6,142 6,436
Minority interest in other partnerships...................................... 663 236
--------- ---------
Total expenses......................................................... 133,615 110,705
--------- -------
Net income...................................................................... 77,244 71,576
Preferred dividends............................................................. 11,797 11,797
--------- ---------
Net income applicable to common shareholders.................................... $ 65,447 $ 59,779
========= =========
Per common share data:
Basic:
Net income applicable to common shareholders................................. $ 1.79 $ 1.65
========= =========
Weighted average number of common shares outstanding......................... 36,496 36,184
========= =========
Diluted:
Net income applicable to common shareholders................................. $ 1.78 $ 1.64
========= =========
Weighted average number of common shares outstanding......................... 36,838 36,379
========= =========
</TABLE>
F-18
<PAGE> 26
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income
("SFAS130") and No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), both of which are effective for fiscal years
beginning after December 15, 1997.
SFAS 130 specifies the presentation and disclosure requirements for
reporting comprehensive income which includes those items which have been
formerly reported as a component of shareholders' equity. SFAS 131 establishes
the disclosure requirements for reporting segment information. The Company
believes that the adoption of SFAS 130 and 131 will not have a material impact
on previously reported financial statements.
14. Subsequent Events
On January 15, 1998 the Company announced the closing of $114 million
of fixed rate nonrecourse secured debt associated with nine Embassy Suites
hotels in which the Company and Promus each own a 50% unconsolidated interest.
The new debt carries a coupon of 6.988%, matures in ten years and amortizes over
25 years. The proceeds were used to repay higher interest rate debt associated
with unconsolidated entities jointly owned with Promus and to repay other
corporate debt.
On February 12, 1998, the Company announced an exchange offer for the
73/8% Senior Notes due 2004 and 75/8% Senior Notes due 2007 issued and sold on
October 1, 1997 in a transaction exempt from the registration requirements of
the Securities Act of 1993, as amended, and accordingly are subject to certain
restrictions upon transfer. The new notes offered in exchange for these notes
are identical in amount and terms, except the new notes have been registered
under the Securities Act pursuant to a registration statement declared effective
on February 10, 1998.
On February 17, 1998, the Company filed a $1 billion omnibus shelf
registration with the Securities and Exchange Commission. This registration
statement will enable the Company to provide offerings from time to time up to
an additional $1 billion in securities, which may include debt securities,
preferred stock, depository shares, common stock and/or common stock warrants.
On February 17, 1998, the Company announced the acquisition of the
194-suite Doubletree Guest Suites hotel in Columbus, Ohio. The purchase price
includes $14.1 million in cash and approximately 134,000 Units each valued at
$37.06. The hotel is managed by a wholly owned subsidiary of Promus.
F-19
<PAGE> 27
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY OPERATING RESULTS (UNAUDITED)
The Company's unaudited consolidated quarterly operating data for the
years ended December 31, 1997 and 1996 follows (in thousands, except per share
data). In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of quarterly results have
been reflected in the data. It is also management's opinion, however, that
quarterly operating data for hotel enterprises are not indicative of results to
be achieved in succeeding quarters or years. In order to obtain a more accurate
indication of performance, there should be a review of operating results,
changes in shareholders' equity and cash flows for a period of several years.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Percentage lease revenue................................. $ 35,370 $ 38,677 $ 48,603 $ 46,464
Equity in income from unconsolidated entities............ 1,127 2,300 2,338 1,198
Other revenue............................................ 95 76 112 291
-------- -------- -------- --------
Total revenues......................... 36,592 41,053 51,053 47,953
-------- -------- -------- --------
Expenses:
General and administrative............................... 972 874 897 1,000
Depreciation............................................. 10,417 11,314 14,238 14,829
Taxes, insurance and other............................... 5,207 5,549 6,155 6,182
Interest expense......................................... 5,601 7,313 7,183 8,695
Minority interest in Operating Partnership............... 1,417 1,524 1,643 1,233
Minority interest in other partnerships.................. 21 121 195 236
-------- -------- -------- --------
Total expenses......................... 23,635 26,695 30,311 32,175
-------- -------- -------- --------
Income before extraordinary charge................................ 12,957 14,358 20,742 15,778
Extraordinary charge from write off of deferred financing fees.... 185
-------- -------- -------- --------
Net income........................................................ 12,957 14,358 20,742 15,593
Preferred dividends............................................... 2,949 2,949 2,949 2,950
-------- -------- -------- --------
Net income applicable to common shareholders...................... $ 10,008 $ 11,409 $ 17,793 $ 12,643
======== ======== ======== ========
Earnings per share information:
Basic:
Income applicable to common shareholders
before extraordinary charge.............................. $ 0.39 $ 0.43 $ 0.49 $ 0.36
Extraordinary charge..................................... (0.01)
-------- -------- -------- --------
Net income applicable to common shareholders............. $ 0.39 $ 0.43 $ 0.49 $ 0.35
======== ======== ======== ========
Weighted average number of common shares outstanding..... 25,391 26,623 36,358 36,517
======== ======== ======== ========
Diluted:
Income applicable to common shareholders
before extraordinary charge.............................. $ 0.39 $ 0.42 $ 0.48 $ 0.35
Extraordinary charge..................................... (0.01)
-------- -------- -------- --------
Net income applicable to common shareholders............. $ 0.39 $ 0.42 $ 0.48 $ 0.34
======== ======== ======== ========
Weighted average number of common shares outstanding..... 25,691 26,999 36,744 36,884
======== ======== ======== ========
</TABLE>
F-20
<PAGE> 28
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY OPERATING RESULTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Percentage lease revenue ......................................... $ 23,976 $ 23,409 $ 25,263 $ 25,302
Income from unconsolidated entities .............................. 320 165 927 598
Other revenue .................................................... 146 628 163 47
-------- -------- -------- --------
Total revenues ................................. 24,442 24,202 26,353 25,947
-------- -------- -------- --------
Expenses:
General and administrative ....................................... 382 466 458 513
Depreciation ..................................................... 4,516 5,788 7,529 8,711
Taxes, insurance and other ....................................... 3,529 3,070 3,260 4,038
Interest expense ................................................. 2,424 2,089 1,760 3,530
Minority interest in Operating Partnership ....................... 1,620 1,523 1,477 970
-------- -------- -------- --------
Total expenses ................................. 12,471 12,936 14,484 17,762
-------- -------- -------- --------
Income before extraordinary charge ........................................ 11,971 11,266 11,869 8,185
Extraordinary charge from write off of deferred financing fees ............ 2,354
-------- -------- -------- --------
Net income ................................................................ 11,971 11,266 9,515 8,185
Preferred dividends ....................................................... 1,835 2,949 2,950
-------- -------- -------- --------
Net income applicable to common shareholders .............................. $ 11,971 $ 9,431 $ 6,566 $ 5,235
======== ======== ======== ========
Earnings per share information:
Basic:
Net income applicable to common shareholders
before extraordinary charge ................................... $ 0.53 $ 0.41 $ 0.38 $ 0.22
Extraordinary charge ............................................. (0.10)
-------- -------- -------- --------
Net income applicable to common shareholders ..................... $ 0.53 $ 0.41 $ 0.28 $ 0.22
======== ======== ======== ========
Weighted average number of common shares outstanding ............. 22,568 22,851 23,201 23,438
======== ======== ======== ========
Diluted:
Net income applicable to common shareholders
before extraordinary charge ................................... $ 0.53 $ 0.40 $ 0.38 $ 0.22
Extraordinary charge ............................................. (0.10)
-------- -------- -------- --------
Net income applicable to common shareholders ..................... $ 0.53 $ 0.40 $ 0.28 $ 0.22
======== ======== ======== ========
Weighted average number of common shares outstanding ............. 22,713 23,148 23,353 23,763
======== ======== ======== ========
</TABLE>
F-21
<PAGE> 29
FELCOR SUITE HOTELS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cost Capitalized Subsequent Gross Amounts at Which
Initial Cost to Acquisition Carried at Close of Period
------------------------------ ------------------------------- --------------------------
Buildings Furniture Buildings Furniture Buildings
and and and and and
Description of Property Land Improvements Fixtures Land Improvements Fixtures Land Improvements
- ----------------------- ---- ------------ -------- ---- ------------ -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Birmingham, AL $ 2,843 $29,286 $ 160 -- $ 730 $ 3,174 $ 2,843 $30,015
Flagstaff, AZ 900 6,825 268 -- 1,561 1,115 900 8,386
Phoenix (Camelback), AZ -- 38,998 613 $ 4,695 826 4,808 4,694 39,824
Phoenix (Crescent), AZ 3,608 29,583 2,886 -- -- 326 3,608 29,583
Anaheim, CA 2,548 14,832 607 -- 554 3,163 2,548 15,386
Burlingame (SF Airport So.), CA -- 39,929 818 -- 60 2,998 -- 39,802
Dana Point, CA 1,787 15,545 536 -- 71 883 1,787 15,616
El Segundo (LAX Airport South), CA 2,660 17,997 798 -- 809 4,705 2,660 18,807
Los Angeles (LAX Airport North), CA 2,207 18,764 1,104 -- -- 445 2,207 18,764
Milpitas, CA 4,021 23,677 562 -- 943 3,474 4,021 24,620
Napa, CA 3,287 14,205 494 -- 813 2,801 3,287 15,019
Oxnard (Mandalay Beach), CA 2,930 22,125 879 -- 617 4,595 2,930 22,742
So. San Francisco (Airport N.), CA 3,418 31,737 527 -- 768 3,831 3,418 32,506
Avon (Beaver Creek Resort), CO 1,134 9,864 340 -- 186 1,293 1,134 10,050
Boca Raton (Doubletree), FL 5,327 3,066 304 -- 41 1,012 5,333 3,102
Boca Raton (Embassy), FL 1,868 16,253 561 -- 186 2,876 1,868 16,438
Deerfield Beach, FL 4,523 29,443 918 -- 1,159 3,676 4,541 30,583
Ft. Lauderdale, FL 5,329 47,850 903 -- 1,604 4,301 5,374 49,409
Jacksonville, FL 1,130 9,608 456 -- 28 865 1,130 9,636
Lake Buena Vista (Disney World), FL 2,896 25,196 869 -- -- -- 2,896 25,196
Miami (Airport), FL 4,135 24,950 1,171 -- 728 4,309 4,135 25,679
Orlando (North), FL 1,673 14,218 684 -- 28 939 1,673 14,246
Orlando (South), FL 1,632 13,870 799 -- 28 1,504 1,632 13,898
Tampa (Busch Gardens), FL 772 12,387 226 -- 57 621 772 12,444
Tampa (Rocky Point), FL 2,142 18,639 643 -- -- 33 2,142 18,639
Atlanta (Airport), GA 5,113 22,857 2,105 -- -- 16 5,113 22,857
Atlanta (Buckhead), GA 7,303 38,996 2,437 -- 13 50 7,303 39,009
Atlanta (Galleria), GA 5,052 28,507 2,526 -- -- 113 5,052 28,507
Brunswick, GA 705 6,067 247 -- -- 720 705 6,067
Chicago (O'Hare), IL 8,178 37,043 2,886 -- -- 89 8,178 37,043
Deerfield, IL 2,305 20,054 692 -- 162 684 2,305 20,216
Lexington, KY 1,955 13,604 587 -- -- 1,280 1,955 13,604
Baton Rouge, LA 2,350 19,092 525 -- 521 3,322 2,350 19,612
New Orleans, LA 2,570 22,300 895 -- 3,854 2,369 2,569 26,154
Boston - Marlborough, MA 948 8,143 325 761 12,394 4,442 1,709 20,537
Baltimore, MD 2,568 22,433 770 -- -- 505 2,568 22,433
Troy, MI 2,968 25,905 909 -- -- 246 2,968 25,905
Bloomington, MN 2,038 17,731 611 -- -- 8 2,038 17,732
Minneapolis (Airport), MN 5,416 36,508 602 -- 78 2,683 5,417 36,396
Minneapolis (Downtown), MN 818 16,820 505 -- 66 3,043 818 16,809
St. Paul, MN 1,156 17,315 849 -- 40 2,876 1,156 17,264
Raleigh/Durham, NC 2,124 18,476 637 -- -- 31 2,124 18,476
Omaha, NE 1,877 16,328 563 -- 10 140 1,877 16,338
<CAPTION>
Gross Amounts at Which Accumulated Net Book
Carried at Close of Period Depreciation Value Life Upon
-------------------------- Buildings and Buildings and Which
Furniture Improvements; Improvements; Depreciation
and Furniture & Furniture & Date of Date in Statement
Description of Property Fixtures Total Fixtures Fixtures Construction Acquired is Computed
- ----------------------- -------- ----- -------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Birmingham, AL $ 3,334 $36,192 $ 2,188 $34,005 1987 01-03-96 5 - 40 Yrs
Flagstaff, AZ 1,383 10,669 1,171 9,497 1988 02-16-95 5 - 40 Yrs
Phoenix (Camelback), AZ 5,420 49,939 3,290 46,649 1985 01-03-96 5 - 40 Yrs
Phoenix (Crescent), AZ 3,212 36,403 666 35,736 1986 06-30-97 5 - 40 Yrs
Anaheim, CA 3,770 21,704 1,982 19,722 1987 01-03-96 5 - 40 Yrs
Burlingame (SF Airport So.), CA 4,003 43,805 3,290 40,515 1986 11-06-95 5 - 40 Yrs
Dana Point, CA 1,419 18,822 433 18,389 1992 02-21-97 5 - 40 Yrs
El Segundo (LAX Airport South), CA 5,503 26,969 2,901 24,068 1985 03-27-96 5 - 40 Yrs
Los Angeles (LAX Airport North), CA 1,549 22,520 590 21,930 1990 02-18-97 5 - 40 Yrs
Milpitas, CA 4,036 32,677 2,452 30,225 1987 01-03-96 5 - 40 Yrs
Napa, CA 3,295 21,601 1,227 20,374 1985 05-08-96 5 - 40 Yrs
Oxnard (Mandalay Beach), CA 5,474 31,146 1,984 29,162 1986 05-08-96 5 - 40 Yrs
So. San Francisco (Airport N.), CA 4,358 40,281 2,794 37,488 1988 01-03-96 5 - 40 Yrs
Avon (Beaver Creek Resort), CO 1,633 12,816 831 11,986 1989 02-20-96 5 - 40 Yrs
Boca Raton (Doubletree), FL 1,316 9,750 598 9,152 1989 11-15-95 5 - 40 Yrs
Boca Raton (Embassy), FL 3,436 21,743 1,700 20,043 1989 02-28-96 5 - 40 Yrs
Deerfield Beach, FL 4,593 39,718 2,643 37,075 1987 01-03-96 5 - 40 Yrs
Ft. Lauderdale, FL 5,204 59,986 3,870 56,117 1986 01-03-96 5 - 40 Yrs
Jacksonville, FL 1,321 12,088 1,648 10,440 1986 07-28-94 5 - 40 Yrs
Lake Buena Vista (Disney World), FL 869 28,960 335 28,626 1987 07-28-97 5 - 40 Yrs
Miami (Airport), FL 5,479 35,293 2,793 32,500 1987 01-03-96 5 - 40 Yrs
Orlando (North), FL 1,624 17,543 2,568 14,974 1985 07-28-94 5 - 40 Yrs
Orlando (South), FL 2,303 17,832 2,581 15,251 1985 07-28-94 5 - 40 Yrs
Tampa (Busch Gardens), FL 848 14,063 804 13,260 1985 11-15-95 5 - 40 Yrs
Tampa (Rocky Point), FL 676 21,458 248 21,210 1986 07-28-97 5 - 40 Yrs
Atlanta (Airport), GA 2,121 30,091 498 29,593 1986 06-30-97 5 - 40 Yrs
Atlanta (Buckhead), GA 2,487 48,799 1,707 47,092 1988 10-17-96 5 - 40 Yrs
Atlanta (Galleria), GA 2,639 36,198 610 35,588 1990 06-30-97 5 - 40 Yrs
Brunswick, GA 967 7,739 631 7,108 1988 07-19-95 5 - 40 Yrs
Chicago (O'Hare), IL 2,975 48,196 757 47,439 1994 06-30-97 5 - 40 Yrs
Deerfield, IL 1,376 23,897 1,006 22,891 1987 06-20-96 5 - 40 Yrs
Lexington, KY 1,866 17,425 1,059 16,366 1987 01-10-96 5 - 40 Yrs
Baton Rouge, LA 3,847 25,810 1,920 23,890 1985 01-03-96 5 - 40 Yrs
New Orleans, LA 3,265 31,989 2,932 29,057 1984 12-01-94 5 - 40 Yrs
Boston - Marlborough, MA 4,767 27,014 1,292 25,721 1988 06-30-95 5 - 40 Yrs
Baltimore, MD 1,275 26,276 621 25,655 1987 03-20-97 5 - 40 Yrs
Troy, MI 1,155 30,028 700 29,329 1987 03-20-97 5 - 40 Yrs
Bloomington, MN 619 20,389 471 19,918 1980 02-01-97 5 - 40 Yrs
Minneapolis (Airport), MN 3,475 45,288 3,060 42,228 1986 11-06-95 5 - 40 Yrs
Minneapolis (Downtown), MN 3,625 21,252 2,018 19,234 1984 11-15-95 5 - 40 Yrs
St. Paul, MN 3,815 22,236 2,251 19,985 1983 11-15-95 5 - 40 Yrs
Raleigh/Durham, NC 668 21,267 246 21,022 1987 07-28-97 5 - 40 Yrs
Omaha, NE 703 18,918 436 18,481 1973 02-01-97 5 - 40 Yrs
</TABLE>
F-22
<PAGE> 30
FELCOR SUITE HOTELS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
<TABLE>
<CAPTION>
Cost Capitalized Subsequent Gross Amounts at Which
Initial Cost to Acquisition Carried at Close of Period
------------------------------ ------------------------------- --------------------------
Buildings Furniture Buildings Furniture Buildings
and and and and and
Description of Property Land Improvements Fixtures Land Improvements Fixtures Land Improvements
- ----------------------- ---- ------------ -------- ---- ------------ -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Piscataway, NJ 1,755 17,563 527 -- 463 2,296 1,755 18,026
Syracuse, NY 1,597 14,812 1,330 -- -- -- 1,597 14,812
Cleveland, OH 1,755 15,329 527 -- 1,259 1,511 1,755 16,588
Dayton, OH 1,140 9,924 342 -- -- -- 1,140 9,924
Tulsa, OK 525 7,344 3,117 -- 140 1,644 525 7,483
Philadelphia (Society Hill), PA 4,542 45,121 1,536 -- -- -- 4,542 45,121
Myrtle Beach (Kingston
Plantation), SC 2,940 24,988 1,470 -- 268 832 2,940 25,256
Nashville (Airport), TN 1,073 9,331 322 -- 20 1,073 9,331 341
Nashville, TN 1,118 9,506 961 -- 28 1,222 1,118 9,534
Austin (Downtown), TX 2,508 21,908 752 -- 137 2,508 21,908 890
Corpus Christi, TX 1,112 9,618 390 51 -- 1,461 1,164 9,618
Dallas (Love Field), TX 1,934 16,674 757 -- 168 1,177 1,934 16,841
Dallas (Market Center), TX 2,619 24,298 2,182 -- -- -- 2,619 24,298
Dallas (Park Central ES), TX 1,497 12,722 647 -- 28 1,415 1,497 12,750
Dallas (Park Central SH), TX 4,513 43,125 2,507 -- -- 195 4,513 43,125
Burlington, VT 3,136 27,283 941 -- -- -- 3,136 27,283
--------- ---------- -------- ------- -------- -------- --------- ----------
Total $ 151,978 $1,226,572 $ 55,105 $ 5,507 $ 31,289 $ 92,274 $ 157,554 $1,257,247
========= ========== ======== ======= ======== ======== ========= ==========
<CAPTION>
Gross Amounts at Which Accumulated Net Book
Carried at Close of Period Depreciation Value Life Upon
-------------------------- Buildings and Buildings and Which
Furniture Improvements; Improvements; Depreciation
and Furniture & Furniture & Date of Date in Statement
Description of Property Fixtures Total Fixtures Fixtures Construction Acquired is Computed
- ----------------------- -------- ----- -------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Piscataway, NJ 2,822 22,603 1,343 21,260 1988 01-10-96 5 - 40 Yrs
Syracuse, NY 1,331 17,739 318 17,421 1989 06-30-97 5 - 40 Yrs
Cleveland, OH 2,037 20,380 1,237 19,143 1990 11-17-95 5 - 40 Yrs
Dayton, OH 342 11,406 11,406 1987 12-30-97 5 - 40 Yrs
Tulsa, OK 4,762 12,770 4,673 8,097 1985 07-28-94 5 - 40 Yrs
Philadelphia (Society Hill), PA 1,536 51,199 361 50,838 1986 10-01-97 5 - 40 Yrs
Myrtle Beach (Kingston
Plantation), SC 2,302 30,498 945 29,553 1987 12-05-96 5 - 40 Yrs
Nashville (Airport), TN 10,745 149 10,596 1988 06-05-97 5 - 40 Yrs
Nashville, TN 2,183 12,836 2,911 9,925 1985 07-28-94 5 - 40 Yrs
Austin (Downtown), TX 25,305 585 24,720 1987 03-20-97 5 - 40 Yrs
Corpus Christi, TX 1,852 12,634 1,222 11,412 1984 07-19-95 5 - 40 Yrs
Dallas (Love Field), TX 1,934 20,710 1,923 18,787 1986 03-29-95 5 - 40 Yrs
Dallas (Market Center), TX 2,183 29,100 522 28,578 1980 06-30-97 5 - 40 Yrs
Dallas (Park Central ES), TX 2,062 16,309 2,534 13,774 1985 07-28-94 5 - 40 Yrs
Dallas (Park Central SH), TX 2,702 50,340 802 49,537 1983 06-30-97 5 - 40 Yrs
Burlington, VT 941 31,360 73 31,287 1967 12-04-97 5 - 40 Yrs
--------- ---------- -------- ----------
Total $ 147,923 $1,562,724 $ 87,400 $1,475,325
========= ========== ======== ==========
</TABLE>
<TABLE>
<S> <C> <C> <C>
(a) Balance at December 31, 1995 $ 343,398 (b) Balance at December 31, 1994 $ 5,026
Additions during the period 568,073 Depreciation expense during the period 5,371
Dispositions during the period (81) -------
---------- Balance at December 31, 1995 10,397
Balance at December 31, 1996 911,390 Depreciation expense during the period 26,321
Additions during the period 651,334 -------
---------- Balance at December 31, 1996 36,718
Balance at December 31, 1997 $1,562,724 Depreciation expense during the period 50,682
-------
Balance at December 31, 1997 $87,400
</TABLE>
F-23
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
FelCor Suite Hotels, Inc.
We have audited the accompanying consolidated balance sheets of DJONT
Operations, L.L.C. as of December 31, 1997 and 1996 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DJONT
Operations, L.L.C. as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the three years then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 13, 1998
F-24
<PAGE> 32
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
ASSETS
1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents ............................................ $ 25,684 $ 5,208
Accounts receivable, net ............................................. 20,274 8,700
Inventories .......................................................... 3,466 2,105
Prepaid expenses ..................................................... 1,307 255
Other assets ......................................................... 3,971 2,203
-------- --------
Total assets ................................................ $ 54,702 $ 18,471
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade .............................................. $ 9,426 $ 1,273
Accounts payable, other .............................................. 4,625 2,398
Due to FelCor Suite Hotels, Inc. ..................................... 18,908 5,526
Accrued expenses and other liabilities ............................... 30,818 15,677
-------- --------
Total liabilities ........................................... 63,777 24,874
-------- --------
Commitments and contingencies (Note 4)
Shareholders' equity:
Capital .............................................................. 1 1
Distributions in excess of earnings .................................. (9,076) (6,404)
-------- --------
Total shareholders' deficit ................................. (9,075) (6,403)
-------- --------
Total liabilities and shareholders' equity .................. $ 54,702 $ 18,471
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-25
<PAGE> 33
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
Revenues:
<S> <C> <C> <C>
Suite revenue ...................................... $ 456,614 $ 234,451 $ 65,649
Food and beverage revenue .......................... 34,813 15,119 2,462
Food and beverage rent ............................. 4,393 2,334 534
Other revenue ...................................... 38,690 17,340 3,924
--------- --------- ---------
Total revenues ............................ 534,510 269,244 72,569
--------- --------- ---------
Expenses:
Departmental Expenses:
Suites ........................................ 111,827 58,953 16,807
Food and beverage.............................. 33,119 15,701 2,723
Other.......................................... 16,250 7,283 1,648
Undistributed Operating Expenses:
General and administrative .................... 39,147 20,123 5,547
Advertising and promotion ..................... 37,333 18,520 5,410
Repair and maintenance ........................ 26,236 14,453 4,010
Utilities ..................................... 21,363 12,248 3,384
Management and incentive fees ................. 11,879 6,077 1,561
Franchise fee ................................. 13,407 5,693 2,473
Percentage lease expenses ..................... 216,990 107,935 26,945
Lessee overhead expenses ...................... 2,332 1,776 834
Liability insurance ........................... 3,202 1,818 468
Conversion cost ............................... 340 2,165 297
Other expenses ................................ 3,757 1,929 702
--------- --------- ---------
Total expenses ............................ 537,182 274,674 72,809
--------- --------- ---------
Net loss ................................................... $ (2,672) $ (5,430) $ (240)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-26
<PAGE> 34
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1994 ..................... $ (333)
Distributions declared ........................... (200)
Net loss ......................................... (240)
-------
Balance at December 31, 1995 ..................... (773)
Distributions declared ........................... (200)
Net loss ......................................... (5,430)
-------
Balance at December 31, 1996 ..................... (6,403)
Net loss ......................................... (2,672)
-------
Balance at December 31, 1997 ..................... $(9,075)
=======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-27
<PAGE> 35
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................... $ (2,672) $ (5,430) $ (240)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Changes in assets and liabilities:
Accounts receivable .................................... (11,574) (5,571) (2,003)
Inventories ............................................ (1,361) (1,573) (205)
Prepaid expenses ....................................... (1,052) 33 (262)
Other assets ........................................... (1,768) (1,898) (141)
Due to FelCor Suite Hotels, Inc. ....................... 13,382 3,130 1,137
Accounts payable, accrued expenses and other liabilities 25,521 11,372 4,000
-------- -------- --------
Net cash flow provided by operating activities 20,476 63 2,286
-------- -------- --------
Cash flows from financing activities:
Distributions paid .......................................... (200) (200)
-------- -------- --------
Net cash flow used in financing activities ... (200) (200)
-------- -------- --------
Net change in cash and cash equivalents ............................. 20,476 (137) 2,086
Cash and cash equivalents at beginning of years ..................... 5,208 5,345 3,259
-------- -------- --------
Cash and cash equivalents at end of years ........................... $ 25,684 $ 5,208 $ 5,345
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-28
<PAGE> 36
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Hervey A. Feldman and Thomas J. Corcoran, Jr. who serve as directors
and officers of FelCor Suite Hotels, Inc. (the "Company") and as managers and
officers of DJONT Operations, L.L.C., a Delaware limited liability company
("DJONT"), own all of the voting Class A membership interest in DJONT
(representing a 50% equity interest). All of the non-voting Class B membership
interest in DJONT (representing the remaining 50% equity interest) is owned by
RGC Leasing, Inc., a Nevada corporation owned by the children of Mr. Charles N.
Mathewson, a director of the Company. Each of the 73 hotels in which FelCor
Suites Limited Partnership (the "Operating Partnership") had an ownership
interest at December 31, 1997 (the "Hotels"), is leased to DJONT or a
consolidated subsidiary thereof ("collectively, the "Lessee") pursuant to
percentage leases ("Percentage Leases"). Messrs. Feldman and Corcoran and the
managers of certain of the Hotels have agreed, directly or through their
affiliates, to make loans to the Lessee of up to an aggregate of approximately
$16.0 million, to the extent necessary to enable the Lessee to pay rent and
other obligations due under the respective Percentage Leases relating to a total
of 34 of the Hotels. Amounts so borrowed by the Lessee, if any, will be
subordinate in right of repayment to the prior payment in full of rent and other
obligations due under the Percentage Leases relating to such Hotels. No loans
were outstanding under such agreements at December 31, 1997.
Messrs. Feldman and Corcoran have entered into an agreement with the
Company pursuant to which they have agreed that through April 15, 2005, any
distributions received by them from DJONT (in excess of their tax liabilities
with respect to the income of DJONT) will be utilized to purchase common stock
from the Company or units of limited partner interest in the Operating
Partnership at then current market prices. The agreement stipulates that Messrs.
Feldman and Corcoran are restricted from selling any stock or units so acquired
for a period of two years from the date of purchase. RGC Leasing, Inc., which
owns the other 50% of DJONT, may elect to purchase common stock of the Company
or Operating Partnership units upon similar terms, at its option. The
independent directors of the Company may suspend or terminate such agreement at
any time.
Fifty-two of the Hotels are operated as Embassy Suites(R) hotels (of
which 28 were converted from other brands), 13 are operated as Doubletree Guest
Suites(R) hotels, seven are operated as Sheraton(R) hotels (five of which are
upscale, full-service traditional non-suite hotels) and one is operated as a
Hilton Suites(R) hotel. Sixty-three of the Hotels are managed by subsidiaries of
Promus Hotel Corporation ("Promus") which, following the recent merger of Promus
with Doubletree Corporation, include Doubletree Hotels Corporation and its
subsidiaries ("Doubletree"). Promus is the largest operator of all-suite,
full-service hotels in the United States. Of the remaining Hotels, seven are
managed by a subsidiary of ITT Sheraton Corporation ("Sheraton") and three are
managed by independent management companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fair Value of Financial Instruments -- Statement of Financial
Accounting Standards 107 requires all entities to disclose the fair value of
certain financial instruments in their financial statements. Accordingly, the
Lessee reports the carrying amount of cash and cash equivalents, accounts
payable and accrued expenses at cost which approximates fair value due to the
short maturity of these instruments.
Cash Equivalents -- All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Inventories -- Inventories are stated at the lower of cost or market.
Revenue Recognition -- Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible. Such losses have been within management's expectations.
Income Taxes -- The Lessee is a limited liability company which is
taxed for federal income taxes purposes as a limited partnership and,
accordingly, all taxable income or loss flows through to the shareholders.
F-29
<PAGE> 37
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principals requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. ACCUMULATED DEFICIT
During 1997 and 1996, the Lessee incurred net losses of approximately
$2.7 million and $5.4 million and at December 31, 1997 a cumulative
shareholders' deficit of approximately $9.1 million. Management's analyses
indicate that a significant portion of such losses are attributable to the
one-time costs of converting the Crown Sterling Suites(R) hotels to Embassy
Suites and Doubletree Guest Suites, and operations of hotels during periods of
substantial renovation. Such renovations are required under the terms of the
related franchise agreements. In accordance with the terms of the Percentage
Leases, although a portion of the suites are not available for guests to rent,
the Lessee is required to pay the full required lease payment. In addition,
during periods of renovation, management believes, and operating data indicates,
that overall the performances of the hotels is impacted as evidenced by improved
operating performances immediately following completion of renovations.
Management is exploring several options to anticipate negative operating cash
flow during renovations, including potential changes to the terms of leases for
future renovations which might mitigate losses for the Lessee during such
renovation periods.
At December 31, 1997 the Lessee had paid all amounts then due the
Company under the Percentage Leases. It is anticipated that a substantial
portion of any future profits of the Lessee will be retained until a positive
shareholders' equity is restored. Management anticipates that future earnings
will be sufficient to enable the Lessee to continue to make necessary payments
when due. Management deems the Lessee to be a viable going concern and, as such,
no adjustments are required to the accompanying financial statements.
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Lessee has future lease commitments under the Percentage Leases
which expire in 2004 (7 hotels), 2005 (13 hotels), 2006 (23 hotels) and 2007 (30
hotels). Minimum future rental payments are computed based on the base rent as
defined under the noncancellable operating leases and are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998.......................................................... $ 135,099
1999.......................................................... 135,099
2000.......................................................... 135,099
2001.......................................................... 135,098
2002.......................................................... 135,098
2003 and thereafter........................................... 490,984
----------
$1,166,477
==========
</TABLE>
The Percentage Lease expense is based on a percentage of suite
revenues, food and beverage revenues and food and beverage rents of the Hotels.
Both the base rent and the threshold suite revenue in each lease computation is
subject to adjustments in the Consumer Price Index ("CPI"). The adjustment is
calculated at the beginning of each calendar year for the hotels acquired prior
to July of the previous year. The adjustment in any lease year may not exceed
7%. The CPI adjustments made in January 1998, 1997 and 1996 are 0.50%, 1.42% and
0.73%, respectively.
Other than real estate and personal property taxes, casualty insurance,
capital improvements and maintenance of underground utilities and structural
elements, which are obligations of the Partnership, the Percentage Leases
require the Lessee to pay rent, liability insurance premiums, all costs,
expenses, utilities and other charges incurred in the operation of the leased
hotels.
F-30
<PAGE> 38
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Lessee is also obligated to indemnify and hold harmless the
Partnership from and against all liabilities, costs and expenses incurred by or
asserted against the Partnership in the normal course of operating the Hotels.
The Lessee is not permitted to sublet all or any substantial part of
the Hotels or assign its interest under any of the Percentage Leases without the
prior written consent of the Partnership.
The Lessee has agreed that during the term of the Percentage Leases it
will maintain a ratio of total debt to consolidated net worth (as defined in the
Percentage Leases) of less than or equal to 50%, exclusive of capital leases. In
addition, the Lessee has agreed that it will not pay fees to any affiliate of
the Lessee.
The Lessee typically pays a franchise fee ranging from 4% to 5% of
suite revenue, and marketing and reservation fees ranging from 1% to 3.5% of
suite revenue. In the cases where there is not a separate franchise agreement,
the right to use the brand name is included in the management agreement. Base
management fees typically range from 2% to 3% of applicable hotel revenues.
Incentive management fees are based upon the hotel's net income before overhead
and typically range from 50% to 100% subject to a maximum annual payment of
between 2% and 3% of total revenues. In many cases managers and franchisors have
agreed to subordinate all or a portion of their fees at a specific hotel or
group of hotels either for a set period of time, or until the hotel or group of
hotels provides a predetermined return to the Lessee, or both.
In the event the Company enters into an agreement to sell or otherwise
transfer a leased hotel, the Company has the right to terminate the Percentage
Lease with respect to such leased hotel upon 90 days' prior written notice upon
either (1) paying the Lessee the fair market value of the Lessee's leasehold
interest in the remaining term of the Percentage Lease to be terminated or (2)
offering to lease to the Lessee a substitute hotel on terms that would create a
leasehold interest in such hotel with a fair market value equal to or exceeding
the fair market value of the Lessee's remaining leasehold interest under the
Percentage Lease to be terminated. The Company also is obligated to pay or
reimburse the Lessee for any assignment fees, termination fees or other
liabilities arising under any franchise license agreement and restaurant
sublease agreements.
The Company shares the executive offices and certain employees with
FelCor, Inc. and the Lessee, and each company bears its share of the costs
thereof, including an allocated portion of the rent, compensation of certain
personnel (other than Messrs. Feldman and Corcoran, whose compensation is borne
solely by the Company), office supplies, telephones and depreciation of office
furniture, fixtures and equipment. Any such allocation of shared expenses to the
Company must be approved by a majority of the independent directors. During
1997, 1996 and 1995, the Lessee paid approximately $2.1 million (approximately
61%), $1.3 million (approximately 61%) and $532,000 (approximately 52%),
respectively, of the allocable expenses under this agreement.
5. PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the additional hotels operated by the Lessee
pursuant to the Percentage Leases discussed in Note 1, historical results of
operations may not be indicative of future results of operations.
The following unaudited Pro Forma Statements of Operations for the
years ended December 31, 1997 and 1996 (in thousands) are presented as if the
Lessee leased and operated all Hotels owned by the Partnership at December 31,
1997, from the beginning of the respective periods presented.
The Pro Forma Statements of Operations does not purport to present what
actual results of operations would have been if the 73 hotels were operated by
the Lessee pursuant to the Percentage Leases from the beginning of the
respective periods presented or to project results for any future period.
F-31
<PAGE> 39
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PRO FORMA INFORMATION (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Suite revenue ............................... $ 536,780 $ 491,412
Food and beverage rent ...................... 4,448 3,280
Food and beverage revenue ................... 57,825 66,619
Other revenue ............................... 45,250 35,961
--------- ---------
Total revenues ..................... 644,303 597,272
Property operating costs and expenses ....... 201,056 195,500
Other operating costs ....................... 148,894 145,273
Management and franchise fees ............... 29,658 23,820
Taxes, insurance and other .................. 8,713 10,671
Percentage lease expenses ................... 254,722 224,423
Lessee overhead expenses .................... 2,332 1,540
--------- ---------
Net loss ........................... $ (1,072) $ (3,956)
========= =========
</TABLE>
F-32
<PAGE> 40
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- -----------------------
<S> <C>
3.1 - Articles of Amendment and Restatement dated June 22, 1995,
amending and restating the Charter of Registrant, as amended or
supplemented by Articles of Merger dated June 23, 1995, Articles
Supplementary dated April 30, 1996, Articles of Amendment dated
August 8, 1996, Articles of Amendment dated June 16, 1997 and
Articles of Amendment dated October 30, 1997.
3.2 - Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to
the Registrant's Registration Statement on Form S-11 (File No.
33-98332) (the "December 1995 Registration Statement") and
incorporated herein by reference).
4.1 - Form of Share Certificate for Common Stock (filed as Exhibit
4.1 to the Registrant's Form 10-Q for the quarter ended June 30,
1996 (the "1996 Second Quarter 10-Q) and incorporated herein by
reference).
4.2 - Indenture dated as of April 22, 1996 by and between the
Registrant and Sun trust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4.2 to the Registrant's Form 8-K dated May 1,
1996 (the "1996 Form 8-K") and incorporated herein by reference).
4.3 - Indenture dated as of October 1, 1997 by and among FelCor
Suites Limited Partnership, the Registrant, the Subsidiary
Guarantors named therein and Sun Trust Bank, Atlanta, Georgia, as
Trustee (filed as Exhibit 4.1 to the Registration Statement on
Form S-4 (File No. 333-39595) filed by the Registrant and the
other co-registrants named therein (the "1997 Form S-4") and
incorporated herein by reference).
4.4 - Form of Share Certificate for $1.95 Series A Cumulative
Convertible Preferred Stock (filed as Exhibit 4.4 to the 1996
Form 8-K and incorporated herein by reference).
10.1 - Amended and Restated Agreement of Limited Partnership of FelCor
Suites Limited Partnership (the "Partnership") (filed as Exhibit
10.1 to the Registrant's Annual Report on Form 10-K/A Amendment
No. 1 for the fiscal year ended December 31, 1994 (the "1994
10-K/A") and incorporated herein by reference).
10.1.1 - First Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of November 17, 1995 by
and among the Registrant, Promus Hotels, Inc. and all of the
persons or entities who are or shall in the future become of the
limited partners of the Partnership (filed as Exhibit 10.1.1 to
the Registrant's Annual Report on Form 10-K, as amended, for the
fiscal year ended December 31, 1995 (the "1995 10-K") and
incorporated herein by reference)
10.1.2 - Second Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of January 9, 1996
between the Registrant and all of the persons or entities who are
or shall in the future become limited partners of the Partnership
(filed as Exhibit 10.1.2 to the 1995 10-K and incorporated herein
by reference).
10.1.3 - Third Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of January 10, 1996 by
and among the Registrant, MarRay-LexGreen, Inc. and all of the
persons and entities who are or shall in the future become
limited partners of the Partnership (filed as Exhibit 10.1.3 to
the 1995 10-K and incorporated herein by reference).
10.1.4 - Fourth Amendment to the Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of January 10,
1996 by and among the Registrant, Piscataway-Centennial
</TABLE>
<PAGE> 41
<TABLE>
<S> <C>
Associates Limited Partnership and all of the persons or entities
who are or shall in the future become limited partners of the
Partnership (filed as Exhibit 10.1.4 to the 1995 10-K and
incorporated herein by reference).
10.1.5 - Fifth Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of May 2, 1996, between
the Registrant and all of the persons or entities who are or
shall in the future become limited partners of the Partnership,
adopting Addendum No. 2 to Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of May 2, 1996
(filed as Exhibit 10.1.5 to the 1996 Second Quarter 10-Q and
incorporated herein by reference).
10.1.6 - Sixth Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of September 16, 1996, by
and among the Registrant, John B. Urbahns, II and all of the
persons or entities who are or shall in the future become limited
partners of the Partnership (filed as Exhibit 10.1.6 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (the "1996 10-K") and incorporated herein by
reference).
10.1.7 - Seventh Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of May 16, 1997, by and
among the Registrant, PMB Associates, Ltd. and all of the persons
or entities who are or shall in the future become limited
partners of the Partnership.
10.1.8 - Eighth Amendment to Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of February 6, 1998, by
and among the Registrant, Columbus/Front Ltd. and all of the
persons or entities who are or shall in the future become limited
partners of the Partnership.
10.2.1 - Form of Lease Agreement between the Partnership as Lessor and DJONT
Operations, L.L.C. ("DJONT") as Lessee (filed as Exhibit 10.2.1
to the 1995 10-K and incorporated herein by reference).
10.2.2 - Schedule of executed Lease Agreements identifying material
variations from the form of Lease Agreement with respect to
hotels acquired by the Registrant through December 31, 1997.
10.3 - Amended and Restated Loan Agreement dated as of September 26,
1996, among the Registrant and the Partnership, as Borrowers,
Boatmen's National Bank of Oklahoma, as Agent and Lender, and
First Tennessee Bank National Association, Liberty Bank and Trust
Company of Tulsa, National Association, Bank One, Texas, N.A.,
First National Bank of Commerce, and AmSouth Bank of Alabama, as
Lenders (filed as Exhibit 10.3.4 to the Registrant's Form 10-Q
for the quarter ended September 30, 1996 (the "1996 Third Quarter
10-Q") and incorporated herein by reference).
10.5 - Employment Agreement dated as of July 28, 1994 between the
Registrant and Hervey A. Feldman (filed as Exhibit 10.7 to the
1994 10-K/A and incorporated herein by reference).
10.6 - Employment Agreement dated as of July 28, 1994 between the
Registrant and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to
the 1994 10-K/A and incorporated herein by reference).
10.7.1 - Restricted Stock and Stock Option Plan of the Registrant (filed
as Exhibit 10.9 to the 1994 10-K/A and incorporated herein by
reference).
10.7.2 - 1995 Restricted Stock and Stock Option Plan of the Registrant
(filed as Exhibit 10.9.2 to the 1995 10-K and incorporated herein
by reference). 10.8 - Savings and Investment Plan of the
Registrant (filed as Exhibit 10.10 to the 1994 10-K/A and
incorporated herein by reference).
10.8 - Savings and Investment Plan of the Registrant (filed as Exhibit
10.10 to the 1994 10-K/A and incorporated herein by reference).
</TABLE>
<PAGE> 42
<TABLE>
<S> <C>
10.9 - Registration Rights Agreement dated as of July 21, 1994 between
the Registrant and the parties named therein (filed as Exhibit
10.11 to the 1994 10-K/A and incorporated herein by reference).
10.10 - Agreement dated as of April 15, 1995 among the Registrant, the
Partnership, FelCor, Inc., Thomas J. Corcoran, Jr. and Hervey A.
Feldman relating to purchase of securities (filed as Exhibit
10.15 to the Registration Statement on Form S-11 (File No.
33-91870) (the "May 1995 Registration Statement") and
incorporated herein by reference).
10.11 - Registration Rights Agreement dated as of November 17, 1995
between the Registrant and Cleveland Finance Associates Limited
Partnership (filed as Exhibit 10.27 to the 1995 10-K and
incorporated herein by reference).
10.12 - Registration Rights Agreement dated as of January 3, 1996
between the Registrant and Robert E. Woolley and Charles M.
Sweeney (filed as Exhibit 10.28 to the 1995 10-K and incorporated
herein by reference).
10.13 - Credit Agreement dated as of February 6, 1996, by and among the
Partnership, as borrower, Holdings and the Registrant, as
guarantors, and Canadian Imperial Bank of Commerce, as agent
(filed as Exhibit 10.30 to the 1996 Form 8-K and incorporated
herein by reference).
10.14 - Third Amended and Restated Revolving Credit Agreement dated as
of August 14, 1997 among the Registrant and the Partnership, as
Borrower, the Lenders party thereto, The Chase Manhattan Bank, as
Administrative Agent , and Wells Fargo Bank, National
Association, as Documentation Agent (filed as Exhibit 10.23 to
the 1997 Form S-4 and incorporated herein by reference).
10.15 - Contract for Purchase and Sale of Hotels dated as of June 5,
1997 by and among ITT Sheraton Corporation, Sheraton Savannah
Corp., Sheraton Peachtree Corp., Sheraton Crescent Corp.,
Sheraton Dallas, Corp., Sheraton Gateway Suites O'Hare Investment
Partnership, and the Partnership (filed as Exhibit 10.24 to the
Registrant's Current Report on Form 8-K dated June 4, 1997 and
incorporated herein by reference).
10.16 - Registration Rights Agreement dated as of September 26, 1997
among the Registrant, the Partnership, Morgan Stanley & Co.
Incorporated, NationsBank Capital Markets, Inc. and Salomon
Brothers Inc. (filed as Exhibit 10.25 to the 1997 Form S-4 and
incorporated herein by reference).
21.1 - List of Subsidiaries of the Registrant.
23.1(1) - Consent of Coopers & Lybrand L.L.P.
27 - Financial Data Schedule.
</TABLE>
(1) Exhibit filed herewith, all other exhibits have been previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
on Form S-3 (File Nos. 333-25717, 333-04947 and 333-46357) and Form S-8 (File
No. 333-32579) of (i) our report dated January 20, 1998, except for Note 14 as
to which the date is February 17, 1998, on our audits of the consolidated
financial statements and financial statement schedule of FelCor Suite Hotels,
Inc. as of December 31, 1997 and 1996, and for the years ended December 31,
1997, 1996, 1995, and (ii) our report dated March 13, 1998 on our audits of the
consolidated financial statements of DJONT Operations, L.L.C. as of December 31,
1997 and 1996, and for the years ended December 31, 1997, 1996, and 1995, which
reports are included herein in this Annual Report on Form 10-K/A Amendment No.
2.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
June 16, 1998
