<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 4, 2000
FELCOR LODGING TRUST INCORPORATED
(Exact name of registrant as specified in its charter)
MARYLAND 1-14236 72-2541756
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 444-4900
(NOT APPLICABLE)
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS
On September 15, 2000, FelCor Lodging Limited Partnership issued $400
million in aggregate principal amount of its 9 1/2% Senior Notes Due 2008,
which notes were fully and unconditionally guaranteed, jointly and severally,
by FelCor Lodging Trust Incorporated and one of its wholly-owned subsidiaries.
The financial statements of FelCor Lodging Trust Incorporated are included
herein, commencing on page F-1, for the purpose of satisfying the financial
statement requirements of FelCor Lodging Trust Incorporated and such subsidiary
applicable to such guarantee. See "Index to Financial Statements" below.
ITEM 7. EXHIBITS
(c) Exhibits. The following exhibit is furnished in accordance with Item
601 of Regulation S-K.
Exhibit No. Description
23 Consent of PricewaterhouseCoopers LLP
<PAGE> 3
FELCOR LODGING TRUST INCORPORATED
INDEX TO FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
<TABLE>
<S> <C>
Report of Independent Accountants............................................................................ F-2
Consolidated Balance Sheets - December 31, 1999 and 1998..................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997................... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997......... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997................... F-6
Notes to Consolidated Financial Statements................................................................... F-7
</TABLE>
F-1
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of FelCor Lodging Trust Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of FelCor
Lodging Trust Incorporated at December 31, 1999 and 1998, and the consolidated
results of operations and cash flows for the years ended December 31, 1999, 1998
and 1997, respectively, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
February 1, 2000,
except as to the information in Note 19,
for which the date is September 15, 2000.
F-2
<PAGE> 5
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------ ------------
<S> <C> <C>
Investment in hotels, net of accumulated depreciation of
$330,555 in 1999 and $178,072 in 1998 ...................................... $ 4,035,344 $ 3,955,582
Investment in unconsolidated entities .......................................... 136,718 140,299
Cash and cash equivalents ...................................................... 36,123 34,692
Due from Lessees ............................................................... 18,394 18,968
Note receivable from unconsolidated entity ..................................... 7,760 7,766
Deferred expenses, net of accumulated amortization of
$4,491 in 1999 and $2,096 in 1998 ........................................... 15,473 10,041
Other assets ................................................................... 5,939 8,035
------------ ------------
Total assets ............................................................ $ 4,255,751 $ 4,175,383
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt, net of discount of $1,401 in 1999 and $1,628 in 1998 ..................... $ 1,833,954 $ 1,594,734
Distributions payable .......................................................... 39,657 67,262
Accrued expenses and other liabilities ......................................... 65,480 57,312
Minority interest in Operating Partnership, 2,991 and 2,939 units issued
and outstanding at December 31, 1999 and 1998, respectively .................... 90,078 87,353
Minority interest in other partnerships ........................................ 51,671 51,105
------------ ------------
Total liabilities .............................................................. 2,080,840 1,857,766
------------ ------------
Commitments and contingencies (Notes 6 and 11)
Shareholders' equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Preferred Stock, 6,050 shares issued and outstanding ............... 151,250 151,250
Series B Preferred Stock, 58 shares issued and outstanding .................. 143,750 143,750
Common stock, $.01 par value, 200,000 shares authorized, 69,291 and
69,284 shares issued at December 31, 1999 and 1998, respectively ............ 693 693
Additional paid-in capital ..................................................... 2,138,477 2,142,250
Distributions in excess of earnings ............................................ (119,385) (78,839)
------------ ------------
2,314,785 2,359,104
Less: Common stock in treasury, at cost, 6,976 and 1,213 shares
at December 31, 1999 and 1998, respectively ................................. (139,874) (41,487)
------------ ------------
Total shareholders' equity ............................................. 2,174,911 2,317,617
------------ ------------
Total liabilities and shareholders' equity ............................. $ 4,255,751 $ 4,175,383
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 6
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Percentage lease revenue ......................................... $ 490,893 $ 328,035 $ 169,114
Equity in income from unconsolidated entities .................... 8,484 7,017 6,963
Other revenue .................................................... 4,624 4,565 574
------------ ------------ ------------
Total revenues .............................. 504,001 339,617 176,651
------------ ------------ ------------
Expenses:
General and administrative ....................................... 9,122 5,254 3,743
Depreciation ..................................................... 152,948 90,835 50,798
Taxes, insurance and other ....................................... 59,572 37,158 21,483
Land leases ...................................................... 17,558 8,130 1,610
Interest expense ................................................. 125,435 73,182 28,792
Minority interest in Operating Partnership ...................... 4,696 6,500 5,817
Minority interest in other partnerships .......................... 2,713 1,121 573
------------ ------------ ------------
Total expenses ............................. 372,044 222,180 112,816
------------ ------------ ------------
Income before nonrecurring items ................................. 131,957 117,437 63,835
Gain on sale of hotels, net ...................................... 236 477
Extraordinary charge from write off of deferred financing fees ... 1,113 3,075 185
------------ ------------ ------------
Net income ....................................................... 131,080 114,839 63,650
Preferred dividends .............................................. 24,735 21,423 11,797
------------ ------------ ------------
Net income applicable to common shareholders ..................... $ 106,345 $ 93,416 $ 51,853
============ ============ ============
Per common share data:
Basic:
Income applicable to common shareholders
before extraordinary charge ................................ $ 1.59 $ 1.93 $ 1.67
Extraordinary charge ....................................... (0.02) (0.06) (0.01)
------------ ------------ ------------
Net income applicable to common shareholders ............... $ 1.57 $ 1.87 $ 1.66
============ ============ ============
Weighted average common shares outstanding ................. 67,392 49,968 31,269
Diluted:
Income applicable to common shareholders
before extraordinary charge ............................ $ 1.59 $ 1.92 $ 1.65
Extraordinary charge ....................................... (0.02) (0.06) (0.01)
------------ ------------ ------------
Net income applicable to common shareholders ............... $ 1.57 $ 1.86 $ 1.64
============ ============ ============
Weighted average common shares outstanding ................. 67,581 50,314 31,610
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 7
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
NUMBER ADDITIONAL DISTRIBUTIONS TOTAL
PREFERRED OF PAID-IN IN EXCESS OF TREASURY SHAREHOLDERS'
STOCK SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 151,250 23,502 $ 235 $ 503,628 $ (13,187) $ 641,926
Issuance of common shares, net of
offering expenses 14,300 143 505,671 505,814
Allocation to minority interest (7,552) (7,552)
Repurchase of common shares
held in treasury $ (41,106) (41,106)
Distributions/dividends declared:
$2.10 per common share (72,437) (72,437)
$1.95 per preferred share (11,797) (11,797)
Net income 63,650 63,650
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 151,250 37,802 378 1,001,747 (33,771) (41,106) 1,078,498
Issuance of common shares, net of
offering expenses 31,482 315 1,151,038 1,151,353
Forfeiture of restricted common stock
awards (381) (381)
Allocation to minority interest (5,848) (5,848)
Issuance of Series B Preferred
Stock, net of offering expenses 143,750 (4,687) 139,063
Distributions/dividends declared:
$2.545 per common share (138,484) (138,484)
$2.157 per Series A preferred share (13,050) (13,050)
$1.44 per Series B depositary
preferred share (8,373) (8,373)
Net income 114,839 114,839
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 295,000 69,284 693 2,142,250 (78,839) (41,487) 2,317,617
Issuance of common shares 7 5 5
Repurchase of common shares (98,387) (98,387)
Allocation to minority interest (3,778) (3,778)
Distributions/dividends declared:
$2.20 per common share (146,891) (146,891)
$1.95 per Series A preferred share (11,797) (11,797)
$2.25 per Series B depositary
preferred share (12,938) (12,938)
Net income 131,080 131,080
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1999 $ 295,000 69,291 $ 693 $2,138,477 $ (119,385) $ (139,874) $2,174,911
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 131,080 $ 114,839 $ 63,650
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of assets ............................................ (236) (477)
Depreciation ...................................................... 152,948 90,835 50,798
Amortization of deferred financing fees and organization costs .... 1,816 1,985 1,468
Amortization of unearned officers' and directors' compensation .... 652 830 1,017
Equity in income from unconsolidated entities ..................... (8,484) (7,017) (6,963)
Extraordinary charge for write off of deferred financing fees ..... 1,113 3,075 185
Minority interest in Operating Partnership ........................ 4,696 6,500 5,817
Minority interest in other partnerships ........................... 2,713 1,121 573
Changes in assets and liabilities, net of effects of acquisitions:
Due from Lessees .................................................. 574 (3,035) (13,382)
Deferred financing fees ........................................... (9,313) (4,348) (8,825)
Other assets ...................................................... (282) (602) (1,175)
Accrued expenses and other liabilities ............................ 5,088 (11,123) 4,315
----------- ----------- -----------
Net cash flow provided by operating activities .......... 282,365 192,583 97,478
----------- ----------- -----------
Cash flows used in investing activities:
Acquisition of hotels ............................................. (10,802) (326,276) (574,100)
Acquisition of unconsolidated entities ............................ (7,452) (4,230) (65,271)
Improvements and additions to hotels .............................. (222,320) (119,107) (52,700)
Note receivable from unconsolidated entity ........................ (7,766)
Bristol interim credit facility ................................... (120,000)
Sale of hotels .................................................... 15,476 7,815
Cash distributions from unconsolidated entities ................... 19,581 19,066 4,211
----------- ----------- -----------
Net cash flow used in investing activities .............. (205,517) (550,498) (687,860)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings .......................................... 1,034,667 1,013,003 679,144
Repayment of borrowings ........................................... (804,915) (658,524) (445,900)
Proceeds from sale of common stock ................................ 516,700
Proceeds from sale of preferred stock ............................. 143,750
Costs associated with public offerings ............................ (4,687) (27,600)
Purchase of treasury stock ........................................ (98,387) (41,106)
Proceeds from exercise of stock options ........................... 8 3,884 592
Distributions paid to limited partners ............................ (7,559) (6,671) (6,026)
Distributions paid to common shareholders ......................... (173,244) (98,754) (63,875)
Dividends paid to preferred shareholders .......................... (25,987) (16,937) (11,797)
----------- ----------- -----------
Net cash flow provided (used) by financing activities ... (75,417) 375,064 600,132
----------- ----------- -----------
Net change in cash and cash equivalents ................................... 1,431 17,149 9,750
Cash and cash equivalents at beginning of years ........................... 34,692 17,543 7,793
----------- ----------- -----------
Cash and cash equivalents at end of years ................................. $ 36,123 $ 34,692 $ 17,543
=========== =========== ===========
Supplemental cash flow information - interest paid ........................ $ 125,085 $ 72,215 $ 21,414
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 9
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
FelCor Lodging Trust Incorporated ("FelCor") is one of the nation's
largest hotel real estate investment trusts ("REIT"). At December 31, 1999, it
owned interests in 188 hotels with nearly 50,000 rooms and suites (collectively
the "Hotels") through its greater than 95% equity interest in FelCor Lodging
Limited Partnership (the "Operating Partnership"). FelCor, the Operating
Partnership, and their subsidiaries are herein referred to, collectively, as the
"Company". The Company owns 100% of the interest in 163 of the Hotels, a 90% or
greater interest in entities owning seven hotels, a 60% interest in an entity
owning two hotels and 50% interests in separate entities that own 16 hotels.
The Company is the owner of the largest number of Embassy Suites(R),
Crowne Plaza(R), Holiday Inn(R), and independently owned Doubletree(R) branded
hotels in the world. The following table provides a schedule of the Hotels, by
brand, operated by each of the Company's Lessees at December 31, 1999:
<TABLE>
<CAPTION>
NOT OPERATED
BRAND DJONT BRISTOL UNDER A LEASE TOTAL
----- ----- ------- ------------- -----
<S> <C> <C> <C> <C>
Embassy Suites 58 58
Holiday Inn 43 1 44
Doubletree and Doubletree Guest Suites(R) 16(1) 16
Crowne Plaza and Crowne Plaza Suites(R) 18 18
Holiday Inn Select(R) 10 10
Sheraton(R) and Sheraton Suites(R) 9 1(2) 10
Hampton Inn(R) 9 9
Holiday Inn Express(R) 5 5
Fairfield Inn(R) 5 5
Harvey Hotel(R) 4 4
Independents 2 1 3
Courtyard by Marriott(R) 2 2
Four Points by Sheraton(R) 1 1
Hilton Suites(R) 1 1
Homewood Suites(R) 1 1
Westin(R) 1 1
-- --- -- ---
Total Hotels 85 100 3 188
== === == ===
</TABLE>
(1) On January 1, 2000, two of these Doubletree Guest Suites hotels were
converted to the Embassy Suites brand.
(2) On January 1, 2000, a lease on this hotels became effective between the
Company and DJONT.
The Hotels are located in the United States (35 states) and Canada,
with a concentration in California (20 hotels), Florida (18 hotels), Georgia (15
hotels) and Texas (41 hotels). The following table provides information
regarding the net acquisition and disposition of hotels through December 31,
1999:
<TABLE>
<CAPTION>
NET HOTELS
ACQUIRED/(DISPOSED OF)
----------------------
<S> <C>
1994 7
1995 13
1996 23
1997 30
1998 120
1999 (5)
----
188
====
</TABLE>
F-7
<PAGE> 10
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION -- (CONTINUED)
At December 31, 1999, the Company leased 85 of the Hotels to DJONT
Operations, L.L.C., a Delaware limited liability company, or a consolidated
subsidiary thereof (collectively "DJONT"), and leased 100 of the Hotels to
Bristol Hotels & Resorts, or a consolidated subsidiary thereof ("Bristol" and,
together with DJONT, the "Lessees"). Three Hotels were operated without a lease.
Thomas J. Corcoran, Jr., the President, Chief Executive Officer, and a
Director of FelCor, and Hervey A. Feldman, Chairman Emeritus of FelCor,
beneficially own a 50% voting common equity interest in DJONT. The remaining 50%
nonvoting common equity interest is beneficially owned by the children of
Charles N. Mathewson, a director of FelCor and major initial investor in the
Company. At December 31, 1999, DJONT had entered into management agreements
pursuant to which 72 of the Hotels leased by it were managed by subsidiaries of
Hilton Hotels Corporation ("Hilton"), ten were managed by subsidiaries of
Starwood Hotels & Resorts Worldwide, Inc. ("Starwood"), and three were managed
by two unrelated management companies.
Bristol, an independent publicly owned company, at December 31, 1999,
leased and managed 100 Hotels and managed one hotel which operated without a
lease. Bristol is one of the largest independent hotel operating companies in
North America and operates the largest number of Bass Hotels & Resorts-branded
hotels in the world.
Certain reclassifications have been made to prior period financial
information to conform to the current period's presentation with no effect to
previously reported net income or shareholder's equity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of FelCor, the Operating Partnership, and their
consolidated subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investment in Hotels -- Hotels are stated at cost and are depreciated
using the straight-line method over estimated useful lives ranging from 31 to 40
years for buildings and improvements and three to seven years for furniture,
fixtures, and equipment.
The Company periodically reviews the carrying value of each Hotel to
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the hotel or that depreciation periods should be modified.
If facts or circumstances support the possibility of impairment, the Company
will prepare a projection of the undiscounted future cash flows, without
interest charges, of the specific hotel and determine if the investment in such
hotel is recoverable based on the undiscounted future cash flows. If impairment
is indicated, an adjustment will be made to the carrying value of the hotel
based on discounted future cash flows. The Company does not believe that there
are any factors or circumstances indicating impairment of any of its investment
in the Hotels.
Maintenance and repairs are charged to the Lessees' operations as
incurred; major renewals and betterments by the Company are capitalized. Upon
the sale or disposition of a fixed asset, the asset and related accumulated
depreciation are removed from the accounts and the related gain or loss is
included in operations.
F-8
<PAGE> 11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Investment in Unconsolidated Entities --The Company owns a 50% interest
in various partnerships or limited liability companies in which the partners
jointly make all material decisions concerning the business affairs and
operations. The Company also owns a 97% nonvoting interest in an entity.
Accordingly, the Company does not control these entities and carries its
investment in unconsolidated entities at cost, plus its equity in net earnings,
less distributions received since the date of acquisition. Equity in net
earnings is adjusted for the straight-line amortization, over a 40-year period,
of the difference between the Company's cost and its proportionate share of the
underlying net assets at the date of acquisition.
Cash and Cash Equivalents -- All highly liquid investments with a
maturity of three months or less when purchased are considered to be cash
equivalents.
Deferred Expenses -- Deferred expenses are recorded at cost.
Amortization is computed using the interest method over the maturity of the
related debt.
Revenue Recognition -- Percentage lease revenue is reported as income
over the lease term as it becomes receivable from the Lessees according to the
provisions of the Percentage Lease agreements. The Lessees are in compliance
with their rental obligations under the Percentage Leases.
Capitalized Interest -- The Company capitalizes interest and certain
other costs relating to hotels undergoing major renovations and redevelopments.
Such costs capitalized in 1999 and 1998 were approximately $7.4 million and $5.9
million, respectively.
Net Income Per Common Share -- Basic earnings per share have been
computed by dividing net income by the weighted average number of common shares
outstanding. Diluted earnings per share have been computed by dividing net
income by the weighted average number of common shares and equivalents
outstanding. Common stock equivalents represent shares issuable upon exercise of
stock options and unvested officers' restricted stock grants.
At December 31, 1999, 1998, and 1997, the Company's Series A Cumulative
Preferred Stock, if converted to common shares, would be antidilutive;
accordingly the Series A Cumulative Preferred Stock is not assumed to be
converted in the computation of diluted earnings per share.
Distributions and Dividends -- FelCor and the Operating Partnership pay
regular quarterly distributions on their Common Stock and Units. Additionally,
the Company pays regular quarterly dividends on preferred stock in accordance
with its preferred stock dividend requirements. FelCor's ability to make
distributions is dependent on its receipt of quarterly distributions from the
Operating Partnership.
For 1999 FelCor paid regular dividends of $2.20 per common share, $1.95
per share of Series A Cumulative Preferred Stock ("Series A Preferred Stock"),
and $2.25 per depositary share evidencing Series B Redeemable Preferred Stock
("Series B Preferred Stock").
Minority Interest in Operating Partnership -- Minority interest in the
Operating Partnership represents the proportionate share of the equity in the
Operating Partnership not owned by FelCor. Income is allocated to minority
interest based on the weighted average percentage ownership throughout the year.
F-9
<PAGE> 12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes -- The Company has elected to be treated as a REIT under
Sections 856 to 860 of the Internal Revenue Code. Accordingly, no provision for
federal income taxes has been reflected in the financial statements.
Earnings and profits, which will determine the taxability of
distributions to shareholders, will differ from income reported for financial
reporting purposes primarily due to the differences for federal income tax
purposes in the estimated useful lives used to compute depreciation.
Distributions made in 1999 and 1998 represent an approximately 7% and 17% return
of capital, respectively, for federal income tax purposes.
3. BRISTOL MERGER
On July 28, 1998, the Company completed the merger of Bristol Hotel
Company's real estate holdings with and into the Company (the "Merger"). The
Merger resulted in the net acquisition of 107 primarily full-service hotels in
return for approximately 31.0 million shares of newly issued Common Stock.
A summary of the fair values of the assets and liabilities acquired in
the Merger, recorded at the date of acquisition, is as follows (in thousands):
<TABLE>
<S> <C>
Investment in hotels ............................... $ 2,014,250
Investment in unconsolidated entity ................ 16,839
Other assets ....................................... 4,151
------------
2,035,240
------------
Common stock issued ................................ 1,146,081
Debt obligations assumed ........................... 868,615
Accrued expenses and other liabilities assumed ..... 55,297
------------
2,069,993
------------
Total cash received in Merger ...................... $ 34,753
============
</TABLE>
The Merger has been accounted for as a purchase, and, accordingly, the
results of operations since the date of acquisition are included in the
Company's consolidated statements of operations.
4. INVESTMENT IN HOTELS
Investment in hotels at December 31, 1999 and 1998, consist of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land ................................... $ 346,862 $ 328,591
Building and improvements .............. 3,616,269 3,470,854
Furniture, fixtures and equipment ...... 383,931 300,501
Construction in progress ............... 18,837 33,708
----------- -----------
4,365,899 4,133,654
Accumulated depreciation ............... (330,555) (178,072)
----------- -----------
$ 4,035,344 $ 3,955,582
=========== ===========
</TABLE>
F-10
<PAGE> 13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENT IN UNCONSOLIDATED ENTITIES
At December 31, 1999, the Company owned 50% interests in separate
entities owning 16 hotels, a parcel of undeveloped land, and a condominium
management company. The Company also owned a 97% nonvoting interest in an entity
that is developing condominiums for sale and that owns an annex to a hotel owned
by the Company. The Company accounts for its investments in these unconsolidated
entities under the equity method.
Summarized unaudited combined financial information for 100% of these
unconsolidated entities is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Balance sheet information:
Investment in hotels .......... $ 337,444 $ 269,881
Non-recourse mortgage debt .... $ 254,668 $ 176,755
Equity ........................ $ 101,120 $ 105,347
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statements of operations information:
Total revenues ................................... $ 69,146 $ 57,006 $ 54,000
Net income ....................................... $ 21,726 $ 17,438 $ 17,044
Net income attributable to the Company ........... 10,626 8,719 8,522
Amortization of cost in excess of book value ..... (2,142) (1,702) (1,559)
-------- -------- --------
Equity in income from unconsolidated entities .... $ 8,484 $ 7,017 $ 6,963
======== ======== ========
</TABLE>
6. DEBT
Debt at December 31, 1999 and 1998, consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
COLLATERAL INTEREST RATE MATURITY DATE 1999 1998
---------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FLOATING RATE DEBT:
-------------------
Line of credit (a) LIBOR + 163bp June 2001 $ 351,000 $ 411,000
Senior term loan (a) LIBOR + 250bp March 2004 250,000
Term loan Unsecured LIBOR + 150bp December 1999 250,000
Mortgage debt 3 hotels LIBOR + 200bp February 2003 62,553
Other Unsecured Up to LIBOR + 200bp Various 32,282 34,750
---------- ----------
Total floating rate debt 695,835 695,750
---------- ----------
FIXED RATE DEBT:
----------------
Line of credit - swapped (a) 7.17 - 7.56% March 2000-2001 313,000 325,000
Publicly-traded term notes (a) 7.38% October 2004 174,377 174,249
Publicly-traded term notes (a) 7.63% October 2007 124,221 124,122
Mortgage debt 15 hotels 7.24% November 2022 142,542 145,062
Senior term loan - swapped (a) 8.30% March 2000-2004 125,000
Mortgage debt 3 hotels 6.97% December 2002 43,836
Mortgage debt 7 hotels 7.54% April 2009 99,075
Mortgage debt 6 hotels 7.55% June 2009 74,483
Other 13 hotels 6.96% - 7.23% 2000 - 2005 85,421 86,715
---------- ----------
Total fixed rate debt 1,138,119 898,984
---------- ----------
Total debt $1,833,954 $1,594,734
========== ==========
</TABLE>
(a) Collateralized by stock and partnership interests in certain
subsidiaries of FelCor.
F-11
<PAGE> 14
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT -- (CONTINUED)
On March 4, 1999 the Company completed a $63 million first mortgage
term loan ("Mortgage Loan"). The Mortgage Loan is collateralized by three
hotels, bears interest at 200 basis points over LIBOR, matures in February 2003
and amortizes over 25 years. The proceeds from this loan were used to pay off a
$44 million mortgage loan due December 2002 and to acquire ownership of land
previously held under ground leases.
On April 1, 1999, the Company entered into a $375 million term loan
("the Senior Term Loan") increasing its credit facilities to $1.2 billion,
consisting of the Senior Term Loan which matures in March 2004 and an $850
million revolving line of credit ("Line of Credit") which matures in June 2001.
The Line of Credit, Senior Term Loan and the Company's publicly traded term
notes are collateralized by stock and partnership interests in certain
subsidiaries of FelCor. The financial covenants in the Senior Term Loan are
consistent with those in the Company's existing Line of Credit. If the Company
achieves investment grade credit ratings from the applicable rating agencies, or
when the Senior Term Loan is retired, the stock and partnership interest
collateral will be released. The proceeds of the Senior Term Loan were used to
prepay a $250 million term loan, which was to mature on December 31, 1999, and
initially to reduce borrowings under the Company's Line of Credit. Interest
payable on borrowings under the credit facilities is variable, determined from a
ratings and leverage-based pricing matrix, ranging from 87.5 basis points to 275
basis points above LIBOR (30-day LIBOR at December 31, 1999, was 5.83%). The
interest rate spread on the Line of Credit ranged from 150 to 162.5 basis points
in 1999. Additionally, the Company is required to pay an unused commitment fee
on the Line of Credit which is variable, determined from a ratings-based pricing
matrix, ranging from 20 to 30 basis points. In 1999 and 1998, the Company wrote
off approximately $1.1 million and $2.5 million, respectively, of deferred
financing fees relating to the term loan of $250 million and the previous
unsecured credit facility of $550 million, respectively. For the years ended
December 31, 1999, 1998, and 1997, the Company paid interest on its unsecured
credit facilities at weighted average interest rates of 7.1%, 7.1%, and 7.6%,
respectively. At December 31, 1999, the Company had borrowing capacity under its
Line of Credit of $186 million.
On April 1, 1999, the Company also closed a 10-year, $100 million
mortgage loan (the "April 1999 First Mortgage Term Loan"). The April 1999 First
Mortgage Term Loan is non-recourse (with certain exceptions), is collateralized
by seven Embassy Suites hotels, carries a fixed rate coupon of 7.54%, matures in
April 2009 and amortizes over 25 years. The proceeds from this loan were used
initially to reduce outstanding borrowings under the Company's Line of Credit.
On May 13, 1999, the Company closed a 10-year, $75 million mortgage
loan. This loan is non-recourse (with certain exceptions), is collateralized by
six Embassy Suites hotels, carries a fixed rate coupon of 7.55%, matures in June
2009 and amortizes over 25 years. The proceeds from this loan were used
initially to reduce outstanding borrowings under the Company's Line of Credit.
The Line of Credit and the Senior Term Loan contain various affirmative
and negative covenants including limitations on total indebtedness, total
secured indebtedness, and cash distributions, as well as the obligation to
maintain a certain minimum tangible net worth and certain minimum interest and
debt service coverage ratios. At December 31, 1999, the Company was in
compliance with all such covenants.
The Company's other borrowings contain affirmative and negative
covenants that are generally equal to or less restrictive than the Line of
Credit and Senior Term Loan. Most of the mortgage debt is non-recourse to the
Company (with certain exceptions) and contain provisions allowing for the
substitution of collateral upon satisfaction of certain conditions. Most of the
mortgage debt is prepayable; subject, however, to various prepayment, yield
maintenance, or defeasance obligations.
F-12
<PAGE> 15
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT -- (CONTINUED)
Future scheduled principal payments on debt obligations at December 31,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
2000 ................................... $ 42,608
2001 ................................... 684,588
2002 ................................... 9,622
2003 ................................... 90,768
2004 ................................... 559,306
2005 and thereafter .................... 448,463
---------------
1,835,355
Discount accretion over term ........... (1,401)
---------------
$ 1,833,954
===============
</TABLE>
To manage the relative mix of its debt between fixed and variable rate
instruments, the Company has entered into interest rate swap agreements with six
financial institutions. These interest rate swap agreements modify a portion of
the interest characteristics of the Company's outstanding debt under its Line of
Credit and Senior Term Loan without an exchange of the underlying principal
amount and effectively convert variable rate debt to a fixed rate. The fixed
rates to be paid, the effective fixed rate, and the variable rate to be received
by the Company at December 31, 1999, are summarized in the following table:
<TABLE>
<CAPTION>
EFFECTIVE
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 12/31/99 MATURITY
--------------- ------------ ---------- ------------- --------
<S> <C> <C> <C> <C>
$113 million 5.9300% 7.5550% 7.7450% March 2000
$ 75 million 5.9375% 7.5625% 7.7450% March 2000
$ 25 million 5.5750% 7.1830% 8.1013% July 2001
$ 25 million 5.5480% 7.1730% 8.1013% July 2001
$ 75 million 5.5550% 7.1800% 8.1013% July 2001
$100 million 5.7955% 8.2960% 8.9763% July 2003
$ 25 million 5.8260% 8.3260% 8.9763% July 2003
------------
$438 million
============
</TABLE>
The differences to be paid or received by the Company under the terms
of the interest rate swap agreements are accrued as interest rates change and
recognized as an adjustment to interest expense by the Company, pursuant to the
terms of its interest rate agreement, and will have a corresponding effect on
its future cash flows. Agreements such as these contain a credit risk in that
the counterparties may be unable to meet the terms of the agreement. The Company
minimizes that risk by evaluating the creditworthiness of its counterparties,
who are limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires
disclosures about the fair value for all financial instruments, whether or not
recognized, for financial statement purposes. Disclosures about fair value of
financial instruments are based on pertinent information available to management
as of December 31, 1999.
F-13
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Considerable judgement is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that could be realized on disposition of
the financial instruments. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Management estimates the fair value of (i) accounts receivable,
accounts payable and accrued expenses approximate carrying value due to the
relatively short maturity of these instruments; (ii) the note receivable
approximates carrying value based upon effective borrowing rates for issuance of
debt with similar terms and remaining maturities; (iii) the borrowings under the
Line of Credit, Senior Term loan and various other mortgage notes approximate
carrying value because these borrowings accrue interest at floating interest
rates based on market. The estimated fair value of the Company's fixed rate debt
of $700 million is $568 million at December 31, 1999, based on current market
interest rates estimated by the Company for similar debt with similar
maturities.
The Company manages its debt portfolio by using interest rate swaps to
achieve an overall desired position of fixed and floating rates. The fair value
of interest rate hedge contracts is estimated based on quotes from the market
makers of these instruments and represents the estimated amounts the Company
would expect to receive or pay to terminate the contracts. Credit and market
risk exposures are limited to the net interest differentials. The estimated
unrealized net gain on these instruments was approximately $6.3 million at
December 31, 1999, which represents the amount the Company would receive to
terminate the agreements based on current market rates.
8. CAPITAL STOCK
As of December 31, 1999, the Company had approximately $946 million of
common stock, preferred stock, debt securities, and/or common stock warrants
available for offerings under shelf registration statements previously declared
effective.
Preferred Stock
The Board of Directors is authorized to provide for the issuance of up
to 20,000,000 shares of Preferred Stock in one or more series, to establish the
number of shares in each series, to fix the designation, powers preferences and
rights of each such series, and the qualifications, limitations or restrictions
thereof.
In 1996 the Company issued 6.1 million shares of its $1.95 Series A
Preferred Stock at $25 per share. The Series A Preferred Stock bears an annual
dividend equal to the greater of $1.95 per share or the cash distributions
declared or paid for the corresponding period on the number of shares of Common
Stock into which the Series A Preferred Stock is then convertible. Each share of
the Series A Preferred Stock is convertible at the shareholder's option to
0.7752 shares of Common Stock, subject to certain adjustments, and may not be
redeemed by the Company before April 30, 2001.
On May 1, 1998, the Company issued 5.75 million depositary shares,
representing 57,500 shares of 9% Series B Preferred Stock, at $25 per depositary
share. The Series B Preferred Stock and the corresponding depositary shares may
be called by FelCor at par on or after May 7, 2003, have no stated maturity,
sinking fund or mandatory redemption, and are not convertible into any other
securities of FelCor. The Series B Preferred Stock has a liquidation preference
of $2,500 per share (equivalent to $25 per depositary share) and is entitled to
annual dividends at the rate of 9% of the liquidation preference (equivalent to
$2.25 annually per depositary share).
F-14
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CAPITAL STOCK -- (CONTINUED)
At December 31, 1999, all dividends then payable on the Series A and
Series B Preferred Stock had been paid.
Operating Partnership Units
FelCor is the sole general partner of the Operating Partnership and is
obligated to contribute the net proceeds from any issuance of its equity
securities to the Operating Partnership in exchange for units of partnership
interest ("Units") corresponding in number and terms to the equity securities
issued by it. Units of limited partner interest may also be issued by the
Operating Partnership to third parties in exchange for cash or property, and
Units so issued to third parties are redeemable at the option of the holders
thereof for a like number of shares of FelCor Common Stock or, at the option of
FelCor, for the cash equivalent thereof.
Treasury Stock Repurchase Program
On September 3, 1999, FelCor announced that its Board of Directors had
authorized the Company to repurchase up to $100 million of its outstanding
common shares. At December 31, 1999, the Company had completed the repurchase of
approximately 5.8 million common shares at a cost of approximately $98.4 million
which has been recorded as treasury stock.
9. TAXES, INSURANCE AND OTHER
Taxes, insurance and other is comprised of the following for the years
ended December 31, 1999, 1998, and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Real estate and personal property taxes .......... $ 52,118 $ 32,892 $ 18,976
Property insurance ............................... 3,481 2,341 1,627
State franchise taxes and Canadian income tax .... 3,973 1,609 718
Other ............................................ 316 162
---------- ---------- ----------
Total taxes, insurance, and other ..... $ 59,572 $ 37,158 $ 21,483
========== ========== ==========
</TABLE>
10. LAND LEASES
The Company leases land occupied by certain hotels from third parties
under various operating leases. Certain leases contain contingent rent features
based on gross revenue at the respective hotels. Future minimum lease payments
under the Company's land lease obligations at December 31, 1999, are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
2000 $ 18,358
2001 18,346
2002 17,951
2003 17,767
2004 17,703
2005 and thereafter 265,115
---------
$ 355,240
=========
</TABLE>
F-15
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Commitments
The Company is to receive rental income from the Lessees under the
Percentage Leases, which expire in 2002 (five hotels), 2003 (three hotels), 2004
(12 hotels), 2005 (19 hotels), 2006 (26 hotels), 2007 (37 hotels), 2008 (54
hotels), and thereafter (15 hotels). The rental income under the Percentage
Leases between 14 of the unconsolidated entities, of which the Company owns 50%,
is payable by the Lessee to the respective entities and is not included in the
following schedule of future lease commitments to the Company. Minimum future
rental income (i.e., base rents) payable to the Company under these
noncancelable operating leases at December 31, 1999 is as follows (in
thousands):
<TABLE>
<CAPTION>
LESSEES
----------------------
DJONT BRISTOL TOTAL
----- ------- -----
YEAR
----
<S> <C> <C> <C>
2000........................................... $ 140,235 $ 180,055 $ 320,290
2001........................................... 143,609 180,076 323,685
2002........................................... 143,966 180,049 324,015
2003........................................... 130,445 177,302 307,747
2004 126,885 169,930 296,815
2005 and thereafter............................ 392,499 650,239 1,042,738
----------- ---------- ----------
$ 1,077,639 $1,537,651 $2,615,290
=========== ========== ==========
</TABLE>
The Percentage Lease revenue is based on a percentage of room and suite
revenues, and a varying combination of food and beverage revenues, food and
beverage rents, and other revenues of the Hotels. Both the base rent and the
threshold suite revenue in each lease computation are subject to adjustments for
changes in the Consumer Price Index ("CPI"). The adjustment is calculated at the
beginning of each calendar year for the hotels acquired prior to July of the
previous year. The adjustment in any lease year may not exceed 7%. The CPI
adjustments made in January 2000 ranged from 1.05% to 2.20%, dependent upon the
Lessee. The CPI adjustments for 1999 ranged from 0.55% to 1.5%, dependent upon
the Lessee, and in 1998 was 0.50%.
Under the Percentage Leases, the Operating Partnership is obligated to
pay the costs of real estate and personal property taxes, property insurance,
maintenance of underground utilities and structural elements of the Hotels, and
to set aside a portion of the hotels' revenues (varying from 4% of room and
suite revenue to 3% of total hotel revenue) per month, on a cumulative basis, to
fund capital expenditures for the periodic replacement or refurbishment of
furniture, fixtures and equipment required for the retention of the franchise
licenses with respect to the Hotels. Included in cash and cash equivalents at
December 31, 1999 and 1998, were cash balances held by the Hotel managers for
these capital expenditures of $19.9 million and $14.8 million, respectively.
Related Party Transactions
The Company shares the executive offices and certain employees with
FelCor, Inc., and DJONT, and each company bears its share of the costs thereof,
including an allocated portion of the rent, compensation of certain personnel
(other than Mr. Corcoran, whose compensation is borne solely by the Company),
office supplies, telephones, and depreciation of office furniture, fixtures, and
equipment. Any such allocation of shared expenses to the Company is required to
be approved by a majority of the Independent Directors. During 1999, 1998, and
1997, the Company paid approximately $5.7 million (approximately 89.5%), $2.8
million (approximately 63%), and $1.3 million (approximately 38%), respectively,
of the allocable expenses under this arrangement.
F-16
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
Included in the mortgage debt of the unconsolidated entities is a
mortgage loan payable to the Company in the amount of $7.8 million for 1999 and
1998. The note bears a fixed interest rate of 8% per annum with a 30 year
amortization, matures on December 31, 2004, and is collateralized by a Mortgage
and Assignment of Leases and Rents with respect to the annex of the hotel owned
by an entity in which the Company has a 97% nonvoting interest.
12. SUPPLEMENTAL CASH FLOW DISCLOSURE
The Company purchased certain assets and assumed certain liabilities in
connection with the acquisition of hotels in 1998 and 1997. During 1999 the
Company purchased the land related to three hotels, which was previously leased.
These purchases were recorded under the purchase method of accounting. The fair
values of the acquired assets and liabilities recorded at the date of
acquisition are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Assets acquired ................... $ 19,776 $ 2,427,027 $ 588,053
Liabilities assumed ............... (7,800) (940,906) (5,932)
Common Stock and Units issued ..... (1,174) (1,152,856)
Minority interest contribution .... (6,989) (8,021)
----------- ----------- -----------
Net cash paid .......... $ 10,802 $ 326,276 $ 574,100
=========== =========== ===========
</TABLE>
Under the Merger Agreement with Bristol Hotel Company, FelCor provided
Bristol a $120 million interim credit facility (the "Interim Credit Facility").
At July 28, 1998, the Interim Credit facility was assumed and canceled by FelCor
upon completion of the Merger.
Approximately $39.7 million, $67.3 million, and $24.7 million of
aggregate preferred stock dividends and common stock distributions had been
declared as of December 31, 1999, 1998, and 1997, respectively. These amounts
were paid in the following January of each year.
In 1998 the Company entered into a joint venture, in which the Company
contributed a hotel with a net book value of $53.9 million for a 60% equity
interest in the venture. The Company has consolidated this venture in the
financial statements and recorded increases of $34.4 million in investment in
hotels and minority interest in other partnerships.
13. STOCK BASED COMPENSATION PLANS
The Company sponsors three restricted stock and stock option plans (the
"FelCor Plans"). In addition, upon completion of the Merger, FelCor assumed two
stock option plans previously sponsored by Bristol Hotel Company (the "Bristol
Plans"). FelCor was initially obligated to issue up to 1,271,103 shares of its
Common Stock pursuant to the Bristol Plans. No additional options may be awarded
under the Bristol Plans. The FelCor Plans and the Bristol Plans are referred to
collectively as the "Plans".
The Company applies APB Opinion 25 and related interpretations in
accounting for the Plans. In 1995 the Financial Accounting Standards Board
("FASB") issued FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") which, if fully adopted by the Company, would change
the methods the Company applies in recognizing the cost of the Plans. Adoption
of the cost recognition provisions of SFAS 123 is optional and the Company has
decided not to adopt the provisions of SFAS 123. However, pro forma disclosures
as if the Company adopted the cost recognition provisions of SFAS 123 are
required by SFAS 123 and are presented below.
F-17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
Stock Options
FelCor is authorized to issue 2,950,000 shares of Common Stock under
the FelCor Plans pursuant to awards granted in the form of incentive stock
options, non-qualified stock options, and restricted stock. All options have
10-year contractual terms and vest over five equal annual installments (20% per
year), beginning in the year following the date of grant.
The options outstanding under the Bristol Plans generally vest either
in four equal annual installments (25% per year) beginning in the second year
following the original date of award, in five equal annual installments (20% per
year) beginning in the year following the original date of award, or on a single
date that is three to five years following the original date of the date of
award.
A summary of the status of FelCor's non-qualified stock options under
the Plans as of December 31, 1999, 1998, and 1997, and the changes during the
years are presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year ... 2,540,466 $22.53 1,670,500 $29.96 1,047,500 $25.67
Granted (A) (B) ........................ 9,750 $22.13 2,445,813 $20.54 752,000 $35.70
Exercised .............................. (760) $10.33 (332,915) $11.67 (31,000) $19.11
Forfeited (B) .......................... (52,683) $32.41 (1,242,932) $31.51 (98,000) $31.56
---------- ---------- ----------
Outstanding at end of year ............. 2,496,773 $22.32 2,540,466 $22.53 1,670,500 $29.96
========== ========== ==========
Exercisable at end of year ............. 906,675 $24.58 796,499 $24.64 411,500 $24.42
</TABLE>
(A) 1998 grants include options covering 1,271,103 shares of Common
Stock issuable as a result of the assumption of the Bristol Plans.
(B) To enable FelCor to preserve its stock options as a meaningful
element of compensation in 1998, existing option holders under the
FelCor Plans employed by FelCor on a full-time basis were offered the
opportunity to exchange their existing options (having exercise prices
ranging from $26.44 to $38.56 per share) for a lesser number of new
options having an equal value under the Black-Scholes option pricing
model. Twenty-two employees accepted this offer in 1998, surrendering
for cancellation existing options covering an aggregate of 1,151,500
shares of Common Stock at a weighted average exercise price of $32.807
per share for new options covering an aggregate of 840,393 shares of
Common Stock at an exercise price of $22.125 per share. The new options
have the same expiration dates and vesting schedules as the options
surrendered for cancellation; however, none of the new options were
exercisable prior to January 1, 2000.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD AVG. EXERCISABLE WGTD. AVG.
EXERCISE PRICES AT 12/31/99 LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
--------------- ----------- ----- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$10.33 to $29.50 2,206,819 7.21 $20.80 734,890 $22.21
$30.28 to $36.63 289,954 7.63 $33.92 171,785 $34.72
---------------- ---------- ---- ------ -------- ------
$10.33 to $36.63 2,496,773 7.26 $22.32 906,675 $24.58
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions: dividend yield of 9.94%; risk free interest rates are
different for each grant and range from 4.65% to 6.2%; the expected lives of
options are 6 years; and volatility of 18.44% for 1999 grants, 32.90% for 1998
grants, and 22.67% for grants issued in 1997. The weighted average fair value of
options granted during 1999, 1998, and 1997 was $1.07, $3.35, and $4.31 per
share, respectively.
F-18
<PAGE> 21
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
Restricted Stock
A summary of the status of the Company's restricted stock grants as of
December 31, 1999, 1998, and 1997 and the changes during the years are presented
below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
FAIR MARKET FAIR MARKET FAIR MARKET
VALUE VALUE VALUE
# SHARES AT GRANT # SHARES AT GRANT # SHARES AT GRANT
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year ....... 125,375 $ 28.97 115,500 $ 29.03 84,500 $ 26.04
--------- --------- ---------
Granted:
With 5-year pro rata vesting ............ 5,000 $ 21.25 35,000 $ 35.00
Vest 100% at grant date ................. 4,875 $ 35.63 6,000 $ 35.00
Vest 100% within 12 months of grant ..... 2,500 $ 36.94
--------- --------- ---------
Total granted .............................. 9,875 $ 28.35 43,500 $ 35.11
Forfeited .................................. (12,500) $ 30.00
--------- --------- ---------
Outstanding at end of year ................. 125,375 $ 28.97 125,375 $ 28.97 115,500 $ 29.03
========= ========= =========
Vested at end of year ...................... 83,575 $ 28.35 65,175 $ 28.26 40,400 $ 26.60
</TABLE>
Pro Forma Net Income and Net Income Per Common Share
Had the compensation cost for the Company's stock-based compensation
plans been determined in accordance with SFAS 123, the Company's net income and
net income per common share for 1999, 1998, and 1997 would approximate the pro
forma amounts below (in thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
SFAS 123 charge................... $ 1,606 $ 1,799 $ 1,447
APB 25 charge..................... $ 652 $ 829 $ 1,017
Net income applicable to
common shareholders............ $ 106,345 $ 105,391 $ 93,416 $ 92,446 $ 51,853 $ 51,423
Diluted net income applicable
to common shareholders
per common share............... $ 1.57 $ 1.56 $ 1.86 $ 1.84 $ 1.64 $ 1.63
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts.
14. LESSEES
All of the Company's percentage lease revenue is derived from the
Percentage Leases with the Lessees. Certain information, related to DJONT's
financial statements, is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
---------- ---------
<S> <C> <C>
Balance Sheet Information:
Cash and cash equivalents........................... $ 20,127 $ 28,538
Accounts receivable, net............................ $ 28,601 $ 27,561
Total assets........................................ $ 71,659 $ 63,972
Due to FelCor Lodging Trust Incorporated............ $ 22,064 $ 16,875
Accounts payable.................................... $ 12,742 $ 13,508
Shareholders' deficit............................... $ (13,142) $ (8,231)
</TABLE>
F-19
<PAGE> 22
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. LESSEES -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Statement of Operations Information:
Room and suite revenue .............. $ 649,323 $ 618,122 $ 456,614
Percentage lease expenses ........... $ 307,532 $ 289,891 $ 216,990
Net income (loss) ................... $ (4,911) $ 844 $ (2,672)
</TABLE>
Certain entities owning interests in DJONT and managers for certain
hotels have agreed to make loans to DJONT of up to an aggregate of approximately
$17.3 million to the extent necessary to enable DJONT to pay rent and other
obligations due under the respective Percentage Leases relating to a total of 38
of the Hotels. No such loans were outstanding at December 31, 1999.
DJONT engages third-party managers to operate the Hotels leased by it
and generally pays such managers a base management fee based on a percentage of
room and suite revenue and an incentive management fee based on DJONT's income
before overhead expenses for each hotel. In certain instances, the hotel
managers have subordinated fees and are committed to make subordinated loans to
DJONT, if needed, to meet its rental and other obligations under the Percentage
Leases.
Bristol is a publicly traded company whose stock is listed on the New
York Stock Exchange under the symbol BH and that files financial statements in
accordance with the Securities Exchange Act of 1934, as amended.
Bristol serves as both the lessee and manager of the 100 Hotels leased
to it by the Company at December 31, 1999, and, as such, is compensated for both
roles through the profitability of the Hotels, after meeting their operating
expenses and rental obligations under the Percentage Leases.
Bristol has entered into an absolute and unconditional guarantee of the
obligations of the Bristol Lessees under the Percentage Leases, and is required
to maintain a minimum liquid net worth. A portion of this liquid net worth is
being satisfied through a letter of credit for the benefit of the Company. This
Letter of Credit is subject to periodic reductions upon satisfaction of certain
conditions and, at December 31, 1999, totaled $9.1 million. According to
Bristol's press release dated February 1, 2000, for the year ended December 31,
1999 and the period from July 28, 1998 through December 31, 1998, Bristol had
net income of $8.2 million and $2.6 million, respectively, and at December 31,
1999 and 1998, had stockholders' equity of $43.1 million and $35.4 million,
respectively.
At December 31, 1999, the Company owned interests in 188 Hotels
operating under various brand names. The Hotels generally operate pursuant to
franchise license agreements which require the payment of fees based on a
percentage of room and suite revenue. These fees are paid by the Lessees.
15. EMPLOYEE BENEFITS
The Company offers a 401(k) plan, health insurance benefits and a
deferred compensation plan to its employees. In 1999, the Company's matching
contribution to the 401(k) plan was $382,000 and the cost of health insurance
benefits were $217,000. The deferred compensation plan offered by the Company is
available only to directors and employees making in excess of $100,000 annually.
The Company makes no matching or other contributions to the deferred
compensation plan other than the payment of its operating and administrative
expenses.
F-20
<PAGE> 23
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that are
consistent with the Company's method of internal reporting, which segments its
business by Lessee. The Company's Lessees at December 31, 1999, were DJONT and
Bristol. Prior to July 28, 1998 (the date of the Bristol Merger), the Company
had only one lessee, DJONT.
The following tables present information about the reportable segments for the
year ended December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
YEAR ENDED DECEMBER 31, 1999 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
----------------------------------------------- ----------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Information:
Percentage lease revenue....................... $ 256,128 $ 234,765 $ 490,893 $ 490,893
Equity in income from unconsolidated
entities................................. $ 7,725 $ 759 $ 8,484 $ 8,484
Expenses:
Depreciation.............................. $ 80,969 $ 71,748 $ 152,717 $ 231 $ 152,948
Interest expense.......................... $ 125,435 $ 125,435
Income (loss) before nonrecurring items........ $ 147,868 $ 118,949 $ 266,817 $ (134,860) $ 131,957
Gain on sale of hotels......................... 236 236
Income (loss) before extraordinary change $ 147,868 $ 118,949 $ 266,817 $ (134,624) $ 132,193
Funds from operations:
Income (loss) before extraordinary charge...... $ 147,868 $ 118,949 $ 266,817 $ (134,624) $ 132,193
Series B preferred dividends................... (12,937) (12,937)
Depreciation................................... 80,969 71,748 152,717 231 152,948
Depreciation for unconsolidated entities....... 9,248 747 9,995 9,995
Minority interest in Operating Partnership..... 4,696 4,696
----------- ---------- ----------- ---------- -----------
Funds from operations.......................... $ 238,085 $ 191,444 $ 429,529 $ (142,634) $ 286,895
=========== ========== =========== ========== ===========
Weighted average common shares and
units outstanding (1)....................... 75,251
Other Information:
Total assets....................... $ 1,940,247 $2,243,916 $ 4,184,163 $ 68,555 $ 4,252,718
Capital expenditures............... $ 51,587 $ 170,733 $ 222,320 $ 222,320
</TABLE>
F-21
<PAGE> 24
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENT INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
YEAR ENDED DECEMBER 31, 1998 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
----------------------------------------------- ----------- ---------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Information:
Percentage lease revenue...................... $ 237,555 $ 90,480 $ 328,035 $ 328,035
Equity in income from unconsolidated
entities................................ $ 6,744 $ 273 $ 7,017 $ 7,017
Expenses:
Depreciation............................ $ 71,055 $ 19,619 $ 90,674 $ 161 $ 90,835
Interest expense........................ $ 73,182 $ 73,182
Income before nonrecurring item............... $ 143,736 $ 54,233 $ 197,969 $ (80,532) $ 117,437
Gain on sale of hotels........................ $ 477 $ 477
Income (loss) before extraordinary charge..... $ 143,736 $ 54,233 $ 197,969 $ (80,055) $ 117,914
Funds from operations:
Income (loss) before extraordinary charge..... $ 143,736 $ 54,233 $ 197,969 $ (80,055) $ 117,914
Series B preferred dividends.................. (8,373) (8,373)
Depreciation.................................. 71,055 19,619 90,674 161 90,835
Depreciation for unconsolidated entities...... 10,254 233 10,487 10,487
Minority interest in Operating Partnership....
6,500 6,500
----------- ---------- ----------- ---------- -----------
Funds from operations......................... $ 225,045 $ 74,085 $ 299,130 $ (81,767) $ 217,363
=========== ========== =========== ========== ===========
Weighted average common shares and
units outstanding (1)...................... 58,013
Other Information:
Total assets...................... $ 2,022,975 $2,093,328 $ 4,116,303 $ 59,080 $ 4,175,383
Capital expenditures.............. $ 65,264 $ 65,839 $ 131,103 $ 131,103
</TABLE>
(1) Weighted average common shares and units outstanding are computed
including dilutive options and unvested stock grants, and assuming
conversion of Series A preferred stock to common stock.
F-22
<PAGE> 25
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENT INFORMATION -- (CONTINUED)
The following table sets forth Percentage Lease revenue and investment
in hotel assets represented by the following geographical areas as of and for
the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
PERCENTAGE LEASE REVENUE INVESTMENT IN HOTEL ASSETS
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
California ......... $ 97,283 $ 63,733 $ 698,942 $ 642,965
Texas .............. 94,782 52,220 891,626 854,558
Florida ............ 61,516 45,719 542,298 519,280
Georgia ............ 39,247 23,691 355,519 349,429
Other States ....... 186,248 138,437 1,802,220 1,705,220
Canada ............. 11,817 5,123 75,294 62,202
---------- ---------- ---------- ----------
Total ... $ 490,893 $ 328,923 $4,365,899 $4,133,654
========== ========== ========== ==========
</TABLE>
17. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"). FAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB 133" which deferred the
effective date of FAS 133 for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company believes that, upon implementation, FAS 133
will not have a material impact on the financial statements of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which provides guidance on revenue
recognition. SAB 101 is effective for fiscal years beginning after December 15,
1999. SAB 101 requires that a lessor not recognize contingent rental income
until annual specified thresholds have been achieved by the lessee. During 1999,
the Company's leases had quarterly, rather than annual, specified rental
thresholds and the Company recognized contingent rentals earned in each quarter
pursuant to the Percentage Lease terms. The Company has reviewed the terms of
its Percentage Leases and has determined that the provisions of SAB 101 will not
materially impact the Company's revenue recognition on an interim basis in 2000,
since a significant majority of the Percentage Leases contain quarterly
specified thresholds. SAB 101 will not impact the Company's revenue recognition
on an annual basis given the Company maintains only calendar year leases. SAB
101 will have no impact on the Company's interim or annual cash flow from the
Lessees, and therefore on its ability to pay dividends.
F-23
<PAGE> 26
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY OPERATING RESULTS (UNAUDITED)
The Company's unaudited consolidated quarterly operating data for the
years ended December 31, 1999 and 1998, follows (in thousands, except per share
data). In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of quarterly results have
been reflected in the data. It is also management's opinion, however, that
quarterly operating data for hotel enterprises are not indicative of results to
be achieved in succeeding quarters or years. In order to obtain a more accurate
indication of performance, there should be a review of operating results,
changes in shareholders' equity and cash flows for a period of several years.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues ........................................ $126,917 $135,187 $124,082 $117,815
Income before nonrecurring items ...................... $ 36,747 $ 41,935 $ 30,021 $ 23,254
Net income applicable to common shareholders .......... $ 30,563 $ 34,638 $ 23,837 $ 17,307
Per diluted common share data:
Net income applicable to common shareholders ..... $ 0.45 $ 0.51 $ 0.35 $ 0.26
Weighted average common shares outstanding ............ 68,344 68,351 68,221 65,543
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues ........................................ $ 57,528 $ 67,402 $108,599 $106,088
Income before nonrecurring items ...................... $ 21,500 $ 24,881 $ 39,854 $ 31,202
Net income applicable to common shareholders .......... $ 17,995 $ 20,027 $ 31,151 $ 24,243
Per diluted common share data:
Net income applicable to common shareholders ..... $ 0.49 $ 0.54 $ 0.53 $ 0.36
Weighted average shares outstanding ................... 36,905 36,851 58,834 68,185
</TABLE>
19. SUBSEQUENT EVENTS
In connection with the efforts of Bass plc to acquire Bristol, as
announced on February 28, 2000, a Bass subsidiary (Bass America, Inc.)
contributed 4,713,185 outstanding FelCor common shares held by it to the
Operating Partnership in exchange for a like number of units of limited partner
interest. This exchange will not affect FelCor's FFO or earnings per share,
although it results in reducing FelCor's percentage ownership in the Operating
Partnership from approximately 95% to approximately 88%.
On January 4, 2000, FelCor announced that its Board of Directors had
approved a $200 million increase to the existing $100 million stock repurchase
program, authorizing the Company to purchase up to an aggregate of $300 million
of its outstanding common shares. Through September 15, 2000, the Company had
purchased an aggregate of 9.5 million shares of FelCor common stock at an
aggregate cost of approximately $167.8 million.
On April 26, 2000, the Company closed a 10-year, $145 million First
Mortgage Term Loan, which is collateralized by seven Sheraton hotels and carries
an 8.73% fixed interest rate. On May 2, 2000, the Company closed $186 million of
10-year, First Mortgage Term Loans which are collateralized by eight Embassy
Suites hotels and carry an 8.69% fixed interest rate. The loans are
non-recourse, mature in May 2010, and amortize over 25 years. The proceeds of
these loans were used to reduce borrowings under its $850 million Line of
Credit.
The Company has identified 25 hotels that it considers non-strategic
and has announced its intention to sell such hotels within the next year. Three
of the hotels are leased by DJONT and the other 22 are leased and managed by
Bristol. The Company expects gross sales proceeds from these hotels to be
approximately $150 million and net proceeds to be approximately $136 million. In
connection with the decision to sell these hotels, the Company has recorded, at
June 30, 2000, a one-time reserve of $63 million representing the difference
between the net book value of these hotels and the estimated net proceeds.
On July 14, the Company entered into a binding sale contract to sell
its Embassy Suites hotel, Los Angeles International Airport-North, California
(215 suites) for a gross price of approximately $24 million. The Company expects
the sale will close in the third quarter of 2000, and result in a gain on sale
of approximately $2.5 million. This hotel is not included in the 25 hotels held
for sale.
On July 21, 2000, FelCor's Independent Directors approved the
acquisition of 100% of DJONT effective January 1, 2001. The purchase price is
approximately 417,000 units of the Operating Partnership; no binding agreements
have been entered into for this acquisition, and the Company cannot assure that
they will successfully complete this transaction.
On August 1, 2000, the Company renewed it Line of Credit. The Line of
Credit was reduced from $850 million to $600 million and the maturity was
extended from July 2001 to August 2003. The effective interest rate ranges from
87.5 basis points to 250 basis points above LIBOR depending on the Company's
leverage and corporate rating.
On September 15, 2000, the Company completed the private placement of
$400 million in aggregate principal amount of its long term senior unsecured
notes. The notes bear interest at 9 1/2%, mature in 2008 and are priced at
98.633% to yield 9.75%. The discount on the $400 million senior notes accrete
using the straight line method over the maturity of the notes. These senior
notes were issued by the Operating Partnership and are fully and unconditionally
guaranteed, jointly and severally, (1) by certain wholly-owned subsidiaries of
the Operating Partnership and (2) by FelCor and one of its wholly-owned
subsidiaries. Condensed consolidating financial information for FelCor and its
guarantor subsidiary is not presented since FelCor has no independent assets or
operations, the guarantee is full and unconditional and any other subsidiaries
of FelCor, other than the Operating Partnership, are minor. Condensed
consolidating financial information for the Operating Partnership and its
guarantor and non-guarantor subsidiaries is separately presented in the
financial statements of the Operating Partnership.
F-24
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FELCOR LODGING TRUST INCORPORATED
Date: October 4, 2000 By: /s/ Lawrence D. Robinson
------------------------------
Lawrence D. Robinson
Senior Vice President, General Counsel
and Secretary
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
23 Consent of PricewaterhouseCoopers LLP
</TABLE>
