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Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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FELCOR LODGING TRUST INCORPORATED
(Exact name of registrant as specified in its charter)
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MARYLAND 545 E. JOHN CARPENTER FRWY. , SUITE 1300 75-2541756
(State or other jurisdiction of IRVING, TEXAS 75062 (I.R.S. Employer
incorporation or organization) (214) 444-4900 Identification No.)
(Address, including ZIP Code, and telephone number,
including area code, of registrant's principal executive
offices)
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LAWRENCE D. ROBINSON
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
FELCOR LODGING TRUST INCORPORATED
545 E. JOHN CARPENTER FRWY., SUITE 1300
IRVING, TEXAS 75062
(214) 444-4900
(Name, address, including ZIP code, and telephone
number, including area code, of agent for service)
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Copy to:
ROBERT W. DOCKERY
JENKENS & GILCHRIST, P.C..
1445 ROSS AVENUE, SUITE 3200
DALLAS, TEXAS 75202-2799
(214) 855-4500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after this registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend reinvestment plans, check the following box: [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
[ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED REGISTERED (1)(2) PER SHARE(1) AGGREGATE OFFERING PRICE REGISTRATION FEE
------------------- ----------------- ---------------- ------------------------ ----------------
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Common Stock, $0.01 par value.... 5,823,060 shares $ 22.46875 $ 130,836,880 $ 34,541
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and based upon the average of the high and low
prices reported on the New York Stock Exchange, Inc. on December 5, 2000.
(2) This registration statement shall also cover any additional shares of
common stock which become issuable by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without the
receipt of consideration which results in an increase in the number of the
outstanding shares of common stock.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AS OF DECEMBER 8, 2000
PRELIMINARY PROSPECTUS
5,823,060 SHARES
FELCOR LODGING TRUST INCORPORATED
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
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TO BE OFFERED BY SEVERAL HOLDERS OF THE COMMON STOCK OF
FELCOR LODGING TRUST INCORPORATED
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This prospectus relates to the public offering, which is not being
underwritten, of 5,823,060 shares of our common stock, which shares may be
issued upon redemption of units of limited partnership interests in FelCor
Lodging Limited Partnership (FelCor LP) held by the selling stockholders.
Pursuant to contributions to FelCor LP by the selling stockholders, FelCor and
FelCor LP, in accordance with the agreement of limited partnership of FelCor LP,
as amended, FelCor, as the sole general partner of FelCor LP, is obligated to
(subject to certain conditions) to redeem the units of limited partnership
interests of FelCor LP, at the option of the selling stockholders, for a like
number of shares of our common stock or, at the option of FelCor, for cash or a
combination of cash and common stock. The units of limited partnership interests
of FelCor LP were originally issued by FelCor LP in connection with a
contribution to FelCor LP of assets or shares of our common stock by the selling
stockholders. The distribution of our shares by the selling stockholders is not
subject to any underwriting agreement. We will receive none of the proceeds from
the sale of the shares offered by this prospectus. All expenses of registration
incurred in connection with this public offering are being borne by us, but all
selling and other expenses incurred by the selling stockholders will be borne by
such selling stockholder.
The shares may be sold by the selling stockholders from time to time on
the New York Stock Exchange (NYSE) or such other national securities exchange or
automated interdealer quotation system on which our common stock is then listed,
through negotiated transactions or otherwise at market prices prevailing at the
time of sale or at negotiated prices.
Our common stock is listed on the NYSE under the symbol "FCH." The last
reported price of our common stock on December 7, 2000, on the NYSE was $
22.9375 per share. To preserve our status as a real estate investment trust
(REIT), our charter limits the common stock that may be owned by any single
person or affiliated group to 9.9% of the outstanding shares and restricts the
transferability of such shares under certain circumstances.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE RISK FACTORS ON PAGE
2 TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF
COMMON STOCK BEING OFFERED BY THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _______________, 200__.
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TABLE OF CONTENTS
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Forward-Looking Statements..............................................................ii
Where you Can Find More Information....................................................iii
Our Company..............................................................................1
Risk Factors.............................................................................2
Description of Capital Stock............................................................10
Federal Income Tax Consequences of FelCor's Status as a REIT............................21
Use of Proceeds.........................................................................40
Selling Stockholders....................................................................41
Plan of Distribution....................................................................41
Legal Matters...........................................................................42
Experts ...............................................................................42
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FORWARD-LOOKING STATEMENTS
The information contained in this prospectus contains forward-looking
statements that involve a number of risks and uncertainties. Forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "anticipates," "may," "will," "should," "seeks," "pro
forma" or other variations thereof (including their use in the negative), or by
discussions of strategies, plans or intentions. A number of factors could cause
results to differ materially from those anticipated by such forward-looking
statements. Among these factors are:
o overall debt levels and the ability to obtain new financing and
service debt;
o inability to retain earnings;
o liquidity and capital expenditures;
o price and number of FelCor equity securities repurchased;
o growth strategy and acquisition activities;
o inability to reach definitive agreements for the acquisition of the
lessees of, or of the leases covering, our hotels;
o competitive conditions in the lodging industry; and
o general economic conditions.
In addition, such forward-looking statements are necessarily dependent upon
assumptions and estimates that may prove to be incorrect. Accordingly, while we
believe that the plans, intentions and expectations reflected in such
forward-looking statements are reasonable, we cannot assure you that such plans,
intentions or expectations will be achieved. The information contained in this
prospectus and in the other documents referenced herein, including "Risk
Factors," identifies important factors that could cause such differences.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public from
the SEC's web site at "http://www.sec.gov" and from our web site at
"http://www.felcor.com." You may also read and copy any document we file with
the SEC at its public reference facilities at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at 7 World Trade Center, Suite 1300, New York, New York
10048, and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. You can also obtain copies of the documents at prescribed
rates by writing to the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities. Our SEC filings
are also available at the office of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005. For further information on obtaining copies of
our public filings at the New York Stock Exchange, you should call (212)
656-5060.
We "incorporate by reference" into this prospectus the information that
we file with the SEC, which means that we can disclose important information to
you by referring you to those documents. The information incorporated by
reference is an important part of this prospectus and information that we file
subsequently with the SEC will automatically update this prospectus. We have
filed the following documents with the SEC and they are incorporated herein by
reference:
(1) Annual Report on Form 10-K for the fiscal year ended
December 31, 1999;
(2) Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2000;
(3) Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000;
(4) Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000;
(5) Current Report on Form 8-K dated October 4, 2000; and
(6) all documents subsequently filed by us with the SEC
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, prior to the termination of this
offering.
You may request a copy of these filings (other than an exhibit to a
filing unless that exhibit is specifically incorporated by reference into that
filing) at no cost, by writing to or telephoning us at the following address:
Lawrence D. Robinson, Senior Vice President, General Counsel and Secretary,
FelCor Lodging Trust Incorporated, 545 East John Carpenter Freeway, Suite 1300,
Irving, Texas 75062, telephone (972) 444-4900, or by e-mail at
[email protected].
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OUR COMPANY
Unless the context otherwise requires, the words "we," "ours," "us" and
the "Company" refer to FelCor Lodging Trust Incorporated (FelCor), FelCor
Lodging Limited Partnership (FelCor LP) and their respective subsidiaries,
collectively.
We are one of the nation's largest hotel REITs, with ownership
interests in 187 hotels at December 1, 2000, with nearly 50,000 rooms and
suites. We own a 100% interest in 162 hotels with 42,077 rooms and suites, a 90%
or greater interest in entities owning seven hotels with 1,745 rooms and suites,
a 60% interest in an entity owning two hotels with 983 rooms and a 50% interest
in separate entities that own 16 hotels with 4,018 rooms and suites. Our hotels
are located in the United States (35 states) and Canada, with a concentration in
Texas (41 hotels), California (19 hotels), Florida (18 hotels) and Georgia (15
hotels).
We own the largest number of Embassy Suites, Crowne Plaza, Holiday Inn
and independently owned Doubletree-branded hotels in the world. The following
table lists our hotels, by brand, at December 1, 2000:
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Brand Total
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Embassy Suites 59
Holiday Inn 44
Crowne Plaza and Crowne Plaza Suites 18
Doubletree and Doubletree Guest Suites 14
Holiday Inn Select 10
Sheraton and Sheraton Suites 10
Hampton Inn 9
Holiday Inn Express 5
Fairfield Inn 5
Harvey Hotel 4
Independents 3
Courtyard by Marriott 2
Four Points by Sheraton 1
Hilton Suites 1
Homewood Suites 1
Westin 1
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Total Hotels 187
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We seek to increase operating cash flow through both internal growth
and selective acquisitions, while maintaining a flexible and conservative
capital structure. In addition to renovating, redeveloping and repositioning our
acquired hotels, we may seek to acquire new upscale properties that will benefit
from our affiliation with one of the premium brands available to us through our
strategic brand owner and manager relationships with Hilton Hotels Corporation,
Bass plc and Starwood Hotels & Resorts Worldwide, Inc.
In June 2000, we identified 25 non-strategic hotels which we presently
intend to sell. If sold, we expect gross sales proceeds from these hotels should
be approximately $150 million and net proceeds should be approximately $136
million (after deducting estimated transaction costs and the costs of
terminating the existing leases and management rights). To date, we have reached
an agreement in principle on the cost of terminating the leases on only 12 of
these hotels. We anticipate that the sale of these 25 hotels would result in a
book loss of approximately $63 million. Accordingly, our Board of Directors
approved a $63 million reserve for the hotels held for sale at June 30, 2000, to
reflect the difference between our book value and the estimated net proceeds
from the sale of these hotels. As of December 1, 2000 we have not sold any of
the 25 hotels held for sale.
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To enable us to satisfy certain requirements for qualification as a
REIT, generally we cannot operate the hotels in which we invest. Accordingly, we
have leased 85 hotels to DJONT Operations, L.L.C. and its consolidated
subsidiaries (DJONT) and 100 hotels to Bristol Hotels & Resorts and its
consolidated subsidiaries (Bristol). Bristol became a subsidiary of Bass plc
(Bass) by virtue of a merger between Bristol and a subsidiary of Bass on March
31, 2000. Two of the hotels are not leased.
Our leases generally have initial terms of five to 15 years and provide
for rent equal to the greater of a minimum base rent or a percentage rent based
on room and suite revenues, food and beverage revenues, food and beverage rents
and, in certain instances, other hotel revenues. Such arrangements are generally
referred to as percentage leases.
Subsidiaries of Bass manage all of the hotels leased by Bristol, plus
one of the two FelCor hotels that are not leased. DJONT has entered into
management agreements pursuant to which 71 hotels leased by it are managed by
subsidiaries of Hilton, 11 are managed by subsidiaries of Starwood and three are
managed by two independent management companies.
On July 21, 2000, our independent directors approved the acquisition of
100% of DJONT effective January 1, 2001. FelCor LP will issue approximately
417,000 FelCor LP units as consideration. No binding agreements have been
entered into for this acquisition. We expect that the benefits to us from the
purchase of DJONT, if completed, will include: (i) a more direct relationship
with the hotel and brand managers, (ii) elimination of potential conflicts of
interest and (iii) consolidated hotel level financial reporting. We will record
the consideration issued plus the net deficit acquired as an expense in the
period in which the transaction is completed. We are currently negotiating with
Bass to acquire the Bristol lessee or the leases held by it. We cannot assure
you that we will successfully complete these transactions.
We were formed as a Delaware corporation on May 16, 1994 and were
reincorporated as a Maryland corporation on June 23, 1995. Our principal
executive offices are located at 545 East John Carpenter Freeway, Suite 1300,
Irving, Texas 75062, and our telephone number is (972) 444-4900.
RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties that we do not
presently know or that we currently deem immaterial may also impair our business
operations.
If any of the risks actually occur, they could materially adversely
affect our business, financial condition or results of operations. In that case,
the trading price of our common stock could decline.
WE HAVE HAD INCREASES IN LEVERAGE THAT COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
As a result of our 1998 merger with Bristol Hotel Company, our leverage
increased during 1998, and it has increased further to fund our renovation,
redevelopment and rebranding program and our share repurchase program. The share
repurchase program authorizes repurchases up to an aggregate maximum of $300
million. From January 1 December 1, 2000, we have repurchased approximately
4,438,700 million shares of common stock under this program at an aggregate cost
of approximately $85.7 million.
At September 30, 2000:
o we had approximately $1.85 billion in consolidated debt, of which
approximately $786 million was secured by mortgages or capital leases;
o we had a ratio of consolidated debt to investment in hotels at cost of
40%;
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o our ratio of EBITDA to interest expense for the nine months then ended
was 2.9-to-1; and
o we had approximately $187 million of floating rate debt, which
constituted 11% of our total debt. Most of this floating rate debt
bears interest at a rate equal to between 2.00% and 2.75% plus the one
month LIBOR rate. At September 30, 2000, the thirty-day LIBOR rate was
6.620%. Changes in economic conditions could result in higher interest
rates, thereby increasing our interest expense on our floating rate
debt and reducing funds available for our current renovation,
redevelopment and rebranding plans and our share repurchase program.
Our leverage could have important consequences for you. For example, it
could:
o make it more difficult for us to satisfy our obligations with respect
to our debt outstanding;
o limit our ability to obtain additional financing, if we need it, for
working capital, our renovation, redevelopment and rebranding plans,
acquisitions, debt service requirements or other purposes;
o increase our vulnerability to adverse economic and industry conditions;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing funds available
for operations, future business opportunities or other purposes;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
o place us at a competitive disadvantage compared to our competitors that
have less debt.
WE MAY BE UNABLE TO REALIZE THE ANTICIPATED BENEFITS OF OUR RENOVATIONS.
The majority of our hotels either recently have been, or are in the
process of being, substantially renovated, redeveloped and, in certain cases,
rebranded. If the completion of the current renovation projects are
significantly delayed, our operating results could be adversely affected. In
addition, no assurance can be given that the recently completed and ongoing
improvements will achieve the results anticipated when we made the decision to
invest in the improvements.
WE DEPEND ON THE LESSEES' HOTEL OPERATIONS FOR OUR REVENUES.
Our revenues consist primarily of rents received under our leases. The
lessees' payment of such rental obligations is generally unsecured. As the
lessee of 100 of our hotels, Bristol must maintain certain net worth and
liquidity requirements. DJONT, which leases 85 of our hotels, has limited
assets, derives its revenue solely from the operation of our hotels and, at
September 30, 2000, had a shareholders' deficit of approximately $18.2 million.
We substantially depend upon the successful operation of our hotels to enable
the lessees, particularly DJONT, to meet their rental obligations under the
leases.
The leases with Bristol and DJONT have varying terms, generally no
longer than 15 years. At the expiration of the lease terms, we will be required
to negotiate renewals or seek replacement leases. We cannot guarantee you that
we will be able to replace or renew such leases successfully or at all, and any
failure to do so could adversely affect our business, financial condition and
results of operations.
CONFLICTS OF INTEREST COULD ADVERSELY AFFECT OUR BUSINESS.
CERTAIN FELCOR DIRECTORS. DJONT leases 85 of our hotels. All of the voting
interests (and a 50% common equity interest) in DJONT are beneficially owned by
Hervey A. Feldman and Thomas J. Corcoran, Jr., co-founders of our company.
Furthermore, Mr. Feldman is the Chairman Emeritus and Mr. Corcoran is the
President, Chief Executive
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Officer and a director of our company. The children of Charles N. Mathewson
beneficially own the remaining 50% common equity, non-voting interest in DJONT.
Mr. Mathewson serves as a director of our company.
Bristol leases or manages 100 of our hotels. Bristol became a
wholly-owned subsidiary of Bass plc in March 2000. Richard C. North, who joined
our Board during 1998, is the Group Finance Director of Bass plc, which is also
the parent of Holiday Hospitality Franchising, Inc. Holiday Hospitality is the
franchisor of most of the Bristol hotels and, together with its affiliates, owns
our common stock and FelCor LP units aggregating approximately 15.5% of our
outstanding common stock and units.
Issues may arise under the leases, franchise agreements and management
contracts, and in the allocation of acquisition and leasing opportunities, that
present conflicts of interests due to the relationship of these directors to the
companies with which they are associated. As an example, any decreases in lease
rental rates payable by DJONT may increase the profits of DJONT, in which
Messrs. Feldman and Corcoran and Mr. Mathewson's children have a direct economic
interest, at our expense. In the event we enter into new or additional hotel
leases or other transactions with Bristol, the interests of Mr. North, by virtue
of his relationship with Bass, may conflict with our interests. For example, any
decrease in lease rental rates payable by Bristol may decrease our profits to
the benefit of Bristol. Also, in the selection of franchises under which our
hotels will be operated, Mr. North by virtue of his relationship with Holiday
Hospitality, may have interests that conflict with our interest. We anticipate
that any director who has a conflict of interest with respect to an issue
presented to our board will abstain from voting upon that issue, although he
will have no legal obligation to do so. We have no provisions in our bylaws or
charter that require an interested director to abstain from voting upon an
issue. Although each director has a fiduciary duty of loyalty to the Company,
there is a risk that, should an interested director vote upon an issue in which
he or one of his affiliates has an interest, his vote may reflect a bias that
could be contrary to our best interests. In addition, even if an interested
director abstains from voting, the director's participation in the meeting and
discussion of an issue in which he or companies with which he is associated have
an interest could influence the votes of other directors regarding the issue.
ANTICIPATED ACQUISITION OF LESSEES. As a result of the passage of the
REIT Modernization Act, we will be able to form or acquire a taxable REIT
subsidiary (TRS) to acquire all or a portion of our existing hotel leases, and
to serve as the lessee for any hotels we acquire after January 1, 2001. In this
regard, our independent directors approved the acquisition of 100% of DJONT,
effective January 1, 2001, for an expected purchase price of approximately
417,000 units of limited partner interest in FelCor LP. In addition, we
currently are negotiating with Bass to acquire our remaining lessee, Bristol, or
the leases owned by it. There are no binding agreements with Bass, DJONT or the
owners of DJONT, and any such acquisitions will be subject to further
negotiations between us and the lessees or their owners. These negotiations may
involve potential conflicts of interest which will need to be resolved before we
can ultimately acquire these lessees or leases. We cannot assure you that we
will successfully complete these transactions.
NO ARMS-LENGTH BARGAINING ON DJONT PERCENTAGE LEASES. We did not
negotiate the terms of the leases with DJONT on an arms-length basis.
Accordingly, these percentage leases may not reflect fair market values or
terms. However, we believe that the terms of these leases are fair to us. The
rental terms of these leases were set based upon historical financial
information and projected operating performance of the applicable hotel. The
other terms of the leases are typical of the provisions found in other leases
entered into in similar circumstances. A majority of our independent directors
approved the leases at the time they were executed.
ADVERSE TAX CONSEQUENCES TO CERTAIN AFFILIATES ON A SALE OF CERTAIN
HOTELS. Messrs. Corcoran and Mathewson may incur additional tax liability if we
sell our investments in six hotels that we acquired in July 1994 from
partnerships controlled by these individuals. Consequently, our interests could
differ from Messrs. Corcoran and Mathewson's interests in the event that we
consider a sale of any of these hotels. Decisions regarding a sale of any of
these six hotels must be made by a majority of the independent directors.
WE HAVE RESTRICTIVE DEBT COVENANTS THAT COULD ADVERSELY AFFECT OUR ABILITY TO
RUN OUR BUSINESS.
At September 30, 2000, we had borrowed approximately $374 million under
our line of credit. We also had issued and outstanding $400 million in principal
amount of 9 1/2% senior notes due 2008 and $300 million in principal amount of
7 3/8% and 7 5/8% senior notes due 2004 and 2007, respectively. The indenture
governing the 9 1/2%
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senior notes, the indenture governing the 7 3/8% and 7 5/8% senior notes and the
agreements governing our line of credit contain various restrictive covenants
including, among others, provisions restricting us from:
o incurring indebtedness;
o making distributions;
o making investments;
o engaging in transactions with affiliates;
o incurring liens;
o merging or consolidating with another person;
o disposing of all or substantially all of our assets; or
o permitting limitations on the ability of our subsidiaries to
make payments to us.
These restrictions may adversely affect our ability to finance our
operations or engage in other business activities that may be in our best
interest.
In addition, certain of these agreements require us to maintain certain
specified financial ratios. Our ability to comply with such ratios may be
affected by events beyond our control. Under the most restrictive of these
provisions, the maximum additional debt that we could incur for investment in
hotel properties was limited to approximately $1 billion at September 30,
2000. These covenants also may restrict our ability to engage in certain other
transactions. In addition, any breach of these limitations could result in the
acceleration of most of our debt. We may not be able to refinance or repay this
debt in full under such circumstances.
WE WILL ENCOUNTER INDUSTRY RELATED RISKS THAT MAY ADVERSELY AFFECT OUR BUSINESS.
INVESTING IN HOTEL ASSETS INVOLVES SPECIAL RISKS. We have invested only
in hotel-related assets, and our hotels are subject to all of the risks common
to the hotel industry. These risks could adversely affect hotel occupancy and
the rates that can be charged for hotel rooms, and generally include:
o competition from other hotels;
o construction of more hotel rooms in a particular area than
needed to meet demand;
o increases in energy costs and other travel expenses that
reduce business and leisure travel;
o adverse effects of declines in general and local economic
activity;
o fluctuations in our revenue caused by the seasonal nature of
the hotel industry;
o adverse effects of a downturn in the hotel industry; and
o risks generally associated with the ownership of hotels and
real estate, as discussed below.
In addition, annual adjustments (based on changes in the Consumer Price Index)
are made to the base rent and the thresholds used to compute percentage rent
under the percentage leases. These adjustments, unless offset by increases in
hotel revenues, would reduce the amount of rent payable to us under the
percentage leases and, consequently, adversely affect our results of operations.
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ACQUISITION OF THE LESSEES OR THE LEASES OF OUR HOTELS MAY INVOLVE
ADDITIONAL RISKS. Currently, as a lessor of hotels, our revenue under the
percentage leases may vary as a result of factors which affect the revenues of
the hotels, but we are not subject to the risks of changes in the operating
expenses of the hotels, all of which risks are now borne by the lessees. If we
are successful in acquiring our lessees, or the leases held by them, we will
become subject to additional risks of adverse changes in operating expenses,
including but not limited to:
o wage and benefit costs;
o repair and maintenance expenses;
o the cost of liability insurance; and
o other operating expenses.
WE COULD FACE INCREASED COMPETITION. Each of our hotels competes with
other hotels in its geographic area. A number of additional hotel rooms have
been or may be built in a number of the geographic areas in which our hotels are
located, which could adversely affect the results of operations of these hotels.
An oversupply of hotel rooms could adversely affect both occupancy and rates in
the markets in which our hotels are located. A significant increase in the
supply of midprice, upscale and upper upscale hotel rooms and suites, if demand
fails to increase proportionately, could have a severe adverse effect on our
business, financial condition, and results of operations.
THE HOTEL INDUSTRY IS SEASONAL IN NATURE. Generally, hotel revenues are
the highest in the second and third quarters of each year. Seasonality causes
quarterly fluctuations in our revenue. We may be able to reduce, but not
eliminate, the effects of seasonality by continuing to diversify the geographic
location and primary customer base of our hotels.
OUR INVESTMENTS ARE CONCENTRATED IN A SINGLE INDUSTRY. Historically, we
have only invested in hotel-related assets. In the event of a downturn in the
hotel industry, the adverse effect on us may be greater than on a more
diversified company with assets outside the hotel industry.
ACQUISITION GROWTH OPPORTUNITIES HAVE DECREASED. There has been
substantial consolidation in, and capital allocated to, the U.S. lodging
industry since the early 1990's. This generally has resulted in higher prices
for hotels. In addition, current market prices of FelCor common stock make its
cost of equity capital relatively high. These conditions have resulted in fewer
attractive acquisition opportunities. An important part of our historical growth
strategy has been the acquisition and, in many instances, the renovation and
repositioning of hotels at less than replacement cost. Continued industry
consolidation and competition for acquisitions could adversely affect our growth
prospects. We compete for hotel investment opportunities with other companies,
some of which have greater financial or other resources than we have. Certain
competitors may have a lower cost of capital and may be able to pay higher
prices or assume greater risks than would be prudent for us to pay or assume.
WE MUST COMPLY WITH REQUIREMENTS OF FRANCHISE AGREEMENTS. Most of our
hotels are operated under various franchise licenses. Each license agreement
requires that the franchised hotel be maintained and operated in accordance with
certain standards. The franchisors also may require substantial improvements to
our hotels, for which we would be responsible under the percentage leases, as a
condition to the renewal or continuation of these franchise licenses. If a
franchise license terminates due to our failure to make required improvements or
to otherwise comply with its terms, we may be liable to the franchisor for a
termination payment. These termination payments would vary by franchise
agreement and by hotel. The loss of a substantial number of franchise licenses
and the related termination payments could have a material adverse effect on our
business, financial condition and results of operations.
OUR ABILITY TO GROW MAY BE LIMITED BY OUR ABILITY TO ATTRACT DEBT FINANCING.
Since the merger with Bristol Hotel Company, we have focused on our
internal growth strategy, which includes the renovation, redevelopment and
rebranding of our hotels to achieve improved revenue performance. We may not be
able to fund growth solely from cash provided from operating activities because
we must distribute at least
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95% (90% beginning in 2001) of our taxable income each year to maintain our
status as a REIT. Consequently, we must rely primarily upon the availability of
debt or equity capital to fund hotel acquisitions and improvements. We do not
presently intend to effect a public offering of equity securities at current
market prices. Consequently, we will be largely dependent upon our ability to
attract debt financing from public or institutional lenders. We cannot assure
you that we will be successful in attracting sufficient debt financing to fund
future growth at an acceptable cost. In addition, we currently have a policy of
limiting debt to not more than 50% of our investment in hotel assets, at cost,
which (unless waived or modified by our board of directors) could also limit our
ability to incur additional debt to fund our continued growth. At September 30,
2000, our consolidated debt represented 40% of our investment in hotels at cost.
THE RECENT MERGERS OF PROMUS AND BRISTOL CREATE UNCERTAINTIES FOR THE FUTURE.
While we expect our positive historical relationships with Promus and
Bristol to continue with their successors, the merger of Promus Hotel
Corporation into a subsidiary of Hilton Hotels Corporation, and of Bristol
Hotels & Resorts into a subsidiary of Bass plc, give rise to some uncertainties.
Changes in personnel, brand standards or operating methods could adversely
affect our relationships, result in increases in required capital expenditures,
reductions in hotel revenues or other adverse consequences of which we are not
presently aware.
WE ARE SUBJECT TO POTENTIAL TAX RISKS.
THE FEDERAL INCOME TAX LAWS GOVERNING REITS ARE COMPLEX. We have
operated and intend to continue to operate in a manner that is intended to
qualify us as a REIT under the federal income tax laws. The REIT qualification
requirements are extremely complicated, however, and interpretations of the
federal income tax laws governing qualification as a REIT are limited.
Accordingly, we cannot be certain that FelCor has been or will continue to be
successful in operating so as to qualify as a REIT. At any time, new laws,
interpretations or court decisions may change the federal tax laws or the
federal income tax consequences of qualification as a REIT.
FAILURE TO MAKE REQUIRED DISTRIBUTIONS WOULD SUBJECT US TO TAXES. In
order to qualify as a REIT, each year we must pay out to our shareholders at
least 95% (90% beginning in 2001) of our taxable income (other than any net
capital gain). To the extent that we satisfy the applicable distribution
requirement, but distribute less than 100% our taxable income, we will be
subject to federal corporate income tax on our undistributed taxable income. In
addition, we will be subject to a 4% nondeductible tax if the actual amount we
pay out to our shareholders in a calendar year is less than a minimum amount
specified under federal tax laws. Our only source of funds to make such
distributions comes from distributions to us from FelCor LP. Accordingly, we may
be required to borrow money or sell assets to make distributions sufficient to
enable us to pay out enough of our taxable income to satisfy the applicable
distribution requirement and to avoid corporate income tax and the 4% tax in a
particular year.
FAILURE TO QUALIFY AS A REIT WOULD SUBJECT US TO FEDERAL INCOME TAXES.
If we fail to qualify as a REIT, we would be subject to federal income tax on
our taxable income. We might need to borrow money or sell hotels in order to pay
any such tax. If we cease to be a REIT, we no longer would be required to
distribute most of our taxable income to our shareholders. Unless our failure to
qualify as a REIT were excused under federal income tax laws, we could not
re-elect REIT status until the fifth calendar year following the year in which
we failed to qualify.
FAILURE TO HAVE DISTRIBUTED BRISTOL HOTEL COMPANY'S EARNINGS AND
PROFITS IN 1998 COULD CAUSE US TO FAIL TO QUALIFY AS A REIT. At the end of any
taxable year, a REIT may not have any accumulated earnings and profits
(described generally for federal income tax purposes as cumulative undistributed
net income) from a non-REIT corporation. Arthur Andersen LLP prepared and
provided to us its computation of the accumulated earnings and profits of
Bristol Hotel Company through the date of the merger of Bristol Hotel Company
into FelCor, and we made a corresponding special one-time distribution to our
shareholders. However, the determination of accumulated earnings and profits for
federal income tax purposes is extremely complex and the computations by Arthur
Andersen LLP are not binding upon the Internal Revenue Service. Should the
Internal Revenue Service successfully assert that the accumulated earnings and
profits of Bristol Hotel Company were greater than the amount so distributed by
us, we may fail to qualify as a REIT.
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SALE OF ASSETS ACQUIRED FROM BRISTOL HOTEL COMPANY WITHIN TEN YEARS
AFTER THE MERGER WILL RESULT IN tax. If, within ten years after the Bristol
merger, we sell any asset acquired in the merger and recognize a taxable gain on
such sale, we will be taxed at the highest corporate rate on an amount equal to
the lesser of (i) the amount of gain that we recognize at the time of the sale
or (ii) the amount of gain that we would have recognized if we had sold the
asset at the time of the merger for its then fair market value. The sales of
Bristol hotels that have been made to date have not resulted in any material
amount of tax liability. If we are successful in selling all of the 25 hotels
held for sale, we could incur a significant tax liability, the amount of which
cannot yet be determined.
INTEREST RATES MAY AFFECT THE PRICE OF OUR COMMON STOCK.
One of the factors that may affect the price of our common stock is the
amount of distributions to stockholders in comparison to yields on other
financial instruments. An increase in market interest rates would provide higher
yields on other financial instruments, which could adversely affect the prices
of our common stock.
DEPARTURE OF KEY PERSONNEL, INCLUDING MR. CORCORAN, COULD ADVERSELY AFFECT OUR
FUTURE OPERATING RESULTS.
WE WILL ENCOUNTER RISKS THAT MAY ADVERSELY AFFECT REAL ESTATE OWNERSHIP.
GENERAL RISKS. Our investments in hotels are subject to the numerous
risks generally associated with owning real estate, including among others:
o adverse changes in general or local economic or real estate
market conditions;
o changes in zoning laws;
o changes in traffic patterns and neighborhood characteristics;
o increases in assessed valuation and tax rates;
o increases in the cost of property insurance;
o governmental regulations and fiscal policies;
o the potential for uninsured or underinsured property losses;
o the impact of environmental laws and regulations; and
o other circumstances beyond our control.
Moreover, real estate investments are relatively illiquid, and we may
not be able to vary our portfolio in response to changes in economic and other
conditions.
COMPLIANCE WITH ENVIRONMENTAL LAWS MAY ADVERSELY AFFECT OUR FINANCIAL
CONDITION. Real estate owners are subject to numerous federal, state and local
environmental laws and regulations. Under these laws, a current or prior owner
of real estate may be liable for the costs of cleaning up and removing hazardous
or toxic substances found on its property, whether or not it was responsible for
their presence. In addition, if an owner of real property arranges for the
disposal of hazardous or toxic substances at another site, it may also be liable
for the costs of cleaning up and removing such substances from the disposal
site, even if it did not own or operate the disposal site. A property owner may
also be liable to third parties for personal injuries or property damage
sustained as a result of its release of hazardous or toxic substances (including
asbestos-containing materials) into the environment. Environmental laws may
require us to incur substantial expenses and limit the use of our properties. We
could be liable for substantial amounts for a failure to comply with applicable
environmental laws, which may be enforced by the government or, in certain
instances, by private parties. The existence of hazardous or toxic substances on
a property can also adversely affect the value of, and the owner's ability to
use, sell or borrow against, the property.
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No assurances can be given that future or amended laws, ordinances or
regulations or more stringent interpretations or enforcement policies of
existing environmental requirements, will not impose any material environmental
liability, or that the environmental condition of the hotels will not be
affected by changes (of which we are unaware) occurring subsequent to the dates
of such audits, by the condition of properties in the vicinity of such hotels
(such as the presence of leaking underground storage tanks) or by the actions of
unrelated third parties.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT MAY ADVERSELY AFFECT
OUR FINANCIAL CONDITION. Under the Americans with Disabilities Act of 1990, all
public accommodations (including hotels) are required to meet certain federal
requirements for access and use by disabled persons. We believe that our hotels
substantially comply with the requirements of the Americans with Disabilities
Act. However, a determination that the hotels are not in compliance with that
Act could result in liability for both governmental fines and damages to private
parties. If we were required to make unanticipated major modifications to the
hotels to comply with the requirements of the Americans with Disabilities Act,
it could adversely affect our ability to pay our obligations.
WE LIMIT THE OWNERSHIP OF OUR CAPITAL STOCK.
In order for us to maintain our status as a REIT, not more than 50% in
value of our outstanding common stock may be owned (actually or constructively
under the applicable tax rules) by five or fewer persons during the last half of
any taxable year. In connection with this requirement, our charter prohibits,
subject to certain exceptions, any person from owning more than 9.9% (determined
in accordance with the Internal Revenue Code and the Securities Exchange Act of
1934) of the number of outstanding shares of any class of our capital stock. Our
charter also prohibits any transfer of our capital stock that would result in a
violation of the 9.9% ownership limit, reduce the number of stockholders below
100 or otherwise result in our failing to qualify as a REIT. Any attempted
transfer in violation of the charter prohibitions will be void and the intended
transferee will not acquire any right in the shares resulting in such violation.
We have the right to take any lawful action that we believe necessary or
advisable to ensure compliance with these ownership and transfer restrictions
and to preserve our status as a REIT, including refusing to recognize any
transfer of capital stock in violation of our charter.
If a person holds or attempts to acquire shares in excess of our
ownership and transfer restrictions, these shares will be immediately designated
as "shares-in-trust" and transferred automatically and by operation of law, in
trust, to a trustee designated by us. The trustee will have the right to receive
all distributions on, to vote and to sell these shares. The holder of the excess
shares will have no right or interest in these shares, except the right (under
certain circumstances) to receive the lesser of: (i) the proceeds of any sale of
these shares by the trustee to a permitted owner and (ii) the amount you paid
for these shares (or the market value of these shares, determined in accordance
with our charter, if the shares were received by gift, bequest or otherwise
without payment). Accordingly, the record owner of any shares designated as
shares-in-trust would suffer a financial loss if the price at which these shares
are sold to a permitted owner is less than what was paid for these shares.
OUR CHARTER AND BYLAWS HAVE ANTI-TAKEOVER AND CORPORATE GOVERNANCE PROVISIONS.
OWNERSHIP LIMIT. The ownership and transfer restrictions of our charter
may have the effect of discouraging or preventing a third party from attempting
to gain control of us without the approval of our Board. Therefore, it is less
likely that a change in control, even if beneficial to stockholders, could be
effected without the approval of our Board.
STAGGERED BOARD. Our Board is divided into three classes. Directors in
each class are elected for terms of three years. As a result, the ability of
stockholders to effect a change in control of us through the election of new
directors is limited by the inability of stockholders to elect a majority of our
Board at any particular meeting.
AUTHORITY TO ISSUE ADDITIONAL SHARES. Under our charter, our Board may
issue preferred stock without stockholder action. The preferred stock may be
issued, in one or more series, with the preferences, qualifications and terms,
designated by our Board that may discourage, delay or prevent a change in
control of us, even if such change were in the best interests of stockholders.
We currently have outstanding 5,980,600 shares of our $1.95 Series A
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Cumulative, Convertible Preferred Stock and 57,500 shares of our 9% Series B
Cumulative Redeemable Preferred Stock (represented by 5,750,000 Depositary
Shares, each representing a 1/100 fractional interest in a share of such Series
B preferred stock). The preferred stock reduces the amount of dividends
available, and has dividend, liquidation and other rights superior, to the
holders of our common stock. Our charter and bylaws contain other provisions
that also may have the effect of delaying or preventing a change in control of
us.
MARYLAND ANTI-TAKEOVER STATUTES. As a Maryland corporation, we are
subject to various provisions under the Maryland General Corporation Law,
including the Maryland business combination statute, which sets forth certain
procedures that must be followed in, and otherwise restricts, certain takeovers
and business combinations. Our charter currently exempts us from the operation
of the Maryland share control statute, which may deny voting rights to shares
involved in an acquisition of one-fifth or more of the voting stock of a
Maryland corporation. To the extent these laws are applicable to us, they may
have the effect of delaying or preventing a change in control of us even though
beneficial to our stockholders.
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF COMMON STOCK
The following description of our common stock is a summary and is not
intended to be complete. You should also review our Charter and Bylaws, copies
of which are available from us upon request.
General
Under our Charter, we have authority to issue up to 200,000,000 shares
of common stock and 20,000,000 shares of preferred stock. Under Maryland law,
stockholders generally are not responsible for the corporation's debts or
obligations. At December 1, 2000, we had outstanding 52,548,950 shares of common
stock.
Terms
Subject to the preferential rights of any series of preferred stock
outstanding, the holders of common stock are entitled to one vote per share on
all matters voted on by stockholders, including in the election of directors.
Our Charter does not provide for cumulative voting in the election of directors.
Except as otherwise required by law or provided in Articles Supplementary
relating to preferred stock of any series, the holders of common stock
exclusively possess all voting power.
Subject to any preferential rights of any series of preferred stock
outstanding, the holders of common stock are entitled to such dividends, if any,
as may be declared from time to time by the Board of Directors from funds
legally available therefor and, upon liquidation, are entitled to receive, pro
rata, all assets of FelCor available for distribution to such holders. All
shares of common stock will, when issued, be fully paid and nonassessable and
will have no preemptive rights. FelCor may, however, enter into contracts with
certain stockholders to grant such holders preemptive rights.
Restrictions on Ownership and Transfer
The shares of common stock are subject to certain restrictions upon
their ownership and transfer which were adopted for the purpose of enabling
FelCor to preserve its status as a REIT. For a description of such restrictions
and the Maryland Anti-Takeover Statutes, see the discussions below under the
captions, "-- Certain Charter and Bylaw Provisions -- Restrictions on Ownership
and Transfer" and "-- Maryland Anti-Takeover Statutes."
Exchange Listing
The common stock is listed on the NYSE under the symbol "FCH."
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Transfer Agent
The transfer agent and registrar for the common stock is SunTrust Bank,
Atlanta, Georgia.
DESCRIPTION OF PREFERRED STOCK
The preferred stock may be issued from time to time in one or more
series, without stockholder approval, with such preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption thereof as shall be established by the
Board of Directors. Thus, without stockholder approval, FelCor could authorize
the issuance of preferred stock with voting, conversion and other rights that
could dilute the voting power and other rights of the holders of common stock.
Pursuant to its authority, the Board of Directors has authorized the issuance of
two classes of preferred stock, as described below.
DESCRIPTION OF SERIES A PREFERRED STOCK
The following is a summary of certain terms and provisions of our $1.95
Series A Cumulative Convertible Preferred Stock (the "Series A preferred
stock"). This summary is not intended to be complete. Accordingly, you should
also review the terms and provisions of our Charter (including the Articles
Supplementary to the Charter setting forth the particular terms of the Series A
preferred stock), and Bylaws, copies of which are available from us upon
request.
General
In April 1996, the Board of Directors authorized FelCor to classify and
issue the Series A preferred stock as part of the authorized preferred stock. At
December 1, 2000, we had outstanding 5,980,600 shares of Series A preferred
stock.
The outstanding shares of Series A preferred stock are validly issued,
fully paid and nonassessable. The holders of the Series A preferred stock have
no preemptive rights with respect to any shares of capital stock of FelCor or
any other securities of FelCor convertible into or carrying rights or options to
purchase any such shares. The shares of Series A preferred stock are not subject
to any sinking fund or other obligation of FelCor to redeem or retire the Series
A preferred stock. Unless converted or redeemed by FelCor into common stock, the
Series A preferred stock will have a perpetual term, with no maturity.
Ranking
The Series A preferred stock rank pari passu with the outstanding
Series B preferred stock (as defined below) and senior to the common stock with
respect to the payment of dividends and amounts upon liquidation, dissolution or
winding up of FelCor.
While any shares of Series A preferred stock are outstanding, FelCor
may not authorize, create or increase the authorized amount of any class or
series of stock that ranks senior to the Series A preferred stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or winding
up without the consent of the holders of two-thirds of the outstanding Series A
preferred stock. However, FelCor may create additional classes of stock,
increase the authorized number of shares of preferred stock or issue series of
preferred stock ranking junior to or on a parity with the Series A preferred
stock with respect, in each case, to the payment of dividends and amounts upon
liquidation, dissolution and winding up without the consent of any holder of
Series A preferred stock.
Dividends
Holders of Series A preferred stock are entitled to receive, when, as
and if declared by the Board of Directors, out of funds legally available for
payment, cash distributions declared or paid for the corresponding period
payable in an amount per share equal to the greater of $0.4875 per quarter
(equivalent to $1.95 per annum) or the cash dividends (determined as of the
record date for each of the respective quarterly dividend payment dates referred
to below) on the number of shares of common stock, or portion thereof, into
which a share of Series A preferred stock is then
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convertible. Dividends on the Series A preferred stock are payable quarterly in
arrears on the last calendar day of January, April, July and October of each
year, commencing July 31, 1996 (and, in the case of any accrued but unpaid
dividends, at such additional times and for such interim periods, if any, as
determined by the Board of Directors). Each such dividend is payable to holders
of record as they appear on the stock records of FelCor at the close of business
on such record dates, not exceeding 60 days preceding the payment dates thereof,
as shall be fixed by the Board of Directors. Dividends will be cumulative,
whether or not in any dividend period or periods there shall be funds legally
available for the payment of such dividends. Accumulations of dividends on
Series A preferred stock will not bear interest. Dividends payable on the Series
A preferred stock for any period greater or less than a full dividend period
will be computed on the basis of a 360-day year consisting of twelve 30-day
months.
Except as provided in the next sentence, no dividend will be declared
or paid on any Parity Stock (as herein defined) unless full cumulative dividends
have been or contemporaneously are declared and paid, or declared and a sum
sufficient for the payment thereof is set apart for such payment, on the Series
A preferred stock for all prior dividend periods and the then current dividend
period. If accrued dividends on the Series A preferred stock and any Parity
Stock for all prior dividend periods have not been paid in full, then any
dividend declared on the Series A preferred stock and any Parity Stock for any
dividend period will be declared ratably in proportion to accrued and unpaid
dividends on the Series A preferred stock and such Parity Stock.
Unless all dividends then required to be paid on the Series A preferred
stock and any Parity Stock have been or contemporaneously are declared and paid,
or declared and a sum sufficient for the payment thereof is set apart for
payment, FelCor will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Stock (as herein
defined) or (ii) except as set forth in the following sentence, redeem, purchase
or otherwise acquire for consideration any Junior Stock (subject to certain
exceptions), through a sinking fund or otherwise. Notwithstanding the foregoing
limitations, FelCor may, at any time, acquire shares of its capital stock,
without regard to rank, for the purpose of preserving its status as a REIT or
for purposes of an employee benefit plan of FelCor.
As used herein, (i) the term "dividend" does not include dividends
payable solely in shares of Junior Stock on Junior Stock, or in options,
warrants or rights to holders of Junior Stock to subscribe for or purchase any
Junior Stock and (ii) the term "Junior Stock" means the common stock, and any
other class of capital stock of FelCor now or hereafter issued and outstanding
that ranks junior to the Series A preferred stock as to the payment of dividends
or amounts upon liquidation, dissolution or winding up of FelCor and (iii) the
term "Parity Stock" means any other class or series of capital stock of FelCor
now or hereafter issued and outstanding (including the Series B preferred stock)
that ranks equally with the Series A preferred stock as to the payment of
dividends and amounts upon liquidation, dissolution or winding up of FelCor.
Redemption
Shares of Series A preferred stock are not redeemable by FelCor prior
to April 30, 2001. On and after April 30, 2001, the shares of Series A preferred
stock will be redeemable, in whole or in part, at the option of FelCor, for (i)
such number of shares of common stock as are issuable at a conversion rate of
0.7752 shares of common stock for each share of Series A preferred stock,
subject to adjustment in certain circumstances, or (ii) cash in an amount equal
to the aggregate market value (determined as of the date of the notice of
redemption) of such number of shares of common stock as specified by FelCor in
the notice of redemption. FelCor may exercise this redemption option only if for
20 trading days within any period of 30 consecutive trading days, including the
last trading day of such period, the closing price of the common stock on the
NYSE equals or exceeds the Conversion Price (as defined in the Series A Articles
Supplementary) per share, subject to adjustment in certain circumstances. If
fewer than all of the shares of Series A preferred stock are to be redeemed, the
shares shall be selected by lot or pro rata or in some other equitable manner
determined by FelCor.
On the redemption date, FelCor must pay on each share of Series A
preferred stock to be redeemed any accrued and unpaid dividends, in arrears, for
any dividend period ending on or prior to the redemption date. In the case of a
redemption date falling after a dividend payment record date and prior to the
related payment date, the holders of the Series A preferred stock at the close
of business on such record date will be entitled to receive the dividend
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payable on such shares on the corresponding dividend payment date,
notwithstanding the redemption of such shares prior to such dividend payment
date. Except as provided for in the preceding sentence, no payment or allowance
will be made for accrued dividends on any shares of Series A preferred stock
called for redemption or on the shares of common stock issuable upon such
redemption.
Unless all dividends then required to be paid on the Series A preferred
stock and any Parity Stock have been or contemporaneously are declared and paid,
or declared and a sum sufficient for the payment thereof set apart for payment,
the Series A preferred stock may not be redeemed in whole or in part and FelCor
may not, except as set forth in the following sentence, redeem, purchase or
otherwise acquire for consideration any shares of Series A preferred stock,
otherwise than pursuant to a purchase or exchange offer made on the same terms
to all holders of Series A preferred stock. Notwithstanding the foregoing
limitations, FelCor may, at any time, acquire shares of its capital stock,
without regard to rank, for the purpose of preserving its status as a REIT or
for purposes of an employee benefit plan of FelCor.
On and after the date fixed for redemption, provided that FelCor has
made available at the office of the registrar and transfer agent a sufficient
number of shares of common stock and/or an amount of cash to effect the
redemption, dividends will cease to accrue on the shares of Series A preferred
stock called for redemption (except that, in the case of a redemption date after
a dividend payment record date and prior to the related dividend payment date,
holders of Series A preferred stock on the dividend payment record date will be
entitled on such dividend payment date to receive the dividend payable on such
shares), such shares shall no longer be deemed to be outstanding and all rights
of the holders of such Series A preferred stock shall cease, except for the
right to receive the common stock and/or any cash payable upon such redemption,
without interest from the date of such redemption. At the close of business on
the redemption date, each holder of Series A preferred stock (unless FelCor
defaults in the delivery of the common stock or cash) will be, without any
further action, (i) deemed a holder of the number of shares of common stock for
which such shares of Series A preferred stock are redeemable or (ii) be entitled
to receive the cash amount applicable to such shares.
Fractional shares of common stock are not to be issued upon redemption
of the Series A preferred stock, but, in lieu thereof, FelCor will pay a cash
adjustment based on the current market price of the common stock on the day
prior to the redemption date.
Liquidation Preference
The holders of Series A preferred stock are entitled to receive in the
event of any liquidation, dissolution or winding up of FelCor, whether voluntary
or involuntary, $25.00 per share of Series A preferred stock plus an amount per
share of Series A preferred stock equal to all dividends (whether or not earned
or declared) accrued and unpaid thereon to the date of final distribution to
such holders ("Series A liquidation preference"), and no more.
Until the holders of the Series A preferred stock have been paid the
Series A liquidation preference in full, no payment will be made to any holder
of Junior Stock upon the liquidation, dissolution or winding up of FelCor. If,
upon any liquidation, dissolution or winding up of FelCor, the assets of FelCor,
or proceeds thereof, distributable among the holders of the Series A preferred
stock and any Parity Stock are insufficient to pay in full the Series A
liquidation preference and the liquidation preference applicable with respect to
any such Parity Stock, then such assets, or the proceeds thereof, will be
distributed among the holders of Series A preferred stock and any such Parity
Stock, ratably, in accordance with the respective amounts which would be payable
on such Series A preferred stock and any such Parity Stock if all amounts
payable thereon were to be paid in full. Neither a consolidation or merger of
FelCor with another corporation, a statutory share exchange by FelCor nor a
sale, lease or transfer of all or substantially all of FelCor's assets will be
considered a liquidation, dissolution or winding up, voluntary or involuntary,
of FelCor.
Voting Rights
Except as indicated below, or except as otherwise from time to time
required by applicable Maryland law, the holders of Series A preferred stock
have no voting rights.
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If six quarterly dividends (whether or not consecutive) payable on the
Series A preferred stock, or any Parity Stock, are in arrears, whether or not
earned or declared, the number of directors then constituting the Board of
Directors will be increased by two and the holders of Series A preferred stock
and any such other Parity Stock, voting together as a single class ("Voting
Preferred Shares"), will have the right to elect two additional directors to
serve on the Board of Directors at an annual meeting of stockholders or a
properly called special meeting of the holders of the Voting Preferred Shares
and at each subsequent annual meeting of stockholders until all such dividends,
together with the dividends for the current quarterly period, on the Voting
Preferred Shares have been paid or declared and set aside for payment.
The approval of two-thirds of the outstanding shares of Series A
preferred stock and any Parity Stock similarly affected, voting together as a
single class, is required in order to amend the FelCor Charter to affect
materially and adversely the rights, preferences or voting power of the holders
of the Series A preferred stock and such Parity Stock, or to amend the FelCor
Charter to authorize, create or increase the authorized amount of any class of
stock having rights senior to the Series A preferred stock and such Parity Stock
with respect to the payment of dividends or amounts upon the liquidation,
dissolution or winding up of FelCor. However, FelCor may create additional
classes of Parity Stock and Junior Stock, increase the authorized number of
shares of Parity Stock and Junior Stock and issue additional series of Parity
Stock and Junior Stock, all without the consent of any holder of Series A
preferred stock.
Except as required by law, the holders of Series A preferred stock are
not entitled to vote on any merger or consolidation involving FelCor or a sale,
lease or transfer of all or substantially all of the assets of FelCor.
Conversion Rights
Shares of Series A preferred stock are convertible, in whole or in
part, at any time, at the option of the holders thereof, into shares of common
stock at a conversion price of $32.25 per share of common stock (equivalent to a
conversion rate of 0.7752 shares of common stock for each share of Series A
preferred stock), subject to adjustment as described below ("-- Conversion Price
Adjustments"). The right to convert shares of Series A preferred stock called
for redemption will terminate at the close of business on such redemption date.
Holders of Series A preferred stock at the close of business on a
dividend payment record date will be entitled to receive the dividend payable on
such shares on the corresponding dividend payment date, notwithstanding the
conversion of such shares following such dividend payment record date and prior
to such dividend payment date. However, shares of Series A preferred stock
surrendered for conversion during the period between the close of business on
any dividend payment record date and the opening of business on the
corresponding dividend payment date (except shares converted after the issuance
by FelCor of a notice of redemption providing for a redemption date during such
period, which shares will be entitled to such dividend) must be accompanied by
payment of an amount equal to the dividend payable on such shares on such
dividend payment date. A holder of shares of Series A preferred stock on a
dividend payment record date who (or whose transferee) tenders any such shares
for conversion into shares of common stock on such dividend payment date will
receive the dividend payable by FelCor on such shares of Series A preferred
stock on such date, and the converting holder need not include payment of the
amount of such dividend upon surrender of shares of Series A preferred stock for
conversion. Except as provided above, FelCor will make no payment or allowance
for unpaid dividends, whether or not in arrears, on converted shares or for
dividends on the shares of common stock issued upon such conversion.
Fractional shares of common stock are not to be issued upon conversion
but, in lieu thereof, FelCor will pay a cash adjustment based on the current
market price of the common stock on the day prior to the conversion date.
Conversion Price Adjustments
The Conversion Price is subject to adjustment upon certain events,
including (i) dividends (and other distributions) payable in common stock, (ii)
the issuance to all holders of common stock of certain rights or warrants
entitling them to subscribe for or purchase common stock at a price per share
less than the fair market value per common stock, (iii) subdivisions,
combinations and reclassifications of common stock and (iv) distributions to all
holders of common stock of evidences of indebtedness of FelCor or assets
(including securities, but excluding those
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dividends, rights, warrants and distributions referred to above for which an
adjustment previously has been made and excluding Permitted FelCor Common Stock
Cash Distributions (as herein defined), and cash dividends which result in a
payment of an equal cash dividend to the holders of the Series A preferred
stock). "Permitted FelCor Common Stock Cash Distributions" means cash dividends
and distributions paid with respect to the common stock after December 31, 1995
not in excess of the sum of FelCor's cumulative undistributed net earnings at
December 31, 1995, plus the cumulative amount of funds from operations, as
determined by the Board of Directors on a basis consistent with the financial
reporting practices of FelCor, after December 31, 1995, minus the cumulative
amount of dividends accrued or paid on the Series A preferred stock or any other
class of preferred stock after January 1, 1996. In addition to the foregoing
adjustments, FelCor will be permitted to make such reductions in the Conversion
Price as it considers to be advisable in order that any event treated for
Federal income tax purposes as a dividend of stock or stock rights will not be
taxable to the holders of the common stock, or, if that is not possible, to
diminish any income taxes that are otherwise payable because of such event.
In case FelCor shall be a party to any transaction (including without
limitation a merger, consolidation, statutory share exchange, tender offer for
all or substantially all of the common stock or sale of all or substantially all
of FelCor's assets), in each case as a result of which shares of common stock
will be converted into the right to receive stock, securities or other property
(including cash or any combination thereof), each share of Series A preferred
stock, if convertible after the consummation of the transaction, will thereafter
be convertible into the kind and amount of shares of stock and other securities
and property receivable (including cash or any combination thereof) upon the
consummation of such transaction by a holder of that number of shares or
fraction thereof of common stock into which one share of Series A preferred
stock was convertible immediately prior to such transaction (assuming such
holder of common stock failed to exercise any rights of election and received
per share the kind and amount received per share by a plurality of non-electing
shares). FelCor may not become a party to any such transaction unless the terms
thereof are consistent with the foregoing.
No adjustment of the Conversion Price will be required to be made in
any case until cumulative adjustments amount to 1% or more of the Conversion
Price. Any adjustments not so required to be made will be carried forward and
taken into account in subsequent adjustments.
Exchange Listing
The Series A preferred stock is listed on the NYSE under the symbol
"FCHpA".
Transfer Agent
The transfer agent and registrar for the Series A preferred stock is
SunTrust Bank, Atlanta, Georgia.
DESCRIPTION OF SERIES B PREFERRED STOCK AND DEPOSITARY SHARES
The following is a summary of certain terms and provisions of our 9%
Series B Cumulative Redeemable Preferred Stock (the "Series B preferred stock").
This summary is not intended to be complete. Accordingly, you should also review
the terms and provisions of our Charter (including the Articles Supplementary to
the Charter setting forth the particular terms of the Series B preferred stock),
and Bylaws, copies of which are available from us upon request.
GENERAL
In April 1998, the Board of Directors authorized FelCor to classify and
issue the Series B preferred stock as part of the authorized preferred stock. At
Decemer 1, 2000, we had outstanding 57,500 shares of Series B preferred stock
represented by 5,750,000 depositary shares (the "Depositary Shares").
Each Depositary Share represents a 1/100 fractional interest in a share
of Series B preferred stock. The shares of Series B preferred stock have been
deposited with SunTrust Bank, as Depositary (the "Preferred Stock Depositary"),
under a Deposit Agreement (the "Deposit Agreement") among FelCor, the Preferred
Stock Depositary and the holders from time to time of the depositary receipts
(the "Depositary Receipts") issued by the Preferred Stock Depositary
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thereunder. The Depositary Receipts evidence the Depositary Shares. Subject to
the terms of the Deposit Agreement, each holder of a Depositary Receipt
evidencing a Depositary Share is entitled to all the rights and preferences of a
1/100 fractional interest in a share of Series B preferred stock (including
dividend, voting, redemption and liquidation rights and preferences).
Ranking
The Series B preferred stock rank pari passu with the outstanding
Series A preferred stock and senior to the common stock with respect to the
payment of dividends and amounts upon liquidation, dissolution or winding up of
FelCor.
While any shares of Series B preferred stock are outstanding, FelCor
may not authorize, create or increase the authorized amount of any class or
series of stock that ranks senior to the Series B preferred stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or winding
up without the consent of the holders of two-thirds of the outstanding Series B
preferred stock. However, FelCor may create additional classes of stock,
increase the authorized number of preferred stock or issue series of preferred
stock ranking junior to or on a parity with the Series B preferred stock with
respect, in each case, to the payment of dividends and amounts upon liquidation,
dissolution and winding up without the consent of any holder of Series B
preferred stock.
Dividends
Holders of Series B preferred stock are entitled to receive, when, as
and if declared by the Board of Directors, out of funds legally available for
payment, cash distributions declared or paid for the corresponding period
payable at the rate of 9% of the liquidation preference per annum (equivalent to
$2.25 per annum per Depositary Share). Dividends on the Series B preferred stock
are payable quarterly in arrears on the last calendar day of January, April,
July and October of each year, commencing July 31, 1998 (and, in the case of any
accrued but unpaid dividends, at such additional times and for such interim
periods, if any, as determined by the Board of Directors). Each such dividend is
payable to holders of record as they appear on the stock records of FelCor at
the close of business on such record dates, not exceeding 60 days preceding the
payment dates thereof, as shall be fixed by the Board o Directors. Dividends
will be cumulative, whether or not in any dividend period or periods there shall
be funds legally available for the payment of such dividends and whether or not
such dividends are authorized. Accumulations of dividends on the Series B
preferred stock will not bear interest. Dividends payable on the Series B
preferred stock will be computed on the basis of a 360-day year consisting of
twelve 30-day months.
Except as provided in the next sentence, no dividend will be declared
or paid on any Parity Stock (as herein defined) unless full cumulative dividends
have been or contemporaneously are declared and paid, or declared and a sum
sufficient for the payment thereof is set apart for such payment, on the Series
B preferred stock for all prior dividend periods and the then current dividend
period. If accrued dividends on the Series B preferred stock and any Parity
Stock for all prior dividend periods have not been paid in full, then any
dividend declared on the Series B preferred stock and any Parity Stock for any
dividend period will be declared ratably in proportion to accrued and unpaid
dividends on the Series B preferred stock and such Parity Stock.
Unless all dividends then required to be paid on the Series B preferred
stock and any Parity Stock have been or contemporaneously are declared and paid,
or declared and a sum sufficient for the payment thereof is set apart for
payment, FelCor will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Stock (as herein
defined) or (ii) except as set forth in the following sentence, redeem, purchase
or otherwise acquire for consideration any Junior Stock (subject to certain
exceptions), through a sinking fund or otherwise. Notwithstanding the foregoing
limitations, FelCor may, at any time, acquire shares of its capital stock,
without regard to rank, for the purpose of preserving its status as a REIT or
for purposes of an employee benefit plan of FelCor.
As used herein, (i) the term "dividend" does not include dividends
payable solely in shares of Junior Stock on Junior Stock, or in options,
warrants or rights to holders of Junior Stock to subscribe for or purchase any
Junior Stock and (ii) the term "Junior Stock" means the common stock, and any
other class of capital stock of FelCor now or
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hereafter issued and outstanding that ranks junior to the Series B preferred
stock as to the payment of dividends or amounts upon liquidation, dissolution or
winding up of FelCor and (iii) the term "Parity Stock" means any other class or
series of capital stock of FelCor now or hereafter issued and outstanding
(including the Series A preferred stock) that ranks equally with the Series B
preferred stock as to the payment of dividends and amounts upon liquidation,
dissolution or winding up of FelCor.
Redemption
Shares of Series B preferred stock are not redeemable by FelCor prior
to May 7, 2003. On and after May 7, 2003, FelCor at its option upon not less
than 30 nor more than 60 days' written notice, may redeem the Series B preferred
stock (and the Preferred Stock Depositary will redeem the number of Depositary
Shares representing the shares of Series B preferred stock so redeemed upon not
less than 30 days' written notice to the holders thereof), in whole or in part,
at any time or from time to time, at a redemption price of $2,500.00 per share
(equivalent to $25.00 per Depositary Share), plus all accrued and unpaid
distributions thereon to the date fixed for redemption (except as provided
below), without interest, to the extent FelCor has funds legally available
therefor. The redemption price of the Series B preferred stock (other than any
portion thereof consisting of accrued and unpaid distributions) may be paid
solely from the sale proceeds of other capital stock of FelCor and not from any
other source. For purposes of the preceding sentence, "capital stock" means any
common stock, preferred stock, depositary shares, interests, participations, or
other ownership interests (however designated) and any rights (other than debt
securities convertible into or exchangeable for equity securities) or options to
purchase any of the foregoing.
The shares of Series B preferred stock have no stated maturity and will
not be subject to any sinking fund or mandatory redemption provisions.
Unless all dividends then required to be paid on the Series B preferred
stock and any Parity Stock have been or contemporaneously are declared and paid,
or declared and a sum sufficient for the payment thereof set apart for payment,
the Series B preferred stock and any Parity Stock may not be redeemed in whole
or in part and FelCor may not, except as set forth in the following sentence,
redeem, purchase or otherwise acquire for consideration any shares of Series B
preferred stock and any Parity Stock, otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of Series B preferred stock
and any Parity Stock. Notwithstanding the foregoing limitations, FelCor may, at
any time, acquire shares of its capital stock, without regard to rank, for the
purpose of preserving its status as a REIT or for purposes of an employee
benefit plan of FelCor.
Liquidation Preference
The holders of Series B preferred stock are entitled to receive in the
event of any liquidation, dissolution or winding up of FelCor, whether voluntary
or involuntary, $2,500 per share of Series B preferred stock (equivalent to $25
per Depositary Share) plus an amount per share of Series B preferred stock equal
to all dividends (whether or not earned or declared) accrued and unpaid thereon
to the date of final distribution to such holders ("Series B liquidation
preference"), and no more.
Until the holders of the Series B preferred stock have been paid the
Series B liquidation preference in full, no payment will be made to any holder
of Junior Stock upon the liquidation, dissolution or winding up of FelCor. If,
upon any liquidation, dissolution or winding up of FelCor, the assets of FelCor,
or proceeds thereof, distributable among the holders of Series B preferred stock
and any Parity Stock are insufficient to pay in full the Series B liquidation
preference and the liquidation preference applicable with respect to any such
Parity Stock, then such assets, or the proceeds thereof, will be distributed
among the holders of Series B preferred stock and any such Parity Stock,
ratably, in accordance with the respective amounts which would be payable on
Series B preferred stock and any such Parity Stock if all amounts payable
thereon were to be paid in full. Neither a consolidation or merger of FelCor
with another corporation, a statutory share exchange by FelCor, nor a sale,
lease or transfer of all or substantially all of FelCor's assets will be
considered a liquidation, dissolution or winding up, voluntary or involuntary,
of FelCor.
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Voting Rights
In any matter in which the Series B preferred stock is entitled to vote
(as expressly described herein or as may be required by law), including any
action by written consent, each share of Series B preferred stock shall be
entitled to 100 votes, each of which 100 votes may be directed separately by the
holder thereof (or by any proxy or proxies of such holder). With respect to each
share of Series B preferred stock, the holder thereof may designate up to 100
proxies, with each such proxy having the right to vote a whole number of votes
(totaling 100 votes per share of Series B preferred stock). As a result, each
Depositary Share will be entitled to one vote.
If six quarterly dividends (whether or not consecutive) payable on the
Series B preferred stock, or any Parity Stock, are in arrears, whether or not
earned or declared, the number of directors then constituting the Board of
Directors will be increased by two and the holders of the Depositary Shares
representing the Series B preferred stock and any other Parity Stock, voting
together as a single class ("Series B Voting Preferred Shares"), will have the
right to elect two additional directors to serve on the Board of Directors at an
annual meeting of stockholders or a properly called special meeting of the
holders of the Series B Voting Preferred Shares and at each subsequent annual
meeting of stockholders until all such dividends, together with the dividends
for the current quarterly period, on the Series B Voting Preferred Shares have
been paid or declared and set aside for payment.
The approval of two-thirds of the outstanding Depositary Shares
representing the Series B preferred stock and any Parity Stock similarly
affected, voting together as a single class, is required in order to (i) amend
the FelCor Charter to affect materially and adversely the rights, preferences or
voting power of the holders of the Series B preferred stock and such Parity
Stock, (ii) enter into a share exchange that affects the Series B preferred
stock, consolidate with or merge into another entity, or permit another entity
to consolidate with or merge into FelCor, unless in each such case, each share
of Series B preferred stock remains outstanding without a material and adverse
change to its terms and rights or is converted into or exchanged for a share of
preferred stock of the surviving entity having preferences, rights, voting
powers, restrictions, limitations as to distributions, qualifications and terms
and conditions of redemption identical to those of a share of Series B preferred
stock (except for changes that do not materially and adversely affect the
holders of the Series B preferred stock) or (iii) amend the FelCor Charter to
authorize, reclassify, create or increase the authorized amount of any class of
stock having rights senior to the Series B preferred stock and such Parity Stock
with respect to the payment of dividends or amounts upon the liquidation,
dissolution or winding up of FelCor. However, FelCor may increase the authorized
number of preferred stock and may create additional classes of Parity Stock and
Junior Stock, increase the authorized number of shares of Parity Stock and
Junior Stock and issue additional series of Parity Stock and Junior Stock, all
without the consent of any holder of Series B preferred stock.
Conversion Rights
Shares of Series B preferred stock are not convertible into or
exchangeable for any other property or securities of FelCor.
Exchange Listing
The Series B preferred stock is listed on the NYSE under the symbol
"FCHpB".
Transfer Agent
The transfer agent and registrar for the Depositary Shares is SunTrust
Bank, Atlanta, Georgia.
CERTAIN CHARTER AND BYLAW PROVISIONS
Restrictions on Ownership and Transfer
For FelCor to qualify as a REIT under the federal income tax laws, it
must meet certain requirements concerning the ownership of its outstanding
stock. Specifically, not more than 50% in value of FelCor's outstanding stock
may be owned, actually and constructively under the applicable attribution
provisions of the federal income tax laws, by five or fewer individuals (as
defined to include certain entities) during the last half of a taxable year (the
"5/50 Rule"), and FelCor must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year or
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during a proportionate part of a shorter taxable year. See "Federal Income Tax
Consequences of FelCor's Status as a REIT - Requirements for Qualification." For
the purpose of preserving FelCor's REIT qualification, the FelCor Charter
contains certain provisions that restrict the ownership and transfer of FelCor's
capital stock under certain circumstances (the "Ownership Limitation
Provisions").
The "Ownership Limitation Provisions" provide that, subject to certain
exceptions specified in the FelCor Charter, no person may own, or be deemed to
own by virtue of the applicable attribution provisions of the Code, more than
9.9% of the outstanding shares of any class of FelCor's capital stock (the
"Ownership Limit"). The Board of Directors may, but in no event will be required
to, waive the Ownership Limit if it determines that such ownership will not
jeopardize FelCor's status as a REIT. As a condition of such waiver, the Board
of Directors may require opinions of counsel satisfactory to it and/or
undertakings or representations from the applicant with respect to preserving
the REIT status of FelCor. The Board of Directors has waived the Ownership
Limit, subject to certain conditions, for certain parties. In determining that
it is appropriate to provide such waivers of the Ownership Limit, the Board of
Directors has consulted with counsel, has obtained or will obtain appropriate
undertakings or representations and has imposed or will impose appropriate
conditions with respect to such waivers to assure that the 5/50 Rule will not be
violated. The Ownership Limitation Provisions will not apply if the Board of
Directors and the holders of 66 2/3% of the outstanding shares of capital stock
entitled to vote on such matter determine that it is no longer in the best
interests of FelCor to attempt to qualify, or to continue to qualify, as a REIT.
Any purported transfer of capital stock of FelCor and any other event
that would otherwise result in any person or entity violating the Ownership
Limit will be void and of no force or effect as to that number of shares in
excess of the Ownership Limit, and the purported transferee ("Prohibited
Transferee") shall acquire no right or interest (or, in the case of any event
other than a purported transfer, the person or entity ("Prohibited Owner")
holding record title to any such shares in excess of the Ownership Limit
("Excess Shares") shall cease to own any right or interest) in such Excess
Shares. In addition, if any purported transfer of capital stock of FelCor or any
other event otherwise would cause FelCor to become "closely held" under the Code
or otherwise fail to qualify as a REIT under the Code (other than as a result of
a violation of the requirement that a REIT have at least 100 stockholders), then
any such purported transfer will be void and of no force or effect as to that
number of shares in excess of the number that could have been transferred
without such result, and the Prohibited Transferee shall acquire no right or
interest (or, in the case of any event other than a transfer, the Prohibited
Owner shall cease to own any right or interest) in such Excess Shares. Also, if
any purported transfer of capital stock of FelCor or any other event would
otherwise cause FelCor to violate the 5/50 Rule or to own, or be deemed to own
by virtue of the applicable attribution provisions of the Code, 10% or more of
the ownership interests in any entity that leases any hotels or in any
sublessee, then any such purported transfer will be void and of no force or
effect as to that number of shares in excess of the number that could have been
transferred without such result, and the Prohibited Transferee shall acquire no
right or interest (or, in the case of any event other than a transfer, the
Prohibited Owner shall cease to own any right or interest) in such Excess
Shares.
Any such Excess Shares will be transferred automatically, by operation
of law, to a trust, the beneficiary of which will be a qualified charitable
organization selected by FelCor (the "Beneficiary"). The trustee of the trust
who shall be designated by FelCor and be unaffiliated with FelCor and any
Prohibited Owner, will be empowered to sell such Excess Shares to a qualified
person or entity and distribute to a Prohibited Transferee an amount equal to
the lesser of the price paid by the Prohibited Transferee for such Excess Shares
or the sales proceeds received by the trust for such Excess Shares. In the case
of any Excess Shares resulting from any event other than a transfer, or from a
transfer for no consideration, the trustee will be empowered to sell such Excess
Shares to a qualified person or entity and distribute to the Prohibited Owner an
amount equal to the lesser of the fair market value of such Excess Shares on the
date of such event or the sales proceeds received by the trust for such Excess
Shares. Prior to a sale of any such aggregate fractional shares by the trust,
the trustee will be entitled to receive, in trust for the benefit of the
Beneficiary, all dividends and other distributions paid by FelCor with respect
to such Excess Shares, and also will be entitled to exercise all voting rights
with respect to such Excess Shares.
Any purported transfer of capital stock of FelCor that would otherwise
cause FelCor to be beneficially owned by fewer than 100 persons will be null and
void in its entirety, and the intended transferee will acquire no rights in such
stock.
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All certificates representing shares of capital stock will bear a
legend referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as may be
required under the federal income tax laws) of the outstanding shares of capital
stock of FelCor must file a written notice with FelCor containing the
information specified in the FelCor Charter no later than January 30 of each
year. In addition, each stockholder shall upon demand be required to disclose to
FelCor in writing such information as FelCor may request in order to determine
the effect, if any, of such stockholder's actual and constructive ownership on
FelCor's status as a REIT and to ensure compliance with the Ownership Limit.
The Ownership Limitation Provisions may have the effect of precluding
an acquisition of control of FelCor without approval of the Board of Directors.
Operations
FelCor generally is prohibited from engaging in certain activities,
including acquiring or holding property or engaging in any activity that would
cause FelCor to fail to qualify as a REIT.
MARYLAND ANTI-TAKEOVER STATUTES
Under the Maryland General Corporation Law (the "Maryland Law"),
certain "business combinations" (including a merger, consolidation, share
exchange or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland corporation and (i)
any person who beneficially owns 10% or more of the voting power of the
corporation's shares, (ii) an affiliate of the corporation who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then outstanding voting stock of
the corporation (an "Interested Stockholder"), or (iii) an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any "business
combination" must be recommended by the board of directors of the corporation
and approved by the affirmative vote of at least (a) 80% of the votes entitled
to be cast by holders of outstanding voting shares of the corporation and (b)
two-thirds of the votes entitled to be cast by holders of outstanding voting
shares of the corporation other than shares held by the Interested Stockholder
with whom the business combination is to be effected, unless, among other
conditions, the corporation's stockholders receive a minimum price (as defined
under the Maryland Law) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of the Maryland Law do not apply, however, to
business combinations that are (i) with respect to specifically identified or
unidentified existing or future Interested Stockholders, approved or exempted by
the board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder, or (ii) if the original articles
of incorporation of the corporation contain a provision expressly electing not
to be governed by Section 3-602 of the Maryland Law or the stockholders of the
corporation adopt a charter amendment by a vote of at least 80% of the votes
entitled to be cast by outstanding shares of voting stock of the corporation,
voting together in a single group, and two-thirds of the votes entitled to be
cast by persons (if any) who are not Interested Stockholders. The FelCor Charter
has exempted from these provisions of Maryland law, any business combination
involving Mr. Feldman or Mr. Corcoran or any present or future affiliates,
associates or other persons acting in concert or as a group with Mr. Feldman or
Mr. Corcoran.
Sections 3-701 et seq. of the Maryland Law (the "Control Share
Statute") provides that "control shares" of a Maryland corporation acquired in a
"control share acquisition" have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiring person, or by officers or
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other shares of stock previously
acquired by that person or in respect of which the acquiring person is able to
exercise or direct the exercise of voting power, would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority, or (iii) a majority or more of all voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions. Voting
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rights will not be denied to "control shares" if the acquisition of such shares,
as to specifically identified or unidentified future or existing stockholders or
their affiliates, has been approved in the charter or bylaws of the corporation
prior to the acquisition of such shares.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors of the corporation to call a
special meeting of stockholders to be held within 50 days of demand to consider
the voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without regard
to the absence of voting rights for the control shares, as of the date of the
last control share acquisition or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiring
person becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of the appraisal rights may not be less than the
highest price per share paid by the acquiring person in the control share
acquisition. Certain limitations and restrictions otherwise applicable to the
exercise of dissenters' rights do not apply in the context of a control share
acquisition.
The Maryland Control Share Statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by a corporation's articles
of incorporation or bylaws.
The FelCor Charter and FelCor Bylaws contain a provision exempting any
and all acquisitions of FelCor's shares of capital stock from the Control Share
Statute. There can be no assurance that this provision will not be amended or
eliminated in the future. If the foregoing exemption in the bylaws is rescinded,
the control share acquisition statute could have the effect of discouraging
offers to acquire FelCor and of increasing the difficulty of consummating any
such offer.
FEDERAL INCOME TAX CONSEQUENCES OF
FELCORS STATUS AS A REIT
This section summarizes the federal income tax issues that you, as a
stockholder, may consider relevant. Because this section is a summary, it does
not address all of the tax issues that may be important to you. In addition,
this section does not address the tax issues that may be important to certain
types of stockholders that are subject to special treatment under the federal
income tax laws, such as insurance companies, tax-exempt organizations (except
to the extent discussed in "--Taxation of Tax-Exempt Stockholders" below),
financial institutions or broker-dealers, and non-U.S. individuals and foreign
corporations (except to the extent discussed in "--Taxation of Non-U.S.
Stockholders" below).
The statements in this section are based on the current federal income
tax laws governing qualification as a REIT. We cannot assure you that new laws,
interpretations thereof, or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be inaccurate.
We urge you to consult your own tax advisor regarding the specific tax
consequences to you of investing in the common stock and of FelCor's election to
be taxed as a REIT. Specifically, you should consult your own tax advisor
regarding the federal, state, local, foreign, and other tax consequences of such
investment and election, and regarding potential changes in applicable tax laws.
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TAXATION OF FELCOR
FelCor elected to be taxed as a REIT under the federal income tax laws
commencing with its short taxable year ended December 31, 1994. FelCor believes
that it has operated in a manner intended to qualify as a REIT since its
election to be a REIT and it intends to continue to so operate. This section
discusses the laws governing the federal income tax treatment of a REIT and its
stockholders. These laws are highly technical and complex.
FelCor's qualification as a REIT depends on its ability to meet on a
continuing basis qualification tests set forth in the federal tax laws. Those
qualification tests involve the percentage of income that FelCor earns from
specified sources, the percentage of its assets that falls within specified
categories, the diversity of its share ownership, and the percentage of its
earnings that it distributes. We describe the REIT qualification tests in more
detail below. For a discussion of the tax treatment of FelCor and its
stockholders if FelCor fails to qualify as a REIT, see "--Failure to Qualify."
If FelCor qualifies as a REIT, it generally will not be subject to
federal income tax on the taxable income that it distributes to its
stockholders. The benefit of that tax treatment is that it avoids the "double
taxation," or taxation at both the corporate and stockholder levels, that
generally results from owning stock in a corporation. However, FelCor will be
subject to federal tax in the following circumstances:
o FelCor will pay federal income tax on taxable income, including net
capital gain, that it does not distribute to its stockholders during,
or within a specified time period after, the calendar year in which the
income is earned.
o FelCor may be subject to the "alternative minimum tax" on any items of
tax preference that it does not distribute or allocate to its
stockholders.
o FelCor will pay income tax at the highest corporate rate on (1) net
income from the sale or other disposition of property acquired through
foreclosure ("foreclosure property") that it holds primarily for sale
to customers in the ordinary course of business and (2) other
non-qualifying income from foreclosure property.
o FelCor will pay a 100% tax on net income from sales or other
dispositions of property, other than foreclosure property, that it
holds primarily for sale to customers in the ordinary course of
business.
o If FelCor fails to satisfy the 75% gross income test or the 95% gross
income test, as described below under "--Requirements for
Qualification--Income Tests," and nonetheless continues to qualify as a
REIT because it meets other requirements, it will pay a 100% tax on (1)
the gross income attributable to the greater of the amounts by which it
fails the 75% and 95% gross income tests, multiplied by (2) a fraction
intended to reflect its profitability.
o If FelCor fails to distribute during a calendar year at least the sum
of (1) 85% of its REIT ordinary income for such year, (2) 95% of its
REIT capital gain net income for such year, and (3) any undistributed
taxable income from prior periods, it will pay a 4% excise tax on the
excess of such required distribution over the amount it actually
distributed.
o FelCor may elect to retain and pay income tax on its net long-term
capital gain.
o If FelCor acquires any asset from a C corporation, or a corporation
such as Bristol that generally is subject to full corporate-level tax,
in a merger or other transaction in which it acquires a basis in the
asset that is determined by reference to the C corporation's basis in
the asset, or another asset, such as the Bristol merger, it will pay
tax at the highest regular corporate rate applicable if it recognizes
gain on the sale or disposition of such asset during the 10-year period
after it acquires such asset. The amount of gain on which it will pay
tax is the lesser of (1) the amount of gain that it recognizes at the
time of the sale or disposition and (2) the amount of gain that it
would have recognized if it had sold the asset at the time it acquired
the asset. The rule described in this paragraph will apply assuming
that FelCor makes an election under the Treasury regulations
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on its tax return for the year in which it acquires assets from a C
corporation. FelCor made an election under the Treasury regulations
with respect to the assets that it acquired from Bristol in its merger
with Bristol. Accordingly, any gain recognized by FelCor on the
disposition of any such asset during the 10-year period beginning on
the date of acquiring the asset, to the extent of such asset's
"built-in gain," will be subject to tax at the highest regular
corporate rate.
REQUIREMENTS FOR QUALIFICATION
A REIT is a corporation, trust, or association that meets the following
requirements:
1. it is managed by one or more trustees or directors;
2. its beneficial ownership is evidenced by transferable shares, or
by transferable certificates of beneficial interest;
3. it would be taxable as a domestic corporation, but for the REIT
provisions of the federal income tax laws;
4. it is neither a financial institution nor an insurance company
subject to special provisions of the federal income tax laws;
5. at least 100 persons are beneficial owners of its shares or
ownership certificates;
6. not more than 50% in value of its outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer
individuals, as defined in the federal income tax laws to include
certain entities, during the last half of any taxable year;
7. it elects to be a REIT, or has made such election for a previous
taxable year, and satisfies all relevant filing and other
administrative requirements established by the Internal Revenue
Service that must be met to elect and maintain REIT status;
8. it uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the federal
income tax laws; and
9. it meets certain other qualification tests, described below,
regarding the nature of its income and assets.
FelCor must meet requirements 1 through 4 during its entire taxable
year and must meet requirement 5 during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months. If FelCor complies with all the requirements for ascertaining the
ownership of its outstanding shares in a taxable year and has no reason to know
that it violated requirement 6, it will be deemed to have satisfied requirement
6 for such taxable year. For purposes of determining share ownership under
requirement 6, an "individual" generally includes a supplemental unemployment
compensation benefits plan, a private foundation, or a portion of a trust
permanently set aside or used exclusively for charitable purposes. An
"individual," however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under the federal income tax laws, and
beneficiaries of such a trust will be treated as holding shares of FelCor in
proportion to their actuarial interests in the trust for purposes of requirement
6.
FelCor has issued sufficient common stock with sufficient diversity of
ownership to satisfy requirements 5 and 6 set forth above. In addition, FelCor's
Charter restricts the ownership and transfer of the common stock so that FelCor
should continue to satisfy requirements 5 and 6. The provisions of the Charter
restricting the ownership and transfer of the common stock are described in
"Description of Capital Stock -- Certain Charter and Bylaw Provisions --
Restrictions on Ownership and Transfer."
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A corporation that is a "qualified REIT subsidiary" is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items of
income, deduction, and credit of a "qualified REIT subsidiary" are treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of which
is owned by the REIT. Thus, in applying the requirements described herein, any
"qualified REIT subsidiary" of FelCor will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such subsidiary will
be treated as assets, liabilities, and items of income, deduction, and credit of
FelCor.
In the case of a REIT that is a partner in a partnership, the REIT is
treated as owning its proportionate share of the assets of the partnership and
as earning its allocable share of the gross income of the partnership for
purposes of the applicable REIT qualification tests. Thus, FelCor's
proportionate share of the assets, liabilities, and items of income of FelCor LP
and of any other partnership or joint venture or limited liability company that
is treated as a partnership for federal income tax purposes in which FelCor has
acquired or will acquire an interest, directly or indirectly (together, the
"Subsidiary Partnerships"), are treated as assets and gross income of FelCor for
purposes of applying the various REIT qualification requirements.
INCOME TESTS
FelCor must satisfy two gross income tests annually to maintain its
qualification as a REIT. First, at least 75% of its gross income for each
taxable year must consist of defined types of income that it derives, directly
or indirectly, from investments relating to real property or mortgages on real
property or temporary investment income. Qualifying income for purposes of that
75% gross income test generally includes:
o rents from real property;
o interest on debt secured by mortgages on real property or on
interests in real property; and
o dividends or other distributions on and gain from the sale of
shares in other REITs.
Second, in general, at least 95% of its gross income for each taxable
year must consist of income that is qualifying income for purposes of the 75%
gross income test, dividends, other types of interest, gain from the sale or
disposition of stock or securities, income from certain interest rate hedging
contracts, or any combination of the foregoing. Gross income from FelCor's sale
of property that it holds primarily for sale to customers in the ordinary course
of business is excluded from both income tests. The following paragraphs discuss
the specific application of the gross income tests to FelCor.
Rent that FelCor receives from real property that it owns and leases to
tenants will qualify as "rents from real property," which is qualifying income
for purposes of the 75% and 95% gross income tests, only if the following
conditions are met:
o First, the rent must not be based, in whole or in part, on the
income or profits of any person, but may be based on a fixed
percentage or percentages of receipts or sales.
o Second, neither FelCor nor a direct or indirect owner of 10% or
more of its stock may own, actually or constructively, 10% or
more of a tenant from whom it receives rent.
o Third, all of the rent received under a lease of real property
will not qualify as "rents from real property" unless the rent
attributable to the personal property leased in connection with
such lease is no more than 15% of the total rent received under
the lease.
o Finally, FelCor generally must not operate or manage its real
property or furnish or render services to its tenants, other than
through an "independent contractor" who is adequately compensated
and from whom FelCor does not derive revenue. However, FelCor
need not provide services through an "independent contractor,"
but instead may provide services directly, if the services are
"usually or customarily rendered" in connection with the rental
of space for occupancy only and are not considered to be provided
for the tenants' convenience. In addition, FelCor may provide a
minimal amount of
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"non-customary" services to the tenants of a property, other than
through an independent contractor, as long as its income from the
services does not exceed 1% of its income from the related
property. Tax legislation enacted in 1999 will allow FelCor to
own up to 100% of the stock of a "taxable REIT subsidiary"
beginning on January 1, 2001. A "taxable REIT subsidiary" can
provide customary and noncustomary services to FelCor's tenants
without tainting FelCor's rental income. See "--Taxable
Subsidiaries."
Pursuant to percentage leases, FelCor's lessees lease from FelCor LP
and the Subsidiary Partnerships the land, buildings, improvements, furnishings
and equipment comprising the hotels, for terms of five to 10 years, with options
to renew for total terms, including the initial term, of not more than 15 years.
The percentage leases provide that the lessees are obligated to pay to FelCor LP
and the Subsidiary Partnerships (1) the greater of a minimum base rent or
percentage rent and (2) "additional charges" or other expenses, as defined in
the leases. Percentage rent is calculated by multiplying fixed percentages by
gross room or suite revenues, and food and beverage revenues and rent for each
of the hotels. Both base rent and the thresholds in the percentage rent formulas
are adjusted for inflation. Base rent and percentage rent accrue and are due
monthly.
In order for the base rent, percentage rent, and additional charges to
constitute "rents from real property," the percentage leases must be respected
as true leases for federal income tax purposes and not treated as service
contracts, joint ventures, or some other type of arrangement. The determination
of whether the percentage leases are true leases depends on an analysis of all
the surrounding facts and circumstances. In making such a determination, courts
have considered a variety of factors, including the following:
o the intent of the parties;
o the form of the agreement;
o the degree of control over the property that is retained by the
property owner, or whether the lessee has substantial control
over the operation of the property or is required simply to use
its best efforts to perform its obligations under the agreement;
and
o to the extent to which the property owner retains the risk of
loss with respect to the property, or whether the lessee bears
the risk of increases in operating expenses or the risk of damage
to the property or the potential for economic gain or
appreciation with respect to the property.
In addition, federal income tax law provides that a contract that
purports to be a service contract (or a partnership agreement) will be treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not:
o the service recipient is in physical possession of the property;
o the service recipient controls the property;
o the service recipient has a significant economic or possessory
interest in the property, or whether the property's use is likely
to be dedicated to the service recipient for a substantial
portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient
shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or
the recipient bears the risk of damage to or loss of the
property;
o the service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if
there is nonperformance under the contract;
o the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service
recipient; and
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o the total contract price does not substantially exceed the rental
value of the property for the contract period.
Since the determination whether a service contract should be treated as
a lease is inherently factual, the presence or absence of any single factor may
not be dispositive in every case.
FelCor believes that the percentage leases will be treated as true
leases for federal income tax purposes. Such belief is based, in part, on the
following facts:
o FelCor LP and the Subsidiary Partnerships, on the one hand, and
the lessees, on the other hand, intend for their relationship to
be that of a lessor and lessee and such relationship is
documented by lease agreements;
o the lessees have the right to the exclusive possession, use and
quiet enjoyment of the hotels during the term of the percentage
leases;
o the lessees bear the cost of, and are responsible for, day-to-day
maintenance and repair of the hotels, other than the cost of
maintaining underground utilities, structural elements and
capital improvements, and generally dictate how the hotels are
operated, maintained, and improved;
o the lessees bear all of the costs and expenses of operating the
hotels, including the cost of any inventory used in their
operation, during the term of the percentage leases, other than
real estate and personal property taxes and property and casualty
insurance premiums;
o the lessees benefit from any savings in the costs of operating
the hotels during the term of the percentage leases;
o the lessees generally have indemnified FelCor LP and the
Subsidiary Partnerships against all liabilities imposed on FelCor
LP and the Subsidiary Partnerships during the term of the
percentage leases by reason of (1) injury to persons or damage to
property occurring at the hotels, (2) the lessees' use,
management, maintenance or repair of the hotels, (3) any
environmental liability caused by acts or grossly negligent
failures to act of the lessees, (4) taxes and assessments in
respect of the hotels that are the obligations of the lessees, or
(5) any breach of the percentage leases or of any sublease of a
hotel by the lessees;
o the lessees are obligated to pay substantial fixed rent for the
period of use of the hotels;
o the lessees stand to incur substantial losses or reap substantial
gains depending on how successfully they operate the hotels;
o FelCor LP and the Subsidiary Partnerships cannot use the hotels
concurrently to provide significant services to entities
unrelated to the lessees;
o the total contract price under the percentage leases does not
substantially exceed the rental value of the hotels for the term
of the percentage leases.
Investors should be aware that there are no controlling Treasury
regulations, published rulings or judicial decisions involving leases with terms
substantially the same as the percentage leases that discuss whether such leases
constitute true leases for federal income tax purposes. If the percentage leases
are characterized as service contracts or partnership agreements, rather than as
true leases, part or all of the payments that FelCor LP and the Subsidiary
Partnerships receive from the lessees may not be considered rent or may not
otherwise satisfy the various requirements for qualification as "rents from real
property." In that case, FelCor likely would not be able to satisfy either the
75% or 95% gross income test and, as a result, would lose its REIT status.
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As described above, in order for the rent received by FelCor to
constitute "rents from real property," several other requirements must be
satisfied. One requirement is that the percentage rent must not be based in
whole or in part on the income or profits of any person. The percentage rent,
however, will qualify as "rents from real property" if it is based on
percentages of receipts or sales and the percentages:
o are fixed at the time the percentage leases are entered into;
o are not renegotiated during the term of the percentage leases in
a manner that has the effect of basing percentage rent on income
or profits; and
o conform with normal business practice.
More generally, the percentage rent will not qualify as "rents from
real property" if, considering the percentage leases and all the surrounding
circumstances, the arrangement does not conform with normal business practice,
but is in reality used as a means of basing the percentage rent on income or
profits. Since the percentage rent is based on fixed percentages of the gross
revenues from the hotels that are established in the percentage leases, and
FelCor has represented that the percentages (1) will not be renegotiated during
the terms of the percentage leases in a manner that has the effect of basing the
percentage rent on income or profits and (2) conform with normal business
practice, the percentage rent should not be considered based in whole or in part
on the income or profits of any person. Furthermore, FelCor has represented
that, with respect to other hotel properties that it acquires in the future, it
will not charge rent for any property that is based in whole or in part on the
income or profits of any person, except by reason of being based on a fixed
percentage of gross revenues, as described above.
Another requirement for qualification of the rent received by FelCor as
"rents from real property" is that FelCor must not own, actually or
constructively, 10% or more of the stock or the assets or net profits any lessee
(a "related party tenant"). The constructive ownership rules generally provide
that, if 10% or more in value of the stock of FelCor is owned, directly or
indirectly, by or for any person, FelCor is considered as owning the stock
owned, directly or indirectly, by or for such person. FelCor does not own any
stock or assets or net profits of any lessee directly. However, FelCor's
independent directors have approved the acquisition of 100% of DJONT Operations,
L.L.C. effective January 1, 2001. No binding agreements have been entered into
for that acquisition. At the time of such acquisition, it is intended that DJONT
Operations, L.L.C. will become a "taxable REIT subsidiary" of FelCor. See
"--Taxable Subsidiaries." In addition, the parent company of Bristol Hotels &
Resorts, Inc. owns approximately 8.8% of FelCor's common stock. Such stock
ownership does not cause Bristol Hotels & Resorts, Inc. to be a related party
tenant. FelCor's Charter prohibits transfers of FelCor stock that would cause
FelCor to own, actually or constructively, 10% or more of the ownership
interests in a lessee. Thus, FelCor should never own, actually or
constructively, 10% of more of any lessee. Furthermore, FelCor has represented
that, with respect to other hotel properties that it acquires in the future, it
will not rent any property to a related party tenant. However, because the
constructive ownership rules are broad and it is not possible to monitor
continually direct and indirect transfers of FelCor stock, no absolute assurance
can be given that such transfers or other events of which FelCor has no
knowledge will not cause FelCor to own constructively 10% or more of a lessee at
some future date.
A third requirement for qualification of the rent received by FelCor as
"rents from real property" is that the rent attributable to the personal
property leased in connection with the lease of a hotel must not be greater than
15% of the total rent received under the lease. The rent attributable to the
personal property contained in a hotel is the amount that bears the same ratio
to total rent for the taxable year as the average of the adjusted bases of the
personal property at the beginning and at the end of the taxable year bears to
the average of the aggregate adjusted basis of both the real and personal
property contained in the hotel at the beginning and at the end of such taxable
year (the "adjusted basis ratio"). Beginning in 2001, that ratio will be
computed using relative fair market values. With respect to each hotel, FelCor
believes either that the adjusted basis ratio is less than 15% or that any
income attributable to excess personal property will not jeopardize FelCor's
ability to qualify as a REIT. There can be no assurance, however, that the
Internal Revenue Service would not challenge FelCor's calculation of an adjusted
basis ratio, or that a court would not uphold such assertion. If such a
challenge were successfully asserted, FelCor could fail to satisfy the 95% or
75% gross income test and thus lose its REIT status.
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A fourth requirement for qualification of the rent received by FelCor
as "rents from real property" is that, other than within the 1% de minimis
exception described above, FelCor cannot furnish or render noncustomary services
to the tenants of the hotels, or manage or operate the hotels, other than
through an independent contractor who is adequately compensated and from whom
FelCor itself does not derive or receive any income. Provided that the
percentage leases are respected as true leases, FelCor should satisfy that
requirement, because FelCor LP and the Subsidiary Partnerships do not perform
any services other than customary ones for the lessees. Furthermore, FelCor has
represented that, with respect to other hotel properties that it acquires in the
future, it will not perform noncustomary services with respect to the tenant of
the property. Tax legislation enacted in 1999 will allow FelCor to own up to
100% of the stock of a "taxable REIT subsidiary" beginning on January 1, 2001. A
"taxable REIT subsidiary" can provide customary and noncustomary services to
FelCor's tenants without tainting FelCor's rental income. See "--Taxable
Subsidiaries."
If a portion of the rent received by FelCor from a hotel does not
qualify as "rents from real property" because the rent attributable to personal
property exceeds 15% of the total rent for a taxable year, the portion of the
rent that is attributable to personal property will not be qualifying income for
purposes of either the 75% or 95% gross income test. Thus, if such rent
attributable to personal property, plus any other income that is nonqualifying
income for purposes of the 95% gross income test, during a taxable year exceeds
5% of FelCor's gross income during the year, FelCor would lose its REIT status.
If, however, the rent from a particular hotel does not qualify as "rents from
real property" because either (1) the percentage rent is considered based on the
income or profits of the related lessee, (2) FelCor owns, actually or
constructively, 10% or more of the lessee, or (3) FelCor furnishes noncustomary
services to the tenants of the hotel, or manages or operates the hotels, other
than through a qualifying independent contractor, none of the rent from that
hotel would qualify as "rents from real property." In that case, FelCor likely
would lose its REIT status because it would be unable to satisfy either the 75%
or 95% gross income test.
In addition to the rent, the lessees are required to pay to FelCor LP
and the Subsidiary Partnerships certain additional charges. To the extent that
such additional charges represent either (1) reimbursements of amounts that the
FelCor LP and the Subsidiary Partnerships are obligated to pay to third parties
or (2) penalties for nonpayment or late payment of such amounts, such charges
should qualify as "rents from real property." However, to the extent that such
charges represent interest that is accrued on the late payment of the rent or
additional charges, such charges will not qualify as "rents from real property,"
but instead should be treated as interest that qualifies for the 95% gross
income test.
The term "interest" generally does not include any amount received or
accrued, directly or indirectly, if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Furthermore, to the extent that interest from a loan that is based on
the residual cash proceeds from the sale of the property securing the loan
constitutes a "shared appreciation provision," income attributable to such
participation feature will be treated as gain from the sale of the secured
property.
A REIT will incur a 100% tax on the net income derived from any sale or
other disposition of property, other than foreclosure property, that the REIT
holds primarily for sale to customers in the ordinary course of a trade or
business. FelCor believes that none of its or FelCor LP's assets is held for
sale to customers and that a sale of any such asset would not be in the ordinary
course of its business. Whether a REIT holds an asset "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those related
to a particular asset. Nevertheless, FelCor will attempt to comply with the
terms of safe-harbor provisions in the federal income tax laws prescribing when
an asset sale will not be characterized as a prohibited transaction. We cannot
provide assurance, however, that FelCor can comply with such safe-harbor
provisions or that FelCor or FelCor LP will avoid owning property that may be
characterized as property that it holds "primarily for sale to customers in the
ordinary course of a trade or business."
FelCor will be subject to tax at the maximum corporate rate on any
income from foreclosure property, other than income that would be qualifying
income for purposes of the 75% gross income test, less expenses directly
connected with the production of such income. However, gross income from such
foreclosure property will qualify
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under the 75% and 95% gross income tests. "Foreclosure property" is any real
property, including interests in real property, and any personal property
incident to such real property:
o that is acquired by a REIT as the result of such REIT having bid
in such property at foreclosure, or having otherwise reduced such
property to ownership or possession by agreement or process of
law, after there was a default or default was imminent on a lease
of such property or on an indebtedness that such property
secured; and
o for which such REIT makes a proper election to treat such
property as foreclosure property.
However, a REIT will not be considered to have foreclosed on a property
where the REIT takes control of the property as a mortgagee-in-possession and
cannot receive any profit or sustain any loss except as a creditor of the
mortgagor. Property generally ceases to be foreclosure property with respect to
a REIT at the end of the third taxable year following the taxable year in which
the REIT acquired such property, or longer if an extension is granted by the
Secretary of the Treasury. The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the first day:
o on which a lease is entered into with respect to such property
that, by its terms, will give rise to income that does not
qualify for purposes of the 75% gross income test or any amount
is received or accrued, directly or indirectly, pursuant to a
lease entered into on or after such day that will give rise to
income that does not qualify for purposes of the 75% gross income
test;
o on which any construction takes place on such property, other
than completion of a building, or any other improvement, where
more than 10% of the construction of such building or other
improvement was completed before default became imminent; or
o which is more than 90 days after the day on which such property
was acquired by the REIT and the property is used in a trade or
business which is conducted by the REIT, other than through an
independent contractor from whom the REIT itself does not derive
or receive any income.
As a result of the rules with respect to foreclosure property, if a lessee
defaults on its obligations under a percentage lease, FelCor terminates the
lessee's leasehold interest and FelCor is unable to find a replacement lessee
for the hotel within 90 days of such foreclosure, gross income from hotel
operations conducted by FelCor from such hotel would cease to qualify for the
75% and 95% gross income tests. In such event, FelCor likely would be unable to
satisfy the 75% and 95% gross income tests and, thus, would fail to qualify as a
REIT.
From time to time, FelCor or FelCor LP may enter into hedging
transactions with respect to one or more of its assets or liabilities. Its
hedging activities may include entering into interest rate swaps, caps, and
floors, options to purchase such items, and futures and forward contracts. To
the extent that FelCor or FelCor LP enters into an interest rate swap or cap
contract, option, futures contract, forward rate agreement, or any similar
financial instrument to hedge its indebtedness incurred to acquire or carry
"real estate assets," any periodic income or gain from the disposition of such
contract should be qualifying income for purposes of the 95% gross income test,
but not the 75% gross income test. To the extent that FelCor or FelCor LP hedges
with other types of financial instruments, or in other situations, it is not
entirely clear how the income from those transactions will be treated for
purposes of the gross income tests. We intend to structure any hedging
transactions in a manner that does not jeopardize FelCor's status as a REIT.
If FelCor fails to satisfy one or both of the gross income tests for
any taxable year, it nevertheless may qualify as a REIT for such year if it
qualifies for relief under certain provisions of the federal income tax laws.
Those relief provisions generally will be available if:
o its failure to meet such tests is due to reasonable cause and not
due to willful neglect;
o we attach a schedule of the sources of its income to its tax
return; and
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o any incorrect information on the schedule was not due to fraud
with intent to evade tax.
We cannot predict, however, whether in all circumstances FelCor would
qualify for the relief provisions. In addition, as discussed above in
"--Taxation of FelCor," even if the relief provisions apply, FelCor would incur
a 100% tax on the gross income attributable to the greater of the amounts by
which it fails the 75% and 95% gross income tests, multiplied by a fraction
intended to reflect its profitability.
ASSET TESTS
To maintain its qualification as a REIT, FelCor also must satisfy two
asset tests at the close of each quarter of each taxable year. First, at least
75% of the value of its total assets must consist of:
o cash or cash items, including certain receivables;
o government securities;
o interests in real property, including leaseholds and options to
acquire real property and leaseholds;
o interests in mortgages on real property;
o stock in other REITs; and
o investments in stock or debt instruments during the one-year
period following FelCor's receipt of new capital that it raises
through equity offerings or offerings of debt with at least a
five-year term.
The second asset test has two components:
o first, of FelCor's investments not included in the 75% asset
class, the value of its interest in any one issuer's securities
may not exceed 5% of the value of its total assets; and
o second, FelCor may not own more than 10% of any one issuer's
outstanding voting securities.
For purposes of both components of the second asset test, "securities"
does not include FelCor's stock in any qualified REIT subsidiary or in other
REITs or its interest in any partnership.
FelCor LP owns 100% of the nonvoting stock of Kingston Plantation
Development Corp., representing 97% of the value of Kingston's outstanding
stock. Kingston owns 50% of the outstanding stock of Promus/FelCor Manager, Inc.
By virtue of its partnership interest in FelCor LP, FelCor is deemed to own its
pro rata share of the assets of FelCor LP, including the stock of Kingston held
by FelCor LP. FelCor LP does not own any of the voting securities of Kingston.
In addition, based upon its analysis of the estimated value of the stock of
Kingston relative to the estimated value of the other assets owned by FelCor,
FelCor believes that the value of its pro rata share of the stock of Kingston
does not exceeds 5% of the total value of FelCor's assets. No independent
appraisals have been obtained to support this conclusion. This 5% limitation
must be satisfied at the end of each quarter in which FelCor or FelCor LP
increases its interest in Kingston, including as a result of FelCor increasing
its interest in FelCor LP in connection with a stock offering or as limited
partners of FelCor LP exercise their rights to redeem their partnership units
for cash or shares of FelCor's common stock. Although FelCor plans to take steps
to ensure that it satisfies the 5% asset test for any quarter with respect to
which retesting is to occur, there can be no assurance that such steps will
always be successful.
Tax legislation enacted in 1999 (the "Tax Bill") will allow FelCor to
own up to 100% of the stock of taxable REIT subsidiaries ("TRSs") beginning on
January 1, 2001. TRSs can perform activities unrelated to FelCor's tenants, such
as third-party management, development, and other independent business
activities, as well as provide services to FelCor's tenants. FelCor and a
taxable subsidiary must elect for the subsidiary to be treated as a TRS. A
corporation
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of which a TRS directly or indirectly owns more than 35% of the voting power or
value of the stock will automatically be treated as a TRS. The Tax Bill limits
the deductibility of interest paid or accrued by a TRS to FelCor to assure that
the TRS is subject to an appropriate level of corporate taxation. Further, the
Tax Bill imposes a 100% excise tax on transactions between a TRS and FelCor or
its tenants that are not conducted on an arm's-length basis. The Tax Bill also
prevents FelCor from owning more than 10% of the voting power or value of the
stock of a taxable subsidiary that is not treated as a TRS. Prior to the Tax
Bill, FelCor only was prohibited from owning more than 10% of the voting stock
of a taxable subsidiary. Overall, no more than 20% of FelCor's assets can
consist of securities of TRSs under the Tax Bill.
The TRS provisions of the Tax Bill will apply for taxable years
beginning after December 31, 2000. However, a taxable subsidiary in existence on
July 12, 1999, such as Kingston, will be grandfathered unless and until (1) it
engages in a new line of business or acquires a substantial new asset, other
than in certain tax-free transactions or pursuant to a binding contract in
effect on July 12, 1999, or (2) FelCor acquires, directly or indirectly,
additional stock in the taxable subsidiary, including as a result of limited
partner redemptions of their interests in FelCor LP, other than in certain
tax-free transactions or pursuant to a binding contract in effect on July 12,
1999. Such existing taxable subsidiaries can be converted into TRSs on a
tax-free basis prior to January 1, 2004. See "--Taxable Subsidiaries."
If FelCor should fail to satisfy the asset tests at the end of a
calendar quarter, it would not lose its REIT status if (1) it satisfied the
asset tests at the close of the preceding calendar quarter and (2) the
discrepancy between the value of its assets and the asset test requirements
arose from changes in the market values of its assets and was not wholly or
partly caused by the acquisition of one or more non-qualifying assets. If FelCor
did not satisfy the condition described in clause (2) of the preceding sentence,
it still could avoid disqualification as a REIT by eliminating any discrepancy
within 30 days after the close of the calendar quarter in which the discrepancy
arose.
DISTRIBUTION REQUIREMENTS
Each taxable year, FelCor must distribute dividends, other than capital
gain dividends and deemed distributions of retained capital gain, to its
stockholders in an aggregate amount at least equal to:
o the sum of (1) 95% of its "REIT taxable income," computed without
regard to the dividends paid deduction and its net capital gain
or loss, and (2) 95% of its after-tax net income, if any, from
foreclosure property; minus
o the sum of certain items of non-cash income.
FelCor must pay such distributions in the taxable year to which they
relate, or in the following taxable year if it declares the distribution before
it timely files its federal income tax return for such year and pays the
distribution on or before the first regular dividend payment date after such
declaration. Under the Tax Bill, the 95% distribution requirement discussed
above was reduced to 90% for taxable years beginning after December 31, 2000.
FelCor will pay federal income tax on taxable income, including net
capital gain, that it does not distribute to stockholders. Furthermore, if it
fails to distribute during a calendar year, or by the end of January following
such calendar year in the case of distributions with declaration and record
dates falling in the last three months of the calendar year, at least the sum
of:
o 85% of its REIT ordinary income for such year;
o 95% of its REIT capital gain income for such year; and
o any undistributed taxable income from prior periods,
it will incur a 4% nondeductible excise tax on the excess of such required
distribution over the amounts it actually distributed. FelCor may elect to
retain and pay income tax on the net long-term capital gain it receives in a
taxable year. See "--Taxation of Taxable U.S. Stockholders." If it so elects, it
will be treated as having distributed any such
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retained amount for purposes of the 4% excise tax described above. FelCor has
made, and FelCor intends to continue to make, timely distributions sufficient to
satisfy the annual distribution requirements.
It is possible that, from time to time, FelCor may experience timing
differences between (1) the actual receipt of income and actual payment of
deductible expenses and (2) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, FelCor may not
deduct recognized capital losses from its "REIT taxable income." Further, it is
possible that, from time to time, FelCor may be allocated a share of net capital
gain attributable to the sale of depreciated property that exceeds its allocable
share of cash attributable to that sale. As a result of the foregoing, FelCor
may have less cash than is necessary to distribute all of its taxable income and
thereby avoid corporate income tax and the excise tax imposed on certain
undistributed income. In such a situation, FelCor may need to borrow funds or
issue preferred stock or additional common stock.
Under certain circumstances, FelCor may be able to correct a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
its stockholders in a later year. FelCor may include such deficiency dividends
in its deduction for dividends paid for the earlier year. Although FelCor may be
able to avoid income tax on amounts distributed as deficiency dividends, it will
be required to pay interest to the Internal Revenue Service based upon the
amount of any deduction it takes for deficiency dividends.
RECORDKEEPING REQUIREMENTS
FelCor must maintain certain records in order to qualify as a REIT. In
addition, to avoid a monetary penalty, it must request on an annual basis
information from its stockholders designed to disclose the actual ownership of
its outstanding stock. FelCor has complied, and FelCor intends to continue to
comply, with such requirements.
FAILURE TO QUALIFY
If FelCor failed to qualify as a REIT in any taxable year, and no
relief provision applied, it would be subject to federal income tax and any
applicable alternative minimum tax on its taxable income at regular corporate
rates. In calculating its taxable income in a year in which it failed to qualify
as a REIT, FelCor would not be able to deduct amounts paid out to stockholders.
In fact, FelCor would not be required to distribute any amounts to stockholders
in such year. In such event, to the extent of its current and accumulated
earnings and profits, all distributions to stockholders would be taxable as
ordinary income. Subject to certain limitations of the federal income tax laws,
corporate stockholders might be eligible for the dividends received deduction.
Unless FelCor qualified for relief under specific statutory provisions, it also
would be disqualified from taxation as a REIT for the four taxable years
following the year during which it ceased to qualify as a REIT. We cannot
predict whether in all circumstances FelCor would qualify for such statutory
relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As long as FelCor qualifies as a REIT, a taxable "U.S. stockholder"
must take into account as ordinary income distributions made out of FelCor's
current or accumulated earnings and profits and that FelCor does not designate
as capital gain dividends or retained long-term capital gain. A U.S. stockholder
will not qualify for the dividends received deduction generally available to
corporations. As used herein, the term "U.S. stockholder" means a holder of
common stock that for U.S. federal income tax purposes is:
o a citizen or resident of the United States;
o a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of an political
subdivision thereof;
o an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes
regardless of its connection with the conduct of a trade or
business within the United States; or
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o any trust with respect to which (1) a U.S. court is able to
exercise primary supervision over the administration of such
trust and (2) one or more U.S. persons have the authority to
control all substantial decisions of the trust.
A U.S. stockholder generally will recognize distributions that FelCor
designates as capital gain dividends as long-term capital gain without regard to
the period for which the U.S. stockholder has held its common stock. FelCor
generally will designate its capital gain dividends as either 20% or 25% rate
distributions. A corporate U.S. stockholder, however, may be required to treat
up to 20% of certain capital gain dividends as ordinary income.
FelCor may elect to retain and pay income tax on the net long-term
capital gain that it receives in a taxable year. In that case, a U.S.
stockholder would be taxed on its proportionate share of FelCor's undistributed
long-term capital gain. The U.S. stockholder would receive a credit or refund
for its proportionate share of the tax FelCor paid. The U.S. stockholder would
increase the basis in its stock by the amount of its proportionate share of
FelCor's undistributed long-term capital gain, minus its share of the tax FelCor
paid.
A U.S. stockholder will not incur tax on a distribution in excess of
FelCor's current and accumulated earnings and profits if such distribution does
not exceed the adjusted basis of the U.S. stockholder's common stock. Instead,
such distribution will reduce the adjusted basis of such common stock. A U.S.
stockholder will recognize a distribution in excess of both FelCor's current and
accumulated earnings and profits and the U.S. stockholder's adjusted basis in
its common stock as long-term capital gain, or short-term capital gain if the
common stock has been held for one year or less, assuming the common stock is a
capital asset in the hands of the U.S. stockholder. In addition, if FelCor
declares a distribution in October, November, or December of any year that is
payable to a U.S. stockholder of record on a specified date in any such month,
such distribution shall be treated as both paid by FelCor and received by the
U.S. stockholder on December 31 of such year, provided that FelCor actually pays
the distribution during January of the following calendar year.
Stockholders may not include in their individual income tax returns any
net operating losses or capital losses of FelCor. Instead, such losses would be
carried over by FelCor for potential offset against its future income generally.
Taxable distributions from FelCor and gain from the disposition of the common
stock will not be treated as passive activity income and, therefore,
stockholders generally will not be able to apply any "passive activity losses,"
such as losses from certain types of limited partnerships in which the
stockholder is a limited partner, against such income. In addition, taxable
distributions from FelCor and gain from the disposition of common stock
generally will be treated as investment income for purposes of the investment
interest limitations. FelCor will notify stockholders after the close of its
taxable year as to the portions of the distributions attributable to that year
that constitute ordinary income, return of capital, and capital gain.
TAXATION OF U.S. STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, a U.S. stockholder who is not a dealer in securities must
treat any gain or loss realized upon a taxable disposition of the common stock
as long-term capital gain or loss if the U.S. stockholder has held the common
stock for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. stockholder must treat any loss upon a sale or exchange of
common stock held by such stockholder for six months or less as a long-term
capital loss to the extent of capital gain dividends and other distributions
from FelCor that such U.S. stockholder treats as long-term capital gain. All or
a portion of any loss that a U.S. stockholder realizes upon a taxable
disposition of the common stock may be disallowed if the U.S. stockholder
purchases other shares of common stock within 30 days before or after the
disposition.
CAPITAL GAINS AND LOSSES
A taxpayer generally must hold a capital asset for more than one year
for gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%.
The maximum tax rate on long-term capital gain applicable to non-corporate
taxpayers is 20% for sales and exchanges of assets held for more than one year.
The maximum tax rate on long-term capital gain from the sale or exchange of
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"section 1250 property," or depreciable real property, is 25% to the extent that
such gain would have been treated as ordinary income if the property were
"section 1245 property." With respect to distributions that FelCor designates as
capital gain dividends and any retained capital gain that it is deemed to
distribute, FelCor generally may designate whether such a distribution is
taxable to its non-corporate stockholders at a 20% or 25% rate. Thus, the tax
rate differential between capital gain and ordinary income for non-corporate
taxpayers may be significant. In addition, the characterization of income as
capital gain or ordinary income may affect the deductibility of capital losses.
A non-corporate taxpayer may deduct capital losses not offset by capital gains
against its ordinary income only up to a maximum annual amount of $3,000. A
non-corporate taxpayer may carry forward unused capital losses indefinitely. A
corporate taxpayer must pay tax on its net capital gain at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
FelCor will report to its stockholders and to the Internal Revenue
Service the amount of distributions it pays during each calendar year, and the
amount of tax it withholds, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to distributions unless such holder (1) is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact or (2)
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with the applicable requirements
of the backup withholding rules. A stockholder who does not provide FelCor with
its correct taxpayer identification number also may be subject to penalties
imposed by the Internal Revenue Service. Any amount paid as backup withholding
will be creditable against the stockholder's income tax liability. In addition,
FelCor may be required to withhold a portion of capital gain distributions to
any stockholders who fail to certify their non-foreign status to FelCor. The
U.S. Treasury Department has issued final regulations regarding the backup
withholding rules as applied to non-U.S. stockholders. Those regulations alter
certain procedural aspects of backup withholding compliance and are effective
for distributions made after December 31, 2000. See "--Taxation of Non-U.S.
Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts and annuities generally are
exempt from federal income taxation. However, they are subject to taxation on
their unrelated business taxable income. While many investments in real estate
generate unrelated business taxable income, the Internal Revenue Service has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute unrelated business taxable income,
provided that the exempt employee pension trust does not otherwise use the
shares of the REIT in an unrelated trade or business of the pension trust. Based
on that ruling, amounts that FelCor distributes to tax-exempt stockholders
generally should not constitute unrelated business taxable income. However, if a
tax-exempt stockholder were to finance its acquisition of the common stock with
debt, a portion of the income that it receives from FelCor would constitute
unrelated business taxable income pursuant to the "debt-financed property"
rules. Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under special provisions of the federal
income tax laws are subject to different unrelated business taxable income
rules, which generally will require them to characterize distributions that they
receive from FelCor as unrelated business taxable income. Finally, in certain
circumstances, a qualified employee pension or profit sharing trust that owns
more than 10% of FelCor's stock is required to treat a percentage of the
dividends that it receives from FelCor as unrelated business taxable income.
Such percentage is equal to the gross income FelCor derives from an unrelated
trade or business, determined as if it were a pension trust, divided by its
total gross income for the year in which it pays the dividends. That rule
applies to a pension trust holding more than 10% of FelCor's stock only if:
o the percentage of its dividends that the tax-exempt trust must
treat as unrelated business taxable income is at least 5%;
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o FelCor qualifies as a REIT by reason of the modification of the
rule requiring that no more than 50% of FelCor's shares be owned
by five or fewer individuals that allows the beneficiaries of the
pension trust to be treated as holding FelCor's stock in
proportion to their actuarial interests in the pension trust; and
o either (1) one pension trust owns more than 25% of the value of
FelCor's stock or (2) a group of pension trusts individually
holding more than 10% of the value of FelCor's stock collectively
owns more than 50% of the value of FelCor's stock.
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "non-U.S. stockholders") are complex. This section
is only a summary of such rules. WE URGE NON-U.S. STOCKHOLDERS TO CONSULT THEIR
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX
LAWS ON OWNERSHIP OF THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
A non-U.S. stockholder that receives a distribution that is not
attributable to gain from FelCor's sale or exchange of U.S. real property
interests, as defined below, and that FelCor does not designate as a capital
gain dividend or retained capital gain will recognize ordinary income to the
extent that FelCor pays such distribution out of its current or accumulated
earnings and profits. A withholding tax equal to 30% of the gross amount of the
distribution ordinarily will apply to such distribution unless an applicable tax
treaty reduces or eliminates the tax. However, if a distribution is treated as
effectively connected with the non-U.S. stockholder's conduct of a U.S. trade or
business, the non-U.S. stockholder generally will be subject to federal income
tax on the distribution at graduated rates, in the same manner as U.S.
stockholders are taxed with respect to such distributions and also may be
subject to the 30% branch profits tax in the case of a non-U.S. stockholder that
is a non-U.S. corporation. FelCor plans to withhold U.S. income tax at the rate
of 30% on the gross amount of any such distribution paid to a non-U.S.
stockholder unless either:
o a lower treaty rate applies and the non-U.S. stockholder files
the required form evidencing eligibility for that reduced rate
with FelCor; or
o the non-U.S. stockholder files an IRS Form 4224 with FelCor
claiming that the distribution is effectively connected income.
The U.S. Treasury Department has issued final regulations that modify
the manner in which FelCor will comply with the withholding requirements. Those
regulations are effective for distributions made after December 31, 2000.
A non-U.S. stockholder will not incur tax on a distribution in excess
of FelCor's current and accumulated earnings and profits if such distribution
does not exceed the adjusted basis of its common stock. Instead, such a
distribution will reduce the adjusted basis of such common stock. A non-U.S.
stockholder will be subject to tax on a distribution that exceeds both FelCor's
current and accumulated earnings and profits and the adjusted basis of its
common stock, if the non-U.S. stockholder otherwise would be subject to tax on
gain from the sale or disposition of its common stock, as described below.
Because FelCor generally cannot determine at the time it makes a distribution
whether or not the distribution will exceed its current and accumulated earnings
and profits, it normally will withhold tax on the entire amount of any
distribution at the same rate as it would withhold on a dividend. However, a
non-U.S. stockholder may obtain a refund of amounts that FelCor withholds if it
later determines that a distribution in fact exceeded its current and
accumulated earnings and profits.
FelCor must withhold 10% of any distribution that exceeds its current
and accumulated earnings and profits. Consequently, although it intends to
withhold at a rate of 30% on the entire amount of any distribution, to the
extent that it does not do so, it will withhold at a rate of 10% on any portion
of a distribution not subject to withholding at a rate of 30%.
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For any year in which FelCor qualifies as a REIT, a non-U.S.
Stockholder will incur tax on distributions that are attributable to gain from
its sale or exchange of "U.S. real property interests" under special provisions
of the federal income tax laws ("FIRPTA"). The term "U.S. real property
interests" includes certain interests in real property and stock in corporations
at least 50% of whose assets consists of interests in real property. Under those
rules, a non-U.S. stockholder is taxed on distributions attributable to gain
from sales of U.S. real property interests as if such gain were effectively
connected with a U.S. business of the non-U.S. stockholder. A non-U.S.
stockholder thus would be taxed on such a distribution at the normal capital
gain rates applicable to U.S. stockholders, subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of a nonresident
alien individual. A non-U.S. corporate stockholder not entitled to treaty relief
or exemption also may be subject to the 30% branch profits tax on such a
distribution. FelCor must withhold 35% of any distribution that it could
designate as a capital gain dividend. A non-U.S. stockholder may receive a
credit against its tax liability for the amount FelCor withholds.
A non-U.S. stockholder generally will not incur tax under FIRPTA as
long as at all times non-U.S. persons hold, directly or indirectly, less than
50% in value of FelCor's stock. We cannot assure you that that test will be met.
However, a non-U.S. stockholder that owned, actually or constructively, 5% or
less of the common stock at all times during a specified testing period will not
incur tax under FIRPTA if the common stock is "regularly traded" on an
established securities market. If the gain on the sale of the common stock were
taxed under FIRPTA, a non-U.S. stockholder would be taxed in the same manner as
U.S. stockholders with respect to such gain, subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations. Furthermore, a non-U.S. stockholder will incur
tax on gain not subject to FIRPTA if (1) the gain is effectively connected with
the non-U.S. stockholder's U.S. trade or business, in which case the non-U.S.
stockholder will be subject to the same treatment as U.S. stockholders with
respect to such gain, or (2) the non-U.S. stockholder is a nonresident alien
individual who was present in the U.S. for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the non-U.S.
stockholder will incur a 30% tax on his capital gains.
OTHER TAX CONSEQUENCES
TAX ASPECTS OF FELCOR'S INVESTMENTS IN FELCOR LP AND THE SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable to our direct or indirect investments in FelCor LP and
the Subsidiary Partnerships (each individually a "Partnership" and,
collectively, the "Partnerships"). The discussion does not cover state or local
tax laws or any federal tax laws other than income tax laws.
CLASSIFICATION AS PARTNERSHIPS
FelCor is entitled to include in its income its distributive share of
each Partnership's income and to deduct its distributive share of each
Partnership's losses only if the Partnerships are classified for federal income
tax purposes as partnerships rather than as corporations or associations taxable
as corporations. An organization will be classified as a partnership, rather
than as a corporation, for federal income tax purposes if it:
o is treated as a partnership under Treasury regulations, effective
January 1, 1997, relating to entity classification (the
"check-the-box regulations"); and
o is not a "publicly traded" partnership.
Under the check-the-box regulations, an unincorporated entity with at
least two members may elect to be classified either as an association taxable as
a corporation or as a partnership. If such an entity fails to make an election,
it generally will be treated as a partnership for federal income tax purposes.
The federal income tax classification of an entity that was in existence prior
to January 1, 1997 will be respected for all periods prior to January 1, 1997
if:
o the entity had a reasonable basis for its claimed classification;
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o the entity and all members of the entity recognized the federal
tax consequences of any changes in the entity's classification
within the 60 months prior to January 1, 1997; and
o neither the entity nor any member of the entity was notified in
writing by a taxing authority on or before May 8, 1996 that the
classification of the entity was under examination.
Each Partnership in existence prior to January 1, 1997 reasonably
claimed partnership classification under the Treasury regulations relating to
entity classification in effect prior to January 1, 1997. In addition, the
Partnerships intend to continue to be classified as partnerships for federal
income tax purposes and no Partnership will elect to be treated as an
association taxable as a corporation under the check-the-box regulations.
A publicly traded partnership is a partnership whose interests are
traded on an established securities market or are readily tradable on a
secondary market or the substantial equivalent thereof. A publicly traded
partnership will not, however, be treated as a corporation for any taxable year
if 90% or more of the partnership's gross income for such year consists of
certain passive-type income, including real property rents, gains from the sale
or other disposition of real property, interest, and dividends (the "90% passive
income exception").
Treasury regulations (the "PTP regulations") provide limited safe
harbors from the definition of a publicly traded partnership. Pursuant to one of
those safe harbors (the "private placement exclusion"), interests in a
partnership will not be treated as readily tradable on a secondary market or the
substantial equivalent thereof if (1) all interests in the partnership were
issued in a transaction or transactions that were not required to be registered
under the Securities Act of 1933, as amended, and (2) the partnership does not
have more than 100 partners at any time during the partnership's taxable year.
In determining the number of partners in a partnership, a person owning an
interest in a partnership, grantor trust, or S corporation that owns an interest
in the partnership is treated as a partner in such partnership only if (1)
substantially all of the value of the owner's interest in the entity is
attributable to the entity's direct or indirect interest in the partnership and
(2) a principal purpose of the use of the entity is to permit the partnership to
satisfy the 100-partner limitation. Each Partnership qualifies for the private
placement exclusion.
If a Partnership is considered a publicly traded partnership under the
PTP regulations because it is deemed to have more than 100 partners, such
Partnership should not be treated as a corporation because it should be eligible
for the 90% passive income exception. If, however, for any reason a Partnership
were taxable as a corporation, rather than as a partnership, for federal income
tax purposes, FelCor would not be able to qualify as a REIT. See "Federal Income
Tax Consequences of FelCor's Status as a REIT -- Requirements for Qualification
-- Income Tests" and "-- Requirements for Qualification -- Asset Tests." In
addition, any change in a Partnership's status for tax purposes might be treated
as a taxable event, in which case FelCor might incur tax liability without any
related cash distribution. See "Federal Income Tax Consequences of FelCor's
Status as a REIT -- Requirements for Qualification -- Distribution
Requirements." Further, items of income and deduction of such Partnership would
not pass through to its partners, and its partners would be treated as
stockholders for tax purposes. Consequently, such Partnership would be required
to pay income tax at corporate tax rates on its net income, and distributions to
its partners would constitute dividends that would not be deductible in
computing such Partnership's taxable income.
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
Partners, Not the Partnerships, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, FelCor is required to
take into account its allocable share of each Partnership's income, gains,
losses, deductions, and credits for any taxable year of such Partnership ending
within or with the taxable year of FelCor, without regard to whether FelCor has
received or will receive any distribution from such Partnership.
Partnership Allocations. Although a partnership agreement generally
will determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes if they do not comply with the
provisions of the federal income tax laws governing partnership allocations. If
an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating
-37-
<PAGE> 42
to the economic arrangement of the partners with respect to such item. Each
Partnership's allocations of taxable income, gain, and loss are intended to
comply with the requirements of the federal income tax laws governing
partnership allocations.
Tax Allocations With Respect to Contributed Properties. Income, gain,
loss, and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such unrealized
gain or unrealized loss is generally equal to the difference between the fair
market value of contributed property at the time of contribution, and the
adjusted tax basis of such property at the time of contribution (a "book-tax
difference"). Such allocations are solely for federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. The Department of the Treasury has issued regulations
requiring partnerships to use a "reasonable method" for allocating items with
respect to which there is a book-tax difference and outlining several reasonable
allocation methods.
Under FelCor LP's partnership agreement, depreciation or amortization
deductions of FelCor LP generally will be allocated among the partners in
accordance with their respective interests in FelCor LP, except to the extent
that FelCor LP is required under the federal income tax laws governing
partnership allocations to use a method for allocating tax depreciation
deductions attributable to contributed properties that results in FelCor
receiving a disproportionate share of such deductions. In addition, gain on sale
of a facility that has been contributed, in whole or in part, to FelCor LP will
be specially allocated to the contributing partners to the extent of any
"built-in" gain with respect to such facility for federal income tax purposes.
Basis in Partnership Interest. FelCor's adjusted tax basis in its
partnership interest in FelCor LP generally is equal to:
o the amount of cash and the basis of any other property
contributed to FelCor LP by FelCor,
o increased by its allocable share of FelCor LP's income and its
allocable share of indebtedness of FelCor LP, and
o reduced, but not below zero, by FelCor's allocable share of
FelCor LP's loss and the amount of cash distributed to FelCor,
and by constructive distributions resulting from a reduction in
FelCor's share of indebtedness of FelCor LP.
If the allocation of FelCor's distributive share of FelCor LP's loss
would reduce the adjusted tax basis of FelCor's partnership interest in FelCor
LP below zero, the recognition of such loss will be deferred until such time as
the recognition of such loss would not reduce FelCor's adjusted tax basis below
zero. To the extent that FelCor LP's distributions, or any decrease in FelCor's
share of the indebtedness of FelCor LP, which is considered a constructive cash
distribution to the partners, would reduce FelCor's adjusted tax basis below
zero, such distributions constitute taxable income to FelCor. Such distributions
and constructive distributions normally will be characterized as capital gain,
and, if FelCor's partnership interest in FelCor LP has been held for longer than
one year, the distributions and constructive distributions will constitute
long-term capital gain.
Depreciation Deductions Available to FelCor LP. To the extent that
FelCor LP acquired its hotels in exchange for cash, its initial basis in such
hotels for federal income tax purposes generally was or will be equal to the
purchase price paid by FelCor LP. FelCor LP depreciates such depreciable hotel
property for federal income tax purposes under the modified accelerated cost
recovery system of depreciation ("MACRS"). Under MACRS, FelCor LP generally
depreciates furnishings and equipment over a seven-year recovery period using a
200% declining balance method and a half-year convention. If, however, FelCor LP
places more than 40% of its furnishings and equipment in service during the last
three months of a taxable year, a mid-quarter depreciation convention must be
used for the furnishings and equipment placed in service during that year. Under
MACRS, FelCor LP generally depreciates buildings and improvements over a 39-year
recovery period using a straight line method and a mid-month convention. FelCor
LP's initial basis in hotels acquired in exchange for units in FelCor LP should
be the same as the transferor's
-38-
<PAGE> 43
basis in such hotels on the date of acquisition by FelCor LP. Although the law
is not entirely clear, FelCor LP generally depreciates such depreciable hotel
property for federal income tax purposes over the same remaining useful lives
and under the same methods used by the transferors. FelCor LP's tax depreciation
deductions are allocated among the partners in accordance with their respective
interests in FelCor LP, except to the extent that FelCor LP is required under
the federal income tax laws governing partnership allocations to use a method
for allocating tax depreciation deductions attributable to contributed
properties that results in FelCor receiving a disproportionate share of such
deductions.
SALE OF A PARTNERSHIP'S PROPERTY
Generally, any gain realized by a Partnership on the sale of property
held by the Partnership for more than one year will be long-term capital gain,
except for any portion of such gain that is treated as depreciation or cost
recovery recapture. Any gain recognized by a Partnership on the disposition of
contributed properties will be allocated first to the partners of the
Partnership to the extent of their "built-in gain" on those properties for
federal income tax purposes. The partners' "built-in gain" on the contributed
properties sold will equal the excess of the partners' proportionate share of
the book value of those properties over the partners' tax basis allocable to
those properties at the time of the sale. Any remaining gain recognized by the
Partnership on the disposition of the contributed properties, and any gain
recognized by the Partnership or the disposition of the other properties, will
be allocated among the partners in accordance with their respective percentage
interests in the Partnership.
FelCor's share of any gain realized by a Partnership on the sale of any
property held by the Partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the Partnership's trade or
business will be treated as income from a prohibited transaction that is subject
to a 100% penalty tax. Such prohibited transaction income also may have an
adverse effect upon FelCor's ability to satisfy the income tests for REIT
status. See "Federal Income Tax Consequences of FelCor's Status as a REIT --
Requirements for Qualification -- Income Tests." FelCor, however, does not
presently intend to acquire or hold or to allow any Partnership to acquire or
hold any property that represents inventory or other property held primarily for
sale to customers in the ordinary course of FelCor's or such Partnership's trade
or business.
TAXABLE SUBSIDIARIES
FelCor LP owns 100% of the nonvoting stock of Kingston Plantation
Development Corp., representing 97% of the value of Kingston's outstanding
stock. Kingston owns 50% of the outstanding stock of Promus/FelCor Manager, Inc.
By virtue of its partnership interest in FelCor LP, FelCor is deemed to own its
pro rata share of the assets of FelCor LP, including the stock of Kingston held
by FelCor LP.
As noted above, for FelCor to qualify as a REIT, FelCor's proportionate
share of the value of the securities of Kingston may not exceed 5% of the total
value of FelCor's assets. In addition, FelCor's proportionate share of the
equity securities of Kingston may not constitute more than 10% of the voting
securities of Kingston. FelCor LP does not own any of the voting securities of
Kingston. In addition, based upon its analysis of the estimated value of the
stock of Kingston relative to the estimated value of the other assets owned by
FelCor, FelCor believes that the value of its pro rata share of the stock of
Kingston does not exceeds 5% of the total value of FelCor's assets. No
independent appraisals have been obtained to support this conclusion. The 5%
limitation must be satisfied at the end of each quarter in which FelCor or
FelCor LP increases its interest in Kingston, including as a result of FelCor
increasing its interest in FelCor LP in connection with a stock offering or as
limited partners of FelCor LP exercise their rights to redeem their partnership
units for cash or shares of FelCor's common stock. Although FelCor plans to take
steps to ensure that it satisfies the 5% asset test for any quarter with respect
to which retesting is to occur, there can be no assurance that such steps will
always be successful.
Kingston is organized as a corporation and pays federal, state, and
local income taxes on its taxable income at normal corporate rates. Any such
taxes reduce amounts available for distribution by Kingston, which in turn will
reduce amounts available for distribution to FelCor's stockholders.
-39-
<PAGE> 44
As described above, the Tax Bill allows FelCor to own up to 100% of the
stock of taxable REIT subsidiaries ("TRSs") beginning on January 1, 2001. TRSs
can perform activities unrelated to FelCor's tenants, such as third-party
management, development, and other independent business activities, as well as
provide services to FelCor's tenants. FelCor and a subsidiary must elect for the
subsidiary to be treated as a TRS. A corporation of which a TRS directly or
indirectly owns more than 35% of the voting power or value of the stock will
automatically be treated as a TRS. The Tax Bill limits the deductibility of
interest paid or accrued by a TRS to FelCor to assure that the TRS is subject to
an appropriate level of corporate taxation. Further, the Tax Bill imposes a 100%
excise tax on transactions between a TRS and FelCor or its tenants that are not
conducted on an arm's-length basis. The Tax Bill also prevents FelCor from
owning more than 10% of the voting power or value of the stock of a taxable
subsidiary that is not treated as a TRS. Prior to the Tax Bill, FelCor only was
prohibited from owning more than 10% of the voting stock of a taxable
subsidiary. Overall, no more than 20% of FelCor's assets can consist of
securities of TRSs under the Tax Bill.
The TRS provisions of the Tax Bill will apply for taxable years
beginning after December 31, 2000. However, a taxable subsidiary in existence on
July 12, 1999, such as Kingston, will be grandfathered unless and until (1) it
engages in a new line of business or acquires a substantial new asset, other
than in certain tax-free transactions or pursuant to a binding contract in
effect on July 12, 1999, or (2) FelCor acquires, directly or indirectly,
additional stock in the taxable subsidiary, including as a result of limited
partner redemptions of their interests in FelCor LP, other than in certain
tax-free transactions or pursuant to a binding contract in effect on July 12,
1999. Such existing taxable subsidiaries can be converted into TRSs on a
tax-free basis prior to January 1, 2004. Accordingly, Kingston will be
grandfathered after the Tax Bill unless and until either (1) it engages in a new
line of business or acquires a substantial new asset or (2) FelCor acquires
additional stock in Kingston, for example, as a result of an increase in
FelCor's percentage interest in FelCor LP due to limited partners' exercise of
their redemption rights. If Kingston were to acquire a substantial new asset or
FelCor were to acquire additional stock in Kingston, such entity no longer would
be grandfathered and FelCor would not be able to satisfy the provision in the
Tax Bill that prevents FelCor from owning more than 10% of the voting power or
value of the stock of a taxable subsidiary that is not treated as a TRS on or
after January 1, 2001.
FelCor's independent directors have approved the acquisition of 100% of
DJONT Operations, L.L.C. effective January 1, 2001. No binding agreements have
been entered into for that acquisition. At the time of such acquisition, it is
intended that DJONT Operations, L.L.C. will become a TRS of FelCor.
STATE AND LOCAL TAXES
FelCor and/or you may be subject to state and local tax in various
states and localities, including those states and localities in which FelCor or
you transact business, own property, or reside. The state and local tax
treatment in such jurisdictions may differ from the federal income tax treatment
described above. Consequently, you should consult your own tax advisor regarding
the effect of state and local tax laws upon an investment in the common stock.
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the sale
of shares offered by this prospectus. We will not receive any proceeds from the
sale of such shares.
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<PAGE> 45
SELLING STOCKHOLDERS
The following table sets forth the name, address and relationship with
us of the selling stockholders and (i) the number of shares of common stock
beneficially owned by the selling stockholder as of December 1, 2000, (ii) the
maximum number of shares of common stock which may be offered by this prospectus
for the account of the selling stockholders and (iii) the amount and percentage
of common stock that would be owned by the selling stockholders after completion
of the offering, assuming the sale of all of the common stock which may be
offered by this prospectus. Except as otherwise noted below, the selling
stockholders have not, within the past three years, had any position, office or
other material relationship with us.
<TABLE>
<CAPTION>
SHARES OR PERCENTAGE OF
NAME OF UNITS OWNED SHARES WHICH MAY BE ALL OUTSTANDING
SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) COMMON STOCK
-------------------- -------------------- -------------------- ---------------
<S> <C> <C> <C>
Bass America, Inc. 8,161,697 5,712,185 0.4%
Huie Properties Ltd. 50,748 50,748 0.0%
SRS Properties Limited Partnership 3,571 3,571 0.0%
Schenley Hotel Associates 55,556 55,556 0.0%
</TABLE>
(1) Beneficial ownership as of December 1, 2000, based upon information
provided by the selling stockholders.
(2) Assumes sale of all shares of common stock registered pursuant to this
prospectus, although the selling stockholders are under no obligation
known to us to sell any shares of common stock at this time.
PLAN OF DISTRIBUTION
The shares may be sold pursuant to this prospectus from time to time by
the selling stockholders and any pledgees, donees, assignees or transferees. The
selling stockholders may sell the shares being offered by this prospectus: (i)
in ordinary brokerage transactions and in transactions in which brokers solicit
purchasers; (ii) in privately negotiated direct sales or sales effected through
agents not involving established trading markets; or (iii) through transactions
in put or call options or other rights (whether exchange-listed or otherwise)
established after the effectiveness of the registration statement of which this
prospectus is a part. The shares may be sold at prices and at terms then
prevailing or at prices related to the then current market price of the common
stock on the NYSE or at other negotiated prices. In addition, any of the shares
that qualify for sale pursuant to Rule 144 may be sold in transactions complying
with such rule, rather than pursuant to this prospectus.
The shares consist of common stock to be issued to the selling
stockholders upon redemption by FelCor LP of units previously issued to such
persons in private transactions exempt from the registration requirements of the
Securities Act. FelCor will acquire each FelCor LP unit redeemed by it in
exchange for a share of common stock and, consequently, its interest in the
FelCor LP will increase.
In the case of sales of the shares effected to or through
broker-dealers, such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders or the
purchasers of the shares sold by or through such broker-dealers, or both. We
have advised the selling stockholders that the anti-manipulative rules of
Regulation M under the Securities Exchange Act of 1934 may apply to their sales
in the market and have informed the selling stockholders of the need for
delivery of copies of this prospectus. We are not aware as of the date of this
prospectus of any agreements between the selling stockholders and any
broker-dealers with respect to the sale of the shares offered by this
prospectus. The selling stockholders and any broker-dealer or other agent
executing sell orders on behalf of the selling stockholders may be deemed to be
"underwriters" within the meaning of the Securities Act, in which case the
commissions
-41-
<PAGE> 46
received by any such broker-dealer or agent and profit on any resale of the
shares of common stock may be deemed to be underwriting commissions under the
Securities Act. The commissions received by a broker-dealer or agent may be in
excess of customary compensation. We will receive no part of the proceeds from
the sale of any shares offered by this prospectus.
Pursuant to the terms of registration rights agreements entered into by
and among FelCor and the selling stockholders, the selling stockholders will pay
their costs and expenses of selling the shares offered by this prospectus,
including commissions and discounts of underwriters, brokers, dealers or agents,
and we have agreed to pay the costs and expenses incident to its registration
and qualification of the shares offered by this prospectus, including applicable
filing fees, legal and accounting fees and expenses. In addition, we have agreed
to indemnify the selling stockholders against certain liabilities, including
certain liabilities arising under the Securities Act.
The selling stockholders may elect to sell all, a portion or none of
the shares offered by this prospectus.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be
passed upon for us by Jenkens & Gilchrist, a Professional Corporation, Dallas,
Texas. In addition, the description of federal income tax consequences contained
in the prospectus under the caption "Federal income Tax Consequences of FelCor
Status as a REIT" is based upon an opinion of Hunton & Williams, Richmond,
Virginia.
EXPERTS
Our consolidated financial statements as of December 31, 1999 and 1998
and for the years ended December 31, 1999, 1998 and 1997 and the consolidated
financial statements of DJONT Operations, L.L.C. as of December 31, 1999 and
1998 and for the years ended December 31, 1999, 1998 and 1997 incorporated by
reference in this prospectus have been so incorporated in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
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<PAGE> 47
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR THE SELLING STOCKHOLDER. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS OR IN OUR AFFAIRS SINCE THE DATE OF THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-----------------
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
Forward Looking Statements ...................................................ii
Where You Can Find More Information..........................................iii
Our Company.................................................................. 1
Risk Factors................................................................. 2
Description of Capital Stock..................................................10
Federal Income Tax Consequences...............................................21
Use of Proceeds...............................................................40
Selling Stockholders..........................................................41
Plan of Distribution..........................................................41
Legal Matters.................................................................42
Experts.......................................................................42
</TABLE>
================================================================================
5,823,060 SHARES
COMMON STOCK
----------
PROSPECTUS
----------
FELCOR LODGING TRUST
INCORPORATED
================================================================================
<PAGE> 48
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the approximate amount of the fees and
expenses, other than underwriting discounts and commissions, payable by the
Registrant in connection with the sale of common stock being registered.
<TABLE>
<S> <C>
SEC Registration Fee....................................................... $ 35,541
Legal Fees and Expenses.................................................... 25,000
Accounting Fees and Expenses............................................... 5,000
Printing Fees.............................................................. 5,000
Miscellaneous.............................................................. 4,459
---------
Total...................................................................... $ 75,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Charter of the General Partner, generally, limits the liability of
the General Partner's directors and officers to the General Partner and the
shareholders for money damages to the fullest extent permitted from time to time
by the laws of the State of Maryland. The Charter also provides, generally, for
the indemnification of directors and officers, among others, against judgments,
settlements, penalties, fines, and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities except in connection with a
proceeding by or in the right of the General Partner in which the director was
adjudged liable to the General Partner or in connection with any other
proceeding, whether or not involving action in his official capacity, in which
he was adjudged liable on the basis that personal benefit was improperly
received by him. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 ("Securities Act") may be permitted to directors and
officers of the General Partner pursuant to the foregoing provisions or
otherwise, the General Partner has been advised that, in the opinion of the
Securities and Exchange Commission (the "Commission"), such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable.
The General Partner may purchase director and officer liability
insurance for the purpose of providing a source of funds to pay any
indemnification described above.
ITEM 16. EXHIBITS
No. Description
4.1 Specimen certificate representing shares of common stock (filed
as Exhibit 4.1 to the Registrant's 10-Q for the quarter ended
June 30, 1996 and incorporated herein by reference)
5.1 Opinion of Jenkens & Gilchrist, a Professional Corporation
8.1 Opinion of Hunton & Williams
23.1 Consent of Jenkens & Gilchrist, a Professional Corporation
(included in Exhibit 5.1 hereto)
23.2 Consent of Hunton & Williams (included in Exhibit 8.1 hereto)
23.3 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (included in Signature Page hereto)
II-1
<PAGE> 49
ITEM 17. UNDERTAKING
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if the registration
statement is on Form S-3, Form S-8 or Form F-3, and the information required to
be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offering therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referred to in Item 15 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question as to whether such indemnification by it is against public policy
as expressed in the Act, and will be governed by the final adjudication of such
issue.
II-2
<PAGE> 50
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Dallas, State of Texas, on the 8th day of December
2000.
FELCOR LODGING TRUST INCORPORATED,
a Maryland corporation (Registrant)
By: /s/ LAWRENCE D. ROBINSON
-----------------------------------------------------
Lawrence D. Robinson
Senior Vice President, Secretary & General Counsel
II-3
<PAGE> 51
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full
power to act without the other, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities (until revoked in writing) to sign
any or all amendments (including post-effective amendments) to this Registration
Statement, to file the same, together with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
to sign any and all applications, registration statements, notices and other
documents necessary or advisable to comply with the applicable state securities
laws, and to file the same, together with all documents in connection therewith,
with the appropriate state securities authorities, granting unto said
attorney-in-fact and agents or any of them, or their or his substitutes or
substitute, full power and authority to do and perform each and every act and
thing necessary and advisable as fully to all intents and purposes as he might
or could do in person, thereby ratifying and confirming all that said
attorney-in-fact and agents, or any of them or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue thereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DONALD J. MCNAMARA Chairman of the Board and Director December 8, 2000
-------------------------------
Donald J. McNamara
/s/ THOMAS J. CORCORAN, JR. President and Chief Executive December 8, 2000
-------------------------------
Thomas J. Corcoran, Jr. Officer and Director
/s/ LESTER C. JOHNSON Vice President and Controller December 8, 2000
-------------------------------
Lester C. Johnson (Principal Accounting Officer)
Director December __, 2000
-------------------------------
Melinda J. Bush
/s/ RICHARD S. ELLWOOD Director December 8, 2000
-------------------------------
Richard S. Ellwood
/s/ RICHARD O. JACOBSON Director December 8, 2000
-------------------------------
Richard O. Jacobson
/s/ CHARLES A. LEDSINGER, JR. Director December 8, 2000
-------------------------------
Charles A. Ledsinger, Jr.
Director December __, 2000
-------------------------------
Robert H. Lutz, Jr.
/s/ CHARLES N. MATHEWSON Director December 8, 2000
-------------------------------
Charles N. Mathewson
/s/ THOMAS A. MCCHRISTY Director December 8, 2000
-------------------------------
Thomas A. McChristy
/s/ RICHARD C. NORTH Director December 8, 2000
-------------------------------
Richard C. North
/s/ MICHAEL D. ROSE Director December 8, 2000
-------------------------------
Michael D. Rose
</TABLE>
II-4
<PAGE> 52
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.1 Specimen certificate representing shares of common stock (filed
as Exhibit 4.1 to the Registrant's 10-Q for the quarter ended
June 30, 1996 and incorporated herein by reference)
5.1 Opinion of Jenkens & Gilchrist, a Professional Corporation
8.1 Opinion of Hunton & Williams
23.1 Consent of Jenkens & Gilchrist, a Professional Corporation
(included in Exhibit 5.1 hereto)
23.2 Consent of Hunton & Williams (included in Exhibit 8.1 hereto)
23.3 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (included in Signature Page hereto)
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