-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DhJzVwC8ZRJ5fjY90BVxHtVC3aSMz+XR9h64im5BMStZPsiRcjzO7k32xlncEeti doxj/1oWz614+9k6EFkDHw== 0000950134-03-004710.txt : 20030327 0000950134-03-004710.hdr.sgml : 20030327 20030327163433 ACCESSION NUMBER: 0000950134-03-004710 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR LODGING L P CENTRAL INDEX KEY: 0001048789 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752544994 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-39595-01 FILM NUMBER: 03621355 BUSINESS ADDRESS: STREET 1: 545 E. JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 FORMER COMPANY: FORMER CONFORMED NAME: FELCOR SUITES LP DATE OF NAME CHANGE: 19971030 10-K 1 d04300e10vk.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 333-3959-01 FelCor Lodging Limited Partnership (Exact name of registrant as specified in its charter) DELAWARE 75-254994 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 545 E. JOHN CARPENTER FRWY., SUITE 1300, IRVING, TEXAS 75062 (Address of principal executive offices) (Zip Code) (972) 444-4900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- NONE Securities registered pursuant to Section 12(g) of the Act: NONE (Title of class) Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the voting and non-voting limited partnership interests held by non-affiliates of the registrant, as of June 28, 2002, was approximately $30 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the 2003 Annual Meeting of Stockholders of FelCor Lodging Trust Incorporated, filed pursuant to Regulation 14A, is incorporated herein by reference into Part III. ================================================================================ FELCOR LODGING LIMITED PARTNERSHIP INDEX
FORM 10-K REPORT ITEM NO. PAGE - -------- ---- PART I 1. Business............................................................................................1 2. Properties.........................................................................................16 3. Legal Proceedings..................................................................................27 4. Submission of Matters to a Vote of Security Holders................................................27 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................28 6. Selected Financial Data............................................................................30 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............31 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................49 8. Financial Statements and Supplementary Data........................................................49 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...............49 PART III 10. Directors and Executive Officers of the Registrant.................................................50 11. Executive Compensation.............................................................................50 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........................................................................50 13. Certain Relationships and Related Transactions.....................................................50 14. Controls and Procedures............................................................................50 PART IV 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................51
This Annual Report on Form 10-K contains registered trademarks owned or licensed by companies other than us, including but not limited to Bristol House(R), Conrad(R), Courtyard by Marriott(R), Crowne Plaza(R), Crown Plaza Suites(R), Disney(R), Doubletree(R), Doubletree Guest Suites(R), Embassy Suites Hotels(R), Fairfield Inn(R), Hampton Inn(R), Harvey Hotel(R), Harvey Suites(R), Hilton(R), Hilton Suites(R), Holiday Inn(R), Holiday Inn & Suites(R), Holiday Inn Express(R), Holiday Inn Express & Suites(R), Holiday Inn Select(R), Homewood Suites(R) by Hilton, Inter-Continental(R), Sheraton(R), Sheraton Suites(R), Staybridge Suites(R), Walt Disney World(R), Westin(R) and Wyndham(R). PART I ITEM 1. BUSINESS At December 31, 2002, FelCor Lodging Limited Partnership and its subsidiaries, or FelCor LP, owned real estate interests in 183 hotels with nearly 50,000 rooms and suites. The sole general partner of FelCor LP is FelCor Lodging Trust Incorporated, or FelCor, a Maryland corporation, the nation's second largest hotel real estate investment trust, or REIT. At December 31, 2002, FelCor owned a greater than 95% equity interest in FelCor LP. Our hotels are located in the United States (35 states) and Canada, with concentrations in Texas (41 hotels), California (19 hotels), Florida (17 hotels) and Georgia (14 hotels). We own the largest number of Embassy Suites Hotels, Crowne Plaza, Holiday Inn and independently owned Doubletree-branded hotels. We seek to increase operating cash flow through aggressive asset management and the competitive positioning of our hotels, to maintain a sound and flexible capital structure, and to reposition our portfolio through the sale of non-strategic hotels and reinvestment in newer, higher quality hotels in major urban and resort markets with greater growth potential. The hotels in which we will reinvest sale proceeds are expected to be ones that are affiliated with, or will benefit from affiliation with, one of the premium brands available to us through our strategic brand owner and manager relationships with Hilton Hotels Corporation, or Hilton, Six Continents Hotels and Starwood Hotels & Resorts Worldwide Inc., or Starwood. At December 31, 2002, we had an aggregate of 62,056,414 shares of FelCor common stock, and units of FelCor LP limited partner interest outstanding. BACKGROUND As a result of the passage of the REIT Modernization Act, effective January 1, 2001, REITs are allowed to own the lessees of their hotels through taxable REIT subsidiaries, or TRSs. In 2001, we acquired our hotel leases from DJONT Operations L.L.C., or DJONT, and Six Continents Hotels. Upon acquisition of our hotel leases, we began recording hotel revenues and expenses, rather than just rental revenue, and became exposed to all of the risks and rewards of hotel operations. Under the leases, the rent payable to us would vary only as a result of changes in hotel revenues. By acquiring the leases, our cash flow and net income also vary as a result of changes in the operating margins of the hotels. Through the ownership of our operating lessees, we now consolidate the operating revenues and expenses of 169 of our hotels. We have 50% unconsolidated interests in the operating revenues and expenses of the remaining 14 hotels, which are accounted for using the equity method. Our business is conducted in one reportable segment, which is hospitality. We derived 97% of our revenues from hotels located within the United States and the balance from our Canadian hotels. Additional information on our business can be found on FelCor's website at www.felcor.com and in the Notes to Consolidated Financial Statements located elsewhere in this Annual Report on Form 10-K. DEVELOPMENTS DURING 2002 During 2002, we sold various non-strategic assets, realizing net cash proceeds of approximately $29 million. These assets included the retail space at our Allerton Crowne Plaza hotel in Chicago, Illinois, the 183-room Doubletree Guest Suites hotel in Boca Raton, Florida, and the Holiday Inn hotel in Colby, Kansas. In addition, we sold four Holiday Inn-branded hotels and a Hampton Inn hotel to a new joint venture, in which we retain a 50% equity interest. In July 2002, we acquired the 208-suite SouthPark Suite Hotel in Charlotte, North Carolina for $14.5 million, and the 385-room Wyndham Myrtle Beach Resort, and a leasehold interest in the associated Arcadian Shores Golf Club, in Myrtle Beach, South Carolina, for $35.3 million. We have converted the SouthPark Suite Hotel to a Doubletree Guest Suites hotel managed by Hilton. The Wyndham Myrtle Beach Resort is currently under renovation, and we expect to convert it to a Hilton hotel in April of 2003. 1 In April 2002, FelCor issued approximately $25 million of their Series B preferred stock. FelCor contributed the proceeds of this preferred stock to us in exchange for Series B preferred units. The preference on these units is the same as FelCor's Series B preferred stock. We utilized the proceeds for working capital and discretionary capital expenditures. In 2002, we entered into two amendments to our unsecured line of credit. In June 2002, we amended our line of credit to relax certain covenant levels to provide us with greater financial flexibility. In December 2002, we further amended our line of credit, to relax covenant levels, and to reduce the line to $300 million from $615 million. The pricing and maturity of our line remained unchanged but with added pricing tiers to reflect the higher permitted leverage. Through a 50/50 joint venture agreement with Hilton, we started the development of a 251-unit luxury oceanfront residential condominium project in Myrtle Beach, South Carolina. We expect this project to be completed in 2004. For 2002, we paid common distributions of $0.60 per unit, preferred distributions of $1.95 per unit on our Series A preferred units and preferred distributions of $2.25 per depository unit on our Series B preferred units. RECENT DEVELOPMENTS In February 2003, we announced our plan to sell 33 non-strategic hotels over the next 36 months, six of which had been previously designated as held for sale. These non-strategic hotels include smaller hotels in secondary or tertiary markets and include some Texas hotels, and specifically, hotels in Dallas, Texas (an area in which we desire to reduce our concentration of hotels). It is our intention to reinvest most of the proceeds from these sales in newer, larger and higher quality hotels, primarily in urban and resort locations with higher growth rates and barriers to competition. For those hotels currently managed by Six Continents Hotels, we are liable for liquidated damages under the terms of our management agreement, unless we reinvest the net proceeds to purchase one or more hotels licensed and managed by Six Continents Hotels within one year of the sale. We recorded $157.5 million in impairment losses in 2002, principally related to the shorter holding periods associated with our decision to sell these non-strategic hotels. The 33 hotels identified as non-strategic represented 14% of our hotel rooms, but less than 7% of our 2002 consolidated hotel EBITDA. (For a discussion of the computation of EBITDA, see the Funds from Operations and EBITDA section in Part II of this Annual Report on Form 10-K, under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.) These non-strategic hotels have an average of 196 rooms, while the average number of rooms for the remainder of our portfolio is 294. THE INDUSTRY The continued stagnation of the U.S. and global economies, the negative wealth effect from the sharp decline in stock values, the erosion of consumer confidence, the difficulties associated with air travel and the prospect of war in Iraq, combined to adversely affect lodging demand. The unprecedented decline in lodging demand is evidenced by the decline in industry revenue per available room, or RevPAR, for 2001 and 2002, the first two-year consecutive decline since industry RevPAR has been tracked. After 18 months of consecutive industry RevPAR declines, the industry recorded increased RevPAR for the last four months of 2002. The RevPAR increases for the last four months of 2002 were driven by occupancy increases over the same period in the prior year. In addition to weak demand, ADR has declined because of competitive pressures and discounting of room rates through the Internet. Business travel is a key profit driver in the lodging industry. In a UBS Warburg survey conducted in October 2002, corporate travel managers reported that they anticipate 2003 hotel spending and negotiated rates will be slightly lower than in 2002 and approximately 80% of their spending is projected to be in downtown/urban markets. These corporate travel managers indicated that they plan to direct less business to luxury hotels, and more to midscale and upscale hotels. 2 One of the most positive fundamentals for the lodging industry is that supply growth has been sharply curtailed. According to PricewaterhouseCoopers' Hospitality Directions - U.S. Edition December 2002 Forecast Update, room supply rose only 1.9% and 1.8% in 2001 and 2002, respectively, and is projected to increase only 1.1% in each of 2003 and 2004. This level of growth is the lowest since 1993, and is well below the historical 15-year average of 2.7% per annum. We do not anticipate a significant recovery in lodging industry RevPAR during 2003. Although most economists are forecasting GDP growth in 2003, growth in lodging demand has historically "lagged" the general economy by six to 12 months. Increasing business travel is typically foreshadowed by growth in both corporate profits and employment. Companies tend to wait for growth in profits prior to hiring, and hire prior to releasing funds for travel. The recovery to date has been termed the "jobless recovery". As such, we do not anticipate that corporations will increase their travel budgets until there is more clarity with regard to the economy and corporate profits. Additionally, lodging demand will be adversely affected during 2003 by the continued fear of an event of terrorism, the commencement of war with Iraq and the increased inconvenience encountered during air travel due to heightened security. Smith Travel Research, a leading provider of industry data, classifies hotel chains into five distinct categories: Upper Upscale, Upscale, Midscale With Food & Beverage, Midscale Without Food & Beverage, and Economy. We own properties in the Upper Upscale (including Doubletree Guest Suites, Doubletree, Embassy Suites Hotels, Sheraton and Westin hotels), Upscale (including Crowne Plaza and Homewood Suites), and Midscale With Food & Beverage (including Holiday Inn and Holiday Inn Select hotels) categories, from which we derived approximately 98% of our EBITDA in 2002. More than 50% of our EBITDA in 2002 was derived from upper upscale all-suite hotels. Smith Travel Research also categorizes hotels based upon their relative market positions, as measured by average daily rate, or ADR, as Luxury, Upscale, Midprice, Economy and Budget. The following table contains information with respect to average occupancy (determined by dividing occupied rooms by available rooms), ADR and RevPAR for our hotels, as well as all Upscale U.S. hotels, all Midprice U.S. hotels and all U.S. hotels, as reported by Smith Travel Research, for the periods indicated.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ NUMBER OF OUR HOTELS ................ 183 183 186 188 193 OCCUPANCY: Our hotels (1) .................... 62.1% 63.9% 70.4% 68.2% 68.3% All Upscale U.S. hotels (2) ....... 61.7 61.8 65.1 64.9 65.9 All Midscale U.S. hotels (3) ...... 57.2 58.4 61.7 61.1 62.0 All U.S. hotels ................... 59.2 60.1 63.7 63.1 63.8 ADR: Our hotels (1) .................... $ 96.84 $ 102.18 $ 104.42 $ 100.72 $ 96.62 All Upscale U.S. hotels (2) ....... 91.05 92.84 94.07 87.45 85.33 All Midscale U.S. hotels (3) ...... 68.40 69.60 69.22 64.89 62.15 All U.S. hotels ................... 83.15 84.85 86.04 81.29 78.15 REVPAR: Our hotels (1) .................... $ 60.16 $ 65.34 $ 73.73 $ 68.93 $ 66.02 All Upscale U.S. hotels (2) ....... 56.22 57.38 69.24 56.76 56.23 All Midscale U.S. hotels (3) ...... 39.13 40.65 42.71 39.65 38.53 All U.S. hotels ................... 49.24 50.99 54.81 51.29 49.86
- ---------- (1) Information is historical, including periods prior to ownership by FelCor LP. (2) This category includes hotels in the "upscale price level," defined as hotels with ADRs in the 70th to 85th percentiles in their respective markets. (3) This category includes hotels in the "midscale level," defined as hotels with ADRs in the 40th to 70th percentiles in their respective markets. 3 BUSINESS STRATEGY In the current operating environment, in which the lodging industry has experienced declines in RevPAR for two consecutive years, we intend to continue focusing on preserving capital, maximizing operating cash flow by actively overseeing the operation of our hotels by our managers, maintaining financial flexibility and placing ourselves in the best position possible to take advantage of opportunities that may arise in the future. We have established, and intend to maintain, strong strategic relationships with our brand owners and managers and have successfully demonstrated our ability to apply our asset management expertise to the renovation, redevelopment and rebranding of our hotels. Maintenance of Financial Flexibility During the current challenging economic environment, we have committed ourselves to conserving capital, maximizing operating cash flow from our hotels and maintaining financial flexibility to take advantage of opportunities that may arise in the future. We expect FelCor's board of directors to suspend our common distributions until our hotels experience an increase in RevPAR of 2% to 4%; decisions on future distributions on common and preferred units will be made based on hotel operating results and minimum distributions required to maintain FelCor's REIT status. We intend to limit distributions generally to not more than available cash flow, after debt service and maintenance capital expenditures, and to restrict discretionary capital expenditures. We have scheduled debt maturities of $35 million in 2003 and $189 million in 2004. In February 2003, we announced our decision to dispose of 33 non-strategic hotels over the next 36 months. These non-strategic hotels include smaller hotels in secondary or tertiary markets and certain hotels in Texas, and specifically in Dallas, areas where we want to reduce our concentration of hotels. We will seek to sell $50 to $75 million of these non-strategic hotels that are unencumbered by debt and management agreement reinvestment requirements during 2003, and to use the proceeds from these sales to pay down debt. Maintenance of Strong Strategic Relationships We benefit from strategic brand owner and manager relationships with Hilton (Embassy Suites Hotels, Hilton and Doubletree), Six Continents Hotels (Crowne Plaza and Holiday Inn) and Starwood (Sheraton and Westin). These relationships enable us to work effectively with our managers to maintain operating margins and maximize operating cash flow from our hotels. o Hilton has a hotel system of approximately 2,000 hotels with more than 330,000 guest rooms worldwide, and is the largest operator of full-service, all-suite hotels in the United States. Hilton owns Hilton Hotels, Conrad, Embassy Suites Hotels, Doubletree and Doubletree Guest Suites brands among others. Subsidiaries of Hilton managed 73 of our hotels at December 31, 2002. Hilton is a 50% partner in joint ventures with us in the ownership of 12 hotels and the development of a residential luxury condominium, and is the holder of a 10% equity interest in certain of our consolidated subsidiaries owning six hotels. o Six Continents Hotels is the world's largest hotel company. Six Continents Hotels owns, operates or franchises more than 3,300 hotels with approximately 515,000 guest rooms in nearly 100 countries around the world. Among the brands owned by Six Continents Hotels are Crowne Plaza, Holiday Inn, Holiday Inn Select, Holiday Inn Express and Inter-Continental. Subsidiaries of Six Continents Hotels managed 82 of our hotels at December 31, 2002, and also own approximately 17% of FelCor's outstanding common stock. On October 1, 2002, Six Continents plc announced a proposal to separate its hotel and soft drink businesses from its retail business, with the new hotel to be called InterContinental Hotels Group plc. This separation is currently expected to be effective on or about April 15, 2003. o Starwood is one of the world's largest hotel operating companies. Directly and through subsidiaries, Starwood owns, leases, manages or franchises more than 740 properties with approximately 224,000 rooms in more than 80 countries. Subsidiaries of Starwood managed 11 of our hotels at December 31, 2002. Starwood is a 40% joint venture partner with us in the ownership of two hotels and a 50% joint venture partner with us in the ownership of one hotel. 4 Hotel Renovation, Redevelopment and Rebranding We expect to continue to differentiate ourselves from many of our competitors by: o our success in upgrading, renovating and/or redeveloping our hotels to enhance their competitive position, and, in certain instances, rebranding them to improve their revenue generating capacity; and o our ongoing program for the maintenance of our upgraded hotel assets, which generally includes: -- contribution of approximately 4% of total annual room and suite revenue to a capital reserve for routine capital replacements and improvements; and -- adherence to a rigorous maintenance and repair program, resulting in the additional expenditure of approximately 4 to 5% of annual hotel revenues on maintenance of the hotels. We have demonstrated our ability to successfully execute renovations. During 2002, we substantially completed a $13 million renovation on our San Diego, California Holiday Inn, we upgraded and converted the recently acquired SouthPark Suite Hotel in Charlotte, North Carolina to a Doubletree Guest Suites hotel and started a $10 million renovation project at the Wyndham Myrtle Beach Resort Hotel, which will allow us to convert this hotel to a Hilton hotel in April 2003. We believe that our historical capital expenditures should limit the need for future major renovation expenditures. During 2002, we made capital expenditures aggregating approximately $63 million and we currently anticipate 2003 capital expenditures of between $60 and $70 million. COMPETITION The hotel industry is highly competitive. Each of our hotels is located in a developed area that includes other hotel properties and competes for guests primarily with other full service and limited service hotels in its immediate vicinity and secondarily with other hotel properties in its geographic market. We believe that brand recognition, location, the quality of the hotel and services provided, and price are the principal competitive factors affecting our hotels. ENVIRONMENTAL MATTERS We customarily obtain a Phase I environmental survey from an independent environmental consultant before acquiring a hotel. The principal purpose of a Phase I survey is to identify indications of potential environmental contamination for which a property owner may have liability and, secondarily, to assess, to a limited extent, the potential for environmental regulatory compliance liabilities. The Phase I surveys of our hotels were designed to meet the requirements of the then current industry standards governing Phase I surveys, and consistent with those requirements, none of the surveys involved testing of groundwater, soil or air. Accordingly, they do not represent evaluations of conditions at the studied sites that would be revealed only through such testing. In addition, their assessment of environmental regulatory compliance issues was general in scope and was not a detailed determination of the hotel's complete environmental compliance status. Similarly, the surveys did not involve comprehensive analysis of potential offsite liability. The Phase I survey reports did not reveal any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations, nor are we aware of any such liability. Nevertheless, it is possible that these reports do not reveal or accurately assess all environmental liabilities and that there are material environmental liabilities of which we are unaware. We believe that our hotels are in compliance, in all material respects, with all federal, state, local and foreign laws and regulations regarding hazardous substances and other environmental matters, the violation of which would have a material adverse effect on us. We have not been notified by any governmental authority or private party of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our current or former properties. However, obligations 5 for compliance with environmental laws that arise or are discovered in the future may adversely affect our financial condition. TAX STATUS OF FELCOR FelCor elected to be taxed as a REIT under the federal income tax laws, commencing with our initial taxable year ended December 31, 1994. As a REIT, FelCor generally is not subject to federal income taxation at the corporate level on its taxable income that is distributed to its stockholders. FelCor may, however, be subject to certain state and local taxes on its income and property. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute annually at least 90% of its taxable income. In connection with FelCor's election to be taxed as a REIT, FelCor's charter imposes restrictions on the ownership and transfer of shares of its common stock. We expect to make distributions on our units sufficient to enable FelCor to meet its distribution obligations as a REIT. As a result of the passage of the REIT Modernization Act, in 2001 we acquired or terminated all of our hotel leases and contributed them to TRSs. These TRSs are subject to both federal and state income taxes. EMPLOYEES We have no employees. FelCor as our sole general partner performs our management functions. Mr. Thomas J. Corcoran, Jr., FelCor's President and Chief Executive Officer, entered into an employment agreement with FelCor in 1994 that continues in effect until December 31, 2003, and automatically renews for successive one-year terms unless terminated by either party. FelCor's other executive officers have change in control contracts that renew annually. FelCor had 65 full-time employees at December 31, 2002. All persons employed in the day-to-day operation of our hotels are employees of the management companies engaged by us, and are not our employees. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements and analyses contained in this Annual Report on Form 10-K or that may in the future be made by, or be attributable to, us, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. All of such forward-looking statements are based upon present expectations and assumptions that may or may not actually occur. The following factors constitute cautionary statements identifying important factors, including material risks and uncertainties, with respect to such forward-looking statements that could cause actual results to differ materially from those reflected in such forward-looking statements or in our historical results. Each of the following factors, among others, could adversely affect our ability to meet the current expectations of management. TERRORIST ACTIVITIES AND THE POTENTIAL OF A MILITARY CONFLICT IN IRAQ HAVE ADVERSELY AFFECTED, AND CREATED UNCERTAINTY IN, OUR BUSINESS The terrorist attacks of September 11, 2001, caused a significant disruption in travel-related businesses in the United States. Consistent with the rest of the lodging industry, we experienced substantial declines in occupancy and ADR due to a decline in both business and leisure travel. In 2002, the economic slowdown, the increasing likelihood of war with Iraq and continued threats of terrorism continued to restrict travel and lodging demand. The commencement of war in Iraq, and the actual or threatened bankruptcy of several major airlines could result in further decreases in travel. We are unable to predict with certainty when or if travel and lodging demand will be fully restored to historically normal levels. Military actions against terrorists, new terrorist attacks (actual or threatened), the military conflict in Iraq, and other political or economic events may cause a lengthy period of uncertainty that could continue to adversely affect the lodging industry, including us, as a result of customer reluctance to travel. 6 OUR FINANCIAL LEVERAGE IS HIGH DUE TO DEPRESSED OPERATING CASH FLOWS At December 31, 2002, our consolidated debt of $1.9 billion equaled 65% of our total market capitalization and 41% of our investment in hotel assets, at cost. Our consolidated debt to EBITDA ratio for the year ended December 31, 2002, was 6.1 times. The decline in our revenues and cash flow from operations during 2001 and 2002, have adversely affected our public debt ratings and may limit our access to additional debt capital. Historically, we have incurred debt for acquisitions and to fund our renovation, redevelopment and rebranding program and a share repurchase program. At December 31, 2002, we had: o approximately $1.9 billion in consolidated debt, of which approximately $683 million was secured by mortgages or capital leases; and o a ratio of EBITDA to cash interest paid, including interest expense from unconsolidated entities, for the year then ended of 1.9x. The current economic slowdown, which began in early 2001 and which was exacerbated by the terrorist attacks of September 11, 2001, has resulted in declines in RevPAR during both 2001 and 2002, compared to the prior years. If the economic slowdown and the reduced RevPAR experienced in 2001 and 2002 worsen, or continue for a protracted period of time, they could have a material adverse effect on our operations and earnings, including our ability to pay distributions and service our debt. As a consequence of the economic slowdown in our business, and in the travel and lodging industries generally, Standard & Poor's lowered its ratings on our $1.2 billion in senior unsecured debt from BB- to B+, in February 2003. Although Moody's affirmed its current rating on our senior unsecured debt in February 2003 (Ba3), we remain on negative outlook. Should Moody's downgrade its ratings to B1, the interest rate on $900 million of our $1.2 billion senior unsecured debt would increase by 50 basis points, which would increase our interest expense by approximately $4.5 million on an annual basis. Our leverage could have important consequences. For example, it could: o limit our ability to obtain additional financing for working capital, renovation, redevelopment and rebranding plans, acquisitions, debt service requirements and other purposes; o require us to agree to additional restrictions and limitations on our business operations and capital structure to obtain additional or continued financing; o increase our vulnerability to adverse economic and industry conditions, as well as to fluctuations in interest rates; 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, payment of distributions 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. 7 WE HAVE RESTRICTIVE DEBT COVENANTS THAT COULD ADVERSELY AFFECT OUR ABILITY TO RUN OUR BUSINESS The indentures governing our existing senior unsecured notes and the agreements governing our line of credit contain various restrictive covenants including, among others, provisions that can restrict our ability to: o incur indebtedness; o make common and preferred distributions; o make investments; o make investments in capital expenditures and acquiring hotels in excess of certain amounts; o engage in transactions with affiliates; o incur liens; o merge or consolidate with another person; o dispose of all or substantially all of our assets; and o permit 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, some of these agreements require us to maintain certain specified financial ratios. Our ability to comply with such ratios may be adversely affected by events beyond our control. In 2002, we entered into two amendments to our line of credit. In June 2002, we amended our line of credit to relax covenant levels to provide us with greater financial flexibility. In December 2002, we further amended our line of credit to relax covenant levels and reduce the line to $300 million from $615 million. The maturity of the line of credit remains at October 31, 2004, but we have the right to extend the maturity date for two consecutive one-year periods, subject to certain conditions. We recorded a $3.2 million expense to write off unamortized deferred financing costs associated with the reduction in our line of credit. Although we were in compliance with our existing covenants prior to the amendments, it was necessary to amend the line of credit in anticipation of a continued negative RevPAR environment. The amended line allows for the relaxation of certain financial covenants through the maturity date, with a step-up in covenants on June 30, 2004, including the unsecured interest coverage, fixed charge coverage, secured leverage, and total leverage tests. The interest rate remains on the same floating rate basis with a tiered spread based on our debt leverage ratio, but with an added tier to reflect higher permitted leverage. There was no amount outstanding under the facility at December 31, 2002. Unless our business and cash flow stabilizes, we may not be able to satisfy the relaxed financial covenant requirements. In such an event, we may need to obtain further amendments from our lenders on the line of credit to continue being able to borrow under it. We are not certain whether, to what extent, or upon what terms the lenders may be willing to continue a relaxation of the covenants. Further amendments to our line of credit may result in additional restrictions on us that, together with any limitation on our ability to borrow under the line, may adversely affect our ability to run our business and manage our financial affairs. The breach of any of these covenants and limitations under our line of credit could result in the acceleration of amounts outstanding under our line of credit. Our failure to satisfy any accelerated indebtedness, if in the amount of $10 million or more, could result in the acceleration of most of our other unsecured recourse indebtedness. We may not be able to refinance or repay our debt in full under those circumstances. 8 CONFLICTS OF INTEREST COULD ADVERSELY AFFECT OUR BUSINESS Certain FelCor directors. Six Continents Hotels currently manages 82 of our hotels. Richard C. North, who joined FelCor's board during 1998, is the Chief Executive Officer of Six Continents PLC Hotels Division, which, through its affiliates, owns approximately 17% of FelCor's outstanding common stock. Issues may arise under the management contracts, and in the allocation of acquisition and management opportunities, that present conflicts of interest due to the relationship of Mr. North to the companies with which he is associated. As an example, in the event we enter into new or additional hotel management contracts or other transactions with Six Continents Hotels, the interests of Mr. North, by virtue of his relationship with Six Continents Hotels, may conflict with our interests. Any increase in management fees payable to Six Continents Hotels may decrease our profits to the benefit of Six Continents Hotels. Also, in the selection of brands under which our hotels will be operated, Mr. North, by virtue of his relationship with Six Continents Hotels, may have interests that conflict with our interests. We anticipate that any director who has a conflict of interest with respect to an issue presented to the FelCor board will abstain from voting upon that issue, although he or she 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. We do not expect to add provisions in our charter and bylaws to this effect. Although each director has a fiduciary duty of loyalty to us, 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. For information regarding the management agreements entered into by us with Six Continents Hotels and others, reference is made to the description of these agreements under the caption "Management Agreements" in Item 2 of this Annual Report on Form 10-K. Adverse tax consequences to affiliates on a sale of some hotels. Mr. Corcoran and Mr. Robert A. Mathewson, a director of FelCor, may incur additional tax liability if we sell our investments in six hotels that we acquired in July 1994 from partnerships in which they were investors. Consequently, our interests could differ from Messrs. Corcoran's 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 FelCor's independent directors. WE MAY BE UNABLE TO REALIZE THE ANTICIPATED BENEFITS OF OUR RENOVATIONS The majority of our hotels recently have been substantially renovated, redeveloped and, in some cases, rebranded. The completed improvements may not achieve the results anticipated when we made the decision to invest in the improvements. WE WILL ENCOUNTER INDUSTRY RELATED RISKS THAT MAY ADVERSELY AFFECT OUR BUSINESS The current economic slowdown has had a significant adverse effect on our RevPAR performance and earnings. If it worsens or continues, the effects on our financial condition could be material. We have experienced declines in RevPAR, beginning in March 2001 and continuing through August 2002. A sharper than anticipated decline in business travel was the primary cause of the decline, which was reflected in decreased occupancies, which led to declines in room rates as hotels competed more aggressively for guests, both of which have had a significant adverse effect on our RevPAR and operating performance. On a national basis, the hotel industry experienced a RevPAR decline of 7.0% for the year ended December 31, 2001, and 2.5% for the year ended December 31, 2002. If the economic slowdown worsens, or continues for a protracted period of time, it could have a material adverse effect on our operations, earnings and financial condition. 9 Investing in hotel assets involves special risks. We have invested 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. 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. We face reduced coverages and increased costs of insurance. Following the events of September 11, 2001, certain types of insurance coverage, such as for acts of terrorism, are only available at high cost. In an effort to keep our cost of insurance within reasonable limits, we have only purchased terrorism insurance for those hotels that are secured by mortgage debt, as required by our lenders. We have established a self-insured retention of $250,000 per occurrence for general liability insurance with regard to 68 of our hotels; the remainder of our hotels participate in general liability programs of our managers, with no deductible. Our property program has a $100,000 all risk deductible, a deductible of 2% of insured value for named windstorm coverage and a deductible of 5% of insured value for California earthquake coverage. Should such uninsured or not fully insured losses be substantial, they could have a material adverse impact on our operating results and cash flows. We have geographic concentrations that may create risks from regional economic and weather conditions. Approximately 54% of our hotel rooms and 56% of our hotel EBITDA for the year ended December 31, 2002, were generated from hotels located in four states: California, Florida, Georgia and Texas. Additionally, we have concentrations in three major metropolitan areas, Atlanta, San Francisco Bay Area and Dallas, which represented approximately 20% of our hotel EBITDA for the year ended December 31, 2002. Therefore, adverse economic or weather conditions in these states or metropolitan areas will have a greater effect on us than similar conditions in other states. We have designated 33 hotels as non-strategic and intend to sell them within the next 36 months. We may be unable to sell the 33 hotels at acceptable prices, or at all, within the proposed time frame; and we may be unable to acquire suitable replacement properties at acceptable prices, or at all, which could trigger substantial penalties payable to Six Continents Hotels under our management agreements. Furthermore, if we sell these hotels and fail to reinvest the net proceeds in assets with returns equal to, or better than, the hotels sold, our results of operations will be adversely affected. We are subject to possible adverse effects of franchise and licensing agreement requirements. Substantially all of our hotels are operated under existing franchise or license agreements with nationally recognized hotel brands. Each such agreement requires that the licensed hotel be maintained and operated in accordance with specific standards and restrictions in order to maintain uniformity within the franchisor system. Compliance with these standards could require us to incur significant expenses or capital expenditures, which could adversely affect our results of operations and ability to make distributions to our partners and 10 payments on our indebtedness. Also, changes to these standards could conflict with a hotel's specific business plan or limit our ability to make improvements or modifications to a hotel without the consent of the brand owner. If such an agreement terminates due to our failure to make required improvements, we may be liable to the brand manager or franchisor for a termination payment. These termination payments vary by agreement and hotel. The loss of a substantial number of brand licenses, and the related termination payments, could have a material adverse effect on our business because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the brand manager or franchisor. The franchise agreements could also expire or terminate, with specified renewal rights, at various times. As a condition to renew, the franchise agreements could involve a renewal application process that would require substantial capital improvements to be made to the hotels for which we would be responsible. The agreements providing franchise licenses with respect to 15 of our hotels expire within the next five years. We are subject to the risks of brand concentration. We are subject to the potential risks associated with concentration of our hotels under a limited number of brands. A negative public image or other adverse event that becomes associated with the brand could adversely affect hotels operated under that brand. The following percentages of our hotels' EBITDA were generated by hotels operated under each of the indicated brands during the year ended December 31, 2002: o Embassy Suites Hotels 42% o Holiday Inn-branded hotels 26% o Crowne Plaza 11% o Sheraton 8% o Doubletree-branded hotels 6% Should any of these brands suffer a significant decline in popularity with the traveling public, it could adversely affect our revenues and profitability. We are subject to the risks of hotel operations. Through our ownership of our lessees, we are subject to the risk of fluctuating hotel operating expenses at our hotels, including but not limited to: o wage and benefit costs; o repair and maintenance expenses; o the costs of gas and electricity; o the costs of insurance, including health, general liability and workers compensation; and o other operating expenses. These operating expenses are more difficult to predict and control than revenue, resulting in an increased risk of volatility in our results of operations. The lodging business is seasonal in nature. Generally, hotel revenues for our hotel portfolio are greater in the second and third calendar quarters than in the first and fourth calendar quarters, although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues. Quarterly earnings also may be adversely affected by events beyond our control, such as extreme weather conditions, economic factors and other considerations affecting travel. We lack control over the management and operations of our hotels. We are dependent on the ability of unaffiliated third party managers to operate and manage our hotels. In order to maintain FelCor's REIT 11 status, we cannot operate our hotels or any subsequently acquired hotels. As a result, we are unable to directly implement strategic business decisions for the operation and marketing of our hotels, such as decisions with respect to the setting of room rates, the salary and benefits provided to hotel employees, the conduct of food and beverage operations and similar matters. OUR ABILITY TO GROW OR SUSTAIN OUR BUSINESS MAY BE LIMITED BY OUR ABILITY TO ATTRACT DEBT OR EQUITY FINANCING AND WE MAY HAVE DIFFICULTY ACCESSING CAPITAL ON ATTRACTIVE TERMS We may not be able to fund future growth and operations solely from cash provided from operating activities because of recent declines in cash flows and our requirement to distribute at least 90% of our taxable income each year to FelCor who, in turn, must distribute it to its stockholders to maintain its status as a REIT. Consequently, we rely upon the availability of debt or equity capital to fund hotel acquisitions and discretionary capital improvements and we may be dependent upon our ability to attract debt financing from public or institutional lenders. The capital markets have been adversely affected by the occurrence of recent events, including the possibility of war in Iraq, the terrorist attacks on September 11, 2001, the ongoing war against terrorism by the United States and the bankruptcy of several major companies, such as Enron Corp. These events, or an escalation in the anti-terrorism war, new terrorist attacks, the war in Iraq or additional bankruptcies in the future, could adversely affect the availability and cost of capital for our business. We cannot assure you that we will be successful in attracting sufficient debt or equity financing to fund future growth and operations at an acceptable cost, or at all. WE OWN AND MAY ACQUIRE INTERESTS IN HOTEL VENTURES WITH THIRD PARTIES THAT EXPOSE US TO SOME RISK OF ADDITIONAL LIABILITIES We own, through our subsidiaries, interests in several real estate ventures with third parties. Those ventures that are not consolidated into our financial statements, own a total of 29 hotels, in which we have an aggregate investment of approximately $142 million. The operations of 15 of these hotels are included in our consolidated results of operations due to our ownership of the lessee of the hotels. None of our directors or officers holds any interest in any of these ventures. The ventures and hotels were subject to non-recourse mortgage loans aggregating approximately $268 million at December 31, 2002. Additionally, one joint venture had a $97.6 million advance type construction loan for a residential condominium development that has been guaranteed equally on a several basis by us and our joint venture partner. At December 31, 2002, there was $11.4 million outstanding on this loan, of which we have guaranteed our pro rata share of $5.7 million at December 31, 2002. The personal liability of our subsidiaries under the non-recourse loans is generally limited to the guaranty of the borrowing ventures' personal obligations to pay for the lender's losses caused by misconduct, fraud or misappropriation of funds by the ventures and other typical exceptions from the non-recourse covenants in the mortgages, such as those relating to environmental liability. We may invest in other ventures in the future that own hotels and have recourse or non-recourse debt financing. If a venture defaults under its mortgage loan, the lender may accelerate the loan and demand payment in full before taking action to foreclose on the hotel. As a partner or member in any of these ventures, our subsidiary may be exposed to liability for claims asserted against the venture, and the venture may not have sufficient assets or insurance to discharge the liability. Our subsidiaries may not legally be able to control decisions being made regarding these ventures and their hotels. In addition, the hotels in a venture may perform at levels below expectations, resulting in the potential for insolvency of the venture unless the partners or members provide additional funds. In some ventures, the partners or members may elect to make additional capital contributions. In many of the foregoing events, we may be faced with the choice of losing our investment in the venture or investing more capital in it with no guaranty of receiving a return on that investment. FELCOR IS SUBJECT TO POTENTIAL TAX RISKS The federal income tax laws governing REITs are complex. FelCor has operated and intends to continue to operate in a manner that is intended to enable them to qualify as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complicated, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, FelCor cannot be certain that they have 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 relating to, or the federal income tax consequences of, qualification as a REIT. 12 Failure to make required distributions would subject FelCor to tax. Each year, a REIT must pay out to its stockholders at least 90% of its taxable income, other than any net capital gain. To the extent that FelCor satisfies the applicable distribution requirement, but distributes less than 100% of their taxable income, they will be subject to federal corporate income tax on their undistributed taxable income. In addition, they will be subject to a 4% nondeductible tax if the actual amount they pay out to their stockholders in a calendar year is less than a minimum amount specified under federal tax laws. FelCor's only source of funds to make such distributions comes from distributions from us. Accordingly, we may be required to borrow money or sell assets to make distributions sufficient to enable FelCor to pay out enough of its 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 FelCor to federal income tax. If FelCor fails to qualify as a REIT in any taxable year, they would be subject to federal income tax on their taxable income. We might need to borrow money or sell hotels in order to distribute to FelCor the funds to pay any such tax. If FelCor ceases to be a REIT, they no longer would be required to distribute most of their taxable income to their stockholders. Unless their failure to qualify as a REIT were excused under federal income tax laws, FelCor could not re-elect REIT status until the fifth calendar year following the year in which they failed to qualify. Failure to have distributed earnings and profits of Bristol Hotel Company in 1998 could cause FelCor to fail to qualify as a REIT. At the end of any taxable year, a REIT may not have any accumulated earnings and profits, described generally for federal income tax purposes as cumulative undistributed net income, from a non-REIT corporation. In connection with the merger of Bristol Hotel Company, or Bristol, with and into FelCor in 1998, Arthur Andersen LLP prepared and provided to FelCor its computation of Bristol's accumulated earnings and profits through the date of the merger, and FelCor made a corresponding special distribution to their stockholders. However, the determination of accumulated earnings and profits for federal income tax purposes is extremely complex and the computations by any professional service firm are not binding upon the Internal Revenue Service. Should the Internal Revenue Service successfully assert that Bristol's accumulated earnings and profits were greater than the amount so distributed by FelCor, they may fail to qualify as a REIT. Alternatively, the Internal Revenue Service may permit FelCor to avoid losing its REIT status by paying a deficiency dividend to eliminate any remaining accumulated earnings and profits of Bristol. There can be no assurance, however, that FelCor would be able to make any such required distribution or that the Internal Revenue Service would not assert loss of REIT status as the penalty for failing to distribute any accumulated earnings and profits of Bristol in 1998. A sale of assets acquired from Bristol within ten years after the merger may result in corporate income tax. If we sell any asset acquired from Bristol within ten years after our merger with Bristol, and we recognize a taxable gain on the sale, we will be taxed at the highest corporate rate on an amount equal to the lesser of: o the amount of gain that we recognize at the time of the sale; or o the amount of gain that we would have recognized if we had sold the asset at the time of the Bristol 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 the hotels that we have designated as non-strategic, the majority of which are Bristol hotels, we could incur corporate income tax with respect to the related built in gain, the amount of which cannot yet be determined. 13 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 real estate 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. Owners of real estate are subject to numerous federal, state, local and foreign environmental laws and regulations. Under these laws and regulations, a current or former owner of real estate may be liable for the costs of remediating hazardous 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 substances at another site, it may also be liable for the costs of remediating the disposal site, even if it did not own or operate the disposal site. Such liability may be imposed without regard to fault or the legality of a party's conduct and may, in certain circumstances, be joint and several. 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 and regulations may require us to incur substantial expenses and limit the use of our properties. We could have substantial liability for a failure to comply with applicable environmental laws and regulations, which may be enforced by the government or, in certain instances, by private parties. The existence of hazardous substances on a property can also adversely affect the value of, and the owner's ability to use, sell or borrow against, the property. We cannot provide assurances that future or amended laws or regulations, or more stringent interpretations or enforcement of existing environmental requirements, will not impose any material environmental liability, or that the environmental condition or liability relating to the hotels will not be affected by new information or changed circumstances, 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 the 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. Various state and local jurisdictions have also adopted requirements relating to the accessibility of buildings to disabled persons. We believe that our hotels substantially comply with the requirements of the Americans with Disabilities Act and other applicable laws. However, a determination that the hotels are not in compliance with such laws could result in liability for both governmental fines and payments 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 and other similar laws, it could adversely affect our ability to make distributions to our partners and to pay our obligations. 14 FELCOR'S CHARTER CONTAINS LIMITATIONS ON OWNERSHIP AND TRANSFER OF SHARES OF ITS STOCK THAT COULD ADVERSELY AFFECT ATTEMPTED TRANSFERS OF FELCOR COMMON STOCK To maintain FelCor's status as a REIT, no more than 50% in value of their outstanding 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. FelCor's charter prohibits, subject to some exceptions, any person from owning more than 9.9%, as determined in accordance with the Internal Revenue Code and the Exchange Act, of the number of outstanding shares of any class of its stock. FelCor's charter also prohibits any transfer of their stock that would result in a violation of the 9.9% ownership limit, reduce the number of stockholders below 100 or otherwise result in their failure to qualify as a REIT. Any attempted transfer of shares in violation of the charter prohibitions will be void, and the intended transferee will not acquire any right in those shares. FelCor has the right to take any lawful action that they believe necessary or advisable to ensure compliance with these ownership and transfer restrictions and to preserve their status as a REIT, including refusing to recognize any transfer of stock in violation of its charter. SOME PROVISIONS IN ITS CHARTER AND BYLAWS AND MARYLAND LAW MAKE A TAKEOVER OF FELCOR MORE DIFFICULT Ownership Limit. The ownership and transfer restrictions of FelCor's charter may have the effect of discouraging or preventing a third party from attempting to gain control of us without the approval of FelCor's board of directors. Accordingly, it is less likely that a change in control, even if beneficial to partners, could be effected without the approval of FelCor's board. Staggered Board. FelCor's board of directors 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 FelCor through the election of new directors is limited by the inability of stockholders to elect a majority of their board at any particular meeting. Authority to Issue Additional Shares. Under FelCor's charter, their board of directors may issue preferred stock without stockholder action. The preferred stock may be issued, in one or more series, with the preferences and other terms designated by FelCor's board that may delay or prevent a change in control of FelCor, even if the change is in the best interests of its stockholders or our partners. FelCor currently has outstanding 5,980,475 shares of their Series A preferred stock and 67,758 shares, represented by 6,775,800 depositary shares, of their Series B preferred stock. FelCor has contributed the proceeds of all of its preferred stock to us in exchange for preferred units. The preference on these units is the same as FelCor's preferred stock. The preferred stock and units reduce the amount of distributions available, and has distribution, liquidation and other rights superior, to the holders of FelCor's common stock and our common units. Maryland Takeover Statutes. As a Maryland corporation, FelCor is subject to various provisions under the Maryland General Corporation Law, including the Maryland business combination statute, that may have the effect of delaying or preventing a transaction or a change in control that might involve a premium price for the stock or otherwise be in the best interests of stockholders. Under the Maryland business combination statute, some "business combinations," including some issuances of equity securities, between a Maryland corporation and an "interested stockholder," which is any person who beneficially owns 10% or more of the voting power of the corporation's shares, or an affiliate of that stockholder, are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. Any of these business combinations must be approved by a stockholder vote meeting two separate super majority requirements unless, among other conditions, the corporation's common stockholders receive a minimum price, as defined in the statute, for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its common shares. FelCor's charter currently provides that the Maryland control share statute will not apply to any of their existing or future stock. That statute may deny voting rights to shares involved in an acquisition of one-tenth or more of the voting stock of a Maryland corporation. To the extent these or other laws are applicable to FelCor or us, they may have the effect of delaying or preventing a change in control of FelCor even though beneficial to FelCor's stockholders. 15 ITEM 2. PROPERTIES We own a diversified portfolio of nationally branded, upscale and full-service hotels managed by its strategic brand managers, which are Hilton, Six Continents Hotels, and Starwood. We are competitively positioned, with a strong management team, strategic brand manager alliances, diversified upscale and full-service hotels, and value creation expertise. We consider our hotels, generally, to be high quality lodging properties with respect to desirability of location, size, facilities, physical condition, quality and variety of services offered in the markets in which they are located. Our hotels are designed to appeal to a broad range of hotel customers, including frequent business travelers, groups and conventions, as well as leisure travelers. The hotels generally feature comfortable, modern guest rooms, extensive meeting and convention facilities and full-service restaurant and catering facilities. Our hotels are located in 35 states and Canada, and are situated primarily in major markets near airport, suburban or downtown areas. The following tables illustrate the distribution of our hotels.
TOP TEN MARKETS HOTELS ROOMS % OF TOTAL ROOMS % OF 2002 EBITDA - --------------- ------ ----- ---------------- ---------------- Atlanta 10 3,061 7% 8% Dallas 17 5,273 11 7 San Francisco Bay area 9 3,255 7 5 New Orleans 2 746 2 4 Orlando 6 2,220 5 4 Philadelphia 3 1,174 3 4 Houston 5 1,696 4 3 Phoenix 4 1,027 2 3 Minneapolis 4 955 2 3 Chicago 4 1,239 3 3 TOP FOUR STATES HOTELS ROOMS % OF TOTAL ROOMS % OF 2002 EBITDA - --------------- ------ ----- ---------------- ---------------- California 19 6,026 13% 19% Texas 36 10,366 22 16 Florida 16 5,346 12 12 Georgia 12 3,415 7 9 LOCATION HOTELS ROOMS % OF TOTAL ROOMS % OF 2002 EBITDA - -------- ------ ----- ---------------- ---------------- Suburban 79 19,615 42% 43% Urban 31 10,483 23 27 Airport 33 9,711 21 21 Highway 14 2,954 6 3 Resort 12 3,678 8 6 CATEGORIES AS DEFINED BY SMITH TRAVEL RESEARCH HOTELS ROOMS % OF TOTAL ROOMS % OF 2002 EBITDA - --------------------- ------ ----- ---------------- ---------------- Upper upscale 85 21,596 47% 59% Midscale full service 55 17,050 36 28 Upscale 20 6,457 14 11 Limited service 9 1,338 3 2
Our hotels have an average of approximately 275 rooms, with eight of them having more than 500 rooms. Although obsolescence arising from age and condition of facilities can adversely affect our hotels, we have invested in excess of $600 million, in the aggregate, during the past five years to upgrade, renovate and/or redevelop our hotels to enhance their competitive position. We are committed to maintaining the high 16 standards of our hotels and spend at least 4% of hotel revenues annually for maintenance and repair programs, in addition to necessary capital. HOTEL BRANDS A key part of our business strategy is to have our hotels managed by one of our strategic brand managers. Our hotels are operated under some of the nation's most recognized and respected hotel brands. We maintain strategic relationships with our brand owners, who also manage substantially all of our hotels. We are the owner of the largest number of Embassy Suites Hotels, Crowne Plaza, Holiday Inn and independently owned Doubletree-branded hotels. The following table illustrates the distribution of our hotels among these premier brands. BRAND DISTRIBUTION
BRAND HOTELS ROOMS % OF TOTAL ROOMS % OF 2002 EBITDA - ----- ------ ----- ---------------- ---------------- Embassy Suites 59 14,842 32% 42% Holiday Inn-branded 53 16,019 34 26 Crowne Plaza 18 5,963 13 11 Sheraton-branded 10 3,269 7 8 Doubletree-branded 13 2,675 6 6 Other 16 3,673 8 7
17 HOTEL OPERATING STATISTICS The following tables set forth historical occupied rooms, or Occupancy, ADR and RevPAR at December 31, 2002 and 2001, and the percentage changes therein between the periods presented for our 169 consolidated hotels: OPERATING STATISTICS BY BRAND
OCCUPANCY (%) -------------------------------- 2002 2001 % VARIANCE ---- ---- ---------- Embassy Suites hotels 67.5 67.0 0.8 Doubletree-branded hotels 65.7 65.8 (0.1) Holiday Inn-branded hotels 61.7 64.8 (4.9) Crowne Plaza hotels 58.7 60.1 (2.3) Sheraton-branded hotels 58.0 62.2 (6.8) Other hotels 58.9 58.4 1.0 Total hotels 62.4 64.2 (2.8)
ADR ($) -------------------------------- 2002 2001 % VARIANCE ---- ---- ---------- Embassy Suites hotels 118.58 127.90 (7.3) Doubletree-branded hotels 99.20 105.16 (5.7) Holiday Inn-branded hotels 80.33 83.74 (4.1) Crowne Plaza hotels 94.05 101.62 (7.5) Sheraton-branded hotels 100.84 109.14 (7.6) Other hotels 95.96 100.14 (4.2) Total hotels 97.90 103.56 (5.5)
REVPAR ($) -------------------------------- YEAR ENDED DECEMBER 31, -------------------------------- 2002 2001 % VARIANCE ---- ---- ---------- Embassy Suites hotels 80.08 85.66 (6.5) Doubletree-branded hotels 65.22 69.22 (5.8) Holiday Inn-branded hotels 49.54 54.27 (8.7) Crowne Plaza hotels 55.24 61.12 (9.6) Sheraton-branded hotels 58.48 67.92 (13.9) Other hotels 56.57 58.45 (3.2) Total hotels 61.14 66.51 (8.1)
18 OPERATING STATISTICS FOR OUR TOP TEN MARKETS
OCCUPANCY (%) -------------------------------- 2002 2001 % VARIANCE ---- ---- ---------- Atlanta 68.0 68.0 - Dallas 48.0 55.3 (13.2) San Francisco Bay area 66.7 69.0 (3.4) New Orleans 65.7 69.7 (5.7) Orlando 66.4 67.5 (1.6) Philadelphia 62.3 62.6 (0.4) Houston 63.2 72.7 (13.1) Phoenix 66.5 61.6 8.0 Minneapolis 67.2 65.8 2.1 Chicago 63.1 64.4 (2.0)
ADR ($) -------------------------------- 2002 2001 % VARIANCE ---- ---- ---------- Atlanta 90.02 96.29 (6.5) Dallas 88.23 89.38 (1.3) San Francisco Bay area 117.11 144.47 (18.9) New Orleans 136.26 141.21 (3.5) Orlando 79.26 86.70 (8.6) Philadelphia 117.54 115.16 2.1 Houston 74.84 78.72 (4.9) Phoenix 110.63 124.06 (10.8) Minneapolis 124.54 128.91 (3.4) Chicago 120.95 133.77 (9.6)
REVPAR ($) -------------------------------- 2002 2001 % VARIANCE ---- ---- ---------- Atlanta 61.22 65.44 (6.5) Dallas 42.34 49.43 (14.3) San Francisco Bay area 78.09 99.75 (21.7) New Orleans 89.50 98.40 (9.1) Orlando 52.66 58.54 (10.1) Philadelphia 73.23 72.05 1.6 Houston 47.30 57.27 (17.4) Phoenix 73.56 76.36 (3.7) Minneapolis 83.68 84.83 (1.4) Chicago 76.37 86.15 (11.4)
19 Embassy Suites Hotels Embassy Suites Hotels are upscale, full-service, all-suite hotels designed to attract frequent business travelers, leisure travelers and weekend guests. Embassy Suites Hotels typically offer numerous services and amenities, such as: o two-room suites, containing two telephones, a mini-refrigerator, coffeemaker, microwave oven, wet bar, and two color televisions; o complimentary, cooked-to-order breakfast; o complimentary cocktails during two hours every evening, subject to local laws and regulations, in an atrium environment; and o business centers equipped with fax and copy machines. Holiday Inn and Holiday Inn Select Hotels The Holiday Inn brand is positioned to attract the business and leisure traveler seeking up-to-date products and features, value and friendly service. Holiday Inn hotels typically offer a full-service restaurant and lounge, swimming pool, meeting and banquet facilities, optional fitness center and electronic locks. In-room amenities generally include a hair dryer, coffeemaker and iron. The Holiday Inn name is recognized around the world, with more than 1,500 hotels currently being operated under this brand. The Holiday Inn Select hotels focus on the business traveler. Each room offers a residential decor with a well-lit work area, including a dataport and voicemail, and in-room coffeemakers. Amenities offered at the Holiday Inn Select hotels generally include full business services, such as photocopying and telecopying, meeting capabilities for small to mid-size groups, exercise facilities and a full-service restaurant and lounge. The Holiday Inn, Holiday Inn Select and Crowne Plaza brands are part of the family of brands owned, operated and franchised by Six Continents Hotels. Six Continents Hotels owns, operates or franchises more than 3,300 hotels with approximately 515,000 guest rooms in nearly 100 countries around the world. Crowne Plaza Hotels Crowne Plaza hotels offer upscale accommodations for business and leisure travelers looking for a full range of services. Guests receive personalized attention through a wide variety of premium guest service offerings which typically include: fully appointed guest rooms with ample work areas, a full complement of business services, excellent dining choices, quality fitness facilities and comprehensive meeting capabilities. There are currently 193 Crowne Plaza hotels in 49 countries around the world. Doubletree and Doubletree Guest Suites Hotels Doubletree hotels and Doubletree Guest Suites are part of an upscale, full-service hotel chain that primarily serves major metropolitan areas and leisure destinations. Each property attempts to reflect the local or regional environment in its design. Typical properties offer a full-service restaurant and lounge, room service, swimming pool, health club, complete meeting and banquet facilities, oversized guest rooms and luxury amenities. Sheraton and Sheraton Suites Sheraton hotels, including Sheraton Suites, are part of Starwood, which owns the Sheraton, Westin and other brand names. There are currently more than 400 Sheraton hotels and resorts in over 70 countries. Sheraton hotels typically offer a wide variety of on-site business services, a full range of amenities and rooms that feature generous work spaces. In more than 150 locations, Sheraton Smart Rooms feature ergonomically designed chairs, ample task lighting, modem hookups and personalized voice mail, as well as printing, copying and faxing capabilities. Starwood owns, leases, manages or franchises more than 750 properties in over 80 countries. 20 Other Hotels As of December 31, 2002, 19 of our hotels were operated under other brands, as follows: o Hampton Inn (5 hotels); o Holiday Inn Express (3 hotels); o Harvey Hotel (4 hotels); o Hilton Suites (1 hotel); o Homewood Suites (1 hotel); o Westin (1 hotel); o Wyndham(1) (1 hotel); and o Independent (3 hotels). - ------------------ (1) This hotel is scheduled to convert to a Hilton in April 2003. 21 HOTEL PORTFOLIO The following table sets forth certain descriptive information regarding our hotels at December 31, 2002:
Hotel State Rooms % Owned (1) Brand ----- ----- ----- ----------- ----- Consolidated operations: Birmingham(2) AL 242 Embassy Suites Montgomery (East I-85)(2) AL 213 Holiday Inn Texarkana (I-30) AR 210 Holiday Inn Flagstaff AZ 119 Embassy Suites Phoenix (Airport - 44th St.) AZ 229 Embassy Suites Phoenix (Camelback) AZ 232 Embassy Suites Phoenix (Crescent)(2) AZ 342 Sheraton Tempe (ASU)(2) AZ 224 Embassy Suites Anaheim (Disney Area)(2) CA 222 Embassy Suites Burlingame (SF-Airport South) CA 340 Embassy Suites Covina (I-10)(2) CA 259 50% Embassy Suites Dana Point - Doheny Beach CA 195 Doubletree Guest Suites El Segundo (LAX-Airport South) CA 349 97% Embassy Suites Irvine (Orange County Airport) CA 335 Crowne Plaza Milpitas (Silicon Valley)(2) CA 266 Embassy Suites Milpitas (San Jose-North) CA 305 Crowne Plaza Napa Valley(2) CA 205 Embassy Suites Oxnard (Mandalay Beach Resort) CA 248 Embassy Suites Palm Desert(2) CA 198 Embassy Suites Pleasanton (San Ramon Area) CA 244 Crowne Plaza Santa Barbara (Goleta)(2) CA 160 Holiday Inn San Diego (On the Bay) CA 600 Holiday Inn San Francisco (Financial District-Chinatown) CA 565 Holiday Inn San Francisco (Fisherman's Wharf) CA 585 Holiday Inn San Francisco (Airport Burlingame)(2) CA 312 Embassy Suites San Francisco (Union Square) CA 403 Crowne Plaza San Rafael (Marin County)(2) CA 235 50% Embassy Suites Aurora (Denver-Southeast) CO 248 90% Doubletree Avon (Beaver Creek Lodge) CO 72 Independent Hartford (Downtown) CT 350 Crowne Plaza Stamford CT 383 Holiday Inn Select Wilmington DE 244 90% Doubletree Boca Raton FL 263 Embassy Suites Cocoa Beach (Oceanfront Resort) FL 500 Holiday Inn Deerfield Beach (Resort)(2) FL 244 Embassy Suites Ft. Lauderdale (17th Street)(2) FL 358 Embassy Suites Ft. Lauderdale (Cypress Creek)(2) FL 253 Sheraton Suites Jacksonville (Bay Meadows) FL 277 Embassy Suites Kissimmee (Nikki Bird Resort) FL 530 Holiday Inn Miami (Airport LeJeune Center) FL 304 Crowne Plaza Miami (Airport)(2) FL 316 Embassy Suites Lake Buena Vista (Walt Disney World Resort) FL 229 Doubletree Guest Suites Orlando (Airport) FL 288 Holiday Inn Select Orlando (International Drive Resort) FL 652 Holiday Inn Orlando (North) FL 277 Embassy Suites Orlando (International Drive/Convention Center)(2) FL 244 Embassy Suites Tampa (Busch Gardens) FL 408 Holiday Inn
22
Hotel State Rooms % Owned (1) Brand ----- ----- ----- ----------- ----- Tampa FL 203 Doubletree Guest Suites Atlanta (Airport) GA 378 Crowne Plaza Atlanta (Airport) GA 233 Embassy Suites Atlanta (Airport-Gateway) GA 395 Sheraton Atlanta (Airport-North)(2) GA 493 Holiday Inn Atlanta (Buckhead)(2) GA 317 Embassy Suites Atlanta (Galleria)(2) GA 278 Sheraton Suites Atlanta (South I-75 & US 41)(2) GA 180 Holiday Inn Atlanta (Perimeter Center)(2) GA 241 50% Embassy Suites Atlanta (Perimeter-Dunwoody)(2) GA 250 Holiday Inn Select Atlanta (Powers Ferry)(2) GA 296 Crowne Plaza Brunswick GA 130 Embassy Suites Columbus (North I-185 at Peachtree Mall) GA 224 Holiday Inn Chicago (Allerton) IL 443 Crowne Plaza Chicago (Lombard-Oak Brook)(2) IL 262 50% Embassy Suites Chicago (O'Hare Airport)(2) IL 297 Sheraton Suites Deerfield (Northbrook)(2) IL 237 Embassy Suites Moline (Quad Cities) IL 138 Hampton Inn Moline (Airport) IL 216 Holiday Inn Moline (Airport Area) IL 110 Holiday Inn Express Indianapolis (North)(2) IN 221 50% Embassy Suites Davenport (Quad Cities) IA 132 Hampton Inn Davenport IA 279 Holiday Inn Overland Park(2) KS 199 50% Embassy Suites Lexington KY 174 Hilton Suites Lexington(2) KY 155 Sheraton Suites Baton Rouge(2) LA 223 Embassy Suites New Orleans(2) LA 372 Embassy Suites New Orleans (French Quarter)(2) LA 374 Holiday Inn Boston (Government Center) MA 303 Holiday Inn Select Boston (Marlborough)(2) MA 229 Embassy Suites Baltimore (BWI Airport) MD 251 90% Embassy Suites Troy MI 251 90% Embassy Suites Bloomington MN 219 Embassy Suites Minneapolis (Airport)(2) MN 310 Embassy Suites Minneapolis (Downtown) MN 216 Embassy Suites St. Paul (Downtown) MN 210 Embassy Suites Kansas City (Plaza)(2) MO 266 50% Embassy Suites Kansas City (Northeast) MO 167 Holiday Inn St. Louis (Downtown) MO 297 Embassy Suites St. Louis (Westport)(2) MO 316 Holiday Inn Jackson (Downtown)(2) MS 354 Crowne Plaza Jackson (North)(2) MS 222 Holiday Inn & Suites Olive Branch (Whispering Woods Hotel and MS 181 Independent Conference Center) Charlotte(2) NC 274 50% Embassy Suites Charlotte (SouthPark) NC 208 Doubletree Guest Suites Raleigh (Crabtree)(2) NC 225 50% Embassy Suites Raleigh NC 203 Doubletree Guest Suites Omaha (Central) NE 187 Doubletree Guest Suites Omaha (Central) NE 131 Hampton Inn Omaha (Central-I-80) NE 383 Holiday Inn Omaha (Old Mill) NE 223 Crowne Plaza
23
Hotel State Rooms % Owned (1) Brand ----- ----- ----- ----------- ----- Omaha (Southwest) NE 131 Hampton Inn Omaha (Southwest) NE 78 Holiday Inn Express & Suites Omaha NE 108 Homewood Suites Parsippany(2) NJ 274 50% Embassy Suites Piscataway(2) NJ 224 Embassy Suites Secaucus (Meadowlands) NJ 304 Crowne Plaza Secaucus (Meadowlands) NJ 261 50% Embassy Suites Albuquerque (Mountainview) NM 360 Holiday Inn Syracuse NY 215 Embassy Suites Cleveland (Downtown) OH 268 Embassy Suites Columbus OH 194 Doubletree Guest Suites Dayton(2) OH 137 Doubletree Guest Suites Tulsa (I-44) OK 244 Embassy Suites Philadelphia (Center City) PA 445 Crowne Plaza Philadelphia (Historic District)(2) PA 364 Holiday Inn Philadelphia (Society Hill)(2) PA 365 Sheraton Pittsburgh (At University Center)(2) PA 251 Holiday Inn Select Charleston (Mills House) SC 214 Holiday Inn Greenville (Roper Mountain Road) SC 208 Crowne Plaza Myrtle Beach (Kingston Plantation) SC 255 Embassy Suites Myrtle Beach(3) SC 385 Wyndham Knoxville (Central at Papermill Road) TN 240 Holiday Inn Nashville (Airport/Opryland Area) TN 296 Embassy Suites Nashville TN 138 Doubletree Guest Suites Nashville (Opryland/Airport) TN 382 Holiday Inn Select Addison (North Dallas) TX 429 Crowne Plaza Amarillo (I-40) TX 248 Holiday Inn Austin (North) (2) TX 260 50% Embassy Suites Austin TX 189 90% Doubletree Guest Suites Austin (Town Lake) TX 320 Holiday Inn Beaumont (Midtown I-10) TX 190 Holiday Inn Corpus Christi(2) TX 150 Embassy Suites Dallas (Alpha Road)(4) TX 114 Independent Dallas (Campbell Centre) TX 300 90% Doubletree Dallas (DFW Airport-North - Irving) TX 506 Harvey Hotel Dallas (DFW Airport-North - Irving)(2) TX 164 Harvey Suites Dallas (DFW Airport-South - Irving) TX 305 Embassy Suites Dallas (Downtown-West End) TX 311 Hampton Inn Dallas (Love Field)(2) TX 248 Embassy Suites Dallas (Market Center)(2) TX 354 Crowne Plaza Dallas (Market Center)(2) TX 244 Embassy Suites Dallas (Park Central) TX 295 Crowne Plaza Suites Dallas (Park Central) TX 279 Embassy Suites Dallas (Park Central)(2) TX 313 Harvey Hotel Dallas (Park Central) TX 438 60% Sheraton Dallas (Park Central) TX 536 60% Westin Houston (I-10 West) TX 349 Holiday Inn Select Houston (Intercontinental Airport)(2) TX 415 Holiday Inn Houston (Medical Center)(2) TX 293 Crowne Plaza Houston (Medical Center)(2) TX 284 Holiday Inn & Suites Houston (Greenway Plaza)(2) TX 355 Holiday Inn Select Midland (Country Villa) TX 250 Holiday Inn Odessa TX 186 Holiday Inn Express & Suites
24
Hotel State Rooms % Owned (1) Brand ----- ----- ----- ----------- ----- Odessa (Centre) TX 245 Holiday Inn & Suites Plano(2) TX 279 Harvey Hotel Plano TX 160 Holiday Inn San Antonio (Airport)(2) TX 261 50% Embassy Suites San Antonio (Downtown) TX 315 Holiday Inn San Antonio (International Airport) TX 397 Holiday Inn Select San Antonio (Northwest I-10)(2) TX 216 50% Embassy Suites Waco (I-35) TX 170 Holiday Inn Salt Lake City (Airport) UT 191 Holiday Inn Burlington(2) VT 309 Sheraton Vienna (Tysons Corner)(2) VA 437 50% Sheraton Premiere Canadian Hotels: Cambridge Ontario 143 Holiday Inn Kitchener (Waterloo) Ontario 182 Holiday Inn Peterborough (Waterfront) Ontario 153 Holiday Inn Sarnia Ontario 151 Holiday Inn Toronto (Airport) Ontario 445 Holiday Inn Select Toronto (Yorkdale) Ontario 370 Holiday Inn Unconsolidated operations: Scottsdale (Downtown)(2) AZ 218 50% Fairfield Inn Atlanta (Downtown)(2) GA 211 50% Courtyard by Marriott Atlanta (Downtown)(2) GA 242 50% Fairfield Inn Great Bend(2) KS 174 50% Holiday Inn Hays(2) KS 117 50% Hampton Inn Hays(2) KS 191 50% Holiday Inn Salina(2) KS 195 50% Holiday Inn Salina (I-70) (2) KS 93 50% Holiday Inn Express & Suites New Orleans (Chateau LeMoyne)(2) LA 171 50% Holiday Inn Dallas (Regal Row)(2) TX 204 50% Fairfield Inn Houston (I-10 East)(2) TX 160 50% Fairfield Inn Houston (I-10 East)(2) TX 90 50% Hampton Inn Houston (Near the Galleria)(2) TX 209 50% Courtyard by Marriott Houston (Near the Galleria)(2) TX 107 50% Fairfield Inn
- ---------------------------- (1) We own 100% of the real estate interests unless otherwise noted. (2) Encumbered by mortgage debt. (3) Conversion to a Hilton hotel is expected in April 2003. (4) Converted to a Staybridge Suites hotel in March 2003. MANAGEMENT AGREEMENTS In July 2001, we acquired the leasehold interests in 88 hotels from Six Continents Hotels. In connection with this acquisition, Six Continents Hotels assigned the leases to those hotels to our TRSs, and the TRSs executed new management agreements with Six Continents Hotels for each of the 88 hotels that was previously leased. Additionally, as a result of our acquisition of DJONT, our TRSs became parties to management agreements with subsidiaries of Hilton, including Promus Hotels, Inc. and its affiliates, DT Management, Inc. and its affiliates, and subsidiaries of Starwood, including Sheraton Operating Corporation and its affiliates. 25 The management agreements governing the operation of 95 of our hotels that are (i) managed by Six Continents Hotels or Starwood under brands owned by them, or (ii) managed by Hilton under the Doubletree brand, contain the right and license to operate the hotels under the specified brands. No separate franchise agreements are required for the operation of these hotels. Management Fees and Performance Standards. Under the management agreements with Six Continents Hotels, the TRS lessees generally pay Six Continents Hotels a basic management fee for each hotel equal to 2% of total revenue of the hotel plus 5% of the room revenue of the hotel for each fiscal month during the initial term and any renewal term. The basic management fees owed under the other management agreements are generally as follows: o Doubletree -- between 2% and 3% of the hotel's total revenue per month; o Sheraton -- 2% of the hotel's total revenue per month; and o Embassy Suites Hotels -- 2% of the hotel's total revenue per month. Under the management agreements with Six Continents Hotels, the TRS lessees are required to pay an incentive management fee based on the performance of all the managed hotels, considered in the aggregate. The incentive management fee is computed as a percentage of hotel profits in excess of specified returns to us, based on our investment in the managed hotels. The management agreements with the other managers generally provide for an incentive management fee based on a percentage of the TRS lessee's net income before overhead, on a hotel by hotel basis. Term and Termination. The management agreements with Six Continents Hotels generally have initial terms of 12 to 17 years. Six Continents Hotels may renew the management agreements for one additional five-year term on mutually acceptable terms and conditions, provided the hotel meets certain performance standards. The TRSs may elect not to continue to operate the hotels under the brand beyond the expiration of the initial term, however such election will give Six Continents Hotels the right to force us to sell such hotel to it at an appraised value. The management agreements with the other managers generally have initial terms of between 10 and 20 years, and the agreements are generally renewable beyond the initial term for a period or periods of between five and 10 years only upon the mutual written agreement of the parties. Management agreements covering 64 of our hotels expire, subject to any renewal rights, within the next five years. The management agreements are generally terminable upon the occurrence of standard events of default or if the hotel subject to the agreement fails to meet certain financial expectations. Upon termination by either party for any reason the TRSs generally will pay all amounts due and owing under the management agreement through the effective date of such termination. Under the Six Continents Hotels management agreements, if we sell any individual hotel, we may be required to pay Six Continents Hotels a monthly replacement management fee equal to the existing fee structure for up to one year. In addition, if a TRS breaches the agreement, resulting in a default and termination thereof, or otherwise causes or suffers a termination for any reason other than an event of default by Six Continents Hotels, the TRS may be liable for liquidated damages under the terms of the management agreement. However, if the termination results from the sale of a hotel, no such liquidated damages will be owed if the net proceeds of the sold hotel are reinvested to purchase one or more hotels licensed and managed by Six Continents Hotels within one year from the sale of the hotel. Assignment. Generally, neither party to the management agreements has the right to sell, assign or transfer the agreements to an unaffiliated third party without the prior written consent of the other party to the agreement, which consent shall not be unreasonably withheld. A change in control of either party will generally require the other's consent, which may not be unreasonably withheld. FRANCHISE AGREEMENTS With the exception of our 95 hotels whose rights to use a brand name are contained in the management agreement governing their operations and our seven hotels that do not operate under a nationally recognized brand name, each of our hotels operates under a franchise or license agreement. Of our 67 hotels 26 that are operated under a franchise or license agreement, 59 are operated under the Embassy Suites Hotels brand. The Embassy Suites Hotels franchise license agreements to which we are a party grant us the right to the use of the Embassy Suites Hotels name, system and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which the licensed hotel must comply. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furnishings, furniture and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. Typically, our Embassy Suites Hotels franchise license agreements provide for payment to the franchisor of a license fee or royalty of 4% of suite revenues. In addition, we pay approximately 3.5% of suite revenues as marketing and reservation system contributions for the systemwide benefit of Embassy Suites Hotels. Our typical Embassy Suites Hotels franchise license agreement provides for a term of 20 years, but we have a right to terminate the license for any particular hotel on the 10th or 15th anniversary of the agreement upon payment by us of an amount equal to the fees paid to the franchisor with respect to that hotel during the two preceding years. The agreements provide us with no renewal or extension rights. The agreements are not assignable by us and a change in control of the franchisee will constitute a default on our part. In the event we breach one of these agreements, in addition to losing the right to use the Embassy Suites Hotels name for the operation of the applicable hotel, we may be liable, under certain circumstances, for liquidated damages equal to the fees paid to the franchisor with respect to that hotel during the three preceding years. Franchise license agreements covering nine of our Embassy Suites Hotels expire within the next five years. ITEM 3. LEGAL PROCEEDINGS There is no litigation pending or known to be threatened against us or affecting any of our hotels, other than claims arising in the ordinary course of business or which are not considered to be material. Furthermore, most of these claims are substantially covered by insurance. We do not believe that any claims known to us, individually or in the aggregate, will have a material adverse effect on us, without regard to any potential recoveries from insurers or other third parties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 27 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION There is not an established public trading market for our common units. The units, however, are redeemable at the option of the holder for a like number of shares of common stock of FelCor or, at the option of FelCor, for the cash equivalent thereof. The following information is provided regarding the common stock of FelCor. FelCor's common stock is traded on the New York Stock Exchange under the symbol "FCH." The following table sets forth for the indicated periods the high and low sale prices for its common stock, as traded on that exchange.
HIGH LOW ---- --- 2001 First quarter............................................... $24.94 $22.14 Second quarter.............................................. 24.75 20.90 Third quarter............................................... 24.23 11.90 Fourth quarter.............................................. 17.20 12.80 2002 First quarter............................................... 22.00 16.20 Second quarter.............................................. 21.73 17.25 Third quarter............................................... 18.74 12.46 Fourth quarter.............................................. 13.15 10.12
STOCKHOLDER INFORMATION At March 17, 2003, FelCor had approximately 465 holders of record of their common stock and approximately 55 holders of record of their Series A preferred stock (which is convertible into common stock). It is estimated that there were approximately 16,200 beneficial owners, in the aggregate, of FelCor's common stock and Series A preferred stock at that date. At March 17, 2003, we had approximately 36 holders of record of our common units. IN ORDER TO COMPLY WITH CERTAIN REQUIREMENTS RELATED TO FELCOR'S QUALIFICATION AS A REIT, FELCOR'S CHARTER LIMITS, SUBJECT TO CERTAIN EXCEPTIONS, THE NUMBER OF SHARES OF COMMON STOCK THAT MAY BE OWNED BY ANY SINGLE PERSON OR AFFILIATED GROUP TO 9.9% OF THE OUTSTANDING COMMON STOCK. DISTRIBUTION INFORMATION We have, historically, had a policy of paying regular quarterly distributions on our common units, and cash distributions have been paid on our common units with respect to each quarter since our inception. However, on February 4, 2003, we announced that, as the result of the uncertain political environment and soft business climate, together with the risk of further margin deterioration should we continue to experience declines in our portfolio's average daily rate, we do not expect FelCor's board of directors to declare future common distributions until there is a 2 to 4% increase in hotel RevPAR. We currently expect to determine the amount of each future quarterly common and preferred distribution, if any, based upon the operating results of that quarter, economic conditions and other operating trends. Future distributions, if any, paid by us will be at the discretion of FelCor's board of directors and will depend on our actual cash flow, financial condition, capital requirements, the annual distribution requirements for FelCor under the REIT provisions of the Internal Revenue Code and such other factors as FelCor's board of directors deems relevant. 28 The following table sets forth information regarding the declaration and payment of distributions by us on our units during 2001 and 2002.
DISTRIBUTION DISTRIBUTION PER UNIT RECORD PAYMENT DISTRIBUTION DATE DATE AMOUNT ------------ ------------ ------------ 2001 First quarter.................................................. 4/13/01 4/30/01 $0.55 Second quarter................................................. 7/13/01 7/31/01 0.55 Third quarter.................................................. 10/15/01 10/31/01 0.55 Fourth quarter................................................. 12/31/01 1/31/02 0.05 2002 First quarter.................................................. 4/12/02 4/30/02 0.15 Second quarter................................................. 7/15/02 7/31/02 0.15 Third quarter.................................................. 10/11/02 10/31/02 0.15 Fourth quarter................................................. 12/31/02 1/31/03 0.15
The foregoing distributions represent approximately a 30% return of capital in 2002 and a 45% return of capital in 2001. In order to maintain FelCor's qualification as a REIT, they must make annual distributions to their stockholders of at least 90% of taxable income (which does not include net capital gains). For the years ended December 31, 2002 and December 31, 2001, FelCor had annual distributions totaling $0.60 and $1.70 per common share, respectively, of which only $0.23 and $0.41 per share, respectively, were required to satisfy the 90% REIT distribution tests in the respective years. All of such funds were provided by us through distributions on our units. Under certain circumstances we may be required to make distributions in excess of cash available for distribution in order to meet FelCor's REIT distribution requirements. In that event, we presently would expect to borrow funds, or to sell assets for cash, to the extent necessary to obtain cash sufficient to make the distributions required to retain FelCor's qualification as a REIT for federal income tax purposes. ISSUANCES OF UNREGISTERED SECURITIES None. EQUITY COMPENSATION PLAN INFORMATION The following table sets forth the number of FelCor's securities to be issued upon exercise of outstanding options, warrants and rights; weighted average exercise price of outstanding options, warrants and rights; and the number of securities remaining available for future issuance. EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES TO WEIGHTED AVERAGE BE ISSUED UPON EXERCISE EXERCISE PRICE OF NUMBER OF SECURITIES OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REMAINING AVAILABLE PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FOR FUTURE ISSUANCE ------------- ----------------------- -------------------- -------------------- Equity compensation plans approved by security holders: Stock Options 1,977,474 $22.85 Restricted Stock 633,281 ---------- Total 2,610,755 1,133,179 ----------
29 ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected financial data for us for the years ended December 31, 2002, 2001, 2000, 1999, and 1998 that has been derived from our audited financial statements and the notes thereto. This data should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 15(a), the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002(1) 2001(2) 2000(3) 1999 1998(4) ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Total revenues ............................. $ 1,317,959 $ 1,200,971 $ 539,964 $ 493,087 $ 332,600 Net income (loss) .......................... $ (192,298) $ (50,144) $ 66,391 $ 135,776 $ 121,339 Net income (loss) applicable to unitholders ............................. $ (218,590) $ (74,744) $ 41,709 $ 111,041 $ 99,916 DILUTED EARNINGS PER UNIT: Net income (loss) applicable to unitholders ............................. $ (3.54) $ (1.21) $ 0.67 $ 1.57 $ 1.87 OTHER DATA: Cash distributions per unit(5) .............. $ 0.60 $ 1.70 $ 2.20 $ 2.20 $ 2.545 Funds From Operations (6) .................. $ 102,372 $ 183,657 $ 288,636 $ 286,895 $ 217,363 EBITDA(6) .................................. $ 306,553 $ 369,591 $ 470,861 $ 432,689 $ 306,361 BALANCE SHEET DATA (AT END OF PERIOD): Total assets ............................... $ 3,780,363 $ 4,079,485 $ 4,103,603 $ 4,255,751 $ 4,175,383 Total debt, net of discount ................ $ 1,877,134 $ 1,938,241 $ 1,838,241 $ 1,833,954 $ 1,594,734
- ---------- (1) Includes hotel revenue and expenses with respect to 88 hotels that were leased to Six Continents Hotels prior to July 1, 2001. Prior to acquisition of these leases, our revenues with respect to these 88 hotels were comprised mainly of percentage lease revenues. Accordingly, revenues, expenses and operating results for the year ended December 31, 2002, are not directly comparable to the same period in 2001. Additionally, for the year ended December 31, 2002, we recognized impairment charges totaling $157.5 million. This impairment resulted primarily from our decision to dispose of 33 non-strategic hotels over the next 36 months. (2) Includes hotel revenues and expenses with respect to 96 hotels that were leased to either DJONT or subsidiaries of Six Continents Hotels prior to January 1, 2001, and 88 hotels that were leased to Six Continents Hotels prior to July 1, 2001. Prior to the acquisition of the leases, our revenues were comprised mainly of percentage lease revenues. Accordingly, revenues, expenses and operating results for the year ended December 31, 2001, are not directly comparable to the same period in 2000. Additionally, for the year ended December 31, 2001, we recorded approximately $78 million of expenses, including lease termination costs of $36.6 million, merger termination costs of $19.9 million, merger related financing costs of $5.5 million, swap termination costs of $7.0 million, loss on hotels held for sale of $7.0 million, the write-off of deferred loan costs of $1.3 million, and abandoned project write-offs of $0.8 million. (3) In the second quarter of 2000, we recorded a $63.0 million loss to reflect the difference between our book value and the expected realizable value of 25 hotels in connection with our decision to sell these non-strategic hotel assets, and an extraordinary charge of $3.9 million for the write-off of deferred loan costs associated with debt retired in 2000, prior to its maturity. (4) On July 28, 1998, we completed the merger of Bristol Hotel Company's real estate holdings with and into FelCor. The merger resulted in the net acquisition of 107 primarily full-service hotels in return for approximately 31 million shares of newly issued common stock. FelCor subsequently contributed all assets and liabilities acquired in the merger to us, in exchange for approximately 31 million units. (5) In 2002, we paid distributions of $0.15 per unit each quarter, and in the fourth quarter of 2001, we paid distributions of $0.05 per unit. This represents a reduction in distributions compared to periods prior to the fourth quarter of 2001, and was prompted by the decrease in revenues resulting from the disruption in travel-related businesses and the general economic downturn that began in 2001. In 1998, we declared a special distribution of accumulated but undistributed earnings and profits as a result of Bristol Hotel Company merging with and into FelCor, in addition to the aggregate quarterly distributions of $2.20 per unit. The amount of the special distribution was $0.345 per unit. (6) A more detailed description and computation of FFO and EBITDA is contained in the "Funds From Operations and EBITDA" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below. 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For background information relating to us and the definitions of certain capitalized terms used herein, reference is made to the Notes to Consolidated Financial Statements of FelCor Lodging Limited Partnership appearing elsewhere in this Annual Report on Form 10-K. The current economic downturn, which started in 2001, resulted in a decline in lodging demand for 2001 that continued into 2002. This had an adverse effect on our operating results for these years. For the year ended December 31, 2002, our hotels' revenue per available room, or RevPAR, decreased by 8.1% compared to 2001. This decline resulted in lower revenues from our hotels and a reduction in our operating income. Also affecting our results of operations for 2002, were impairment related charges of $157.5 million resulting primarily from our decision to designate 33 hotels as non-strategic and to sell them over the next 36 months. We raised a net total of $24 million in new equity capital during 2002, through the issuance of FelCor's Series B preferred stock. FelCor contributed the proceeds to us in exchange for our Series B preferred units. We had no borrowings under our line of credit at December 31, 2002. FINANCIAL COMPARISON
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------- % CHANGE % CHANGE 2002 2001 2002-2001 2000 2001-2000 ------------ ------------ ------------ ------------ ------------ (IN MILLIONS, EXCEPT REVPAR) Revenue Per Available Room ("RevPAR") ......................... $ 61.14 $ 66.51 (8.1)% $ 75.17 (11.5)% Funds From Operations ("FFO") .......... $ 102.4 $ 183.7 (44.3) $ 288.6 (36.3) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") .......................... $ 306.6 $ 369.6 (17.0) $ 470.9 (21.5) Net income (loss) ...................... $ (192.3)(1) $ (50.1)(2) (283.8) $ 66.4(3) (175.5)
(1) The net loss for the year ended December 31, 2002, includes $157.5 million in impairment related charges, principally associated with our decision to sell 33 non-strategic hotels over the next 36 months. (2) The net loss for the year ended December 31, 2001, includes $78.1 million of expenses, consisting of merger termination costs of $19.9 million, merger related financing costs of $5.6 million, lease termination costs of $36.6 million, swap termination costs of $7.0 million, a loss on assets held for sale of $7.0 million, abandoned project write-offs of $0.8 million, and a loss of $1.3 million from the write-off of deferred loan costs. (3) The net income for the year ended December 31, 2000, was reduced by a $63 million loss recognized to reflect the difference between our book value and the estimated realizable value of 25 non-strategic hotel assets that we decided to sell, and a $4 million loss from the write-off of deferred loan costs. REVPAR DECLINE We experienced declines in RevPAR from March 2001 through August 2002. An overall decline in both business and leisure travel was reflected in decreased occupancies, which led to declines in room rates as hotels competed more aggressively for guests, both of which had a significant adverse effect on our RevPAR and operating performance. Our hotel RevPAR declined 8.1% in 2002, compared to 2001. On a national basis, the hotel industry experienced RevPAR declines of 2.5% and 7.0% for 2002 and 2001, respectively. Our hotel occupancies declined by only 2.8% in 2002, compared to 2001, while our average daily rates ("ADR") declined 5.5% from those experienced in 2001. 31 In 2002, our hotels had a 220 basis point drop in pro forma hotel operating margins from the prior year. The compression in margins was principally related to improving occupancies of our hotels coupled with decreasing ADR. Also affecting hotel margins were increases in employee related costs, marketing, and repair and maintenance costs. We continue to actively work with our brand managers to increase revenues and control operating costs, while still maintaining the satisfaction and security of our hotel guests. SALE OF NON-STRATEGIC HOTELS In February 2003, we announced our plan to sell 33 non-strategic hotels over the next 36 months, six of which had been previously designated as held for sale. These non-strategic hotels include smaller hotels in secondary or tertiary markets and include some Texas hotels, and specifically, hotels in Dallas, Texas (an area in which we desire to reduce our concentration of hotels). It is our intention to reinvest most of the proceeds from these sales in newer, larger and higher quality hotels, primarily in urban and resort locations with higher growth rates and barriers to competition. For those hotels currently managed by Six Continents Hotels, we are liable for liquidated damages under the terms of our management agreement, unless we reinvest the net proceeds to purchase one or more hotels licensed and managed by Six Continents Hotels within one year of the sale. We will seek to sell $50 to $75 million of these non-strategic hotels that are unencumbered by debt and management agreement reinvestment requirements during 2003, and use the proceeds from these sales to pay down debt. We recorded $157.5 million in impairment related losses in 2002, principally related to shorter hold periods associated with our decision to sell these non-strategic hotels. The 33 hotels identified as non-strategic represent 14% of our hotel rooms, but less than 7% of our 2002 consolidated hotel EBITDA. These non-strategic hotels have an average of 196 rooms, while the average number of rooms for the remainder of our portfolio is 294. RESULTS OF OPERATIONS Comparison of the Years Ended December 31, 2002 and 2001 On July 1, 2001, we acquired operating leases covering 88 of our hotels and contributed them to our TRSs. As the leases were acquired, we began receiving and recording hotel revenues and expenses, rather than percentage lease revenue, for these hotels. Consequently, the historical results for the year ended December 31, 2002, and the year ended December 31, 2001, are not directly comparable. We recorded a net loss applicable to unitholders of $218.6 million in 2002, compared to a net loss of $74.7 million in 2001. The principal components of the 2002 loss were impairment related charges of $157.5 million, principally related to shorter holding periods associated with our decision to sell 33 non-strategic hotels; the decrease in hotel RevPAR of 8.1%; and contraction of hotel operating margins, principally associated with the decline in RevPAR. Total revenue for the year ended December 31, 2002, increased $117.0 million over 2001. The increase is principally associated with reporting hotel operating revenues for 88 of the hotels during the first six months of 2002, of $305.3 million, contrasted with percentage lease revenue we reported for these hotels during the same period in 2001, of $115.1 million. This increase was partially offset by a $62.0 million reduction in hotel operating revenues and an $11.2 million net reduction from disposition and acquisition of hotels during the periods reported. Total operating expenses increased $114.4 million for the year ended December 31, 2002, over 2001. This increase primarily resulted from the inclusion of $208.3 million in hotel operating expenses, management fees and other property related costs for the 88 hotels during the first six months of 2002 that were not included in the same period of 2001, prior to our acquisition of the leases. Offsetting this increase were $19.9 million of merger termination costs associated with the termination of the MeriStar Hospitality merger and $36.6 million of lease termination costs associated with the acquisition of hotel leases that were recorded in 2001. 32 Taxes, insurance and lease expense decreased $8.6 million, principally as the result of decreases in lease expense of $9.7 million, and property taxes of $4.1 million, partially offset by increased insurance costs of $5.2 million. The decrease in lease expense is related to participating leases that are based principally on revenues. Property taxes decreased principally from the resolutions of prior year property tax disputes. Included in the year ended December 31, 2002, were $1.7 million of abandoned project costs related to our pursuit of a large portfolio acquisition. We were unable to reach mutually acceptable pricing and terms with the seller as a result of the uncertain operating environment and softening capital markets. The year ended December 31, 2001, included $0.8 million of abandoned project costs. Recurring interest expense, net of interest income, increased $6.0 million for the year ended December 31, 2002, over 2001. The increase is primarily related to excess cash that we carried during 2002, an increase in average debt outstanding of $45.3 million, over 2001, and higher average interest rates in 2002 resulting from our senior unsecured notes issued during 2001. The year ended December 31, 2002, included a $3.2 million charge-off of capitalized costs from reduced line commitments. The prior year included $5.5 million of merger related financing costs related to the $300 million in senior debt that was repaid in October 2001, and a $1.3 million loss related to the charge-off of capitalized costs from reduced line commitments. Also in 2001, in connection with the issuance of favorably priced fixed rate debt and the prepayment of floating rate debt, we terminated $250 million of interest rate swaps, resulting in a $7.0 million swap termination cost. We recorded impairment related losses of $157.5 million during the fourth quarter of 2002. Of these losses, $118.3 million primarily related to shorter holding periods associated with our recent decision to sell 33 hotels over the next 36 months. Six of these 33 hotels had been identified for sale in prior periods and were included in the hotels for which an impairment loss of $7.0 million was recorded in 2001. Of the remaining 2002 impairment charge: $25.8 million related to two hotels held for investment that are not included in the disposition plan and $13.4 million related to an other than temporary decline in the value of certain equity method investments. Equity in the income of unconsolidated entities decreased by $17.5 million, compared to 2001. The decrease in 2002 principally resulted from the previously described $13.4 million impairment loss and an 8.6% drop in RevPAR from our unconsolidated hotels. Minority interests decreased $2.5 million for the year ended December 31, 2002, over 2001. Minority interest represents the proportionate share of the income or loss of other consolidated subsidiaries not owned by us. Partially offsetting the net loss for the year ended December 31, 2002, was a gain of $5.1 million on the sale of retail space and $0.9 million on the sale of a hotel. The net loss for the year ended December 31, 2001, was reduced by a gain of $3.0 million related to condemnation proceeds received and a gain of $0.4 million on the sale of land. Comparison of the Year Ended December 31, 2002 with Pro Forma 2001 On July 1, 2001, we acquired the operating leases covering 88 of our hotels and contributed them to our TRSs. As the leases were acquired, we began receiving and recording hotel revenues and expenses, rather than percentage lease revenue. Consequently, a comparison of historical results for the year ended December 31, 2002, to the year ended December 31, 2001, may not be as meaningful as a discussion of pro forma results. Accordingly, we have included a discussion of the comparison of the pro forma results of operations. The pro forma results of operations for the year ended December 31, 2001, assumes that our acquisition of the 88 hotel leases had occurred on January 1, 2001. 33 CONDENSED CONSOLIDATED STATEMENTS OF OPERATING INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------------ HISTORICAL PRO FORMA HISTORICAL 2002 2001 2001 ---------- ---------- ---------- Total revenues $1,317,959 $1,442,974 $1,200,971 ---------- ---------- ---------- Operating expenses: Hotel operating expenses 1,191,832 1,260,326 1,021,785 Abandoned project costs 1,663 837 837 Lease termination costs 36,604 36,604 Merger termination costs 19,919 19,919 ---------- ---------- ---------- Total operating expenses 1,193,495 1,317,686 1,079,145 ---------- ---------- ---------- Operating income $ 124,464 $ 125,288 $ 121,826 ---------- ---------- ----------
The 2001 Pro Forma Condensed Consolidated Statement of Operating Income is presented for illustrative purposes only and is not necessarily indicative of what the actual results of operations would have been had the transaction previously described occurred on the indicated date, nor do they purport to represent our results of operations for future periods. The pro forma numbers presented represent our historical revenues and expenses, modified as described in the pro forma adjustments below. Pro forma adjustments: (a) Total revenue adjustments consist of the increase in our historical revenue from the elimination of historical percentage lease revenue and the addition of historical hotel operating revenues. (b) Hotel operating expense adjustments consist of: (i) the increase in our historical operating expense from the addition of historical hotel operating expenses and the elimination of percentage lease expense for the 88 hotel leases acquired from Six Continents Hotels on July 1, 2001, (ii) the recording of management fees at their new contractual rates, and (iii) the elimination of historical franchise fees, which are included in the new management fees for these hotels. Revenues decreased $125.0 million in 2002, compared to pro forma 2001. The decrease in revenue resulted principally from a decline in both business and leisure travel for the year ended December 31, 2002 compared to 2001, which reflected the weak economy and political uncertainties during the period. During the year ended December 31, 2002, RevPAR for our hotels decreased 8.1%, compared to the prior year pro forma; the decline in RevPAR was comprised of a decrease in hotel occupancy of 1.8 percentage points (or 2.8%), to 62.4%, and a decline in ADR of 5.5%, to $97.90. Hotel operating expenses decreased $68.5 million in 2002, compared to pro forma 2001. This decrease is primarily related to a decrease in the expenses from hotel operations associated with the 8.1% decrease in RevPAR. However, hotel operating expenses, as a percentage of total revenue, increased from 87% to 90%. The principal reason for the increase in operating expenses, as a percentage of total revenue, was a 220 basis point drop in hotel operating margins. This margin compression primarily relates to the reduction in revenue and the inability to reduce labor costs, repair and maintenance costs and marketing costs proportionately. We are actively working with our managers to implement cost cutting programs at our hotels to maximize hotel operating profits. These measures include reducing labor costs, streamlining staffing, and consolidating operations by closing unused floors in hotels when possible. Included in the year ended December 31, 2002, were $1.7 million of abandoned project costs related to our pursuit of a large portfolio acquisition. We were unable to reach mutually acceptable pricing and terms with the seller as a result of the uncertain operating environment and softening capital markets. The year ended December 31, 2001, included $0.8 million of abandoned project costs. 34 Included in the prior year were $36.6 million in lease termination costs, associated with the acquisition of our hotel leases and $19.9 million of costs associated with the termination of the proposed MeriStar Hospitality merger. Our operating income was $124.5 million in 2002, compared to pro forma operating income of $125.3 million in 2001. The 2001 pro forma operating income included $57.4 million in costs associated with abandoned project costs, lease termination costs and merger termination costs. The principal reasons for this decline in pro forma total revenues and pro forma hotel operating expenses were an 8.1% decline in RevPAR and the contraction of hotel operating margins principally associated with the decline in RevPAR. Comparison of the Years Ended December 31, 2001 and 2000 Prior to December 31, 2000, we leased 184 hotels to either DJONT or Six Continents Hotels and reported the lease revenue from the percentage lease agreements. Our historical revenues for 2000 represented, principally, rental income on leases. Expenses during this period represented specific ownership costs, including real estate and property taxes, property insurance and ground leases. Effective January 1, 2001, through our TRSs, we acquired 96 of these hotel leases and, effective July 1, 2001, acquired the leases on our remaining 88 hotels, assuming all operating risks and rewards of these 184 hotels. As a result of acquiring these leases, we reported hotel operating revenues and expenses. Our expenses included all hotel operating costs, including management fees, salary expenses, hotel marketing, utilities, and food and beverage costs, in addition to ownership costs. Accordingly, operating results for the year ended December 31, 2001, are not directly comparable to 2000. For the year ended December 31, 2001, we recorded total revenues of $1.2 billion, compared to $539.9 million for the year ended December 31, 2000. The increase in total revenues of $661.0 million is principally associated with reporting hotel operating revenues in 2001, rather than the percentage lease revenue reported in the previous year. The 96 hotels acquired from DJONT contributed approximately $787.9 million in hotel operating revenue in 2001, compared to $277.3 million in percentage lease revenue for 2000. The 88 hotels acquired July 1, 2001, from Six Continents Hotels contributed approximately $115.1 million in percentage lease revenue and $295.0 million in hotel operating revenue, following the acquisition of these leases, compared to $259.6 million in percentage lease revenue for these same hotels in 2000. Total operating expense increased $813.5 million for the year ended December 31, 2001, over 2000, primarily as a result of the inclusion of hotel operating expenses, management fees and other property related costs of $710.6 million, which were not included in 2000, prior to our acquisition of the hotel leases. Also included in total operating expenses for 2001 are: lease termination costs; merger termination costs; depreciation; taxes, insurance and lease expense; and corporate expenses. Taxes, insurance and lease expense increased by $48.2 million for year ended December 31, 2001, over 2000. The majority of this increase is related to percentage lease expense paid to unconsolidated ventures owning hotels whose operations were acquired with the acquisition of DJONT. We included in operating expenses $36.6 million of costs associated with the acquisition of DJONT and the Six Continents Hotels leases, and $19.9 million of expenses associated with the termination of the MeriStar merger. We also incurred $5.5 million in merger related financing costs related to the $300 million in senior debt that was repaid in October 2001, as a result of the termination of the MeriStar merger. In connection with the issuance of favorably priced fixed rate debt, and the prepayment of floating rate debt, we terminated $250 million of interest rate swaps, resulting in a $7.0 million swap termination cost. In June 2000, we announced our intention to sell 25 non-strategic hotels and, in 2000, recorded an expense of $63.0 million representing the difference between the net book value of these hotels and their estimated net proceeds from sale. In 2001, an additional $7.0 million loss provision was recorded related to the remaining 13 hotels held for sale. Equity in income from unconsolidated entities decreased $7.5 million in 2001, compared to 2000. The principal reasons for the decrease in 2001 were a gain of $3.7 million recorded in 2000 from the development and sale of condominiums by an entity in which we own a 50% equity interest and a decline in 35 percentage lease revenue in 2001 from these unconsolidated entities, related to a 11.2% decline in the RevPAR of the hotels owned by them during 2001. We recorded a net loss applicable to unitholders of $74.7 million in 2001, compared to a net income of $41.7 million in 2000. The principal components of the loss in 2001 were the decrease in hotel RevPAR of 11.4%, contraction of hotel operating margins principally associated with the decline in RevPAR, costs of terminating the MeriStar merger of $19.9 million, merger financing costs of $5.5 million, lease termination costs of $36.6 million associated with acquiring hotel leases, swap termination costs of $7.0 million associated with repayment of variable rate debt, and a loss on assets held for sale of $7.0 million. Comparison of the pro forma years ended December 31, 2001 and 2000 Between January 1 and July 1, 2001, we acquired the operating leases covering our hotels and contributed them to our TRSs. As the leases were acquired, we began directly receiving and recording hotel revenues and expenses, rather than percentage lease revenue. Consequently, a comparison of historical results for the year ended December 31, 2001, to the year ended December 31, 2000, may not be as meaningful as a discussion of pro forma results. Accordingly, we have included a discussion of the comparison of the pro forma results of operations. The pro forma results of operations for the years ended December 31, 2001, and 2000 assumes that the following occurred on January 1, 2000: o Our acquisition of DJONT for 416,667 units, valued at approximately $10 million; o Our acquisition of 12 hotel leases, together with their associated management contracts, from Six Continents Hotels for which FelCor issued 413,585 shares of its common stock, valued at approximately $10 million; and o Our acquisition of the remaining 88 hotel leases held by Six Continents Hotels. CONDENSED CONSOLIDATED STATEMENTS OF OPERATING INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------------- PRO FORMA PRO FORMA HISTORICAL HISTORICAL 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Total revenues .................... $1,442,974 $1,667,270 $1,200,971 $ 539,964 ---------- ---------- ---------- ---------- Operating expenses: Hotel operating expenses ....... 1,260,326 1,402,018 1,021,785 265,634 Lease termination costs ........ 36,604 36,604 Merger termination costs ....... 19,919 19,919 Abandoned project costs ........ 837 837 ---------- ---------- ---------- ---------- Total operating expenses .......... 1,317,686 1,402,018 1,079,145 265,634 ---------- ---------- ---------- ---------- Operating income .................. $ 125,288 $ 265,252 $ 121,826 $ 274,330 ---------- ---------- ---------- ----------
The 2002 and 2001 Condensed Consolidated Statements of Operating Income are presented for illustrative purposes only and are not necessarily indicative of what the actual results of operations would have been had the above transactions occurred on the indicated date, nor do they purport to represent our results of operations for future periods. Pro forma numbers presented represent our historical revenues and expenses, modified as described in the pro forma adjustments below. 36 Pro forma adjustments: (a) Total revenue adjustments consist of the changes in our historical revenue from the elimination of historical percentage lease revenue and the addition of historical hotel operating revenues. (b) Hotel operating expense adjustments consist of: (i) the increase in our historical operating expense from the addition of historical hotel operating expenses and the elimination of percentage lease expense; (ii) the recording of management fees at their new contractual rates; and (iii) the elimination of historical franchise fees, which are included in the new management fees for these hotels. Pro forma revenues decreased $224.3 million in 2001, primarily as a result of the economic downturn and disruptions in business and leisure travel following the terrorist attacks on September 11, 2001. As a result of these events, both business and leisure travel declined significantly during the year ended December 31, 2001, compared to 2000. During 2001, our hotels' RevPAR decreased 11.4%, comprised of a decrease in occupancy of 6.6 percentage points (or 9.4%), to 63.9%, and a decline in ADR of 2.4%, to $102.18. During the four-week period following the terrorist attacks on September 11, 2001, our hotels recorded average occupancy rates as low as 33.9%. However, our hotel RevPAR performance improved throughout the fourth quarter, with RevPAR decreases compared to the prior year periods, of 25.2% in October, 23.6% in November, and 18.8% in December. Pro forma hotel operating expenses decreased $141.7 million in 2001, compared to 2000, but pro forma hotel operating expense as a percentage of total revenue increased from 84% to 87%. The principal reason for the increased operating expense, as a percentage of total revenue, was a 260 basis point drop in hotel operating margins (gross operating profit less franchise and management fees). This margin compression primarily related to increased labor costs, the cost of frequent guest programs and utility costs as a percentage of total revenue. The increase in pro forma costs as a percentage of pro forma revenue is principally related to the decrease in hotel revenue previously discussed. We have been actively working with our managers to implement cost cutting programs at the hotels to stabilize the hotels' operating profits. These measures include reducing labor costs, streamlining staffing, and consolidating operations by closing unused floors in hotels, when possible. Our pro forma operating income was $125.3 million in 2001, compared to pro forma operating income of $265.3 million in 2000. The principal reasons for the drop in pro forma operating income were the decrease in pro forma hotel RevPAR of 11.4%, contraction of pro forma operating margins principally associated with the decline in RevPAR, costs of terminating the MeriStar merger of $19.9 million and lease termination costs of $36.6 million associated with acquiring the hotel leases. Funds From Operations and EBITDA We and FelCor consider FFO and EBITDA to be key measures of a REIT's performance and should be considered along with, but not as an alternative to, net income and cash flow as a measure of FelCor's and our operating performance and liquidity. The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of properties, plus real estate related depreciation and amortization, after comparable adjustments for the applicable portion of these items related to unconsolidated entities and joint ventures. We and FelCor believe that FFO and EBITDA are helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, they provide investors with an indication of the ability of the REIT to incur and service debt, to make capital expenditures, to pay distributions and to fund other cash needs. We compute FFO in accordance with standards established by NAREIT, except that we add back certain significant non-recurring items, such as lease termination costs, merger termination costs, merger financing costs, abandoned project costs, impairment losses, charge-off of deferred financing costs and interest rate swap termination expenses to derive FFO. This may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do. FFO and EBITDA do not represent cash generated from operating activities as determined by GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor does it necessarily reflect the funds available to fund our cash needs, including our ability to make cash distributions. FFO and EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties. 37 The following table details our computation of FFO and EBITDA (in thousands):
YEARS ENDED DECEMBER 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ FUNDS FROM OPERATIONS (FFO)(a) Net income (loss) ..................................... $ (192,298) $ (50,144) $ 66,391 Gain on sale of hotel assets .......................... (5,861) (2,595) Depreciation .......................................... 152,817 157,692 160,745 Depreciation from unconsolidated entities ............. 11,616 10,881 10,167 Preferred distributions: Series A preferred distributions ................... (11,662) Series B preferred distributions ................... (14,630) (12,937) (12,937) Significant non-recurring items: Impairment loss .................................... 157,505 7,000 63,000 Charge-off of deferred financing costs ............. 3,222 1,270 3,865 Abandoned project costs ............................ 1,663 837 Merger termination costs ........................... 19,919 Merger related financing costs ..................... 5,486 Lease termination costs ............................ 36,604 Swap termination costs ............................. 7,049 ------------ ------------ ------------ FFO ................................................... $ 102,372 $ 183,657 288,636 ============ ============ ============ Weighted average units outstanding(b) ................. 62,061 66,675 67,239 EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)(a) FFO ................................................... $ 102,372 $ 183,657 $ 288,636 Interest expense ...................................... 166,427 161,226 158,620 Interest expense from unconsolidated entities ......... 9,374 9,678 9,188 Amortization expense .................................. 2,088 2,093 1,480 Preferred distributions: Series A preferred distributions ................... 11,662 Series B preferred distributions ................... 14,630 12,937 12,937 ------------ ------------ ------------ EBITDA ................................................ $ 306,553 $ 369,591 $ 470,861 ============ ============ ============
(a) FFO and EBITDA are adjusted to exclude significant non-recurring items. (b) Weighted average units outstanding are computed including dilutive options, unvested stock grants, and assuming conversion of Series A preferred units to units, when dilutive. LIQUIDITY AND CAPITAL RESOURCES Our principal source of cash to meet our cash requirements, including distributions to unitholders and repayments of indebtedness, is from the results of operations of our hotels. For the year ended December 31, 2002, net cash flow provided by operating activities, consisting primarily of hotel operations, was $106 million. We currently expect that our operating cash flow for 2003 will be within the range of $70 to $90 million using current RevPAR forecasts. Our debt maturities for 2003 are $35 million and we expect 2003 capital expenditures to be approximately $60 to $70 million. Cash necessary to fund cash flow shortfalls and distributions, if any, will be funded from our cash balances, which were approximately $150 million at the date of this filing, proceeds from the sale of hotels or additional borrowings. However, due to the sharp reduction in travel that began in 2001, and the resultant drop in RevPAR and profits from our hotel operations, we expect 38 FelCor's Board of Directors to defer future common distributions until our hotels experience a 2% to 4% increase in RevPAR, and to determine the amount of preferred distributions, if any, for each quarterly period, based upon the operating results of that quarter, economic conditions, other operating trends and FelCor's minimum REIT distribution requirements. Currently, we do not anticipate paying any distributions on our common units during 2003. Recent events, including the threat of additional terrorist attacks, the commencement of war in Iraq and the bankruptcy of several major corporations, have had an adverse impact on the capital markets. These events, new terrorist attacks, a prolonged war in Iraq or additional bankruptcies could further adversely affect the availability and cost of capital for our business. In addition, should the anticipated recovery of the overall economy, and of the lodging industry, continue to be delayed significantly, that too could adversely affect our operating cash flow and the availability and cost of capital for our business. As a consequence of the economic slowdown in our business, and the travel and lodging industries generally, Standard & Poor's lowered its ratings on our $1.2 billion in senior unsecured debt from BB- to B+ with a stable outlook, in February 2003. Although Moody's affirmed its current rating on our senior debt in February 2003 (Ba3), we remain on negative outlook. Should Moody's downgrade our current rating, the interest rate on $900 million of our $1.2 billion in senior unsecured debt would increase by 50 basis points, which would increase our interest expense by $4.5 million on an annual basis. We are also subject to the risks of fluctuating hotel operating margins at our hotels, including but not limited to wage and benefit costs, repair and maintenance expenses, utilities, liability insurance, and other operating expenses that can fluctuate disproportionately to revenues. These operating expenses are difficult to predict and control, resulting in an increased risk of volatility in our results of operations. The economic slowdown and the sharp drop in Occupancy and ADR that began in 2001, have resulted both in declines in RevPAR and an erosion in operating margins. If the declines in hotel RevPAR and/or operating margins worsen or continue for a protracted time, they could have a material adverse effect on our operations, earnings and cash flow. On April 4, 2002, FelCor completed the private placement of approximately $25 million of their Series B preferred stock. These shares of preferred stock were issued at a discount to yield an effective rate of 9.4%. FelCor contributed the proceeds of this preferred stock to us in exchange for Series B preferred units. The preference on these units is the same as FelCor's Series B preferred stock. The proceeds were used for working capital, and allowed us to accelerate certain capital expenditures. In August 2002, we contributed five of our hotels held for sale to a joint venture in which one of our subsidiaries holds a 50% equity interest, and a subsidiary of our joint venture partner holds the other 50% equity interest. An affiliate of our joint venture partner manages these hotels. Pursuant to the joint venture agreement, our joint venture partner contributed $1.4 million to the new venture. The venture closed on a $10 million line of credit, of which approximately $4.4 million was drawn at closing, with the cash proceeds going to us. The remaining $5.5 million under the line of credit is being used for capital improvements at the hotels. In addition to our 50% equity interest, we retained a preferred right to receive approximately $6.3 million from the venture. In 2002, we entered into two amendments to our line of credit. In June 2002, we amended our line of credit to relax covenant levels to provide us with greater financial flexibility. In December 2002, we further amended our line of credit to relax covenant levels and to reduce capacity under the line to $300 million from $615 million. The maturity of the line of credit remains at October 31, 2004, but we have the right to extend the maturity date for two consecutive one-year periods, subject to certain conditions. We recorded a $3.2 million expense to write-off unamortized deferred financing costs associated with the reduction in our line of credit. Although we were in compliance with our existing covenants prior to the amendments, it was necessary to amend the line of credit in anticipation of a continued negative RevPAR environment. The amended line allows for the relaxation of certain financial covenants through the maturity date, with a step-up in covenants on June 30, 2004, including the unsecured interest coverage, fixed charge coverage, secured leverage, and total leverage tests. The interest rate remains on the same floating rate basis with a tiered spread based on our debt leverage ratio, but with an added tier to reflect the higher permitted leverage. There was no amount outstanding under the facility at December 31, 2002. As of the date of this filing, we had $149 million 39 outstanding under our line of credit and cash and cash equivalents of approximately $150 million. The primary reason for the outstanding balance on our line of credit was our decision to carry excess cash because of the current geopolitical and economic uncertainties and their potential impact on our operating results. In addition to financial covenants, our line of credit includes certain other affirmative and negative covenants, including restrictions on our ability to create or acquire wholly-owned subsidiaries; restrictions on the operation/ownership of our hotels; limitations on our ability to lease property or guarantee leases of other persons; limitations on our ability to make restricted payments (such as distributions on units and preferred units, FelCor share repurchases and certain investments); limitations on our ability to merge or consolidate with other persons to issue stock of our subsidiaries and to sell all or substantially all of our assets; restrictions on our ability to construct new hotels or acquire hotels under construction; limitations on our ability to change the nature of our business and limitations on our ability to modify certain instruments, to create liens, to enter into transactions with affiliates and limitations on our ability to enter into joint ventures. Under the most recent amendment to our line of credit, at higher permitted leverage levels we agreed to certain more stringent limitations on acquisitions, restricted payments and discretionary capital expenditures. At December 31, 2002, we were in compliance with all of these covenants. Unless our business and cash flow stabilizes, we may not be able to satisfy the relaxed financial covenant requirements. In such an event, we may need to obtain further amendments from our lenders under the line of credit to continue being able to borrow under it. We are not certain whether, to what extent, or upon what terms the lenders may be willing to further relax the covenants. Further amendments to our line of credit may result in additional restrictions on us that, together with any limitation on our ability to borrow under the line, may adversely affect our ability to run our business and manage our financial affairs. The breach of any of the covenants and limitations under our line of credit could result in the acceleration of amounts outstanding. Our failure to satisfy any accelerated indebtedness, if in the amount of $10 million or more, could result in the acceleration of most of our other unsecured recourse indebtedness. We may not be able to refinance or repay our debt in full under those circumstances. Our other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the line of credit. Most of our mortgage debt is non-recourse to us and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of our mortgage debt is prepayable, subject to various prepayment penalties, yield maintenance or defeasance obligations. At December 31, 2002, we had unencumbered investments in hotels with a net book value totaling $2.3 billion. Our publicly traded senior unsecured notes require that we satisfy a total leverage, a secured leverage and an interest coverage test in order to incur additional indebtedness, except under our line of credit or to refinance maturing debt with replacement debt, as defined under our indentures; to pay distributions in excess of the minimum distributions required to meet FelCor's REIT qualification test; to repurchase units; or to merge. As of the date of this filing, we have satisfied all such incurrence tests. We currently expect that we will have the flexibility to meet these tests unless RevPAR declines continue or become more severe. We have debt maturing of $35 million in 2003 and $189 million in 2004, including $175 million of our senior unsecured notes that mature in October 2004. We anticipate meeting these obligations through a combination of cash on hand, cash flow from operations, borrowing under our line of credit, additional secured debt and sale of non-strategic hotel assets. We currently anticipate that we will meet our financial covenant and incurrence tests under the RevPAR guidance provided at FelCor's fourth quarter earnings conference call on February 5, 2003. For the first quarter of 2003, we currently anticipate that our portfolio RevPAR will be 3% to 5% below the comparable period of the prior year. FFO is expected to be within the range of $8 to $11 million for the first quarter of 2003, and EBITDA is expected to be within the range of $59 million to $62 million for the same period. The RevPAR decline in 2003, compared to the same periods in 2002, was approximately 3.6% for January, 5.8% for February, and was 6.5% for the first 19 days of March. We currently anticipate that full year 2003 hotel portfolio RevPAR will be approximately the same as 2002, plus or minus 1%. FFO, for the year 2003, is anticipated to be within the range of $74 to $87 million and EBITDA is expected to be within the range of $277 to $289 million. 40 Certain significant credit and debt statistics at December 31, 2002, and 2001, are as follows:
2002 2001 ---- ---- Consolidated debt to annual EBITDA 6.1x 5.2x Total debt to annual EBITDA 6.6x 5.6x Consolidated debt to investment in hotels, at cost 40.8% 42.8% Consolidated debt to total market capitalization 64.6% 59.3% Consolidated debt to assets 49.6% 47.4% EBITDA to consolidated interest paid(a) 1.9x 2.4x EBITDA to total interest expense(b) 1.7x 2.2x Fixed charge coverage ratio(c) 1.5x 1.9x
(a) EBITDA to consolidated interest paid represents consolidated EBITDA divided by interest expense before capitalized interest and amortization of debt costs. (b) EBITDA to total interest expense represents consolidated EBITDA divided by interest expense, including our pro rata share of unconsolidated interest expense. Our interest coverage incurrence test under our senior unsecured notes allows the exclusion of certain unrestricted subsidiaries that are included in the consolidated numbers used to compute this ratio. (c) Fixed charge coverage ratio represents consolidated EBITDA divided by consolidated interest expense, our pro rata share of unconsolidated interest expense and preferred distributions. At December 31, 2002, we had: o $66.5 million of cash and cash equivalents; o No balance outstanding under our $300 million line of credit; o Fixed interest rate debt equal to 89% of our total debt; o Weighted average maturity of fixed interest rate debt of approximately six years; and o Secured debt to total assets of 18.1% The following details our debt outstanding at December 31, 2002, and 2001 (in thousands):
DECEMBER 31, 2002 COLLATERAL(a) INTEREST RATE MATURITY DATE 2002 2001 ------------- ------------- ------------- ---------- ----------- FLOATING RATE DEBT: Line of credit None 4.48% October 2004 $ 49,674 Publicly-traded term notes-swapped None 4.59(b) October 2004 $ 174,760 174,633 Publicly-traded term notes-swapped None 4.99(b) October 2007 25,000 Promissory note None 3.44 June 2016 650 650 ---- ---------- ----------- Total floating rate debt(c) 4.73 200,410 224,957 ---- ---------- ----------- FIXED RATE DEBT: Publicly-traded term notes None 7.63 October 2007 99,518 124,419 Publicly-traded term notes None 9.50 September 2008 596,195 595,525 Publicly-traded term notes None 8.50 June 2011 297,907 297,655 Mortgage debt 15 hotels 7.24 November 2007 134,738 137,541 Mortgage debt 7 hotels 7.54 April 2009 94,288 95,997 Mortgage debt 6 hotels 7.55 June 2009 70,937 72,209 Mortgage debt 7 hotels 8.73 May 2010 140,315 142,254 Mortgage debt 8 hotels 8.70 May 2010 180,534 182,802 Mortgage debt 6 hotels 7.20 2003 - 2005 54,993 57,008 Other 1 hotel 9.10 2003 - 2010 7,299 8,041 ---- ---------- ----------- Total fixed rate debt(c) 8.61 1,676,724 1,713,451 ---- ---------- ----------- Total debt(c) 8.18% $1,877,134 $1,938,408 ---- ---------- ----------
(a) At December 31, 2002, we had unencumbered investments in hotels with a net book value totaling $2.3 billion. 41 (b) At December 31, 2002, our $175 million in publicly traded notes due October 2004, and $25 million of our publicly traded notes due October 2007, were matched with interest rate swap agreements that effectively converted the fixed interest rate on these notes to a floating interest rate tied to LIBOR. The differences to be paid or received by us under the terms of the interest rate swap agreements are accrued as interest rates change and are recognized as an adjustment to interest expense. The interest rate swaps decreased our interest expense by $4 million during 2002. (c) Calculated based on the weighted average of outstanding debt at December 31, 2002. All of our floating rate debt at December 31, 2002, was based upon LIBOR. Six month LIBOR at December 31, 2002, was 1.38%. At December 31, 2002, we had $175 million of publicly traded term notes due October 2004, and $25 million of publicly traded term notes due October 2007, that were matched with interest rate swap agreements which effectively convert the fixed interest rate on these notes to a variable interest rate. These interest rate swap agreements have maturity dates coinciding with the maturity dates of these publicly traded term notes. We entered into seven separate interest rate swap agreements with three different financial institutions. Under these agreements, we receive a fixed rate of 7.375% for the agreements maturing in October 2004, and 7.625% for the agreement maturing in October 2007. We pay the six-month LIBOR rate plus a spread ranging from 2.57% to 3.57%. The weighted average spread over LIBOR at December 31, 2002, was 3.25%. In January and February 2003, we executed two additional interest rate swaps. These new fair value swaps are similar to those that existed at December 31, 2002; they modify a portion of the interest characteristics of our outstanding fixed rate debt without an exchange of the underlying principal amount and effectively convert fixed rate debt to a variable rate. As designated fair value hedges, these swaps will be marked to market through the income statement, but are offset by the change in fair value of our swapped outstanding fixed rate debt. The notional amount of these new swaps is $50 million, on which we receive a fixed rate of 7.625% and pay a rate of LIBOR plus an average spread of 4.325%. We spent approximately $63 million on upgrading and renovating our hotels during the year ended December 31, 2002. Our unconsolidated entities spent approximately $17.2 million on upgrading and renovating hotels, and approximately $8.1 million on a residential condominium development project, during the year ended December 31, 2002. Notwithstanding the current significant economic downturn, we believe that our hotels will continue to benefit from our extensive capital expenditure programs in previous years. We currently anticipate our 2003 capital expenditures to be between $60 and $70 million. Contractual Obligations We have obligations and commitments to make certain future payments under debt agreements and various contracts. The following schedule details these obligations at December 31, 2002 (in thousands):
LESS THAN 1 1 - 3 4 - 5 AFTER TOTAL YEAR YEARS YEARS 5 YEARS ---------- ----------- -------- -------- ---------- Debt $1,883,754 $35,118 $231,834 $272,645 $1,344,157 Liquidated damages related to the sale of hotels managed by Six Continents Hotels(a) 4,468 4,468 Operating leases 298,557 37,997 75,224 46,644 138,712 ---------- ------- -------- -------- ---------- Total contractual obligations $2,186,779 $77,563 $307,058 $319,289 $1,482,869 ---------- ------- -------- -------- ----------
(a) We currently expect that this obligation will be satisfied by our investment in one or more hotels licensed and managed by Six Continents Hotels. 42 We have guaranteed the payment of 50% of a loan related to the construction of a residential condominium project in Myrtle Beach, South Carolina, and a full recourse loan for one of our 50% owned unconsolidated hotel ventures. The following schedule details these obligations and maturity dates at December 31, 2002 (in thousands):
TOTAL AMOUNTS COMMITTED 2003 2004 2005 ------------- ---- ---- ---- Loan guarantee $5,966 $143 $143 $5,680
Investments in Unconsolidated Entities At December 31, 2002, we had unconsolidated 50% investments in ventures that own an aggregate of 29 hotels (referred to as hotel joint ventures), and we had unconsolidated 50% investments in ventures that operate 14 of those 29 hotels (referred to as operating joint ventures). We own 100% of the lessees operating the remaining 15 hotels owned by the hotel joint ventures. None of our directors, officers or employees owns any interest in any of these hotel or operating joint ventures. The hotel ventures had approximately $267 million of non-recourse mortgage debt relating to 29 of the hotels. This debt is not reflected as a liability on our consolidated balance sheet. The liability of our subsidiaries that are members or partners in these ventures is generally limited to the guarantee of the borrowing venture's personal obligations to pay for the lender's losses caused by misconduct, fraud or misappropriation of funds by the venture and other typical exceptions from the nonrecourse provisions in the mortgages, such as for environmental liabilities. One hotel joint venture had a full recourse loan outstanding of $0.3 million at December 31, 2002, that we guaranteed. At December 31, 2002, we also had an unconsolidated 50% investment in a venture that is developing a residential condominium project in Myrtle Beach, South Carolina. This joint venture has a $97.6 million full recourse construction loan. We and our joint venture partner, Hilton, have each guaranteed 50% of the amount outstanding under this loan. At December 31, 2002, an aggregate of $11.4 million had been drawn under this loan, of which we have guaranteed our pro rata share of $5.7 million. Our pro rata share of the entire amount available under the construction loan is $48.8 million. The anticipated completion date of this development is late 2004. Capital expenditures on the hotels owned by our hotel joint ventures are generally paid from the capital reserve account, which is funded from the income from operations of these ventures. However, if a venture has insufficient cash to make necessary capital improvements, the venture may make a capital call upon the venture members or partners to fund such necessary improvements. It is possible that, in the event of a capital call, the other joint venture member or partner may be unwilling or unable to make the necessary capital contributions. Under such circumstances, we may elect to make the other party's contribution as a loan to the venture or as an additional capital contribution by us. Under certain circumstances, a capital contribution by us may increase our investment equity to greater than 50% and may require that we consolidate the venture, including all of its assets and liabilities, into our consolidated financial statements. With respect to those ventures that are partnerships, any of our subsidiaries that serve as a general partner will be liable for all of the recourse obligations of the venture, to the extent that the venture does not have sufficient assets or insurance to satisfy the obligations. In addition, the hotels owned by these ventures could perform below expectations and result in the insolvency of the ventures and the acceleration of their debts, unless the members or partners provide additional capital. In some ventures, the members or partners may be required to make additional capital contributions or have their interest in the venture be reduced or offset for the benefit of any party making the required investment on their behalf. In the foregoing and other circumstances, we may be faced with the choice of losing our investment in a venture or investing additional capital under circumstances that do not assure a return on that investment. Quantitative and Qualitative Disclosures About Market Risk At December 31, 2002, approximately 89% of our consolidated debt had fixed interest rates. Currently, market rates of interest are below the rates we are obligated to pay on our fixed-rate debt. 43 The following tables provide information about our financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the tables present scheduled maturities and weighted average interest rates, by maturity dates. For interest rate swaps, the tables present the notional amount and weighted average interest rate, by contractual maturity date. The fair value of our fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements that could have been borrowed at the date presented, at then current market interest rates. The fair value of our variable to fixed interest rate swaps indicates the estimated amount that would have been received or paid by us had the swaps been terminated at the date presented. EXPECTED MATURITY DATE AT DECEMBER 31, 2002 (DOLLARS IN THOUSANDS)
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE ------- -------- ------- ------- -------- ---------- ---------- ---------- LIABILITIES Fixed rate: Debt $35,118 $189,228 $42,606 $14,217 $258,428 $1,343,507 $1,883,104 $1,725,934 Interest rate swaps(a) (175,000) (25,000) (200,000) Average interest rate 7.42% 7.91% 7.48% 8.04% 7.46% 8.89% 8.61% Floating rate: Debt 650 650 650 Interest rate swaps(a) 175,000 25,000 200,000 7,708 Average interest rate(b) 4.59% 4.95% 10.18% 4.63% Total $35,118 $189,228 $42,606 $14,217 $258,428 $1,344,157 1,883,754 7.42% 4.84% 7.48% 8.04% 7.22% 8.89% 8.18% Discount accretion (6,620) Total debt $1,877,134
(a) At December 31, 2002, our $175 million in publicly traded notes due October 2004, and $25 million of our publicly traded notes due October 2007, were matched with interest rate swap agreements that effectively converted the fixed interest rate on these notes to a variable interest rate tied to LIBOR. The interest rate swap agreements also have maturities that coincide with those notes. The differences to be paid or received by us under the terms of the interest rate swap agreements are accrued as interest rates change and are recognized as an adjustment to interest expense. The interest rate swaps decreased our interest expense by $4 million during 2002. (b) The average floating rate of interest represents the implied forward rates in the yield curve at December 31, 2002. EXPECTED MATURITY DATE AT DECEMBER 31, 2001 (DOLLARS IN THOUSANDS)
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE ------- -------- ------- ------- -------- ---------- ---------- ---------- LIABILITIES Fixed rate: Debt $12,922 $ 34,904 $189,229 $42,635 $ 14,216 $1,601,946 $1,895,852 $1,664,696 Interest rate swaps(a) (175,000) (175,000) Average interest rate 7.88% 7.43% 7.91% 7.46% 8.04% 8.66% 8.59% Floating rate: Debt 49,674 650 50,324 50,324 Interest rate swaps 175,000 175,000 (1,466) Average interest rate(a) 4.83% 8.26% 4.84% Total $12,922 $ 34,904 $238,903 $42,635 $ 14,216 $1,602,596 1,946,176 7.88% 7.43% 5.01% 7.46% 8.04% 8.66% 8.15% Discount accretion (7,768) Total debt $1,938,408
(a) The average floating rate of interest represents the implied forward rates in the yield curve at December 31, 2001. 44 Swap contracts, such as described above, contain a credit risk, in that the counterparties may be unable to fulfill the terms of the agreement. We minimize that risk by evaluating the creditworthiness of our counterparties, who are limited to major banks and financial institutions, and we do not anticipate nonperformance by the counterparties. The credit ratings for the financial institutions that are counterparties to the interest rate swap agreements range from A to AA-. INFLATION Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, require us to reduce room rates in the near term and may limit our ability to raise room rates in the future. SEASONALITY The lodging business is seasonal in nature. Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters, although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues. Quarterly earnings also may be adversely affected by events beyond our control, such as extreme weather conditions, economic factors and other considerations affecting travel. Historically, to the extent that cash flow from operations has been insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we have utilized cash on hand or borrowings under our line of credit to make distributions to our equity holders. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, the carrying value of investments in hotels, litigation, and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements. o We are required by GAAP to record an impairment charge when we believe that an investment in one or more of our hotels has been impaired, such that future undiscounted cash flows would not recover the book basis, or net book value, of the investment. We test for impairment when certain events occur, including one or more of the following: projected cash flows are significantly less than recent historical cash flows; significant changes in legal factors or actions by a regulator that could affect the value of our hotels; events that could cause changes or uncertainty in travel patterns; and a current expectation that, more likely than not, a hotel will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. In February 2003, we announced our plan to sell 33 non-strategic hotels over the next 36 months. The shorter probable holding periods related to our decision to sell these hotels was the primary factor that led to an impairment charge of $118.3 million on 20 of these 33 hotels. Additional impairment charges of $25.8 million were recorded in the fourth quarter of 2002, resulting from decreased estimates of future cash flows from two hotels not included in our disposition plan. We revised our estimates of future cash flows in the fourth quarter of 2002, when it became apparent that the recovery of 45 the travel industry would take longer than we had originally expected. In the evaluation of impairment of our hotel assets, and in establishing the impairment charge, we made many assumptions and estimates on a hotel by hotel basis, which included the following: o Annual cash flow growth rates for revenues and expenses; o Holding periods; o Expected remaining useful lives of assets; o Estimates in fair values taking into consideration future cash flows, capitalization rates, discount rates and comparable selling prices; and o Future capital expenditures. Changes in these estimates, future adverse changes in market conditions or poor operating results of underlying hotels could result in losses or an inability to recover the carrying value of the hotels that may not be reflected in the hotel's current carrying value, thereby requiring additional impairment charges in the future. o We own a 50% interest in various real estate joint ventures reported under the equity method of accounting. In accordance with GAAP, we record an impairment of these equity method investments when they experience an other than temporary decline in value. During the fourth quarter of 2002, we determined that certain of our equity method investments had experienced an other than temporary decline in value, because a recovery of their value in excess of previously recorded book values was not expected to occur within the next year. As such, we recorded a related impairment loss of $13.4 million. Changes in our estimates or future adverse changes in the market conditions of the hotels owned by equity method investments could result in additional declines in value that could be considered other than temporary. o We make estimates with respect to contingent liabilities for losses covered by insurance in accordance with FAS 5, Accounting for Contingencies. We record liabilities for self insured losses under our insurance programs when it becomes probable that an asset has been impaired or a liability has been incurred at the date of our financial statements and the amount of the loss can be reasonably estimated. In 2002, we became self-insured for the first $250,000, per occurrence, of our general liability claims with regard to 68 of our hotels. We review the adequacy of our reserves for our self-insured claims on a regular basis. Our reserves are intended to cover the estimated ultimate uninsured liability for losses with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves represent estimates at a given accounting date, generally utilizing projections based on claims, historical settlement of claims and estimates of future costs to settle claims. Estimates are also required since there may be reporting lags between the occurrence of the insured event and the time it is actually reported. Because establishment of insurance reserves is an inherently uncertain process involving estimates, currently established reserves may not be sufficient. If our insurance reserves of $2.3 million, at December 31, 2002, for general liability losses are insufficient, we will record an additional expense in future periods. Property and catastrophic losses are event-driven losses and, as such, until a loss occurs and the amount of loss can be reasonably estimated, no liability is recorded. We have recorded no contingent liabilities with regard to property or catastrophic losses at December 31, 2002. o Credit is extended to hotel guests, and terms of credit range from one day for the clearing of credit card receivables to 30 days for corporate accounts. We make estimates with respect to the collectability of our trade receivables and provide an allowance for doubtful accounts for our estimate of probable losses. Our estimate of losses is based on several factors, including historical losses, the aging of the outstanding receivables, and the financial condition of the customers. If a customer becomes insolvent or files for bankruptcy, we charge-off the entire amount due from that customer. At both December 31, 2002 and 2001, we had an allowance for doubtful accounts of $1.4 million and had recorded bad debt expense of $1.5 million and $1.8 million for the years ended December 31, 2002 and 2001, respectively. No bad debt expense was recorded during the year ended December 31, 2000, as this period was prior to 46 our purchase of the hotel leases. Significant judgments and estimates must be made and used in connection with establishing allowances in any accounting period. Material differences may result in the amount and timing of our allowances for any period if adverse economic conditions cause widespread financial difficulties among our customers, in general. Specifically, additional bankruptcies of other companies in the travel industry, such as airlines, may result in additional charges to bad debt expense. o SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" establishes accounting and reporting standards for derivative instruments. In accordance with this pronouncement, all of our interest rate swap agreements outstanding at December 31, 2002, were designated as fair value hedges because they are hedging our exposure to the changes in the fair value of our fixed rate debt. Our swaps meet the criteria necessary to assume no ineffectiveness of the hedge. These instruments are marked to our estimate of their fair market value through the income statement, but are offset by the change in the estimated fair value of our swapped fixed rate debt. We estimate the fair value of our interest rate swaps and fixed rate debt through the use of a third party valuation. We may use other methods and assumptions to validate the fair market value. At December 31, 2002, our estimate of the fair market value of the interest rate swaps was approximately $7.7 million and represents the amount that we estimate we would currently receive upon termination of these instruments, based on current market rates and reasonable assumptions about relevant future market conditions. o Our TRSs have cumulative future tax deductions totaling $103.4 million. The gross deferred income tax asset associated with these future tax deductions was $39.3 million. We have recorded a valuation allowance equal to 100% of our $39.3 million deferred tax asset related to our TRSs, because of the uncertainty of realizing the benefit of the deferred tax asset. SFAS 109, "Accounting for Income Taxes," establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. In accordance with SFAS 109 we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In the event we were to determine that we would be able to realize all or a portion of our deferred tax assets in the future, an adjustment to the deferred tax asset would increase operating income in the period such determination was made. RECENT ACCOUNTING ANNOUNCEMENTS During the year ended December 31, 2002, we elected early adoption of the provisions of Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145, among other things, rescinds SFAS 4, which required that gains and losses from extinguishments of debt be classified as an extraordinary item, net of related income tax effects. We have reclassified all losses from extinguishment of debt reported in prior periods to be included in income before equity in income of unconsolidated entities, minority interests and gain on sale of assets in the accompanying financial statements to conform to SFAS 145. The Financial Accounting Standards Board ("FASB") has issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") of the FASB, has set forth in EITF Issue No 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146 also included (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. 47 SFAS 146 will be effective for exit or disposal activities initiated after December 31, 2002. We do not currently expect SFAS 146 to have a material impact on our results of operations and financial position. The FASB has issued SFAS No. 147, "Acquisitions of Certain Financial Institutions," which is effective for certain transactions arising on or after October 1, 2002. SFAS 147 will have no impact on us. The FASB has issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to a fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have adopted the disclosure requirements of SFAS 148. The Company currently accounts for stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. In accordance with one of the alternative methods of transition for a voluntary change to a fair value based method of accounting for stock-based employee compensation mandated by SFAS 148, we intend to adopt the "prospective method" as of January 1, 2003. Under this method, compensation expense will be recognized for any new awards issued after December 31, 2002. We do not currently expect the adoption of SFAS 148 to have a material impact on our financial position or results of operations. FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," ("FIN 45") was issued in November 2002. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We have made the disclosures required by FIN 45. FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"), was issued in January 2003. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. We have no unconsolidated variable interest entities that would be consolidated under the requirements of FIN 46. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Portions of this Annual Report on Form 10-K include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements. The risks, uncertainties and 48 assumptions that may affect our actual results, which are discussed more fully under "Cautionary Factors That May Affect Future Results" in Item 1 hereof and in our previous filings under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (collectively, "Cautionary Disclosures"), include: general economic conditions, including the timing and magnitude of any recovery from the current soft economy; future acts of terrorism and the commencement of war in Iraq; the availability of capital; and numerous other factors which may affect results, performance and achievements. The forward looking statements included herein, and all subsequent written and oral forward looking statements attributable to us or persons acting on our behalf, are expressly qualified in their entirety by the Cautionary Disclosures. We undertake no obligation to update any forward-looking statements to reflect future events or circumstances. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information and disclosures regarding market risks applicable to us are incorporated herein by reference to the discussion under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" contained elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2002. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Included herein beginning at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 49 PART III. -- OTHER INFORMATION ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT We have no directors or officers. FelCor as the general partner performs our management functions. Information about the directors and executive officers of FelCor called for by this Item is contained in FelCor's definitive Proxy Statement for their 2003 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION We have no directors or officers. FelCor as the general partner performs our management functions. Information about the directors and executive officers of FelCor called for by this Item is contained in FelCor's definitive Proxy Statement for their 2003 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information called for by this Item is contained in FelCor's definitive Proxy Statement for their 2003 Annual Meeting of Stockholders, or in Item 5 of this Annual Report on Form 10-K for the year ended December 31, 2002, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this Item is contained in FelCor's definitive Proxy Statement for their 2003 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of FelCor's senior management, including FelCor's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, FelCor's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely accumulating and communicating to them material information relating to us and our consolidated subsidiaries that are required to be included in our periodic SEC filings. (b) Changes in internal controls. Not applicable. 50 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Included herein at pages F-1 through F-38. 2. Financial Statement Schedules The following financial statement schedule is included herein at page F-39 through F-43. Schedule III - Real Estate and Accumulated Depreciation for FelCor Lodging Limited Partnership All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted. 3. Exhibits The following exhibits are filed as part of this Annual Report on Form 10-K:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 3.1 - Second Amended and Restated Agreement of Limited Partnership of FelCor Lodging Limited Partnership ("FelCor LP") dated December 31, 2001 (filed as Exhibit 10.1 to FelCor Lodging Trust Incorporated's ("FelCor") Annual Report on Form 10-K for the fiscal year ended December 31, 2001 ("FelCor's 2001 Form 10-K"), and incorporated herein by reference). 3.1.1 - First Amendment to Second Amended and Restated Agreement of Limited Partnership of FelCor LP dated April 1, 2002 (filed as Exhibit 10.1.1 to FelCor's Form 8-K dated April 1, 2002, and filed on April 4, 2002, and incorporated herein by reference). 3.1.2 - Second Amendment to Second Amended and Restated Agreement of Limited Partnership of FelCor LP dated August 31, 2002 (filed as Exhibit 10.1.2 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 ("FelCor's 2002 Form 10-K"), and incorporated herein by reference). 3.1.3 - Third Amendment to Second Amended and Restated Agreement of Limited Partnership of FelCor LP dated October 1 2002 (filed as Exhibit 10.1.3 to FelCor's 2002 Form 10-K and incorporated herein by reference). 4.1 - Indenture dated October 1, 1997, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.1 to the Registration Statement on Form S-4 (file no. 333-39595) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.1.1 - First Amendment to Indenture dated February 5, 1998, by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.2 to the Registration Statement on Form S-4 (file no. 333-39595) of FelCor LP and the other co-registrants named therein and incorporated herein by reference).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 4.1.2 - Second Amendment to Indenture and First Supplemental Indenture dated December 30, 1998, by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.2 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 ("FelCor's 1998 Form 10-K"), and incorporated herein by reference). 4.1.3 - Third Amendment to Indenture dated March 30, 1999, by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.3 to FelCor's Form 10-Q for the quarter ended March 31, 1999 ("FelCor's March 1999 10-Q"), and incorporated herein by reference). 4.1.4 - Second Supplemental Indenture dated August 1, 2000, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.2.4 to the Registration Statement on Form S-4 (file no. 333-47506) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.1.5 - Third Supplemental Indenture dated July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.2.5 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.1.6 - Fourth Supplemental Indenture dated October 1, 2002, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.6 to FelCor's 2002 Form 10-K and incorporated herein by reference). 4.2 - Indenture dated September 15, 2000, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.3 to the Registration Statement on Form S-4 (file no. 333-47506) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.2.1 - First Supplemental Indenture dated July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.3.1 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.2.2 - Second Supplemental Indenture dated October 1, 2002, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.8.2 to FelCor's 2002 Form 10-K and incorporated herein by reference). 4.3 - Indenture dated June 4, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.9 to FelCor's Form 8-K dated as of June 4, 2001, and filed June 14, 2001, and incorporated herein by reference). 4.3.1 - First Supplemental Indenture dated July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.4.1 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.3.2 - Second Supplemental Indenture dated October 1, 2002, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.9.2 to FelCor's 2002 Form 10-K and incorporated herein by reference).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.1 - Contribution Agreement dated January 1, 2001, by and among FelCor, FelCor LP, FelCor, Inc., RGC and DJONT Operations, L.L.C. (filed as Exhibit 10.27 to FelCor's Form 10-Q for the quarter ended March 31, 2001 ("FelCor's March 2001 10-Q"), and incorporated herein by reference). 10.2 - Leasehold Acquisition Agreement dated March 30, 2001, by and among Bass (U.S.A.) Incorporated, in its individual capacity and on behalf of its subsidiaries and affiliates, and FelCor, in its individual capacity and on behalf of its subsidiaries and affiliates, including as an exhibit thereto the form of Management Agreement for Six Continents-branded hotels (filed as Exhibit 10.28 to FelCor's March 2001 10-Q and incorporated herein by reference). 10.3 - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Six Continents Hotels, as manager, with respect to FelCor's Six Continents-branded hotels (included as an exhibit to the Leasehold Acquisition Agreement filed as Exhibit 10.2 above). 10.4 - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Hilton Hotels Corporation, as manager, with respect to FelCor's Embassy Suites Hotels, including the form of Embassy Suites Hotels License Agreement attached as an exhibit thereto (filed as Exhibit 10.5 to FelCor's 2001 Form 10-K and incorporated herein by reference). 10.5 - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Hilton Hotels Corporation, as manager, with respect to FelCor's Doubletree and Doubletree Guest Suites hotels (filed as Exhibit 10.6 to FelCor's 2001 Form 10-K and incorporated herein by reference). 10.6 - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Starwood Hotels & Resorts, Inc., as manager, with respect to FelCor's Sheraton and Westin hotels (filed as Exhibit 10.7 to FelCor's 2001 Form 10-K and incorporated herein by reference). 10.7 - Employment Agreement dated July 28, 1994, between FelCor and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to FelCor's Annual Report on Form 10-K/A Amendment No. 1 for the fiscal year ended December 31, 1994 ("FelCor's 1994 Form 10-K/A"), and incorporated herein by reference). 10.8 - Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 10.9 to FelCor's 1994 Form 10-K/A and incorporated herein by reference). 10.9 - Savings and Investment Plan of FelCor (filed as Exhibit 10.10 to FelCor's 2001 Form 10-K and incorporated herein by reference). 10.10 - 1995 Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 10.9.2 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference). 10.11 - Non-Qualified Deferred Compensation Plan, as amended and restated July 1999 (filed as Exhibit 10.9 to FelCor's Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference). 10.12 - 1998 Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 4.2 to FelCor's Registration Statement on Form S-8 (file no. 333-66041) and incorporated herein by reference).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.13 - 2001 Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 10.14 to FelCor's 2002 Form 10-K and incorporated herein by reference). 10.14 - Second Amended and Restated 1995 Equity Incentive Plan (filed as Exhibit 99.1 to FelCor's Post-Effective Amendment on Form S-3 to Form S-4 Registration Statement (file no. 333-50509) and incorporated herein by reference). 10.15 - Amended and Restated Stock Option Plan for Non-Employee Directors (filed as Exhibit 99.2 to FelCor's Post-Effective Amendment on Form S-3 to Form S-4 Registration Statement (file no. 333-50509) and incorporated herein by reference). 10.16 - Form of Severance Agreement for executive officers and certain key employees of FelCor (filed as Exhibit 10.13 to FelCor's 1998 Form 10-K and incorporated herein by reference). 10.17 - Stockholders' and Registration Rights Agreement dated July 27, 1998, by and among FelCor, Bass America, Inc., Holiday Corporation, Bass plc, United/Harvey Investors I, L.P., United/Harvey Investors II, L.P., United/Harvey Investors III, L.P., United/Harvey Investors IV, L.P., and United/Harvey Investors V, L.P. (filed as Exhibit 10.18 to FelCor's Form 8-K dated August 10, 1998, and incorporated herein by reference). 10.18 - Seventh Amended and Restated Credit Agreement dated July 26, 2001, among FelCor, FelCor LP and FelCor Canada Co., as borrowers, the lenders party thereto, The Chase Manhattan Bank and The Chase Manhattan Bank of Canada, as administrative agents, Bankers Trust Company, as syndication agent, J.P. Morgan Securities Inc. and Deutsche Banc Alex. Brown, Inc., as co-lead arrangers and joint bookrunners, and Bank of America, N.A. and Salomon Smith Barney, Inc., as document agents (filed as Exhibit 10.17 to FelCor's Form 10-Q for the quarter ended June 30, 2001, and incorporated herein by reference). 10.18.1 - First Amendment dated November 6, 2001, among FelCor, FelCor LP and FelCor Canada Co., as borrowers, the lenders party thereto, The Chase Manhattan Bank and The Chase Manhattan Bank of Canada, as administrative agents, and Bankers Trust Company, as syndication agent (filed as Exhibit 10.17.1 to FelCor's Form 10-Q for the quarter ended September 30, 2001 ("FelCor's September 2001 10-Q"), and incorporated herein by reference). 10.18.2 - Second Amendment dated June 17, 2002, among FelCor, FelCor LP and FelCor Canada Co., as borrowers, the lenders party thereto, JPMorgan Chase Bank and J.P. Morgan Bank Canada, as administrative agents, and Deutsche Bank Trust Company Americas, as syndication agent (filed as Exhibit 10.18.2 to FelCor's Form 8-K dated June 17, 2002, and filed on July 1, 2002, and incorporated herein by reference). 10.18.3 - Third Amendment and Consent dated December 20, 2002, among FelCor, FelCor LP and FelCor Canada Co., as borrowers, the lenders party thereto, JPMorgan Chase Bank and J.P. Morgan Bank Canada, as administrative agents, and Deutsche Bank Trust Company Americas, as syndication agent (filed as Exhibit 10.18.3 to FelCor's Form 8-K dated December 20, 2002, and filed December 23, 2002, and incorporated herein by reference).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.19 - Loan Agreement dated October 10, 1997, among Bristol Lodging Company, Bristol Lodging Holding Company, Nomura Asset Capital Corporation, as administrative agent and collateral agent for Lenders, and Bankers Trust Company, as co-agent for Lenders (filed as Exhibit 10.10 to Bristol Hotel Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference). 10.19.1 - First Amendment to Loan Agreement and Ancillary Loan Documents made as of May 28, 1999, among FelCor Lodging Company, L.L.C., FelCor Lodging Holding Company, L.L.C. and LaSalle National Bank, as Trustee for Nomura Asset Securities Corporation Commercial Pass-Through Certificates Series 1998-D6, as administrative agent and collateral agent (filed as Exhibit 10.19.1 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (" FelCor's 1999 Form 10-K"), and incorporated herein by reference). 10.20 - Form of Mortgage, Security Agreement and Fixture Filing by and between FelCor/CSS Holdings, L.P. as mortgagor, and The Prudential Insurance Company of America, as mortgagee (filed as Exhibit 10.23 to FelCor's March 1999 10-Q and incorporated herein by reference). 10.20.1 - Promissory Note dated April 1, 1999, in the original principal amount of $100,000,000 made by FelCor/CSS Holdings, Ltd., payable to the order of The Prudential Insurance Company of America (filed as Exhibit 10.23.1 to FelCor's Form 10-Q for the quarter ended June 30, 1999 ("FelCor's June 1999 10-Q"), and incorporated herein by reference). 10.21 - Form of Deed of Trust, Security Agreement and Fixture Filing, each dated May 12, 1999, from FelCor/MM Holdings, L.P., as borrower, in favor of Fidelity National Title Insurance Company, as trustee, and Massachusetts Mutual Life Insurance Company, as beneficiary, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.21.1, also executed by FelCor/CSS Holdings, L.P. with respect to the Embassy Suites Hotels-Anaheim and Embassy Suites Hotels-Deerfield Beach, and by FelCor LP with respect to the Embassy Suites Hotels-Palm Desert (filed as Exhibit 10.24.2 to FelCor's June 1999 10-Q and incorporated herein by reference). 10.21.1 - Form of six separate Promissory Notes each dated May 12, 1999, made by FelCor/MM Holdings, L.P. payable to the order of Massachusetts Mutual Life Insurance Company in the respective original principal amounts of $12,500,000 (Embassy Suites Hotels-Dallas Market Center), $14,000,000 (Embassy Suites Hotels-Dallas Love Field), $12,450,000 (Embassy Suites Hotels-Tempe), $11,550,000 (Embassy Suites Hotels-Anaheim), $8,900,000 (Embassy Suites Hotels-Palm Desert), $15,600,000 (Embassy Suites Hotels-Deerfield Beach) (filed as Exhibit 10.24.1 to FelCor's June 1999 10-Q and incorporated herein by reference). 10.22 - Form of Deed of Trust and Security Agreement and Fixture Filing with Assignment of Leases and Rents, each dated April 20, 2000, from FelCor/MM S-7 Holdings, L.P., as mortgagor, in favor of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America, as mortgagee, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.22.2 (filed as Exhibit 10.24 to FelCor's Form 10-Q for the quarter ended June 30, 2000 ("FelCor's June 2000 10-Q"), and incorporated herein by reference).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.22.1 - Form of Accommodation Cross-Collateralization Mortgage and Security Agreement, each dated April 20, 2000, executed by FelCor/MM S-7 Holdings, L.P., in favor of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America (filed as Exhibit 10.24.1 to FelCor's June 2000 10-Q and incorporated herein by reference). 10.22.2 - Form of fourteen separate Promissory Notes each dated April 20, 2000, each made by FelCor/MM S-7 Holdings, L.P., each separately payable to the order of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America, respectively, in the respective original principal amounts of $13,500,000 (Phoenix (Crescent), Arizona), $13,500,000 (Phoenix (Crescent), Arizona), $6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $9,000,000 (Atlanta Galleria, Georgia), $9,000,000 (Atlanta Galleria, Georgia), $12,500,000 (Chicago O'Hare Airport, Illinois), $12,500,000 (Chicago O'Hare Airport, Illinois), $3,500,000 (Lexington, Kentucky), $3,500,000 (Lexington, Kentucky), $17,000,000 (Philadelphia Society Hill, Philadelphia), $17,000,000 (Philadelphia Society Hill, Philadelphia), $10,500,000 (South Burlington, Vermont) and $10,500,000 (South Burlington, Vermont) (filed as Exhibit 10.24.2 to FelCor's June 2000 10-Q and incorporated herein by reference). 10.23 - Form of Deed of Trust and Security Agreement, each dated May 2, 2000, from each of FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P., each as borrower, in favor of The Chase Manhattan Bank, as beneficiary, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.23.1 (filed as Exhibit 10.25 to FelCor's June 2000 10-Q and incorporated herein by reference). 10.23.1 - Form of eight separate Promissory Notes, each dated May 2, 2000, made by FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P., each separately payable to the order of The Chase Manhattan Bank in the respective original principal amounts of $38,250,000 (Atlanta Buckhead, Georgia), $20,500,000 (Boston Marlborough, Massachusetts), $16,575,000 (Chicago Deerfield, Illinois), $5,338,000 (Corpus Christi, Texas), $25,583,000 (Orlando South, Florida), $32,650,000 (New Orleans, Louisiana), $20,728,000 (Piscataway, New Jersey) and $26,268,000 (South San Francisco, California) (filed as Exhibit 10.25.1 to FelCor's June 2000 10-Q and incorporated herein by reference). 10.24 - Registration Rights Agreement dated June 4, 2001, by and among FelCor LP, FelCor and Deutsche Banc Alex. Brown Inc., in its individual capacity and on behalf of J.P. Morgan Securities Inc., Banc of America Securities LLC, Salomon Smith Barney Inc., Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, SG Cowen Securities Corporation, Credit Lyonnais Securities (USA) Inc., Scotia Capital (USA) Inc., BMO Nesbitt Burns Corp., Fleet Securities, Inc., PNC Capital Markets, Inc. and Wells Fargo Brokerage Services, LLC (filed as Exhibit 10.29 to FelCor's Form 8-K dated June 4, 2001, and filed June 14, 2001, and incorporated herein by reference).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.25 - Registration Rights Agreement dated December 3, 2001, by and among FelCor, FelCor LP, Deutsche Banc Alex. Brown, J.P. Morgan Securities Inc., Banc of America Securities LLC, Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. (filed as Exhibit 10.27 to FelCor's 2001 Form 10-K and incorporated herein by reference). 10.26 - Exchange Agreement dated October 1, 2002, by and among FelCor LP, FelCor and Six Continents Hotels Operating Corp. (filed as Exhibit 10.28 to FelCor's Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference). 21* - List of Subsidiaries of FelCor LP. 99.1* - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of FelCor, FelCor LP's general partner. 99.2* - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer of FelCor, FelCor LP's general partner.
- ----------------- * Indicates that the document is filed herewith. (b) Reports on Form 8-K No current reports on Form 8-K were filed by FelCor LP during the three months ended December 31, 2002. 57 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FELCOR LODGING LIMITED PARTNERSHIP a Delaware Limited Partnership By: FelCor Lodging Trust Incorporated Its General Partner By: /s/ LAWRENCE D. ROBINSON -------------------------------------- Lawrence D. Robinson Executive Vice President Date: March 24, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. DATE SIGNATURE March 24, 2003 /s/ Donald J. McNamara ----------------------------------------------------- Donald J. McNamara Chairman of the Board and Director March 24, 2003 /s/ Thomas J. Corcoran, Jr. ----------------------------------------------------- Thomas J. Corcoran, Jr. President and Director (Chief Executive Officer) March 26, 2003 /s/ Richard J. O'Brien ----------------------------------------------------- Richard J. O'Brien Executive Vice President and Chief Financial Officer (Principal Financial Officer) March 26, 2003 /s/ Lester C. Johnson ----------------------------------------------------- Lester C. Johnson Senior Vice President and Controller (Principal Accounting Officer) March 24, 2003 /s/ Melinda J. Bush ----------------------------------------------------- Melinda J. Bush, Director March 24, 2003 /s/ Richard S. Ellwood ----------------------------------------------------- Richard S. Ellwood, Director March 24, 2003 /s/ Richard O. Jacobson ----------------------------------------------------- Richard O. Jacobson, Director March 24, 2003 /s/ Charles A. Ledsinger, Jr. ----------------------------------------------------- Charles A. Ledsinger, Jr., Director March 24, 2003 /s/ Robert H. Lutz, Jr. ----------------------------------------------------- Robert H. Lutz, Jr., Director March 25, 2003 /s/ Robert A. Mathewson ----------------------------------------------------- Robert A. Mathewson, Director March 24, 2003 /s/ Richard C. North ----------------------------------------------------- Richard C. North, Director March 24, 2003 /s/ Michael D. Rose ----------------------------------------------------- Michael D. Rose, Director 58 CERTIFICATIONS I, Thomas J. Corcoran, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of FelCor Lodging Limited Partnership, 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange act rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 27, 2003 /s/ Thomas J. Corcoran, Jr. --------------------------------------------- Thomas J. Corcoran, Jr. Chief Executive Officer FelCor Lodging Trust Incorporated General Partner 59 CERTIFICATIONS I, Richard J. O'Brien, certify that: 1. I have reviewed this annual report on Form 10-K of FelCor Lodging Limited Partnership, 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange act rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 27, 2003 /s/ Richard J. O'Brien ------------------------------------------- Richard J. O'Brien Chief Financial Officer FelCor Lodging Trust Incorporated General Partner 60 FELCOR LODGING LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS PART I - FINANCIAL INFORMATION Report of Independent Accountants.......................................................................F-2 Consolidated Balance Sheets - December 31, 2002 and 2001................................................F-3 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000..............F-4 Consolidated Statements of Comprehensive Income.........................................................F-5 Consolidated Statements of Partners' Capital for the years ended December 31, 2002, 2001 and 2000.......F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000..............F-7 Notes to Consolidated Financial Statements..............................................................F-8 Report of Independent Accountants on Financial Statement Schedule......................................F-39 Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2002........................F-40
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of FelCor Lodging Trust Incorporated In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), partners' capital and cash flows present fairly, in all material respects, the financial position of FelCor Lodging Limited Partnership at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. As discussed in Note 2 to the financial statements, effective January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standard 133, "Accounting for Derivative Instruments and Hedging Activities." PricewaterhouseCoopers LLP Dallas, Texas February 3, 2003, except as to Note 26, which is as of March 21, 2003 F-2 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (IN THOUSANDS)
ASSETS 2002 2001 -------------- -------------- Investment in hotels, net of accumulated depreciation of $782,166 in 2002 and $630,962 in 2001 .......................................... $ 3,473,452 $ 3,653,236 Investment in unconsolidated entities ............................................... 141,943 155,217 Hotels held for sale ................................................................ 38,937 Cash and cash equivalents ........................................................... 66,542 128,742 Accounts receivable, net of allowance for doubtful accounts of $1,413 in 2002 and $1,404 in 2001 ............................................................. 48,548 51,276 Deferred expenses, net of accumulated amortization of $13,357 in 2002 and $10,672 in 2001 ............................................ 24,185 31,249 Other assets ........................................................................ 25,693 20,828 -------------- -------------- Total assets .............................................................. $ 3,780,363 $ 4,079,485 ============== ============== LIABILITIES AND PARTNERS' CAPITAL Debt, net of discount of $6,620 in 2002 and $7,768 in 2001 .......................... $ 1,877,134 $ 1,938,408 Distributions declared but unpaid ................................................... 14,792 8,172 Accrued expenses and other liabilities .............................................. 150,385 164,052 Minority interests .................................................................. 48,596 49,559 -------------- -------------- Total liabilities ......................................................... 2,090,907 2,160,191 -------------- -------------- Commitments and contingencies Redeemable units at redemption value, 3,290 and 9,005, units issued and outstanding at December 31, 2002 and 2001, respectively ...................................... 37,634 150,479 -------------- -------------- Preferred units: $01 par value, 20,000 units authorized: Series A Cumulative Convertible Preferred Units, 5,980 and 5,981 units issued and outstanding at December 31, 2002 and 2001, respectively ................... 149,512 149,515 Series B Cumulative Redeemable Preferred Units, 68 and 58 units issued and outstanding at December 31, 2002 and 2001, respectively ................... 169,395 143,750 Common units, 64,470 and 58,705 units issued and outstanding at December 31, 2002 and 2001, respectively ................................................... 1,333,014 1,475,926 Accumulated other comprehensive income .............................................. (99) (376) -------------- -------------- Total partners' capital .................................................... 1,651,822 1,768,815 -------------- -------------- Total liabilities, redeemable units and partners' capital ................. $ 3,780,363 $ 4,079,485 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F-3 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2002 (IN THOUSANDS, EXCEPT PER UNIT DATA)
2002 2001 2000 ------------ ------------ ------------ Revenues: Hotel operating revenue ..................................................... $ 1,316,313 $ 1,082,844 Percentage lease revenue .................................................... 115,137 $ 536,907 Retail space rental and other revenue ....................................... 1,646 2,990 3,057 ------------ ------------ ------------ Total revenues ................................................................. 1,317,959 1,200,971 539,964 ------------ ------------ ------------ Expenses: Hotel operating expenses .................................................... 462,293 362,645 Other property operating costs .............................................. 363,931 290,247 Management and franchise fees ............................................... 66,897 57,739 Taxes, insurance and lease expense .......................................... 132,138 140,784 92,633 Corporate expenses .......................................................... 13,756 12,678 12,256 Depreciation ................................................................ 152,817 157,692 160,745 Abandoned project costs ..................................................... 1,663 837 Lease termination costs ..................................................... 36,604 Merger termination costs .................................................... 19,919 ------------ ------------ ------------ Total operating expenses ....................................................... 1,193,495 1,079,145 265,634 ------------ ------------ ------------ Operating income ............................................................... 124,464 121,826 274,330 Interest expense, net: Recurring financing ......................................................... 164,294 158,343 156,712 Merger related financing .................................................... 5,486 Swap termination expense ....................................................... 7,049 Charge-off of deferred financing costs ......................................... 3,222 1,270 3,865 Impairment loss on investment in hotels and hotels held for sale ............... 144,085 7,000 63,000 ------------ ------------ ------------ Income (loss) before equity in income from unconsolidated entities, minority interests and gain on sale of assets ............................ (187,137) (57,322) 50,753 Equity in income (loss) from unconsolidated entities, including an impairment loss in 2002 of $13,419 ....................................... (10,127) 7,346 14,820 Minority interests .......................................................... (1,095) (3,585) (3,570) ------------ ------------ ------------ Income (loss) from continuing operations ....................................... (198,359) (53,561) 62,003 Gain on sale of assets ...................................................... 6,061 3,417 4,388 ------------ ------------ ------------ Net income (loss) .............................................................. (192,298) (50,144) 66,391 Preferred distributions ..................................................... (26,292) (24,600) (24,682) ------------ ------------ ------------ Net income (loss) applicable to unitholders .................................... $ (218,590) $ (74,744) $ 41,709 ============ ============ ============ Per unit data: Basic: Income (loss) from continuing operations applicable to unitholders ........ $ (3.54) $ (1.21) $ 0.67 ============ ============ ============ Net income (loss) applicable to unitholders ............................... $ (3.54) $ (1.21) $ 0.67 ============ ============ ============ Weighted average units outstanding ........................................ 61,737 61,635 62,301 Diluted: Income (loss) from continuing operations applicable to unitholders ........ $ (3.54) $ (1.21) $ 0.67 ============ ============ ============ Net income (loss) applicable to unitholders ............................... $ (3.54) $ (1.21) $ 0.67 ============ ============ ============ Weighted average units outstanding ........................................ 61,737 61,635 62,556 Cash distributions declared on partnership units ............................... $ 0.60 $ 1.70 $ 2.20 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDIATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (IN THOUSANDS)
2002 2001 2000 --------- --------- --------- Net income (loss) ..........................................$(192,298) $ (50,144) $ 66,391 Cumulative transition adjustment from interest rate swaps .. 248 Unrealized holding losses from interest rate swaps ......... (7,297) Losses realized on interest rate swap terminations ......... 7,049 Foreign currency translation adjustment .................... 277 (376) -- --------- --------- --------- Comprehensive income (loss) ...........................$(192,021) $ (50,520) $ 66,391 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS) xxx
Accumulated Other Total Preferred Partnership Comprehensive Partners' Units Units Income (Loss) Capital --------- ----------- ------------- ---------- Balance, December 31, 1999 .................. $295,000 $1,917,651 $2,212,651 Conversion of Series A preferred units ...... (1,735) (1,735) Contributions ............................... 3,410 3,410 Redemption of units ......................... (190,416) (190,416) Distributions ............................... (158,104) (158,104) Allocations to redeemable units ............. (51,598) (51,598) Net income .................................. 66,391 66,391 -------- ---------- ------- ---------- Balance, December 31, 2000 .................. 293,265 1,587,334 1,880,599 Foreign exchange translation ................ $ (376) (376) Contributions ............................... 17,487 17,487 Redemption of units ......................... (9,218) (9,218) Distributions ............................... (134,694) (134,694) Allocations to redeemable units ............. 65,161 65,161 Net loss .................................... (50,144) (50,144) -------- ---------- ------- ---------- Balance, December 31, 2001 .................. 293,265 1,475,926 (376) 1,768,815 Foreign exchange translation ................ 277 277 Issuance of Series B preferred units ........ 25,645 25,645 Contributions ............................... 132 132 Distributions ............................... (63,550) (63,550) Conversion of preferred units ............... (3) (3) Allocations from redeemable units ........... 112,804 112,804 Net loss .................................... (192,298) (192,298) -------- ---------- ------- ---------- Balance, December 31, 2002 .................. $318,907 $1,333,014 $ (99) $1,651,822 ======== ========== ======= ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (IN THOUSANDS)
2002 2001 2000 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss) ............................................................ $ (192,298) $ (50,144) $ 66,391 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ....................................................... 152,817 157,692 160,745 Gain on sale of assets ............................................. (6,061) (3,417) (4,388) Amortization of deferred financing fees ............................ 5,297 5,292 4,628 Accretion (amortization) of debt ................................... 407 17 (692) Allowance for doubtful accounts .................................... (9) 220 Amortization of unearned officers' and directors' compensation ..... 2,088 2,093 1,478 Equity in loss (income) from unconsolidated entities ............... 10,127 (7,346) (14,820) Charge-off of deferred financing costs ............................. 3,222 1,270 3,865 Lease termination costs ............................................ 36,604 Impairment loss on investment in hotels and hotels held for sale ... 144,085 7,000 63,000 Minority interest in other partnerships ............................ 1,095 3,585 3,570 Changes in assets and liabilities: Accounts receivable ................................................ 4,524 6,847 (9,664) Deferred expenses .................................................. (1,455) (13,801) (16,964) Other assets ....................................................... (6,253) 1,596 (5,339) Accrued expenses and other liabilities ............................. (11,750) (16,543) 25,494 ---------- ---------- ---------- Net cash flow provided by operating activities ........... 105,836 130,965 277,304 ---------- ---------- ---------- Cash flows provided by (used in) investing activities: Acquisition of hotels ........................................................ (49,778) Improvements and additions to hotels ......................................... (60,793) (65,446) (95,235) Operating cash received in acquisition of lessees ............................ 29,731 Proceeds from sale of assets ................................................. 29,001 66,330 35,111 Cash distributions from unconsolidated entities .............................. 11,310 8,132 25,358 ---------- ---------- ---------- Net cash flow provided by (used in) investing activities . (70,260) 38,747 (34,766) ---------- ---------- ---------- Cash flows provided by (used in) financing activities: Proceeds from borrowings ..................................................... 1,122,172 997,424 Net proceeds from sale of preferred units .................................... 23,809 Repayment of borrowings ...................................................... (62,460) (1,020,290) (992,635) Redemption of units .......................................................... (113) (4,127) (88,542) Proceeds from exercise of FelCor stock options ............................... 678 Distributions paid to minority interests ..................................... (2,058) (4,799) (5,229) Distributions paid to unitholders ............................................ (31,074) (136,094) (138,928) Distributions paid to preferred unitholders .................................. (25,907) (24,600) (24,691) ---------- ---------- ---------- Net cash flow used in financing activities ............... (97,803) (67,060) (252,601) ---------- ---------- ---------- Effect of exchange rate changes on cash ................................................ 27 30 Net change in cash and cash equivalents ................................................ (62,200) 102,682 (10,063) Cash and cash equivalents at beginning of periods ...................................... 128,742 26,060 36,123 ---------- ---------- ---------- Cash and cash equivalents at end of periods ............................................ $ 66,542 $ 128,742 $ 26,060 ========== ========== ========== Supplemental cash flow information -- Interest paid ................................................................ $ 159,401 $ 164,261 $ 143,594 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-7 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION FelCor Lodging Limited Partnership, or FelCor LP, and our subsidiaries at December 31, 2002, had ownership interests in the real estate of 183 hotels, with nearly 50,000 rooms and suites. Our sole general partner is FelCor Lodging Trust Incorporated, or FelCor, a Maryland corporation, the nation's second largest hotel real estate investment trust, or REIT. At December 31, 2002, FelCor owned a greater than 95% equity interest in our operations. At December 31, 2002, we owned a 100% real estate interest in 145 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 unconsolidated entities that own 29 hotels. The operations of 15 of these 29 hotels are included in our consolidated results of operations due to our ownership of the lessee of the hotels. At December 31, 2002, we had an aggregate of 62,056,414 shares of FelCor common stock, and units of FelCor LP limited partnership outstanding. On January 1, 2001, the REIT Modernization Act, or RMA, went into effect. Among other things, the RMA permits a REIT to form taxable subsidiaries, or TRSs, that lease hotels from the REIT, provided that the hotels continue to be managed by unrelated third parties. Effective January 1, 2001, we completed transactions that resulted in our newly formed TRSs acquiring leases for 96 hotels that were previously leased to either DJONT Operations, L.L.C. and its consolidated subsidiaries, DJONT, or subsidiaries of Six Continents Hotels. Effective July 1, 2001, we acquired the remaining 88 hotel leases held by Six Continents Hotels. By acquiring these leases through our TRSs, we acquired the economic benefits and risks of the operations of these hotels, and began reporting hotel revenues and expenses rather than percentage lease revenues. Through the ownership of our operating lessees, where we have a majority ownership interest, we consolidate the operating revenues and expenses of 169 of our hotels. We have 50% unconsolidated interests in the operating revenues and expenses of the remaining 14 hotels, which are accounted for using the equity method. The following table provides a schedule of our 169 consolidated hotel operations, by brand, at December 31, 2002:
BRAND ----- Hilton Hotels Corporation ("Hilton") brands: Embassy Suites Hotels(R) .................................... 59 Doubletree(R) and Doubletree Guest Suites(R) ................ 13 Hampton Inn(R) .............................................. 7 Hilton Suites(R) ............................................ 1 Homewood Suites(R) .......................................... 1 Six Continents Hotels brands: Holiday Inn(R) .............................................. 39 Crowne Plaza(R) and Crowne Plaza Suites(R) .................. 18 Holiday Inn Select(R) ....................................... 10 Holiday Inn Express(R) ...................................... 3 Starwood Hotels & Resorts Worldwide Inc., or Starwood, brands: Sheraton(R) and Sheraton Suites(R) .......................... 10 Westin(R) ................................................... 1 Other brands ..................................................... 7 --- Total hotels ..................................................... 169 ===
F-8 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. ORGANIZATION -- (CONTINUED) At December 31, 2002, the operations of our 169 hotels were located in the United States (35 states) and Canada (six hotels), with a concentration in Texas (36 hotels), California (19 hotels), Florida (16 hotels) and Georgia (12 hotels). Approximately 51% of our hotel room revenues were generated from hotels in these four states. At December 31, 2002 of the 169 hotels, (i) subsidiaries of Six Continents Hotels managed 82, (ii) subsidiaries of Hilton managed 72, (iii) subsidiaries of Starwood managed 11, (iv) subsidiaries of Interstate Hotels Corporation, or IHC, managed two, and (v) two independent management companies managed two. Certain reclassifications have been made to prior period financial information to conform to the current period's presentation, with no effect to our previously reported net income or partner's capital. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- Our accompanying consolidated financial statements include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which we exercise control, and for which control is other than temporary. Intercompany transactions and balances are eliminated in consolidation. Investments in unconsolidated entities (50 percent owned ventures) are accounted for by the equity method. Use of Estimates -- The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America, 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 -- Our hotels are stated at cost and are depreciated using the straight-line method over estimated useful lives of 40 years for buildings, 15 to 20 years for improvements and three to seven years for furniture, fixtures, and equipment. We periodically review the carrying value of each of our hotels 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, we 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, we will make an adjustment to the carrying value of the hotel based on discounted future cash flows. Maintenance and repairs are expensed and major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from our accounts and the related gain or loss is included in operations. Investment in Unconsolidated Entities --We own a 50% interest in various real estate ventures in which the partners or members jointly make all material decisions concerning the business affairs and operations, additionally, we own a preferred equity interest in two of these real estate ventures. As we do not control these entities, we carry our investment in unconsolidated entities at cost, plus our equity in net earnings or losses, less distributions received since the date of acquisition, less any adjustment for impairment. Our equity in net earnings or losses is adjusted for the straight-line depreciation, over the lower of 40 years or the remaining life of the venture, of the difference between our cost and our proportionate share of the underlying net assets at the date of acquisition. Our investment in unconsolidated entities is periodically reviewed for other than temporary declines in market value. Any decline that is not expected to recover in the next 12 months is considered other than temporary and an impairment is recorded as a reduction in the carrying value of the investment. Estimated fair values are based on our projections of cash flows and market capitalization rates. F-9 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Hotels Held for Sale -- We classify any hotel that meets the held for sale criteria of Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," as held for sale. We adopted SFAS 144 in 2002, and at December 31, 2002, we had no hotels held for sale under this new standard. At December 31, 2002, we transferred six of our hotels designated as held for sale, into investment in hotels at the lower of estimated fair value at that date or the depreciated value that would have been the carrying value of these hotels had we not ceased depreciation once they were transferred to our held for sale portfolio. No adjustment to carrying value was required upon the transfer of these six hotels into investment in hotels. We will resume the depreciation of these hotels effective January 1, 2003. We had no discontinued operations in or prior to 2002 under SFAS 144, because all sales related to assets that either did not meet the definition of a component or were designated as held for sale prior to the adoption of SFAS 144. Cash and Cash Equivalents -- All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Included in cash and cash equivalents is $16.4 million and $13.2 million in 2002 and 2001, respectively, which is held in escrow under certain of our debt agreements. We place cash deposits at major banks. Our bank account balances may exceed the Federal Depository Insurance Limits of $100,000; however, management believes the credit risk related to these deposits is minimal. Deferred Expenses -- Deferred expenses, consisting primarily of loan costs, are recorded at cost. Amortization is computed using a method that approximates the interest method over the maturity of the related debt. In 2002, we early adopted the provisions of SFAS 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Under SFAS 145, losses from the extinguishment of debt are no longer considered extraordinary. The charge-offs of deferred financing costs in 2001 of $1.3 million and in 2000 of $3.9 million have been reclassified from an extraordinary loss to a component of continuing operations in the accompanying consolidated statements of operations, consistent with the 2002 treatment. Other Assets -- Other assets consist primarily of hotel operating inventories, prepaid expenses and deposits. Revenue Recognition -- Prior to January 2001, our principal source of revenue was from percentage lease revenue. Percentage lease revenue was comprised of fixed base rent and percentage rent based on room revenues above certain annual thresholds. All annual thresholds were based on periods ending December 31. We recognized base rent as income on the straight-line basis and percentage rent when annual thresholds were met. At December 31, 2002, we had no hotels leased to third parties. Beginning in January 2001, in conjunction with the effectiveness of the RMA, we started acquiring our lessees and leases and began to earn room revenue, food and beverage revenue and other revenue through the operations of our hotels. We recognize these revenues as the hotel services are performed. Foreign Currency Translation -- Results of operations for our Canadian hotels are maintained in Canadian dollars and translated using the average exchange rates during the period. Assets and liabilities are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Resulting translation adjustments are reflected in accumulated other comprehensive income. Capitalized Cost -- We capitalize interest and certain other costs, such as property taxes, land leases, and property insurance relating to hotels undergoing major renovations and redevelopments. Such costs capitalized in 2002, 2001, and 2000, were approximately $1.4 million, $1.2 million and $2.0 million, respectively. F-10 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Net Income (Loss) Per Unit -- We computed basic earnings per unit by dividing net income (loss) available to unitholders by the weighted average number of units outstanding. We computed diluted earnings per unit by dividing net income (loss) available to unitholders by the weighted average number of units and unit equivalents outstanding. Unit equivalents represent units issuable upon exercise of FelCor stock options and FelCor's unvested officers' restricted stock grants. At December 31, 2002, 2001, and 2000, our Series A Cumulative Preferred Units, or Series A preferred units, if converted to units, would be antidilutive; accordingly we do not assume conversion of the Series A preferred units in the computation of diluted earnings per unit. At December 31, 2002, 2001 and 2000, the majority of FelCor stock options granted are not included in the computation of diluted earnings per unit because the average market price of FelCor common stock during each respective year exceeded the exercise price of the options. Stock Compensation -- FelCor applies APB Opinion 25 and related interpretations in accounting for their stock based compensation plans. In 1995, SFAS 123, "Accounting for Stock-Based Compensation," was issued, which, if fully adopted, would have changed the methods applied in recognizing the cost of the plans. Adoption of the cost recognition provisions of SFAS 123 is optional, and FelCor has decided to adopt the provisions of SFAS 123 beginning in the first quarter of 2003. Had the compensation cost for FelCor's stock-based compensation plans been determined in accordance with SFAS 123, our net income or loss and net income or loss per unit for 2002, 2001, and 2000 would approximate the pro forma amounts below (in thousands, except per unit data):
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000 ------------------------ ------------------------ ----------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- ----------- --------- SFAS 123 charge ........................ $ 2,617 $ 2,704 $ 1,965 APB 25 charge .......................... $ 2,088 $ 2,093 $ 1,478 Income (loss) from continuing operations and net income (loss) applicable to unitholders ............ $ (218,590) $ (219,119) $ (74,744) $ (75,355) $ 41,709 $ 41,222 Diluted net income (loss) applicable to unitholders per unit ............................ $ (3.54) $ (3.55) $ (1.21) $ (1.22) $ 0.67 $ 0.66
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. Derivatives -- On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically, SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either partner's capital or net income, depending on whether the derivative instrument qualifies as a hedge for accounting purposes and the nature of the hedging activity. Upon adoption of SFAS 133, on January 1, 2001, we recorded the fair value of our interest rate swap agreements, having a notional value of $250 million, as an asset of $248,000 with a corresponding credit to accumulated other comprehensive income reported in partner's capital. Segment Information -- SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," requires the disclosure of selected information about operating segments. Based on the guidance provided in the standard, we have determined that our business is conducted in one operating segment. F-11 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Distributions and Dividends -- We and FelCor have historically paid regular quarterly distributions on FelCor's common stock and our units. Additionally, we have paid regular quarterly distributions on our preferred units in accordance with our unit distribution requirements. FelCor's ability to make distributions is dependent on our quarterly distributions to them. For 2002, we paid distributions of $0.60 per unit, $1.95 per unit of our Series A preferred units, and $2.25 per depositary unit evidencing our 9% Series B Redeemable Preferred Units, or Series B preferred units. Minority Interests -- Minority interests in consolidated subsidiaries represents the proportionate share of the equity not owned by us. We allocate income and loss to minority interest based on the weighted average percentage ownership throughout the year. Income Taxes -- We are a partnership under the Internal Revenue Code. Prior to January 1, 2001, as a partnership all of our taxable income or loss, or tax credits were passed through to our partners. Under the RMA that became effective January 1, 2001, we generally lease our hotels to wholly-owned TRSs that are subject to federal and state income taxes. We account for income taxes in accordance with the provisions of Statement of Financial Accounting Standards 109. Under SFAS 109, we account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax losses. 3. ACQUISITION OF HOTEL LEASES As a result of the passage of the RMA, effective January 1, 2001, we acquired 100% of DJONT, which owned leases on 85 of our hotels, and contributed it to a TRS. In consideration, we issued 416,667 of our units, valued at approximately $10 million, and we assumed DJONT's accumulated stockholders' deficit of $25 million, which we expensed as lease termination cost in 2001. On January 1, 2001, we acquired from Six Continents Hotels the leases covering 11 hotels, terminated one additional lease in connection with the sale of the related hotel and terminated the 12 related management agreements in exchange for 413,585 shares of FelCor's common stock valued at approximately $10 million and we issued a corresponding number of partnership units to FelCor. Of this $10 million in consideration, we expensed approximately $2 million as lease termination costs in 2001 and $8 million in 2000, in connection with the designation of certain of these hotels as held for sale. Of the 11 hotels, two have been sold, eight have been contributed to a joint venture with IHC, and one has been classified as held for investment. We purchased certain assets and assumed certain liabilities in connection with the acquisition of the leases on these 96 hotels. The fair values of the acquired assets and liabilities at January 1, 2001, are as follows (in thousands): Cash and cash equivalents ......................... $25,300 Accounts receivable ............................... 30,214 Other assets ...................................... 17,318 ------- Total assets acquired ............................. 72,832 ------- Accounts payable .................................. 18,656 Due to FelCor LP .................................. 30,687 Accrued expenses and other liabilities ............ 40,372 ------- Total liabilities assumed ......................... 89,715 ------- Liabilities assumed in excess of assets acquired .. 16,883 Value of FelCor common stock and units issued ..... 19,721 ------- Lease termination costs ...................... $36,604 =======
We acquired the remaining 88 hotel leases held by Six Continents Hotels on July 1, 2001. In consideration for the acquisition of these leases, we entered into long-term management agreements with F-12 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACQUISITION OF HOTEL LEASES -- (CONTINUED) Six Continents Hotels with regard to these hotels, and FelCor issued to Six Continents Hotels 100 shares of their common stock and we issued a corresponding number of partnership units to FelCor. The management fees payable to Six Continents Hotels include compensation to Six Continents Hotels for both management services and the acquisition of the 88 leases and, as such, are higher than we pay to other managers for comparable services. Management fees under these management contracts will be expensed as incurred. We purchased certain assets and acquired certain liabilities with the acquisition of the 88 hotel leases. The fair value of the acquired assets and liabilities at July 1, 2001, are as follows (in thousands): Cash and cash equivalents .............. $ 4,431 Accounts receivable .................... 30,964 Other assets 6,941 ------- Total assets acquired ........ $42,336 ======= Accounts payable ....................... $ 7,660 Accrued expenses and liabilities 34,676 ------- Total liabilities assumed .... $42,336 =======
4. INVESTMENT IN HOTELS Investment in hotels at December 31, 2002 and 2001, consists of the following (in thousands):
2002 2001 ----------- ----------- Building and improvements ............ $ 3,399,151 $ 3,479,682 Furniture, fixtures and equipment .... 492,750 446,287 Land ................................. 353,972 346,468 Construction in progress ............. 9,745 11,761 ----------- ----------- 4,255,618 4,284,198 Accumulated depreciation ............. (782,166) (630,962) ----------- ----------- $ 3,473,452 $ 3,653,236 =========== ===========
On July 12, 2002, we acquired the 208-suite SouthPark Suite Hotel in Charlotte, North Carolina for $14.5 million. We converted this hotel to a Doubletree Guest Suites hotel in October 2002. We entered into a 15-year management agreement with Hilton for the hotel concurrent with the acquisition closing. We utilized excess cash on hand to acquire the hotel. On July 19, 2002, we acquired the 385-room Wyndham(R) resort and a lease on the Arcadian Shores Golf Club in Myrtle Beach, South Carolina. We intend to convert this hotel to a Hilton hotel in April 2003. We purchased this hotel, adjacent land and a leasehold interest in the golf course for $35.3 million. We entered into a 15-year management agreement with Hilton for the hotel concurrent with the acquisition closing. We utilized excess cash on hand to acquire this hotel. In June 2002, we sold retail space associated with the Allerton Hotel located in Chicago, Illinois, for net proceeds of $16.7 million and recorded a net gain of approximately $5.1 million. In addition, in 2002 we also recognized a $0.2 million gain related to the condemnation of land adjacent to one of our hotels. In 2001, we received $3.9 million from the condemnation of three parcels of land and recorded a gain of $2.9 million. In 2001, we sold an undeveloped parcel of land adjacent to one of our hotels in Atlanta and recorded a gain of $0.5 million. In 2000, we sold two hotels for $33.8 million, recognizing a gain of $2.6 million, and vacant excess land and a billboard for $2.3 million, recognizing a gain of $1.8 million. F-13 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. HOTELS HELD FOR SALE In 2000, we identified 25 hotels that we considered non-strategic and announced our intention to sell such hotels. In connection with the decision to sell these hotels, in 2000 we recorded an impairment charge of $63 million representing the difference between the net book value and the then estimated fair market value of these hotels. In 2001, we recognized an additional $7 million impairment charge to reflect the deterioration of the market value of the then remaining 13 hotels held for sale. The net valuation allowance on these 13 hotels held for sale as of December 31, 2001 was $39.1 million. At December 31, 2002, we transferred the remaining six hotels to hotels held for investment. No depreciation expense has been recorded on these hotels since June 30, 2000; however, since we transferred these hotels to held for investment, depreciation of these six hotels resumed on January 1, 2003. During 2000, one of these hotels was sold and we recognized a gain of approximately $0.1 million, included in the total gains recognized in 2000 discussed previously. In March 2001, we contributed eight of the hotels held for sale to a joint venture in which we retain a 50% equity interest and an affiliate of IHC holds the other 50% equity interest. We contributed hotels with a book value of approximately $77 million, and received net cash proceeds of approximately $52 million. We retained an $8 million common equity interest and a $16.6 million preferred equity interest paying 8.85%. No gain or loss was recorded in connection with this transaction. We also made a loan of approximately $4 million to IHC, secured by its interest in the venture. In June 2001, we sold the 140-room Hampton Inn located in Marietta, Georgia, for a net sales price of $7 million. In September 2001, we sold the 119-room Hampton Inn located in Jackson, Mississippi, for a net sales price of $4 million. In November 2001, we sold the 129-room Doubletree Hotel located in Tampa, Florida for a net sales price of $3 million. We recorded no gain or loss from these sales. We sold our 183-room Doubletree Guest Suites hotel in Boca Raton, Florida, in April 2002, and received net sales proceeds of $6.5 million. We recorded a net gain of approximately $0.8 million on the sale. In August 2002, we contributed five of the hotels held for sale, located in Kansas, to a joint venture in which we retain a 50% equity interest and an independent hotel company holds the other 50% equity interest. We received net cash proceeds of approximately $4.4 million and retained a $1.4 million common equity interest and a $6.3 million preferred equity interest paying 8.19%. Also in August 2002, we sold our 71-room Holiday Inn Express hotel in Colby, Kansas, receiving net proceeds of $1.7 million. We recorded no gain or loss in connection with these transactions as the proceeds received approximated the book value of the properties. Revenues related to the hotels held for sale, less costs associated with those assets, were included in our results of operations for the year ended December 31, 2002, 2001, and 2000, and represented net income of approximately $0.1 million, $11 million, and $16 million, (net of $3 million in depreciation expense for 2000), respectively. 6. INVESTMENT IN UNCONSOLIDATED ENTITIES We owned 50% interests in joint venture entities that owned 29 hotels at December 31, 2002, and 24 hotels at December 31, 2001. We also owned a 50% interest in entities that own an undeveloped parcel of land, provides condominium management services, develops condominiums in Myrtle Beach, South Carolina, and leases 13 hotels. We account for our investments in these unconsolidated entities under the equity method. F-14 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INVESTMENT IN UNCONSOLIDATED ENTITIES -- (CONTINUED) Summarized unaudited combined balance sheet information for 100% of these unconsolidated entities is as follows (in thousands):
DECEMBER 31, ------------------- 2002 2001 -------- -------- Investment in hotels .......... $383,249 $365,802 Total assets .................. $408,979 $392,387 Debt .......................... $278,978 $266,238 Total liabilities ............. $279,887 $276,355 Equity ........................ $129,854 $116,032
Debt of our unconsolidated entities at December 31, 2002, consisted of $267.4 million of non-recourse mortgage debt. It also included $6.0 million of mortgage debt guaranteed by us and $5.7 million of mortgage debt guaranteed by Hilton, one of our joint venture partners. The debt guaranteed by us consisted primarily of 50% of a loan related to the construction of a residential condominium project in Myrtle Beach, South Carolina. The loan commitment is for $97.6 million of which approximately $11.4 million was outstanding as of December 31, 2002. Our guarantee reduces from 50% to 25% of the outstanding balance when the condominium project is completed and receives a certificate of occupancy, which we expect to occur in late 2004. Our guarantee is a payment guarantee and will trigger in the event that the joint venture fails to pay interest or principal due under the debt agreement. The loan matures in August 2005 and bears interest at LIBOR plus 200 basis points. As of December 31, 2002, we have not established any liability related to our guarantees of debt because it is not probable that we will be required to perform under these guarantees. Summarized unaudited combined statement of operations information for 100% of these unconsolidated entities is as follows (in thousands):
2002 2001 2000 -------- -------- -------- Total revenues .................................... $ 84,926 $ 82,776 $ 80,761 Net income ........................................ $ 8,818 $ 17,498 $ 30,729 Net income attributable to FelCor ................. $ 4,409 $ 8,749 $ 16,962 Preferred return .................................. 1,341 1,103 Depreciation of cost in excess of book value ...... (2,458) (2,506) (2,142) Impairment loss ................................... (13,419) -------- -------- -------- Equity in income (loss) from unconsolidated entities ........................ $(10,127) $ 7,346 $ 14,820 ======== ======== ========
A summary of the components of our investment in unconsolidated entities as of December 31, 2002 and 2001, is as follows:
2002 2001 --------- --------- Hotel investments ..................................... $ 141,403 $ 153,052 Land and condominium investments ...................... 2,452 2,802 Hotel lease investments ............................... (1,912) (637) --------- --------- $ 141,943 $ 155,217 ========= =========
This investment included net preferred interests, including unpaid preferred returns, of $23.8 million and $17.7 million as of December 31, 2002 and 2001, respectively. We cease the accrual of preferred returns if it becomes probable that the returns will not be realized. Under this policy, we did not recognize $0.4 million of owed but unpaid preferred returns during the year ended December 31, 2002. F-15 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INVESTMENT IN UNCONSOLIDATED ENTITIES -- (CONTINUED) A summary of the components of our equity in income (loss) of unconsolidated entities for the years ended December 31, 2002, 2001, and 2000, are as follows:
2002 2001 2000 -------- -------- -------- Hotel investments, including an impairment loss in 2002 of $13,419 .................................... $ (8,852) $ 7,983 $ 11,577 Net gain on sale of condominium project ................. 3,243 Hotel lessee operations ................................. (1,275) (637) -------- -------- -------- $(10,127) $ 7,346 $ 14,820 ======== ======== ========
7. DEBT Debt at December 31, 2002 and 2001, consists of the following (in thousands):
INTEREST RATE AT DECEMBER 31, COLLATERAL(a) 2002 MATURITY DATE 2002 2001 ------------- --------------- ------------- ----------- ------------ FLOATING RATE DEBT: Line of credit None 4.48% October 2004 $ 49,674 Publicly-traded term notes-swapped None 4.59(b) October 2004 $ 174,760 174,633 Publicly-traded term notes-swapped None 4.99(b) October 2007 25,000 Promissory note None 3.44 June 2016 650 650 ---- ------------ ------------ Total floating rate debt(c) 4.73 200,410 224,957 ---- ------------ ------------ FIXED RATE DEBT: Publicly-traded term notes None 7.63 October 2007 99,518 124,419 Publicly-traded term notes None 9.50 September 2008 596,195 595,525 Publicly-traded term notes None 8.50 June 2011 297,907 297,655 Mortgage debt 15 hotels 7.24 November 2007 134,738 137,541 Mortgage debt 7 hotels 7.54 April 2009 94,288 95,997 Mortgage debt 6 hotels 7.55 June 2009 70,937 72,209 Mortgage debt 7 hotels 8.73 May 2010 140,315 142,254 Mortgage debt 8 hotels 8.70 May 2010 180,534 182,802 Mortgage debt 6 hotels 7.20 2003 - 2005 54,993 57,008 Other 1 hotel 9.10 2010 7,299 8,041 ---- ------------ ------------ Total fixed rate debt(c) 8.61 1,676,724 1,713,451 ---- ------------ ------------ Total debt(c) 8.18% $ 1,877,134 $ 1,938,408 ==== ============ ============
(a) At December 31, 2002, we had unencumbered investments in hotels with a net book value totaling $2.3 billion. (b) At December 31, 2002, our $175 million publicly-traded notes due October 2004 and $25 million of our publicly traded notes due October 2007, were matched with interest rate swap agreements that effectively converted the fixed interest rate on the notes to a floating interest rate tied to LIBOR. The differences to be paid or received by us under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense. The interest rate swaps decreased interest expense by $4 million during 2002. (c) Calculated based on the weighted average of outstanding debt as of December 31, 2002. All of our floating rate debt at December 31, 2002, was based upon LIBOR (1.39% as of December 31, 2002). We reported interest expense net of interest income of $2.1 million, $2.9 million and $1.9 million, and capitalized interest of $0.8 million, $0.8 million and $1.1 million for the years ended December 31, 2002, 2001, and 2000, respectively. F-16 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. DEBT -- (CONTINUED) Interest expense associated with the $300 million in senior debt that was repaid in October 2001, relating to our terminated merger with MeriStar Hospitality Corporation, or MeriStar, was $5.5 million, and is presented net of $2.9 million of interest income from the proceeds of the senior notes held in escrow, during the year ended December 31, 2001. We charged off $3.2 million of unamortized deferred financing costs as a result of a reduction of the line of credit commitments in 2002. In 2001, we recorded charge-offs of $0.2 million and $1 million of unamortized costs related to the prepayment of floating rate debt and the renewal of the line of credit, respectively. Also in 2000, we recorded charge-offs of $0.6 million and $3.3 million of unamortized costs related to the reduction of the line of credit and the repayment of a $375 million floating rate senior term loan, respectively. On January 11, 2001, we completed the private placement of $100 million in 9 1/2% senior unsecured notes that mature in September 2008. These notes were issued at a premium to yield an effective rate of 91/8%. The proceeds were used initially to pay down our line of credit. In October 2001, we exchanged the $100 million in privately placed senior notes for notes with identical terms that are registered under the Securities Act of 1933. In June 2001, we completed the private placement of $600 million in 8 1/2% senior unsecured notes that mature in 2011. We placed approximately $315 million of the proceeds in escrow, pending the closing or termination of the merger with MeriStar. The remaining proceeds were used to pay down the line of credit and other floating rate debt. In October 2001, as the result of the merger termination, in accordance with the requirements of the indenture governing these notes, we redeemed $300 million in principal amount of these notes. The redemption price was 101% of the principal amount redeemed plus accrued interest and was paid out of the $315 million in escrowed funds. In October 2001, we exchanged the remaining privately placed notes for notes with identical terms that were registered under the Securities Act of 1933. In June 2001, in connection with the issuance of fixed rate senior notes and the subsequent prepayment of floating rate debt, we terminated $200 million of interest rate swaps, resulting in a $4.8 million swap termination cost recorded in the second quarter. In December 2001, we completed the private placement of $100 million in 9 1/2% senior unsecured notes that mature in September 2008. These notes were issued at a discount to yield 9.6%. The proceeds were used initially to pay down our line of credit. In connection with the issuance of these notes and the prepayment of floating rate debt, we terminated $50 million of interest rate swaps resulting in a $2.2 million swap termination cost during the fourth quarter of 2001. In 2002, we entered into two amendments to our line of credit. In June 2002, we amended our line of credit to relax covenant levels to provide us with greater financial flexibility. In December 2002, we further amended our line of credit to relax covenant levels and reduce the line to $300 million from $615 million. The maturity of the line of credit remains at October 31, 2004, but we have the right to extend the maturity date for two consecutive one-year periods, subject to certain conditions. We charged off $3.2 million of unamortized deferred financing costs associated with the reduction in our line of credit. Although we were in compliance with our existing covenants prior to the amendments, it was necessary to amend the line of credit in anticipation of a continued negative RevPAR environment. The amended line allows for the relaxation of certain financial covenants through the maturity date, with a step-up in covenants on June 30, 2004, including the unsecured interest coverage, fixed charge coverage, secured leverage, and total leverage tests. The interest rate remains on the same floating rate basis with a tiered spread based on our debt leverage ratio, but with an added tier to reflect the higher permitted leverage. There was no amount outstanding under the facility at December 31, 2002. F-17 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. DEBT -- (CONTINUED) In addition to financial covenants, our line of credit includes certain other affirmative and negative covenants, including: Restrictions on our ability to create or acquire wholly-owned subsidiaries; restrictions on the operation/ownership of our hotels; limitations on our ability to lease property or guarantee leases of other persons; limitations on our ability to make restricted payments (such as distributions on units and preferred units, unit repurchases and certain investments); limitations on our ability to merge or consolidate with other persons, issue stock of our subsidiaries and sell all or substantially all of our assets; restrictions on our ability to construct new hotels or acquire hotels under construction; limitations on our ability to change the nature of our business; limitations on our ability to modify certain instruments; limitations on our ability to create liens; limitations on our ability to enter into transactions with affiliates; and limitations on our ability to enter into joint ventures. Under the most recent amendment to our line of credit, at higher permitted leverage levels we agreed to certain more stringent limitations on acquisitions, restricted payments and discretionary capital expenditures. At December 31, 2002, we were in compliance with all covenants under our line of credit. If RevPAR declines continue or become more severe, we may be unable to satisfy all of the covenant requirements under our line of credit. In such an event, we may need to obtain further amendments from our lenders or seek other sources of financing. Further amendments to our line of credit, if any, may result in additional restrictions on our financial flexibility. Failure to satisfy one or more of the financial or other covenants under our line of credit could result in an event of default, notwithstanding our ability to meet our debt service obligations. Other events of default under our line of credit include a default in the payment of other recourse indebtedness of $10 million or more, bankruptcy and a change of control. Our other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the line of credit. Most of the mortgage debt is non-recourse to us and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of our mortgage debt is prepayable, subject to various prepayment penalties, yield maintenance, or defeasance obligations. Our publicly traded senior unsecured notes require that we satisfy a total leverage, a secured leverage and an interest coverage test in order to incur additional indebtedness, except under our line of credit or to refinance maturing debt with replacement debt, as defined in our senior unsecured note indenture; to pay distributions in excess of the minimum distributions required for FelCor to meet the REIT qualification test; to repurchase units; or to merge. As of December 31, 2002, and the date of this filing, we have satisfied all such incurrence tests. In addition, the interest rate on $900 million of our senior debt increases by 50 basis points if two major rating agencies downgrade our debt below certain levels. Future scheduled principal payments on debt obligations at December 31, 2002, are as follows (in thousands):
YEAR ---- 2003......................... $ 35,118 2004......................... 189,228 2005......................... 42,606 2006......................... 14,217 2007......................... 258,428 2008 and thereafter.......... 1,344,157 ---------- 1,883,754 Discount accretion over term. (6,620) ---------- $1,877,134 ==========
F-18 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. DERIVATIVES On the date we enter into a derivative contract, we designate the derivative as a hedge to the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), or the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge). We have entered into both types of derivative contracts. For a fair value hedge the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. For a cash flow hedge the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. At December 31, 2002, all of our derivative contracts are fair value hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or specific firm commitments. We also formally assess (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows or fair values of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When we determine that a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting prospectively, as discussed below. In the normal course of business, we are exposed to the effect of interest rate changes. We limit these risks by following established risk management policies and procedures including the use of derivatives. It is our objective to use interest rate hedges to manage our fixed and floating interest rate position and not to engage in speculation on interest rates. We manage interest rate risk based on the varying circumstances of anticipated borrowings, and existing floating and fixed rate debt, including our revolving line of credit. We will generally seek to pursue interest rate risk mitigation strategies that will result in the least amount of reported earnings volatility under generally accepted accounting principles, while still meeting strategic economic objectives and maintaining adequate liquidity and flexibility. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. To manage the relative mix of our debt between fixed and variable rate instruments, at December 31, 2002, we had entered into interest rate swap agreements with four financial institutions with a notional value of $200 million. These interest rate swap agreements modify a portion of the interest characteristics of our outstanding fixed rate debt, without an exchange of the underlying principal amount, and effectively convert fixed rate debt to a variable rate. To determine the fair values of our derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. The interest rate swap agreements held at December 31, 2002, are designated as fair value hedges, are marked to market through the income statement, but are offset by the change in fair value of our swapped outstanding fixed rate debt. The estimated unrealized net gain on these interest rate swap agreements was approximately $7.7 million at December 31, 2002, and represents the amount we would receive if the agreements were terminated based on current market rates. At December 31, 2001, we had a net unrealized loss of $1.5 million related to these agreements. F-19 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. DERIVATIVES -- (CONTINUED) The fixed rates we will receive and the variable rate we will pay under these swaps as of December 31, 2002, are summarized in the following table:
Weighted-average Notional Amount Number of Spread Paid in Fixed Rate Swap Maturity (in millions) Swaps Excess of LIBOR Received ------------- ------------- --------- ----------------- ---------- October 2004 $175 5 3.2043% 7.3750% October 2007 25 1 3.5675% 7.6250% ---- $200 ====
The differences to be paid or received by us under the terms of the interest rate swap agreements are accrued as interest rates change and we recognize them as an adjustment to interest expense, pursuant to the terms of our interest rate swap agreement; they will have a corresponding effect on our future cash flows. Under interest rate swaps then in force, we received $4 million during 2002, paid $0.5 million in 2001 and received $1.8 million during 2000. Agreements such as these contain a credit risk in that the counterparties may be unable to meet the terms of the agreement. We minimize that risk by evaluating the creditworthiness of our counterparties, who are limited to major banks and financial institutions, and we do not anticipate nonperformance by the counterparties. The credit ratings for the financial institutions that are counterparties to the interest rate swap agreements range from A to AA-. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107 requires disclosures about the fair value of 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, 2002. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize 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. Our estimates of 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) notes receivable approximate carrying value based upon effective borrowing rates for issuance of debt with similar terms and remaining maturities; (iii) the borrowings under our line of credit approximate carrying value because these borrowings accrue interest at floating interest rates based on market; and (iv) our interest rate swaps and the hedged debt are recorded at estimates of fair value. The estimated fair value of our debt of $1.9 billion is $1.7 billion at December 31, 2002, based on current market interest rates estimated by us for similar debt with similar maturities. 10. INCOME TAXES FelCor has elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, FelCor must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its taxable income to its stockholders. It is FelCor's management's current intent to adhere to these requirements and maintain its REIT status. As a REIT, FelCor generally will not be subject to corporate level federal income taxes on net income it distributes to its stockholders. If FelCor fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not qualify as a REIT for subsequent taxable years. Even if F-20 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES -- (CONTINUED) FelCor qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through TRSs is subject to federal, state and local taxes. Under the RMA, which became effective January 1, 2001, we generally lease our hotels to wholly-owned TRSs that are subject to federal and state income taxes. We account for income taxes in accordance with the provisions of SFAS 109, "Accounting for Income Taxes." Under SFAS 109, we account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. At December 31, 2002 and 2001, our TRS had a deferred tax asset, prior to any valuation allowance, primarily comprised of the following (in thousands):
2002 2001 -------- -------- Accumulated net operating losses of our TRS ...... $ 30,986 $ 8,983 Accrued employee benefits ........................ 7,746 8,877 Bad debt allowance ............................... 537 534 -------- -------- Gross deferred tax asset ......................... 39,269 18,394 Valuation allowance .............................. (39,269) (18,394) -------- -------- Net deferred tax asset ........................... $ -- $ -- ======== ========
We have provided a 100% valuation allowance against this asset as of December 31, 2002 and 2001, due to the uncertainty of realization and, accordingly, no provision or benefit for income taxes is reflected in the accompanying Consolidated Statements of Operations. 11. REDEEMABLE OPERATING PARTNERSHIP UNITS AND PARTNERS' CAPITAL FelCor is our sole general partner and is obligated to contribute the net proceeds from any issuance of its equity securities to us in exchange for units corresponding in number and terms to the equity securities issued by it. We may also issue units to third parties in exchange for like number of shares of FelCor common stock or, at the options of FelCor, for the cash equivalent thereof. Due to these redemption rights, these limited partnership units have been excluded from partners' capital and are included in redeemable units and measured at redemption value as of the end of the periods presented. At December 31, 2002 and 2001 there were 3,289,651 and 9,005,328 redeemable units outstanding. The value of the redeemable units are based on the closing market price of FelCor's common stock at the balance sheet date, which at December 31, 2002 and 2001 was $11.44 and $16.71, respectively. In consideration for the acquisition of all the equity interests in DJONT, we issued 416,667 units on January 1, 2001. This transaction reduced FelCor's ownership of limited partnership units from approximately 86% to approximately 85%. During 2002, 5,713,185 units owned by a subsidiary of Six Continents Hotels were exchanged for a like number of FelCor's newly issued common stock, and 2,492 units were redeemed for $49,000 in cash. The exchange with Six Continents Hotels resulted in an increase in FelCor's ownership of us from approximately 85% to 95%. As of December 31, 2002, FelCor had approximately $920 million of common stock, preferred stock, debt securities, and/or common stock warrants available for offerings under shelf registration statements previously declared effective. F-21 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. REDEEMABLE OPERATING PARTNERSHIP UNITS AND PREFERRED UNITS -- (CONTINUED) Preferred Units FelCor's 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, FelCor issued 6.1 million shares of their Series A preferred stock at $25 per share. The Series A preferred stock bears an annual cumulative dividend payable in arrears 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 stockholder's option to 0.7752 shares of common stock, subject to certain adjustments, and could not be redeemed by us before April 30, 2001. The proceeds from the Series A preferred stock were contributed to us in exchange for a like number of Series A preferred units. The preference on these units is the same as FelCor's Series A preferred stock. During 2000, holders of 69,400 shares of Series A preferred stock converted their shares to 53,798 common shares, which were issued from treasury shares. On May 1, 1998, FelCor issued 5.75 million depositary shares, representing 57,500 shares of their Series B preferred stock at $25 per depositary share. They may call the Series B preferred stock and the corresponding depositary shares at $25 per depositary share on or after May 7, 2003. These shares have no stated maturity, sinking fund or mandatory redemption, and are not convertible into any of our other securities. 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 cumulative dividends at the rate of 9% of the liquidation preference (equivalent to $2.25 annually per depositary share). The proceeds from the Series B preferred stock were contributed to us in exchange for a like number of Series B preferred units. The preference on these units is the same as FelCor's Series B preferred stock. On April 4, 2002, FelCor issued 1,025,800 depositary shares, representing 10,258 shares of Series B preferred stock at $24.37 per depositary share to yield 9.4%. The proceeds from FelCor's Series B preferred stock issuance were contributed to us in exchange for a like number of Series B preferred units. The preference on these units is the same as FelCor's Series B preferred stock. We used the net proceeds of $23.8 million for working capital and discretionary capital expenditures. At December 31, 2002, all distribution then payable on the Series A and Series B preferred units had been paid. Treasury Stock Repurchase Program In 2000, FelCor's board of directors authorized the repurchase of up to $300 million of their outstanding common shares. This share repurchase program was suspended in March 2001. Stock repurchases may, at the discretion of FelCor's management, be made from time to time at prevailing prices in the open market or through privately negotiated transactions. Through March 2001, FelCor repurchased approximately 10.5 million shares of its common stock at an aggregate of approximately $189 million. This has been recorded as a reduction to partner's capital as a result of the redemption of units held by FelCor to fund the repurchase. FelCor has suspended the stock repurchase program and, since March 27, 2001, they have not repurchased any additional shares of their common stock in the open market. F-22 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. REDEEMABLE OPERATING PARTNERSHIP UNITS AND PREFERRED UNITS -- (CONTINUED) In consideration for the acquisition of 12 leases that were held by Six Continents Hotels, in January 2001, FelCor issued to Six Continents Hotels, 413,585 shares of its common stock previously held in treasury. In July 2001, FelCor issued 100 shares of its common stock from treasury to Six Continents Hotels to acquire the remaining 88 leases still held by Six Continents Hotels. We issued a corresponding number of partnership units to FelCor for the common stock issued. Activity during 2002 included FelCor's issuance of 58,606 shares under restricted stock grants to its employees and directors, offset by the forfeiture of 3,292 shares under restricted stock grants and the exercise of 3,100 stock options. 12. OTHER PROPERTY OPERATING COSTS Hotel operating revenue is comprised of the following for the year ended December 31, 2002 and 2001 (in thousands):
2002 2001 ---------- ---------- Room .......................................... $1,036,547 $ 866,101 Food and beverage ............................. 212,076 157,812 Other operating departments ................... 67,690 58,931 ---------- ---------- Total operating revenues ........... $1,316,313 $1,082,844 ========== ==========
Hotel operating expenses are comprised of the following for the year ended December 31, 2002 and 2001 (in thousands):
2002 2001 -------- -------- Room ............................................. $264,480 $212,857 Food and beverage ................................ 166,147 122,999 Other operating departments ...................... 31,666 26,789 -------- -------- Total operating expenses .............. $462,293 $362,645 ======== ========
Other property operating costs is comprised of the following for the year ended December 31, 2002 and 2001 (in thousands):
2002 2001 -------- -------- Hotel general administrative expense ............. $124,747 $ 99,041 Marketing ........................................ 106,873 87,042 Repair and maintenance ........................... 69,740 54,603 Utilities ........................................ 62,571 49,561 -------- -------- Total other property operating costs .. $363,931 $290,247 ======== ========
F-23 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. TAXES, INSURANCE AND LEASE EXPENSE Taxes, insurance and lease expense is comprised of the following for the years ended December 31, 2002, 2001, and 2000 (in thousands):
2002 2001 2000 -------- -------- -------- Real estate and personal property taxes ................................... $ 52,074 $ 56,587 $ 63,207 Operating lease expense, including $24,092, $33,668, and $18,058 of percentage rent in 2002, 2001 and 2000 respectively(a) ................. 61,815 71,479 21,985 Property and general liability insurance .................................. 16,703 11,525 4,065 State franchise and Canadian income taxes ................................. 1,546 1,193 3,376 -------- -------- -------- Total taxes, insurance, and lease expense ...................... $132,138 $140,784 $ 92,633 ======== ======== ========
(a) Includes lease expense associated with the hotels owned by unconsolidated entities. 14. LAND LEASES AND HOTEL RENT We lease land occupied by certain hotels from third parties under various operating leases that expire through 2073. Certain land leases contain contingent rent features based on gross revenue at the respective hotels. In addition, we recognize rent expense for 15 hotels that are owned by unconsolidated entities and are leased to our wholly-owned TRSs. These leases expire through 2015 and require the payment of base rents and contingent rent based on revenues at the respective hotels. Future minimum lease payments under our land lease obligations and hotel leases at December 31, 2002, are as follows (in thousands):
YEAR ---- 2003.................................... $ 38,027 2004.................................... 38,095 2005.................................... 37,230 2006.................................... 33,205 2007.................................... 13,538 2008 and thereafter..................... 138,746 -------- $298,841 ========
15. MERGER TERMINATION COSTS On May 9, 2001, we entered into a merger agreement with MeriStar. On September 21, 2001, we announced jointly with MeriStar the termination of the merger. The decision to terminate the merger resulted from the September 11 terrorist attacks and their subsequent adverse impact on the financial markets. As a result of the merger termination, we expensed $19.9 million associated with the merger and $5.5 million in merger financing costs for the year ended December 31, 2001. 16. IMPAIRMENT LOSS We recorded impairment losses aggregating $157.5 million during the fourth quarter of 2002. The provisions of SFAS 144 resulted in $144.1 million of this impairment charge. This related principally to our fourth quarter 2002 decision to sell 33 non-strategic hotels over the next 36 months. An impairment charge of $118.3 million was recorded on 20 of these 33 hotels. Six of these 33 hotels had been previously identified for sale and had been included in previous impairment losses. The 33 hotels identified as non-strategic represented 14% of our hotel rooms and 9% of our consolidated hotel revenue during the year ended December 31, 2002, and had a net book value of $235.1 million as of December 31, 2002. Of the remaining 2002 impairment charge, $25.2 million related to two hotels held for investment that are not included in our disposition plan. In accordance with the provisions of SFAS 144, because the estimated future undiscounted cash flows from these individual hotels did not exceed the hotel's carrying values, we reduced F-24 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. IMPAIRMENT LOSS -- (CONTINUED) the carrying value of the 22 impaired hotels to our estimate of each hotel's estimated fair value as of December 31, 2002. In addition, the 2002 impairment charge included a $0.6 million write-down of construction in progress. We recorded an impairment charge of $13.4 million related to an other than temporary decline in value of certain equity method investments under the provisions of Accounting Principles Board Opinion 18, "The Equity Method of Accounting for Common Stocks" ("APB 18"). In accordance with APB 18, other than temporary declines in fair value of our investment in unconsolidated entities result in reductions in the carrying value of these investments. We consider a decline in value in our equity method investments that is not estimated to recover within 12 months to be other than temporary. We recorded impairment charges of $7 million and $63 million in 2001 and 2000, respectively, in conjunction with the designation of certain hotels as held for sale. 17. EARNINGS PER UNIT The following table sets forth the computation of basic and diluted earnings per unit for the years ended December 31, 2002, 2001 and 2000 (in thousands, except per unit data):
2002 2001 2000 --------- --------- --------- Numerator: Income (loss) from continuing operations ............................... $(198,359) $ (53,561) $ 62,003 Less: Preferred distributions ....................................... (26,292) (24,600) (24,682) Gain on sale of assets .............................................. 6,061 3,417 4,388 --------- --------- --------- Income (loss) from continuing operations and net income (loss) applicable to the unitholders ....................................... $(218,590) $ (74,744) $ 41,709 ========= ========= ========= Denominator: Denominator for basic earnings per unit - weighted average units ............................................... 61,737 61,635 62,301 Effect of dilutive securities: Stock options .......................................................... 27 Restricted units ....................................................... 228 --------- --------- --------- Denominator for diluted earnings per unit - adjusted weighted average units and assumed conversions .......................................................... 61,737 61,635 62,556 ========= ========= ========= Earnings (loss) per unit data: Basic: Income (loss) from continuing operations applicable to unitholders ..... $ (3.54) $ (1.21) $ 0.67 ========= ========= ========= Net income (loss) ...................................................... $ (3.54) $ (1.21) $ 0.67 ========= ========= ========= Diluted: Income (loss) from continuing operations applicable to unitholders ..... $ (3.54) $ (1.21) $ 0.67 ========= ========= ========= Net income (loss) ...................................................... $ (3.54) $ (1.21) $ 0.67 ========= ========= =========
F-25 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. EARNINGS PER UNIT -- (CONTINUED) Securities that could potentially dilute basic earnings per unit in the future that were not included in computation of diluted earnings per unit, because they would have been antidilutive for the periods presented, are as follows (unaudited, in thousands):
2002 2001 2000 ----- ----- ----- Stock Options ............................... 7 49 Restricted units granted but not vested ..... 317 355 Series A preferred units .................... 4,636 4,636 4,636
Series A preferred units that would be excluded from net income (loss) applicable to unitholders, if the Series A preferred units were dilutive were $11.7 million for 2002, 2001 and 2000. 18. COMMITMENTS AND RELATED PARTY TRANSACTIONS The acquisition of DJONT, one of our primary lessees, was completed effective January 1, 2001. In consideration for the acquisition of DJONT, we issued 416,667 units valued at approximately $10 million. The acquisition of DJONT required negotiations between FelCor and the owners of DJONT, including Thomas J. Corcoran, Jr., FelCor's President, Chief Executive Officer, and a director of FelCor, and the children of Charles N. Mathewson, a former director of FelCor. The interests of Mr. Corcoran and Mr. Mathewson were in direct conflict with FelCor's interests in these negotiations and, accordingly, they abstained from participation in FelCor's board of directors' discussion and vote on this matter. Prior to our acquisition of DJONT, which was effective January 1, 2001, our general partner, FelCor, shared the executive offices and certain employees with FelCor, Inc., and DJONT, (both companies were controlled by Thomas J. Corcoran, Jr., President and CEO) and each company paid its share of the costs thereof, including an allocated portion of the rent, compensation of certain personnel, office supplies, telephones, and depreciation of office furniture, fixtures, and equipment. We reimbursed FelCor for our share of such allocated costs. Any such allocation of shared expenses to us is required to be approved by a majority of FelCor's independent directors. At December 31, 2002, FelCor, Inc. had a 10% ownership interest in one hotel and limited other investments. During 2000, we and FelCor paid approximately $7.5 million (approximately 89.4%) of the allocable expenses under this arrangement. Following the acquisition of DJONT, FelCor, Inc. continued to share certain overhead costs. FelCor, Inc. paid $50,000 and $45,000 for shared office costs in 2002 and 2001, respectively. In December 2000, we sold one hotel and, effective January 1, 2001, completed the acquisition of leases with respect to 12 hotels that had been leased to and operated by Six Continents Hotels. In consideration for the acquisition of such leases and termination of the related management agreements, FelCor issued 413,585 shares of their common stock, valued at approximately $10 million, to Six Continents Hotels. We acquired the remaining leases held by Six Continents Hotels, effective July 1, 2001. We contributed these leases to our TRSs. In consideration for these 88 leases, FelCor issued 100 shares of their common stock and caused their subsidiaries to agree to new long-term management agreements with subsidiaries of Six Continents Hotels to manage these hotels. The acquisition of the leases held by Six Continents Hotels involved negotiations between FelCor and Six Continents Hotels. Richard C. North, a director of FelCor, was the Group Finance Director of Six Continents plc, the parent of Six Continents Hotels and, together with its affiliates, the owner of approximately 17% of FelCor's outstanding shares and our units. The interest of Six Continents plc in those negotiations was in direct conflict with our interests. Mr. North abstained from participating in any discussion or vote by FelCor's board relating to these transactions. Following the events of September 11, 2001, certain types of insurance coverage, such as for acts of terrorism, were only available at a high cost. In an effort to keep our cost of insurance within reasonable F-26 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED) limits, we have only purchased terrorism insurance for those hotels that are secured by mortgage debt, as required by our lenders. We have established a self-insured retention of $250,000 per occurrence for general liability insurance with regard to 68 of our hotels; the remainder of our hotels participate in general liability programs, of our managers, with no deductible. Due to the increase in our general liability deductible for the 68 hotels, we maintain reserves to cover the estimated ultimate uninsured liability for losses with respect to reported and unreported claims incurred as of the end of each accounting period. At December 31, 2002, our reserves for this self-insured portion of general liability claims was $2.3 million. Our property program has a $100,000 all risk deductible, a deductible of 2% of insured value for named windstorm and a deductible of 5% of insured value for California quake. No reserves have been established as of December 31, 2002, for these property deductibles, as no related losses are estimated to have been incurred. Should such uninsured or not fully insured losses be substantial, they could have a material adverse impact on our operating results and cash flows. There is no litigation pending or known to be threatened against us or affecting any of our hotels, other than claims arising in the ordinary course of business or which are not considered to be material. Furthermore, most of these claims are substantially covered by insurance. We do not believe that any claims known to us, individually or in the aggregate, will have a material adverse effect on us, without regard to any potential recoveries from insurers or other third parties. Our hotels are operated under various management agreements that call for base management fees, which range from 2% to 7% of hotel room revenue and generally have an incentive provision related to the hotel's profitability. In addition, the management agreements generally require us to invest approximately 3% to 4% of revenues in capital maintenance. The management agreements have terms from 10 to 20 years and generally have renewal options. With the exception of 95 hotels whose rights to use a brand name are contained in the management agreement governing their operations, and seven of our hotels that do not operate under a nationally recognized brand name, each of our hotels operates under a franchise or license agreement. Typically, our franchise or license agreements provide for a royalty fee of 4% of room revenues to be paid to the franchisor. Under our management agreement with Six Continents Hotels, we are obligated to replace the amount of investment in hotels that were under Six Continents Hotels management but were sold or otherwise transferred to non-Six Continents Hotels management or pay liquidated damages. As a result of the 2002 sales and contributions to joint ventures, we are required to spend $13.6 million on the purchase of one or more hotels licensed and managed by Six Continents Hotels by August 2003. Until that replacement occurs, we must pay a replacement fee of approximately $21,000 per month. If we do not replace the investment by August 2003, we may incur liquidated damages of $4.5 million. We currently expect that this obligation will be satisfied by our investment in one or more hotels licensed and managed by Six Continents Hotels. Also under our Six Continents Hotels management agreement, if a TRS breaches the agreement, resulting in a default and termination thereof, or otherwise causes or suffers a termination for any reason other than an event of default by Six Continents Hotels, the TRS may be liable for liquidated damages under the terms of the management agreement. In the event we breach one of our Embassy Suites Hotels franchise license agreements, in addition to losing the right to use the Embassy Suites Hotels name for the operation of the applicable hotel, we may be liable, under certain circumstances, for liquidated damages equal to the fees paid to the franchisor with respect to that hotel during the three preceding years. F-27 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. SUPPLEMENTAL CASH FLOW DISCLOSURE Approximately $15 million, $8 million, and $34 million of aggregate preferred distributions and partnership unit distributions had been declared as of December 31, 2002, 2001, and 2000, respectively. These amounts were paid in the following January of each year. As the result of Six Continent's exchange of 5,713,185 units for common stock in 2002, there was a reduction in redeemable units of $73.4 million and corresponding increase in partner's capital. 20. FELCOR STOCK BASED COMPENSATION PLANS FelCor sponsors four restricted stock and stock option plans (the "FelCor Plans"). In addition, upon completion of the merger with Bristol Hotel Company (the "Merger") in 1998, they 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." Upon the issuance of any stock, FelCor is obligated to contribute the proceeds to us in exchange for a like number of units. FelCor is authorized to issue 3,700,000 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 either over five equal annual installments (20% per year), beginning in the year following the date of grant or 100% at the end of a four-year vesting term. Under the FelCor plans there were approximately 1,133,000 shares available for grant at December 31, 2002. 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 award. Options covering 93,434 shares were outstanding under the Bristol Plans at December 31, 2002. Stock Options A summary of the status of FelCor's non-qualified stock options under the Plans as of December 31, 2002, 2001, and 2000, and the changes during these years are presented in the following tables:
2002 2001 2000 ----------------------- ------------------------ ------------------------ WEIGHTED WEIGHTED WEIGHTED NO. SHARES OF AVERAGE NO. SHARES OF AVERAGE NO. SHARES OF AVERAGE UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of the year ........ 2,041,212 $ 22.85 1,900,780 $ 23.33 2,496,773 $ 22.32 Granted ..................................... 300,000 $ 17.94 69,000 $ 19.50 Exercised ................................... (48,806) $ 10.33 Retired(a) .................................. (349,443) $ 12.28 Forfeited ................................... (63,738) $ 22.82 (110,762) $ 23.33 (315,550) $ 26.75 ---------- ---------- ---------- Outstanding at end of year .................. 1,977,474 $ 22.85 2,041,212 $ 22.85 1,900,780 $ 23.33 ========== ========== ========== Exercisable at end of year .................. 1,641,944 $ 23.75 1,546,913 $ 23.84 804,066 $ 24.64
(a) In the second quarter of 2000, FelCor purchased options covering an aggregate of 349,443 shares of their common stock for approximately $1.9 million. These options were held by employees of Bristol and were issued in substitution for stock options previously granted by Bristol Hotel Company that were outstanding at the time of its merger with us in 1998. These options so purchased and retired had exercise prices ranging from $10.33 to $16.95 per share and the majority of these options were scheduled to vest in the third quarter of 2000. The purchase price was recorded as a reduction in partner's capital. F-28 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 20. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ------------------------------ RANGE OF NUMBER WGTD. AVG. NUMBER EXERCISE OUTSTANDING REMAINING WGTD AVG. EXERCISABLE WGTD. AVG. PRICES AT 12/31/02 LIFE EXERCISE PRICE AT 12/31/02 EXERCISE PRICE ---------------- ----------- --------- -------------- ----------- -------------- $10.33 to $29.92 1,824,523 5.13 $21.81 1,488,993 $22.57 $30.28 to $36.63 152,951 4.44 $35.31 152,951 $35.31 --------- --------- $10.33 to $36.63 1,977,474 5.08 $22.85 1,641,944 $23.75 ========= =========
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 for 2001 and 2000 when options were granted: dividend yield of 12.44% to 11.28%; risk free interest rates are different for each grant and range from 4.33% to 6.58%; the expected lives of options are six years; and volatility of 21.04% for 2001 grants and 18.22% for 2000 grants. The weighted average fair value of options granted during 2001 and 2000, was $0.85 and $0.90 per share, respectively. FelCor issued no stock options in 2002. Restricted Stock A summary of the status of FelCor's restricted stock grants as of December 31, 2002, 2001, and 2000, and the changes during these years are presented below:
2002 2001 2000 -------------------- ------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE FAIR MARKET FAIR MARKET FAIR MARKET VALUE VALUE VALUE NO. SHARES AT GRANT NO. SHARES AT GRANT NO. SHARES AT GRANT ---------- -------- ---------- -------- ---------- ----------- Outstanding at beginning of the year . 570,575 $ 24.40 367,575 $ 25.01 138,975 $ 28.26 Granted(a): With immediate vesting(b) ......... 19,100 $ 17.55 14,300 $ 23.74 18,500 $ 17.81 With 5-year pro rata vesting ...... 43,606 $ 17.71 214,000 $ 22.89 210,100 $ 23.50 Forfeited ............................ (25,300) $ 20.23 -------- -------- -------- Outstanding at end of year ........... 633,281 $ 23.73 570,575 $ 24.40 367,575 $ 25.01 ======== ======== ======== Vested at end of year ................ 316,715 $ 21.78 215,795 $ 24.09 140,075 $ 26.97
- ------------------------------------- (a) All shares granted are issued out of treasury except for 4,100, 2,700, and 18,500 of the restricted shares issued to directors during the years ended December 31, 2002, 2001 and 2000, respectively. (b) Shares awarded to FelCor's Directors. 21. EMPLOYEE BENEFITS FelCor offers a 401(k) plan, health insurance benefits and a deferred compensation plan to its employees. FelCor's matching contribution to its 401(k) plan was $0.5 million, $0.5 million, and $0.4 million and the cost of health insurance benefits were $0.6 million, $0.5 million, and $0.3 million during the years ended December 31, 2002, 2001 and 2000, respectively. The deferred compensation plan FelCor offers is available only to directors and qualifying senior officers. FelCor makes no matching or other contributions to the deferred compensation plan, other than the payment of its operating and administrative expenses. The employees at our hotels are employees of the respective management companies. Under the management agreements, we reimburse the management companies for the cost of salaries and employee benefits related to the employees who work at our hotels. We are not, however, the sponsors of their employee benefit plans and have no obligation to fund these plans. F-29 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 22. SEGMENT INFORMATION SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," requires the disclosure of selected information about operating segments. Based on the guidance provided in the standard, we have determined that our business is conducted in one operating segment. The following table sets forth revenues for, and investment in hotel assets represented by, the following geographical areas as of and for the years ended December 31, 2002, 2001 and 2000 (in thousands):
REVENUE(a) INVESTMENT IN HOTEL ASSETS ------------------------------------ ------------------------------------ 2002 2001 2000 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- ---------- California ........... $ 207,094 $ 195,376 $ 118,857 $ 689,761 $ 689,791 $ 679,781 Texas ................ 232,138 206,766 97,274 839,192 867,263 860,093 Florida .............. 135,545 130,402 66,014 547,627 540,155 529,857 Georgia .............. 96,862 89,487 40,183 320,890 318,268 315,497 Other states ......... 608,565 552,964 203,776 1,780,837 1,793,950 1,749,134 Canada ............... 37,755 25,976 13,860 77,311 74,771 79,570 ---------- ---------- ---------- ---------- ---------- ---------- Total ..... $1,317,959 $1,200,971 $ 539,964 $4,255,618 $4,284,198 $4,213,932 ========== ========== ========== ========== ========== ==========
(a) Prior to January 1, 2001, all of the revenues that we derived from hotel assets consisted of percentage lease revenue. Effective January 1, 2001, we acquired 96 hotel leases and effective July 1, 2001, we acquired the remaining 88 hotel leases. Upon acquisition of these leases, our revenue derived from hotel assets became hotel operating revenues, including room revenues, food and beverage revenue and other hotel operating revenue. 23. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS The Financial Accounting Standards Board, or FASB, has issued SFAS 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") of the FASB has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also included (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS No. 146 will be effective for exit or disposal activities initiated after December 31, 2002. We do not currently expect SFAS No. 146 to have a material impact on our results of operations and financial position. The FASB has issued SFAS 148, "Accounting for Stock-Based Compensation - - Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to a fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. We have adopted the disclosure requirements of SFAS 148. We currently account for stock-based employee compensation in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations. In accordance with one of the alternative methods of transition for a voluntary change to a fair value based method of accounting for stock-based employee compensation mandated by SFAS 148, we intend to adopt the "prospective method" as of January 1, 2003. Under this method, compensation expense will be recognized for any new awards issued after December 31, 2002. We do not currently expect the adoption of SFAS 148 to have a material impact on our financial position or results of operations. F-30 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 23. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS -- (CONTINUED) FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," or FIN 45, was issued in November 2002. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We have made the disclosures required by FIN 45. FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," or FIN 46, was issued in January 2003. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the equity to finance its activities without additional subordinated financial support from other parties. We have no unconsolidated variable interest entities that would be consolidated under the requirements of FIN 46. 24. QUARTERLY OPERATING RESULTS (UNAUDITED) Our unaudited consolidated quarterly operating data for the years ended December 31, 2002 and 2001, follows (in thousands, except per unit 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 partners' capital and cash flows for a period of several years.
FIRST SECOND THIRD FOURTH 2002 QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- Total revenues ........................................ $ 324,810 $ 351,726 $ 331,582 $ 309,841 Net income (loss) applicable to unitholders ........... $ (14,383) $ 7,386 $ (16,152) $(195,441) Diluted per unit data: Net income (loss) applicable to unitholders ...... $ (0.23) $ 0.12 $ (0.26) $ (3.17) Weighted average units outstanding ............... 61,722 62,097 61,732 61,740
FIRST SECOND THIRD FOURTH 2001 QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- Total revenues ........................................ $ 285,653 $ 274,649 $ 337,759 $ 302,910 Net income (loss) applicable to unitholders ........... $ (15,162) $ 19,203 $ (37,342) $ (41,443) Diluted per unit data: Net income (loss) applicable to unitholders ...... $ (0.25) $ 0.31 $ (0.60) $ (0.67) Weighted average units outstanding ............... 61,609 61,644 61,996 61,644
F-31 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 24. CONSOLIDATING FINANCIAL INFORMATION Certain of our wholly-owned subsidiaries (FelCor/CSS Holdings, L.P.; FelCor/CSS Hotels, L.L.C.; FelCor/LAX Hotels L.L.C.; FelCor Eight Hotels, L.L.C.; FelCor/St. Paul Holdings, L.P.; FelCor/LAX Holdings, L.P.; FHAC Nevada Holdings, L.L.C.; FelCor TRS Holdings, L.P.; Kingston Plantation Development Corp.; FHAC Texas Holdings, L.P.; FelCor Omaha Hotel Company, L.L.C.; FelCor Country Villa Hotel, L.L.C.; FelCor Moline Hotel, L.L.C.; FelCor Canada Co. and FelCor Hotel Asset Company, L.L.C., collectively, "Subsidiary Guarantors"), together with FelCor and two of its wholly-owned subsidiaries (FelCor Nevada Holdings, L.L.C. and FelCor Holdings Trust), are guarantors of senior debt. The following tables present consolidating information for the Subsidiary Guarantors. CONSOLIDATING BALANCE SHEET DECEMBER 31, 2002 (IN THOUSANDS)
ASSETS SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Net investment in hotel properties .................. $ 464,473 $ 1,529,637 $ 1,479,342 $ 3,473,452 Equity investment in consolidated entities .......... 2,325,436 $ (2,325,436) Investment in unconsolidated entities ............... 120,406 21,537 141,943 Cash and cash equivalents ........................... 24,725 24,479 17,338 66,542 Deferred assets ..................................... 19,697 937 3,551 24,185 Other assets ........................................ 3,619 65,507 5,115 74,241 ------------ ------------ ------------ ------------ ------------ Total assets ................................ $ 2,958,356 $ 1,642,097 $ 1,505,346 $ (2,325,436) $ 3,780,363 ============ ============ ============ ============ ============ LIABILITIES AND PARTNERS' CAPITAL Debt ................................................ $ 1,215,925 $ 101,371 $ 559,838 $ 1,877,134 Distributions payable ............................... 14,792 14,792 Accrued expenses and other liabilities .............. 38,086 96,566 15,733 150,385 Minority interest - other partnerships ............. 97 48,499 48,596 ------------ ------------ ------------ ------------ ------------ Total liabilities ........................... 1,268,900 197,937 624,070 2,090,907 ------------ ------------ ------------ ------------ ------------ Redeemable units, at redemption value ............... 37,634 37,634 ------------ ------------ ------------ ------------ ------------ Preferred units ..................................... 318,907 318,907 Common units ........................................ 1,332,915 1,444,259 881,276 (2,325,436) 1,333,014 Accumulated other comprehensive loss ................ (99) ------------ ------------ ------------ ------------ ------------ Total partners' capital ................. 1,615,822 1,444,160 881,276 (2,325,436) 1,615,822 Total liabilities, redeemable units and partners' capital ........................ $ 2,958,356 $ 1,642,097 $ 1,505,346 $ (2,325,436) $ 3,780,363 ============ ============ ============ ============ ============
F-32 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 25. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001 (IN THOUSANDS)
ASSETS SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Net investment in hotel properties .................... $ 505,815 $ 1,598,085 $ 1,549,336 $ 3,653,236 Equity investment in consolidated entities ............ 2,433,437 $ (2,433,437) Investment in unconsolidated entities ................. 138,974 16,243 155,217 Assets held for sale .................................. 3,818 35,119 38,937 Cash and cash equivalents ............................. 68,463 47,318 12,961 128,742 Deferred assets ....................................... 26,098 1,101 4,050 31,249 Other assets .......................................... 3,697 64,079 4,328 72,104 ------------ ------------ ------------ ------------ ------------ Total assets ............................. $ 3,180,302 $ 1,761,945 $ 1,570,675 $ (2,433,437) $ 4,079,485 ============ ============ ============ ============ ============ LIABILITIES AND PARTNERS' CAPITAL Debt .................................................. $ 1,224,441 $ 144,106 $ 569,861 $ 1,938,408 Distributions payable ................................. 8,172 8,172 Accrued expenses and other liabilities ................ 28,298 111,146 24,608 164,052 Minority interest - other partnerships ............... 97 49,462 49,559 ------------ ------------ ------------ ------------ ------------ Total liabilities ............................. 1,261,008 255,252 643,931 2,160,191 ------------ ------------ ------------ ------------ ------------ Redeemable units, at redemption value ................. 150,479 150,479 ------------ ------------ ------------ ------------ ------------ Preferred units ....................................... 293,265 293,265 Common units .......................................... 1,475,550 1,507,069 926,744 $ (2,433,437) 1,475,926 Accumulated other comprehensive loss .................. (376) (376) ------------ ------------ ------------ ------------ ------------ Total partners' capital ...................... 1,768,815 1,506,693 926,744 (2,433,437) 1,768,815 Total liabilities and partners' capital ....... $ 3,180,302 $ 1,761,945 $ 1,570,675 $ (2,433,437) $ 4,079,485 ============ ============ ============ ============ ============
F-33 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 25. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Revenues: Hotel operating revenue ............................... $ 1,313,786 $ 2,527 $ 1,316,313 Percentage lease revenue .............................. $ 69,600 156,291 $ (225,891) Other revenue ......................................... 1,601 45 1,646 ------------ ------------ ------------ ------------ ------------ Total revenue .............................. 71,201 1,313,786 158,863 (225,891) 1,317,959 ------------ ------------ ------------ ------------ ------------ Expenses: Hotel operating expense ............................... 383 890,903 1,835 893,121 Taxes, insurance and other ............................ 8,301 325,254 24,474 (225,891) 132,138 Abandoned projects .................................... 1,663 1,663 Corporate expenses .................................... 2,300 6,290 5,166 13,756 Depreciation .......................................... 26,665 67,209 58,943 152,817 ------------ ------------ ------------ ------------ ------------ Total operating expenses ................... 39,312 1,289,656 90,418 (225,891) 1,193,495 ------------ ------------ ------------ ------------ ------------ Operating income (loss) ............................... 31,889 24,130 68,445 124,464 Interest expense, net ................................. (106,082) (11,770) (46,442) (164,294) Impairment loss ....................................... (41,195) (34,071) (68,819) (144,085) Charge-off of deferred financing costs ................ (3,216) (6) (3,222) ------------ ------------ ------------ ------------ ------------ Income (loss) before equity in income from unconsolidated entities, minority interests, and gain on sale of assets .............. (118,604) (21,717) (46,816) (187,137) Equity in loss from consolidated entities ........................................... (64,707) (64,707) Equity in loss from unconsolidated entities ........................................... (8,987) (1,140) (10,127) Minority interests in other partnerships .............. (1,095) (1,095) Gain on sale of assets ................................ 5,861 200 6,061 ------------ ------------ ------------ ------------ ------------ Net income (loss) ..................................... (192,298) (16,996) (47,711) (64,707) (192,298) Preferred distributions ............................... (26,292) (26,292) ------------ ------------ ------------ ------------ ------------ Net income (loss) applicable to unitholders ........... $ (218,590) $ (16,996) $ (47,711) $ (64,707) $ (218,590) ============ ============ ============ ============ ============
F-34 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 25. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Revenues: Hotel operating revenue .......................... $ 1,080,041 $ 2,803 $ 1,082,844 Percentage lease revenue ......................... $ 73,494 76,312 172,199 $ (206,868) 115,137 Other revenue .................................... 2,990 2,990 ------------ ------------ ------------ ------------ ------------ Total revenue ......................... 76,484 1,156,353 175,002 (206,868) 1,200,971 ------------ ------------ ------------ ------------ ------------ Expenses: Hotel operating expense .......................... 708,656 1,975 710,631 Taxes, insurance and other ....................... 11,266 312,415 24,808 (206,868) 141,621 Corporate expenses ............................... 3,465 6,074 3,139 12,678 Depreciation ..................................... 27,268 70,034 60,390 157,692 Lease termination costs .......................... 34,834 1,770 36,604 Merger termination costs ......................... 19,919 19,919 ------------ ------------ ------------ ------------ ------------ Total operating expenses .............. 96,752 1,098,949 90,312 (206,868) 1,079,145 ------------ ------------ ------------ ------------ ------------ Operating income (loss) .......................... (20,268) 57,404 84,690 121,826 Interest expense, net ............................ (95,541) (9,448) (58,840) (163,829) Impairment loss on hotels held for sale .......... (804) (6,196) (7,000) Swap termination expense ......................... (7,049) (7,049) Charge-off of deferred financing costs ........... (1,270) (1,270) ------------ ------------ ------------ ------------ ------------ Income (loss) before equity in income from unconsolidated entities, minority interests, and gain on sale of assets ......... (124,932) 41,760 25,850 (57,322) Equity in income from consolidated entities ...................................... 66,160 (66,160) Equity in income from unconsolidated entities ...................................... 7,983 (637) 7,346 Minority interests in other partnerships ......... (3,585) (3,585) Gain on sale of assets ........................... 645 462 2,310 3,417 ------------ ------------ ------------ ------------ ------------ Net income (loss) ................................ (50,144) 41,585 24,575 (66,160) (50,144) Preferred distributions .......................... (24,600) (24,600) ------------ ------------ ------------ ------------ ------------ Net income (loss) applicable to unitholders ...... $ (74,744) $ 41,585 $ 24,575 $ (66,160) $ (74,744) ============ ============ ============ ============ ============
F-35 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 24. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Revenues: Percentage lease revenue ........................ $ 106,797 $ 259,374 $ 170,736 $ 536,907 Other revenue ................................... 3,057 3,057 ------------ ------------ ------------ ------------ ------------ Total revenue ........................ 109,854 259,374 170,736 539,964 ------------ ------------ ------------ ------------ ------------ Expenses: Taxes, insurance and other ...................... 18,314 52,004 22,315 92,633 Corporate expenses .............................. 4,218 5,019 3,019 12,256 Depreciation .................................... 35,636 72,882 52,227 160,745 ------------ ------------ ------------ ------------ ------------ Total operating expenses ............. 58,168 129,905 77,561 265,634 ------------ ------------ ------------ ------------ ------------ Operating income (loss) ......................... 51,686 129,469 93,175 274,330 Interest expense, net ........................... (94,950) (15,990) (45,772) (156,712) Impairment loss on hotels held for sale ......... (6,938) (52,483) (3,579) (63,000) Charge-off of deferred financing costs .......... (3,865) (3,865) ------------ ------------ ------------ ------------ ------------ Income (loss) before equity in income from unconsolidated entities, minority interests, and gain on sale of assets ........ (54,067) 60,996 43,824 50,753 Equity in income from consolidated entities ..................................... 103,985 $ (103,985) Equity in income from unconsolidated entities ..................................... 13,898 922 14,820 Minority interests in other partnerships ........ 114 (3,684) (3,570) Gain on sale of assets .......................... 2,461 1,789 138 4,388 ------------ ------------ ------------ ------------ ------------ Net income (loss) ............................... 66,391 63,707 40,278 (103,985) 66,391 Preferred distributions ......................... (24,682) (24,682) ------------ ------------ ------------ ------------ ------------ Net income (loss) applicable to unitholders ..... $ 41,709 $ 63,707 $ 40,278 $ (103,985) $ 41,709 ============ ============ ============ ============ ============
F-36 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 25. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2002 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES CONSOLIDATED ------------ ------------ ------------ ------------ Cash flows from operating activities .................. $ (56,040) $ 80,226 $ 81,650 $ 105,836 Cash flows from (used in) investing activities ........ (53,077) (5,000) (12,183) (70,260) Cash flows from (used in) financing activities ........ 65,379 (98,065) (65,090) (97,776) ------------ ------------ ------------ ------------ Change in cash and cash equivalents ................... (43,738) (22,839) 4,377 (62,200) Cash and cash equivalents at beginning of period ...... 68,463 47,318 12,961 128,742 ------------ ------------ ------------ ------------ Cash and equivalents at end of period ................. $ 24,725 $ 24,479 $ 17,338 $ 66,542 ============ ============ ============ ============
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2001 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES CONSOLIDATED ------------ ------------ ------------ ------------ Cash flows from operating activities .................. $ (75,768) $ 119,916 $ 86,817 $ 130,965 Cash flows from (used in) investing activities ........ 42,410 11,593 (15,247) 38,747 Cash flows from (used in) financing activities ........ 96,717 (87,223) (76,524) (67,030) ------------ ------------ ------------ ------------ Change in cash and cash equivalents ................... 63,350 44,286 (4,954) 102,682 Cash and cash equivalents at beginning of period ...... 5,113 3,032 17,915 26,060 ------------ ------------ ------------ ------------ Cash and equivalents at end of period ................. $ 68,463 $ 47,318 $ 12,961 $ 128,742 ============ ============ ============ ============
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES CONSOLIDATED ------------ ------------ ------------ ------------ Cash flows from operating activities .................. $ (953) $ 184,195 $ 94,062 $ 277,304 Cash flows from (used in) investing activities ........ 33,721 (44,540) (23,947) (34,766) Cash flows from (used in) financing activities ........ (30,748) (149,041) (72,812) (252,601) ------------ ------------ ------------ ------------ Change in cash and cash equivalents ................... 2,020 (9,386) (2,697) (10,063) Cash and cash equivalents at beginning of period ...... 3,093 12,418 20,612 36,123 ------------ ------------ ------------ ------------ Cash and equivalents at end of period ................. $ 5,113 $ 3,032 $ 17,915 $ 26,060 ============ ============ ============ ============
F-37 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 26. SUBSEQUENT EVENTS In January and February 2003, we executed two additional interest rate swaps. These new fair value swaps are the same type as those that existed at December 31, 2002, in that they modify a portion of the interest characteristics of our outstanding fixed rate debt, without an exchange of the underlying principal amount, and effectively convert fixed rate debt to a variable rate. As designated fair value hedges, these swaps will be marked to market through the income statement, but are offset by the change in fair value of our swapped outstanding fixed rate debt. The notional amount of these new swaps is $50 million on which we will receive a fixed rate of 7.625% and pay a rate of LIBOR plus an average spread of 4.325%. As a consequence of the economic slowdown in our business, and the travel and lodging industries generally, Standard & Poor's lowered its ratings on our $1.2 billion in senior unsecured debt one level, to B+, in February 2003. Although Moody's affirmed its current rating on our senior debt in February 2003 (Ba3), we remain on negative outlook. Should Moody's downgrade its Ba3 rating on our senior unsecured debt to B1, the interest rate on $900 million of our $1.2 billion senior unsecured debt would increase by 50 basis points, which would increase our annual interest expense by approximately $4.5 million. On February 4, 2003, FelCor announced that, as the result of the uncertain political environment and soft business climate, together with the risk of further margin deterioration should we continue to experience declines in our portfolio's average daily rate, they do not expect their Board of Directors to declare future partnership distributions until there is a 2 to 4% increase in hotel RevPAR. Subsequent to December 31, 2002 and prior to March 21, 2003, we have drawn $149 million on our line of credit to increase available cash on hand. F-38 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of FelCor Lodging Trust Incorporated: Our audits of the consolidated financial statements referred to in our report dated February 3, 2003, except as to Note 26, which is as of March 21, 2003, appearing on page F-2 of the Annual Report on Form 10-K of FelCor Lodging Trust Incorporated (which report and consolidated financial statements are included in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Dallas, Texas February 3, 2003 F-39 FELCOR LODGING LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2002 (IN THOUSANDS)
COST CAPITALIZED GROSS AMOUNTS AT SUBSEQUENT TO WHICH CARRIED AT INITIAL COST ACQUISITION CLOSE OF PERIOD ----------------------- ----------------- -------------------- BUILDINGS BUILDINGS BUILDINGS AND AND AND LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS - -------- ------------ ---- ------------ ---- ------------ ---- ------------ Birmingham, AL (1) $ 11,880 $ 2,843 $ 29,286 0 $ 687 $ 2,843 $ 29,973 Montgomery E. I-85, AL (2) 602 830 7,221 9 2,759 839 9,980 Texarkana I-30, AR (2) 0 0 5,245 0 1,589 0 6,834 Flagstaff, AZ (1) 0 900 6,825 0 1,671 900 8,496 Phoenix (Airport-44th St.), AZ (1) 0 2,969 25,828 0 1,436 2,969 27,264 Phoenix (Camelback), AZ (1) 0 0 38,998 4,695 1,174 4,695 40,172 Phoenix (Crescent), AZ (3) 26,128 3,608 29,583 0 351 3,608 29,934 Tempe (ASU), AZ (1) 11,776 3,951 34,371 0 1,001 3,951 35,372 Anaheim (Disney(R) Area), CA (1) 10,924 2,548 14,832 0 797 2,548 15,629 Burlingame (San Francisco A/P So.), CA (1) 0 0 39,929 0 353 0 40,282 Dana Point, CA (5) 0 1,787 15,545 0 912 1,787 16,457 El Segundo (LAX Airport South), CA (1) 0 2,660 17,997 0 696 2,660 18,693 Irvine (Orange County Airport), CA (6) 0 4,953 43,109 0 1,919 4,953 45,028 Milpitas, CA (1) 20,460 4,021 23,677 0 1,187 4,021 24,864 Milpitias (San Jose N.), CA (6) 0 4,127 35,917 0 5,948 4,127 41,865 Napa, CA (1) 10,749 3,287 14,205 0 1,176 3,287 15,381 Oxnard (Mandalay Beach), CA (1) 0 2,930 22,125 0 1,839 2,930 23,964 Palm Desert, CA (1) 8,418 2,368 20,598 5 1,744 2,373 22,342 Pleasanton, CA (6) 0 3,152 27,428 0 242 3,152 27,670 San Diego (On the Bay), CA (2) 0 0 68,229 0 3,432 0 71,661 San Francisco (Financial District), CA (2) 0 0 21,679 0 1,657 0 23,336 San Francisco (Fisherman's Wharf), CA (2) 0 0 61,883 0 1,086 0 62,969 San Francisco (Union Square), CA (6) 0 8,466 73,685 0 3,799 8,466 77,484 Santa Barbara, CA (2) 5,322 1,683 14,647 0 226 1,683 14,873 So. San Francisco (SF Airport No.), CA (1) 25,511 3,418 31,737 0 1,017 3,418 32,754 Cambridge, Canada (2) 0 478 4,159 (21) 897 457 5,056 Kitchener (Waterloo), Canada (2) 0 0 9,384 0 1,070 0 10,454 Peterbourough (Waterfront), Canada (2) 0 730 6,354 (32) 366 698 6,720 Sarnia, Canada (2) 0 268 2,337 (11) 1,181 257 3,518 Toronto (Airport), Canada (9) 0 0 21,041 0 2,369 0 23,410 Toronto (Yorkdale), Canada (2) 0 1,567 13,634 (69) 3,568 1,498 17,202 Aurora (Denver Southeast), CO (7) 0 2,432 21,158 0 523 2,432 21,681 Avon (Beaver Creek Resort), CO (8) 0 1,134 9,864 (16) 403 1,118 10,267 Hartford Downtown, CT (6) 0 2,310 20,109 0 6,199 2,310 26,308 Stamford, CT (9) 0 0 37,154 0 2,226 0 39,380 Wilmington, DE (7) 0 1,379 12,487 0 9,715 1,379 22,202 Boca Raton, FL (1) 0 1,868 16,253 0 92 1,868 16,345 Cocoa Beach (Oceanfront Resort), FL (2) 0 2,285 19,893 0 10,073 2,285 29,966 Deerfield Beach, FL (1) 14,755 4,523 29,443 68 1,253 4,591 30,696 Ft. Lauderdale (Cypress Creek), FL (11) 12,580 3,009 26,177 0 1,109 3,009 27,286 Ft. Lauderdale, FL (1) 15,746 5,329 47,850 (163) 1,759 5,166 49,609 Jacksonville, FL (1) 0 1,130 9,608 0 5,281 1,130 14,889 Kissimmee (Nikki Bird Resort), FL (2) 0 0 31,457 0 6,479 0 37,936 Lake Buena Vista (Disney World (R)), FL (5) 0 2,896 25,196 0 441 2,896 25,637 Miami Airport, FL (1) 12,729 4,135 24,950 0 780 4,135 25,730 Miami Airport, FL (6) 0 0 26,007 0 1,105 0 27,112 Orlando (Airport), FL (9) 0 2,549 22,188 0 1,752 2,549 23,940 Orlando (Int'l Drive Resort), FL (2) 0 5,108 44,459 0 8,784 5,108 53,243 Orlando (North), FL (1) 0 1,673 14,218 0 5,895 1,673 20,113 Orlando (South), FL (1) 24,846 1,632 13,870 0 765 1,632 14,635 Tampa (Near Busch Gardens), FL (2) 0 0 9,425 0 11,328 0 20,753 Tampa Rocky Point, FL (5) 0 2,142 18,639 0 1,344 2,142 19,983 Atlanta (Airport Gateway), GA (3) 0 5,113 22,857 0 245 5,113 23,102 Atlanta (Airport North), GA (2) 16,589 0 34,354 0 400 0 34,754 Atlanta (Airport), GA (1) 0 0 22,342 2,568 1,162 2,568 23,504 Atlanta (Airport), GA (6) 0 0 40,735 0 267 0 41,002 Atlanta (Buckhead), GA (1) 37,147 7,303 38,996 0 856 7,303 39,852 ACCUMULATED LIFE UPON WHICH DEPRECIATION DEPRECIATION IN BUILDING AND YEAR STATEMENT IS LOCATION TOTAL IMPROVEMENTS OPENED DATE ACQUIRED COMPUTED - -------- ----- ------------ ------ ------------- -------- Birmingham, AL (1) 32,816 $ 5,383 1987 1/3/1996 15 - 40 Yrs Montgomery E. I-85, AL (2) 10,819 1,146 1964 7/28/1998 15 - 40 Yrs Texarkana I-30, AR (2) 6,834 897 1970 7/28/1998 15 - 40 Yrs Flagstaff, AZ (1) 9,396 1,610 1988 2/16/1995 15 - 40 Yrs Phoenix (Airport-44th St.), AZ (1) 30,233 3,169 1981 5/4/1998 15 - 40 Yrs Phoenix (Camelback), AZ (1) 44,867 7,149 1985 1/3/1996 15 - 40 Yrs Phoenix (Crescent), AZ (3) 33,542 4,088 1986 6/30/1997 15 - 40 Yrs Tempe (ASU), AZ (1) 39,323 4,062 1986 5/4/1998 15 - 40 Yrs Anaheim (Disney(R) Area), CA (1) 18,177 2,963 1987 1/3/1996 15 - 40 Yrs Burlingame (San Francisco A/P So.), CA (1) 40,282 7,224 1986 11/6/1995 15 - 40 Yrs Dana Point, CA (5) 18,244 2,373 1992 2/21/1997 15 - 40 Yrs El Segundo (LAX Airport South), CA (1) 21,353 4,111 1985 3/27/1996 15 - 40 Yrs Irvine (Orange County Airport), CA (6) 49,981 5,015 1986 7/28/1998 15 - 40 Yrs Milpitas, CA (1) 28,885 4,558 1987 1/3/1996 15 - 40 Yrs Milpitias (San Jose N.), CA (6) 45,992 4,748 1987 7/28/1998 15 - 40 Yrs Napa, CA (1) 18,668 2,654 1985 5/8/1996 15 - 40 Yrs Oxnard (Mandalay Beach), CA (1) 26,894 4,022 1986 5/8/1996 15 - 40 Yrs Palm Desert, CA (1) 24,715 2,604 1984 5/4/1998 15 - 40 Yrs Pleasanton, CA (6) 30,822 3,049 1986 7/28/1998 15 - 40 Yrs San Diego (On the Bay), CA (2) 71,661 7,610 1965 7/28/1998 15 - 40 Yrs San Francisco (Financial District), CA (2) 23,336 4,503 1970 7/28/1998 15 - 40 Yrs San Francisco (Fisherman's Wharf), CA (2) 62,969 6,883 1970 7/28/1998 15 - 40 Yrs San Francisco (Union Square), CA (6) 85,950 8,504 1970 7/28/1998 15 - 40 Yrs Santa Barbara, CA (2) 16,556 1,629 1969 7/28/1998 15 - 40 Yrs So. San Francisco (SF Airport No.), CA (1) 36,172 5,834 1988 1/3/1996 15 - 40 Yrs Cambridge, Canada (2) 5,513 661 1969 7/28/1998 15 - 40 Yrs Kitchener (Waterloo), Canada (2) 10,454 1,251 1965 7/28/1998 15 - 40 Yrs Peterbourough (Waterfront), Canada (2) 7,418 813 1965 7/28/1998 15 - 40 Yrs Sarnia, Canada (2) 3,775 390 1970 7/28/1998 15 - 40 Yrs Toronto (Airport), Canada (9) 23,410 2,837 1970 7/28/1998 15 - 40 Yrs Toronto (Yorkdale), Canada (2) 18,700 2,111 1970 7/28/1998 15 - 40 Yrs Aurora (Denver Southeast), CO (7) 24,113 2,510 1989 3/15/1998 15 - 40 Yrs Avon (Beaver Creek Resort), CO (8) 11,385 1,739 1989 2/20/1996 15 - 40 Yrs Hartford Downtown, CT (6) 28,618 2,991 1973 7/28/1998 15 - 40 Yrs Stamford, CT (9) 39,380 4,236 1984 7/28/1998 15 - 40 Yrs Wilmington, DE (7) 23,581 2,407 1972 3/20/1998 15 - 40 Yrs Boca Raton, FL (1) 18,213 2,996 1989 2/28/1996 15 - 40 Yrs Cocoa Beach (Oceanfront Resort), FL (2) 32,251 3,913 1960 7/28/1998 15 - 40 Yrs Deerfield Beach, FL (1) 35,287 5,496 1987 1/3/1996 15 - 40 Yrs Ft. Lauderdale (Cypress Creek), FL (11) 30,295 3,155 1986 5/4/1998 15 - 40 Yrs Ft. Lauderdale, FL (1) 54,775 8,987 1986 1/3/1996 15 - 40 Yrs Jacksonville, FL (1) 16,019 2,663 1986 7/28/1994 15 - 40 Yrs Kissimmee (Nikki Bird Resort), FL (2) 37,936 4,540 1974 7/28/1998 15 - 40 Yrs Lake Buena Vista (Disney World (R)), FL (5) 28,533 3,446 1987 7/28/1997 15 - 40 Yrs Miami Airport, FL (1) 29,865 4,688 1983 7/28/1998 15 - 40 Yrs Miami Airport, FL (6) 27,112 2,997 1987 1/3/1996 15 - 40 Yrs Orlando (Airport), FL (9) 26,489 2,688 1984 7/28/1998 15 - 40 Yrs Orlando (Int'l Drive Resort), FL (2) 58,351 5,890 1972 7/28/1998 15 - 40 Yrs Orlando (North), FL (1) 21,786 3,986 1985 7/28/1994 15 - 40 Yrs Orlando (South), FL (1) 16,267 3,146 1985 7/28/1994 15 - 40 Yrs Tampa (Near Busch Gardens), FL (2) 20,753 2,937 1966 7/28/1998 15 - 40 Yrs Tampa Rocky Point, FL (5) 22,125 2,720 1986 7/28/1997 15 - 40 Yrs Atlanta (Airport Gateway), GA (3) 28,215 3,171 1986 6/30/1997 15 - 40 Yrs Atlanta (Airport North), GA (2) 34,754 3,774 1967 7/28/1998 15 - 40 Yrs Atlanta (Airport), GA (1) 26,072 2,664 1989 5/4/1998 15 - 40 Yrs Atlanta (Airport), GA (6) 41,002 4,542 1975 7/28/1998 15 - 40 Yrs Atlanta (Buckhead), GA (1) 47,155 6,114 1988 10/17/1996 15 - 40 Yrs
F-40
COST CAPITALIZED GROSS AMOUNTS AT SUBSEQUENT TO WHICH CARRIED AT INITIAL COST ACQUISITION CLOSE OF PERIOD ----------------------- ----------------- -------------------- BUILDINGS BUILDINGS BUILDINGS AND AND AND LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS - -------- ------------ ---- ------------ ---- ------------ ---- ------------ Atlanta (Galleria), GA (11) 17,418 5,052 28,507 0 938 5,052 29,445 Atlanta (Jonesboro South), GA (2) 2,758 859 7,475 0 183 859 7,658 Atlanta Perimeter, GA (9) 10,295 0 20,450 0 401 0 20,851 Atlanta Powers Ferry, GA (6) 10,041 3,391 29,518 0 630 3,391 30,148 Brunswick, GA (1) 0 705 6,067 0 110 705 6,177 Columbus (Airport North), GA (2) 0 0 6,979 0 2,033 0 9,012 Davenport, IA (12) 0 434 2,534 0 0 434 2,534 Davenport, IA (2) 0 547 2,192 0 0 547 2,192 Chicago (Allerton), IL (6) 0 3,298 28,723 15,589 28,050 18,887 56,773 Chicago (O'Hare), IL (3) 24,192 8,178 37,043 0 735 8,178 37,778 Deerfield, IL (1) 16,097 2,305 20,054 0 570 2,305 20,624 Moline (Airport), IL (13) 0 232 1,603 0 0 232 1,603 Moline (Airport), IL (2) 0 822 2,015 0 0 822 2,015 Moline, IL (12) 0 505 2,859 0 0 505 2,859 Lexington, KY (11) 6,774 0 21,644 2,488 597 2,488 22,241 Lexington, KY (14) 0 1,955 13,604 0 149 1,955 13,753 Baton Rouge, LA (1) 7,637 2,350 19,092 1 998 2,351 20,090 New Orleans (French Quarter), LA (2) 23,215 5,228 45,504 0 7,736 5,228 53,240 New Orleans, LA (1) 31,709 3,647 31,993 0 5,914 3,647 37,907 Boston (Government Center), MA (9) 0 0 45,191 0 5,398 0 50,589 Boston (Marlborough), MA (1) 19,909 948 8,143 761 13,117 1,709 21,260 Baltimore (BWI), MD (1) 0 2,568 22,433 (2) 1,360 2,566 23,793 Troy, MI (1) 0 2,968 25,905 0 1,330 2,968 27,235 Bloomington, MN (1) 0 2,038 17,731 0 584 2,038 18,315 Minneapolis (Airport), MN (1) 15,086 5,417 36,508 0 62 5,417 36,570 Minneapolis (Downtown), MN (1) 0 818 16,820 0 495 818 17,315 St Paul, MN (1) 0 1,156 17,315 0 51 1,156 17,366 Kansas City (Northeast), MO (2) 0 967 8,415 0 46 967 8,461 St. Louis (Downtown), MO (1) 0 3,179 27,659 0 1,424 3,179 29,083 St. Louis (Westport), MO (2) 7,576 2,767 24,072 0 2,312 2,767 26,384 Jackson (Downtown), MS (6) 4,841 2,226 19,370 0 448 2,226 19,818 Jackson (North), MS (15) 5,228 1,643 14,296 0 229 1,643 14,525 Olive Branch (Whispering Woods Conference Center), MS (8) 0 1,238 12,084 (158) 1,728 1,080 13,812 Raleigh/Durham, NC (5) 0 2,124 18,476 0 849 2,124 19,325 SouthPark Suites (5) 0 1,458 12,681 1 256 1,459 12,937 Omaha (Central), NE (12) 0 514 4,477 0 923 514 5,400 Omaha (Central), NE (5) 0 1,877 16,328 0 1,163 1,877 17,491 Omaha (I-80), NE (2) 0 1,782 15,513 0 3,365 1,782 18,878 Omaha (Old Mill Northwest), NE (6) 0 971 8,448 0 4,876 971 13,324 Omaha (Southwest), NE (12) 0 464 4,036 0 808 464 4,844 Omaha (Southwest), NE (13) 0 917 7,983 0 893 917 8,876 Omaha (Southwest), NE (15) 0 371 3,228 0 24 371 3,252 Piscataway, NJ (1) 20,131 1,755 17,424 0 1,141 1,755 18,565 Secaucus (Meadowlands), NJ (6) 0 2,339 20,497 0 4,533 2,339 25,030 Albuquerque (Mountain View), NM (2) 0 1,314 11,439 0 866 1,314 12,305 Syracuse, NY (1) 0 1,483 13,756 0 329 1,483 14,085 Cleveland, OH (1) 0 1,755 15,329 0 3,194 1,755 18,523 Columbus, OH (5) 0 1,918 16,691 0 1,338 1,918 18,029 Dayton, OH (5) 6,180 1,140 11,223 149 1,235 1,289 12,458 Tulsa, OK (1) 0 525 7,344 0 651 525 7,995 Philadelphia (Center City), PA (6) 0 5,759 50,127 0 2,737 5,759 52,864 Philadelphia (Independence Mall), PA (2) 11,955 3,164 27,536 0 5,920 3,164 33,456 Philadelphia (Society Hill), PA (3) 32,901 4,542 45,121 0 1,328 4,542 46,449 Pittsburgh, PA (9) 15,500 0 25,031 0 1,613 0 26,644 Charleston (Mills House), SC (2) 0 3,251 28,295 0 429 3,251 28,724 Greenville (Roper), SC (6) 0 1,551 13,492 (20) 792 1,531 14,284 Kingston Myrtle Beach (22) 0 12,000 17,689 6 5 12,006 17,694 Myrtle Beach (Kingston Plantation), SC (1) 0 2,940 24,988 0 1,787 2,940 26,775 Knoxville (Central), TN (2) 0 0 11,517 0 1,570 0 13,087 ACCUMULATED LIFE UPON WHICH DEPRECIATION DEPRECIATION IN BUILDING AND YEAR STATEMENT IS LOCATION TOTAL IMPROVEMENTS OPENED DATE ACQUIRED COMPUTED - -------- ----- ------------ ------ ------------- -------- Atlanta (Galleria), GA (11) 34,497 4,000 1990 6/30/1997 15 - 40 Yrs Atlanta (Jonesboro South), GA (2) 8,517 836 1973 7/28/1998 15 - 40 Yrs Atlanta Perimeter, GA (9) 20,851 2,300 1985 7/28/1998 15 - 40 Yrs Atlanta Powers Ferry, GA (6) 33,539 3,350 1981 7/28/1998 15 - 40 Yrs Brunswick, GA (1) 6,882 1,122 1988 7/19/1995 15 - 40 Yrs Columbus (Airport North), GA (2) 9,012 1,222 1969 7/28/1998 15 - 40 Yrs Davenport, IA (12) 2,968 0 1985 7/28/1998 15 - 40 Yrs Davenport, IA (2) 2,739 0 1966 7/28/1998 15 - 40 Yrs Chicago (Allerton), IL (6) 75,660 7,889 1923 7/28/1998 15 - 40 Yrs Chicago (O'Hare), IL (3) 45,956 5,144 1994 6/30/1997 15 - 40 Yrs Deerfield, IL (1) 22,929 3,321 1987 6/20/1996 15 - 40 Yrs Moline (Airport), IL (13) 1,835 0 1996 7/28/1998 15 - 40 Yrs Moline (Airport), IL (2) 2,837 0 1961 7/28/1998 15 - 40 Yrs Moline, IL (12) 3,364 0 1985 7/28/1998 15 - 40 Yrs Lexington, KY (11) 24,729 2,531 1989 5/4/1998 15 - 40 Yrs Lexington, KY (14) 15,708 2,356 1987 1/10/1996 15 - 40 Yrs Baton Rouge, LA (1) 22,441 3,628 1985 1/3/1996 15 - 40 Yrs New Orleans (French Quarter), LA (2) 58,468 5,522 1969 7/28/1998 15 - 40 Yrs New Orleans, LA (1) 41,554 7,264 1984 12/1/1994 15 - 40 Yrs Boston (Government Center), MA (9) 50,589 5,601 1968 7/28/1998 15 - 40 Yrs Boston (Marlborough), MA (1) 22,969 3,232 1988 6/30/1995 15 - 40 Yrs Baltimore (BWI), MD (1) 26,359 3,431 1987 3/20/1997 15 - 40 Yrs Troy, MI (1) 30,203 3,931 1987 3/20/1997 15 - 40 Yrs Bloomington, MN (1) 20,353 2,654 1980 2/1/1997 15 - 40 Yrs Minneapolis (Airport), MN (1) 41,987 6,690 1986 11/6/1995 15 - 40 Yrs Minneapolis (Downtown), MN (1) 18,133 3,178 1984 11/15/1995 15 - 40 Yrs St Paul, MN (1) 18,522 3,324 1983 11/15/1995 15 - 40 Yrs Kansas City (Northeast), MO (2) 9,428 1,300 1975 7/28/1998 15 - 40 Yrs St. Louis (Downtown), MO (1) 32,262 3,399 1985 5/4/1998 15 - 40 Yrs St. Louis (Westport), MO (2) 29,151 2,827 1979 7/28/1998 15 - 40 Yrs Jackson (Downtown), MS (6) 22,044 2,235 1975 7/28/1998 15 - 40 Yrs Jackson (North), MS (15) 16,168 1,685 1957 7/28/1998 15 - 40 Yrs Olive Branch (Whispering Woods Conference Center), MS (8) 14,892 1,528 1972 7/28/1998 15 - 40 Yrs Raleigh/Durham, NC (5) 21,449 2,542 1987 7/28/1997 15 - 40 Yrs SouthPark Suites (5) 14,396 159 N/A 7/12/2002 15 - 40 Yrs Omaha (Central), NE (12) 5,914 672 1965 7/28/1998 15 - 40 Yrs Omaha (Central), NE (5) 19,368 2,465 1973 2/1/1997 15 - 40 Yrs Omaha (I-80), NE (2) 20,660 2,055 1991 7/28/1998 15 - 40 Yrs Omaha (Old Mill Northwest), NE (6) 14,295 1,842 1974 7/28/1998 15 - 40 Yrs Omaha (Southwest), NE (12) 5,308 580 1986 7/28/1998 15 - 40 Yrs Omaha (Southwest), NE (13) 9,793 857 1989 7/28/1998 15 - 40 Yrs Omaha (Southwest), NE (15) 3,623 448 1996 7/28/1998 15 - 40 Yrs Piscataway, NJ (1) 20,320 3,138 1988 1/10/1996 15 - 40 Yrs Secaucus (Meadowlands), NJ (6) 27,369 2,783 N/A 7/28/1998 15 - 40 Yrs Albuquerque (Mountain View), NM (2) 13,619 1,377 1968 7/28/1998 15 - 40 Yrs Syracuse, NY (1) 15,568 1,964 1989 6/30/1997 15 - 40 Yrs Cleveland, OH (1) 20,278 3,055 1990 11/17/1995 15 - 40 Yrs Columbus, OH (5) 19,947 2,160 1985 2/4/1998 15 - 40 Yrs Dayton, OH (5) 13,747 1,566 1987 12/30/1997 15 - 40 Yrs Tulsa, OK (1) 8,520 2,440 1985 7/28/1994 15 - 40 Yrs Philadelphia (Center City), PA (6) 58,623 5,806 1970 7/28/1998 15 - 40 Yrs Philadelphia (Independence Mall), PA (2) 36,620 4,176 1972 7/28/1998 15 - 40 Yrs Philadelphia (Society Hill), PA (3) 50,991 6,150 1986 10/1/1997 15 - 40 Yrs Pittsburgh, PA (9) 26,644 3,082 1988 7/28/1998 15 - 40 Yrs Charleston (Mills House), SC (2) 31,975 3,147 1982 7/28/1998 15 - 40 Yrs Greenville (Roper), SC (6) 15,815 1,589 1984 7/28/1998 15 - 40 Yrs Kingston Myrtle Beach (22) 29,700 360 1974 7/23/2002 15 - 40 Yrs Myrtle Beach (Kingston Plantation), SC (1) 29,715 4,463 1987 12/5/1996 15 - 40 Yrs Knoxville (Central), TN (2) 13,087 1,472 1966 7/28/1998 15 - 40 Yrs
F-41
COST CAPITALIZED GROSS AMOUNTS AT SUBSEQUENT TO WHICH CARRIED AT INITIAL COST ACQUISITION CLOSE OF PERIOD ----------------------- ----------------- -------------------- BUILDINGS BUILDINGS BUILDINGS AND AND AND LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS - -------- ------------ ---- ------------ ---- ------------ ---- ------------ Nashville (Airport), TN (5) 0 1,073 1,206 0 0 1,073 1,206 Nashville (Opryland/Airport), TN (9) 0 0 27,733 0 1,926 0 29,659 Nashville, TN (1) 0 1,118 9,506 0 414 1,118 9,920 Addison (North Dallas), TX (6) 0 4,938 42,965 0 431 4,938 43,396 Amarillo (I-40), TX (2) 0 0 5,754 0 2,873 0 8,627 Austin (Downtown), TX (5) 0 2,508 21,908 0 2,003 2,508 23,911 Austin (Town Lake), TX (2) 0 0 21,433 0 833 0 22,266 Beaumont (Midtown I-10), TX (2) 0 685 5,964 0 2,286 685 8,250 Corpus Christi, TX (1) 5,184 1,113 9,618 51 800 1,164 10,418 Dallas (Alpha Road), TX (17) 0 0 9,757 1,619 (1,618) 1,619 8,139 Dallas (Campbell Center), TX (7) 0 3,208 27,907 0 1,360 3,208 29,267 Dallas (DFW Airport South), TX (1) 0 0 35,156 4,041 519 4,041 35,675 Dallas (Downtown West End), TX (12) 0 1,953 16,989 0 1,676 1,953 18,665 Dallas (Love Field), TX (1) 13,242 1,934 16,674 0 522 1,934 17,196 Dallas (Market Center), TX (1) 11,823 2,560 23,751 0 509 2,560 24,260 Dallas (Market Center), TX (6) 12,334 4,056 35,303 0 790 4,056 36,093 Dallas (Park Central), TX (1) 0 1,497 12,722 (19) 895 1,478 13,617 Dallas (Park Central), TX (20) 0 4,513 43,125 0 4,460 4,513 47,585 Dallas (Park Central), TX (3) 0 1,720 28,550 (898) 340 822 28,890 Dallas (Park Central), TX (6) 0 0 30,347 5,603 409 5,603 30,756 Dallas, TX (19) 6,054 0 13,564 2,391 431 2,391 13,995 Houston (I-10 West), TX (9) 0 3,037 26,431 0 1,179 3,037 27,610 Houston (Int'l Airport), TX (2) 12,583 3,868 33,664 0 769 3,868 34,433 Houston (Medical Center), TX (15) 7,930 2,270 19,757 0 2,225 2,270 21,982 Houston (Medical Center), TX (6) 5,974 2,479 21,573 0 738 2,479 22,311 Houston (Near Greenway), TX (9) 6,676 3,398 29,579 0 584 3,398 30,163 Irving (DFW Airport North), TX (19) 0 0 56,404 10,002 1,077 10,002 57,481 Irving (DFW Airport North), TX (21) 10,351 1,537 13,379 0 304 1,537 13,683 Midland (Country Villa), TX (2) 0 404 3,517 0 158 404 3,675 Odessa (Centre), TX (15) 0 487 4,238 0 107 487 4,345 Odessa (Parkway Blvd), TX (13) 0 370 3,218 0 92 370 3,310 Plano, TX (19) 7,729 1,813 15,775 0 665 1,813 16,440 Plano, TX (2) 0 885 7,696 0 207 885 7,903 San Antonio (Downtown), TX (2) 0 0 22,129 0 809 0 22,938 San Antonio (Int'l Airport), TX (9) 0 3,351 29,168 0 1,951 3,351 31,119 Waco (I-35), TX (2) 0 574 4,994 0 157 574 5,151 Salt Lake City (Airport), UT (2) 0 0 5,302 0 2,767 0 8,069 Burlington, VT (3) 20,321 3,136 27,283 0 647 3,136 27,930 -------- -------- ----------- ------- -------- -------- ---------- $675,806 $305,334 $ 3,257,683 $48,638 $284,933 $353,972 $3,542,616 ======== ======== =========== ======= ======== ======== ========== ACCUMULATED LIFE UPON WHICH DEPRECIATION DEPRECIATION IN BUILDING AND YEAR STATEMENT IS LOCATION TOTAL IMPROVEMENTS OPENED DATE ACQUIRED COMPUTED - -------- ----- ------------ ------ ------------- -------- Nashville (Airport), TN (5) 2,279 0 1988 6/5/1997 15 - 40 Yrs Nashville (Opryland/Airport), TN (9) 29,659 3,332 1981 7/28/1998 15 - 40 Yrs Nashville, TN (1) 11,038 2,689 1985 7/28/1994 15 - 40 Yrs Addison (North Dallas), TX (6) 48,334 4,872 1985 7/28/1998 15 - 40 Yrs Amarillo (I-40), TX (2) 8,627 1,166 1970 7/28/1998 15 - 40 Yrs Austin (Downtown), TX (5) 26,419 3,299 1987 3/20/1997 15 - 40 Yrs Austin (Town Lake), TX (2) 22,266 2,484 1967 7/28/1998 15 - 40 Yrs Beaumont (Midtown I-10), TX (2) 8,935 1,047 1967 7/28/1998 15 - 40 Yrs Corpus Christi, TX (1) 11,582 1,846 1984 7/19/1995 15 - 40 Yrs Dallas (Alpha Road), TX (17) 9,758 2,374 1997 7/28/1998 15 - 40 Yrs Dallas (Campbell Center), TX (7) 32,475 3,269 1982 5/29/1998 15 - 40 Yrs Dallas (DFW Airport South), TX (1) 39,716 4,100 1985 7/28/1998 15 - 40 Yrs Dallas (Downtown West End), TX (12) 20,618 1,858 1969 7/28/1998 15 - 40 Yrs Dallas (Love Field), TX (1) 19,130 3,234 1986 3/29/1995 15 - 40 Yrs Dallas (Market Center), TX (1) 26,820 3,326 1980 6/30/1997 15 - 40 Yrs Dallas (Market Center), TX (6) 40,149 3,903 1983 7/28/1998 15 - 40 Yrs Dallas (Park Central), TX (1) 15,095 3,026 1985 7/28/1994 15 - 40 Yrs Dallas (Park Central), TX (20) 52,098 6,433 1983 6/30/1997 15 - 40 Yrs Dallas (Park Central), TX (3) 29,712 2,867 1972 11/1/1998 15 - 40 Yrs Dallas (Park Central), TX (6) 36,359 3,374 1981 7/28/1998 15 - 40 Yrs Dallas, TX (19) 16,386 1,544 1988 7/28/1998 15 - 40 Yrs Houston (I-10 West), TX (9) 30,647 2,926 1969 7/28/1998 15 - 40 Yrs Houston (Int'l Airport), TX (2) 38,301 3,772 1971 7/28/1998 15 - 40 Yrs Houston (Medical Center), TX (15) 24,252 2,469 1984 7/28/1998 15 - 40 Yrs Houston (Medical Center), TX (6) 24,790 2,503 1973 7/28/1998 15 - 40 Yrs Houston (Near Greenway), TX (9) 33,561 3,359 1984 7/28/1998 15 - 40 Yrs Irving (DFW Airport North), TX (19) 67,483 6,600 1987 7/28/1998 15 - 40 Yrs Irving (DFW Airport North), TX (21) 15,220 1,478 1989 7/28/1998 15 - 40 Yrs Midland (Country Villa), TX (2) 4,079 471 1979 7/28/1998 15 - 40 Yrs Odessa (Centre), TX (15) 4,832 481 1982 7/28/1998 15 - 40 Yrs Odessa (Parkway Blvd), TX (13) 3,680 403 1977 7/28/1998 15 - 40 Yrs Plano, TX (19) 18,253 1,888 1983 7/28/1998 15 - 40 Yrs Plano, TX (2) 8,788 911 1983 7/28/1998 15 - 40 Yrs San Antonio (Downtown), TX (2) 22,938 2,591 1968 7/28/1998 15 - 40 Yrs San Antonio (Int'l Airport), TX (9) 34,470 3,639 1981 7/28/1998 15 - 40 Yrs Waco (I-35), TX (2) 5,725 601 1970 7/28/1998 15 - 40 Yrs Salt Lake City (Airport), UT (2) 8,069 1,067 1963 7/28/1998 15 - 40 Yrs Burlington, VT (3) 31,066 3,536 1967 12/4/1997 15 - 40 Yrs ---------- -------- $3,896,588 $466,833 ========== ========
F-42
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2002 2001 ----------- ----------- Reconciliation of Land and building and Improvements Balance at beginning of period $ 3,826,150 $ 3,790,698 Additions during period: Acquisitions 43,827 Improvements 23,022 35,452 Reclass of Hotels previously 16,009 held for sale Deductions during period: Sale of properties (12,420) Impairment charge (143,465) ----------- ----------- Balance at end of period $ 3,753,123 $ 3,826,150 =========== =========== Reconciliation of Accumulated Depreciation Balance at beginning of period $ 371,282 $ 276,715 Additions during period: Depreciation for the period 96,773 94,567 Deductions during period: Sale of properties (1,222) ----------- ----------- Balance at end of period $ 466,833 $ 371,282 =========== ===========
1. Embassy Suites 12. Hampton Inn 2. Holiday Inn 13. Holiday Inn Express 3. Sheraton 14. Hilton Suites 4. Fairfield Inn 15. Holiday Inn Hotel & Suites 5. Doubletree Guest Suites 16. Homewood Suites 6. Crowne Plaza 17. Bristol House 7. Doubletree 18. Crowne Plaza Suites 8. Independents 19. Harvey Hotel 9. Holiday Inn Select 20. Westin 10. Courtyard by Marriott 21. Harvey Suites 11. Sheraton Suites F-43 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 3.1 - Second Amended and Restated Agreement of Limited Partnership of FelCor Lodging Limited Partnership ("FelCor LP") dated December 31, 2001 (filed as Exhibit 10.1 to FelCor Lodging Trust Incorporated's ("FelCor") Annual Report on Form 10-K for the fiscal year ended December 31, 2001 ("FelCor's 2001 Form 10-K"), and incorporated herein by reference). 3.1.1 - First Amendment to Second Amended and Restated Agreement of Limited Partnership of FelCor LP dated April 1, 2002 (filed as Exhibit 10.1.1 to FelCor's Form 8-K dated April 1, 2002, and filed on April 4, 2002, and incorporated herein by reference). 3.1.2 - Second Amendment to Second Amended and Restated Agreement of Limited Partnership of FelCor LP dated August 31, 2002 (filed as Exhibit 10.1.2 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 ("FelCor's 2002 Form 10-K"), and incorporated herein by reference). 3.1.3 - Third Amendment to Second Amended and Restated Agreement of Limited Partnership of FelCor LP dated October 1 2002 (filed as Exhibit 10.1.3 to FelCor's 2002 Form 10-K and incorporated herein by reference). 4.1 - Indenture dated October 1, 1997, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.1 to the Registration Statement on Form S-4 (file no. 333-39595) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.1.1 - First Amendment to Indenture dated February 5, 1998, by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.2 to the Registration Statement on Form S-4 (file no. 333-39595) of FelCor LP and the other co-registrants named therein and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 4.1.2 - Second Amendment to Indenture and First Supplemental Indenture dated December 30, 1998, by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.2 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 ("FelCor's 1998 Form 10-K"), and incorporated herein by reference). 4.1.3 - Third Amendment to Indenture dated March 30, 1999, by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.3 to FelCor's Form 10-Q for the quarter ended March 31, 1999 ("FelCor's March 1999 10-Q"), and incorporated herein by reference). 4.1.4 - Second Supplemental Indenture dated August 1, 2000, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.2.4 to the Registration Statement on Form S-4 (file no. 333-47506) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.1.5 - Third Supplemental Indenture dated July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.2.5 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.1.6 - Fourth Supplemental Indenture dated October 1, 2002, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.6 to FelCor's 2002 Form 10-K and incorporated herein by reference). 4.2 - Indenture dated September 15, 2000, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.3 to the Registration Statement on Form S-4 (file no. 333-47506) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.2.1 - First Supplemental Indenture dated July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.3.1 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.2.2 - Second Supplemental Indenture dated October 1, 2002, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.8.2 to FelCor's 2002 Form 10-K and incorporated herein by reference). 4.3 - Indenture dated June 4, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.9 to FelCor's Form 8-K dated as of June 4, 2001, and filed June 14, 2001, and incorporated herein by reference). 4.3.1 - First Supplemental Indenture dated July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.4.1 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.3.2 - Second Supplemental Indenture dated October 1, 2002, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.9.2 to FelCor's 2002 Form 10-K and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.1 - Contribution Agreement dated January 1, 2001, by and among FelCor, FelCor LP, FelCor, Inc., RGC and DJONT Operations, L.L.C. (filed as Exhibit 10.27 to FelCor's Form 10-Q for the quarter ended March 31, 2001 ("FelCor's March 2001 10-Q"), and incorporated herein by reference). 10.2 - Leasehold Acquisition Agreement dated March 30, 2001, by and among Bass (U.S.A.) Incorporated, in its individual capacity and on behalf of its subsidiaries and affiliates, and FelCor, in its individual capacity and on behalf of its subsidiaries and affiliates, including as an exhibit thereto the form of Management Agreement for Six Continents-branded hotels (filed as Exhibit 10.28 to FelCor's March 2001 10-Q and incorporated herein by reference). 10.3 - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Six Continents Hotels, as manager, with respect to FelCor's Six Continents-branded hotels (included as an exhibit to the Leasehold Acquisition Agreement filed as Exhibit 10.2 above). 10.4 - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Hilton Hotels Corporation, as manager, with respect to FelCor's Embassy Suites Hotels, including the form of Embassy Suites Hotels License Agreement attached as an exhibit thereto (filed as Exhibit 10.5 to FelCor's 2001 Form 10-K and incorporated herein by reference). 10.5 - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Hilton Hotels Corporation, as manager, with respect to FelCor's Doubletree and Doubletree Guest Suites hotels (filed as Exhibit 10.6 to FelCor's 2001 Form 10-K and incorporated herein by reference). 10.6 - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Starwood Hotels & Resorts, Inc., as manager, with respect to FelCor's Sheraton and Westin hotels (filed as Exhibit 10.7 to FelCor's 2001 Form 10-K and incorporated herein by reference). 10.7 - Employment Agreement dated July 28, 1994, between FelCor and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to FelCor's Annual Report on Form 10-K/A Amendment No. 1 for the fiscal year ended December 31, 1994 ("FelCor's 1994 Form 10-K/A"), and incorporated herein by reference). 10.8 - Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 10.9 to FelCor's 1994 Form 10-K/A and incorporated herein by reference). 10.9 - Savings and Investment Plan of FelCor (filed as Exhibit 10.10 to FelCor's 2001 Form 10-K and incorporated herein by reference). 10.10 - 1995 Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 10.9.2 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference). 10.11 - Non-Qualified Deferred Compensation Plan, as amended and restated July 1999 (filed as Exhibit 10.9 to FelCor's Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference). 10.12 - 1998 Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 4.2 to FelCor's Registration Statement on Form S-8 (file no. 333-66041) and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.13 - 2001 Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 10.14 to FelCor's 2002 Form 10-K and incorporated herein by reference). 10.14 - Second Amended and Restated 1995 Equity Incentive Plan (filed as Exhibit 99.1 to FelCor's Post-Effective Amendment on Form S-3 to Form S-4 Registration Statement (file no. 333-50509) and incorporated herein by reference). 10.15 - Amended and Restated Stock Option Plan for Non-Employee Directors (filed as Exhibit 99.2 to FelCor's Post-Effective Amendment on Form S-3 to Form S-4 Registration Statement (file no. 333-50509) and incorporated herein by reference). 10.16 - Form of Severance Agreement for executive officers and certain key employees of FelCor (filed as Exhibit 10.13 to FelCor's 1998 Form 10-K and incorporated herein by reference). 10.17 - Stockholders' and Registration Rights Agreement dated July 27, 1998, by and among FelCor, Bass America, Inc., Holiday Corporation, Bass plc, United/Harvey Investors I, L.P., United/Harvey Investors II, L.P., United/Harvey Investors III, L.P., United/Harvey Investors IV, L.P., and United/Harvey Investors V, L.P. (filed as Exhibit 10.18 to FelCor's Form 8-K dated August 10, 1998, and incorporated herein by reference). 10.18 - Seventh Amended and Restated Credit Agreement dated July 26, 2001, among FelCor, FelCor LP and FelCor Canada Co., as borrowers, the lenders party thereto, The Chase Manhattan Bank and The Chase Manhattan Bank of Canada, as administrative agents, Bankers Trust Company, as syndication agent, J.P. Morgan Securities Inc. and Deutsche Banc Alex. Brown, Inc., as co-lead arrangers and joint bookrunners, and Bank of America, N.A. and Salomon Smith Barney, Inc., as document agents (filed as Exhibit 10.17 to FelCor's Form 10-Q for the quarter ended June 30, 2001, and incorporated herein by reference). 10.18.1 - First Amendment dated November 6, 2001, among FelCor, FelCor LP and FelCor Canada Co., as borrowers, the lenders party thereto, The Chase Manhattan Bank and The Chase Manhattan Bank of Canada, as administrative agents, and Bankers Trust Company, as syndication agent (filed as Exhibit 10.17.1 to FelCor's Form 10-Q for the quarter ended September 30, 2001 ("FelCor's September 2001 10-Q"), and incorporated herein by reference). 10.18.2 - Second Amendment dated June 17, 2002, among FelCor, FelCor LP and FelCor Canada Co., as borrowers, the lenders party thereto, JPMorgan Chase Bank and J.P. Morgan Bank Canada, as administrative agents, and Deutsche Bank Trust Company Americas, as syndication agent (filed as Exhibit 10.18.2 to FelCor's Form 8-K dated June 17, 2002, and filed on July 1, 2002, and incorporated herein by reference). 10.18.3 - Third Amendment and Consent dated December 20, 2002, among FelCor, FelCor LP and FelCor Canada Co., as borrowers, the lenders party thereto, JPMorgan Chase Bank and J.P. Morgan Bank Canada, as administrative agents, and Deutsche Bank Trust Company Americas, as syndication agent (filed as Exhibit 10.18.3 to FelCor's Form 8-K dated December 20, 2002, and filed December 23, 2002, and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.19 - Loan Agreement dated October 10, 1997, among Bristol Lodging Company, Bristol Lodging Holding Company, Nomura Asset Capital Corporation, as administrative agent and collateral agent for Lenders, and Bankers Trust Company, as co-agent for Lenders (filed as Exhibit 10.10 to Bristol Hotel Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference). 10.19.1 - First Amendment to Loan Agreement and Ancillary Loan Documents made as of May 28, 1999, among FelCor Lodging Company, L.L.C., FelCor Lodging Holding Company, L.L.C. and LaSalle National Bank, as Trustee for Nomura Asset Securities Corporation Commercial Pass-Through Certificates Series 1998-D6, as administrative agent and collateral agent (filed as Exhibit 10.19.1 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (" FelCor's 1999 Form 10-K"), and incorporated herein by reference). 10.20 - Form of Mortgage, Security Agreement and Fixture Filing by and between FelCor/CSS Holdings, L.P. as mortgagor, and The Prudential Insurance Company of America, as mortgagee (filed as Exhibit 10.23 to FelCor's March 1999 10-Q and incorporated herein by reference). 10.20.1 - Promissory Note dated April 1, 1999, in the original principal amount of $100,000,000 made by FelCor/CSS Holdings, Ltd., payable to the order of The Prudential Insurance Company of America (filed as Exhibit 10.23.1 to FelCor's Form 10-Q for the quarter ended June 30, 1999 ("FelCor's June 1999 10-Q"), and incorporated herein by reference). 10.21 - Form of Deed of Trust, Security Agreement and Fixture Filing, each dated May 12, 1999, from FelCor/MM Holdings, L.P., as borrower, in favor of Fidelity National Title Insurance Company, as trustee, and Massachusetts Mutual Life Insurance Company, as beneficiary, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.21.1, also executed by FelCor/CSS Holdings, L.P. with respect to the Embassy Suites Hotels-Anaheim and Embassy Suites Hotels-Deerfield Beach, and by FelCor LP with respect to the Embassy Suites Hotels-Palm Desert (filed as Exhibit 10.24.2 to FelCor's June 1999 10-Q and incorporated herein by reference). 10.21.1 - Form of six separate Promissory Notes each dated May 12, 1999, made by FelCor/MM Holdings, L.P. payable to the order of Massachusetts Mutual Life Insurance Company in the respective original principal amounts of $12,500,000 (Embassy Suites Hotels-Dallas Market Center), $14,000,000 (Embassy Suites Hotels-Dallas Love Field), $12,450,000 (Embassy Suites Hotels-Tempe), $11,550,000 (Embassy Suites Hotels-Anaheim), $8,900,000 (Embassy Suites Hotels-Palm Desert), $15,600,000 (Embassy Suites Hotels-Deerfield Beach) (filed as Exhibit 10.24.1 to FelCor's June 1999 10-Q and incorporated herein by reference). 10.22 - Form of Deed of Trust and Security Agreement and Fixture Filing with Assignment of Leases and Rents, each dated April 20, 2000, from FelCor/MM S-7 Holdings, L.P., as mortgagor, in favor of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America, as mortgagee, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.22.2 (filed as Exhibit 10.24 to FelCor's Form 10-Q for the quarter ended June 30, 2000 ("FelCor's June 2000 10-Q"), and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.22.1 - Form of Accommodation Cross-Collateralization Mortgage and Security Agreement, each dated April 20, 2000, executed by FelCor/MM S-7 Holdings, L.P., in favor of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America (filed as Exhibit 10.24.1 to FelCor's June 2000 10-Q and incorporated herein by reference). 10.22.2 - Form of fourteen separate Promissory Notes each dated April 20, 2000, each made by FelCor/MM S-7 Holdings, L.P., each separately payable to the order of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America, respectively, in the respective original principal amounts of $13,500,000 (Phoenix (Crescent), Arizona), $13,500,000 (Phoenix (Crescent), Arizona), $6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $9,000,000 (Atlanta Galleria, Georgia), $9,000,000 (Atlanta Galleria, Georgia), $12,500,000 (Chicago O'Hare Airport, Illinois), $12,500,000 (Chicago O'Hare Airport, Illinois), $3,500,000 (Lexington, Kentucky), $3,500,000 (Lexington, Kentucky), $17,000,000 (Philadelphia Society Hill, Philadelphia), $17,000,000 (Philadelphia Society Hill, Philadelphia), $10,500,000 (South Burlington, Vermont) and $10,500,000 (South Burlington, Vermont) (filed as Exhibit 10.24.2 to FelCor's June 2000 10-Q and incorporated herein by reference). 10.23 - Form of Deed of Trust and Security Agreement, each dated May 2, 2000, from each of FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P., each as borrower, in favor of The Chase Manhattan Bank, as beneficiary, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.23.1 (filed as Exhibit 10.25 to FelCor's June 2000 10-Q and incorporated herein by reference). 10.23.1 - Form of eight separate Promissory Notes, each dated May 2, 2000, made by FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P., each separately payable to the order of The Chase Manhattan Bank in the respective original principal amounts of $38,250,000 (Atlanta Buckhead, Georgia), $20,500,000 (Boston Marlborough, Massachusetts), $16,575,000 (Chicago Deerfield, Illinois), $5,338,000 (Corpus Christi, Texas), $25,583,000 (Orlando South, Florida), $32,650,000 (New Orleans, Louisiana), $20,728,000 (Piscataway, New Jersey) and $26,268,000 (South San Francisco, California) (filed as Exhibit 10.25.1 to FelCor's June 2000 10-Q and incorporated herein by reference). 10.24 - Registration Rights Agreement dated June 4, 2001, by and among FelCor LP, FelCor and Deutsche Banc Alex. Brown Inc., in its individual capacity and on behalf of J.P. Morgan Securities Inc., Banc of America Securities LLC, Salomon Smith Barney Inc., Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, SG Cowen Securities Corporation, Credit Lyonnais Securities (USA) Inc., Scotia Capital (USA) Inc., BMO Nesbitt Burns Corp., Fleet Securities, Inc., PNC Capital Markets, Inc. and Wells Fargo Brokerage Services, LLC (filed as Exhibit 10.29 to FelCor's Form 8-K dated June 4, 2001, and filed June 14, 2001, and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.25 - Registration Rights Agreement dated December 3, 2001, by and among FelCor, FelCor LP, Deutsche Banc Alex. Brown, J.P. Morgan Securities Inc., Banc of America Securities LLC, Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. (filed as Exhibit 10.27 to FelCor's 2001 Form 10-K and incorporated herein by reference). 10.26 - Exchange Agreement dated October 1, 2002, by and among FelCor LP, FelCor and Six Continents Hotels Operating Corp. (filed as Exhibit 10.28 to FelCor's Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference). 21* - List of Subsidiaries of FelCor LP. 99.1* - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of FelCor, FelCor LP's general partner. 99.2* - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer of FelCor, FelCor LP's general partner.
- ----------------- * Indicates that the document is filed herewith. EX-21 3 d04300exv21.txt SUBSIDIARIES . . . EXHIBIT 21 LIST OF THE SUBSIDIARIES OF FELCOR LODGING LIMITED PARTNERSHIP (as of December 31, 2002)
STATE AND FORM OF NAME ORGANIZATION ---- ----------------- FelCor/CSS Hotels, L.L.C. Delaware; Limited Liability Company FelCor/CSS Holdings, L.P. Delaware; Limited Partnership FelCor/St. Paul Holdings, L.P. Delaware; Limited Partnership FelCor/Charlotte Hotel, L.L.C. Delaware; Limited Liability Company FelCor/Indianapolis Hotel, L.L.C. Delaware; Limited Liability Company E.S. Charlotte Limited Partnership Minnesota; Limited Partnership E.S. North, an Indiana Limited Partnership Indiana; Limited Partnership FCH/PSH, L.P. Pennsylvania; Limited Partnership FelCor Lodging Holding Company, L.L.C. Delaware; Limited Liability Company FelCor Lodging Company, L.L.C. Delaware; Limited Liability Company FelCor Hotel Operating Company, L.L.C. Delaware; Limited Liability Company FelCor Pennsylvania Company, L.L.C. Delaware; Limited Liability Company FelCor Hospitality Holding Company, L.L.C. Delaware; Limited Liability Company FelCor Hospitality Company, L.L.C. Delaware; Limited Liability Company FelCor Hotel Asset Company, L.L.C. Delaware; Limited Liability Company FHAC Nevada Holdings, L.L.C. Nevada; Limited Liability Company FHAC Texas Holdings, L.P. Texas; Limited Partnership FelCor HHCL Company, L.L.C. Delaware; Limited Liability Company FelCor Hotels GenPar, L.L.C. Delaware; Limited Liability Company FelCor Hotels LimPar, L.L.C. Delaware; Limited Liability Company HHHC GenPar, L.P. Delaware; Limited Partnership FelCor Hotel Company, Ltd. Texas; Limited Partnership FelCor Hotels GenPar II, L.L.C. Delaware; Limited Liability Company FelCor Hotel Company II, Ltd. Texas; Limited Partnership
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STATE AND FORM OF NAME ORGANIZATION ---- ----------------- FelCor Chat-Lem, L.L.C. Delaware; Limited Liability Company HI Chat-Lem/Iowa - New Orleans Venture Louisiana; General Partnership FelCor Philadelphia Center, L.L.C. Delaware; Limited Liability Company FelCor Marshall Motels, L.L.C. Delaware; Limited Liability Company Center City Hotel Associates Pennsylvania; Limited Partnership FelCor Hotels Financing II, L.L.C. Delaware; Limited Liability Company FelCor Hotels Financing I, L.L.C. Delaware; Limited Liability Company FelCor Hotels Investments I, Ltd. Texas; Limited Partnership FelCor Hotels Investments II, Ltd. Texas; Limited Partnership FelCor Salt Lake, L.L.C. Delaware; Limited Liability Company FelCor St. Louis Company, L.L.C. Delaware; Limited Liability Company FelCor Canada Holding GP, L.L.C. Delaware; Limited Liability Company FelCor Canada Holding, L.P. Delaware; Limited Partnership FelCor Canada Co. Nova Scotia; Unlimited Liability Company FelCor Omaha Hotel Company, L.L.C. Delaware; Limited Liability Company FelCor Country Villa Hotel, L.L.C. Delaware; Limited Liability Company FelCor Moline Hotel, L.L.C. Delaware; Limited Liability Company FelCor Eight Hotels, L.L.C. Delaware; Limited Liability Company EPT Meadowlands Limited Partnership Delaware; Limited Partnership EPT Kansas City Limited Partnership Delaware; Limited Partnership EPT San Antonio Limited Partnership Delaware; Limited Partnership EPT Austin Limited Partnership Delaware; Limited Partnership EPT Overland Park Limited Partnership Delaware; Limited Partnership EPT Atlanta - Perimeter Center Limited Partnership Delaware; Limited Partnership EPT Raleigh Limited Partnership Delaware; Limited Partnership EPT Covina Limited Partnership Delaware; Limited Partnership Promus/FCH Condominium Company, L.L.C. Delaware; Limited Liability Company
-2-
STATE AND FORM OF NAME ORGANIZATION ---- ----------------- Promus/FCH Development Company, L.L.C. Delaware; Limited Liability Company Promus/FelCor San Antonio Venture Texas; General Partnership Promus/FelCor Parsippany Venture New Jersey; General Partnership MHV Joint Venture Texas; General Partnership Promus/FelCor Lombard Venture Illinois; General Partnership Promus/FelCor Hotels, L.L.C. Delaware; Limited Liability Company Kingston Plantation Development Corp. Delaware; Corporation Promus/FelCor Manager, Inc. Delaware; Corporation FelCor/New Orleans Annex, L.L.C. Delaware; Limited Liability Company Brighton at Kingston Plantation, L.L.C. Delaware; Limited Liability Company Margate Towers at Kingston Plantation, L.L.C. Delaware; Limited Liability Company FCH/DT Hotels, L.L.C. Delaware; Limited Liability Company FCH/DT Holdings, L.P. Delaware; Limited Partnership FCH/DT BWI Holdings, L.P. Delaware; Limited Partnership FelCor/LAX Hotels, L.L.C. Delaware; Limited Liability Company FelCor/LAX Holdings, L.P. Delaware; Limited Partnership Los Angeles International Airport Hotel Associates, a Texas limited partnership Texas; Limited Partnership Park Central Joint Venture Texas; General Partnership FelCor Airport Utilities, L.L.C. Delaware; Limited Liability Company FelCor/MM Hotels, L.L.C. Delaware; Limited Liability Company FelCor/MM Holdings, L.P. Delaware; Limited Partnership Tysons Corner Hotel Company, L.L.C. Delaware; Limited Liability Company FelCor/MM S-7 Hotels, L.L.C. Delaware; Limited Liability Company FelCor/MM S-7 Holdings, L.P. Delaware; Limited Partnership FelCor/CMB Buckhead Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB Corpus Hotel, L.L.C. Delaware; Limited Liability Company
-3-
STATE AND FORM OF NAME ORGANIZATION ---- ----------------- FelCor/CMB Corpus Holdings, L.P. Delaware; Limited Partnership FelCor/CMB Deerfield Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB Marlborough Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB New Orleans Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB Orsouth Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB Orsouth Holdings, L.P. Delaware; Limited Partnership FelCor/CMB Piscataway Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB SSF Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB SSF Holdings, L.P. Delaware; Limited Partnership FCH/IHC Hotels, L.P. Delaware; Limited Partnership FCH/IHC Dallas Holdings, L.L.C. Delaware; Limited Liability Company FCH/IHC Dallas Hotels, L.P. Delaware; Limited Partnership FCH/IHC I-10 Holdings, L.L.C. Delaware; Limited Liability Company FCH/IHC I-10 Hotels, L.P. Delaware; Limited Partnership FCH/IHC Atlanta Hotels, L.L.C. Delaware; Limited Liability Company FCH/IHC Scottsdale Hotels, L.L.C. Delaware; Limited Liability Company FCH/IHC Houston Holdings, L.L.C. Delaware; Limited Liability Company FCH/IHC Houston Hotels, L.P. Delaware; Limited Partnership FCH/HHC Hotels, L.L.C. Delaware; Limited Liability Company FelCor TRS I, L.L.C. Delaware; Limited Liability Company FelCor TRS Holdings, L.P. Delaware; Limited Partnership FelCor TRS II, Inc. Delaware; Corporation DJONT Operations, L.L.C. Delaware; Limited Liability Company DJONT Leasing, L.L.C. Delaware; Limited Liability Company DJONT/EPT Manager, Inc. Delaware; Corporation
-4-
STATE AND FORM OF NAME ORGANIZATION ---- ----------------- DJONT/EPT Leasing, L.L.C. Delaware; Limited Liability Company FCH/DT Leasing, L.L.C. Delaware; Limited Liability Company FCH/DT Leasing II, L.L.C. Delaware; Limited Liability Company FCH/SH Leasing, L.L.C. Delaware; Limited Liability Company FCH/SH Leasing II, L.L.C. Delaware; Limited Liability Company DJONT/CMB Buckhead Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB FCOAM, L.L.C. Delaware; Limited Liability Company DJONT/CMB Deerfield Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB Corpus Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB SSF Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB Orsouth Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB New Orleans Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB Piscataway Leasing, L.L.C. Delaware; Limited Liability Company BHR Operations, L.L.C. Delaware; Limited Liability Company FCH/JVEIGHT Leasing, L.L.C. Delaware; Limited Liability Company FCH/IHC Leasing, L.P. Delaware; Limited Partnership FCH/IHC Atlanta Leasing, L.L.C. Delaware; Limited Liability Company FCH/IHC Scottsdale Leasing, L.L.C. Delaware; Limited Liability Company FCH/IHC I-10 Leasing GP, L.L.C. Delaware; Limited Liability Company FCH/IHC I-10 Leasing, L.P. Delaware; Limited Partnership FCH/IHC Houston Leasing GP, L.L.C. Delaware; Limited Liability Company FCH/IHC Houston Leasing, L.P. Delaware; Limited Partnership FCH/IHC Dallas Leasing GP, L.L.C. Delaware; Limited Liability Company FCH/IHC Dallas Leasing, L.P. Delaware; Limited Partnership FCH/HHC Leasing, L.L.C. Delaware; Limited Liability Company
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STATE AND FORM OF NAME ORGANIZATION ---- ----------------- BHR Hotels Finance, Inc. Delaware; Corporation BHR Dallas Tenant Company, L.P. Delaware; Limited Partnership BHR Plano Tenant Company, L.P. Delaware; Limited Partnership BHR Lodging Tenant Company Delaware; Corporation BHR Canada Tenant Company Nova Scotia; Unlimited Liability Company BHR Salt Lake Tenant Company, L.L.C. Delaware; Limited Liability Company
-6- EX-99.1 4 d04300exv99w1.txt CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of FelCor Lodging Limited Partnership (the "Registrant") on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report), the undersigned hereby certifies, in the capacity as indicated below and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant. March 27, 2003 /s/ THOMAS J. CORCORAN, JR. ----------------------------------------- Thomas J. Corcoran, Jr. Chief Executive Officer of FelCor Lodging Trust Incorporated, as general partner of FelCor Lodging Limited Partnership A signed original of this written statement required by Section 906 has been provided to FelCor Lodging Limited Partnership and will be retained by FelCor Lodging Limited Partnership and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 5 d04300exv99w2.txt CERTIFICATION OF THE CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of FelCor Lodging Limited Partnership (the "Registrant") on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report), the undersigned hereby certifies, in the capacity as indicated below and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant. March 27, 2003 /s/ RICHARD J. O'BRIEN ----------------------------------------- Richard J. O'Brien Chief Financial Officer of FelCor Lodging Trust Incorporated, as general partner of FelCor Lodging Limited Partnership A signed original of this written statement required by Section 906 has been provided to FelCor Lodging Limited Partnership and will be retained by FelCor Lodging Limited Partnership and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----