-----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, BaCozJBIxaHfm9ep9dKpU1KcnC/AQroyEuj7cSE46jvKF/WCmpdBMMoAQbjEQws0 DRaFvnPdK6tuOnCjRtpaYg== 0000950134-97-008000.txt : 19971106 0000950134-97-008000.hdr.sgml : 19971106 ACCESSION NUMBER: 0000950134-97-008000 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19971105 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR SUITE HOTELS INC CENTRAL INDEX KEY: 0000923603 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752541756 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-39595 FILM NUMBER: 97708552 BUSINESS ADDRESS: STREET 1: 545 E JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 2144444900 MAIL ADDRESS: STREET 1: 545 E JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR SUITES LP CENTRAL INDEX KEY: 0001048789 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752564994 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-39595-01 FILM NUMBER: 97708553 BUSINESS ADDRESS: STREET 1: 545 E. JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR/CSS HOTELS LLC CENTRAL INDEX KEY: 0001048790 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752624290 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-39595-02 FILM NUMBER: 97708554 BUSINESS ADDRESS: STREET 1: 545 E. JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR/LAX HOTELS LLC CENTRAL INDEX KEY: 0001048791 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752647535 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-39595-03 FILM NUMBER: 97708555 BUSINESS ADDRESS: STREET 1: 545 E. JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR EIGHT HOTELS LLC CENTRAL INDEX KEY: 0001048792 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752582006 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-39595-04 FILM NUMBER: 97708556 BUSINESS ADDRESS: STREET 1: 545 E. JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR/CSS HOLDINGS LP CENTRAL INDEX KEY: 0001048793 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752620463 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-39595-05 FILM NUMBER: 97708557 BUSINESS ADDRESS: STREET 1: 545 E. JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR/ST PAUL HOLDINGS LP CENTRAL INDEX KEY: 0001048794 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752624292 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-39595-06 FILM NUMBER: 97708558 BUSINESS ADDRESS: STREET 1: 545 E. JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR/LAX HOLDINGS LP CENTRAL INDEX KEY: 0001048795 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752624293 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-39595-07 FILM NUMBER: 97708559 BUSINESS ADDRESS: STREET 1: 545 E. JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 S-4 1 FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1997 REGISTRATION NO. _________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- FELCOR SUITES LIMITED PARTNERSHIP FELCOR SUITE HOTELS, INC. FELCOR/CSS HOTELS, L.L.C. FELCOR/LAX HOTELS, L.L.C. FELCOR EIGHT HOTELS, L.L.C. FELCOR/CSS HOLDINGS, L.P. FELCOR/ST. PAUL HOLDINGS, L.P. FELCOR/LAX HOLDINGS, L.P. (Exact name of co-registrant as specified in its charter) DELAWARE 7011 75-2564994 MARYLAND (Primary Standard 72-2541756 DELAWARE Industrial 75-2624290 DELAWARE Classification Code 75-2647535 DELAWARE Number) 75-2582006 DELAWARE 75-2620463 DELAWARE 75-2624292 DELAWARE 75-2624293 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 545 E. JOHN CARPENTER FRWY. LAWRENCE D. ROBINSON SUITE 1300 SENIOR VICE PRESIDENT IRVING, TEXAS 75062 AND GENERAL COUNSEL (972) 444-4900 545 E. JOHN CARPENTER FRWY., SUITE 1300 IRVING, TEXAS 75062 (Address, including zip code (972) 444-4900 and telephone number, including (Name, address, including zip area code, of registrant's code, and telephone number, principal executive offices) including area code, of agent for service)
------------------------- Copies to: ROBERT W. DOCKERY JENKENS & GILCHRIST, A PROFESSIONAL CORPORATION 1445 ROSS AVENUE, SUITE 3200 DALLAS, TEXAS 75202 (214) 855-4500 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] ------------------------- 2 CALCULATION OF REGISTRATION FEE
============================================================================================================================ PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES BEING REGISTERED REGISTERED PER UNIT PRICE (1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------------- 7 3/8% Senior Notes Due 2004 $175,000,000 100% $175,000,000 $53,030.30 7 5/8% Senior Notes Due 2007 $125,000,000 100% $125,000,000 $37,878.79 Guarantees of Senior Notes (2) $300,000,000 100% $300,000,000 (3) ============================================================================================================================
(1) Estimated solely for the purposes of calculating the registration fee in accordance with Rule 457(f) under the Securities Act of 1933, as amended. (2) FelCor Suite Hotels, Inc. and the following wholly-owned subsidiaries of the Registrant: FelCor/CSS Hotels, L.L.C., FelCor/LAX Hotels, L.L.C., FelCor Eight Hotels, L.L.C., FelCor/CSS Holdings, L.P., FelCor/St. Paul Holdings, L.P. and FelCor/LAX Holdings, L.P., have each guaranteed the notes being registered pursuant hereto. (3) Pursuant to Rule 457(n), no separate fee is payable with respect to the guarantees of the Notes being registered. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. 3 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1997 FELCOR SUITES LIMITED PARTNERSHIP OFFER TO EXCHANGE ALL OF ITS OUTSTANDING 7 3/8% SENIOR NOTES DUE 2004 AND 7 5/8% SENIOR NOTES DUE 2007 FOR 7 3/8% SENIOR NOTES DUE 2004 AND 7 5/8% SENIOR NOTES DUE 2007 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _________ ___, 1997 (AS SUCH DATE MAY BE EXTENDED, BUT SHALL NOT BE LATER THAN _________ __, 1997, THE "EXPIRATION DATE"). FelCor Suites Limited Partnership, a Delaware limited partnership ("FelCor LP"), hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letter of transmittal (the "Letter of Transmittal"), to exchange (i) $1,000 in principal amount of its 7 3/8% Senior Notes due 2004 (the "New 7 3/8% Notes") for each $1,000 in principal amount of its outstanding 7 3/8% Senior Notes due 2004 (the "Old 7 3/8% Notes") and (ii) $1,000 in principal amount of its 7 5/8% Senior Notes due 2007 (the "New 7 5/8% Notes") for each $1,000 in principal amount of its outstanding 7 5/8% Senior Notes due 2007 (the "Old 7 5/8% Notes") (the Old 7 3/8% Notes and Old 7 5/8% Notes are collectively referred to herein as the "Old Notes"; the New 7 3/8% Notes and the New 7 5/8% Notes are collectively referred to herein as the "New Notes"; the Old Notes and the New Notes are collectively referred to herein as the "Notes"). Aggregate principal amounts of $175,000,000 of Old 7 3/8% Notes and $125,000,000 of Old 7 5/8% Notes are outstanding. See "The Exchange Offer." Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Notes where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. FelCor LP has agreed that, starting on the Expiration Date and ending on the close of business one year after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." FelCor LP will accept for exchange any and all Old Notes that are validly tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is subject to the terms and provisions of the Registration Rights Agreement, dated as of September 26, 1997 (the "Registration Rights Agreement"), among the FelCor LP, FelCor Suite Hotels, Inc., a Maryland corporation ("FelCor"), and Morgan Stanley & Co. Incorporated, NationsBank Capital Markets, Inc. and Salomon Brothers Inc (the "Initial Purchasers"). Each series of the Old Notes may be tendered only in multiples of $1,000. See "The Exchange Offer." (continued on next page) -------------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 14 HEREIN FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------------------- The date of this Prospectus is November __, 1997 4 The Old Notes were issued in a transaction (the "Private Placement") pursuant to which FelCor LP issued an aggregate of $175,000,000 principal amount of Old 7 3/8% Notes and an aggregate of $125,000,000 principal amount of Old 7 5/8% Notes to the Initial Purchasers on October 1, 1997 pursuant to a Placement Agreement, dated September 26, 1997 (the "Placement Agreement"), among FelCor LP, FelCor and the Initial Purchasers. The Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act. FelCor LP, FelCor and the Initial Purchasers also entered into the Registration Rights Agreement, pursuant to which FelCor LP granted certain registration rights for the benefit of the holders of the Old Notes. The Exchange Offer is intended to satisfy certain of FelCor LP's obligations under the Registration Rights Agreement with respect to the Old Notes. See "The Exchange Offer--Purpose and Effect." The Old Notes were, and the New Notes will be, issued under the Indenture, dated as of October 1, 1997 (the "Indenture"), among FelCor LP, FelCor, the Subsidiary Guarantors (as defined in the Indenture) and SunTrust Bank, Atlanta, as trustee (in such capacity, the "Trustee"). The form and terms of each series of the New Notes will be identical in all material respects to the form and terms of the corresponding series of the Old Notes, except that (i) the New Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, and (ii) holders of New Notes will not be, and upon the consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to any rights under the Registration Rights Agreement intended for the holders of unregistered securities. The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by FelCor LP to SunTrust Bank, Atlanta, as registrar of the Old Notes (in such capacity, the "Registrar") under the Indenture, of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes in each series that are validly tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain Rights," "--Procedures for Tendering Old Notes" and "Description of the Notes and Guarantees." The New 7 3/8% Notes will bear interest at a rate equal to 7 3/8% per annum and the New 7 5/8% Notes will bear interest at a rate equal to 7 5/8% per annum. Interest on the New Notes is payable semiannually, on October 1 and April 1 of each year, commencing on April 1, 1998 (each, an "Interest Payment Date") and shall accrue from October 1, 1997 or from the most recent Interest Payment Date with respect to the Old Notes to which interest has been paid or duly provided for. The New 7 3/8% Notes will mature on October 1, 2004 and the New 7 5/8 Notes will mature on October 1, 2007. See "Description of the Notes and Guarantees." Each series of New Notes will be redeemable in whole or in part at the option of FelCor LP at any time, at a redemption price equal to the greater of (i) 100% of the principal amount of such New Notes and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined herein) plus 25 basis points, plus, in each case, accrued interest thereon to the date of redemption. See "Description of the Notes and Guarantees - -- Optional Redemption." In the event of a Change of Control (as defined herein), holders of the New Notes will have the right to require FelCor LP to purchase their New Notes, in whole or in part, at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. The New Notes will be unsecured Senior Indebtedness (as defined herein) of FelCor LP, will rank pari passu in right of payment to existing and future unsecured Senior Indebtedness of FelCor LP and will rank senior in right of payment to future subordinated Indebtedness of FelCor LP. The New Notes will be guaranteed on a senior unsecured basis by FelCor and each of its subsidiaries so long as they are obligors on other Indebtedness (as defined herein) of FelCor or FelCor LP which is pari passu with or subordinated to the Notes (the "Guarantors"). At September 30, 1997, after giving effect to the Private Placement and the application of the net proceeds therefrom, the total Indebtedness of FelCor LP would have been approximately $428 million, including $12 in secured Indebtedness. Based on existing interpretations of the Securities Act by the Staff of the Securities and Exchange Commission (the "Commission") set forth in "no-action" letters issued to third parties, FelCor LP believes that New Notes issued pursuant to the Exchange Offer to any holder of Old Notes in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than a broker-dealer who purchased Old Notes directly from FelCor LP for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is not an affiliate of FelCor LP, is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. Holders wishing to accept the Exchange Offer must represent to FelCor LP, as required by the Registration Rights Agreement, that such conditions have been met. In addition, if such holder is not a broker-dealer, it must represent that it is not engaged in, and does not intend to engage in, a distribution of the New Notes. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer--Resales of the New Notes." This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market- making or other trading activities. (ii) 5 As of October 28, 1997, Cede & Co. ("Cede"), as nominee for The Depository Trust Company, New York, New York ("DTC"), was (i) the sole registered holder of the Old 7 3/8% Notes and held the Old 7 3/8% Notes for 28 of its participants and (ii) the holder of an aggregate of $122 million in principal amount of the Old 7 5/8% Notes for 27 of its participants. At October 28, 1997, an aggregate of $3 million in principal amount of the Old 7 5/8% Notes were held by five other holders, each of which has represented itself to be (A) a "Qualified Institutional Buyer" (as defined in Rule 144A ("Rule 144A") under the Securities Act) or (B) an institutional "Accredited Investor" (as defined in Rule 501(a)(1),(2),(3) or (7) of Regulation D under the Securities Act). FelCor LP believes that no such participant or other holder of the Old Notes is an affiliate (as such term is defined in Rule 405 under the Securities Act) of FelCor LP. There has previously been only a limited secondary market, and no public market, for the Old Notes. The Old Notes are eligible for trading in the Private Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. In addition, the Initial Purchasers have advised the Company that they currently intend to make a market in the New Notes; however, the Initial Purchasers are not obligated to do so and any market making activities may be discontinued by the Initial Purchasers at any time. Prior top the Exchange Offer, there has been no public trading market for the New Notes. Therefore, there can be no assurance that an active trading market for any of the Notes will develop. If such a trading market develops for any of the Notes, future trading prices will depend on many factors, including, among other things, prevailing interest rates, FelCor LP's results of operations and the market for similar securities. Depending on such factors, the Notes may trade at a discount from their face value. See "Risk Factors--Absence of Public Market." FelCor LP will not receive any proceeds from this Exchange Offer. Pursuant to the Registration Rights Agreement, FelCor LP will bear certain registration expenses. THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL FELCOR LP ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. Old Notes sold in reliance upon Rule 144A are represented by one or more global notes (the "Global Old Notes") in definitive, fully registered form, deposited with, or on behalf of, DTC, as the initial depository with respect to the Global Old Notes (in such capacity, the "Depository"). The Global Old Notes are registered in the name of Cede & Co., as nominee of DTC, and beneficial interests in the Global Old Notes are shown on and transfers thereof may be effected through records maintained by the Depository and its participants. Participants in the Depository may transfer their interests in the Global Old Notes electronically in accordance with the Depository's established procedures without the need to transfer a physical certificate. Old Notes sold to Institutional Accredited Investors that are not Qualified Institutional Buyers are represented by one or more physical note certificates (the "Certificated Old Notes") in definitive, fully registered form. New Notes in the form of one or more global notes (the "Global New Notes") will be exchanged for Global Old Notes and New Notes in the form of physical note certificates (the "Certificated New Notes") will be exchanged for Certificated Old Notes. (iii) 6 TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . (v) INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . (v) NOTE REGARDING FORWARD-LOOKING INFORMATION . . . . . . . . . . . . . . . . (vi) SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 THE EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION . . . . . . . . . . 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 31 BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 42 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . 62 DESCRIPTION OF CERTAIN INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . 64 DESCRIPTION OF THE NOTES AND GUARANTEES . . . . . . . . . . . . . . . . . . 67 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS . . . . . . . . . . 90 PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . F-1
(iv) 7 AVAILABLE INFORMATION FelCor is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621 and 75 Park Place, 14th Floor, New York, New York 10007. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains a World Wide Web site that contains registration statements, reports, proxy and information statements and other materials that are filed through the Commission's Electronic Data Gathering, Analysis and Retrieval System. This Web site can be accessed at http://www.sec.gov. In addition, FelCor's Common Stock and Series A Preferred Stock are listed on the New York Stock Exchange. FelCor's reports, proxy statements and other information filed under the Exchange Act may also be inspected and copied at the offices of the New York Stock Exchange, 120 Broad Street, New York, New York 10005. FelCor LP has agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the Notes remain outstanding, it will furnish to the holders of Notes and submit to the Commission (unless the Commission will not accept such materials) (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if FelCor LP were required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by FelCor's independent accountants, and (ii) all reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, for so long as any of the Notes remain outstanding, FelCor LP has agreed to make available to any prospective purchaser of Notes in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN EXHIBITS THERETO, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO FELCOR SUITES LIMITED PARTNERSHIP, 545 E. JOHN CARPENTER FRWY., SUITE 1300, IRVING, TEXAS 75062, ATTENTION: GENERAL COUNSEL, (972) 444-4900. The following documents, which have been previously filed by FelCor with the Commission under the Exchange Act (File No. 024250), are incorporated herein by reference: (i) Annual Report on Form 10-K for the year ended December 31, 1996; (ii) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997: (iii) Quarterly Report on Form 10-Q for the quarter ended June 30, 1997; (iv) Current Report on Form 8-K dated June 4, 1997; (v) Current Report on Form 8-K dated July 11, 1997, as amended by Current Report on Form 8-K/A dated August 13, 1997; (vi) Current Report on Form 8-K dated September 19, 1997; and (vii) Current Report on Form 8-K dated October 1, 1997. All documents filed by FelCor pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the Exchange Offer shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. (v) 8 Any statement contained herein, or in any document incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. FelCor will provide, without charge, to each person to whom a copy of this Prospectus is delivered, on the written request of any such person, a copy of any or all of the documents incorporated herein by reference, except the exhibits to such documents (unless such exhibits are specifically incorporated by reference in such documents). Requests for such copies should be directed to the Company at 545 E. John Carpenter Frwy., Suite 1300, Irving, Texas 75062, Attention: Lawrence D. Robinson, Senior Vice President, General Counsel and Secretary. NOTE REGARDING FORWARD-LOOKING INFORMATION INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH 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. THE STATEMENTS IN "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN 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. (vi) 9 SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the consolidated financial statements of FelCor LP and FelCor, including the notes thereto, contained elsewhere in this Prospectus, as well as the information appearing in the documents incorporated by reference herein. Unless otherwise indicated or unless the context otherwise requires, all references to the "Company" are to FelCor, FelCor LP and their respective subsidiaries, on a consolidated basis. Market data and certain other industry data and forecasts used throughout this Prospectus were obtained from internal surveys, market research, publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Similarly, internal surveys, industry data and forecasts and market research, while believed to be reliable, have not been independently verified, and none of FelCor LP, or the Guarantors makes any representation as to the accuracy of such information. THE COMPANY FelCor is a self-administered equity real estate investment trust ("REIT") that, at September 30, 1997, owned an approximate 92.6% general partner interest in FelCor LP, which holds the Company's interest in 71 full-service, upscale hotels ("Current Hotels"). The Current Hotels consist of 51 Embassy Suites(R) hotels, one hotel in Myrtle Beach, South Carolina, that is in the process of conversion to an Embassy Suites hotel, 12 Doubletree Guest Suites(R) hotels, six Sheraton(R) hotels, and one Hilton Suites(R) hotel. The Current Hotels contain an aggregate of 17,486 suites/rooms, and are located in 26 states. Fifty of the Current Hotels are managed by a subsidiary of Promus Hotel Corporation ("Promus"), which is the largest operator of full-service, all-suite hotels in the United States. Since its formation, through a merger with entities organized in 1991, and initial public offering ("IPO") in July 1994, the Company has acquired 65 full-service, upscale hotels containing an aggregate of 16,007 suites/rooms. Since the IPO, the Company has completed five public offerings of its capital stock, raising gross proceeds of more than $1 billion, including one public offering of convertible preferred stock that raised $151.3 million in gross proceeds. The Company seeks to increase operating cash flow and enhance its value through both internal growth and acquisitions, while maintaining a conservative capital structure. At September 30, 1997, the Company had a total market capitalization in excess of $2 billion and a debt to total market capitalization ratio of 19%. Additionally, after giving effect to the Private Placement and application of the proceeds therefrom, the Company would have had total unencumbered assets of $1.6 billion and total Indebtedness of $428 million (of which only $12 million would have been secured Indebtedness), representing approximately 26% of its Adjusted Total Assets (as defined herein) at such date. The Company's senior management includes co-founders Hervey A. Feldman, Chairman of the Board, and Thomas J. Corcoran, Jr., President and Chief Executive Officer. Mr. Feldman has been engaged in the hotel business for approximately 30 years, including serving as the founding President and Chief Executive Officer of Embassy Suites (the predecessor of Promus) from January 1983 to May 1990 and as its Chairman of the Board from June 1990 until January 1992. Mr. Corcoran has been engaged in the hotel and restaurant business since 1979, with experience in the development, financing and acquisition of hotel and restaurant properties. Based on the closing price of the common stock of FelCor ("Common Stock") on the New York Stock Exchange ("NYSE") on September 30, 1997, Messrs. Feldman and Corcoran, together with other executive officers and directors of the Company, owned collectively more than $40 million of the aggregate outstanding Common Stock and units of limited partner interest in FelCor LP ("Units"). See "Management -- Security Ownership of Management." To enable the Company to satisfy certain requirements for qualification as a REIT, neither FelCor nor FelCor LP can operate the hotels in which they invest. Accordingly, FelCor LP leases the Current Hotels (and expects to lease any additional hotels) to DJONT Operations, L.L.C., or a subsidiary thereof ("Lessee"), pursuant to leases providing for the payment of rent based primarily upon the suite revenues of such hotels ("Percentage Leases"). The Lessee pays rent to FelCor LP under the Percentage Leases and, in addition, enters into franchise agreements (where applicable) and engages independent third party professional managers to operate the hotels. Under the Percentage Leases, the Lessee is required to pay all franchise fees, management fees and other operating expenses of the hotels leased by it. All of the voting interests in the Lessee (constituting a 50% equity interest) are beneficially owned by Messrs. Feldman and Corcoran, and the non-voting interests (constituting the remaining 50% equity interest) are owned beneficially by the children of Charles N. Mathewson, a major initial investor in and a director of the Company. The following diagram illustrates the general relationships among FelCor, FelCor LP, the Lessee, the franchisors and the managers: -1- 10 [GRAPH] The Company's executive offices are located at 545 E. John Carpenter Frwy., Suite 1300, Irving, Texas 75062. The Company may also be reached by telephone at (972) 444-4900, by facsimile transmission at (972) 444-4949, or by e-mail addressed to information@felcor.com. Additional information regarding the Company may be obtained from its Internet web site at http://www.felcor.com. -2- 11 THE INDUSTRY The United States hotel industry has experienced significant improvement in the past five years. According to Coopers & Lybrand L.L.P. Hospitality Directions, after a period of extended unprofitability in the late 1980's and early 1990's, lodging industry profit has increased every year from 1992 through 1996. The industry downturn in the late 1980's resulted primarily from an increase in the supply of new hotel rooms that significantly outpaced growth in room demand. The percentage growth in room demand exceeded percentage growth in new room supply from 1992 through 1996. As a result, according to Smith Travel Research, for All Upscale U.S. Hotels (including both Upscale and Upper Upscale Hotels), occupancy increased from 61.7% in 1991 to 68.4% in 1996, and ADR increased from $65.89 in 1991 to $85.54 in 1996. Smith Travel Research classifies the hotel industry into six distinct categories: Budget, Economy, Midscale, Midscale with Food & Beverage, Upscale and Upper Upscale. All of the Company's properties are operated under brands that are included in the Upper Upscale category. This category has experienced relatively low levels of new construction. BUSINESS STRATEGY Overview The Company's primary business objectives are to (i) focus on selection of sound hotel investments, (ii) add value to its hotels through active asset management and the strategic investment of capital, and (iii) build solid working relationships with, and be the "owner-of-choice" for, selected premium, full-service hotel brand owners/managers who are willing to commit to the on- going success of the hotels they license/manage for the Company. The Company seeks to increase operating cash flow and enhance its value through both internal growth and acquisitions. The Company's internal growth strategy is to utilize its asset management expertise to improve the quality of its hotels by renovating, upgrading and repositioning, thereby improving the revenue performance of the hotels, and to participate, through the Percentage Leases, in any growth in revenues at its hotels. The Company's acquisition growth strategy remains focused primarily upon the purchase of additional existing and a limited number of newly developed hotels that meet the Company's investment criteria. Strategic Relationships The Company currently maintains strategic brand owner/manager relationships with Promus, Doubletree Hotels Corporation ("Doubletree") and ITT Sheraton Corporation ("Sheraton"). Promus and Doubletree have entered into a definitive agreement to merge their companies. The combined company will constitute the lodging industry's third largest entity based on annual revenue. The Company believes that this merger will increase the Company's flexibility in branding its all-suite hotels to capitalize on local market conditions and brand representation. ITT Corporation, the parent of ITT Sheraton Corporation, is currently the subject of a hostile tender offer by Hilton Hotel Corporation and has also announced that it has entered into a definitive agreement to merge with Starwood Lodging. The Company cannot now predict what the ultimate outcome of these competing proposals will be. o Promus Hotel Corporation is the largest operator of full-service, all-suite hotels in the United States. Promus is also the owner of the Embassy Suites brand and the manager of 50 of the Company's Current Hotels. In addition, based on the closing price of the Common Stock on the NYSE on September 30, 1997, Promus owned more than $55 million of the aggregate Common Stock of FelCor and Units of FelCor LP. The relationship with Promus has provided the foundation for the Company's historical growth. o Doubletree Hotels Corporation is the owner of the nation's second largest full-service, all-suite hotel brand, Doubletree Guest Suites. Doubletree provides hotel owners with management and franchise services under its Doubletree Hotels(R), Doubletree Guest Suites, Club Hotels by Doubletree(R), Red Lion Hotels(R) and other brands, as well as management services for other non- Doubletree brand hotels. Doubletree is the manager of all of the 12 Current Hotels operated under the Doubletree Guest Suites brand. o ITT Sheraton Corporation is the owner of the Sheraton brand and one of the world's largest hotel companies, with more than 430 hotels in over 60 countries. This newest strategic alliance, coupled with the purchase of six Sheraton hotels this year (including a total of four non-suite hotels), provided the Company with its initial entry into the upscale, full-service, non-suite hotel market and should provide the Company with opportunities for future growth. -3- 12 The strength of the Company's strategic relationships with the foregoing brand owners/managers are evidenced by their (i) significant equity investments in 15 of the Company's hotels, (ii) agreements to make subordinated loans to the Lessee (in support of the Lessee's obligations under certain Percentage Leases with respect to certain hotels), (iii) subordination of certain customary fees to the Lessee's obligations under applicable Percentage Leases, (iv) grants of certain performance-based termination rights by the managers to the Lessees, and (v) in one case, guarantee of a $25 million loan to the Company. Growth Strategy Beginning with the acquisition of the 18 Crown Sterling Suites(R) hotels ("CSS Hotels"), from the fourth quarter of 1995 through September 30, 1997, the Company has acquired 58 hotels containing an aggregate of 14,587 suites/rooms for approximately $1.4 billion, resulting in an increase in its portfolio of suites/rooms by more than 500%. The Company converted the 18 CSS Hotels to Embassy Suites hotels (16 hotels) and Doubletree Guest Suites hotels (two hotels), investing over $50 million in the complete renovation and upgrade of such hotels. As a consequence, revenue per available room/suite ("RevPAR") of the CSS Hotels for the nine months ended September 30, 1997 increased approximately 22.0% over the nine months ended September 30, 1996. Additionally, for the 13 original hotels acquired by the Company prior to the acquisition of the CSS Hotels, the Company achieved a 6.6% increase in RevPAR for the nine months ended September 30, 1997 over the comparable period in 1996, from $79.39 to $84.61. The Company intends to continue to focus its acquisition strategy with respect to individual hotels primarily upon the purchase of full-service, upscale hotels (both all-suite and non-suite) that will fit within one of the Company's premium brand owner/manager alliances with Promus, Doubletree and Sheraton. The Company believes that it has benefitted, and will continue to benefit, from its strong relationships with its brand owner/managers. The Company also may construct additional suites/rooms and meeting space at certain of its hotels if market and other conditions warrant. Capital Strategy The Company intends to maintain a conservative capital structure that enhances its access to the capital markets on favorable terms and promotes future earnings growth. Since the IPO, the Company has completed five public offerings of its capital stock, raising gross proceeds of more than $1 billion, including one public offering of convertible preferred stock that raised $151.3 million in gross proceeds. In addition, the Company has reduced its payout ratio (distributions as a percentage of Funds From Operations) from 80% for the year ended December 31, 1995 to 68% for the twelve month period ended September 30, 1997. The Board of Directors of the Company has adopted a policy which limits the Company's indebtedness to not more than 40% of its investment in hotel assets, at cost. At September 30, 1997, the Company had a $550 million unsecured revolving line of credit ("Line of Credit"), under which it had borrowed $296 million, an unsecured term loan of $25 million (guaranteed by Promus) ("Renovation Loan"), the proceeds of which were used to finance the cost of renovations to the CSS Hotels, and approximately $1 million of other unsecured indebtedness. The Company also had, at September 30, 1997, an $85 million secured term loan ("Term Loan") that has been repaid from the proceeds of the Private Placement, and an additional $12 million in secured debt. At September 30, 1997, after giving effect to the Private Placement and the application of the proceeds therefrom, the total Indebtedness of the Company would have been 26% of Adjusted Total Assets and its ratio of EBITDA to interest paid for the 12 months ended September 30, 1997 would have been 4.8 to 1. The Company believes that its debt limitation policy, its preference for unsecured debt and its success in raising equity capital for expansion, demonstrate the Company's commitment to the maintenance of a conservative but flexible capital structure. -4- 13 HOTEL PORTFOLIO Current Hotels The Company was organized as a REIT in July 1994. At such time, the Company acquired six Embassy Suites hotels (the "Initial Hotels") through a merger with entities organized in 1991. Subsequent to its formation, the Company has completed the acquisition of interests in 65 additional hotels through September 30, 1997. Of the Current Hotels, the Company owns 100% equity interests in 53 hotels, a 97% interest in a partnership that owns one hotel, a 90% interest in partnerships that own three hotels and a 50% interest in separate partnerships that own 14 hotels. The following table provides certain information regarding the Current Hotels:
NUMBER OF HOTELS NUMBER OF AGGREGATE ACQUIRED SUITES/ROOM ACQUISITION PRICE(1) ---------------- ----------- -------------------- (DOLLARS IN MILLIONS) Inception (July 28, 1994) through December 31, 1994 . . . . . . . . . . . . 7 1,730 $ 107.3 Year Ended December 31, 1995 . . . . . . . 13 2,649 237.1 Year Ended December 31, 1996 . . . . . . . 23 5,769 560.5 Nine Months Ended September 30, 1997 . . . 28 7,161 596.9 -- ------- --------- Subtotals . . . . . . . . . . . . 71 17,309 1,501.8 Additional suites constructed by the Company at its hotels . . . . . . . . . . -- 177 21.2 ------- --------- Totals . . . . . . . . . . . . . 71 17,486 $ 1,523.0 == ======= =========
- ----------- (1) With respect to the hotels in which the Company owns less than a 100% interest, includes the Company's purchase price for the interest acquired by the Company. The Current Hotels represent the following brands:
NUMBER OF BRAND NUMBER OF HOTELS SUITES/ROOMS ----- ---------------- ------------ Embassy Suites . . . . . . . . . . . . . . . 52 12,709 Doubletree Guest Suites . . . . . . . . . . . 12 2,381 Sheraton . . . . . . . . . . . . . . . . . . 6 2,222 Hilton Suites . . . . . . . . . . . . . . . . 1 174 -- ------- Totals . . . . . . . . . . . . . . 71 17,486 == =======
Other Potential Hotel Transactions The Company is in various stages of evaluation and negotiation with respect to a number of other available hotel transactions which, if the Company were to elect to pursue all of such transactions, could require an additional investment by the Company of more than $300 million. Due to the preliminary status of such negotiations and evaluations, no assurance can be given that the Company will elect to pursue, or succeed in the completion of, any of such transactions. RECENT DEVELOPMENTS Since June 30, 1997 the Company has: o issued, on July 15, 1997, an additional 1,000,000 shares of its Common Stock, pursuant to the exercise of an over-allotment option granted to the underwriters in connection with the Company's offering of 10.2 million shares of Common Stock consummated on June 30, 1997 (resulting in aggregate gross proceeds to the Company of approximately $410.2 million); o completed, on July 28, 1997, the acquisition of three Doubletree Guest Suites hotels, with an aggregate of 635 suites, for a total purchase price of approximately $71.6 million; o increased its Line of Credit, on August 14, 1997, from $400 million to $550 million, extended the maturity of the facility to September 30, 2000 and reduced the effective pricing with respect to borrowings thereunder; o acquired, on September 11, 1997, the land (which previously had been held by the Company under a long-term ground lease) upon which the Company's Phoenix (Camelback), Arizona, Embassy Suites hotel is located at a cost of approximately $4.6 million; and o acquired, on September 30, 1997, the partnership that owns the 365-room Sheraton Society Hill hotel in Philadelphia, Pennsylvania for a purchase price of approximately $51 million. -5- 14 THE PRIVATE PLACEMENT The outstanding $175 million in principal amount of Old 7 3/8% Notes and $125 million in principal amount of Old 7 5/8% Notes, were sold by FelCor LP to the Initial Purchasers on October 1, 1997, pursuant to the Placement Agreement. The Initial Purchasers subsequently resold the Old Notes to Qualified Institutional Buyers in compliance with Rule 144A and to a limited number of institutional Accredited Investors that, prior to their purchase of Old Notes, delivered to the Initial Purchasers a letter containing certain representations and agreements. FelCor LP and the Initial Purchasers also entered into the Registration Rights Agreement pursuant to which FelCor LP granted certain registration rights for the benefit of the holders of the Old Notes. The Exchange Offer made hereby is intended to satisfy certain of FelCor LP's obligations under the Registration Rights Agreement with respect to the Old Notes. See"The Exchange Offer--Purpose and Effect." THE EXCHANGE OFFER The Exchange Offer . . . . FelCor LP is offering, upon the terms and subject to the conditions set forth herein and in the Letter of Transmittal, to exchange $1,000 in principal amount of New Notes for each $1,000 in principal amount of outstanding Old Notes of the corresponding maturity, with Global New Notes being exchanged for Global Old Notes and Certificated New Notes being exchanged for Certificated Old Notes. As of the date of this Prospectus, $175 million in aggregate principal amount of the Old 7 3/8% Notes and $125 million in aggregate principal amount of Old 7 5/8% Notes, is outstanding. As of October 28, 1997, (i) there was one registered holder of the Old 7 3/8% Notes, Cede & Co., which held the Old 7 3/8% Notes for 28 of its participants and (ii) there were six registered holders of the Old 7 5/8% Notes, Cede & Co., which held $122 million in principal amount of the Old 7 5/8% Notes for 27 of its participants, and five institutional Accredited Investors holding an aggregate of $3 million in principal amount of the Old 7 5/8% Notes. See "The Exchange Offer--Terms of the Exchange Offer." Expiration Date. . . . . . 5:00 p.m., New York City time, on __________ __, 1997 as the same may be extended at the discretion of FelCor LP, but shall not be later than ________ __, 1997. See "The Exchange Offer--Expiration Date; Extensions; Amendments." Conditions of the Exchange Offer . . . . . The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. The only condition to the Exchange Offer is the declaration by the Commission of the effectiveness of the Registration Statement of which this Prospectus constitutes a part (the "Exchange Offer Registration Statement"). See "The Exchange Offer--Conditions of the Exchange Offer." Accrued Interest . . . . . The New 7 3/8% Notes will bear interest at a rate equal to 7 3/8% annum and the New 7 5/8% Notes will bear interest at a rate equal to 7 5/8% per annum. Interest shall accrue from October 1, 1997 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. See "Description of the Notes and Guarantees--General." Procedures for Tendering Old Notes. . . . . . . . Each holder desiring to accept the Exchange Offer must complete and sign the Letter of Transmittal, have the signature thereon guaranteed if required by the Letter of Transmittal, and deliver the Letter of Transmittal, together with the Old Notes or a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal) and any other required documents (such as evidence of authority to act, if the Letter of Transmittal is signed by someone acting in a fiduciary or representative capacity), to the Exchange Agent (as defined under "The Exchange Offer--The Exchange Agent; Assistance") at the address set forth herein and on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. Any Beneficial Owner (as defined under "The Exchange Offer--Procedures for Tendering Old Notes") of the Old Notes whose Old Notes are registered in the name of a nominee, such as a broker, dealer, commercial bank or trust company and who wishes to tender Old Notes in the Exchange Offer, should instruct such entity or person to promptly tender on such Beneficial Owner's behalf. See "The Exchange Offer--Procedures for Tendering Old Notes." -6- 15 Guaranteed Delivery Procedures . . . . . . . Holders of Old Notes who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date, may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. See "The Exchange Offer--Guaranteed Delivery Procedures." Acceptance of Old Notes and Delivery of New Notes. . Upon effectiveness of the Exchange Offer Registration Statement of which this Prospectus constitutes a part and consummation of the Exchange Offer, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly after acceptance of the Old Notes. See "The Exchange Offer--Acceptance of Old Notes for Exchange; Delivery of New Notes." Withdrawal Rights. . . . . Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer --Withdrawal Rights." Certain Federal Income Tax Considerations . . . There will not be any U.S. Federal income tax consequences to holders exchanging Old Notes for New Notes pursuant to the Exchange Offer. See "Certain Federal Income Tax Consequences." The Exchange Agent . . . . SunTrust Bank, Atlanta is the exchange agent (in such capacity, the "Exchange Agent"). The address and telephone number of the Exchange Agent are set forth in "The Exchange Offer--The Exchange Agent; Assistance" and on the back cover page of this Prospectus. Fees and Expenses . . . . All expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Company. The Company will also pay certain transfer taxes applicable to the Exchange Offer. See "The Exchange Offer--Fees and Expenses." Resales of the New Notes . . . . . . . . . Based on existing interpretations by the Staff of the Commission set forth in "no-action" letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer to a holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by a holder (other than (i) a broker-dealer who purchased the Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker as a result of market- making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer--Resales of the New Notes" and "Plan of Distribution." Effect of Not Tendering Old Notes for Exchange . . . . . . Old Notes that are not tendered or that are not properly tendered will, following the expiration of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Company will have no further obligations to provide for the registration under the Securities Act of such Old Notes and such Old Notes will, following the expiration of the Exchange Offer, bear interest at the same rate as the New Notes. -7- 16 DESCRIPTION OF NEW NOTES The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes, except that (i) the New Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, and (ii) holders of the New Notes will not be, and upon consummation of the Exchange Offer, holders of the Old Notes will no longer be, entitled to any rights under the Registration Rights Agreement intended for the holders of unregistered securities, except in limited circumstances. See "The Exchange Offer--Termination of Certain Rights." The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to the Registrar under the Indenture of the New Notes in the same aggregate principal amount and maturities as the aggregate principal amount and maturities of Old Notes that are duly tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain Rights," "-- Procedures for Tendering Old Notes" and "Description of the Notes and Guarantees." Issuer . . . . . . . . . . . FelCor Suites Limited Partnership. Securities Offered . . . . . $175,000,000 aggregate principal amount of 7 3/8% Senior Notes Due 2004 and $125,000,000 aggregate principal amount of 7 5/8% Senior Notes Due 2007 which have been registered under the Securities Act. Maturity Dates . . . . . . . The New 7 3/8% Notes will mature on October 1, 2004 and the New 7 5/8% Notes will mature on October 1, 2007. Interest . . . . . . . . . . Interest on the New Notes is payable semiannually in cash on October 1 and April 1 of each year, commencing April 1, 1998. Optional Redemption . . . . . Each series of New Notes will be redeemable in whole or in part at the option of FelCor LP at any time, at a redemption price equal to the greater of (i) 100% of the principal amount of such Notes and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined herein) plus 25 basis points, plus, in each case, accrued interest thereon to the date of redemption. See "Description of the Notes and Guarantees -- Optional Redemption." Change of Control . . . . . . Upon a Change of Control (as defined herein), each holder of the New Notes will have the right to require FelCor LP to purchase such holder's New Notes at a price equal to 101% of the principal amount thereof plus accrued interest, if any, to the date of purchase. There can be no assurance that FelCor LP will have the financial resources necessary to purchase the New Notes upon a Change of Control. See "Description of the Notes and Guarantees -- Repurchase of Notes upon a Change of Control." Ranking . . . . . . . . . . . The Indebtedness evidenced by the New Notes will be unsecured, senior obligations of FelCor LP, and will rank pari passu in right of payment with all other unsecured Senior Indebtedness thereof, including, without limitation, the obligations of FelCor LP under the Line of Credit. As unsecured Senior Indebtedness of FelCor LP and the Guarantors, the New Notes will be effectively subordinated to all secured Indebtedness thereof and to the Indebtedness of the non-guarantor Subsidiaries. As of September 30, 1997, after giving effect to the Private Placement and the application of the proceeds therefrom, the total Indebtedness of FelCor LP and the Guarantors would have been approximately $428 million, including $12 million of secured Indebtedness. The non-guarantor Subsidiaries had no Indebtedness. There is currently no outstanding indebtedness of FelCor LP or the Guarantors that is subordinated in right of payment to the New Notes. See "Capitalization" and "Description of Certain Indebtedness." -8- 17 Guarantees . . . . . . . . . All payments with respect to the New Notes will be unconditionally and irrevocably guaranteed by FelCor and certain wholly owned Subsidiaries of FelCor LP so long as they are obligors on other Indebtedness of FelCor or FelCor LP which is pari passu with or subordinated to the New Notes. See "Description of the Notes and Guarantees -- Guarantees." Limitations on Incurrence of Indebtedness . . . . . . . . The Indenture contains certain covenants limiting the incurrence of Indebtedness: (1) FelCor LP, FelCor and the Restricted Subsidiaries (as defined herein) will not incur any Indebtedness if, after giving effect thereto, the aggregate principal amount of their outstanding Indebtedness is greater than 60% of Adjusted Total Assets (as defined herein). After giving effect to the application of the proceeds of the Private Placement, Indebtedness of FelCor LP, FelCor and the Restricted Subsidiaries would have been approximately 26% of Adjusted Total Assets as of September 30, 1997. (2) FelCor LP, FelCor and the Restricted Subsidiaries will not incur any Secured Debt or Subsidiary Debt (each as defined herein) if, after giving effect thereto, the aggregate principal amount of their outstanding Secured Debt and Subsidiary Debt is greater than 40% of their Adjusted Total Assets. After giving effect to the application of the proceeds of the Private Placement, the Secured Debt and Subsidiary Debt of FelCor LP, FelCor and the Restricted Subsidiaries would have been less than 1% of the Adjusted Total Assets as of September 30, 1997. (3) FelCor LP, FelCor and the Restricted Subsidiaries will not incur any Indebtedness if, after giving effect to the incurrence of such Indebtedness, their Interest Coverage Ratio (as defined herein) would be less than 2.0 to 1. After giving effect to the application of the proceeds of the Private Placement, their Interest Coverage Ratio would have been 4.8 to 1 for the 12 months ended September 30, 1997. (4) FelCor LP, FelCor and the Restricted Subsidiaries will maintain Total Unencumbered Assets (as defined herein) of not less than 150% of the aggregate outstanding principal amount of their Unsecured Indebtedness (as defined herein) on a consolidated basis. After giving effect to the application of the proceeds of the Private Placement, Total Unencumbered Assets would have been 398% of such Unsecured Indebtedness as of September 30, 1997. Certain Other Covenants . . . . . . . . . . The Indenture contains certain other covenants for the benefit of the holders of the Notes which, among other things, restrict the ability of FelCor LP, FelCor and the Restricted Subsidiaries to: make certain distributions, investments and other restricted payments; create restrictions on the ability of Restricted Subsidiaries to make certain payments; issue or sell stock of Restricted Subsidiaries; enter into transactions with affiliates; create liens; sell assets; enter into certain sale-leaseback transactions; and, with respect to FelCor LP and FelCor, consolidate, merge or sell all or substantially all of their assets. See "Description of the Notes and Guarantees -- Covenants." However, in the event, and only for so long as, the Notes are rated Investment Grade (as defined herein) the covenants described under "Description of the Notes and Guarantees -- Covenants -- Limitation on Liens," "-- Limitation on Sale-Leaseback Transactions," "-- Limitation on Restricted Payments," "-- Limitation on Dividend and other Payment Restrictions Affecting Restricted Subsidiaries," "-- Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries," "-- Limitation on Issuances of Guarantees by Restricted Subsidiaries," and "-- Limitation on Transactions with Affiliates" will be inapplicable. -9- 18 Absence of a Public Market for the New Notes . . . . The New Notes are a new issue of securities with no established trading market. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Notes. The Initial Purchasers have advised FelCor LP that they currently intend to make a market in the New Notes. However, the Initial Purchasers are not obligated to do so, and any market making with respect to the New Notes may be discontinued at any time without notice. FelCor LP does not intend to apply for listing of the New Notes on any securities exchange. RISK FACTORS SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE EXCHANGE OFFER. -10- 19 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following tables set forth summary historical and pro forma consolidated financial information for FelCor LP and FelCor. The following information should be read in conjunction with the historical financial statements and notes thereto for FelCor LP and FelCor and Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included herein. In the opinion of management, the financial data as of June 30, 1996 and 1997 and for the six months ended June 30, 1996 and 1997 include all adjustments necessary to present fairly the information set forth therein. The pro forma operations and other data for the year ended December 31, 1996 and for the six months ended June 30, 1997 have been prepared as if the purchase of each of the hotels acquired prior to June 30, 1997, the hotels acquired through September 30, 1997, the Series A Preferred Stock offering in the second quarter of 1996, the Common Stock offerings in the first and second quarters of 1997, and the Private Placement had been consummated on January 1, 1996. The pro forma balance sheet data has been prepared as if the purchase of the hotels acquired through September 30, 1997, and the Private Placement had been consummated on June 30, 1997. The pro forma financial information is not necessarily indicative of what the actual financial position and results of operations of FelCor LP or FelCor would have been as of and for the periods indicated, nor does it purport to represent the future financial position and results of operations of FelCor LP or FelCor. FELCOR SUITES LIMITED PARTNERSHIP
HISTORICAL PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30 THROUGH ------------------------------ ------------------------------ DECEMBER 31, HISTORICAL PRO FORMA HISTORICAL PRO FORMA 1994 ------------------ --------- ------------------- --------- ---- 1995 1996 1996(1) 1996 1997 1997(1) ------- -------- --------- -------- -------- --------- (IN THOUSANDS, EXCEPT RATIO DATA) OPERATING DATA: Percentage lease revenue .............$ 6,043 $23,787 $ 97,950 $173,147(2) $ 47,385 $ 74,048 $101,175(2) Net income applicable to unitholders . 3,418 15,322 38,793 57,202 24,544 24,358 34,827 OTHER DATA: Lessee suite revenue .................$16,094 $65,649 $234,451 $481,471 $105,557 $202,085 $267,036 Funds From Operations assuming conversion of preferred units(3) ... 4,905 20,707 77,141 125,466 37,002 56,335 73,734 EBITDA(4) ............................ 5,014 22,203 85,764 158,659 40,926 63,433 93,671 Ratio of EBITDA to interest paid ..... -- 15.1x 9.4x 4.9x 10.3x 6.5x 5.1x Ratio of earnings to fixed charges(5) ......................... 32.4x 8.6x 5.1x 3.0x 6.5x 3.2x 3.1x
DECEMBER 31, JUNE 30, -------------------------------- --------------------------------- HISTORICAL HISTORICAL PRO FORMA -------------------------------- ------------------- --------- 1994 1995 1996 1996 1997 1997(1) --------- --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and short term investments ............. $ 1,118 $166,821 $ 7,793 $ 5,052 $ 13,394 $ 13,394 Investment in hotel properties, net ......... 104,800 325,155 899,691 798,116 1,320,982 1,443,604 Investment in unconsolidated partnerships ... -- 13,819 59,867 12,984 126,714 126,714 Total assets ................................ 108,305 548,359 978,788 825,679 1,479,574 1,611,057 Long-term debt and capital lease obligations: 7 3/8% Senior Notes Due 2004 .............. -- -- -- -- -- 175,000 7 5/8% Senior Notes Due 2007 .............. -- -- -- -- -- 125,000 Unsecured Line of Credit .................. -- -- 115,000 -- 192,000 73,728 Term Loan ................................. 8,750 -- 85,000 65,000 85,000 -- Capitalized leases ........................ -- 11,256 12,875 13,771 12,048 12,048 Other unsecured debt ...................... -- 8,410 26,550 8,350 25,650 25,650 Redeemable units, at redemption value ....... 33,055 74,790 98,542 84,973 108,192 108,192 Partners' capital ........................... 61,885 445,433 468,247 486,558 887,942 922,697
-11- 20 FELCOR SUITE HOTELS, INC.
HISTORICAL PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30 THROUGH ---------------------------- --------------------------------- DECEMBER 31, HISTORICAL PRO FORMA HISTORICAL PRO FORMA 1994 ---------------- --------- ---------------- ---------- ----------- 1995 1996 1996(1) 1996 1997 1997(1) ----- ------ --------- ----- ---- ---------- (IN THOUSANDS, EXCEPT RATIO DATA) OPERATING DATA: Percentage lease revenue.......... $ 6,043 $ 23,787 $ 97,950 $173,147(2) $ 47,385 $ 74,048 $101,175(2) Net income applicable to common shareholders ................... 2,511 12,191 33,203 52,082 21,402 21,416 31,821 OTHER DATA: Lessee suite revenue ............. $16,094 $ 65,649 $234,451 $481,471 $105,557 $202,085 $267,036 Funds From Operations assuming conversion of preferred stock(3) 4,905 20,707 77,141 125,466 37,002 56,335 73,734 EBITDA(4) ........................ 5,014 22,203 85,764 158,659 40,926 63,433 93,671 Ratio of EBITDA to interest paid . -- 15.1x 9.4x 4.9x 10.3x 6.5x 5.1x Ratio of earnings to fixed charges(5) ..................... 32.4x 8.6x 5.1x 3.0x 6.5x 3.2x 3.1x
DECEMBER 31, JUNE 30, -------------------------------- --------------------------------- HISTORICAL HISTORICAL PRO FORMA -------------------------------- --------------------- ---------- 1994 1995 1996 1996 1997 1997(1) --------- --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and short term investments........... $ 1,118 $ 166,821 $ 7,793 $ 13,394 $ 13,394 $ 5,052 Investment in hotel properties, net....... 104,800 325,155 899,691 798,116 1,320,982 1,443,604 Investment in unconsolidated partnerships -- 13,819 59,867 12,984 126,714 126,714 Total assets.............................. 108,305 548,359 978,788 825,679 1,479,574 1,611,057 Debt and capital lease obligations: 7 3/8% Senior Notes Due 2004............ -- -- -- -- 175,000 7 5/8% Senior Notes Due 2007............ -- -- -- -- 125,000 Unsecured Line of Credit................ -- -- 115,000 -- 192,000 73,728 Term Loan............................... 8,750 -- 85,000 65,000 85,000 -- Capitalized leases...................... -- 11,256 12,875 13,771 12,048 12,048 Other unsecured debt.................... -- 8,410 26,550 8,350 25,650 25,650 Minority interest in FelCor LP............ 25,685 58,837 76,112 86,229 75,109 75,724 Shareholders' equity...................... 69,255 461,386 641,926 636,552 1,072,275 1,106,415
- ---------- (1) The pro forma financial information does not purport to represent what the financial position or results of operations of FelCor LP or FelCor actually would have been if the purchases of each of the hotels acquired in 1996 and 1997 (through September 30, 1997), the Series A Preferred Stock offering, the Common Stock offerings in the first and second quarters of 1997, and the Private Placement had, in fact, occurred on such dates, or to project their financial position or results of operations at any future date or for any future period. (2) Represents lease payments from the Lessee to FelCor LP calculated on a pro forma basis by applying the contractual or anticipated rent provisions of the Percentage Leases to the historical suite and food and beverage revenues of the Current Hotels. (3) The following table computes Funds From Operations under the National Association of Real Estate Investment Trusts ("NAREIT") definition. Funds From Operations under the NAREIT definition consists of net income, computed in accordance with generally accepted accounting principles, excluding gains or losses from debt restructurings and sales of property, plus depreciation of real property (including furniture and equipment) plus, in the case of FelCor, the minority interest in FelCor LP and after adjustments for unconsolidated partnerships and joint ventures. The computation of Funds From Operations for FelCor LP and FelCor yields the same result. -12- 21
HISTORICAL PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30 THROUGH ---------------------------- ---------------------------- DECEMBER 31, HISTORICAL PRO FORMA HISTORICAL PRO FORMA 1994 ---------------- --------- -------------- --------- ----------- 1995 1996 1996(1) 1996 1997 1997(1) ----- ------ --------- ----- ---- --------- (IN THOUSANDS) Net income........................... $ 2,511 $ 12,191 $ 40,937 $ 63,880 $ 23,237 $ 27,315 $ 37,720 Add: Minority interest in FelCor LP......................... 907 3,131 5,590 5,120 3,142 2,942 3,006 Depreciation......................... 1,487 5,232 26,544 46,113 10,304 21,730 27,831 Depreciation for unconsoli- dated subsidiaries................. -- 153 1,716 10,353 319 4,348 5,177 Extraordinary charge from writeoff of deferred financing fees......... -- -- 2,354 -- -- -- -- -------- -------- -------- -------- -------- --------- -------- Funds From Operations assuming conversion of preferred stock..................... $ 4,905 $ 20,707 $ 77,141 $125,466 $ 37,002 $ 56,335 $ 73,734 ======== ======== ======== ======== ======== ========= ========
Industry analysts generally consider Funds From Operations to be an appropriate measure of the performance of an equity REIT. Funds From Operations should not be considered as an alternative to net income or other measurements under generally accepted accounting principles as an indication of operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. Funds From Operations does not reflect cash expenditures for capital improvements or principal repayment of debt. (4) EBITDA is computed by adding net income, minority interest in FelCor LP, interest expense, income taxes, depreciation expense, amortization expense, extraordinary expenses and cash distributions paid by unconsolidated partnerships and deducting extraordinary income and income from unconsolidated partnerships. The computation of EBITDA for FelCor LP and FelCor yields the same result. The differences between Funds From Operations and EBITDA are scheduled in the following table.
HISTORICAL PERIOD FROM JULY 28, 1994 (INCEPTION OF YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30 OPERATIONS) ----------------------------------- ----------------------------------- THROUGH HISTORICAL PRO FORMA HISTORICAL PRO FORMA DECEMBER 31,---------------------- --------- ---------------------- --------- 1994 1995 1996 1996(1) 1996 1997 1997(1) --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS) Funds From Operations assuming conversion of preferred stock .... $ 4,905 $ 20,707 $ 77,141 $ 125,466 $ 37,002 $ 56,335 $ 73,734 Add: Interest expense ................. 109 2,004 9,803 32,829 4,513 12,914 18,889 Amortization expense ............. -- 158 592 592 215 557 557 Cash distributions from unconsolidated partnerships .... -- -- 1,954 13,248 -- 1,402 9,000 Deduct: Income from unconsolidated partnerships ................... -- (513) (2,010) (3,123) (485) (3,427) 3,332) Depreciation from unconsolidated partnerships ................... -- (153) (1,716) (10,353) (319) (4,348) (5,177) --------- --------- --------- --------- --------- --------- --------- EBITDA ............................. $ 5,014 $ 22,203 $ 85,764 $ 158,659 $ 40,926 $ 63,433 $ 93,671 ========= ========= ========= ========= ========= ========= =========
(5) For purposes of computing ratio of earnings to fixed charges, earnings consist of net income plus fixed charges and minority interest expense in FelCor LP (with respect to FelCor), excluding capitalized interest, and fixed charges consist of interest, whether expensed or capitalized, and amortization of loan costs. -13- 22 RISK FACTORS An investment in the Notes involves a significant degree of risk. In addition to the other information contained in this Prospectus, prospective investors should carefully consider the following factors in evaluating the Exchange Offer. RISKS OF LEVERAGE; FLOATING RATE DEBT; INABILITY TO RETAIN EARNINGS At September 30, 1997, after giving effect to the Private Placement and the application of the proceeds therefrom, the Company's outstanding Indebtedness would have been approximately $428 million, including approximately $91 million under the Line of Credit which bears interest at floating rates. Since the Company intends to continue to acquire additional hotels, and must distribute annually at least 95% of its taxable net income to maintain its REIT status, it may borrow additional funds to make investments or distributions. The Board of Directors has the discretion to permit the Company to incur debt, subject to the current policy of the Board of Directors limiting indebtedness to not more than 40% of the Company's investment in hotel properties, at cost, on a consolidated basis, after giving effect to the Company's use of proceeds from any indebtedness. The Company has obtained the Line of Credit to provide, as necessary, funds for investments in additional hotel properties, working capital and cash to make distributions. The Company's use of the Line of Credit for working capital, distributions and general corporate purposes is limited to 10% of the amount available thereunder. The majority of the Company's floating rate debt bears interest at LIBOR (5.656% at September 30, 1997) plus an amount between 0.45% and 1.5%. There can be no assurance that the Company will be able to meet its present or future debt service obligations and, to the extent that it cannot, it risks the loss of certain of its assets to foreclosure. Changes in economic conditions could result in higher interest rates which could increase debt service requirements on the Company's floating rate debt. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if the Company is in need of capital to repay indebtedness in accordance with its terms or otherwise, it could be required to liquidate one or more investments in hotel properties at times which may not permit realization of the maximum return on such investments. In order to qualify as a REIT, the Company generally is required each year to distribute to its shareholders at least 95% of its net taxable income (excluding any net capital gain). In addition, the Company is subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of (i) 85% of its ordinary income, (ii) 95% of its capital gain net income for that year, and (iii) any undistributed taxable income from prior periods. The Company intends to continue to make distributions to its shareholders to comply with the 95% distribution requirement and to avoid the nondeductible excise tax. FelCor's income consists primarily of its share of the income of FelCor LP, and FelCor's cash available for distribution consists primarily of its share of cash distributions from FelCor LP. Differences in timing between taxable income and cash available for distribution due to the seasonality of the hospitality industry could require the Company to borrow funds on a short-term basis to meet the 95% distribution requirement and to avoid the nondeductible excise tax. In such a case, the Company also would be required to borrow funds to make payments of principal and interest on Indebtedness. HOTEL INDUSTRY RISKS Operating Risks The Company's hotels are subject to all operating risks common to the hotel industry. These risks include, among other things, intense competition from other hotels; over-building in the hotel industry which has adversely affected occupancy, ADR and RevPAR in the past; increases in operating costs due to inflation and other factors, which increases have not always been, and may not necessarily in the future be, offset by increased suite/room rates; dependence on business and commercial travelers and tourism; increases in energy costs and other expenses of travel; and adverse effects of general and local economic conditions. Such factors could adversely affect the Lessee's ability to make lease payments and, consequently, the Company's ability to make any required payments of principal and interest on indebtedness. Further, annual adjustments to the base rent and the thresholds for computation of percentage rent, based upon a formula taking into account changes in the U.S. Consumer Price Index ("CPI"), would (in the absence of offsetting increases in suite revenue and in the event of any decrease in suite revenues) result in decreased revenues to the Company under the Percentage Leases and decreased amounts available for required payments of principal and interest on indebtedness. -14- 23 Competition Competition for Guests; Operations. The hotel industry is highly competitive. Each of the Company's hotels experiences competition primarily from other upscale hotels in its immediate vicinity, but also competes with other hotel properties in its geographic market. Some of the competitors of the Company's hotels have substantially greater marketing and financial resources than the Company and the Lessee. A number of additional hotel rooms are in development, have been announced or have recently been completed in a number of the Company's markets, and additional hotel rooms may be developed in the future. Such additional hotel rooms could have an adverse effect on the revenues of the Company's hotels in such markets. Competition for Acquisitions. The Company may be competing for investment opportunities with entities which have substantially greater financial resources than the Company. These entities may generally be able to accept more risk than the Company prudently can manage. Competition may generally reduce the number of suitable investment opportunities offered to the Company and increase the bargaining power of property owners seeking to sell. Seasonality of Hotel Business The hotel industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. Through diversity in the geographic location and in the primary customer base of the Company's hotels, the Company may be able to lessen, but not eliminate, the effects of seasonality. Accordingly, seasonality can be expected to cause quarterly fluctuations in the Company's lease revenue, to the extent it receives percentage rent. Investment Concentration in Single Industry The Company's current strategy is to acquire interests exclusively in hotel properties. The Company will not seek to invest in assets selected to reduce the risks associated with investments in the hotel industry, and will be subject to risks inherent in concentrating investments in a single industry. Therefore, the adverse effect on the Company's lease revenue and amounts available for required payments of principal and interest on indebtedness and to make distribution to shareholders resulting from a downturn in the hotel industry will be more pronounced than if the Company had diversified its investments outside of the hotel industry. In addition, the Company's hotels are concentrated in the Upper Upscale category of the hotel industry, particularly the all-suite segments therein. Emphasis on Embassy Suites Hotels; Market Concentration Fifty-one of the Company's 71 Current Hotels are operated under, and one is in the process of being converted to, the Embassy Suites brand. Accordingly, the Company is subject to risks inherent in concentrating the Company's investments in the Embassy Suites brand, such as a reduction in business following adverse publicity related to the brand, which could have an adverse effect on the Company's lease revenues and amounts available for required payments of principal and interest on indebtedness and to make distributions to shareholders. The Current Hotels are located in 26 states; however, almost one-half of such hotels are located in three states, with 11 hotels located in each of Florida and California and nine hotels located in Texas. Therefore, adverse events or conditions which affect those areas particularly (such as natural disasters or adverse changes in local economic conditions) could have a more pronounced negative impact on the operations of the Company and amounts available for required payments of principal and interest on indebtedness than events affecting other areas. OPERATIONAL RISKS OF RAPID GROWTH The Company's acquisition of interests in 58 hotels between late 1995 and September 30, 1997, has resulted in a substantial increase in the number and geographic dispersion of the hotels owned by the Company and leased to the Lessee. As a result, the Company has added five senior management personnel as well as additional accounting and administrative personnel between mid-1995 and September 30, 1997. To the extent the Company is unable to retain or hire experienced personnel to manage its business and assets, its operations could be adversely affected. Continued growth may result in increased demands upon, or additions to, the Company's staff. The increased demand upon the time of such employees, particularly if additional qualified staff cannot be obtained, could adversely affect the operations and revenues of the Company. -15- 24 RISK OF FRAUDULENT TRANSFER LIABILITY The management of FelCor believes that the indebtedness represented by the Notes and the Subsidiary Guarantees was incurred for proper purposes and in good faith, and that, based on present forecasts, asset valuations and other financial information, the Company is solvent, has sufficient capital for carrying on its businesses and is able to pay its debts as they mature. Notwithstanding management's belief, if a court of competent jurisdiction in a suit by an unpaid creditor or a representative of creditors (such as a trustee in bankruptcy or a debtor-in-possession) were to find that either FelCor, FelCor LP or the Subsidiary Guarantors did not receive fair consideration or reasonably equivalent value for issuing the Notes or the Subsidiary Guarantees and, at the time of the incurrence of indebtedness represented by the Notes or the Subsidiary Guarantees, such entity was insolvent, was rendered insolvent by reason of such incurrence, was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital, intended to hinder, delay or defraud its creditors, such court could avoid such indebtedness or subordinate such indebtedness to other existing and future indebtedness of such entity. The measure of insolvency for purposes of the foregoing will vary depending upon the law of the relevant jurisdiction. Generally, however, an entity would be considered insolvent for purposes of the foregoing if the sum of an entity's debts is greater than all of its property at a fair valuation, or if the present fair saleable value of the entity's assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured. RESTRICTIVE DEBT COVENANTS The terms of the Line of Credit and Indenture contain certain restrictive covenants, including, among others, covenants which may prohibit or significantly restrict the ability of FelCor, FelCor LP and certain of their subsidiaries to incur indebtedness, make investments, engage in transactions with shareholders and affiliates, incur liens, create restrictions on the ability of certain subsidiaries to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of such entities. In addition, the Company is required under the Line of Credit to maintain certain specified financial ratios. There can be no assurance that the Company will be able to maintain such ratios or that such covenants will not adversely affect the Company's ability to finance its future operations or capital needs or to engage in other business activities that may be in the interest of the Company. The breach of any of these covenants or the inability of the Company to comply with the required financial ratios could result in a default under the Line of Credit or the Indenture. In the event of any such default, all amounts borrowed under the Line of Credit or the Indenture, together with accrued interest, could be declared to be due and payable. If the Indebtedness under the Line of Credit or the Indenture were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay such Indebtedness in full. See "Description of Certain Indebtedness" and "Description of the Notes and Guarantees." DEPENDENCE ON LESSEE'S HOTEL OPERATIONS The Company's revenues consist primarily of lease revenue under the Percentage Leases. The obligations of the Lessee under the Percentage Leases are unsecured. The Lessee's only assets are cash, receivables, inventory, supplies and prepaid expenses needed in the operation of the Current Hotels, the franchise licenses for the Current Hotels, its rights and benefits under the Percentage Leases and the management contracts relating to such hotels and, subject to certain limitations, its right to borrow on a subordinated basis up to approximately $9 million from its equity owners. At June 30, 1997, the Lessee had a deficit in total shareholders' equity of approximately $5.4 million. Consequently, both the Company and the Lessee are substantially dependent upon the operations of the Current Hotels. RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS Fifty-one of the Current Hotels are being operated under, and one is in the process of being converted to, the Embassy Suites brand. Of the 19 remaining Current Hotels, 12 are operated as Doubletree Guest Suites hotels, under management contracts with Doubletree, six are operated as Sheraton hotels, under management contracts with Sheraton, and one is, and may continue to be, operated under a franchise license as a Hilton Suites hotel. No assurance can be provided that the Company will not be required to make and fund significant additional improvements to the Current Hotels in the future to obtain or maintain its franchise licenses. Failure to complete improvements, when required, in a manner satisfactory to the franchisor could result in the failure to issue, or the cancellation, of one or more franchise licenses. In addition, the Company may desire to operate additional hotels acquired by it under franchise licenses from Promus or another franchisor, and such franchisors may require that significant capital expenditures be made to such additional hotels as a condition of granting such franchise licenses. -16- 25 The continuation of franchise licenses for the Current Hotels is subject to the maintenance of specified operating standards and other terms and conditions. Promus periodically inspects its licensed properties to confirm adherence to its maintenance and operating standards. Under each Percentage Lease, the Company is obligated, among other things, to pay the costs of maintaining the structural elements of each hotel and to set aside as a reserve 4% of hotel suite revenues per month, on a cumulative basis, and to fund from the reserve or from other sources capital expenditures (subject to approval by the Company's Board of Directors) for the periodic replacement or refurbishment of furniture, fixtures and equipment required for the retention of such franchise licenses. During the period from the closing of the Company's initial public offering to December 31, 1996, the Company made, and in the future may be obligated or deem it advisable to make, capital investments in the Current Hotels in excess of 4% of the suite revenues thereof. Should the Company be required or elect to do so in the future, such investments may necessitate the use of borrowed funds or the reduction of distributions. The Lessee is responsible for routine maintenance and repair expenditures with respect to the Current Hotels. The failure to maintain the standards or adhere to the other terms and conditions of the Embassy Suites or other franchise licenses could result in the loss or cancellation of such franchise licenses. It is possible that a franchisor could condition the continuation of a franchise license upon the completion of substantial capital improvements, which the Board of Directors may determine to be too expensive or otherwise unwarranted in light of general economic conditions or the operating results or prospects of the affected hotel. In that event, the Board of Directors may elect to allow the franchise license to lapse, in which event the Company will be obligated to indemnify the Lessee against any loss or liability incurred by it as a consequence of such decision. In any case, if a franchise is terminated, the Company and the Lessee may seek to obtain a suitable replacement franchise, or to operate the affected hotel independent of a franchise license. The loss of any franchise license could have a material adverse effect upon the operations or the underlying value of the hotel covered by such license because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. The loss of a number of the franchise licenses for the Current Hotels could have a material adverse effect on the Company's revenues under the Percentage Leases and the Company's cash available to make required payments of principal and interest on indebtedness and to make distributions to its shareholders. CONFLICTS OF INTEREST General Because of the direct and indirect ownership interests of Messrs. Feldman, Corcoran and Mathewson in, and their positions with, the Company and the Lessee, there are inherent conflicts of interest in connection with the Company's purchase of the Initial Hotels, in which such persons held an interest, and in the ongoing lease and operation of the Company's hotels. Accordingly, the interests of the Company's shareholders may not have been, and in the future may not be, solely reflected in all decisions made or actions taken by such officers and directors of the Company. In an effort to address one of the primary continuing conflicts, Messrs. Feldman and Corcoran have entered into an agreement with the Company to utilize any amounts distributed to them from the Lessee, in excess of their tax liability for the earnings of the Lessee, to purchase from the Company additional shares of Common Stock (or Units) at the then current market price. No Arms-Length Bargaining on Percentage Leases The terms of the Percentage Leases were not negotiated on an arms-length basis and, accordingly, may not reflect fair market values or terms. Management of the Company believes, however, that the terms of such agreements are fair to the Company. The lease payments under the Percentage Leases have been, and will be, calculated with reference to historical financial data and the projected operating and financial performance of the hotels. The terms of the Percentage Leases are believed by management of the Company to be typical of provisions found in other leases entered into in similar transactions. The Percentage Leases are approved by the Company's "Independent Directors," being those directors who are not officers or employees of the Company or affiliates of any subsidiary or lessee thereof. The Company does not own any interest in the Lessee. All of the voting Class A membership interest in the Lessee (representing a 50% equity interest) is owned beneficially by Messrs. Feldman and Corcoran and all of the non-voting Class B membership interest in the Lessee (representing the remaining 50% equity interest) is held by RGC Leasing, Inc., a Nevada corporation owned by the children of Mr. Mathewson, a director of the Company. As a result, such persons may have a conflict of interest with the Company in the performance of their management services to the Company in connection with the Percentage Leases. Adverse Tax Consequences to Certain Affiliates on a Sale of Initial Hotels Certain affiliates of the Company may have unrealized gain in their investments in the six Initial Hotels acquired by the Company at its inception on July 28, 1994. A subsequent sale of such hotels by the Company, although not restricted by agreement, may cause adverse tax consequences to such persons. Therefore, the interests of the Company and certain of its affiliates, including Messrs. Feldman, Corcoran and Mathewson, could be different in connection with the disposition of any of such hotels. However, decisions with respect to the disposition of all hotel properties in which the Company invests will be made by a majority of the Board of Directors, which majority must include a majority of the Independent Directors when the disposition involves any of the Initial Hotels. -17- 26 RELIANCE ON KEY PERSONNEL The Company's future success, including particularly the implementation of the Company's acquisition growth strategy, is substantially dependent on the active participation of Messrs. Feldman and Corcoran. The loss of the services of either of these individuals could have a material adverse effect on the Company. REAL ESTATE INVESTMENT RISKS The Company's investments are subject to varying degrees of risk generally incident to the ownership of real property, including, in addition to the risks discussed below, adverse changes in general or local economic conditions, zoning laws, traffic patterns and neighborhood characteristics, tax rates, governmental rules and fiscal policies, and by civil unrest, acts of war, and other adverse factors which are beyond the control of the Company. Illiquidity of Real Estate Real estate investments are relatively illiquid. The ability of the Company to vary its portfolio in response to changes in economic and other conditions will be limited. Also, no assurances can be given that the market value of any of the Current Hotels will not decrease in the future. There can be no assurance that the Company will be able to dispose of an investment when it finds disposition advantageous or necessary or that the sale price realized in any disposition will recoup or exceed the amount of the Company's investment therein. Uninsured and Underinsured Losses Each of the Current Hotels is covered by comprehensive policies of insurance, including liability, fire and extended coverage. Management believes such specified coverage is of the type and amount customarily obtained by owners of real property assets. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, that may be uninsurable or not economically insurable. Eleven of the Current Hotels are located in California, which is subject to relatively higher seismic risks. Although each of such hotels was constructed under the more recent and stringent post-1984 building codes that were intended to reduce the likelihood or extent of damage from seismic activity, no assurance can be given that an earthquake would not cause substantial damage and losses. Additionally, 16 of the Current Hotels are located in the coastal areas of Florida, Georgia, Louisiana, South Carolina or Texas and may, therefore, be particularly susceptible to potential damage from hurricanes or high-wind activity. The Company presently maintains and intends to continue to maintain earthquake insurance on each of the Current Hotels located in California and wind damage insurance on its hotels located in Florida, Georgia, Louisiana, South Carolina and Texas, to the extent practicable. The Company's Board of Directors may exercise discretion in determining amounts, coverage limits and the deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on the Company's investments at a reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of the Company's lost investment. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it impractical to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received by the Company might not be adequate to restore its economic position with respect to such property. Environmental Matters Under various federal, state, and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Liability also may extend to persons holding a security interest in the property, under certain limited circumstances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly remediate such contaminated property, may adversely affect the owner's ability to dispose of such property, to fully utilize such property without restriction or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Certain environmental laws and common law principles could be used to impose liability for release of hazardous or toxic substances, including the release of asbestos-containing materials ("ACMs") into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with such releases, including exposure to released ACMs. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. In connection with the ownership of the Current Hotels and any subsequently acquired hotels, the Company may be potentially liable for such costs. The cost of defending against claims of -18- 27 liability, of compliance with environmental regulatory requirements or of remediating a contaminated property could materially adversely affect the business, assets or results of operations of the Company and, consequently, amounts available for required payments of principal and interest on indebtedness and to make distributions to the Company's shareholders. Phase I environmental audits from independent environmental engineers were obtained with respect to substantially all of the Current Hotels prior to the acquisition thereof by the Company. The principal purpose of Phase I audits is to identify indications of potential environmental contamination for which the Current Hotels may be responsible and, secondarily, to assess, to a limited extent, the potential for environmental regulatory compliance liabilities. The Phase I audits of the Current Hotels were designed to meet the requirements of the then current industry standards governing Phase I audits, and consistent with those requirements, none of the audits 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 Current Hotels' complete compliance status. Similarly, the audits did not involve comprehensive analysis of potential off-site liability. The Phase I audit reports have not revealed any environmental liability that management believes would have a material adverse effect on the Company's business, assets or results of operations, nor is the Company aware of any such liability. Nevertheless, it is possible that these reports do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Compliance with Americans with Disabilities Act Under the Americans with Disabilities Act of 1990 ("ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While management of the Company believes that, based upon an examination thereof and consultation with professionals, the Current Hotels are substantially in compliance with these requirements, a determination that the Company is not in compliance with the ADA could result in the imposition of fines or an award of damages to private litigants. If the Company were required to make substantial modifications at the Current Hotels to comply with the ADA, the Company's ability to make required payments of principal and interest on indebtedness and to make distributions to its shareholders could be adversely affected. Increases in Property Taxes Each Current Hotel is subject to real and personal property taxes. The real and personal property taxes on hotel properties in which the Company invests may increase as property tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, the Company's ability to make required payments of principal and interest on indebtedness and to make distributions to its shareholders could be adversely affected. ABSENCE OF PUBLIC MARKET The New Notes are new issues of securities, have no established trading market and may not be widely distributed. The Company does not intend to list the New Notes on any national securities exchange or to seek the admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. The Company has been advised by the Initial Purchasers that they presently intend to make a market in the New Notes. However, the Initial Purchasers are not obligated to do so and any market making activities with respect to the New Notes may be discontinued at any time without notice. In addition, such market making activity will be subject to the limitations imposed by the Exchange Act and may be limited during the Exchange Offer and at certain other times. No assurance can be given that an active public or other trading market will develop for the New Notes or as to the liquidity of any trading market for the New Notes. If a trading market does not develop or is not maintained, holders of the New Notes may experience difficulty in reselling the New Notes or may be unable to sell them at all. If a market for the New Notes develops, any such market may be discontinued at any time. If a public trading market develops for the New Notes, future trading prices of the New Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on prevailing interest rates, the market for similar securities and other facts, including the financial condition of the Company, the New Notes may trade at a discount from their principal amount. -19- 28 THE EXCHANGE OFFER PURPOSE AND EFFECT The Old Notes were sold by FelCor LP to the Initial Purchasers on October 1, 1997, pursuant to the Placement Agreement. The Initial Purchasers subsequently resold the Old Notes to Qualified Institutional Buyers in compliance with Rule 144A and to a limited number of institutional Accredited Investors that, prior to their purchase of Old Notes, delivered to the Initial Purchasers a letter containing certain representations and agreements. FelCor LP, FelCor and the Initial Purchasers also entered into the Registration Rights Agreement, pursuant to which FelCor LP agreed, with respect to the Old Notes and subject to the Company's determination that the Exchange Offer is permitted under applicable law, to cause to be filed a registration statement with the Commission under the Securities Act concerning the Exchange Offer, to use its best efforts to cause such registration statement to be declared effective by the Commission, and to cause the Exchange Offer to be consummated on or prior to April 1, 1998. The Company will keep the Exchange Offer open for a period of not less than 20 business days and not more than 30 business days. This Exchange Offer is intended to satisfy the Company's exchange offer obligations under the Registration Rights Agreement. CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES Following the expiration of the Exchange Offer, holders of Old Notes not tendered, or not properly tendered, will not have any further registration rights and such Old Notes will continue to be subject to the existing restrictions on transfer thereof. Accordingly, the liquidity of the market for a holder's Old Notes could be adversely affected upon expiration of the Exchange Offer if such holder elects not to participate in the Exchange Offer. TERMS OF THE EXCHANGE OFFER FelCor LP hereby offers, upon the terms and subject to the conditions set forth herein and in the accompanying Letter of Transmittal, to exchange (i) $1,000 in principal amount of the New 7 3/8% Notes for each $1,000 in principal amount of the outstanding Old 7 3/8% Notes and (ii) $1,000 in principal amount of the New 7 5/8% Notes for each $1,000 in principal amount of the outstanding Old 7 5/8% Notes. Global New Notes will be exchanged for Global Old Notes and Certificated New Notes will be exchanged for Certificated Old Notes. FelCor LP will accept for exchange any and all Old Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to the terms and provisions of the Registration Rights Agreement. See "--Conditions of the Exchange Offer." Old Notes may be tendered only in multiples of $1,000. Subject to the foregoing, holders of Old Notes may tender less than the aggregate principal amount represented by the Old Notes held by them, provided that they appropriately indicate this fact on the Letter of Transmittal accompanying the tendered Old Notes. As of the date of this Prospectus, $175 million in aggregate principal amount of the Old 7 3/8% Notes and $125 million in aggregate principal amount of Old 7 5/8% Notes, is outstanding. As of October 28, 1997, (i) there was one registered holder of the Old 7 3/8% Notes, Cede & Co., which held the Old 7 3/8% Notes for 28 of its participants and (ii) there were six registered holders of the Old 7 5/8% Notes, Cede & Co., which held $122 million in principal amount of the Old 7 5/8% Notes for 27 of its participants, and five institutional Accredited Investors holding an aggregate of $3 million in principal amount of the Old 7 5/8% Notes. Solely for reasons of administration, FelCor LP has fixed the close of business on November __, 1997, as the record date (the "Record Date") for purposes of determining the persons to whom this Prospectus and the Letter of Transmittal initially will be mailed. Only a holder of the Old Notes (or such holder's legal representative or attorney-in-fact) may participate in the Exchange Offer. There will be no fixed record date for determining holders of the Old Notes entitled to participate in the Exchange Offer. FelCor LP believes that, as of the date of this Prospectus, no such holder is an affiliate (as defined in Rule 405 under the Securities Act) of FelCor LP. FelCor LP shall be deemed to have accepted validly tendered Old Notes when, as and if FelCor LP has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Old Notes and for the purposes of receiving the New Notes from FelCor LP. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. -20- 29 EXPIRATION DATE; EXTENSIONS; AMENDMENTS The Expiration Date shall be __________ ___, 1997, at 5:00 p.m., New York City time, unless FelCor LP, in its sole discretion, extends the Exchange Offer, in which case the Expiration Date shall be the latest date and time to which the Exchange Offer is extended, but shall not be later than __________ ___, 1997. In order to extend the Exchange Offer, FelCor LP will notify the Exchange Agent of any extension by oral or written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Company reserves the right, in its sole discretion, (i) to delay accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the conditions set forth below under "--Conditions of the Exchange Offer" shall not have been satisfied, to terminate the Exchange Offer, by giving oral or written notice of such delay, extension, or termination to the Exchange Agent, and (iv) to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is amended in a manner determined by FelCor LP to constitute a material change, FelCor LP will promptly disclose such amendments by means of a prospectus supplement that will be distributed to the registered holders of the Old Notes. Modification of the Exchange Offer, including, but not limited to, (i) extension of the period during which the Exchange Offer is open and (ii) satisfaction of the conditions set forth below under "--Conditions of the Exchange Offer" may require that at least five (5) business days remain in the Exchange Offer. CONDITIONS OF THE EXCHANGE OFFER The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is conditioned upon the declaration by the Commission of the effectiveness of the Exchange Offer Registration Statement of which this Prospectus constitutes a part. ACCRUED INTEREST The New 7 3/8% Notes will bear interest at a rate equal to 7 3/8% per annum and the New 7 5/8% Notes will bear interest at a rate equal to 7 5/8% per annum, which interest shall accrue from October 1, 1997 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. See "Description of the Notes and Guarantees--General." PROCEDURES FOR TENDERING OLD NOTES The tender of a holder's Old Notes as set forth below and the acceptance thereof by FelCor LP will constitute a binding agreement between the tendering holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. Except as set forth below, a holder who wishes to tender Old Notes for exchange pursuant to the Exchange Offer must deliver such Old Notes, together with a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to the Exchange Agent at the address set forth under "-- The Exchange Agent; Assistance" and on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. Each signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Old Notes surrendered for exchange pursuant hereto are tendered (i) by a registered holder of the Old Notes who has not completed either the box entitled "Special Exchange Instructions" or the box entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii) by an Eligible Institution (as defined under "The Exchange Offer--Procedures for Tendering Old Notes"). In the event that a signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, is required to be guaranteed, such guarantee must be by a firm which is a member of a registered national securities exchange or the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or otherwise be an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If the Letter of Transmittal is signed by a person other than the registered holder of the Old Notes, the Old Notes surrendered for exchange must either (i) be endorsed by the registered holder, with the signature thereon guaranteed by an Eligible Institution, or (ii) be accompanied by a bond power, in satisfactory form as determined by FelCor LP in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution. The term "registered holder" as used herein with respect to the Old Notes means any person in whose name the Old Notes are registered on the books of the Registrar. -21- 30 All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of Old Notes tendered for exchange will be determined by FelCor LP in its sole discretion, which determination shall be final and binding. FelCor LP reserves the absolute right to reject any and all Old Notes not properly tendered and to reject any Old Notes FelCor LP's acceptance of which might, in the judgment of FelCor LP or its counsel, be unlawful. FelCor LP also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to particular Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Old Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) by FelCor LP shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes for exchange must be cured within such period of time as FelCor LP shall determine. FelCor LP will use reasonable efforts to give notification of defects or irregularities with respect to tenders of Old Notes for exchange but shall not incur any liability for failure to give such notification. Tenders of the Old Notes will not be deemed to have been made until such irregularities have been cured or waived. If any Letter of Transmittal, endorsement, bond power, power of attorney or any other document required by the Letter of Transmittal is signed by a trustee, executor, corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and, unless waived by FelCor LP, proper evidence satisfactory to FelCor LP, in its sole discretion, of such person's authority to so act must be submitted. Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Old Notes in the Exchange Offer should contact such registered holder promptly and instruct such registered holder to tender on such Beneficial Owner's behalf. If such Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to completing and executing the Letter of Transmittal and tendering Old Notes, make appropriate arrangements to register ownership of the Old Notes in such Beneficial Owner's name. Beneficial Owners should be aware that the transfer of registered ownership may take considerable time. By tendering, each registered holder will represent to FelCor LP that, among other things (i) the New Notes to be acquired in connection with the Exchange Offer by the holder and each Beneficial Owner of the Old Notes are being acquired by the holder and each Beneficial Owner in the ordinary course of business of the holder and each Beneficial Owner, (ii) the holder and each Beneficial Owner are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the New Notes, (iii) the holder and each Beneficial Owner acknowledge and agree that any person participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the Staff of the Commission set forth in "no-action" letters that are discussed herein under "--Resales of the New Notes," (iv) that if the holder is a broker-dealer that acquired Old Notes as a result of market making or other trading activities, it will deliver a prospectus in connection with any resale of New Notes acquired in the Exchange Offer, (v) the holder and each Beneficial Owner understand that a secondary resale transaction described in clause (iii) above should be covered by an effective registration statement containing the selling security holder information required by Item 507 of Regulation S-K of the Securities Act, and (vi) neither the holder nor any Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of FelCor LP except as otherwise disclosed to FelCor LP in writing. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date, may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution and a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed by such holder, (ii) on or prior to the Expiration Date, the Exchange Agent must have received from the holder and the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder, the certificate number or numbers of the tendered Old Notes, and the principal amount of tendered Old Notes, stating that the tender is being made thereby and guaranteeing that, within five (5) business days after the date of delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed Letter of Transmittal and any other required documents will be deposited by the Eligible Institution with the Exchange Agent, and (iii) such properly completed and executed documents required by the Letter of Transmittal and the tendered Old Notes in proper form for transfer must be received by the Exchange Agent within five (5) business days after the Expiration Date. Any Holder who wishes to tender Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time, on the Expiration Date. -22- 31 ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all the conditions to the Exchange Offer, FelCor LP will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly after acceptance of the Old Notes. For purposes of the Exchange Offer, FelCor LP shall be deemed to have accepted validly tendered Old Notes, when, as, and if FelCor LP has given oral or written notice thereof to the Exchange Agent. In all cases, issuances of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of such Old Notes, a properly completed and duly executed Letter of Transmittal and all other required documents; provided, however, that FelCor LP reserves the absolute right to waive any defects or irregularities in the tender or conditions of the Exchange Offer. If any tendered Old Notes are not accepted for any reason, such unaccepted Old Notes will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. WITHDRAWAL RIGHTS Tenders of the Old Notes may be withdrawn by delivery of a written notice to the Exchange Agent, at its address set forth on the back cover page of this Prospectus, at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depository"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes, as applicable), (iii) be signed by the holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by a bond power in the name of the person withdrawing the tender, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution together with the other documents required upon transfer by the Indenture, and (iv) specify the name in which such Old Notes are to be re-registered, if different from the Depository, pursuant to such documents of transfer. Any questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by FelCor LP, in its sole discretion. The Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are withdrawn will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal. Properly withdrawn Old Notes may be retendered by following one of the procedures described under "The Exchange Offer--Procedures for Tendering Old Notes" at any time on or prior to the Expiration Date. THE EXCHANGE AGENT; ASSISTANCE SunTrust Bank, Atlanta is the Exchange Agent. All tendered Old Notes, executed Letters of Transmittal and other related documents should be directed to the Exchange Agent. Questions and requests for assistance and requests for additional copies of this Prospectus, the Letter of Transmittal and other related documents should be addressed to the Exchange Agent as follows: BY REGISTERED OR CERTIFIED MAIL, HAND DELIVERY OR OVERNIGHT COURIER: SunTrust Bank, Atlanta SunTrust Bank, Atlanta 58 Edgewood Avenue, 4th Floor Annex c/o First Chicago Trust Company Atlanta, Georgia 30302 or 14 Wall Street, 8th Floor Attention: David M. Kaye New York, New York 10005 BY FACSIMILE: (404) 332-3966 (GA) or (212) 240-8938 (NY) -23- 32 FEES AND EXPENSES All expenses incident to FelCor LP's consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by FelCor LP, including, without limitation: (i) all registration and filing fees (including fees and expenses of compliance with state securities or Blue Sky laws), (ii) printing expenses (including expenses of printing certificates for the New Notes in a form eligible for deposit with DTC and of printing prospectuses), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for FelCor LP, (v) fees and disbursements of independent certified public accountants, (vi) rating agency fees, and (vii) internal expenses of FelCor LP (including all salaries and expenses of officers and employees of FelCor LP performing legal or accounting duties). FelCor LP has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or others for soliciting acceptance of the Exchange Offer. FelCor LP, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. FelCor LP will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Old Notes, as reflected in FelCor LP's accounting records on the date of the exchange. Accordingly, no gain or loss will be recognized by FelCor LP for accounting purposes. The expenses of the Exchange Offer will be amortized over the term of the New Notes. RESALES OF THE NEW NOTES Based on an interpretation by the Staff of the Commission set forth in "no-action" letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer to a holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than (i) a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act, or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. The Company has not requested or obtained an interpretive letter from the Staff of the Commission with respect to this Exchange Offer, and the Company and the holders are not entitled to rely on interpretive advice provided by the Staff to other persons, which advice was based on the facts and conditions represented in such letters. However, the Exchange Offer is being conducted in a manner intended to be consistent with the facts and conditions represented in such letters. If any holder acquires New Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the New Notes, such holder cannot rely on the position of the Staff of the Commission enunciated in Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available April 13, 1989), or interpreted in the Commission's letter to Shearman & Sterling (available July 2, 1993), or similar "no-action" or interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." It is expected that the New Notes will be freely transferable by the holders thereof, subject to the limitations described in the immediately preceding paragraph. Sales of New Notes acquired in the Exchange Offer by holders who are "affiliates" of the Company within the meaning of the Securities Act will be subject to certain limitations on resale under Rule 144 of the Securities Act. Such persons will only be entitled to sell New Notes in compliance with the volume limitations set forth in Rule 144, and sales of New Notes by affiliates will be subject to certain Rule 144 requirements as to the manner of sale, notice and the availability of current public information regarding the Company. The foregoing is a summary only of Rule 144 as it may apply to affiliates of the Company. Any such persons must consult their own legal counsel for advice as to any restrictions that might apply to the resale of their Notes. -24- 33 CAPITALIZATION The following table sets forth the capitalization of FelCor LP at June 30, 1997 and as adjusted to reflect (i) hotel purchases through September 30, 1997, (ii) cash contributed from the issuance of additional Units associated with the exercise of the underwriters' overallotment option to purchase Common Stock from the June 30, 1997 Common Stock offering by FelCor, and (iii) the sale of the Old Notes in the Private Placement and the application of the net proceeds therefrom to reduce indebtedness.
JUNE 30, 1997 ------------------------ ACTUAL AS ADJUSTED ----------- ----------- (IN THOUSANDS) Short-term debt: Current portion of Term Loan ............................................ $ 2,399 $ -- Current portion of capitalized leases ................................... 2,278 2,278 ---------- ---------- Total short-term debt ........................................... $ 4,677 $ 2,278 ========== ========== Long-term debt: 7 3/8% Senior Notes Due 2004 ............................................ -- $ 175,000 7 5/8% Senior Notes Due 2007 ............................................ -- 125,000 Line of Credit .......................................................... $ 192,000 73,728 Term Loan ............................................................... 82,601 -- Capitalized leases ...................................................... 9,770 9,770 Other unsecured debt .................................................... 25,650 25,650 ---------- ---------- Total long-term debt ............................................ 310,021 409,148 ---------- ---------- Redeemable units, at redemption value ..................................... 108,192 108,192 Preferred units ........................................................... 151,250 151,250 Partners' capital(1) ...................................................... 887,942 922,697 ---------- ---------- Total capitalization ............................................ $1,457,405 $1,591,287 ========== ==========
- ------------------ (1) Includes an aggregate of 162,500 Units issued to reflect shares awarded under FelCor's Restricted Stock and Stock Option Plans, of which 75,900 shares are fully vested and 86,600 shares vest ratably over five years (unvested shares being subject to forfeiture under certain conditions). Excludes (a) 4,689,960 Units issuable to reflect shares of Common Stock issuable upon conversion of FelCor's outstanding Series A Preferred Stock and (b) 1,449,500 Units issuable to reflect shares of Common Stock issuable upon the exercise of outstanding stock options granted to employees of FelCor. -25- 34 SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following tables set forth selected historical and pro forma financial information for FelCor LP and FelCor. With respect to each of FelCor LP and FelCor, the following tables set forth (i) selected historical operating and other financial information for the period from July 28, 1994 (inception of operations) to December 31, 1994 and the years December 31, 1995 and 1996 and the six months ended June 30, 1996 and 1997, (ii) selected historical balance sheet data as of December 31, 1994, 1995 and 1996, and June 30, 1996 and 1997, (iii) selected pro forma operating and other financial information for the year ended December 31, 1996 and the six months ended June 30, 1997 and (iv) selected pro forma balance sheet data as of June 30, 1997. The selected historical financial information for each of FelCor LP and FelCor as of and for the period from July 28, 1994 (inception of operations) to December 31, 1994 and the years ended December 31, 1995 and 1996 has been derived from the historical financial statements of FelCor LP or FelCor audited by Coopers & Lybrand L.L.P., independent accountants, whose reports with respect thereto are set forth elsewhere herein. The selected historical financial data as of and for the six months ended June 30, 1996 and 1997 have been derived from the unaudited financial statements of FelCor LP and FelCor, which have been prepared by management on the same basis as the audited financial statements, and, in the opinion of management, include all adjustments consisting of normal recurring accruals that are considered necessary for a fair presentation of the results for such periods. Such results of operations for the six months ended June 30, 1996 and 1997 are not necessarily indicative of results to be anticipated for the entire year. The pro forma operating and other information is presented as if the purchase of each of the hotels acquired in 1996 and 1997 (through September 30, 1997), the Series A Preferred Stock offering in the second quarter of 1996, the Common Stock offerings in the first and second quarters of 1997, and the Private Placement had been consummated on January 1, 1996 and, therefore, incorporates certain assumptions that are included in the notes to the pro forma financial statements that are included in the Company's Consolidated Financial Statements herein. The pro forma balance sheet data is presented as if the purchase of the hotels acquired through September 30, 1997, and the Private Placement had been consummated on June 30, 1997. The pro forma financial information is not necessarily indicative of what the actual financial position and results of operations of FelCor LP or FelCor would have been as of and for the periods indicated, nor does it purport to represent the future financial position and results of operations of FelCor LP or FelCor. -26- 35 FELCOR SUITES LIMITED PARTNERSHIP
HISTORICAL PERIOD FROM JULY 28, 1994 (INCEPTION OF YEAR ENDED DECEMBER 31, OPERATIONS) ----------------------------------- THROUGH HISTORICAL PRO FORMA DECEMBER 31, ---------------------- --------- 1994 1995 1996 1996(1) ------------ --------- --------- --------- (IN THOUSANDS, EXCEPT PER UNIT AND RATIO DATA) OPERATING DATA: REVENUE Percentage lease revenue ...................... $ 6,043 $ 23,787 $ 97,950 $ 173,147(2) Income from unconsolidated partnerships ....... -- 513 2,010 3,123 Interest income ............................... 207 1,691 984 -- --------- --------- --------- --------- TOTAL REVENUE ................................... 6,250 25,991 100,944 176,270 --------- --------- --------- --------- EXPENSES General and administrative .................... 355 870 1,819 3,303(3) Depreciation .................................. 1,487 5,232 26,544 46,113 Taxes, insurance and other .................... 881 2,563 13,897 24,789 Interest expense .............................. 109 2,004 9,803 32,829 Minority interest in other partnerships ....... -- -- -- 236 --------- --------- --------- --------- TOTAL EXPENSES .................................. 2,832 10,669 52,063 107,270 --------- --------- --------- --------- Income before extraordinary charge ............ 3,418 15,322 48,881 69,000 Extraordinary charge .......................... -- -- 2,354 -- --------- --------- --------- --------- Net income (loss) ............................. 3,418 15,322 46,527 69,000 Preferred distributions(4) .................... -- -- 7,734 11,798 --------- --------- --------- --------- Net income applicable to unitholders .......... $ 3,418 $ 15,322 $ 38,793 $ 57,202 ========= ========= ========= ========= Net income per unit(5) ........................ $ 0.54 $ 1.70 $ 1.49 $ 1.45 ========= ========= ========= ========= Weighted ave. no. of units outstanding ........ 6,385 8,956 26,037 39,407 ========= ========= ========= ========= OTHER DATA: Lessee suite revenue .......................... $ 16,094 $ 65,649 $ 234,451 $ 481,471 Funds From Operations assuming conversion of preferred units(6) ............. 4,905 20,707 77,141 125,446 EBITDA(7) ..................................... 5,014 22,203 85,764 158,659 Ratio of EBITDA to interest paid .............. -- 15.1x 9.4x 4.9x Ratio of earnings to fixed charges(8).......... 32.4x 8.6x 5.1x 3.0x Cash provided from operating activities ....... 3,959 18,075 73,932 -- Cash provided from financing activities ....... 97,952 406,825 247,422 -- Cash used in investing activities activities .. (100,793) (259,197) (480,382) -- Cash available for distributions(9) ........... 4,370 18,081 60,888 95,001 SIX MONTHS ENDED JUNE 30, ----------------------------------- HISTORICAL PRO FORMA ---------------------- --------- 1996 1997 1997(1) --------- --------- --------- OPERATING DATA: REVENUE Percentage lease revenue ...................... $ 47,385 $ 74,048 $ 101,175(2) Income from unconsolidated partnerships ....... 485 3,427 3,332 Interest income ............................... 774 170 -- --------- --------- --------- TOTAL REVENUE ................................... 48,644 77,645 104,507 --------- --------- --------- EXPENSES General and administrative .................... 848 1,846 2,046(3) Depreciation .................................. 10,304 21,730 27,831 Taxes, insurance and other .................... 6,600 10,756 14,785 Interest expense .............................. 4,513 12,914 18,889 Minority interest in other partnerships ....... -- 142 230 --------- --------- --------- TOTAL EXPENSES .................................. 22,265 47,388 63,781 --------- --------- --------- Income before extraordinary charge ............ 26,379 30,257 40,726 Extraordinary charge .......................... -- -- -- --------- --------- --------- Net income (loss) ............................. 26,379 30,257 40,726 Preferred distributions(4) .................... 1,835 5,899 5,899 --------- --------- --------- Net income applicable to unitholders .......... $ 24,544 $ 24,358 $ 34,827 ========= ========= ========= Net income per unit(5) ........................ $ 0.95 $ 0.84 $ 0.88 ========= ========= ========= Weighted ave. no. of units outstanding ........ 25,843 28,886 39,472 ========= ========= ========= OTHER DATA: Lessee suite revenue .......................... $ 105,557 $ 202,085 $ 267,036 Funds From Operations assuming conversion of preferred units(6) ............. 37,002 56,335 73,734 EBITDA(7) ..................................... 40,926 63,433 93,671 Ratio of EBITDA to interest paid .............. 10.3x 6.5x 5.1x Ratio of earnings to fixed charges(8).......... 6.5x 3.2x 3.1x Cash provided from operating activities ....... 32,684 43,696 -- Cash provided from financing activities ....... 124,206 456,437 -- Cash used in investing activities activities .. (318,659) (494,532) -- Cash available for distributions(9) ........... 30,944 42,910 57,710
DECEMBER 31, JUNE 30, ----------------------------------- ----------------------------------- HISTORICAL HISTORICAL PRO FORMA ----------------------------------- ----------------------- ---------- 1994 1995 1996 1996 1997 1997(1) --------- --------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Cash and short term investments ..... $ 1,118 $ 166,821 $ 7,793 $ 5,052 $ 13,394 $ 13,394 Investment in hotel properties, net.. 104,800 325,155 899,691 798,116 1,320,982 1,443,604 Investment in unconsolidated partnerships....................... -- 13,819 59,867 12,984 126,714 126,714 Total assets......................... 108,305 548,359 978,788 825,679 1,479,574 1,611,057 Debt and capital lease obligations... 7 3/8% Senior Notes Due 2004 ...... -- -- -- -- -- 175,000 7 5/8% Senior Notes Due 2007 ...... -- -- -- -- -- 125,000 Unsecured Line of Credit .......... -- -- 115,000 -- 192,000 73,728 Term Loan ......................... 8,750 -- 85,000 65,000 85,000 -- Capitalized leases ................ -- 11,256 12,875 13,771 12,048 12,048 Other unsecured debt .............. -- 8,410 26,550 8,350 25,650 25,650 Redeemable units, at redemption value ............................. 33,055 74,790 98,542 84,973 108,192 108,192 Partners' capital ................... 61,885 445,433 468,247 486,558 887,942 922,697
-27- 36 FELCOR SUITE HOTELS, INC.
HISTORICAL PERIOD FROM JULY 28, 1994 (INCEPTION OF YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30 OPERATIONS) ------------------------------------ ------------------------------------ THROUGH HISTORICAL PRO FORMA HISTORICAL PRO FORMA DECEMBER 31, ---------------------- --------- ------------------------ --------- 1994 1995 1996 1996(1) 1996 1997 1997(1) --------- --------- --------- --------- --------- --------- -------- (IN THOUSANDS, EXCEPT PER UNIT AND RATIO DATA) OPERATING DATA: REVENUE Percentage lease revenue ......... $ 6,043 $ 23,787 $ 97,950 $173,147(2) $ 47,385 $ 74,048 $101,175(2) Income from unconsolidated partnerships .................... -- 513 2,010 3,123 485 3,427 3,332 Interest income .................. 207 1,691 984 -- 774 170 -- --------- --------- --------- -------- --------- --------- -------- Total revenue ...................... 6,250 25,991 100,944 176,270 48,644 77,645 104,507 --------- --------- --------- -------- --------- --------- -------- Expenses General and administrative ....... 355 870 1,819 3,303(3) 848 1,846 2,046(3) Depreciation ..................... 1,487 5,232 26,544 46,113 10,304 21,730 27,831 Taxes, insurance and other ....... 881 2,563 13,897 24,789 6,600 10,756 14,785 Interest expense ................. 109 2,004 9,803 32,829 4,513 12,914 18,889 Minority interest in other partnerships ................... -- -- -- 236 -- 142 230 Minority interest in FelCor LP(10) 907 3,131 5,590 5,120 3,142 2,942 3,006 --------- --------- --------- -------- --------- --------- -------- Total expenses ..................... 3,739 13,800 57,653 112,390 25,407 50,330 66,787 --------- --------- --------- -------- --------- --------- -------- Income before extraordinary charge ......................... 2,511 12,191 43,291 63,880 23,237 27,315 37,720 Extraordinary charge ............. -- -- 2,354 -- -- -- -- --------- --------- --------- -------- --------- --------- -------- Net income (loss) ................ 2,511 12,191 40,937 63,880 23,237 27,315 37,720 Preferred dividends(4) ........... -- -- 7,734 11,798 1,835 5,899 5,899 --------- --------- --------- -------- --------- --------- -------- Net income applicable to common shareholders ................... $ 2,511 $ 12,191 $ 33,203 $ 52,082 $ 21,402 $ 21,416 $ 31,821 ========= ========= ========= ======== ========= ========= ======== Net income per common share(5) ... $ 0.54 $ 1.70 $ 1.44 $ 1.44 $ 0.94 $ 0.82 $ 0.87 ========= ========= ========= ======== ========= ========= ======== Weighted average number of common shares outstanding ............. 4,690 7,165 23,076 36,237 22,760 26,078 36,558 ========= ========= ========= ======== ========= ========= ======== Other Data: Lessee suite revenue ............. $ 16,094 $ 65,649 $ 234,451 $481,471 $ 105,557 $ 202,085 $267,036 Cash dividends per common share .. $ 0.66 $ 1.84 $ 1.92 $ 1.92 $ 0.92 $ 1.00 $ 1.00 Funds From Operations assuming conversion of preferred stock(6)......... 4,905 20,707 77,141 125,466 37,002 56,335 73,734 EBITDA(7) ........................ 5,014 22,203 85,764 158,659 40,926 63,433 93,671 Ratio of EBITDA to interest paid . -- 15.1x 9.4x 4.9x 10.3x 6.5x 5.1x Ratio of earnings to fixed charges(8) ...................... 32.4x 8.6x 5.1x 3.0x 6.5x 3.2x 3.1x Cash provided from operating activities ..................... 3,959 18075 73,932 -- 32,684 43,696 -- Cash provided from financing activities ..................... 97,952 406,825 247,422 -- 124,206 456,437 -- Cash used in investing activities (100,793) (259,197) (480,382) -- (318,659) (494,532) -- Cash available for distributions(11) .................. 4,370 18,081 60,888 95,001 30,944 42,910 57,710
DECEMBER 31, JUNE 30, ------------------------------ ----------------------------------- HISTORICAL HISTORICAL PRO FORMA ------------------------------ ----------------------------------- 1994 1995 1996 1996 1997 1997(1) -------- -------- -------- -------- ---------- ---------- BALANCE SHEET DATA: Cash and short term investments ................. $ 1,118 $166,821 $ 7,793 $ 5,052 $ 13,394 $ 13,394 Investment in hotel properties, net ............. 104,800 325,155 899,691 798,116 1,320,982 1,443,604 Investment in unconsolidated partnerships ................ -- 13,819 59,867 12,984 126,714 126,714 Total assets .................. 108,305 548,359 978,788 825,679 1,479,574 1,611,057 Debt and capital lease obligations 7 3/8% Senior Notes Due 2004 -- -- -- -- -- 175,000 7 5/8% Senior Notes Due 2007 -- -- -- -- -- 125,000 Unsecured Line of Credit .... -- -- 115,000 -- 192,000 73,728 Term Loan ................... 8,750 -- 85,000 65,000 85,000 -- Capitalized leases .......... -- 11,256 12,875 13,771 12,048 12,048 Other unsecured debt ........ -- 8,410 26,550 8,350 25,650 25,650 Minority interest in FelCor LP......................... 25,685 58,837 76,112 86,229 75,109 75,724 Shareholders' equity .......... 69,255 461,386 641,926 636,552 1,072,275 1,106,415
- ---------- -28- 37 (1) The pro forma financial information does not purport to represent what the financial position or results of operations of FelCor LP or FelCor actually would have been if the purchases of each of the hotels acquired in 1996 and 1997 (through September 30, 1997), the Series A Preferred Stock offering, the Common Stock offerings in the first and second quarters of 1997, and the Private Placement had, in fact, occurred on such dates, or to project their financial position or results of operations at any future date or for any future period. (2) With respect to the pro forma financial information, represents lease payments from the Lessee to FelCor LP calculated on a pro forma basis by applying the contractual or anticipated rent provisions of the Percentage Leases to the historical suite and food and beverage revenues of the Current Hotels. (3) Pro forma general and administrative expenses represent executive and other compensation, legal, audit, and other expenses. These amounts are based on historical general and administrative expenses as well as probable 1997 expenses. (4) Represents annual dividends on the Series A Preferred Stock of $1.95 per share multiplied by 6,050,000 outstanding shares of Series A Preferred Stock. (5) Net income per common share is computed by dividing net income applicable to common shareholders by the weighted average number of common shares and equivalents outstanding. Net income per unit is computed by dividing net income applicable to unitholders by the weighted average number of partnership units outstanding. Common share and unit equivalents that have a dilutive effect represent restricted shares issued to certain officers and directors. For the periods presented, the common share and unit equivalents had an immaterial dilutive effect. (6) The following table computes Funds From Operations under the NAREIT definition. Funds From Operations under the NAREIT definition consists of net income, computed in accordance with generally accepted accounting principles, excluding gains or losses from debt restructurings and sales of property, plus depreciation of real property (including furniture and equipment) plus, in the case of FelCor, the minority interest in FelCor LP and after adjustments for unconsolidated partnerships and joint ventures. The computation of Funds From Operations for FelCor LP and FelCor yields the same result.
HISTORICAL PERIOD FROM JULY 28, 1994 (INCEPTION OF YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30 OPERATIONS) ------------------------------ ------------------------------ THROUGH HISTORICAL PRO FORMA HISTORICAL PRO FORMA DECEMBER 31, ------------------- --------- ------------------- -------- 1994 1995 1996 1996(1) 1996 1997 1997(1) -------- -------- -------- --------- -------- -------- -------- (IN THOUSANDS) Net income .......................... $ 2,511 $ 12,191 $ 40,937 $ 63,880 $ 23,237 $ 27,315 $ 37,720 Add: Minority interest in FelCor LP .. 907 3,131 5,590 5,120 3,142 2,942 3,006 Depreciation ...................... 1,487 5,232 26,544 46,113 10,304 21,730 27,831 Depreciation for unconsolidated subsidiaries .................... -- 153 1,716 10,353 319 4,348 5,177 Extraordinary charge from writeoff of deferred financing fees .................. -- -- 2,354 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Funds From Operations assuming conversion of preferred stock ..... $ 4,905 $ 20,707 $ 77,141 $125,466 $ 37,002 $ 56,335 $ 73,734 ======== ======== ======== ======== ======== ======== ========
Industry analysts generally consider Funds From Operations to be an appropriate measure of the performance of an equity REIT. Funds From Operations should not be considered as an alternative to net income or other measures under generally accepted accounting principles as an indicator of operating performance or to cash flow from operating, investing or financing activities as a measure of liquidity. Funds From Operations does not reflect cash expenditures for capital improvements or principal repayment of debt. (7) EBITDA is computed by adding net income, minority interest in FelCor LP, interest expense, income taxes, depreciation expense, amortization expense, extraordinary expenses and cash distributions paid by unconsolidated partnerships and deducting extraordinary income and income from unconsolidated partnerships. The computation of EBITDA for FelCor LP and FelCor yields the same result. The differences between Funds From Operations and EBITDA are scheduled in the following table. -29- 38
HISTORICAL PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) TWELVE MONTHS ENDED SIX MONTHS ENDED JUNE 30 THROUGH ---------------------- ---------------------------- DECEMBER 31, HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL PRO FORMA 1994 1995 1996 1996(1) 1996 1997 1997(1) --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS) Funds From Operations assuming conversion of preferred stock .... $ 4,905 $ 20,707 $ 77,141 $ 125,466 $ 37,002 $ 56,335 $ 73,734 Add: Interest expense ................. 109 2,004 9,803 32,829 4,513 12,914 18,889 Amortization expense ............. -- 158 592 592 215 557 557 Cash distributions from unconsolidated partnerships .... -- -- 1,954 13,248 -- 1,402 9,000 Deduct: Income from unconsolidated partnerships ................... -- (513) (2,010) (3,123) (485) (3,427) (3,332) Depreciation from unconsolidated partnerships .... -- (153) (1,716) (10,353) (319) (4,348) (5,177) --------- --------- --------- --------- --------- --------- --------- EBITDA ..................... $ 5,014 $ 22,203 $ 85,764 $ 158,659 $ 40,926 $ 63,433 $ 93,671 ========= ========= ========= ========= ========= ========= =========
(8) For purpose of computing the ratio of earnings to fixed charges, earnings consist of net income plus fixed charges and minority interest in FelCor LP (with respect to FelCor), excluding capitalized interest, and fixed charges consist of interest, whether expensed or capitalized, and amortization of loan costs. (9) Represents net income applicable to unitholders plus depreciation and amortization, depreciation from unconsolidated subsidiaries, amortization of unearned officers' and directors' compensation, amortization of loan costs, and the non-cash portion of general and administrative expenses, less scheduled repayments of borrowings and an amount equal to 4% of hotel suite revenues, which is required to be set aside by the Company for refurbishment and replacement of furniture and equipment, capital expenditures and other nonroutine items as required by the Percentage Leases. (10) Calculated for FelCor as 7.4% of income before minority interest on a pro forma basis. (11) Represents net income applicable to common shareholders plus minority interest, depreciation and amortization, depreciation from unconsolidated subsidiaries, amortization of unearned officers' and directors' compensation, amortization of loan costs, and the non-cash portion of general and administrative expenses, less scheduled repayments of borrowings and an amount equal to 4% of hotel suite revenues, which is required to be set aside by the Company for refurbishment and replacement of furniture and equipment, capital expenditures and other nonroutine items as required by the Percentage Leases. -30- 39 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW FelCor is a self-administered REIT that at September 30, 1997, owned an approximate 92.6% general partner interest in FelCor LP. At June 30, 1997, the Company owned interests in 67 hotels with an aggregate of 16,357 suites ("Hotels") and, through September 30, 1997, has since acquired four additional hotels with an aggregate of 1,000 suites and opened 129 new suites at one of its hotels. For additional background relating to the Company and the definitions of certain capitalized terms used herein, reference is made to Note 1 of Notes to Consolidated Financial Statements of FelCor appearing elsewhere herein. The principal factors affecting the Company's results of operations are: continued growth in the number of hotels through acquisitions; improvements in the suite revenues measured by RevPAR and the status of renovations to hotels acquired. Improvements in suite revenue significantly impact the Company because the Company's principal source of revenues is lease payments by the Lessee under the Percentage Leases. The Percentage Leases are computed as a percentage of suite revenues, food and beverage revenues and food and beverage rents of the Current Hotels. For the six months ended June 30, 1997 and the years ended December 31, 1996 and 1995, the portion of the Percentage Lease revenue derived from suite revenues was 97.4%, 97.2% and 97.6%, respectively. At June 30, 1997, the Company owned interests in 67 hotels, an increase of 24 hotels over year end 1996 and an increase of 47 hotels over year end 1995. During 1996 and 1997, the Company substantially completed major renovations on the 18 CSS Hotels acquired in late 1995 and early 1996. While the renovations adversely impacted the suite revenue for these hotels in 1996, RevPAR for those hotels during the first six months of 1997 improved 22.0% over the same period last year. Actual historical results of operations, for the six months ended June 30, 1997 and 1996, for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994 for the Company are summarized as follows:
PERIOD FROM JULY 28, 1994 TWELVE MONTHS (INCEPTION OF SIX MONTHS ENDED OPERATIONS) ENDED JUNE 30, DECEMBER 31, THROUGH ----------------- ------------------- DECEMBER 31, 1997 1996 1996 1995 1994 ----------------- ------------------- ------------- (IN MILLIONS) Revenues ............................ $ 77.6 $ 48.6 $ 100.9 $ 26.0 $ 6.3 Income before extraordinary charge .. 27.3 23.2 43.3 12.2 2.5 Net income available to common shareholders ...................... 21.4 21.4 33.2 12.2 2.5 Funds From Operations (FFO)(a) ...... 56.3 37.0 77.1 20.7 4.9 Weighted average shares and units outstanding(a) .................... 33.6 27.4 29.2 9.0 6.4
- ---------- (a) Conversion of preferred stock to common stock is assumed for purposes of computing FFO and weighted average shares and units outstanding. -31- 40 RESULTS OF OPERATIONS THE COMPANY -- ACTUAL Comparison of the Six Months Ended June 30, 1997 and 1996 Revenues. For the six months ended June 30, 1997 and 1996, the Company had revenues of $77.6 million and $48.6 million, respectively, consisting of Percentage Lease revenues of $74.0 million and $47.4 million, income in unconsolidated partnerships of $3.4 million and $485,000 and other revenue (consisting primarily of interest income) of $170,000 and $744,000, respectively. Percentage Lease revenue is computed as a percentage of suite revenue, food and beverage revenues and food and beverage rents of the Hotels. For the six months ended June 30, 1997, 97.4% of Percentage Lease revenue was derived from suite revenue. A more detailed discussion of hotel suite revenue begins at "The Hotels -- Actual" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations. The increase in Percentage Lease revenue is attributed primarily to the increased number of hotels owned at June 30, 1997 compared to the same period in 1996 and increased suite revenue at the comparable hotels (those hotels owned for the entire six months in both 1996 and 1997). The increase in the number of hotels accounted for approximately $21.8 million of the increase while Percentage Lease revenue for the twenty comparable hotels increased by $4.9 million or 19%. Suite revenue for the Original Hotels and the CSS Hotels increased 8.6% and 21.0%, respectively, for this six month period. The increase in income from unconsolidated partnerships is primarily attributed to the increase in unconsolidated partnership hotels from one hotel at June 30, 1996 to 14 at June 30, 1997. Expenses. Total expenses increased $24.9 million in the six months ended June 30, 1997 from $25.4 million to $50.3 million over the same period in 1996. The primary components of the dollar increase are: depreciation; taxes, insurance and other; and interest expense. The primary reason for this increase is related to the increased number of hotels owned by the Company. Those expenses that made up the majority of the increase, as a percentage of total revenue, were depreciation (28.0% of total revenue for the six months ended June 30, 1997 compared to 21.2% in the same period 1996), interest expense (16.6% of total revenue in 1997 compared to 9.3% in 1996) and minority interest in FelCor LP (3.8% of total revenue in 1997 compared to 6.5% in 1996). Depreciation, as a percentage of total revenue, increased primarily as a result of the major renovation projects which were placed in service and started depreciating in late 1996 or early 1997. The increased interest expense, as a percentage of total revenue, is reflective of the additional borrowings during the 1996 and first six months of 1997 to finance hotel acquisitions and the renovation program. Minority interest in FelCor LP decreased as a percentage of total revenue because of the additional 13.2 million shares of common stock issued during 1997, which decreases the Unitholders' interest in the operations of FelCor LP. Preferred dividends increased from $1.8 million for the six months in 1996 to $5.9 million for the same period in 1997. This increased because the preferred stock, which was issued in May 1996, accrued a full six months of dividends in 1997 compared to only a partial second period dividend in 1996. Net income applicable to common shareholders for the six months ended June 30, 1997 and 1996 was $21.4 million in both periods. Comparison of the Years Ended December 31, 1996 and 1995 Revenues. For the years ended December 31, 1996 and 1995, the Company had revenues of $100.9 million and 26.0 million, respectively, consisting primarily of Percentage Lease revenues of $98.0 million and $23.8 million. -32- 41 The 288% increase in total revenue is primarily attributable to the Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of 36 hotels acquired during 1995 and 1996. There were seven hotels which were owned for all of 1996 and 1995. Percentage Lease revenues for these hotels increased 13.9% for the year ended December 31, 1996 over the same period in 1995 (an increase of $2.7 million). All of these hotels experienced increases in RevPAR, ranging from 2.3% to 12.1% over the prior year. Management believes that the hotels it acquires will generally experience increases in suite revenue (and accordingly, provide the Company with increases in Percentage Lease revenues) after the completion of the renovation and upgrade programs; however, as individual hotels undergo such renovations, their performance has been, and may continue to be, adversely affected by such temporary factors as suites out of service and disruptions of hotel operations. See "-- The Hotels -- Actual." Expenses. Total expenses increased by $43.9 million for the year ended December 31, 1996 from $13.8 million in 1995 to $57.7 million in 1996. The primary components of this increase were: depreciation; taxes, insurance and other; and interest. The primary reason for the increases are attributed to the additional hotels acquired in 1996 and 1995. Depreciation increased as a percentage of total revenue from 20% in 1995 to 26% in 1996. The relative increase in depreciation is primarily a result of capital expenditures during 1995 and 1996 and the resultant depreciation as well as a decrease in long lived fixed assets relative to total fixed assets (long lived fixed assets at December 31, 1996 made up 81.7% of total fixed assets and at December 31, 1995 84.7% of total fixed assets). Taxes, insurance and other increased as a percentage of total revenue from 10% in 1995 to 14% in 1996. The largest single component in this category is real and personal property taxes. In many instances upon purchase of a hotel, the hotel is reassessed for tax purposes resulting in increased property tax expenses. Interest expense increased as a percentage of total revenue from 8% in 1995 to 10% in 1996. This relative increase is attributed to the increased use of debt to finance acquisitions, the extensive renovations in 1996 and the assumption of capital leases, for hotels purchased in late 1995 and during 1996. In the third quarter of 1996, the Company recorded an extraordinary charge for the write off of deferred financing fees of $2.4 million. This extraordinary write off resulted from the early retirement of debt. Comparison of the Year Ended December 31, 1995 and the Period from July 28, 1994 (Inception of Operations) through December 31, 1994 Percentage Lease revenue increased from $6.0 million in 1994 to $23.8 million in 1995, primarily because of the partial year of operations in 1994 and the increase in the number of hotels in which the Company owned an interest (from seven to 20). Income before minority interest as a percent of total revenues increased from 54.7% in 1994 to 59.0% in 1995, primarily as a result of the decline in depreciation, as a percentage of total revenues, from 23.8% in 1994 to 20.1% in 1995. The decrease in depreciation, as a percentage of total revenues, resulted primarily from the relative increase in Percentage Lease revenue to depreciation with respect to the seven hotels acquired in 1994 and a decrease in the percentage of long lived fixed assets relative to total fixed assets. Funds From Operations The Company considers funds from operations to be a key measure 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 the Company's operating performance and liquidity. The following table computes Funds From Operations under the NAREIT definition. Funds From Operations under the NAREIT definition consists of net income, computed in accordance with generally accepted accounting principles, excluding gains or losses from debt restructuring and sales of property, plus depreciation of real property plus, in the case of FelCor, the minority interest in FelCor LP (including furniture and equipment) and after adjustments for unconsolidated partnerships and joint ventures. -33- 42
PERIOD FROM JULY 28, 1994 (INCEPTION OF SIX MONTHS ENDED YEAR ENDED OPERATIONS) JUNE 30, DECEMBER 31, THROUGH ------------------- ------------------- DECEMBER 31, 1997 1996 1996 1995 1994 ------- ------- ------- ------- ------- (IN THOUSANDS) Funds From Operations (FFO): Net income .............................. $27,315 $23,237 $40,937 $12,191 $ 2,511 Less preferred dividends ................ 5,899 1,835 7,734 -- -- ------- ------- ------- ------- ------- Net income available for common shares .. 21,416 21,402 33,203 12,191 2,511 Add back: Extraordinary charge from write off of deferred financing fees ......... -- -- 2,354 -- -- Minority interest ..................... 2,942 3,142 5,590 3,131 907 Depreciation .......................... 21,730 10,304 26,544 5,232 1,487 Depreciation for unconsolidated partnerships ....................... 4,348 319 1,716 153 -- ------- ------- ------- ------- ------- FFO available to common shares and units .............................. 50,436 35,167 69,407 20,707 4,905 Add preferred dividends ................. 5,899 1,835 7,734 -- -- ------- ------- ------- ------- ------- FFO assuming conversion of preferred stock .............................. $56,335 $37,002 $77,141 $20,707 $ 4,905 ======= ======= ======= ======= ======= Weighted average common shares outstanding ........................ 26,078 22,760 23,076 7,165 4,690 Weighted average units outstanding ...... 2,808 3,083 2,961 1,791 1,695 ------- ------- ------- ------- ------- Weighted average common shares and units outstanding .................. 28,886 25,843 26,037 8,956 6,385 ======= ======= ======= ======= ======= Weighted average common shares and units outstanding, assuming conversion of preferred stock ...... 33,576 27,389 29,164 8,956 6,385 ======= ======= ======= ======= =======
Included in the Funds From Operations described above is the Company's share of FFO from its interest in 14 unconsolidated partnerships. The FFO contribution from these unconsolidated partnerships was as follows:
SIX MONTHS ENDED FOR THE YEARS ENDED JUNE 30, DECEMBER 31, 1997 1996 1996 1995 -------- -------- -------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS INFORMATION: Percentage Lease revenue ........................ $ 23,729 $ 1,771 $ 9,974 $ 1,420 Depreciation .................................... 7,214 600 3,086 282 Taxes, insurance and other ...................... 3,178 163 915 229 Interest expense ................................ 5,001 -- 1,638 -- Net income ...................................... 8,336 1,008 4,366 1,050 50% of net income attributable to the Company ... 4,168 504 2,183 525 Amortization of cost in excess of book value .... (741) (19) (173) (12) -------- -------- -------- -------- Income from unconsolidated partnerships ......... 3,427 485 2,010 513 Add back: Depreciation .......................... 3,607 300 1,543 141 Amortization of excess cost .... 741 19 173 12 -------- -------- -------- -------- FFO contribution of unconsolidated partnerships.. $ 7,775 $ 3,726 $ 3,726 $ 666 ======== ======== ======== ========
-34- 43 The Hotels -- Actual Comparison of Hotels' Suite Revenue for the Six Months Ended June 30, 1997 and 1996 The following table sets forth historical suite revenue and percentage changes therein between the periods presented for the 60 hotels which the Lessee operated at June 30, 1997. The following table also presents comparative information with respect to occupancy, ADR and RevPAR for the 13 Original Hotels, the 18 CSS Hotels, the 12 1996 Acquisitions and the 17 1997 Acquisitions, regardless of ownership, through June 30, 1997. This table excludes the seven hotels acquired by the Company on June 30, 1997, and the four hotels subsequently acquired.
SIX MONTHS ENDED JUNE 30, ----------------------- 1997 1996 VARIANCE --------- --------- --------------- SUITE REVENUE (IN THOUSANDS): Original Hotels(13) . . . . . . . . . . . . . . . . . . . . . $ 42,918 $ 39,525 8.6% CSS Hotels(18) . . . . . . . . . . . . . . . . . . . . . . . 72,563 59,970 21.0 1996 Acquisitions(12) . . . . . . . . . . . . . . . . . . . . 45,486 42,033 8.2 1997 Acquisitions(17) . . . . . . . . . . . . . . . . . . . . 55,641 52,286 6.4 -------- -------- Totals(60) . . . . . . . . . . . . . . . . . . . . . $216,608 $193,814 11.8% OCCUPANCY: Original Hotels . . . . . . . . . . . . . . . . . . . . . . . 77.7% 77.7% 0.0pts. CCS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . 74.5 68.5 6.0 1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . 75.8 73.5 2.3 1997 Acquisitions . . . . . . . . . . . . . . . . . . . . . . 75.2 74.4 0.8 Totals . . . . . . . . . . . . . . . . . . . . . . . 75.6% 72.9% 2.7pts. ADR: Original Hotels . . . . . . . . . . . . . . . . . . . . . . . $ 110.22 $ 102.61 7.4% CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . 116.80 104.16 12.1 1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . 117.83 111.22 5.9 1997 Acquisitions . . . . . . . . . . . . . . . . . . . . . . 106.45 100.56 5.9 Totals . . . . . . . . . . . . . . . . . . . . . . . $ 112.85 $ 104.27 8.2% REVPAR: Original Hotels . . . . . . . . . . . . . . . . . . . . . . . $ 85.62 $ 79.75 7.4% CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . 86.99 71.33 22.0 1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . 89.29 81.79 9.2 1997 Acquisitions . . . . . . . . . . . . . . . . . . . . . . 80.04 74.82 7.0 Totals . . . . . . . . . . . . . . . . . . . . . . . $ 85.28 $ 76.03 12.2%
ORIGINAL HOTELS: Boston -- Marlborough, MA; Brunswick, GA; Chicago -- Lombard, IL; Corpus Christi, TX; Dallas (Love Field), TX; Dallas (Park Central), TX; Flagstaff, AZ; Jacksonville, FL; Nashville, TN; New Orleans, LA; Orlando (North), FL; Orlando (South), FL; Tulsa, OK. CSS HOTELS: Anaheim, CA; Baton Rouge, LA; Birmingham, AL; Boca Raton (Doubletree), FL; Deerfield Beach, FL; Ft. Lauderdale, FL; El Segundo (LAX (Airport) South), CA; Miami (Airport), FL; Milpitas, CA; Minneapolis (Airport), MN; Minneapolis (Downtown), MN; Napa, CA; Oxnard (Mandalay Beach), CA; Phoenix (Camelback), AZ; South San Francisco (Airport North), CA; Burlingame (S.F. Airport So.), CA; St. Paul, MN; Tampa (Busch Gardens), FL(1). 1996 ACQUISITIONS: Atlanta (Buckhead), GA; Avon (Beaver Creek Resort), CO; Boca Raton (Embassy), FL; Charlotte, NC; Cleveland, OH; Deerfield, IL; Indianapolis (North), IN; Myrtle Beach (Kingston Plantation), SC(3); Lexington, KY(2); Parsippany, NJ; Piscataway, NJ; San Rafael (Marin Co.), CA. 1997 ACQUISITIONS(4): Atlanta (Airport), GA; Austin (Airport North), TX; Austin (Downtown), TX(1); Bloomington, MN(1); Baltimore, MD(1); Covina, CA; Dana Point, CA(1); Kansas City, MO; LAX North, CA; Nashville (Airport), TN; Omaha, NE(1); Overland Park, KS; Raleigh, NC; San Antonio (NW), TX; San Antonio (Airport), TX; Secaucus, NJ; Troy, MI(1). - -------------------- -35- 44 (1) Operating as a Doubletree Guest Suites hotel. (2) Operating as a Hilton Suites hotel. (3) In the process of conversion to Embassy Suites hotels. (4) Excludes five Sheraton hotels and two Embassy Suites hotels acquired on June 30, 1997, and the four hotels subsequently acquired. Suite revenue from the 60 Hotels, included without regard to ownership, increased 11.8% for the six months ended June 30, 1997 from the same period of 1996. The Original Hotels increased 8.6%, the CSS Hotels increased 21.0%, the 1996 Acquisition Hotels increased 8.2% and the 1997 Acquisition Hotels increased 6.4% for the six months ended June 30, 1997 as compared to the same period of 1996. The Original Hotels were owned by the Company throughout all of the first six months of both 1997 and 1996. Suite revenue for these hotels increased $3.4 million over the same period in 1996. This improvement in suite revenue resulted from increased ADR of 7.4% while maintaining the same occupancy percentage of 77.7% during both periods. The hotels in this group recorded increases in ADR ranging from 1.6% to 12.0%. The increases in ADR at these hotels are attributed to the strength of the markets that these hotels are in as well as aggressive rate management. For the first six months of 1997 compared to the first six months of 1996 the CSS Hotels experienced an increase in ADR of 12.1% to $116.80 and a 6.0 percentage point increase in occupancy to 74.5%. The strength of the improvement in the CSS Hotels is partially reflective of the $54 million suite renovation program that was completed in the first quarter of 1997. This program made substantial upgrades and improvements to these former CSS Hotels. This group of hotels were also converted to the Embassy Suites (16) or Doubletree Guest Suites (2) brand during 1996. The increase in both occupancy and ADR is also attributable in part, to the stronger marketing presence of the Embassy Suites and Doubletree Guest Suites brands. The 1996 Acquisition hotels increased ADR by 5.9% to $117.83 and occupancy increased 2.3 percentage points which resulted in suite revenue increases for these hotels of $3.5 million in the first six months of 1997 compared to the same period in 1996. Some of the 1996 Acquisition Hotels benefitted from suite renovations completed in 1996 or during the first quarter of 1997 and the Company expects to commence renovation on several of the remaining hotels in this group later in the year. The Company has committed to reserving 4% of suite revenue for ongoing capital replacements and improvements for all of its hotels, in addition to making repair and maintenance expenditures and any necessary renovations for hotels acquired. Typically, the Lessee spends 5% to 6% of suite revenue for repair and maintenance expenditures annually. The 1997 Acquisition hotels collectively, had increases in both ADR and occupancy for the three and six months ended June 30, 1997 compared to the same period of 1996. Certain of the individual 1997 Acquisition hotels, however, had decreases in ADR and/or occupancy for such comparable periods. These decreases are primarily the result of temporary declines attributed to disruptions from the rebranding, repositioning and/or renovation of certain hotels and, in the case of those hotels located in Atlanta, Georgia, the result of supply additions in anticipation of above-normal demand attributable to the 1996 Summer Olympics which were held in Atlanta. Comparison of the Hotels' Suite Revenue for the Years Ended December 31, 1996 and 1995 The following table presents comparative information with respect to suite revenue, occupancy, ADR and revenue per available suite for the six Initial Hotels, the seven Pre-CSS Hotels, the 18 CSS Hotels and the 12 1996 Acquisitions, regardless of ownership. The following figures reflect the adverse impact of the loss of nearly 173,000 available suite nights (approximately 5.5% of total available suite nights for the year) as a result of the temporary removal of suites from service for renovation and upgrading during 1996. The variance for suite revenue and RevPAR for the Hotels, as set forth above, do not agree primarily because the leap year in 1996 added one additional day. -36- 45
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 VARIANCE --------- --------- --------- SUITE REVENUE (IN THOUSANDS): Initial Hotels(6) . . . . . . . . . . . . . . . . . . . . . $ 43,540 $ 39,961 9.0% Pre-CSS Hotels(7) . . . . . . . . . . . . . . . . . . . . . 35,083 31,766 10.4 --------- --------- ---- Original Hotels(13) . . . . . . . . . . . . . . . . . . . . 78,623 71,727 9.6 CSS Hotels(18) . . . . . . . . . . . . . . . . . . . . . . 118,300 114,408 3.4 1996 Acquisitions(12) . . . . . . . . . . . . . . . . . . . 83,921 80,699 4.0 --------- --------- ---- Totals(43) . . . . . . . . . . . . . . . . . . . $ 280,844 $ 266,834 5.3% ========= ========= ==== OCCUPANCY: Initial Hotels . . . . . . . . . . . . . . . . . . . . . 77.5% 76.1% 1.4pts Pre-CSS Hotels . . . . . . . . . . . . . . . . . . . . . 75.3 74.1 1.2 Original Hotels . . . . . . . . . . . . . . . . . . . . . 76.5 75.2 1.3 CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . 67.8 69.6 (1.8) 1996 Acquisitions . . . . . . . . . . . . . . . . . . . . 73.0 75.2 (2.2) Totals . . . . . . . . . . . . . . . . . . . . . 71.6% 72.6% (1.0)pts ADR: Initial Hotels . . . . . . . . . . . . . . . . . . . . $ 103.73 $ 97.27 6.6% Pre-CSS Hotels . . . . . . . . . . . . . . . . . . . . 101.71 94.40 7.7 Original Hotels . . . . . . . . . . . . . . . . . . . . 102.82 95.98 7.1 CSS Hotels . . . . . . . . . . . . . . . . . . . . . . 103.31 97.75 5.7 1996 Acquisitions . . . . . . . . . . . . . . . . . . . 111.54 104.51 6.7 Totals . . . . . . . . . . . . . . . . . . . . $ 105.50 $ 99.20 6.3% REVENUE PER AVAILABLE SUITE (REVPAR): Initial Hotels . . . . . . . . . . . . . . . . . . . . $ 80.43 $ 74.02 8.7% Pre-CSS Hotels . . . . . . . . . . . . . . . . . . . . 76.55 69.96 9.4 Original Hotels . . . . . . . . . . . . . . . . . . . . 78.65 72.17 9.0 CSS Hotels . . . . . . . . . . . . . . . . . . . . . . 70.05 68.01 3.0 1996 Acquisitions . . . . . . . . . . . . . . . . . . . 81.46 78.56 3.7 Totals . . . . . . . . . . . . . . . . . . . . $ 75.52 72.05 4.8%
INITIAL HOTELS: Dallas (Park Central), TX; Jacksonville, FL; Nashville, TN; Orlando (North), FL; Orlando (South), FL; Tulsa, OK. PRE-CSS HOTELS: Boston -- Marlborough, MA; Brunswick, GA; Chicago -- Lombard, IL; Corpus Christi, TX; Dallas (Love Field), TX; Flagstaff, AZ; New Orleans, LA. ORIGINAL HOTELS: Initial Hotels and Pre-CSS Hotels combined. CSS HOTELS: Anaheim, CA; Baton Rouge, LA; Birmingham, AL; Boca Raton (Doubletree), FL; Deerfield Beach, FL; Ft. Lauderdale, FL; El Segundo (LAX (Airport) South), CA; Oxnard (Mandalay Beach), CA; Miami (Airport), FL; Milpitas, CA; Minneapolis (Airport), MN; Minneapolis (Downtown), MN; Napa, CA; Phoenix (Camelback), AZ; South San Francisco (Airport North), CA; Burlingame (S.F. Airport So.), CA; St. Paul, MN; Tampa (Busch Gardens), FL(1). 1996 ACQUISITIONS: Avon (Beaver Creek Resort), CO; Boca Raton (Embassy), FL; Charlotte, NC; Deerfield, IL; Cleveland, OH; Indianapolis (North), IN; Lexington, KY(2); San Rafael (Marin Co.), CA; Parsippany, NJ; Piscataway, NJ; Atlanta (Buckhead), GA; Myrtle Beach (Kingston Plantation), SC(3). - ------------------ (1) Operating as a Doubletree Guest Suites hotel. (2) Operating as a Hilton Suites hotel. (3) In the process of conversion to an Embassy Suites hotel. -37- 46 Pro forma revenues for the 43 hotels that the Company owned at December 31, 1996, increased 5.3% over 1995. The majority of the increase came from the Pre-CSS Hotels (10.4%) and the Initial Hotels (9.0%). The CSS Hotels had only a slight increase in suite revenue (3.4%) as did the 1996 Acquisitions (4.0%) primarily as a result of the commencement of major renovations in the CSS Hotels and some of the 1996 Acquisitions. As a result of these renovations, the Company lost nearly 173,000 available suite nights, or 5.5% of the total available suite nights for the year. The Initial Hotels and the Pre-CSS Hotels experienced increases in both occupied suites, as a percentage of available suites (including those temporarily out of service for renovation) and ADR over the prior year. The CSS Hotels increased ADR by 5.7% but dropped in occupancy by 1.8 percentage points. Similarly the 1996 Acquisitions increased ADR by 6.7% but dropped in occupancy by 2.2 percentage points. The CSS Hotels revenues were adversely affected by the suites taken out of service during 1996 for renovation. During 1996 the Company took more than 153,000 suite nights out of service in the CSS Hotels for renovation, this represents more than 9% of the total available suite nights for these hotels. This renovation adversely impacted the ADR at the hotels because of the disruptions caused by the renovation and the occupancy was adversely impacted by reducing the number of suites actually available. During the fourth quarter of 1996, the 10 CSS Hotels where renovations had been substantially completed by early in the fourth quarter experienced an increase in suite revenue in excess of 15% compared to the same period in 1995. Management believes that similar increases in suite revenue should occur in 1997 for the CSS Hotels as the renovations had been substantially completed by year end 1996. The Company expects that the Initial Hotels and the Pre-CSS Hotels should continue increased suite revenue growth in 1997. The CSS Hotels should start to benefit from the extensive renovation that was substantially completed in 1996, and show solid revenue growth in 1997. The 1996 Acquisitions should also start to benefit from renovations (many of which began in 1996) and show improving suite revenue during 1997. THE LESSEE -- ACTUAL Comparison of the Six Months Ended June 30, 1997 and 1996 Total revenues increased 88.6% from $122.5 million in the first six months of 1996 to $231.0 million for the same period of 1997. The primary reasons for this increase are the number of hotels operated by the Lessee which increased from 37 hotels at June 30, 1996 to 60 hotels at June 30, 1997 and the increases in revenues at the hotels owned in both the first six months of 1997 and 1996. Percentage Lease expense, property operating costs, and other hotel expenses increased in the first six months of 1997 compared to the same period of 1996 and relate primary to the increased number of hotels operated by the Lessee. The increase in percentage lease expense is also attributable in part to the increase in the suite revenue. The Lessee had a net income of $1.0 million and a net loss of $204,000 for the six months ended June 30, 1997 and 1996, respectively. Comparison of the Years Ended December 31, 1996 and 1995 For the years ended December 31, 1996 and 1995, the Lessee had revenues of $269.2 million and $72.6 million respectively, consisting primarily of suite revenues of $234.5 million and $65.6 million. The 271% increase in total revenue is primarily attributable to the increase in number of hotels leased, from 20 hotels at December 31, 1995 to 43 hotels at December 31, 1996. There were seven hotels which were leased for all of 1996 and 1995. Suite revenues for these hotels increased 9.0% for the year ended December 31, 1996 over the same period in 1995 (an increase of $4.3 million). All of these hotels experienced increases in suite revenue, ranging from 2.6% to 12.5% over the prior year. The Lessee recorded a net loss of $5.4 million for 1996, compared to a net loss of $240,000 for 1995. The increased loss is reflected in the relative increase in Percentage Lease expenses, from 37.1% of total revenue in 1995 to 40.1% of total revenue in 1996. Since Percentage Lease expense is principally computed as a percentage of suite revenue, the losses of suite revenue from the renovation and conversion of the CSS hotels (through suites taken out of service and disruptions from the renovation) resulted in a larger portion of the Percentage Lease expense to be fixed in nature and therefore increased as a percentage of total revenue. The Lessee also incurred approximately $2.2 million in one-time conversion costs related to the CSS Hotels. -38- 47 Year Ended December 31, 1995 For the year ended December 31, 1995, the Lessee had suite revenue of $65.5 million. The Percentage Lease payments, hotel expenses and operating expenses were $26.9 million, $18.5 million and $26.6 million respectively, and net loss was $240,000. The Lessee distributed approximately $200,000 to two of its shareholders in 1995 and these shareholders purchased shares of Common Stock of the Company in an amount equal to such distributions. Period from July 28, 1994 (Inception of Operations) through December 31, 1994 For the period July 28, 1994 (inception of operations) through December 31, 1994 the Lessee had suite revenue of $16.1 million. The Percentage Lease payments, hotel expenses and operating expenses were $6.0 million, $4.7 million and $7.3 million, respectively, and net income was $109,000. The Lessee distributed approximately $443,000 to its shareholders in 1994 and these shareholders purchased shares of common stock of the Company in an amount equal to such distributions. Comparison of the Year Ended December 31, 1995 and the Period from July 28, 1994 (Inception of Operations) through December 31, 1994 Total revenues increased 297% from 1994 to 1995, primarily because of the partial year of operations in 1994 and the increase in the number of hotels leased (from seven to 20). The Lessee recorded a net loss of $240,000 for 1995, compared to net income of $109,000 in 1994, primarily as a result of the relative increase in Percentage Lease payments, as a percentage of total revenues, from 33.0% in 1994 to 37.1% in 1995, offset (in part) by a decline in all other expenses, as a percentage of total revenues, from 66.4% in 1994 to 63.2% in 1995. RENOVATIONS AND CAPITAL EXPENDITURES The Company believes that one factor that differentiates it from many other hotel companies is its commitment to make the necessary capital expenditures on its hotels to maintain them and improve them to the Company's high standards. This is approached in three ways: annual investments of a minimum of 4% of suite revenue for capital improvements; an aggressive renovation and upgrade program for hotels acquired to bring them up to Company standards; and the construction of additional suites, meeting rooms and public areas where market conditions indicate. Renovations The Company committed approximately $70 million during 1996 to the upgrade and renovation of the CSS Hotels and the wholly owned 1996 Acquisitions. At June 30, 1997, the Company had spent approximately $51.4 million on the CSS Hotels renovations and upgrades. Additionally, in 1996 the Company spent approximately $3 million on renovations to hotels owned prior to the purchase of the CSS Hotels. Room Additions In 1996, the Company completed the addition of an aggregate of 48 suites at its hotels in Flagstaff, Arizona and New Orleans, Louisiana at an approximate cost of $5.3 million, and at July 1, 1997, the Company added a net of 129 suites, additional meeting rooms and other public area upgrades at its Boston -- Marlborough, Massachusetts hotel with a completion cost of approximately $15.8 million. Additionally, an aggregate of 224 additional suites are currently in the process of development at three of the Company's existing hotels at an aggregate estimated cost of approximately $20.5 million. Capital Improvements It is the Company's policy to invest approximately 4% of suite revenue on annual capital improvements at its hotels. These investments are in addition to the previously discussed renovations and room additions. During 1996 the Company spent approximately $9.2 million on these type capital expenditures totaling 4.3% of suite revenue of company owned hotels. These investments also are in addition to the 5% to 6% of suite revenue spent by the Lessee for repair and maintenance expenditures annually. -39- 48 LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash to meet its cash requirements, including repayments of Indebtedness, is its cash flow from the Percentage Leases. For the six months ended June 30, 1997, cash flow provided by operating activities, consisting primarily of Percentage Lease revenue, was $43.7 million and funds from operations assuming the conversion of preferred stock, which is the sum of net income, minority interest, and depreciation of real property (including furniture and equipment), was $56.3 million. The Lessee's obligations under the Percentage Leases are unsecured. The Lessee's ability to make lease payments under the Percentage Leases and the Company's liquidity, including repayments of Indebtedness, are substantially dependent on the ability of the Lessee to generate sufficient cash flow from the operation of the Hotels. At June 30, 1997, the Lessee had paid all amounts then due FelCor LP under the Percentage Leases. During the six months ended June 30, 1997, the Lessee realized a net income of $1.0 million. The Lessee's accumulated shareholders' deficit of $5.4 million at June 30, 1997 resulted primarily from losses during 1996 as a consequence of the one-time costs of converting the CSS Hotels to the Embassy Suites and Doubletree Guest Suites brands and the substantial number of suite nights lost during 1996 due to renovation. It is anticipated that a substantial portion of any future profits of the Lessee will be retained until a positive shareholders' equity is restored. Although it is currently anticipated that the Lessee could sustain a small loss during 1997, it is anticipated that its future earnings will be sufficient to enable it to continue to make its lease payments under the Percentage Leases when due. Minority equity interests in three of DJONT's consolidated subsidiaries, which relate to a total of 16 of the Hotels, are held by unrelated third parties. These three subsidiaries have entered into separate revolving credit agreements with an affiliate of Messrs. Feldman and Corcoran and/or the holders of such minority equity interests, or affiliates thereof, which provide these subsidiaries with the right to borrow up to an aggregate of $9.0 million, to the extent necessary to enable them to pay rent and other obligations due under the Percentage Leases relating to such Hotels. Amounts borrowed thereunder, if any, will be subordinated in right of repayment to the Percentage Leases. No loans were outstanding under such agreements at June 30, 1997. The Company intends to acquire additional hotels and may incur indebtedness to make such acquisitions, or to meet distribution requirements imposed on a REIT under the Internal Revenue Code, to the extent that working capital and cash flow from the Company's investments are insufficient to make such distributions. At June 30, 1997, the Company had $13.4 million of cash and cash equivalents and had utilized $192 million of the amount available under the Company's $400 million unsecured revolving Line of Credit. On August 14, 1997, the Company amended and restated its existing unsecured Line of Credit to increase availability from $400 million to $550 million, extend the term by one year to September 30, 2000 and to reduce the effective interest rate. To manage the relative mix of its debt between fixed and variable rate instruments, the Company has entered into two separate interest rate swap agreements. These interest rate swap agreements effectively convert variable rate debt to a fixed rate. See "Description of Other Indebtedness." The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense by the Company pursuant to the terms of its interest rate agreement and will have a corresponding effect on its future cash flows. Agreements such as these contain a credit risk that the counterparties may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, which are limited to major banks and financial institutions, and does not anticipate nonperformance by the counterparties. To provide for additional flexibility, the Company registered up to an aggregate of $1.0 billion in common stock, preferred stock, debt securities and/or common stock warrants pursuant to two shelf registration statements, of which approximately $332.1 million is currently available. One shelf registration statement for $500 million was declared effective by the Commission during 1996 and the second shelf registration statement for $500 million was declared effective during the second quarter of 1997. The terms and conditions of the stock or debt securities issued thereunder are determined by the Company based upon market conditions at the time of issuance. A total of 6,050,000 shares of Series A Preferred Stock at $25.00 per share were issued in the second quarter of 1996 and 3,000,000 shares of common stock at $35.50 per share were issued during the first quarter of 1997 pursuant to the shelf registration declared effective in 1996, leaving approximately $242.3 million available under that shelf registration. With regard to the shelf registration declared effective in 1997, the Company issued an aggregate 11,200,000 shares of common stock at $36.625 per share, leaving approximately $89.8 million available under that shelf registration. -40- 49 The Company completed construction on and placed into service a net addition of 129 suites at the Boston- Marlborough hotel on July 1, 1997. Additionally, construction has begun on suite additions for 224 additional suites at three of the Company's existing hotels at an aggregate estimated cost of approximately $20.5 million and an expected completion in the first and fourth quarters of 1998. The Company's cash flow from financing activities of approximately $456.4 million for the six months ended June 30, 1997 resulted from the following: The sale of an aggregate of 13.2 million shares of Common Stock (3.0 million shares in the first quarter of 1997 at $35.50 per share and 10.2 million shares at June 30, 1997 at $36.625) less 1.2 million shares of Common Stock repurchased from Promus with net proceeds of $413.5 million; net borrowings under the Company's Line of Credit of $76 million; distributions paid to common shareholders, preferred shareholders and limited partners of $33.7 million; and proceeds from the exercise of stock options by a former employee of $563,000. INFLATION Operators of hotels, in general, possess the ability to adjust room rates periodically to reflect the effects of inflation. Competitive pressures may, however, limit the Lessee's ability to raise room rates. SEASONALITY The Hotels' operations historically have been seasonal in nature, reflecting higher occupancy rates primarily during the first three quarters of each year. This seasonality can be expected to cause fluctuations in the Company's quarterly lease revenue, particularly during the fourth quarter, to the extent that it receives Percentage Rent. To the extent cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in lease revenue, the Company expects to utilize other cash on hand or borrowings under the Line of Credit to make distributions to its shareholders or to make payments on the Notes. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS During 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), No. 129 "Disclosure of Information About Capital Structure" ("SFAS 129"), No. 130 "Reporting Comprehensive Income" ("SFAS 130"), and No. 131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), all of which are effective for fiscal years beginning after December 15, 1997. SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 129 establishes standards for disclosing information about an entity's capital structure such as information about securities, liquidation preference of preferred stock and redeemable stock. SFAS 130 specifies the presentation and disclosure requirements for reporting comprehensive income which includes those items which have been formerly reported as a component of shareholders' equity. SFAS 131 establishes the disclosure requirements for reporting segment information. Management believes that, when adopted, SFAS 128, 129, 130 and 131 will not have a significant impact on the Company's financial statements. -41- 50 BUSINESS AND PROPERTIES THE INDUSTRY The United States hotel industry has experienced significant improvement in the past five years. According to Coopers & Lybrand L.L.P. Hospitality Directions, after a period of extended unprofitability in the late 1980's and early 1990's, lodging industry profit has increased every year from 1992 through 1996. The industry downturn in the late 1980's resulted primarily from an increase in the supply of new hotel rooms that significantly outpaced growth in demand. The industry began to turn around in 1991, and the percentage growth in room demand exceeded the percentage growth in room supply from 1992 through 1996. As a result, according to Smith Travel Research, for All Upscale U.S. Hotels (including both Upscale and Upper Upscale Hotels), occupancy increased from 61.7% in 1991 to 68.4% in 1996, and ADR increased from $65.89 in 1991 to $85.54 in 1996. Smith Travel Research classifies the hotel industry into six distinct categories: Budget, Economy, Midscale, Midscale with Food & Beverage, Upscale and Upper Upscale. All of the Company's properties are operated under brands that are included in the Upper Upscale category. This category has experienced relatively low levels of new construction. The following table contains information with respect to average occupancy, ADR and RevPAR for the Current Hotels, all Embassy Suites hotels, all upscale U.S. hotels and all U.S. hotels for the periods indicated.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1990 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- ---- OCCUPANCY: Current Hotels(1) . . . -- -- -- -- 73.9% 72.6% 72.2% Embassy Suites Hotels(2) . . . . . 69.6% 69.4% 71.8% 73.1% 74.9 74.2 73.6 All Upscale U.S. Hotels(3) . . . . . 61.6 61.7 64.7 66.8 68.1 68.4 68.4 All U.S. Hotels(4) . . 61.8 60.1 61.9 63.1 64.7 65.1 65.7 ADR Current Hotels(1) . . . -- -- -- -- $ 92.87 $ 98.20 $105.23 Embassy Suites Hotels(2) . . . . . $ 86.73 $ 88.19 $ 90.97 $ 93.78 97.18 101.90 107.36 All Upscale U.S. Hotels(3) . . . . . 62.16 65.89 73.11 72.05 77.19 81.17 85.54 All U.S. Hotels(4) . . 58.70 59.12 59.62 61.30 64.24 67.66 71.66 REVPAR(5) Current Hotels(1) . . . -- -- -- -- $ 68.63 $ 71.30 $ 75.97 Embassy Suites Hotels(2) . . . . . $ 60.36 $ 61.20 $ 65.32 $ 68.55 72.86 75.61 79.02 All Upscale U.S. Hotels(3) . . . . . 38.29 40.65 47.30 48.13 52.57 55.52 58.51 All U.S. Hotels(4) . . 36.28 35.53 36.90 38.68 41.56 44.05 47.08
- ---------- (1) The information for the Current Hotels, for periods prior to their acquisition by the Company, was obtained from the prior owners. Information for certain of the Current Hotels was not available for periods prior to 1994. (2) Information provided by Promus. (3) Information obtained from Smith Travel Research. This category includes 49 hotel chains designated by such firm as "upper upscale" (including Embassy Suites hotels, Doubletree Guest Suites hotels and Sheraton hotels) or "upscale." (4) Information obtained from Smith Travel Research. (5) RevPAR is determined by dividing room or suite revenues by available rooms or suites. -42- 51 BACKGROUND FelCor was formed as a Delaware corporation on May 16, 1994 and was reincorporated as a Maryland corporation on June 23, 1995. FelCor is a self administered equity REIT formed for the purpose of acquiring and holding interests in hotel properties. In connection with the formation of FelCor, FelCor LP acquired the six Initial Hotels through a merger with entities organized in 1991 and controlled by Hervey A. Feldman and Thomas J. Corcoran, Jr. The consideration for the acquisition consisted of (i) 1,695,146 Units, then representing approximately 26.5% of the equity interests in FelCor LP and (ii) the assumption and payment of mortgage indebtedness and other obligations relating to the Initial Hotels of approximately $76.0 million. The Units are exchangeable, subject to certain limitations, for a like number of shares of the Common Stock of FelCor or for cash, at the option of FelCor. To enable the Company to qualify as a REIT, neither FelCor nor FelCor LP can operate the hotels in which they invest. Accordingly, FelCor LP leases all of the hotels owned by it to the Lessee, pursuant to the Percentage Leases. The Lessee is a Delaware limited liability company, 25% of which is beneficially owned by each of Messrs. Feldman and Corcoran, the Chairman of the Board and the President of the Company, respectively, and 50% of which is owned by RGC Leasing, Inc., a Nevada corporation owned by the children of Charles N. Mathewson, a major initial investor in and a director of the Company. It is anticipated that additional hotels acquired by the Company will be leased to the Lessee upon similar terms. See "Certain Relationships and Related Transactions" for additional information regarding the interests of affiliates arising out of the acquisition of the Initial Hotels, the Percentage Leases and certain other transactions. BUSINESS STRATEGY Overview The Company's primary business objectives are to (i) focus on selection of sound hotel investments, (ii) add value to its hotels through active asset management and the strategic investment of capital, and (iii) build solid working relationships with, and be the "owner-of-choice" for, selected premium, full-service hotel brand owners/managers who are willing to commit to the on-going success of the hotels they license/ manage for the Company. The Company seeks to increase operating cash flow and, enhance its value through both internal growth and acquisitions. The Company's internal growth strategy is to utilize its asset management expertise to improve the quality of its hotels by renovating, upgrading and repositioning, thereby improving the revenue performance of the hotels, and to participate, through the Percentage Leases, in any growth in revenues at its hotels. The Company's acquisition growth strategy remains focused primarily upon the purchase of additional existing and a limited number of newly developed hotels that meet the Company's investment criteria. Strategic Relationships The Company currently maintains strategic brand owner/manager relationships with Promus, Doubletree and Sheraton. Promus and Doubletree have entered into a definitive agreement to merge their companies. The combined company will constitute the lodging industry's third largest entity based on annual revenue. The Company believes that this merger will increase the Company's flexibility in branding its all suite hotels to capitalize on local market conditions and brand representation. ITT Corporation, the parent of ITT Sheraton Corporation, is currently the subject of a hostile tender offer by Hilton Hotel Corporation and has also announced that it has entered into a definitive agreement to merge with Starwood Lodging. The Company cannot now predict what the ultimate outcome of these competing proposals will be. o Promus Hotel Corporation is the largest operator of full-service, all-suite hotels in the United States. Promus is also the owner of the Embassy Suites brand and the manager of 50 of the Company's Current Hotels. In addition, based on the closing price of the Common Stock on the NYSE on September 30, 1997, Promus owned more than $55 million of the aggregate Common Stock of FelCor and Units of FelCor LP. The relationship with Promus has provided the foundation for the Company's historical growth. o Doubletree Hotels Corporation is the owner of the nation's second largest full-service, all-suite hotel brand, Doubletree Guest Suites. Doubletree provides hotel owners with management and franchise services under its Doubletree Hotels, Doubletree Guest Suites, Club Hotels by Doubletree, Red Lion Hotels and other brands, as well as management services for other non-Doubletree brand hotels. Doubletree is the manager of all of the 12 Current Hotels operated under the Doubletree Guest Suites brand. -43- 52 o ITT Sheraton Corporation is the owner of the Sheraton brand and one of the world's largest hotel companies, with more than 430 hotels in over 60 countries. This newest strategic alliance, coupled with the purchase of six Sheraton hotels this year (including a total of four non-suite hotels), provided the Company with its initial entry into the upscale, full-service, non-suite hotel market and should provide the Company with opportunities for future growth. The strength of the Company's strategic relationships with the foregoing brand owners/managers are evidenced by their (i) significant equity investments in 15 of the Company's hotels, (ii) agreements to make subordinated loans to the Lessee (in support of the Lessee's obligations under certain Percentage Leases with respect to certain hotels), (iii) subordination of certain customary fees to the Lessee's obligations under applicable Percentage Leases, (iv) grants of certain performance-based termination rights by the managers to the Lessees, and (v) in one case, guarantee of a $25 million loan to the Company. Internal Growth Strategy Beginning with the acquisition of the CSS Hotels, from the fourth quarter of 1995 through September 30, 1997, the Company has acquired 58 hotels containing an aggregate of 14,587 suites/rooms for approximately 1.4 billion, resulting in an increase in its portfolio of suites/rooms by more than 500%. The Company converted the 18 CSS Hotels to Embassy Suites hotels (16 hotels) and Doubletree Guest Suites hotels (two hotels), investing over $50 million in the complete renovation and upgrade of such hotels. As a consequence, RevPAR of the CSS Hotels for the nine months ended September 30, 1997 increased approximately 22.0% over the nine months ended September 30, 1996. Additionally, for the 13 original hotels acquired by the Company prior to the acquisition of the CSS Hotels, the Company achieved a 6.6% increase in RevPAR for the nine months ended September 30, 1997 over the comparable period in 1996, from $79.39 to $84.61. Acquisition Growth Strategy At present, the Company intends to continue to focus its acquisition strategy with respect to individual hotels primarily upon the purchase of full-service, upscale hotels (both all-suite and non-suite) that will fit within one of the Company's three premium brand/owner/manager alliances with Promus, Doubletree and Sheraton. The Company believes that it has benefitted, and will continue to benefit, from its strong relationships with its brand owner/managers. The Company also may construct additional suites/rooms and/or meeting space at certain of its hotels if market and other conditions warrant. An aggregate of 224 additional suites are currently in the process of development at three of the Company's existing hotels at an aggregate estimated cost of approximately $20.5 million. Capital Strategy The Company intends to maintain a conservative capital structure that enhances its access to the capital markets on favorable terms and promotes future earnings growth. Since the IPO, the Company has completed five public offerings of its capital stock, raising gross proceeds of more than $1 billion, including one public offering of convertible preferred stock that raised $151.3 million in gross proceeds. In addition, the Company has reduced its payout ratio (distributions as a percentage of Funds From Operations) from 80% for the year ended December 31, 1995 to 68% for the 12 month period ended September 30, 1997. The Board of Directors of the Company has adopted a policy which limits the Company's indebtedness to not more than 40% of its investment in hotel assets, at cost. At September 30, 1997, the Company had the $550 million unsecured revolving Line of Credit, under which it had borrowed $296 million, the unsecured Renovation Loan of $25 million (guaranteed by Promus), the proceeds of which were used to finance the cost of renovations to the CSS Hotels, and approximately $1 million of other unsecured indebtedness. The Company also had at September 30, 1997, the $85 million secured Term Loan that will be repaid from the proceeds of the Private Placement, and an additional $12 million in secured debt. At September 30, 1997, after giving effect to the Private Placement and the application of the proceeds therefrom, the total Indebtedness of the Company would have been 26% of total assets and its ratio of EBITDA to interest paid for the twelve months ended September 30, 1997 would have been 5.9 to 1. The Company believes that its debt limitation policy, its preference for unsecured debt and its success in raising equity capital for expansion, demonstrate the Company's commitment to the maintenance of a conservative but flexible capital structure. -44- 53 HOTEL PORTFOLIO Current Hotels Subsequent to the Company's formation and the concurrent acquisition of the Initial Hotels, the Company completed the acquisition of interests in 65 additional hotels through September 30, 1997. Of the Current Hotels, the Company owns 100% equity interests in 53 hotels, a 97% interest in the partnership that owns one hotel, a 90% interest in partnerships that own three hotels, and a 50% interest in separate partnerships that own 14 hotels. At September 30, 1997, 51 of the Current Hotels were operated as Embassy Suites hotels, 12 as Doubletree Guest Suites hotels, six as Sheraton hotels, one as a Hilton Suites hotel, and one hotel was in the process of being converted to the Embassy Suites brand. The Current Hotels are located in 26 states. The following table provides certain information regarding the Current Hotels:
NUMBER OF HOTELS AGGREGATE ACQUIRED NUMBER OF SUITES ACQUISITION PRICE -------- ---------------- ----------------- (IN MILLIONS) 1994 Initial Hotels . . . . . . . . . . . . 6 1,479 $ 81.5 4th Quarter . . . . . . . . . . . . . . 1 251 25.8 1995 1st Quarter . . . . . . . . . . . . . . 2 350 27.4 2nd Quarter . . . . . . . . . . . . . . 1 100 9.4 3rd Quarter . . . . . . . . . . . . . . 3 542 31.3(1) 4th Quarter . . . . . . . . . . . . . . 7 1,657 169.0 1996 1st Quarter . . . . . . . . . . . . . . 14 3,501 383.5 2nd Quarter . . . . . . . . . . . . . . 3 691 68.1 3rd Quarter . . . . . . . . . . . . . . 4 1,005 30.8(2) 4th Quarter . . . . . . . . . . . . . . 2 572 78.1 1997 1st Quarter . . . . . . . . . . . . . . 15 3,446 209.4(3) 2nd Quarter . . . . . . . . . . . . . . 9 2,715 264.9(4) 3rd Quarter . . . . . . . . . . . . . . 4 1,000 122.6 --- ------ -------- Subtotals . . . . . . . . . . . 71 17,309 $1,501.8 Additional suites constructed by the Company at its hotels . . . . . . . . . -- 177 21.2 --- ------ -------- Totals . . . . . . . . . . . . 71 17,486 $1,523.0 === ====== ========
- ------------------------ (1) Includes the purchase price of the Company's 50% interest in the unconsolidated partnership owning the 262-suite, Chicago-Lombard, Illinois Embassy Suites hotel. (2) Represents the purchase price of the Company's 50% interest in separate unconsolidated partnerships owning Embassy Suites hotels in Marin County, California; Parsippany, New Jersey; Charlotte, North Carolina; and Indianapolis, Indiana, with an aggregate of 1,005 suites. (3) Includes the purchase price of the Company's (a) 50% interests in separate unconsolidated partnerships owning eight Embassy Suites hotels, with an aggregate of 1,934 suites, and (b) 90% interests in consolidated partnerships owning three Doubletree Guest Suites hotels, with an aggregate of 691 suites. (4) Includes the purchase price of the Company's 50% interest in an unconsolidated partnership owning the 261-suite Embassy Suites hotel in San Antonio (Airport), Texas. Of the 1997 Acquisitions, nine consist of 50% interests in unconsolidated partnerships owning an aggregate of eight Embassy Suites hotels, bringing to 12 the number of hotels owned by joint ventures with Promus, and three consist of 90% interests in consolidated partnerships, in which Doubletree holds the remaining 10% interest, owning an aggregate of three Doubletree Guest Suites hotels. Of the remaining hotels acquired in 1997, three are Embassy Suites hotels, seven are Doubletree Guest Suites hotels (including three that were converted from other brands), and six are Sheraton hotels. -45- 54 Other Potential Hotel Transactions The Company is in various stages of evaluation and negotiation with respect to a number of other available hotel transactions which, if the Company were to elect to pursue all of such transactions, could require an additional investment by the Company of more than $300 million. Due to the preliminary status of such negotiations and evaluations, no assurance can be given that the Company will elect to pursue, or succeed in the completion of, any of such transactions. Hotel Renovation and Conversion The Company believes that its commitment to make the necessary capital expenditures to upgrade and maintain its hotel properties in accordance with its high standards differentiates it from many other hotel companies. Typically, the Company renovates or upgrades hotels acquired by it and, in many instances, incurs the cost of converting such hotels into national brands, like Embassy Suites, Doubletree Guest Suites or Sheraton. The Company made capital expenditures of approximately $52.2 million during 1996, in the conversion and upgrade of hotels acquired by it through December 31, 1996. The majority of such expenditures were made in connection with the complete renovation and upgrading of the 18 CSS Hotels. The Company has incurred additional conversion and upgrade costs of approximately $17.6 million during the first six months of 1997 with respect to various renovation and upgrade projects. Significant additional conversion and upgrade costs may be incurred by the Company with respect to any additional hotels acquired by it. In addition to the conversion and upgrade costs typically incurred by the Company in connection with newly acquired hotels, the Company is required under the Percentage Leases to provide a capital replacement reserve, consisting of 4% of suite revenues (on a cumulative basis), for recurring capital improvements and replacements at its hotels. In addition to the capital expenditures made, as described above, for the conversion and upgrade of newly acquired hotels, the Company spent approximately $9.2 million (approximately 4.3% of suite revenues) during 1996, and approximately $3.9 million (approximately 2.4% of suite revenues) during the six months ended June 30, 1997, on recurring capital replacements. In addition to such capital expenditures by the Company, the Lessee also spent approximately $14.5 million (approximately 6.2% of suite revenues) during 1996, and approximately $11.1 million (approximately 5.5% of suite revenues) during the six months ended June 30, 1997, on routine maintenance and repair of its hotels, for which the Lessee is responsible under the Percentage Leases. During 1996 and the first six months of 1997, the Company completed the construction of 17 additional suites at its Flagstaff hotel, 31 additional suites at its New Orleans hotel, and a net of 129 suites, additional meeting rooms and other public area improvements to its Boston-Marlborough hotel at an aggregate cost of approximately $21.2 million. Additionally, an aggregate of 224 additional suites are currently in the process of development at three of the Company's existing hotels, at an estimated cost of approximately $20.5 million. Embassy Suites Hotels Fifty-one of the Current Hotels are, and one is in the process of conversion to, Embassy Suites hotels operating under franchise licenses from Promus. Embassy Suites hotels are upscale, full-service, all-suite hotels designed to attract frequent business travelers, leisure travelers and weekend guests. Embassy Suites consistently achieves one of the highest guest satisfaction ratings in the industry. Among the services and amenities typically offered by Embassy Suites hotels are: two-room suites, with each suite containing two telephones, a mini-refrigerator, coffee maker, microwave oven, wet bar, and two color televisions; complimentary, full, cooked-to-order breakfast every morning; complimentary cocktails during two hours every evening (subject to local laws and regulations) in an atrium environment; fitness center, indoor heated pool, sauna, whirlpool and steam room; guest laundry and valet services; and a 100% satisfaction guarantee. Restaurant, banquet, in-room dining and lounge services are available to guests at customary rates. Embassy Suites hotels are constructed, maintained and operated in accordance with a comprehensive set of building, maintenance, operational, recordkeeping and reservation system guidelines designed to ensure a uniformly high level of service, appearance and quality. The Embassy Suites system was among the first hotel chains to offer guests an unconditional 100% satisfaction guarantee. Embassy Suites, the predecessor-in-interest to Promus, was organized in 1983, and the first Embassy Suites hotel was opened in Overland Park, Kansas in 1984. Mr. Feldman, Chairman of the Board of the Company, served as the founding President and Chief Executive Officer of Embassy Suites from 1983 until 1990, and as its Chairman of the Board from 1990 until January 1992. In March 1984, Embassy Suites, Inc. acquired the 24 hotel Granada Royale Hometel(R)chain, and converted its hotels to the Embassy Suites system during 1985. By the spring of 1986, Embassy Suites hotels were located in 20 states, making it a national upscale all-suite chain and the largest upscale all-suite operator in the United States. The Embassy Suites chain has continued to grow through franchising, new hotel development and the acquisition and conversion of all-suite hotels from other brands. From 30 hotels in 10 states at December 31, 1984, the Embassy Suites chain has grown to 137 hotels in 35 states, the District of Columbia, Canada, Colombia, Puerto Rico, and Thailand at August 31, 1997, making it the largest U.S. full-service, all-suite hotel chain. Of the 137 Embassy Suites hotels in operation at August 31, 1997, a total of 76 were being operated by Promus as owner, lessee or manager. -46- 55 Doubletree Guest Suites Hotels Twelve of the Current Hotels are Doubletree Guest Suites hotels. The Doubletree Guest Suites all-suite hotels comprise one of the largest all-suite hotel chains in the United States as measured by number of suites and system revenues. Doubletree's all-suite hotels are targeted at business travelers and families who have a need or desire for greater space than typically is provided at most traditional hotels. The total guest room revenue for the year ended December 31, 1996 for Doubletree's all-suite hotels was derived approximately 45% from business travelers, 29% from group meetings and 26% from leisure travelers. As of June 30, 1997, Doubletree's all-suite hotels included 42 Doubletree Guest Suites hotels in 18 states and the District of Columbia, with a total of 8,987 guest rooms. The hotels range in size from 55 to 460 guest suites. Suite rates generally range from $60 to $250 per night. Each guest suite has a separate living room and dining/work area, with a color television, refrigerator and wet bar. Doubletree is one of the largest full-service hotel operating companies in the United States. As of June 30, 1997, Doubletree and its affiliates managed, leased, or franchised 255 hotels with an aggregate of 58,578 rooms in 40 states, the District of Columbia, Mexico, and the Caribbean. This represents a 6% and 5% increase in number of hotels and aggregate room count, respectively, for the first half of 1997. Doubletree provides hotel owners with management and franchise services under its Doubletree Hotels, Doubletree Guest Suites, Club Hotels by Doubletree, Red Lion Hotels and other brands. As of June 30, 1997, Doubletree's portfolio of hotels included 101 Doubletree Hotels, 42 Doubletree Guest Suites hotels, 19 Club Hotels by Doubletree, 16 Red Lion Hotels and 77 hotels operated by Doubletree under third party brand names or as independent hotels. Sheraton Hotels Two of the Current Hotels are Sheraton Suites hotels. Sheraton Suites hotels typically offer two-room suites, each with a wet bar, refrigerator, microwave, coffee maker and two televisions. Restaurant, lounge, swimming pool and fitness center facilities are also typically available to guests. Four of the Current Hotels are full-service upscale Sheraton hotels. While each of these hotels offers some suite accommodations, the substantial percentage of the accommodations are non-suite rooms. Sheraton hotels generally offer numerous amenities and facilities, such as multiple restaurants, banquet and meeting space, recreational facilities (including indoor and/or outdoor pools and fitness centers) and business centers. Sheraton Hotels, including Sheraton Suites, are part of Sheraton Hotels & Resorts, the upscale brand segment operated and franchised by ITT Sheraton Corporation, which is a wholly-owned subsidiary of ITT Corporation. ITT Sheraton Corporation owns, leases, manages and/or franchises over 430 luxury, upscale and mid-scale hotels, having over 135,000 guest rooms, in over 60 countries. In the upscale segment, which includes Sheraton hotels, Sheraton owns, leases, manages and franchises approximately 290 properties with approximately 105,000 rooms. Sheraton's origins date back to 1937 and its history includes many firsts in the hospitality industry, including the first hotel chain to be listed on the NYSE, the first chain to centralize and automate the reservations function and the first to develop a toll-free 800- number system for direct consumer access. Other All-Suite Hotels The Company also owns one Hilton Suites hotel. Hilton Suites is one of the brands operated and franchised by Hilton Hotels Corporation. Hilton Suites hotels provide a private bedroom and separate living room with amenities that include a second television with a video cassette player, wet bar with microwave, mini-refrigerator and coffee maker. In addition, a complimentary prepared-to-order breakfast and evening beverage reception are offered daily. -47- 56 HOTEL OPERATIONS At September 30, 1997, 50 of the Current Hotels were being managed by Promus, 12 were being managed by Doubletree, six were being managed by Sheraton and three were being managed by independent professional management companies. During 1996, the ADR at the Current Hotels increased by approximately 7.2% which, when combined with a decline in occupancy of approximately 0.4 percentage points, resulted in an increase in RevPAR of 6.5%. These figures reflect the adverse impact of the loss of nearly 173,000 available suite nights (approximately 2.7% of total available suite nights for the year) as a result of the temporary removal of suites from service for renovation and upgrading during 1996. The performance of the CSS Hotels and certain of the other hotels acquired during 1996, which underwent substantial renovation and upgrading during the year, substantially offset the improved performance of the other Current Hotels, which experienced an increase in RevPAR during 1996 of approximately 8.5% over 1995. -48- 57 The following table sets forth historical operating data regarding the Current Hotels for the periods presented, regardless of ownership.
ADR($) ------- TWELVE # OF MONTHS SUITES/ YEAR YEAR ENDED LOCATION BRAND ROOMS OPENED ACQUIRED 9/30/97 ---------- ------- ----- ------- -------- ------- CURRENT HOTELS(1): Birmingham, AL ............................ Embassy Suites(3) 242 1987 1996 $ 111.31 Flagstaff, AZ ............................. Embassy Suites(3) 119 1988 1995 94.00 Phoenix (Camelback), AZ ................... Embassy Suites(3) 233 1985 1996 147.14 Phoenix (Crescent), AZ .................... Sheraton 342 1986 1997 112.00 Anaheim, CA ............................... Embassy Suites(3) 222 1987 1996 100.59 Burlingame (S.F. Airport So.), CA ......... Embassy Suites(2)(3) 339 1986 1995 127.39 Covina, CA ................................ Embassy Suites(5) 264 1980 1997 79.63 Dana Point, CA ............................ Doubletree Guest Suites 198 1992 1997 93.10 El Segundo (LAX Airport South), CA ........ Embassy Suites(3) 350 1985 1996 84.95 Los Angeles (LAX Airport North), CA ....... Embassy Suites(2)(3) 215 1990 1997 104.59 Milpitas, CA .............................. Embassy Suites(3) 267 1987 1996 126.65 Napa, CA .................................. Embassy Suites(3) 205 1985 1996 127.62 Oxnard (Mandalay Beach), CA ............... Embassy Suites(3) 249 1986 1996 126.81 San Rafael (Marin Co.), CA ................ Embassy Suites(5) 235 1990 1996 117.27 South San Francisco (Airport North), CA ... Embassy Suites 312 1988 1996 124.61 Avon (Beaver Creek Resort), CO ............ Embassy Suites(3) 72 1989 1996 203.91 Boca Raton (Doubletree), FL ............... Doubletree Guest Suites(3) 182 1989 1995 80.10 Boca Raton (Embassy), ..................... Embassy Suites(3) 263 1989 1996 90.23 Deerfield Beach, FL ....................... Embassy Suites(3) 244 1987 1996 126.34 Ft. Lauderdale, FL ........................ Embassy Suites(3) 359 1986 1996 112.59 Jacksonville, FL .......................... Embassy Suites 210 1985 1994 110.14 Lake Buena Vista (Disney World), FL ....... Doubletree Guest Suites(2) 229 1987 1997 133.70 Miami (Airport), FL ....................... Embassy Suites(3) 314 1987 1996 100.72 Orlando (North), FL ....................... Embassy Suites 210 1985 1994 113.29 Orlando (South), FL ....................... Embassy Suites 244 1985 1994 120.98 Tampa (Busch Gardens), FL ................. Doubletree Guest Suites(3) 129 1985 1995 90.57 Tampa (Rocky Point), FL ................... Doubletree Guest Suites 203 1986 1997 109.37 Atlanta (Airport), GA ..................... Sheraton 395 1986 1997 93.54 Atlanta (Buckhead), GA .................... Embassy Suites 317 1988 1996 133.13 Atlanta (Galleria), GA .................... Sheraton 278 1990 1997 112.55 Atlanta (Perimeter Center), GA ............ Embassy Suites(5) 241 1985 1997 112.52 Brunswick, GA ............................. Embassy Suites(3) 130 1988 1995 73.12 Chicago -- Lombard, IL .................... Embassy Suites(5) 262 1990 1995 117.48 Chicago (O'Hare), IL ...................... Sheraton 297 1986 1997 125.59 Deerfield, IL ............................. Embassy Suites(3) 237 1987 1996 107.58 Indianapolis (North), IN .................. Embassy Suites(5) 222 1985 1996 103.76 Overland Park, KS ......................... Embassy Suites(5) 199 1984 1997 109.39 Lexington, KY ............................. Hilton Suites(3) 174 1987 1996 99.50 Baton Rouge, LA ........................... Embassy Suites(3) 224 1985 1996 96.15 New Orleans, LA ........................... Embassy Suites(3) 282 1984 1994 126.77 Boston -- Marlbourgh,MA ................... Embassy Suites(3) 229 1988 1995 112.40 Baltimore, MD ............................. Doubletree Guest Suites(4) 251 1987 1997 93.97 ADR($) REVPAR($) ------------------------------- ---------------------------------------- TWELVE YEAR ENDED DECEMBER 31, MONTHS YEAR ENDED DECEMBER 31, ------------------------------- ENDED ----------------------------- 1996 1995 1994 9/30/97 1996 1995 1994 ---- ---- ------- ------- ---- ---- ---- CURRENT HOTELS(1): Birmingham, AL ............................ 101.33 $ 94.13 $ 88.49 $ 69.98 $ 65.20 $ 64.30 $ 60.62 Flagstaff, AZ ............................. 92.04 89.98 89.13 63.49 64.23 60.31 61.80 Phoenix (Camelback), AZ ................... 140.12 130.49 121.73 111.21 96.70 95.69 90.40 Phoenix (Crescent), AZ .................... 107.71 95.53 72.94 78.93 76.54 69.61 54.24 Anaheim, CA ............................... 91.48 85.94 85.04 71.14 60.22 59.27 53.76 Burlingame (S.F. Airport So.), CA ......... 114.58 102.42 99.41 106.57 89.06 80.66 75.72 Covina, CA ................................ 79.13 75.64 79.91 48.82 42.59 40.56 40.84 Dana Point, CA ............................ 82.12 79.09 68.56 53.62 51.53 49.92 44.35 El Segundo (LAX Airport South), CA ........ 80.76 83.55 85.67 67.31 58.97 52.91 55.10 Los Angeles (LAX Airport North), CA ....... 102.67 102.72 100.12 81.77 79.59 72.32 80.09 Milpitas, CA .............................. 108.11 93.57 88.03 103.87 81.47 74.44 64.58 Napa, CA .................................. 115.84 111.52 112.72 84.43 77.78 72.53 76.48 Oxnard (Mandalay Beach), CA ............... 120.36 117.25 116.73 78.32 75.43 73.72 77.91 San Rafael (Marin Co.), CA ................ 111.78 108.49 101.64 93.35 86.04 85.46 79.92 South San Francisco (Airport North), CA ... 108.33 93.80 92.43 91.48 72.89 63.52 62.37 Avon (Beaver Creek Resort), CO ............ 185.60 150.72 149.21 101.40 95.26 93.21 85.44 Boca Raton (Doubletree), FL ............... 78.26 79.83 83.02 45.42 41.32 40.19 40.19 Boca Raton (Embassy), ..................... 85.67 86.26 83.36 67.16 62.68 63.48 59.27 Deerfield Beach, FL ....................... 119.06 119.93 122.46 88.73 72.94 78.85 79.42 Ft. Lauderdale, FL ........................ 105.92 106.44 105.47 84.40 74.31 70.46 70.14 Jacksonville, FL .......................... 106.17 96.43 84.41 85.37 81.40 72.75 64.01 Lake Buena Vista (Disney World), FL ....... 121.25 113.40 114.91 112.31 100.77 85.93 85.50 Miami (Airport), FL ....................... 86.07 88.52 84.99 77.76 64.02 67.41 65.43 Orlando (North), FL ....................... 103.56 97.49 93.47 94.81 86.58 77.97 74.04 Orlando (South), FL ....................... 114.74 109.37 103.61 105.89 96.66 86.19 81.83 Tampa (Busch Gardens), FL ................. 85.08 80.66 79.58 60.67 63.20 59.05 63.19 Tampa (Rocky Point), FL ................... 98.35 90.25 85.63 79.17 74.01 66.62 64.38 Atlanta (Airport), GA ..................... 102.13 82.20 71.01 58.02 68.13 55.56 51.46 Atlanta (Buckhead), GA .................... 138.39 120.82 107.40 102.83 103.66 98.12 86.95 Atlanta (Galleria), GA .................... 118.59 104.06 94.65 71.54 79.52 71.73 73.07 Atlanta (Perimeter Center), GA ............ 117.93 102.40 92.68 87.32 91.66 79.82 74.74 Brunswick, GA ............................. 71.03 61.22 49.07 52.12 52.72 45.30 37.07 Chicago -- Lombard, IL .................... 109.64 101.28 95.21 88.58 85.06 77.94 71.68 Chicago (O'Hare), IL ...................... 119.27 108.43 104.41 92.87 82.50 71.44 99.12 Deerfield, IL ............................. 100.96 96.74 90.90 81.77 75.05 74.85 67.53 Indianapolis (North), IN .................. 100.22 98.60 90.93 73.31 70.70 72.14 65.77 Overland Park, KS ......................... 102.94 97.93 91.73 81.53 77.21 72.81 69.72 Lexington, KY ............................. 96.71 88.12 82.70 76.63 74.99 70.16 65.38 Baton Rouge, LA ........................... 87.27 81.08 79.57 67.29 53.86 56.96 55.12 New Orleans, LA ........................... 119.90 114.48 105.76 92.59 90.82 83.42 87.48 Boston -- Marlbourgh,MA ................... 104.89 89.12 85.26 86.99 80.47 72.29 68.08 Baltimore, MD ............................. 89.41 82.03 82.97 71.26 67.88 62.09 57.88 OCCUPANCY(%) -------------------------------- TWELVE MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------ 9/30/97 1996 1995 1994 CURRENT HOTELS(1): ------- ---- ---- ---- Birmingham, AL ............................ 62.9% 64.3% 68.3% 68.5% Flagstaff, AZ ............................. 67.5 69.8 67.0 69.3 Phoenix (Camelback), AZ ................... 75.6 69.0 73.3 74.3 Phoenix (Crescent), AZ .................... 70.5 71.1 72.9 74.4 Anaheim, CA ............................... 70.7 65.8 69.0 63.2 Burlingame (S.F. Airport So.), CA ......... 83.7 77.7 78.7 76.2 Covina, CA ................................ 61.3 53.8 53.6 51.1 Dana Point, CA ............................ 57.6 62.8 63.1 64.7 El Segundo (LAX Airport South), CA ........ 79.2 73.0 63.3 64.3 Los Angeles (LAX Airport North), CA ....... 78.2 77.5 70.4 80.0 Milpitas, CA .............................. 82.0 75.4 79.6 73.4 Napa, CA .................................. 66.2 67.1 65.0 67.8 Oxnard (Mandalay Beach), CA ............... 61.8 62.7 62.9 66.7 San Rafael (Marin Co.), CA ................ 79.6 77.0 78.8 78.6 South San Francisco (Airport North), CA ... 73.4 67.3 67.7 67.5 Avon (Beaver Creek Resort), CO ............ 49.7 51.3 61.8 57.3 Boca Raton (Doubletree), FL ............... 56.7 52.8 50.4 48.4 Boca Raton (Embassy), ..................... 74.4 73.2 73.6 71.1 Deerfield Beach, FL ....................... 70.2 61.3 65.7 64.9 Ft. Lauderdale, FL ........................ 75.0 70.2 66.2 66.5 Jacksonville, FL .......................... 77.5 76.7 75.4 75.8 Lake Buena Vista (Disney World), FL ....... 84.0 83.1 75.8 74.4 Miami (Airport), FL ....................... 77.2 74.4 76.1 77.0 Orlando (North), FL ....................... 83.7 83.6 80.0 79.2 Orlando (South), FL ....................... 87.5 84.2 78.8 79.0 Tampa (Busch Gardens), FL ................. 67.0 74.3 73.2 79.4 Tampa (Rocky Point), FL ................... 72.4 75.2 73.8 75.2 Atlanta (Airport), GA ..................... 62.0 66.7 67.6 72.5 Atlanta (Buckhead), GA .................... 77.2 74.9 81.2 81.0 Atlanta (Galleria), GA .................... 63.6 67.1 68.9 77.2 Atlanta (Perimeter Center), GA ............ 77.6 77.7 77.9 80.7 Brunswick, GA ............................. 71.3 74.2 74.0 75.5 Chicago -- Lombard, IL .................... 75.4 77.6 77.0 75.3 Chicago (O'Hare), IL ...................... 73.9 69.2 65.9 94.9 Deerfield, IL ............................. 76.0 74.3 77.4 74.3 Indianapolis (North), IN .................. 70.7 70.6 73.2 72.3 Overland Park, KS ......................... 74.5 75.0 74.4 76.0 Lexington, KY ............................. 77.0 77.5 79.6 79.1 Baton Rouge, LA ........................... 70.0 61.7 70.2 69.3 New Orleans, LA ........................... 73.0 75.7 72.9 82.7 Boston -- Marlbourgh,MA ................... 77.4 76.7 81.1 79.9 Baltimore, MD ............................. 75.8 75.9 75.7 69.8
-49- 58
# of Suites/ Year Year Location Brand Rooms Opened Acquired - -------------------------------------- --------------------------- ----- ------ -------- Troy, MI ............................. Doubletree Guest Suites(4) 251 1987 1997 Bloomington, MN ...................... Doubletree Guest Suites 219 1980 1997 Minneapolis (Airport), MN ............ Embassy Suites(3) 311 1986 1995 Minneapolis (Downtown), MN ........... Embassy Suites(3) 218 1984 1995 St. Paul, MN ......................... Embassy Suites(2)(3) 210 1983 1995 Kansas City (Cntry Club Plaza), MO ... Embassy Suites(2)(5) 266 1976 1997 Charlotte, NC ........................ Embassy Suites(5) 274 1989 1996 Raleigh/Durham, NC ................... Doubletree Guest Suites 203 1987 1997 Raleigh, NC .......................... Embassy Suites(5) 225 1987 1997 Omaha, NE ............................ Doubletree Guest Suites 189 1973 1997 Parsippany, NJ ....................... Embassy Suites(5) 274 1989 1996 Piscataway, NJ ....................... Embassy Suites(3) 225 1988 1996 Secaucus, NJ ......................... Embassy Suites(5) 261 1986 1997 Syracuse, NY ......................... Embassy Suites 215 1989 1997 Cleveland, OH ........................ Embassy Suites(3) 268 1990 1995 Tulsa, OK ............................ Embassy Suites 240 1985 1994 Philadelphia (Society Hill), PA ...... Sheraton 365 1986 1997 Myrtle Beach (Kingston Plantation), SC Embassy Suites(6) 255 1987 1996 Nashville (Airport), TN .............. Doubletree Guest Suites 138 1988 1997 Nashville, TN ........................ Embassy Suites 296 1986 1994 Austin (Airport North), TX ........... Embassy Suites(5) 261 1984 1997 Austin (Downtown), TX ................ Doubletree Guest Suites(4) 189 1987 1997 Corpus Christi, TX ................... Embassy Suites 150 1984 1995 Dallas (Love Field), TX .............. Embassy Suites 248 1986 1995 Dallas (Market Center), TX ........... Embassy Suites 244 1980 1997 Dallas (Park Central), TX ............ Embassy Suites 279 1985 1994 Dallas (Park Central), TX ............ Sheraton 545 1983 1997 San Antonio (Northwest), TX .......... Embassy Suites(5) 217 1979 1997 San Antonio (Airport), TX ............ Embassy Suites(5) 261 1985 1997 --- Totals .............................. 17,486 ====== ADR($) --------------------------------------------- Twelve Year Ended December 31, Months ------------------------------- Ended 9/30/97 1996 1995 1994 ------- ---- ---- ---- Troy, MI ............................. $ 99.58 $ 93.11 $ 84.25 $ 75.03 Bloomington, MN ...................... 108.41 108.83 104.67 97.86 Minneapolis (Airport), MN ............ 123.23 114.54 102.65 99.08 Minneapolis (Downtown), MN ........... 103.31 96.37 93.26 93.08 St. Paul, MN ......................... 97.24 91.20 82.44 79.81 Kansas City (Cntry Club Plaza), MO ... 107.53 102.41 98.86 93.47 Charlotte, NC ........................ 118.46 110.83 100.52 90.49 Raleigh/Durham, NC ................... 106.05 96.60 84.87 79.57 Raleigh, NC .......................... 117.46 112.31 103.53 92.74 Omaha, NE ............................ 89.49 91.29 89.61 83.35 Parsippany, NJ ....................... 133.29 126.09 116.02 109.42 Piscataway, NJ ....................... 115.13 102.28 101.98 96.46 Secaucus, NJ ......................... 133.00 122.48 111.62 107.92 Syracuse, NY ......................... 98.59 94.98 95.09 91.70 Cleveland, OH ........................ 103.89 103.85 99.40 86.98 Tulsa, OK ............................ 91.30 88.11 82.14 80.16 Philadelphia (Society Hill), PA ...... 134.57 124.92 112.43 107.26 Myrtle Beach (Kingston Plantation), SC 124.87 119.33 110.10 106.27 Nashville (Airport), TN .............. 82.53 84.21 79.01 74.77 Nashville, TN ........................ 106.99 103.00 100.92 94.27 Austin (Airport North), TX ........... 108.53 108.56 107.92 93.82 Austin (Downtown), TX ................ 115.11 107.27 102.50 91.64 Corpus Christi, TX ................... 90.86 82.95 77.66 77.54 Dallas (Love Field), TX .............. 108.25 104.14 98.95 92.81 Dallas (Market Center), TX ........... 121.62 117.93 109.72 103.43 Dallas (Park Central), TX ............ 107.12 105.13 95.50 86.24 Dallas (Park Central), TX ............ 105.70 96.01 85.74 77.78 San Antonio (Northwest), TX .......... 104.54 100.14 100.29 99.96 San Antonio (Airport), TX ............ 104.28 99.66 97.33 99.90 Totals .............................. 111.14 105.23 98.20 92.87 RevPAR($) ------------------------------------------ Twelve Year Ended December 31, Months ------------------------------- Ended 9/30/97 1996 1995 1994 ------- ---- ---- ---- Troy, MI ............................. $ 75.34 $ 69.04 $ 61.01 $ 57.85 Bloomington, MN ...................... 75.07 79.12 82.29 78.58 Minneapolis (Airport), MN ............ 91.22 79.38 75.52 75.27 Minneapolis (Downtown), MN ........... 67.51 53.40 62.04 64.78 St. Paul, MN ......................... 69.38 59.88 63.56 64.00 Kansas City (Cntry Club Plaza), MO ... 83.01 78.11 64.47 65.90 Charlotte, NC ........................ 86.23 80.28 74.14 69.46 Raleigh/Durham, NC ................... 81.00 71.70 64.76 57.02 Raleigh, NC .......................... 97.43 92.20 83.42 76.73 Omaha, NE ............................ 61.64 68.98 70.42 63.52 Parsippany, NJ ....................... 104.88 96.45 85.89 80.39 Piscataway, NJ ....................... 79.73 74.47 73.90 72.89 Secaucus, NJ ......................... 108.86 102.76 90.37 87.54 Syracuse, NY ......................... 74.05 70.81 68.58 68.72 Cleveland, OH ........................ 76.92 69.63 70.79 60.54 Tulsa, OK ............................ 65.50 64.92 59.51 58.18 Philadelphia (Society Hill), PA ...... 96.62 92.70 83.04 82.89 Myrtle Beach (Kingston Plantation), SC 91.55 88.62 83.27 79.52 Nashville (Airport), TN .............. 65.69 62.65 60.02 58.14 Nashville, TN ........................ 80.07 75.35 73.67 71.27 Austin (Airport North), TX ........... 84.06 79.06 80.00 71.30 Austin (Downtown), TX ................ 90.60 82.34 82.86 71.91 Corpus Christi, TX ................... 67.17 60.80 60.24 64.81 Dallas (Love Field), TX .............. 83.07 79.05 69.71 67.64 Dallas (Market Center), TX ........... 88.71 86.40 78.96 77.57 Dallas (Park Central), TX ............ 81.06 79.63 74.24 68.00 Dallas (Park Central), TX ............ 66.23 67.78 63.65 56.48 San Antonio (Northwest), TX .......... 73.00 70.69 69.55 71.98 San Antonio (Airport), TX ............ 78.56 75.74 73.38 78.28 Totals .............................. 81.41 75.97 71.30 68.63 Occupancy(%) ---------------------------------- Twelve Year Ended December 31, Months ------------------------ Ended 9/30/97 1996 1995 1994 ------- ---- ---- ---- Troy, MI ............................. 75.7% 74.1% 72.4% 77.1% Bloomington, MN ...................... 69.2 72.7 78.6 80.3 Minneapolis (Airport), MN ............ 74.0 69.3 73.6 76.0 Minneapolis (Downtown), MN ........... 65.3 55.4 66.5 69.6 St. Paul, MN ......................... 71.3 65.7 77.1 80.2 Kansas City (Cntry Club Plaza), MO ... 77.2 76.3 65.2 70.5 Charlotte, NC ........................ 72.8 72.4 73.8 76.8 Raleigh/Durham, NC ................... 76.4 74.2 76.3 71.7 Raleigh, NC .......................... 82.9 82.1 80.6 82.7 Omaha, NE ............................ 68.9 75.6 78.6 76.2 Parsippany, NJ ....................... 78.7 76.5 74.0 73.5 Piscataway, NJ ....................... 69.3 72.8 72.5 75.6 Secaucus, NJ ......................... 81.9 83.9 81.0 81.1 Syracuse, NY ......................... 75.1 74.6 72.1 74.9 Cleveland, OH ........................ 74.0 67.1 71.2 69.6 Tulsa, OK ............................ 71.7 73.7 72.4 72.6 Philadelphia (Society Hill), PA ...... 71.8 74.2 73.9 77.3 Myrtle Beach (Kingston Plantation), SC 73.3 74.3 75.6 74.8 Nashville (Airport), TN .............. 79.6 74.4 76.0 77.8 Nashville, TN ........................ 74.8 73.2 73.0 75.6 Austin (Airport North), TX ........... 77.5 72.8 74.1 76.0 Austin (Downtown), TX ................ 78.7 76.8 80.8 78.5 Corpus Christi, TX ................... 73.9 73.3 77.6 83.6 Dallas (Love Field), TX .............. 76.7 75.9 70.4 72.9 Dallas (Market Center), TX ........... 72.9 73.3 72.0 75.0 Dallas (Park Central), TX ............ 75.7 75.7 77.7 78.8 Dallas (Park Central), TX ............ 62.7 70.6 74.2 72.6 San Antonio (Northwest), TX .......... 69.8 70.6 69.4 72.0 San Antonio (Airport), TX ............ 75.3 76.0 75.4 78.4 Totals .............................. 73.3 72.2 72.6 73.9
(1) The information included in this table for periods prior to the acquisition of a particular hotel by the Company or by FelCor Affiliates was obtained from the prior owners. (2) These hotels are situated upon parcels of land subject to ground leases. (3) This hotel underwent substantial renovation, upgrading and expansion during 1996. (4) The Company owns a 90% equity interest in the entity that owns these hotels. (5) The Company owns a 50% equity interest in the entity that owns these hotels. (6) This hotel is in the process of conversion to the Embassy Suites brand. -50- 59 Each of the Current Hotels owned by the Company is leased to the Lessee pursuant to a Percentage Lease. Accordingly, the Company derives substantially all of its revenues from rents under the Percentage Leases, which rents are directly affected by changes in suite revenue. See "-- The Percentage Leases." The following table sets forth comparative suite revenue information for each of the Current Hotels on a consolidated basis, with respect to historical suite revenues, as if the hotels had been owned by the Company throughout the periods presented.
SUITE REVENUE(1) PERCENTAGE CHANGE -------------------------------------------------------------------------- TWELVE TWELVE MONTHS MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED --------------------------- 9/30/97 1996 VS. 1995 VS. LOCATION 9/30/97 1996 1995 1994 VS. 1996 1995 1994 -------- ------- ---- ---- ---- -------- -------- -------- (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE) CURRENT HOTELS: Birmingham, AL(2) ................................. $ 6,181 $ 5,790 $ 5,680 $ 5,371 6.8% 1.9% 5.8% Flagstaff, AZ(2) .................................. 2,758 2,614 2,245 2,301 5.5 16.4 (2.4) Phoenix (Camelback), AZ(2) ........................ 9,418 8,239 8,160 7,666 14.3 1.0 6.4 Phoenix (Crescent), AZ ............................ 9,853 9,581 8,690 4,619 2.8 10.3 88.1 Anaheim, CA(2) .................................... 5,768 4,907 4,802 4,356 17.6 2.2 10.2 Burlingame (S.F. Airport So.), CA(2) .............. 13,225 11,070 9,948 9,355 19.5 11.3 6.3 Covina, CA ........................................ 4,633 4,053 3,908 3,936 14.3 3.7 (0.7) Dana Point, CA .................................... 3,854 3,716 3,571 3,172 3.7 4.1 12.6 El Segundo Airport (LAX South), CA(2) ............. 8,574 7,538 6,760 7,033 13.7 11.5 (3.9) Los Angeles (LAX Airport North), CA(2)............. 6,417 6,263 5,675 6,285 2.5 10.4 (9.7) Milpitas, CA(2) ................................... 10,085 7,953 7,254 6,290 26.8 9.6 15.3 Napa, CA(2) ....................................... 6,317 5,846 5,427 5,723 8.1 7.7 (5.2) Oxnard (Mandalay Beach), CA(2) .................... 7,118 6,893 6,700 7,081 3.3 2.9 (5.4) San Rafael (Marin Co. ), CA ....................... 8,007 7,400 7,330 6,857 8.2 1.0 6.9 South San Francisco (Airport North), CA ........... 10,418 8,323 7,234 7,103 25.2 15.1 1.8 Avon (Beaver Creek Resort), CO(2) ................. 2,673 2,480 2,415 2,214 7.8 2.7 9.1 Boca Raton (Doubletree), FL(2) .................... 3,017 2,753 2,670 2,670 9.6 3.1 0.0 Boca Raton (Embassy), FL(2) ....................... 6,448 6,033 6,093 5,689 6.9 (1.0) 7.1 Deerfield Beach, FL(2) ............................ 7,902 6,531 7,023 7,073 21.0 (7.0) (0.7) Ft. Lauderdale, FL(2) ............................. 11,059 9,788 9,233 9,180 13.0 6.0 0.6 Jacksonville, FL(2) ............................... 6,544 6,256 5,576 4,907 4.6 12.2 13.6 Lake Buena Vista (Disney World), FL ............... 9,387 8,446 7,183 7,146 11.1 17.6 0.5 Miami (Airport), FL(2) ............................ 8,969 7,388 7,726 7,498 21.4 (4.4) 3.0 Orlando (North), FL ............................... 7,267 6,654 5,976 5,675 9.2 11.3 5.3 Orlando (South), FL ............................... 9,431 8,632 7,676 7,287 9.3 12.5 5.3 Tampa (Busch Gardens), FL(2) ...................... 2,857 2,984 2,781 2,975 (4.3) 7.3 (6.5) Tampa (Rocky Point), FL ........................... 5,866 5,499 4,936 4,771 6.7 11.4 3.5 Atlanta (Airport), GA ............................. 8,457 9,841 8,011 7,419 (14.1) 22.8 8.0 Atlanta (Buckhead), GA ............................ 11,898 12,026 11,353 10,410 (1.1) 5.9 9.1 Atlanta (Galleria), GA ............................ 7,339 8,091 7,279 7,415 (9.3) 11.2 (1.8) Atlanta (Perimeter Center), GA .................... 7,681 8,085 7,021 6,575 (5.0) 15.2 6.8 Brunswick, GA(2) .................................. 2,473 2,508 2,149 1,759 (1.4) 16.7 22.2 Chicago -- Lombard, IL ............................ 8,471 8,156 7,454 6,855 3.9 9.4 8.7 Chicago (O'Hare), IL .............................. 10,177 8,973 7,796 7,457 13.4 15.1 4.5 Deerfield, IL(2) .................................. 7,093 6,510 6,457 5,825 9.0 0.8 10.8 Indianapolis (North), IN .......................... 5,913 5,738 5,845 5,329 3.0 (1.8) 9.7 Overland Park, KS ................................. 5,922 5,624 5,289 5,064 5.3 6.3 4.4 Lexington, KY (2) ................................. 4,867 4,776 4,456 4,152 1.9 7.2 7.3 Baton Rouge, LA (2) ............................... 5,484 4,428 4,657 4,507 23.8 (4.9) 3.3 New Orleans (2) ................................... 9,269 8,346 7,643 8,014 11.1 9.2 (4.6)
-51- 60
SUITE REVENUE(1) PERCENTAGE CHANGE ------------------------------------------------------------------------------------ TWELVE TWELVE MONTHS MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ------------------------------ 9/30/97 1996 VS. 1995 VS. LOCATION 9/30/97 1996 1995 1994 VS. 1996 1995 1994 -------- ------- ---- ---- ---- -------- -------- -------- (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE) Boston-Marlbourgh, MA (2) . . $ 4,093 $ 2,945 $ 2,646 $ 2,485 39.0% 11.3% 6.5% Baltimore, MD . . . . . . . . 6,529 6,236 5,688 5,303 4.7 9.6 7.3 Troy, MI . . . . . . . . . . 6,903 6,342 5,589 5,300 8.9 13.5 5.5 Bloomington, MN . . . . . . . 6,001 6,342 6,578 6,281 (5.4) (3.6) 4.7 Minneapolis (Airport), MN (2) . . . . . . . . . . . 10,321 9,006 8,545 8,531 14.6 5.4 0.2 Minneapolis (Downtown), MN (2) . . . . . . . . . . . 5,360 4,260 4,937 5,155 25.8 (13.7) (4.2) St. Paul, MN (2) . . . . . . 5,318 4,602 4,872 4,906 15.5 (5.5) (0.7) Kansas City (Country Club Plaza), MO . . . . . . . . . 8,059 7,604 6,259 6,398 6.0 21.5 (2..2) Charlotte, NC . . . . . . . . 8,624 8,051 7,415 6,947 7.1 8.6 6.7 Raleigh/Durham, NC . . . . . 6,002 5,327 7,498 4,225 12.7 11.0 13.6 Raleigh, NC . . . . . . . . . 8,002 7,592 6,851 6,302 5.4 10.8 8.7 Omaha, NE . . . . . . . . . . 4,230 4,754 4,858 4,382 (11.0) (2.1) 10.9 Parsippany, NJ . . . . . . . 10,489 9,673 8,590 8,039 8.4 12.6 6.9 Piscataway, NJ (2) . . . . . 6,528 6,132 6,069 5,986 6.5 1.0 1.4 Secaucus, NJ . . . . . . . . 10,371 9,816 8,609 8,340 5.7 14.0 3.0 Syracuse, NY . . . . . . . . 5,811 5,572 5,381 5,393 4.3 3.5 (0.2) Cleveland, OH (2) . . . . . . 7,525 6,830 6,925 5,922 10.2 (1.4) 16.9 Tulsa, OK . . . . . . . . . . 5,738 5,703 5,213 5,097 0.6 9.4 2.3 Philadelphia (Society Hill), PA . . . . . 13,100 12,384 11,064 11,044 5.8 11.9 0.2 Myrtle Beach (Kingston (Plantation), SC . . . . . . 8,568 8,270 7,750 7,522 3.6 6.7 3.0 Nashville (Airport), TN . . . 3,242 3,164 3,023 2,928 2.5 4.7 3.2 Nashville, TN . . . . . . . . 8,651 8,163 7,960 7,678 6.0 2.6 3.7 Austin (Airport North), TX . 7,977 7,542 7,622 6,792 5.8 (1.0) 12.2 Austin (Downtown), TX . . . . 6,250 5,696 5,716 4,960 9.7 (0.3) 15.2 Corpus Christi, TX . . . . . 3,677 3,338 3,298 3,548 10.2 1.2 (7.0) Dallas (Love Field), TX . . . 7,520 7,176 6,327 6,106 4.8 13.4 3.6 Dallas (Market Center), TX . 7,901 7,716 7,032 6,908 2.4 9.7 1.8 Dallas (Park Central), TX . . 8,255 8,131 7,560 6,925 1.5 7.6 9.2 Dallas (Park Central), TX . . 13,174 13,523 12,662 11,236 (2.6) 6.8 12.7 San Antonio (Northwest), TX . . . . . . . . . . . . . 5,782 5,614 5,509 5,701 3.0 1.9 (3.4) San Antonio (Airport), TX . . 7,484 7,235 6,990 7,457 3.4 3.5 (6.3) --------- --------- --------- --------- Totals . . . . . . . . . . . $ 516,575 $ 481,471 $ 450,419 $ 428,811 7.3% 6.9% 5.0% ========= ========= ========= =========
- ----------------------- (1) The information included in this table with respect to suite revenues of the Current Hotels, for periods prior to their acquisition by the Company, was obtained from the prior owners. Suite Revenue, as shown, reflects the Lessee's 100% interest in the Current Hotels, even where the Company owns less than a 100% interest in such hotels. (2) This hotel underwent substantial renovation, upgrading or expansion during 1996. -52- 61 THE PERCENTAGE LEASES Pro Forma Lease Revenue The following table reflects comparative pro forma Percentage Lease Revenue received by the Company pursuant to the Percentage Leases for the 12 months ended September 30, 1997 and for the year ended December 31, 1996, as if the Current Hotels had been subject to the Percentage Leases for the entire periods presented.
PERCENTAGE LEASE REVENUE ------------------------ TWELVE MONTHS YEAR ENDED ENDED DECEMBER 31, LOCATION BRAND 9/30/97 1996 -------- ----- ------- ---- (IN THOUSANDS) CONSOLIDATED HOTELS: Birmingham, AL . . . . . . . . . . . . . Embassy Suites $ 3,546 $ 3,332 Flagstaff, AZ . . . . . . . . . . . . . . Embassy Suites 1,201 1,138 Phoenix (Camelback), AZ . . . . . . . . . Embassy Suites 5,521 4,711 Phoenix (Crescent), AZ . . . . . . . . . Sheraton 3,615 3,525 Anaheim, CA . . . . . . . . . . . . . . . Embassy Suites 2,799 2,250 Burlingame (S.F. Airport So.), CA . . . . Embassy Suites 7,486 6,089 Dana Point, CA . . . . . . . . . . . . . Doubletree Guest Suites 1,446 1,395 El Segundo (LAX Airport South), CA . . . Embassy Suites 3,704 3,057 Los Angeles (LAX Airport North), CA . . . Embassy Suites 2,677 2,591 Milpitas, CA . . . . . . . . . . . . . . Embassy Suites 6,013 4,619 Napa, CA . . . . . . . . . . . . . . . . Embassy Suites 2,638 2,335 Oxnard (Mandalay Beach), CA . . . . . . . Embassy Suites 3,369 3,258 South San Francisco (Airport North), CA . Embassy Suites 5,376 4,029 Avon (Beaver Creek Resort), CO . . . . . Embassy Suites 742 631 Boca Raton (Doubletree), FL . . . . . . . Doubletree Guest Suites 1,290 1,119 Boca Raton (Embassy), FL . . . . . . . . Embassy Suites 2,494 2,240 Deerfield Beach, FL . . . . . . . . . . . Embassy Suites 4,070 3,214 Ft. Lauderdale, FL . . . . . . . . . . . Embassy Suites 6,393 5,600 Jacksonville, FL . . . . . . . . . . . . Embassy Suites 2,597 2,431 Lake Buena Vista (Disney World), FL . . . Doubletree Guest Suites 5,068 4,467 Miami (Airport), FL . . . . . . . . . . . Embassy Suites 4,526 3,507 Orlando (North), FL . . . . . . . . . . . Embassy Suites 3,538 3,163 Orlando (South), FL . . . . . . . . . . . Embassy Suites 3,942 3,441 Tampa (Busch Gardens), FL . . . . . . . . Doubletree Guest Suites 1,240 1,326 Tampa (Rocky Point), FL . . . . . . . . . Doubletree Guest Suites 2,930 2,703 Atlanta (Airport), GA . . . . . . . . . . Sheraton 3,355 4,156 Atlanta (Buckhead), GA . . . . . . . . . Embassy Suites 5,936 6,014 Atlanta (Galleria), GA . . . . . . . . . Sheraton 3,123 3,533 Brunswick, GA . . . . . . . . . . . . . . Embassy Suites 957 982 Chicago (O'Hare), IL . . . . . . . . . . Sheraton 5,648 4,709 Deerfield, IL . . . . . . . . . . . . . . Embassy Suites 3,423 3,066 Lexington, KY . . . . . . . . . . . . . . Hilton Suites 2,188 2,158 Baton Rouge, LA . . . . . . . . . . . . . Embassy Suites 2,507 1,830 New Orleans, LA . . . . . . . . . . . . . Embassy Suites 4,052 3,470 Boston -- Marlborough, MA . . . . . . . . Embassy Suites 2,227 1,484 Baltimore, MD . . . . . . . . . . . . . . Doubletree Guest Suites 3,165 2,943 Troy, MI . . . . . . . . . . . . . . . . Doubletree Guest Suites 3,656 3,250 Bloomington, MN . . . . . . . . . . . . . Doubletree Guest Suites 2,771 3,049 Minneapolis (Airport), MN . . . . . . . . Embassy Suites 5,883 5,006 Minneapolis (Downtown), MN . . . . . . . Embassy Suites 2,505 1,797 St. Paul, MN . . . . . . . . . . . . . . Embassy Suites 2,010 1,561 Raleigh/Durham, NC . . . . . . . . . . . Doubletree Guest Suites 2,881 2,623 Omaha, NE . . . . . . . . . . . . . . . . Doubletree Guest Suites 1,948 2,284 Piscataway, NJ . . . . . . . . . . . . . Embassy Suites 2,588 2,394
-53- 62
PERCENTAGE LEASE REVENUE ------------------------ TWELVE MONTHS YEAR ENDED ENDED DECEMBER 31, LOCATION BRAND 9/3097 1996 -------- ----- ------ ---- (IN THOUSANDS) S> Syracuse, NY . . . . . . . . . . . . . . Embassy Suites 2,227 2,130 Cleveland, OH . . . . . . . . . . . . . . Embassy Suites 2,564 2,131 Tulsa, OK . . . . . . . . . . . . . . . . Embassy Suites 2,497 2,489 Philadelphia (Society Hill), PA . . . . . Sheraton 6,505 5,753 Myrtle Beach (Kingston Plantation), SC . Embassy Suites 3,337 2,738 Nashville (Airport), TN . . . . . . . . . Doubletree Guest Suites 1,372 1,320 Nashville, TN . . . . . . . . . . . . . . Embassy Suites 3,646 3,360 Austin (Downtown), TX . . . . . . . . . . Doubletree Guest Suites 3,218 2,829 Corpus Christi, TX . . . . . . . . . . . Embassy Suites 1,680 1,463 Dallas (Love Field), TX . . . . . . . . . Embassy Suites 3,446 3,231 Dallas (Market Center), TX . . . . . . . Embassy Suites 3,704 3,583 Dallas (Park Central), TX . . . . . . . . Embassy Suites 3,670 3,609 Dallas (Park Central), TX . . . . . . . . Sheraton 5,973 6,031 -------- -------- Total Consolidated Hotels . . . . . . . $192,883 $173,147 ======== ======== UNCONSOLIDATED HOTELS: Covina, CA . . . . . . . . . . . . . . . Embassy Suites $ 1,688 $ 1,293 San Rafael (Marin Co.), CA . . . . . . . Embassy Suites 3,994 3,575 Atlanta (Perimeter Center), GA Embassy Suites 3,623 3,889 Chicago --Lombard, IL . . . . . . . . . . Embassy Suites 3,956 3,767 Indianapolis (North), IN . . . . . . . . Embassy Suites 2,569 2,450 Overland Park, KS . . . . . . . . . . . . Embassy Suites 2,835 2,641 Kansas City (Country Club Plaza), MO . . Embassy Suites 3,890 3,594 Charlotte, NC . . . . . . . . . . . . . . Embassy Suites 4,193 3,832 Raleigh, NC . . . . . . . . . . . . . . . Embassy Suites 3,949 3,693 Parsippany, NJ . . . . . . . . . . . . . Embassy Suites 5,006 4,471 Secaucus, NJ . . . . . . . . . . . . . . Embassy Suites 4,444 4,082 Austin (Airport North), TX . . . . . . . Embassy Suites 4,077 3,792 San Antonio (NW), TX . . . . . . . . . . Embassy Suites 2,597 2,488 San Antonio (Airport), TX . . . . . . . . Embassy Suites 3,217 3,114 --------- --------- Total Unconsolidated Hotels . . . . . . 50,038 46,681 --------- --------- Total Hotels . . . . . . . . . . . . . . $ 242,921 $ 219,828 ========= =========
Lease Terms Each of the Current Hotels is leased to the Lessee pursuant to a Percentage Lease generally having a term of 10 years and providing for rent equal to the greater of Base Rent or Percentage Rent. The terms of each Percentage Lease are approved by FelCor's Independent Directors, including the Percentage Rent terms that are typically 17% of suite revenue up to a tier amount (the "Suite Revenue Breakpoint") and 65% of suite revenue in excess of the Suite Revenue Breakpoint. Each Percentage Lease also requires the Lessee to pay as rent 5% of the food and beverage revenues from each Current Hotel in which the restaurant and bar operations are conducted directly by the Lessee and 98% of the food and beverage rent revenues from each Current Hotel in which the restaurant and bar operations are subleased by the Lessee to an unrelated third party. The amount of Base Rent and of the Suite Revenue Breakpoint in each Percentage Lease formula is subject to adjustment, annually, based upon a formula taking into account changes in the Consumer Price Index over the preceding two years; however, the adjustment in any year may not exceed 7%. An adjustment of 0.73% was effective January 1, 1996 for the 10 hotels acquired by the Company prior to July 1, 1995 and an adjustment of 1.42% will be effective January 1, 1997 for the 37 Current Hotels acquired prior to July 1, 1996. The adjustment is calculated at the beginning of each calendar year, for those hotels acquired prior to July 1 of the preceding year. Maintenance and Modifications. Under the Percentage Leases, the Company is required to maintain the underground utilities and the structural elements of the improvements, including exterior walls (excluding plate glass) and the roof of each leased hotel. In addition, the Percentage Leases obligate the Company to fund periodic improvements (in addition to maintenance of structural elements) to the buildings and grounds comprising the leased hotels, and the periodic repair, replacement and refurbishment of furniture, fixtures and equipment in the leased hotels, when and as required to meet the requirements of the applicable franchise licenses, and to establish and maintain a -54- 63 reserve, which is available to the Lessee for such purposes, in an amount equal to 4% of hotel suite revenues, on a cumulative basis. The Company's obligation is not limited to the amount in such reserve. Otherwise, the Lessee is required, at its expense, to maintain the leased hotels in good order and repair, except for ordinary wear and tear, and to make nonstructural repairs, whether foreseen or unforeseen, ordinary or extraordinary, which may be necessary and appropriate to keep the leased hotels in good order and repair. Insurance and Property Taxes. The Company is responsible for paying real estate and personal property taxes and property and casualty insurance premiums on the leased hotels (except to the extent that personal property associated with the leased hotels is owned by the Lessee). The Lessee is required to pay for all liability insurance on the leased hotels, which must include extended coverage, comprehensive general public liability, workers' compensation and other insurance appropriate and customary for properties similar to the leased hotels. Indemnification. Under each of the Percentage Leases, the Lessee will indemnify, and will be obligated to hold harmless, the Company from and against all liabilities, costs and expenses (including reasonable attorneys' fees and expenses) incurred by, imposed upon or asserted against the Company on account of, among other things, (i) any accident or injury to person or property on or about the leased hotels, (ii) any misuse by the Lessee or any of its agents of the leased hotels, (iii) any environmental liability resulting from conditions disclosed in the environmental audits received by the Company before it acquired the leased hotels or caused or resulting thereafter from any action or negligence of the Lessee, (iv) taxes and assessments in respect of the leased hotels (other than real estate and personal property taxes and any income taxes of the Company on income attributable to the leased hotels), (v) the sale or consumption of alcoholic beverages on or in the real property or improvements thereon, or (vi) any breach of the Percentage Leases by the Lessee; provided, however, that such indemnification will not be construed to require the Lessee to indemnify the Company against it's own grossly negligent acts or omissions or willful misconduct. Assignment and Subleasing. The Lessee is not permitted to sublet all or substantially all of any one or more of the leased hotels or to assign its interest under any of the Percentage Leases, other than to an affiliate of the Lessee, without the prior written consent of the Company. The Lessee may, however, sublet space to operators of gift shops, restaurants, lounges or other amenities at the leased hotels. No assignment or subletting will release the Lessee from any of its obligations under the Percentage Leases. Damage to Current Hotels. In the event of damage to or destruction of any leased hotel covered by insurance which renders the leased hotel unsuitable for the Lessee's use and occupancy, the Lessee is generally obligated to repair, rebuild, or restore the leased hotel or offer to acquire the leased hotel on the terms set forth in the applicable Percentage Lease. If the Lessee rebuilds the leased hotel, the Company is obligated to disburse to the Lessee, from time to time and upon satisfaction of certain conditions, any insurance proceeds actually received by the Company as a result of such damage or destruction, and any excess costs of repair or restoration will be paid by the Lessee. If the Lessee decides not to rebuild and the Company rejects the Lessee's mandatory offer to purchase the leased hotel on the terms set forth in the Percentage Lease, the Percentage Lease will terminate and the insurance proceeds will be retained by the Company. If the Company accepts the Lessee's offer to purchase the leased hotel, the Percentage Lease will terminate and the Lessee will be entitled to the insurance proceeds. In the event that damage to or destruction of a leased hotel which is covered by insurance does not render the leased hotel wholly unsuitable for the Lessee's use and occupancy, the Lessee generally will be obligated to repair or restore the leased hotel. In the event of material damage to or destruction of any leased hotel which is not covered by insurance, the Lessee is obligated to either repair, rebuild, or restore the leased hotel or offer to purchase the leased hotel on the terms and conditions set forth in the Percentage Lease. The Percentage Lease shall remain in full force and effect during the first three months of any period required for repair or restoration of any damaged or destroyed leased hotel, after which time, rent will be equitably abated. Condemnation of Current Hotels. In the event of a total condemnation of a leased hotel, the relevant Percentage Lease will terminate as of the date of taking, and the Company and the Lessee will be entitled to their shares of the condemnation award in accordance with the provisions of the Percentage Lease. In the event of a partial taking which does not render the leased hotel unsuitable for the Lessee's use, the Lessee shall restore the untaken portion of the leased hotel to a complete architectural unit and the Company shall contribute to the cost of such restoration that part of the condemnation award specified for restoration. -55- 64 Events of Default. Events of Default under the Percentage Leases include, among others, the following: (i) the occurrence of an Event of Default under any other lease between the Company and the Lessee or any affiliate of the Lessee; (ii) the failure by the Lessee to pay Base Rent when due and the continuation of such failure for a period of 10 days thereafter; (iii) the failure by the Lessee to pay the excess of Percentage Rent over Base Rent within 90 days after the end of the calendar year in which such payment was due; (iv) the failure by the Lessee to observe or perform any other term of a Percentage Lease and the continuation of such failure for a period of 30 days after receipt by the Lessee of notice from the Company thereof, unless such failure cannot be cured within such period and the Lessee commences appropriate action to cure such failure within said 30 days and thereafter acts, with diligence, to correct such failure within such time as is necessary; (v) if the Lessee shall file a petition in bankruptcy or reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law, or shall be adjudicated a bankrupt or shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of the Lessee as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law shall be filed in any court and the Lessee shall be adjudicated a bankrupt and such adjudication shall not be vacated or set aside or stayed within 60 days after the entry of an order in respect thereof, or if a receiver of the Lessee or of the whole or substantially all of the assets of the Lessee shall be appointed in any proceeding brought by the Lessee or if any such receiver, trustee or liquidator shall be appointed in any proceeding brought against the Lessee and shall not be vacated or set aside or stayed within 60 days after such appointment; (vi) if the Lessee voluntarily discontinues operations of a leased hotel for more than 30 days, except as a result of damage, destruction, or condemnation; or (vii) if the franchise agreement with respect to a leased hotel is terminated by the franchisor as a result of any action or failure to act by the Lessee or its agents. If an Event of Default occurs and continues beyond any curative period, the Company has the option of terminating the Percentage Lease or any or all other Percentage Leases by giving the Lessee 10 days' prior written notice of the date for termination of the Percentage Lease and, unless such Event of Default is cured prior to the termination date set forth in said notice, the specified Percentage Leases shall terminate on the date specified in the Company's notice and the Lessee is required to surrender possession of the affected leased hotels. Termination of Percentage Leases on Disposition of the Current Hotels. In the event the Company enters into an agreement to sell or otherwise transfer a leased hotel, the Company has the right to terminate the Percentage Lease with respect to such leased hotel upon 90 days' prior written notice upon either (i) paying the Lessee the fair market value of the Lessee's leasehold interest in the remaining term of the Percentage Lease to be terminated or (ii) offering to lease to the Lessee a substitute hotel on terms that would create a leasehold interest in such hotel with a fair market value equal to or exceeding the fair market value of the Lessee's remaining leasehold interest under the Percentage Lease to be terminated. The Company also is obligated to pay, or reimburse the Lessee for, (x) any assignment fees, termination fees or other liabilities arising under any franchise license agreement solely as a result of the assignment or termination of such franchise license agreement in connection with the Company's sale of a leased hotel and termination of the Percentage Lease with respect thereto and (y) any termination fees payable under any restaurant sublease solely as a result of the termination thereof upon termination of the Percentage Lease with respect thereto. Other Lease Covenants. The Lessee has agreed that during the term of the Percentage Leases it will maintain a ratio of total debt to consolidated net worth (as defined in the Percentage Leases) of less than or equal to 50%, exclusive of capitalized leases. In addition, the Lessee has agreed that it will not pay fees to any affiliate of the Lessee. -56- 65 Breach by Company. If the Company fails to cure a breach on its part under a Percentage Lease, the Lessee may purchase the relevant leased hotel from the Company for a purchase price equal to the leased hotel's then fair market value. Upon notice from the Lessee that the Company has breached the Lease, the Company has 30 days to cure the breach or proceed to cure the breach, which period may be extended in the event of certain specified, unavoidable delays. Inventory. The initial standard inventory of goods and supplies necessary for the operation of the leased hotels has been acquired by the Lessee. The Lessee is required to purchase, at its expense, any and all replacements and additions to such inventory as may be necessary for the continued operation of the leased hotels and, upon the termination of the applicable Percentage Lease, to surrender such leased hotel to the Company. SEASONALITY The Current Hotels' operations historically have been seasonal in nature, reflecting higher occupancy rates primarily during the first three quarters of each year. This seasonality can be expected to cause fluctuations in the Company's quarterly lease revenue, particularly during the fourth quarter, to the extent that it receives Percentage Rent. To the extent cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in lease revenue, the Company expects to utilize other cash on hand or borrowings under the Line of Credit to make distributions to its shareholders. COMPETITION The hotel industry is highly competitive. Each of the Company's hotels is located in a developed area that includes other hotel properties and competes for guests primarily with other upscale hotels in its immediate vicinity and secondarily with other full service hotel properties in its geographic market. An increase in the number of competitive hotel properties in a particular area could have a material adverse effect on the occupancy, ADR and RevPAR of the Company's hotels in that area. The Company believes that brand recognition, location, the quality of the hotel and services provided, and price are the principal competitive factors affecting the Company's hotels. The Company competes for investment opportunities with other entities, some of which have substantially greater financial resources than the Company. These larger entities may be able to accept more risk than the Company can prudently manage. An increase in the number of purchasers for upscale hotel properties may reduce the number of suitable investment opportunities offered to the Company and may increase the bargaining power of owners seeking to sell their hotels. ENVIRONMENTAL MATTERS Under various federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances on the property. Furthermore, a person that arranges for the disposal or treatment of, or transports for disposal or treatment, a hazardous or toxic substance at any property may be liable for the costs of removal or remediation of hazardous or toxic substances released into the environment at or from that property. The costs of removal or remediation of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner's ability to fully utilize such property without restriction, to sell such property or to borrow using such property as collateral. In connection with the ownership and operation of the Company's hotels, FelCor, FelCor LP and the Lessee, as the case may be, may be potentially liable for any such costs. Phase I environmental audits, by independent environmental engineers, are customarily obtained with respect to hotels, prior to the acquisition thereof by the Company. The principal purpose of Phase I audits is to identify indications of potential environmental contamination for which such hotels may be responsible and, secondarily, to assess, to a limited extent, the potential for environmental regulatory compliance liabilities. The Phase I audits of the Current Hotels were designed to meet the requirements of the then current industry standards governing Phase I audits, and consistent with those requirements, none of the audits involved testing of groundwater, soil or air. Accordingly, they do not -57- 66 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 Current Hotels' complete compliance status. Similarly, the audits did not involve comprehensive analysis of potential off-site liability. The Phase I audit reports did not reveal any environmental liability that management believes would have a material adverse effect on the Company's business, assets or results of operations, nor is the Company aware of any such liability. Nevertheless, it is possible that these reports do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. No assurances can be given that (i) future or amended laws, ordinances or regulations or more stringent interpretations or enforcement policies of existing environmental requirements, will not impose any material environmental liability or (ii) the environmental condition of the Current Hotels will not be affected by changes (of which the Company is unaware) occurring subsequent to the date of such audits, by the condition of properties in the vicinity of such hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to the Company. The Company believes that its Current Hotels are in compliance, in all material respects, with all federal, state and local ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which would have a material adverse effect on FelCor, FelCor LP or the Lessee. The Company has not been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of its present or former properties. TAX STATUS The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its initial taxable year ending December 31, 1994. As a REIT, the Company (subject to certain exceptions) will not be subject to federal income taxation, at the corporate level, on its taxable income that is distributed to the shareholders of the Company. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its taxable income. The Company may, however, be subject to certain state and local taxes on its income and property. In connection with the Company's election to be taxed as a REIT, the Company's Charter imposes restrictions on the transfer of shares of Common Stock. The Company has adopted the calendar year as its taxable year. EMPLOYEES Messrs. Feldman and Corcoran have each entered into employment agreements with the Company, pursuant to which they have agreed to devote substantially all of their time to the business of the Company through 1999. In addition, the Company had 28 other employees at September 30, 1997. All persons employed in the day-to-day operation of the Company's Current Hotels are employees of the management companies engaged by the Lessee to operate such hotels. PERSONNEL AND OFFICE SHARING ARRANGEMENTS The Company shares executive offices with the Lessee and FelCor, Inc., a corporation owned by Messrs. Feldman and Corcoran. Each entity bears an allocated share of the costs thereof, including but not limited to rent, salaries of all personnel (other than Messrs. Feldman and Corcoran, who are compensated solely by the Company), office supplies and telephones. Such allocations of shared costs are subject to the approval of a majority of the independent directors of the Company. During 1996 approximately $807,000 (approximately 38% of all allocable expenses) was borne by the Company under this arrangement. LEGAL PROCEEDINGS The Company's Current Hotels are subject to various claims arising in the ordinary course of business. These claims, exclusive of potential third party recoveries, are not considered to be material. Furthermore, such claims are substantially covered by insurance. Management does not believe that any claims known to it (individually or in the aggregate) will have a material adverse effect on the Company, without regard to any potential recoveries from insurers or other third parties. -58- 67 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Board of Directors currently consists of seven members, four of whom are not officers or employees of the Company or any subsidiary or lessee thereof ("Independent Directors"). The Board of Directors is divided into three classes who serve staggered three-year terms with the term of each director expiring at the annual meeting of shareholders held three years after his election. Set forth below is certain information regarding the directors and executive officers of the Company.
YEAR FIRST TERM NAME POSITION ELECTED CLASS EXPIRES ---- -------- ------- ----- ------- Hervey A. Feldman . . . . . . . . . Chairman of the Board 1994 Class I 1998 Thomas J. Corcoran, Jr . . . . . . President and Chief Executive Officer, Director 1994 Class II 1999 Richard S. Ellwood . . . . . . . . Independent Director 1994 Class III 2000 Richard O. Jacobson . . . . . . . . Independent Director 1994 Class III 2000 Charles N. Mathewson . . . . . . . Director 1994 Class I 1998 Thomas A. McChristy . . . . . . . . Independent Director 1994 Class III 2000 Donald J. McNamara . . . . . . . . Independent Director 1994 Class II 1999 Randall L. Churchey . . . . . . . . Senior Vice President, Chief Financial Officer and Treasurer 1997 -- -- Lawrence D. Robinson . . . . . . . Senior Vice President, General Counsel and Secretary 1996 -- -- Jack Eslick . . . . . . . . . . . . Vice President, Director of Asset Management 1996 -- -- June H. McCutchen . . . . . . . . . Vice President, Director of Design and Construction 1995 -- -- William P. Stadler . . . . . . . . Vice President, Director of Acquisition and Development 1995 -- --
Hervey A. Feldman (age 60) is the Chairman of the Board of the Company and has served in such capacity since its formation in May 1994. He is also a co-founder of FelCor, Inc. and has served as its Chairman since its formation in 1991. Prior to that time, he held executive positions with Embassy Suites, Inc., serving as its Chairman of the Board from June 1990 until January 1992, and as its President and Chief Executive Officer from the founding of that company in January 1983 to April 1990. Prior to 1990, Mr. Feldman had spent over 25 years in the hotel industry, including serving in various management positions with Brock Hotel Corporation during a period when that company was one of the largest franchisees of Holiday Inn(R) hotels in the U.S.; as Executive Vice President for North American Development of Holiday Inns, Inc.; and President and Chief Executive Officer of Brock Residence Inns, Inc., which founded the extended-stay, all-suite chain now known as Residence Inns by Marriott(R). Thomas J. Corcoran, Jr. (age 48) is the President and Chief Executive Officer of the Company and has served in such capacity since its formation in May 1994. He is also a co-founder of FelCor, Inc. and has served as its President and Chief Executive Officer since its formation in 1991. From October 1990 to December 1991, he served as the Chairman, President and Chief Executive Officer of Fiesta Foods, Inc., a manufacturer of tortilla chips and taco shells. From 1979 to 1990, Mr. Corcoran held various positions with Integra -- A Hotel and Restaurant Company (formerly Brock Hotel Corporation), including serving as the President and Chief Executive Officer of that company from 1986 to 1990, and with ShowBiz Pizza Time, Inc., an operator and franchisor of family entertainment center/pizza restaurants. -59- 68 Richard S. Ellwood (age 66) is the founder and principal owner of R. S. Ellwood & Co., Inc., a real estate investment banking firm which was organized in 1987. Prior to 1987, as an investment banker, Mr. Ellwood was elected successively in 1968 a general partner of White Weld & Co., in 1978 a managing director of Warburg Paribas Becker, Incorporated and in 1984 a managing director and senior banker of Merrill Lynch Capital Markets. Mr. Ellwood has extensive experience in hotel financing. He was a founder of Hotel Investors Trust, a REIT, and served as a Trustee from 1970 until its merger with another REIT in 1987. He is currently a director of two additional REITs, Apartment Investment and Management Company and Corporate Realty Income Trust. Richard O. Jacobson (age 61) is the President and Chief Executive Officer of Jacobson Warehouse Company, Inc., a privately-held warehouse company with facilities in 15 locations in seven states, which Mr. Jacobson founded 29 years ago. He is also President and Chief Executive Officer of Jacobson Transportation Company, Inc., a truckload common carrier with authority to operate in 48 states and Canada. Mr. Jacobson is a member of the Boards of Directors of Advanced Oxygen Technology, Inc., AlaTenn Resources, Inc., Allied Group, Inc., Firstar Bank Des Moines, N.A., Firstar Bank of Iowa, N.A. and Heartland Express, Inc. Charles N. Mathewson (age 69) has served, for more than the past five years, in various positions with International Game Technology ("IGT"), a company engaged in the design and manufacture of microprocessor based gaming products and gaming monitoring systems. Since February 1988, he has served as the Chairman of the Board of IGT. He has served as a director of IGT since December 1985, as President from December 1986 to February 1988, and as Chief Executive Officer from December 1986 until June 1993 and from February 1996 until the present. Mr. Mathewson also is a member of the Board of Directors of Baron Asset Fund. Thomas A. McChristy (age 71) is the President of T.A. McChristy Co. Inc., a real estate investment company, and has served in that capacity since 1957. Mr. McChristy also served as the President and Chief Operating Officer of Syntech International, Inc., a lottery systems and equipment manufacturing company, from 1986 to 1988 and as its Chief Executive Officer from 1989 to 1992. Donald J. McNamara (age 44) is the founder and Chairman of The Hampstead Group, a real estate investment company with substantial activities in the hospitality and retirement housing industries. Mr. McNamara also is the Chairman of the Board of Directors of Bristol Hotel Company and a director of Mountasia Entertainment International and Catellus Development Corporation. Randall L. Churchey (age 37) became the Senior Vice President, Chief Financial Officer and Treasurer of the Company on November 1, 1997. For approximately 15 years prior to joining the Company, Mr. Churchey held various positions with Coopers & Lybrand, L.L.P. Most recently, Mr. Churchey served as the Chairman of the Hospitality and Real Estate Practice for the Southwestern United States. Lawrence D. Robinson (age 54) has served as Senior Vice President, General Counsel and Secretary of the Company since May 1996. From 1972 to 1989, Mr. Robinson was a partner in the Kansas City-based law firm of Stinson, Mag & Fizzell, for which he founded and managed a Dallas, Texas office from 1982 to 1989. From 1989 through April 1996, Mr. Robinson was a partner in the Houston-based law firm of Bracewell & Patterson, L.L.P., where he served as the managing partner of its Dallas office until 1992, as the head of that office's corporate and securities law section and as chairman of its firm-wide hospitality group. Jack Eslick (age 45) joined the Company in April 1996 as its Vice President, Director of Asset Management. Mr. Eslick has over 20 years experience in hotel operations. From April 1991 until he joined the Company, Mr. Eslick served as Vice President of Operations of Promus, where he had direct responsibility for all operations in a region that grew from 14 hotels to 26 hotels. Prior to April 1991, he served in various capacities with Holiday Inns, Inc., including serving as general manager of various hotels and as a Regional Director of Operations. June H. McCutchen (age 42) joined the Company in October 1995 as Vice President, Director of Design and Construction. Her most recent experience was as Account Executive for Hospitality Restoration & Builders, Inc. since 1994. From 1992 to 1994 she was Project Manager for American General Hospitality, Inc. where she managed all capital improvement work for over 35 properties each year. Prior to 1992, Ms. McCutchen was Project Manager for Hilton Hotels, Inc. from 1987 to 1992, and prior to 1987, she served as design coordinator and purchasing manager for Embassy Suites, Inc. -60- 69 William P. Stadler (age 42) began his employment with the Company in July 1995 as Vice President, Director of Acquisition and Development. Mr. Stadler has over 17 years of experience in hotel acquisition and development, having served as Vice President-Development for Coastal Hotel Group from 1994 until he joined the Company in 1995, as Vice President-Development for Embassy Suites, Inc. from 1992 to 1994, as Senior Vice President-Development for Landmark Hotels, Inc. from 1989 to 1991 and as Vice President-Development for Marriott Corporation from 1985 to 1989. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth the beneficial ownership of the Company's Common Stock and Series A Preferred Stock, as of November 1, 1997, by (i) each director and director nominee, (ii) each named executive officer and (iii) all directors and executive officers as a group. Unless otherwise indicated, such shares of Common Stock and Series A Preferred Stock are owned directly and the indicated person has sole voting and investment power.
AMOUNT AND AMOUNT AND NATURE OF NATURE OF BENEFICIAL BENEFICIAL NAME OF OWNERSHIP OF PERCENT OF OWNERSHIP OF PERCENT OF BENEFICIAL OWNER COMMON STOCK CLASS(1) PREFERRED STOCK CLASS(1) ---------------- ------------ -------- --------------- -------- Hervey A. Feldman . . . . . . . . . . . . . . . . 464,315(2)(3) 1.3% 3,000 (10) * Thomas J. Corcoran, Jr . . . . . . . . . . . . . 464,415(2)(4) 1.3% 3,000 * Richard S. Ellwood . . . . . . . . . . . . . . . 4,500 * 0 0 Richard O. Jacobson . . . . . . . . . . . . . . . 21,200 * 0 0 Charles N. Mathewson . . . . . . . . . . . . . . 609,777 (5) 1.6% 90,000 (11) 1.5% Thomas A. McChristy . . . . . . . . . . . . . . . 45,900 (6) * 0 0 Donald J. McNamara . . . . . . . . . . . . . . . 4,600 * 0 0 Lawrence D. Robinson . . . . . . . . . . . . . . 36,500 (7) * 0 0 Randall L. Churchey . . . . . . . . . . . . . . . 0 0 0 0 William P. Stadler . . . . . . . . . . . . . . . 12,577 (8) * 100 * Jack Eslick . . . . . . . . . . . . . . . . . . . 12,000 (9) * 0 0 June H. McCutchen . . . . . . . . . . . . . . . . 4,000 * 0 0 All executive officers and directors as a group (12 persons) . . . . . . . . . . . . . . . 1,384,869 3.5% 96,100 1.6%
- ------------------ * Represents less than 1% of the outstanding shares of such class. (1) Based upon 36,588,732 shares outstanding as of November 1, 1997. (2) Includes 294,915 shares issuable to FelCor, Inc. upon exercise of redemption rights with respect to Units issued to it in connection with the IPO. Messrs. Feldman and Corcoran are the sole shareholders and directors of FelCor, Inc. and each may be deemed to own beneficially all of the Units owned by FelCor, Inc. Also includes (i) an aggregate of 33,000 shares issued pursuant to stock grants (9,000 in February 1995, 9,000 in December 1995, and 15,000 in February 1997), which shares vest over a five-year period from the date of grant at the rate of 20% per year and of which 5,400 shares are fully vested, (ii) 120,000 shares issuable pursuant to currently exercisable stock options, and (iii) 2,325 shares issuable upon the conversion of 3,000 shares of Series A Preferred Stock. Does not include 331,000 shares issuable pursuant to outstanding stock options which are not currently exercisable. (3) Includes 200 shares owned of record by Mr. Feldman's minor children. (4) Includes 300 shares owned of record by Mr. Corcoran's minor children. -61- 70 (5) Includes 540,009 shares issuable to or for the benefit of Mr. Mathewson upon exercise of redemption rights with respect to Units, which represents Mr. Mathewson's pro rata interest in Units issued in connection with the IPO to partnerships in which Mr. Mathewson is a limited partner. Also includes 69,768 shares issuable upon conversion of 90,000 shares of Series A Preferred Stock. (6) Includes 38,000 shares owned of record by the T.A. McChristy Living Trust, over which Mr. McChristy has sole investment and voting power, and 3,000 shares owned of record by his spouse's individual retirement account. (7) Includes (i) 14,500 shares issued pursuant to stock grants, which shares vest over a five-year period from the date of grant at the rate of 20% per year and of which 2,400 shares are fully vested, and (ii) 20,000 shares issuable pursuant to currently exercisable stock options. Does not include 100,000 shares issuable pursuant to outstanding stock options which are not currently exercisable. (8) Represents (i) 2,500 shares issued pursuant to a stock grant, which shares vest over a five-year period from the date of grant at the rate of 20% per year and of which 1,000 shares are fully vested, (ii) 10,000 shares issuable pursuant to currently exercisable stock options and (iii) 77 shares issuable upon the conversion of 100 shares of Series A Preferred Stock. Does not include 30,000 shares issuable pursuant to outstanding stock options which are not currently exercisable. (9) Represents (i) 2,000 shares issued pursuant to a stock grant, which shares are fully vested and (ii) 10,000 shares issuable pursuant to currently exercisable stock options. Does not include 55,000 shares issuable pursuant to outstanding stock options which are not currently exercisable. (10) Includes 1,000 shares owned by Mr. Feldman's spouse and 1,000 shares owned by trust for the benefit of his minor children. (11) Represents shares owned of record by the Charles M. Mathewson Trust. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS FelCor and FelCor LP have entered into a number of transactions with the Lessee and certain other affiliates. Mr. Feldman and Mr. Corcoran, who are officers and directors of FelCor, control and are also officers and directors of the Lessee. THE PERCENTAGE LEASES The Company and the Lessee have entered into the Percentage Leases, each with a minimum term of ten years, relating to each hotel owned by the Company. The Company anticipates that similar Percentage Leases will be executed with respect to any additional hotel properties acquired by it in the future. Pursuant to the terms of the Percentage Leases, the Lessee is required to pay the greater of Base Rent or Percentage Rent and certain other additional charges, and is entitled to all profits from the operation of the hotels after the payment of operating, management and other expenses. Lease rent paid by the Lessee under the Percentage Leases totaled approximately $108 million for the year ended December 31, 1996 and approximately $97 million for the six months ended June 30, 1997. The Lessee is a Delaware limited liability company, all of the voting Class A membership interest in which (representing a 50% equity interest) is beneficially owned one half by Mr. Feldman and one half by Mr. Corcoran. All of the non-voting Class B membership interest in the Lessee (representing the remaining 50% equity interest) is owned by RGC Leasing, Inc., a Nevada corporation owned by the children of Charles N. Mathewson. -62- 71 EMPLOYMENT AGREEMENTS The Company has entered into the Employment Agreements with each of Messrs. Feldman and Corcoran that will continue in effect until December 31, 1999 and automatically be renewed for successive one year terms, unless otherwise terminated. Pursuant to such Employment Agreements, Mr. Feldman serves as Chairman of the Board, and Mr. Corcoran serves as President and Chief Executive Officer, of the Company. Each was paid a base salary of $5,000 per month through 1994, $10,000 per month in 1995 and $10,270 in 1996. Effective January 1, 1997, Mr. Feldman is entitled to receive $12,500 per month and Mr. Corcoran is entitled to receive $16,667 per month. Messrs. Feldman and Corcoran have agreed to devote substantially all of their time to the business of the Company. The Compensation Committee of the Board may provide for additional compensation as a bonus should it determine, in its discretion, based on merit, the Company's anticipated financial performance and other criteria, that such additional compensation is appropriate. The Company maintains a comprehensive medical plan for the benefit of Messrs. Feldman and Corcoran and their dependents. OPTION AND RIGHT OF FIRST REFUSAL In 1994, the Company was granted a two-year option to purchase, at fair market value, and a right of first refusal with respect to an Embassy Suites hotel located in St. Louis, Missouri that was developed by a FelCor Affiliate and opened for business on December 21, 1994 under the management of Promus. In anticipation of the December 21, 1996 expiration date of such option and right of first refusal, the Independent Directors of FelCor, following an inspection of the hotel and a thorough consideration of all matters deemed relevant by them determined, at a meeting held at such hotel in June 1996, that it would be in the best interests of the Company and its shareholders to allow this option and right of first refusal to expire unexercised. Such decision was based, in part, upon the fact that the Company had other purchase opportunities, that the option was only exercisable at fair market value and that the hotel offered little opportunity for the Company to benefit from additional capital expenditures, or changes in brand or management. Accordingly, this option and right of first refusal was not exercised and expired by its terms on December 21, 1996. SHARING OF OFFICES AND EMPLOYEES The Company shares the executive offices and certain employees with FelCor, Inc. and the Lessee, and each company bears its share of the costs thereof, including an allocated portion of the rent, salaries of certain personnel (other than Messrs. Feldman and Corcoran, whose salaries are borne solely by the Company), office supplies, telephones and depreciation of office furniture, fixtures and equipment. Any such allocation of shared expenses to the Company must be approved by a majority of the Independent Directors. During 1996, the Company paid approximately $807,000 (approximately 38%) of the allocable expenses under this arrangement. COMPENSATION OF DIRECTOR FOR SPECIAL SERVICES In connection with the Company's acquisition, during February 1997, of interests in 10 hotels at an aggregate cost of approximately $139 million (including the Company's share of certain assumed indebtedness), Mr. Richard S. Ellwood, an Independent Director of the Company, was paid a one-time fee in the amount of $200,000 for his services in facilitating this transaction. -63- 72 DESCRIPTION OF CERTAIN INDEBTEDNESS The Company's indebtedness consists primarily of the outstanding Old Notes, amounts borrowed under the Line of Credit, and the Renovation Loan. In addition, the Company has assumed certain other indebtedness and capitalized lease obligations in connection with the purchase of certain of the Current Hotels. As of September 30, 1997, after giving effect to the Private Placement and the application of the proceeds therefrom, the Company's total Indebtedness would have been approximately $428 million, of which $300 million would have been outstanding under the Notes, $91 million would have been outstanding under the Line of Credit, $25 million would have been outstanding under the Renovation Loan and $12 million would have been outstanding under other Indebtedness. Line of Credit. In September 1996, the Company obtained the Line of Credit, originally a $250 million unsecured revolving credit facility from a group of lenders co-arranged by The Chase Manhattan Bank and Wells Fargo Bank, National Association. As subsequently amended and restated, the Line of Credit has been increased to $550 million. The Line of Credit has a term of three years ending October 1, 2000. Borrowings under the Line of Credit bear interest, at the Company's option, (i) at a base rate ("Base Rate") equal to the higher of the base rate announced from time to time by The Chase Manhattan Bank or 0.5% plus the Federal funds rate, in either case plus an applicable margin of 0% to 0.25%, or (ii) at a Eurodollar rate ("Eurodollar Rate") based upon the 30, 60, or 90 day or 6-month LIBOR plus an applicable margin of 1.00% to 1.75%. The applicable margin varies depending upon the Company's long-term senior unsecured implied debt rating or its leverage ratio and, at September 30, 1997, was 0.0% in the case of Base Rate borrowings and 1.4% in the case of Eurodollar Rate borrowings. The weighted average interest rate in effect for borrowings under the Line of Credit was 7.22% at September 30, 1997. Up to 10% of the amount available under the Line of Credit may be used for general corporate or working capital purposes. The total amount available under the Line of Credit is limited to 50% of the aggregate value of the Company's eligible hotels, which generally includes hotels that are unencumbered. The Company's availability under the Line of Credit, as of September 30, 1997, was $550 million, of which $296 million had been borrowed. The Line of Credit requires FelCor and FelCor LP to comply with certain financial tests and to maintain certain financial ratios. FelCor and FelCor LP must maintain: (i) a ratio of Adjusted EBITDA to Gross Interest Expense for the four most recent quarters of not less than 2.5 to 1.0; (ii) a ratio of Adjusted EBITDA to Fixed Charges for the four most recent quarters of not less than 2.0 to 1.0; and (iii) Tangible Net Worth of not less than the sum of (a) $825 million plus (b) 50% of the aggregate net proceeds received by the Company or any of its subsidiaries after June 30, 1997 in connection with any offering of stock or stock equivalents of the Company. FelCor and FelCor LP shall ensure that at the end of each fiscal quarter at least 50% of the aggregate Adjusted NOI generated by all hotels during the preceding four fiscal quarters shall be generated by hotels wholly owned or leased by FelCor or FelCor LP or its wholly owned subsidiaries; provided that, for hotels owned or leased for less than four fiscal quarters only the Adjusted NOI generated by such hotels since the date of acquisition of such hotel shall be included in calculating such aggregate Adjusted NOI. In addition, FelCor and FelCor LP shall not, during each fiscal quarter on a consolidated basis permit (a) Total Indebtedness to exceed 50% of Total Value or (b) Total Secured Indebtedness to exceed 20% of Total Value. For purposes of the financial covenants in the Line of Credit, the following terms have the definitions set forth below: "Adjusted EBITDA" means, for any person, EBITDA less the aggregate FF&E Reserves for such period in respect of each hotel owned or leased by such person and its subsidiaries. "Adjusted NOI" means, with respect to any hotel, for any period, the net operating income for such hotel for such period less the FF&E Reserve for such hotel. "EBITDA" means, for any person for any period, the net income (loss) for such period plus (a) the sum of the following amounts: (i) depreciation expense, (ii) amortization expense and other non-cash charges, (iii) interest expense, (iv) income tax expense, (v) extraordinary loses (and other losses on certain asset sales not otherwise included in extraordinary loses determined on a consolidated basis in accordance with generally accepted accounting principles) and (vi) minority interests attributable to FelCor LP's partnership units, less (b) the sum of the following amounts: (i) extraordinary gains (and in the case of FelCor and FelCor LP, other gains on certain asset sales not otherwise included in extraordinary gains), (ii) the applicable share of net income (loss) of such person's unconsolidated entities; plus (c) such person's pro rata share of EBITDA of such persons unconsolidated entities. -64- 73 "FF&E Reserve" means, for any person (or with respect to any hotel) for any period, a reserve equal to 4% of suite revenues from any hotel owned by such person for such period plus (a) for any person, such person's pro rata share of any FF&E Reserve for any hotel owned by such person's unconsolidated entities or (b) with respect to certain joint venture hotels, the FF&E Reserve for such joint venture hotel multiplied by the applicable joint venture percentage. "Fixed Charges" means, for any person for any period, (a) Gross Interest Expense for such period plus (b) the aggregate amount of scheduled principal payments on the Total Indebtedness of such person (excluding optional prepayments and scheduled principal payments in respect of any such Total Indebtedness which is payable in a single installment at final maturity) required to be made during such period. "Gross Interest Expense" means, for any person for any period, the sum of (a) the total interest expense in respect of all Indebtedness (excluding all contingent obligations) of such person and its subsidiaries for such period determined on a consolidated basis in conformity with generally accepted accounting principles, plus capitalized interest of such person and its subsidiaries plus (b) such person's pro rata share of Gross Interest Expense of such person's unconsolidated entities. "Indebtedness" of any person means, without duplication, the principal amount of (i) all indebtedness of such person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured) or for the deferred purchase price of property or services (ii) all obligations of such person evidenced by notes, bonds, debentures or similar instruments, (ii) all indebtedness of such person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such person, (iv) all capitalized lease obligations of such person, (v) all contingent obligations of such person, (vi) all obligations of such person to purchase, redeem, retire, defease or otherwise acquire for value any stock or stock equivalents of such person, valued, in the case of mandatorily redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (vii) all Indebtedness referred to in clause (i), (ii), (iii), (iv), (v) or (vi) above secured by any lien upon or in property owned by such person, even though such person has not assumed or become liable for the payment of such Indebtedness and (viii) all liabilities of such person under Title IV of ERISA. "Tangible Net Worth" means, with respect to FelCor or FelCor LP at any date, (a) the sum of (i) the total shareholders' equity of FelCor and (ii) the value of all partnership interests in FelCor LP owned by persons other than FelCor; minus (b) the sum of all intangible assets of FelCor, each as shown on the consolidated balance sheet of FelCor as of such date. "Total Indebtedness" of any person means the sum of the following (without duplication): (a) all Indebtedness of such person and its subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles, plus (b) such person's pro rata share of Indebtedness (excluding non-recourse indebtedness) of such person's unconsolidated entities. "Total Secured Indebtedness" of any person means any Total Indebtedness of such person for which the obligations thereunder are secured by a pledge of or other encumbrance on any assets of such person or its subsidiaries or unconsolidated entities "Total Value" means the sum of: (A) for hotels owned or leased for four quarters or more, Adjusted NOI on a consolidated basis from such hotels for the preceding four quarters divided by ten percent; plus (B) for hotels (x) owned or leased for less than four quarters (including newly acquired hotels and hotels to be immediately acquired using the proceeds of any loans under the Line of Credit) and (y) certain other hotels, but only for the year ending December 31, 1997, FelCor or FelCor LP's investment in such hotels; plus (C) the sum of $15,000,000, being the agreed aggregate sum of FelCor and FelCor LP's investment at cost in certain properties; plus (D) FelCor or FelCor LP's pro rata share of unencumbered cash or cash equivalents held by such person, its subsidiaries or an unconsolidated entity; all as subject to adjustment in certain limited cases. -65- 74 Failure to satisfy any of the financial covenants would constitute an Event of Default, notwithstanding the ability of the Company to meet its debt service obligations. An Event of Default also includes without limitation, a cross-default to other indebtedness, bankruptcy and a change of control. In addition to the financial covenants, the Line of Credit includes certain other affirmative and negative covenants, including: (a) a requirement that a certain percentage of the rooms/suites be (i) operated as "suite hotels," (ii) maintained under "Embassy Suites," "Doubletree" or "Sheraton" licenses and (iii) managed by Promus, Doubletree or Sheraton; (b) a restriction on the creation or acquisition of any direct or indirect wholly owned subsidiary unless such subsidiary becomes a guarantor under the Line of Credit; (c) restrictions on the declaration or payment of dividends or other distribution of assets, properties, cash, rights, obligations or securities in respect of any stock or stock equivalents; (d) restrictions on the sale of assets or merger of the Company or its subsidiaries and (e) restrictions on construction of new hotels or investments in budget hotels. Renovation Loan. The Renovation Loan is a $25 million loan facility which was used by the Company to fund a portion of the renovation cost of the CSS Hotels that were converted to Embassy Suites hotels. The facility is guaranteed by Promus, bears interest at LIBOR plus 45 basis points, requires quarterly principal payments of $1.25 million beginning in June 1999 and matures in June 2000. At September 30, 1997, the Company had drawn the full $25 million under this loan facility and the interest rate in effect was 6.39%. Interest Rate Swaps. During the fourth quarter of 1996, the Company entered into two separate interest rate swap agreements to manage the relative mix of its debt between fixed and variable rate instruments. These interest rate swap agreements modify a portion of the interest characteristics of the Company's outstanding debt without an exchange of the underlying principal amount and effectively convert variable rate debt to a fixed rate. The fixed rates to be paid, the effective fixed rate, and the variable rate to be received by the Company at September 30, 1997 are summarized in the following table:
SWAP RATE RECEIVED (VARIABLE) SWAP RATE EFFECTIVE AT SWAP NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 9/30/97 MATURITY --------------- ----------- ---------- ------- -------- $50 million . . . . . . . . 6.11125% 7.61125% 6.37925% October 1999 25 million . . . . . . . . 5.95500 7.45500 6.09800 November 1999
The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense by the Company pursuant to the terms of its interest rate agreement and will have a corresponding effect on its future cash flows. Agreements such as these contain a credit risk that the counterparties may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, which are limited to major banks and financial institutions, and does not anticipate nonperformance by the counterparties. -66- 75 DESCRIPTION OF THE NOTES AND GUARANTEES Except as otherwise indicated below, the following summary applies to both the Old Notes and the New Notes. As used herein, the term "Notes" shall mean the Old Notes and the New Notes, unless otherwise indicated. The form and terms of the New Notes are substantially identical to the form and terms of the Old Notes, except that the exchange of the New Notes pursuant to the Exchange Offer will be registered under the Securities Act and, therefore, the New Notes will not bear any legends restricting transfer thereof. The New Notes will evidence the same debt as the Old Notes and will be treated as a single class under the Indenture with any Old Notes that remain outstanding. Each series of New Notes will be issued solely in exchange for an equal principal amount of the corresponding series of Old Notes. As of the date hereof, $175 million in aggregate principal amount of Old 7 3/8% Notes and $125 million aggregate principal amount of Old 7 5/8% Notes, is outstanding. See "The Exchange Offer." The following summary of certain provisions of the Indenture, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part, does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. Whenever particular defined terms of the Indenture not otherwise defined herein are referred to, the definitions ascribed to such terms in the Indenture are incorporated herein by reference. For definitions of certain capitalized terms used in the following summary, see "-- Certain Definitions." GENERAL The Old Notes are, and the New Notes will be, unsecured senior obligations of FelCor LP. The 7 3/8% Notes will be initially limited to $175 million in aggregate principal amount and will mature on October 1, 2004. The 7 5/8% Notes will be initially limited to $125 million in aggregate principal amount and will mature on October 1, 2007. Each of the 7 3/8% Notes will initially bear interest at 7 3/8% per annum, and each of the 7 5/8% Notes will initially bear interest at 7 5/8% per annum, in each case, from October 1, 1997 or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semiannually (to Holders of record at the close of business on the September 15 or the March 15 immediately preceding the Interest Payment Date) on October 1 and April 1 of each year, commencing April 1, 1998. Principal of, premium, if any, and interest on the Notes is payable, and the Notes may be exchanged or transferred, at the office or agency of FelCor LP in the Borough of Manhattan, the City of New York (which initially will be the corporate trust office of the Trustee at First Chicago Trust Company of New York, 14 Wall Street, Suite 4607, New York, New York 10005, as agent for the Trustee); provided that, at the option of FelCor LP, payment of interest may be made by check mailed to the Holders at their addresses as they appear in the Security Register. The Notes will be issued only in fully registered form, without coupons, in denominations of $1,000 of principal amount and any integral multiple thereof. See "-- Book-Entry; Delivery and Form." No service charge will be made for any registration of transfer or exchange of Notes, but FelCor LP may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. Subject to the covenants described below under "Covenants" and applicable law, FelCor LP may issue additional Notes under the Indenture. The Notes offered hereby and any additional notes subsequently issued under the Indenture would be treated as a single class for all purposes under the Indenture. GUARANTEES The Notes will be guaranteed on an unsecured senior basis by FelCor and the Subsidiary Guarantors so long as FelCor and the Subsidiary Guarantors are obligors on other Indebtedness of FelCor or FelCor LP, whether directly or as a guarantor, which is pari passu with or subordinated to the Notes. The guarantees, while outstanding, will be unconditional regardless of the enforceability of the Notes and the Indenture. The covenants described below applicable to FelCor and its Restricted Subsidiaries will only be applicable so long as FelCor remains a Guarantor. FelCor currently conducts no other business and has no significant assets other than its general partnership interest in FelCor LP. -67- 76 Each future Restricted Subsidiary that subsequently guarantees Indebtedness of FelCor LP or FelCor which is pari passu with or subordinate in right of payment to the Notes will be required to execute a Subsidiary Guarantee. See "Limitation on Issuances of Guarantees by Restricted Subsidiaries." OPTIONAL REDEMPTION Each series of Notes will be redeemable in whole at any time or in part from time to time, at the option of FelCor LP, at a redemption price equal to the greater of (i) 100% of the principal amount of such Notes and (ii) the sum of the present values of the remaining payments of principal and interest thereon from the redemption date to the applicable maturity date discounted, in each case, to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 25 basis points, plus, in each case, accrued interest thereon to the date of redemption. "Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Note to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Note. "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with FelCor LP. "Comparable Treasury Price" means, with respect to any redemption date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such business day, the average of the Reference Treasury Dealer Quotations actually obtained by the Trustee for such redemption date. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, NationsBanc Capital Markets, Inc. and Salomon Brothers Inc and their respective successors; provided, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), FelCor LP shall substitute therefor another Primary Treasury Dealer. Notice of any redemption will be mailed at least 30 days but no more than 60 days before the redemption date to each holder of Notes to be redeemed. Unless FelCor LP defaults in payment of the redemption price, on and after the redemption date interest will cease to accrue on the Notes or portions thereof called for redemption. SINKING FUND There will be no sinking fund payments for the Notes. REGISTRATION RIGHTS In connection with the original issuance and sale of the Old Notes, the Initial Purchasers and their assignees became entitled to the benefits of the Registration Rights Agreement. Pursuant to the Registration Rights Agreement, FelCor LP and FelCor have agreed to use their best efforts, at their cost, to file and cause to become effective a registration statement with respect to a registered offer to exchange each series of Notes for an issue of senior notes of FelCor LP ("Exchange Notes") with terms identical to such Notes (including the guarantee by FelCor and the Subsidiary -68- 77 Guarantors), except that the Exchange Notes will not bear legends restricting the transfer thereof. Upon such registration statement being declared effective, FelCor LP shall offer the Exchange Notes in return for surrender of the Notes. Such offer shall remain open for not less than 20 business days after the date notice of the Exchange Offer is mailed to Holders. For each Note surrendered to FelCor LP under the Exchange Offer, the Holder will receive an Exchange Note of equal principal amount. Interest on each Exchange Note shall accrue from the last Interest Payment Date on which interest was paid on the Notes so surrendered or, if no interest has been paid on such Notes, from the Closing Date. In the event that applicable interpretations of the staff of the Commission do not permit FelCor LP and FelCor to effect the Exchange Offer, or under certain other circumstances, FelCor LP and FelCor shall, at their cost, use their best efforts to cause to become effective a shelf registration statement ("Shelf Registration Statement") with respect to resales of the Notes and to keep such Shelf Registration Statement effective until the expiration of the time period referred to in Rule 144(k) under the Securities Act, or such shorter period that will terminate when all Notes covered by the Shelf Registration Statement have been sold pursuant thereto. FelCor LP and FelCor shall, in the event of such a shelf registration, provide each Holder copies of the prospectus, notify each Holder when the Shelf Registration Statement for the Notes has become effective and take certain other actions as are required to permit resales of the Notes. A Holder that sells its Notes pursuant to the Shelf Registration Statement generally will be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by those provisions of the Registration Rights Agreement that are applicable to such Holder (including certain indemnification obligations). In the event that the Exchange Offer is not consummated and a Shelf Registration Statement is not declared effective on or prior to April 1, 1998, the annual interest rate borne by such Notes will be increased by .5% until the Exchange Offer is consummated or the Shelf Registration Statement is declared effective. RANKING The indebtedness evidenced by the Notes will be unsecured senior obligations of FelCor LP, and will rank pari passu in right of payment with other Senior Indebtedness of FelCor LP, including, without limitation, the obligations of FelCor LP under the Line of Credit. The Notes will be effectively subordinated to Secured Indebtedness (as defined herein) of FelCor LP and the Guarantors and to the Indebtedness of the non-guarantor Subsidiaries. As of September 30, 1997, after giving effect to the Private Placement and the application of the proceeds therefrom, the total Indebtedness of FelCor LP and the Guarantors would have been approximately $428 million (including approximately $12 million in Secured Indebtedness). The non-guarantor Subsidiaries had no Indebtedness at such date. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the covenants and other provisions of the Indenture. Reference is made to the Indenture for the full definition of all terms as well as any other capitalized term used herein for which no definition is provided. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition from such Person by a Restricted Subsidiary and not incurred by such Person in connection with, or in anticipation of, such Person becoming a Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness of such Person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon consummation of the transactions by which such Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness. "Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of FelCor, FelCor LP and their respective Restricted Subsidiaries for such period determined on a consolidated basis in conformity with GAAP plus the minority interest in FelCor LP, if applicable; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income of any Person (other than FelCor LP, FelCor or a Restricted Subsidiary), except to the extent of the amount of dividends or other distributions actually paid to FelCor LP, FelCor or any of their respective Restricted Subsidiaries by such Person during such period; (ii) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary; (iii) any gains or losses (on an after-tax basis) attributable to Asset Sales; (iv) for so long -69- 78 as the Notes are not rated Investment Grade, any amount paid or accrued as dividends on Preferred Stock of FelCor LP, FelCor or any Restricted Subsidiary owned by Persons other than FelCor or FelCor LP and any of their respective Restricted Subsidiaries; and (v) all extraordinary gains and extraordinary losses. "Adjusted Consolidated Net Tangible Assets" means the total amount of assets of FelCor LP, FelCor and their respective Restricted Subsidiaries (less applicable depreciation, amortization and other valuation reserves), except to the extent resulting from write-ups of capital assets (excluding write-ups in connection with accounting for acquisitions in conformity with GAAP), after deducting therefrom (i) all current liabilities of FelCor LP, FelCor and their respective Restricted Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set forth on the most recent quarterly or annual consolidated balance sheet of FelCor LP or FelCor and their respective Restricted Subsidiaries, prepared in conformity with GAAP and filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant. "Adjusted Total Assets" means, for any Person, the sum of (i) Total Assets for such Person as of the end of the calendar quarter preceding the Transaction Date as set forth on the most recent quarterly or annual consolidated balance sheet of FelCor LP or FelCor and their respective Restricted Subsidiaries, prepared in conformity with GAAP and filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant and (ii) any increase in Total Assets following the end of such quarter including, without limitation, any increase in Total Assets resulting from the application of the proceeds of any additional Indebtedness. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Asset Acquisition" means (i) an investment by FelCor LP or FelCor or any of their respective Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary or shall be merged into or consolidated with FelCor LP or FelCor or any of their respective Restricted Subsidiaries; provided that such Person's primary business is related, ancillary, incidental or complementary to the businesses of FelCor LP or FelCor or any of their respective Restricted Subsidiaries on the date of such investment or (ii) an acquisition by FelCor LP or FelCor or any of their respective Restricted Subsidiaries from any other Person that constitutes substantially all of a division or line of business, or one or more hotel properties, of such Person; provided that the property and assets acquired are related, ancillary, incidental or complementary to the businesses of FelCor LP or FelCor or any of their respective Restricted Subsidiaries on the date of such acquisition. "Asset Disposition" means the sale or other disposition by FelCor LP or FelCor or any of their respective Restricted Subsidiaries (other than to FelCor LP, FelCor or another Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of any Restricted Subsidiary or (ii) all or substantially all of the assets that constitute a division or line of business, or one or more hotel properties, of FelCor LP or FelCor or any of their respective Restricted Subsidiaries. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or sale- leaseback transaction) in one transaction or a series of related transactions by FelCor LP or FelCor or any of their Restricted Subsidiaries to any Person other than FelCor LP or FelCor or any of their respective Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary other than sales permitted under clause (iv) of the "Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant described below, (ii) all or substantially all of the property and assets of an operating unit or business of FelCor LP or FelCor or any of their respective Restricted Subsidiaries or (iii) any other property and assets of FelCor LP or FelCor or any of their respective Restricted Subsidiaries outside the ordinary course of business of FelCor LP or FelCor or such Restricted Subsidiary and, in each case, that is not governed by the provisions of the Indenture applicable to mergers, consolidations and sales of assets of FelCor LP and FelCor; provided that "Asset Sale" shall not include (a) sales or other dispositions of inventory, receivables and other current assets, (b) sales, transfers or other dispositions of assets with a fair market value not in excess of $1 million in any transaction or series of related transactions or (c) sales or other dispositions of assets for consideration at least equal to the fair market value of the assets sold or disposed of, to the extent that the consideration received would satisfy clause (i)(B) of the second sentence of the "Limitation on Asset Sales" covenant. -70- 79 "Average Life" means at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (b) the amount of such principal payment by (ii) the sum of all such principal payments. "Capital Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated, whether voting or non-voting), including partnership interests, whether general or limited, in the equity of such Person, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all Common Stock, Preferred Stock and Units. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person. "Capitalized Lease Obligations" means the discounted present value of the rental obligations under a Capitalized Lease as reflected on the balance sheet of such Person in accordance with GAAP. "Change of Control" means such time as (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total voting power of the Voting Stock of FelCor or, other than by FelCor, of FelCor LP on a fully diluted basis; or (ii) individuals who on the Closing Date constitute the Board of Directors (together with any new or replacement directors whose election by the Board of Directors or whose nomination by the Board of Directors for election by FelCor's shareholders was approved by a vote of at least a majority of the members of the Board of Directors then still in office who either were members of the Board of Directors on the Closing Date or whose election or nomination for election was so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office. "Closing Date" means the date on which the Notes are originally issued under the Indenture. "Common Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting), which have no preference on liquidation or with respect to distributions over any other class of Capital Stock, including partnership interests, whether general or limited, of such Person's equity, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all series and classes of common stock. "Consolidated EBITDA" means, for any period, Adjusted Consolidated Net Income for such period plus, to the extent such amount was deducted in calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest Expense, (ii) income taxes (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets), (iii) depreciation expense, (iv) amortization expense and (v) all other non-cash items reducing Adjusted Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), less all non-cash items increasing Adjusted Consolidated Net Income, all as determined on a consolidated basis for FelCor LP, FelCor and their respective Restricted Subsidiaries in conformity with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Adjusted Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the percentage ownership interest in the income of such Restricted Subsidiary not owned on the last day of such period by FelCor LP or FelCor or any of their respective Restricted Subsidiaries. "Consolidated Interest Expense" means, for any period, without duplication, the aggregate amount of interest expense in respect of Indebtedness (including, without limitation, amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with GAAP; all commissions, discounts and other fees and expenses owed with respect to letters of credit and bankers' acceptance financing; the net costs associated with Interest Rate Agreements and Indebtedness that is Guaranteed or secured by assets of FelCor LP, FelCor or any of their respective Restricted Subsidiaries and all but the principal component of rentals in respect of capitalized lease obligations paid, accrued or scheduled to be paid or to be accrued by FelCor LP, -71- 80 FelCor and their respective Restricted Subsidiaries) during such period, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP; excluding (i) the amount of such interest expense of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income pursuant to clause (ii) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income pursuant to clause (ii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the offering of the Notes or paid in connection with any other Indebtedness outstanding on August 31, 1997, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Disqualified Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock, other than Units, at any time prior to the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Notes; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants described below and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to FelCor LP's repurchase of such Notes as are required to be repurchased pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants described below. "DJONT" means DJONT Operations, L.L.C., a Delaware limited liability company. "fair market value" means the price that would be paid in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Board of Directors, whose determination shall be conclusive if evidenced by a Board Resolution. "Funds From Operations" for any period means the consolidated net income of FelCor LP, FelCor and their respective Restricted Subsidiaries for such period in conformity with GAAP excluding gains or losses from debt restructurings and sales of property, plus depreciation of real property (including furniture and equipment) and after adjustments for unconsolidated partnerships and joint ventures plus the minority interest in FelCor LP, if applicable; provided that for purposes of the payment of any dividend or distribution by FelCor LP or FelCor, "Funds From Operations" shall be equal to $80 million plus the amount thereof computed for the period commencing with the first day of the fiscal quarter in which the Closing Date occurs and ending on the last day of the last fiscal quarter preceding the payment of such dividend or distribution. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Closing Date, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations contained or referred to in the Indenture shall be computed in conformity with GAAP applied on a consistent basis, except that calculations made for purposes of determining compliance with the terms of the covenants and with other provisions of the Indenture shall be made without giving effect to (i) the amortization of any expenses incurred in connection with the offering of the Notes and (ii) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. -72- 81 "Government Securities" means direct obligations of, obligations guaranteed by, or participations in pools consisting solely of obligations of or obligations guaranteed by, the United States of America for the payment of which obligations or guarantee the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the option of the issuer thereof. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm's-length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantors" means FelCor and the Subsidiary Guarantors, collectively, so long as they remain obligors on any Indebtedness of FelCor or FelCor LP which is pari passu with or subordinated to the Notes. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) the face amount of letters of credit or other similar instruments (excluding obligations with respect to letters of credit (including trade letters of credit) securing obligations (other than obligations described in (i) or (ii) above or (v), (vi) or (vii) below) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if drawn upon, to the extent such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement), (iv) all unconditional obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all Capitalized Lease Obligations, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise included in this definition or the definition of Consolidated Interest Expense, obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations of the type described above and, with respect to obligations under any Guarantee, the maximum liability upon the occurrence of the contingency giving rise to the obligation; provided that (A) the amount outstanding at any time of any Indebtedness issued with original issue discount shall be deemed to be the face amount with respect to such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at the date of determination in conformity with GAAP, and (B) Indebtedness shall not include any liability for federal, state, local or other taxes. "Interest Coverage Ratio" means, on any Transaction Date, the ratio of (i) the aggregate amount of Consolidated EBITDA for the then most recent four fiscal quarters prior to such Transaction Date for which reports have been filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant ("Four Quarter Period") to (ii) the aggregate Consolidated Interest Expense during such Four Quarter Period. In making the foregoing calculation, (A) pro forma effect shall be given to any Indebtedness Incurred or repaid (other than in connection with an Asset Acquisition or Asset Disposition) during the period ("Reference Period") commencing on the first day of the Four Quarter Period and ending on the Transaction Date (other than Indebtedness Incurred or repaid under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) in effect on the last day of such Four Quarter Period unless any portion of such -73- 82 Indebtedness is projected, in the reasonable judgment of the senior management of FelCor LP or FelCor, to remain outstanding for a period in excess of 12 months from the date of the Incurrence thereof), in each case as if such Indebtedness had been Incurred or repaid on the first day of such Reference Period; (B) Consolidated Interest Expense attributable to interest on any Indebtedness (whether existing or being Incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the Transaction Date (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months or, if shorter, at least equal to the remaining term of such Indebtedness) had been the applicable rate for the entire period; (C) pro forma effect shall be given to Asset Dispositions and Asset Acquisitions (including giving pro forma effect to the application of proceeds of any Asset Disposition and any Indebtedness Incurred or repaid in connection with any such Asset Acquisitions or Asset Dispositions) that occur during such Reference Period but subsequent to the end of the related Four Quarter Period as if they had occurred and such proceeds had been applied on the first day of such Reference Period; and (D) pro forma effect shall be given to asset dispositions and asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition and any Indebtedness Incurred or repaid in connection with any such asset acquisitions or asset dispositions) that have been made by any Person that has become a Restricted Subsidiary or has been merged with or into FelCor LP or FelCor or any of their respective Restricted Subsidiaries during such Reference Period but subsequent to the end of the related Four Quarter Period and that would have constituted Asset Dispositions or Asset Acquisitions during such Reference Period but subsequent to the end of the related Four Quarter Period had such transactions occurred when such Person was a Restricted Subsidiary as if such asset dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions and had occurred on the first day of such Reference Period; provided that to the extent that clause (C) or (D) of this sentence requires that pro forma effect be given to an Asset Acquisition or Asset Disposition, such pro forma calculation shall be based upon the four full fiscal quarters immediately preceding the Transaction Date of the Person, or division or line of business, or one or more hotel properties, of the Person that is acquired or disposed of to the extent that such financial information is available. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement, option or future contract or other similar agreement or arrangement with respect to interest rates. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including without limitation by way of Guarantee or similar arrangement, but excluding advances to customers in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable on the consolidated balance sheet of FelCor LP, FelCor and their respective Restricted Subsidiaries) or capital contribution to (by means of any transfer of cash or other property (tangible or intangible) to others or any payment for property or services solely for the account or use of others, or otherwise), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by, such Person and shall include (i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market value of the Capital Stock (or any other Investment), held by FelCor LP or FelCor or any of their respective Restricted Subsidiaries of (or in) any Person that has ceased to be a Restricted Subsidiary, including without limitation, by reason of any transaction permitted by clause (iii) of the "Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant; provided that the fair market value of the Investment remaining in any Person that has ceased to be a Subsidiary shall be deemed not to exceed the aggregate amount of Investments previously made in such Person valued at the time such Investments were made, less the net reduction of such Investments. For purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant described below, (i) "Investment" shall include the fair market value of the assets (net of liabilities (other than liabilities to FelCor LP or FelCor or any of their respective Restricted Subsidiaries)) of any Restricted Subsidiary at the time such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of liabilities (other than liabilities to FelCor LP or FelCor or any of their respective Restricted Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary shall be considered a reduction in outstanding Investments and (iii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer. "Investment Grade" means a rating of the Notes by both S&P and Moody's, each such rating being in one of such agency's four highest generic rating categories that signifies investment grade (i.e. BBB- (or the equivalent) or higher by S&P and Baa3 (or the equivalent) or higher by Moody's); provided, in each case, such ratings are publicly available; provided, further, that in the event Moody's or S&P is no longer in existence for purposes of determining -74- 83 whether the Notes are rated "Investment Grade," such organization may be replaced by a nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) designated by FelCor LP and FelCor, notice of which shall be given to the Trustee. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including without limitation, any conditional sale or other title retention agreement or lease in the nature thereof or any agreement to give any security interest). "Line of Credit" means the credit facility established pursuant to the Third Amended and Restated Revolving Credit Agreement dated as of August 14, 1997 among FelCor LP, FelCor, the lenders party thereto, The Chase Manhattan Bank, as Administrative Agent, Wells Fargo Bank, National Association, as Documentation Agent, together with all other agreements, instruments and documents executed or delivered pursuant thereto or in connection therewith, in each case as such agreements, instruments or documents may be amended, supplemented, extended, renewed, replaced or otherwise modified from time to time; provided that, with respect to an agreement providing for the refinancing of Indebtedness under the Line of Credit, such agreement shall be the Line of Credit under the Indenture only if a notice to that effect is delivered by FelCor LP and FelCor to the Trustee and there shall be at any time only one instrument that is (together with the aforementioned related agreements, instruments and documents) the Line of Credit under the Indenture. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to FelCor LP or FelCor or any of their respective Restricted Subsidiaries) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes actually paid or payable as a result of such Asset Sale by FelCor LP, FelCor and their respective Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) amounts reserved by FelCor LP, FelCor and their respective Restricted Subsidiaries against any liabilities associated with such Asset Sale, including without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined on a consolidated basis in conformity with GAAP and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to FelCor LP or FelCor or any of their respective Restricted Subsidiaries) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of attorney's fees, accountants's fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of tax paid or payable as a result thereof. "Offer to Purchase" means an offer to purchase Notes by FelCor LP, from the Holders commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all Notes validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) ("Payment Date"); (iii) that any Note not tendered will continue to accrue interest pursuant to its terms; (iv) that, unless FelCor LP defaults in the payment of the purchase price, any Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest on and after the Payment Date; (v) that Holders electing to have a Note purchased pursuant to the Offer to Purchase will be required to surrender the Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the Payment Agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing -75- 84 his election to have such Notes purchased; and (vii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. On the Payment Date, FelCor LP shall (i) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase; and (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and shall promptly thereafter deliver, or cause to be delivered, to the Trustee all Notes or portions thereof so accepted together with an Officers' Certificate specifying the Notes or portions thereof accepted for payment by FelCor LP. The Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Note equal in principal amount to any unpurchased portion of any Note surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. FelCor LP will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. FelCor LP will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that FelCor LP is required to repurchase Notes pursuant to an Offer to Purchase. "Permitted Investment" means (i) an Investment in FelCor LP or FelCor or any of their Restricted Subsidiaries or a Person which will, upon the making of such Investment, become a Restricted Subsidiary or be merged or consolidated with or into or transfer or convey all or substantially all its assets to, FelCor LP or FelCor or any of their Restricted Subsidiaries; provided that such person's primary business is related, ancillary, incidental or complementary to the businesses of FelCor LP or FelCor or any of their respective Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash Investments; (iii) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordances with GAAP; and (iv) stock, obligations or securities received in satisfaction of judgments. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated, whether voting or non-voting), which have a preference on liquidation or with respect to distributions over any other class of Capital Stock, including preferred partnership interests, whether general or limited, or such Person's preferred or preference stock, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all series and classes of such preferred or preference stock. "Restricted Subsidiary" means any Subsidiary of FelCor LP or FelCor other than an Unrestricted Subsidiary. "Secured Indebtedness" means an Indebtedness secured by a Lien upon the property of FelCor LP or FelCor or any of their respective Restricted Subsidiaries. "Senior Indebtedness" means the following obligations of FelCor LP or FelCor or any of their respective Restricted Subsidiaries, whether outstanding on the Closing Date or thereafter Incurred: (i) all Indebtedness and all other monetary obligations (including expenses fees and other monetary obligations) of FelCor LP and FelCor under the Line of Credit; (ii) all Indebtedness and all other monetary obligations of FelCor LP or FelCor or any of their respective Restricted Subsidiaries (other than the Notes), including principal and interest on such Indebtedness, unless such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued is expressly subordinated in right of payment to the Notes; and (iii) Subsidiary Debt. Senior Indebtedness will also include interest accruing subsequent to events of bankruptcy of FelCor LP and FelCor and their respective Restricted Subsidiaries at the rate provided for the document governing such Senior Indebtedness, whether or not such interest is an allowed claim enforceable against the debtor in a bankruptcy case under bankruptcy law. "Significant Subsidiary" means, at any date of determination, any Restricted Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal year of FelCor LP and FelCor, accounted for more than 10% of the consolidated revenues of FelCor LP, FelCor and their respective Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of FelCor LP, FelCor and their respective Restricted Subsidiaries, all as set forth on the most recently available consolidated financial statements thereof for such fiscal year. "S&P" means Standard & Poor's Ratings Services and its successors. -76- 85 "Stated Maturity" means, (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person and the accounts of which would be consolidated with those of such Person in its consolidated financial statements in accordance with GAAP, if such statements were prepared as of such date. "Subsidiary Debt" means all unsecured Indebtedness of which a Restricted Subsidiary is the primary obligor. "Subsidiary Guarantee" means a Guarantee by each Subsidiary Guarantor for payment of the Notes by such Subsidiary Guarantor. The Subsidiary Guarantee will be an unsecured senior obligation of each Subsidiary Guarantor and will be unconditional regardless of the enforceability of the Notes and the Indenture. Notwithstanding the foregoing, each Subsidiary Guarantee by a Subsidiary Guarantor shall provide by its terms that it shall remain in effect only so long as such Subsidiary Guarantor remains an obligor on other Indebtedness of FelCor or FelCor LP which is pari passu with or subordinated to the Notes and that it shall be automatically and unconditionally released and discharged upon any sale, exchange or transfer, to any Person not an Affiliate of FelCor LP or FelCor, of all of the Capital Stock owned by FelCor LP, FelCor and their respective Restricted Subsidiaries in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not then prohibited by the Indenture). "Subsidiary Guarantor" means each of (i) FelCor/CSS Hotels, L.L.C., a Delaware limited liability company, (ii) FelCor/LAX Hotels, L.L.C., a Delaware limited liability company, (iii) FelCor/CSS Holdings, L.P., a Delaware limited partnership, (iv) FelCor/St. Paul Holdings, L.P., a Delaware limited partnership, (v) FelCor/LAX Holdings, L.P., a Delaware limited partnership and (vi) FelCor Eight Hotels, L.L.C., a Delaware limited liability company and each other Restricted Subsidiary that executes a Subsidiary Guarantee in compliance with the "Limitation on Issuances of Guarantees by Restricted Subsidiaries" covenant below. "Temporary Cash Investment" means any of the following: (i) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (ii) time deposits accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50 million and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of FelCor LP or FelCor) organized and in existence under the laws of the United States of America, any state thereof with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, and (v) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or Moody's. "Total Assets" means the sum of (i) Undepreciated Real Estate Assets and (ii) all other assets of FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis determined in conformity with GAAP (but excluding intangibles and accounts receivables). "Total Unencumbered Assets" as of any date means the sum of (i) those Undepreciated Real Estate Assets not securing any portion of Secured Indebtedness and (ii) all other assets (but excluding intangibles and accounts receivable) of FelCor LP, FelCor and their respective Restricted Subsidiaries not securing any portion of Secured Indebtedness determined on a consolidated basis in accordance with GAAP. -77- 86 "Trade Payables" means, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transaction Date" means, with the respect to the Incurrence of any Indebtedness by FelCor LP or FelCor or any of their respective Restricted Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Undepreciated Real Estate Assets" means, as of any date, the cost (being the original cost to FelCor LP or FelCor or any of their respective Restricted Subsidiaries plus capital improvements) of real estate assets of FelCor LP, FelCor and their Restricted Subsidiaries on such date, before depreciation and amortization of such real estate assets, determined on a consolidated basis in conformity with GAAP. "Units" means the limited partnership units of FelCor LP, that by their terms are redeemable at the option of the holder thereof and that, if so redeemed, at the election of FelCor are redeemable for cash or Common Stock of FelCor. "Unrestricted Subsidiary" means (i) any Subsidiary of FelCor LP or FelCor that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of FelCor LP or FelCor) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, FelCor LP or FelCor or any of their respective Restricted Subsidiaries; provided that (A) any Guarantee by FelCor LP or FelCor or any of their respective Restricted Subsidiaries of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by FelCor LP or FelCor or such Restricted Subsidiary (or all, if applicable) at the time of such designation: (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under the "Limitation on Restricted Payments" covenant described below and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under the "Limitation on Indebtedness" and "Limitation on Restricted Payments" covenants described below. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such designation; and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately after such designation would, if Incurred at such time, have been permitted to be Incurred (and shall be deemed to have been Incurred) for all purposes of the Indenture. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Unsecured Indebtedness" means any Indebtedness of FelCor LP or FelCor or any of their respective Restricted Subsidiaries that is not Secured Indebtedness. "Voting Stock" means with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. "Wholly Owned" means, with respect to any Subsidiary of any Person, the ownership of all of the outstanding Capital Stock of such Subsidiary (other than any director's qualifying shares or Investments by individuals mandated by applicable law) by such Person or one or more Wholly Owned Subsidiaries of such Person. COVENANTS The Indenture contains, among others, the following covenants, provided that the Indenture provides that the "Limitation on Liens," the "Limitation on Sale-Leaseback Transactions," the "Limitation on Restricted Payments," the "Limitation on Dividend and other Payment Restrictions Affecting Restricted Subsidiaries," the "Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries," the "Limitation on Issuances of Guarantees by Restricted Subsidiaries," and the "Limitation on Transactions with Affiliates" will not be applicable in the event, and only for so long as, the Notes are rated Investment Grade. -78- 87 Limitation on Indebtedness (a)(i) Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, Incur any Indebtedness if, immediately after giving effect to the Incurrence of such additional Indebtedness, the aggregate principal amount of all outstanding Indebtedness of FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis determined in accordance with GAAP is greater than 60% of Adjusted Total Assets. (ii) In addition to the foregoing limitations on the Incurrence of Indebtedness, neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, Incur any Subsidiary Debt or any Secured Indebtedness if, immediately after giving effect to the Incurrence of such additional Subsidiary Debt or Secured Indebtedness, the aggregate principal amount of all outstanding Subsidiary Debt and Secured Indebtedness of FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis is greater than 40% of Adjusted Total Assets. (b) In addition to the covenants specified in (a) above, neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, Incur any Indebtedness (other than the Notes, the Subsidiary Guarantees and other Indebtedness existing on the Closing Date); provided that FelCor LP or FelCor or any of their respective Restricted Subsidiaries may Incur Indebtedness if, after giving effect to the Incurrence of such Indebtedness and the receipt and application of the proceeds therefrom, the Interest Coverage Ratio of FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis would be greater than 2.0 to 1. (c) Notwithstanding paragraphs (a) or (b), FelCor LP or FelCor or any of their respective Restricted Subsidiaries (except as specified below) may Incur each and all of the following: (i) Indebtedness outstanding under the Line of Credit at any time in an aggregate principal amount not to exceed $550 million less any amount of such Indebtedness permanently repaid as provided under the "Limitation on Asset Sales" covenant described below; (ii) Indebtedness owed (A) to FelCor LP or FelCor evidenced by an unsubordinated promissory note or (B) to any Restricted Subsidiary; provided that any event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to FelCor LP or FelCor or any other Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance or refund, outstanding Indebtedness (other than Indebtedness Incurred under clause (i), (ii), (iv) or (vi) of this paragraph) and any refinancings thereof in an amount not to exceed the amount so refinanced or refunded (plus premiums, accrued interest, fees and expenses); provided that Indebtedness the proceeds of which are used to refinance or refund the Notes or Indebtedness that is pari passu with or subordinated in right of payment to, the Notes shall only be permitted under this clause (iii) if (A) in case the Notes are refinanced in part or the Indebtedness to be refinanced is pari passu with the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is outstanding, is pari passu with or is expressly made subordinate in right of payment to the remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated in right of payment to the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Notes at least to the extent that the Indebtedness to be refinanced is subordinated to the Notes and (C) such new indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such New Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; and provided further that in no event may Indebtedness of FelCor LP or FelCor that is pari passu with or subordinated in right of payment to the Notes be refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in respect of performance, surety or appeal bonds provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements; provided that such agreements (a) are designed solely to protect FelCor LP or FelCor or any of their respective Restricted Subsidiaries against fluctuations in foreign currency exchange rates or interest rates and (b) do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder, and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of FelCor LP or FelCor or any of their respective Restricted Subsidiaries pursuant to such agreements, in any case Incurred in connection with the disposition of any business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by any Person acquiring -79- 88 all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition), in a principal amount not to exceed the gross proceeds actually received by FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis in connection with such disposition; (v) Indebtedness of FelCor LP or FelCor, to the extent the net proceeds thereof are promptly (A) used to purchase Notes tendered in an Offer to Purchase made as a result of a Change in Control or (B) deposited to defease the Notes as described below under "Defeasance"; or (vi) Guarantees of the Notes and Guarantees of Indebtedness of FelCor LP or FelCor by any of their respective Restricted Subsidiaries provided the guarantee of such Indebtedness is permitted by and made in accordance with the "Limitation on Issuances of Guarantees by Restricted Subsidiaries" covenant described below. (d) Notwithstanding any other provision of this "Limitation on Indebtedness" covenant, the maximum amount of Indebtedness that FelCor LP or FelCor or any of their respective Restricted Subsidiaries may Incur pursuant to this "Limitation on Indebtedness" covenant shall not be deemed to be exceeded, with respect to any outstanding Indebtedness due solely to the result of fluctuations in the exchange rates of currencies. (e) For purposes of determining any particular amount of Indebtedness under this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred under the Line of Credit on or prior to the Closing Date shall be treated as Incurred pursuant to clause (i) of paragraph (c) of this "Limitation on Indebtedness" covenant, (2) Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included and (3) any Liens granted pursuant to the equal and ratable provisions referred to in the "Limitation on Liens" covenant described below shall not be treated as Indebtedness. For purposes of determining compliance with this "Limitation on Indebtedness" covenant, in the event that an item of Indebtedness meets the criteria of more that one of the types of Indebtedness described in the above clauses (other than Indebtedness referred to in clause (2) of the preceding sentence), each of FelCor LP and FelCor, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses; provided that FelCor LP and FelCor must classify such item of Indebtedness in an identical fashion. Maintenance of Total Unencumbered Assets FelCor LP, FelCor and their respective Restricted Subsidiaries will maintain Total Unencumbered Assets of not less than 150% of the aggregate outstanding principal amount of the Unsecured Indebtedness of FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis. Limitation on Liens Neither FelCor LP nor FelCor shall secure any Indebtedness under the Line of Credit by a Lien unless contemporaneously therewith effective provision is made to secure the Notes equally and ratably with the Indebtedness under the Line of Credit for so long as the Indebtedness under the Line of Credit is secured by a Lien. Limitation on Sale-Leaseback Transactions Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, enter into any sale-leaseback transaction involving any of its assets or properties whether now owned or hereafter acquired, whereby any of them sells or transfers such assets or properties and then or thereafter leases such assets or properties or any substantial part thereof. The foregoing restriction does not apply to any sale-leaseback transaction if (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the lease secures or relates to industrial revenue or pollution control bonds; (iii) the transaction is solely between FelCor LP or FelCor and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted Subsidiaries; or (iv) FelCor LP or FelCor or any of their respective Restricted Subsidiaries, within 12 months after the sale or transfer of any assets or properties is completed, applies an amount not less than the net proceeds received from such sale in accordance with clause (A) or (B) of the first paragraph of the "Limitation on Asset Sales" covenant described below. -80- 89 Limitation on Restricted Payments Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, directly or indirectly, (i) declare or pay any dividend or make any distribution on or with respect to its Capital Stock (other than (x) dividends or distributions payable solely in shares of its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire shares of such Capital Stock and (y) pro rata dividends or distributions on Common Stock of FelCor LP or any Restricted Subsidiary held by minority stockholders) held by Persons other than FelCor LP or FelCor or any of their respective Restricted Subsidiaries, (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of (A) FelCor LP, FelCor or an Unrestricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Person other than FelCor LP or FelCor or any of their respective Restricted Subsidiaries unless in connection with such purchase the Unrestricted Subsidiary is designated as a Restricted Subsidiary or (B) a Restricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by an Affiliate of FelCor LP or FelCor (other than a Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock of FelCor LP or FelCor, (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of FelCor LP or FelCor that is subordinated in right of payment to the Notes or (iv) make an Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (i) through (iv) above being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (A) a Default or Event of Default shall have occurred and be continuing, (B) FelCor LP or FelCor could not Incur at least $1.00 of Indebtedness under the paragraphs (a) and (b) of the "Limitation on Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments (the amount, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) made after the Closing Date shall exceed the sum of (1) 95% of the aggregate amount of the Funds From Operations (or, if the Funds From Operations is a loss, minus 100% of the amount of such loss) (determined by excluding income resulting from transfers of assets by FelCor LP or FelCor or any of their respective Restricted Subsidiaries to an Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter in which the Closing Date occurs and ending on the last day of the last fiscal quarter preceding the Transaction Date for which reports have been filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant plus (2) the aggregate Net Cash Proceeds received by FelCor LP or FelCor after the Closing Date from the issuance and sale permitted by the Indenture of its Capital Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of FelCor LP or FelCor, including an issuance or sale permitted by the Indenture of Indebtedness of FelCor LP or FelCor for cash subsequent to the Closing Date upon the conversion of such Indebtedness into Capital Stock (other than Disqualified Stock) of FelCor LP or FelCor, or from the issuance to a Person who is not a Subsidiary of FelCor LP or FelCor of any options, warrants or other rights to acquire Capital Stock of FelCor LP or FelCor (in each case, exclusive of any Disqualified Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated Maturity of the Notes), plus (3) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to FelCor LP or FelCor or any of their respective Restricted Subsidiaries or from the Net Cash Proceeds from the sale of any such Investment (except, in each case, to the extent any such payment or proceeds are included in the calculation of Funds From Operations) or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments") not to exceed, in each case, the amount of Investments previously made by FelCor LP, FelCor and their respective Restricted Subsidiaries in such Person or Unrestricted Subsidiary, plus (4) the purchase price of noncash tangible assets acquired in exchange for an issuance of Capital Stock (other than Disqualified Stock) of FelCor LP or FelCor; provided that in any event FelCor LP or FelCor may declare or pay any dividend or make any distribution that is necessary to maintain FelCor's status as a REIT under the Code if (1) the aggregate principal amount of all outstanding Indebtedness of FelCor LP or FelCor on a consolidated basis at such time is less than 60% of Adjusted Total Assets and (2) no Default or Event of Default shall have occurred and be continuing. The provisions of the foregoing paragraph shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at said date of declaration, such payment would comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Notes including premium, if any, and accrued and unpaid interest, with the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of paragraph (c) of the "Limitation on Indebtedness" covenant; (iii) the repurchase, redemption or other acquisition of Capital Stock of FelCor -81- 90 LP or FelCor or an Unrestricted Subsidiary (or options, warrants or other rights to acquire such Capital Stock) in exchange for, or out of the proceeds of a substantially concurrent issuance of, shares of Capital Stock (other than Disqualified Stock) of FelCor LP or FelCor (or options, warrants or other rights to acquire such Capital Stock); (iv) the making of any principal payment on, or the repurchase, redemption, retirement, defeasance or other acquisition for value of, Indebtedness of FelCor LP or FelCor which is subordinated in right of payment to the Notes in exchange for, or out of the proceeds of, a substantially concurrent issuance of, shares of the Capital Stock (other than Disqualified Stock) of FelCor LP or FelCor (or options, warrants or other rights to acquire such Capital Stock); (v) payments or distributions, to dissenting stockholders pursuant to applicable law pursuant to or in connection with a consolidation, merger or transfer of assets that complies with the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the property and assets of FelCor LP or FelCor; (vi) Investments in any Person or Persons in an aggregate amount not to exceed $150 million; or (vii) the payment of any dividend or distribution on the Capital Stock of FelCor LP or FelCor declared prior to the Closing Date, provided that, except in the case of clauses (i), (iii) and (vii), no Default or Event of Default shall have occurred and be continuing or occur as a direct consequence of the actions or payments set forth therein. Each Restricted Payment permitted pursuant to the preceding paragraph (other than the Restricted Payment referred to in clause (ii) thereof, an exchange of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or (iv) thereof, an Investment referred to in clause (vi) thereof or the dividends or distributions referred to in clause (vii) thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred to in clauses (iii) and (iv), shall be included in calculating whether the conditions of clause (C) of the first paragraph of this "Limitation on Restricted Payments" covenant have been met with respect to any subsequent Restricted Payments. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by FelCor LP or FelCor or any of their respective Restricted Subsidiaries, (ii) pay any Indebtedness owed to FelCor LP, FelCor or any other Restricted Subsidiary, (iii) make loans or advances to FelCor LP, FelCor or any other Restricted Subsidiary or (iv) transfer its property or assets to FelCor LP, FelCor or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: (i) existing on the Closing Date in the Indenture or in the Line of Credit, and any extensions, refinancings, renewals or replacements of such agreements; provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) existing under or by reason of applicable law; (iii) existing with respect to any Person or the property or assets of such Person acquired by FelCor LP, FelCor or any Restricted Subsidiary, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in the case of clause (iv) of the first paragraph of this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of FelCor LP, FelCor or any Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of FelCor LP, FelCor or any Restricted Subsidiary in any manner material to FelCor LP, FelCor and their respective Restricted Subsidiaries taken as a whole; (v) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary; or (vi) contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was issued if (A) the encumbrance or restriction applies only in the event of a payment default or a default with respect to a financial covenant contained in such Indebtedness or agreement, (B) the encumbrance or restriction is not materially more disadvantageous to the Holders of the Notes than is customary in comparable financings (as determined by FelCor LP and FelCor) and (C) each of FelCor LP and FelCor determines that any such encumbrance or restriction will not materially affect such Persons' ability to make principal or interest payments on the Notes. Nothing contained in this -82- 91 "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent FelCor LP, FelCor or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2) restricting the sale or other disposition of property or assets of FelCor LP or FelCor or any of their respective Restricted Subsidiaries that secure Indebtedness of FelCor LP, FelCor or any of their respective Restricted Subsidiaries. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries Neither FelCor LP nor FelCor will sell, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to FelCor LP, FelCor or a Wholly Owned Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales to individuals of shares of Restricted Subsidiaries, to the extent required by applicable law or to the extent necessary to obtain local liquor licenses; (iii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Subsidiary and any Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under the "Limitation on Restricted Payments" covenant if made on the date of such issuance or sale or (iv) sales of not greater than 20% of the Capital Stock of a newly-created Restricted Subsidiary made in connection with, or in contemplation of, the acquisition or development by such Restricted Subsidiary of one or more properties to any Person that is, or is an Affiliate of, the entity that provides, franchise management or other services, as the case may be, to one or more properties owned by such Restricted Subsidiary. Limitation on Issuances of Guarantees by Restricted Subsidiaries Neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries, directly or indirectly, to Guarantee any Indebtedness of FelCor LP or FelCor which is pari passu with or subordinate in right of payment to the Notes ("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Subsidiary Guarantee by such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against FelCor LP, FelCor or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not Incurred in connection with, or in contemplation of, such person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of such Guarantee Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated to the Notes. Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted Subsidiary may provide by its terms that it shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of FelCor LP or FelCor, of all of Capital Stock held by FelCor LP, FelCor and their respective Restricted Subsidiaries in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the Indenture) or (ii) the release or discharge of the Guarantee which resulted in the creation of such Subsidiary Guarantee, except a discharge or release by or as a result of payment under such Guarantee. Limitation on Transactions with Affiliates Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, directly or indirectly, enter into, renew or extend any transaction (including, without limitations, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any holder (or any Affiliate of such holder) of 5% or more of any class of Capital Stock of FelCor LP or FelCor or with any Affiliate of FelCor LP or FelCor or any of their respective Restricted Subsidiaries, except upon fair and reasonable terms no less favorable to FelCor LP, FelCor or such Restricted Subsidiary than could be obtained, at the time of such transaction or, if such transaction is pursuant to a written agreement, at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. -83- 92 The foregoing limitation does not limit, and shall not apply to (i) transactions (A) approved by a majority of the independent directors of FelCor or (B) for which FelCor LP, FelCor or any Restricted Subsidiary delivers to the Trustee a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to FelCor LP, FelCor or such Restricted Subsidiary from a financial point of view; (ii) any transaction solely between FelCor LP or FelCor and any of their respective Wholly Owned Restricted Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable and customary fees and expenses to directors of FelCor who are not employees of FelCor; (iv) any payments or other transactions pursuant to any tax-sharing agreement between FelCor LP or FelCor and any other Person with which FelCor LP or FelCor files a consolidated tax return or with which FelCor LP or FelCor is part of a consolidated group for tax purposes; or (v) any Restricted Payments not prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding the foregoing, any transaction or series of related transactions covered by the first paragraph of this "Limitation on Transactions with Affiliates" covenant and not covered by clauses (ii) through (v) of this paragraph, (a) the aggregate amount of which exceeds $2 million in value or relates to the leasing of one or more hotel properties to DJONT, must be approved or determined to be fair in the manner provided for in clause (i)(A) or (B) above and (b) the aggregate amount of which exceeds $5 million in value, must be determined to be fair in the manner provided for in clause (i)(B) above. Limitation on Asset Sales Neither FelCor LP nor FelCor will, and neither FelCor LP or FelCor will permit any of their respective Restricted Subsidiaries to, consummate any Asset Sale, unless (i) the consideration received by FelCor LP, FelCor or such Restricted Subsidiary is at least equal to the fair market value of the assets sold or disposed of and (ii) at least 75% of the consideration received consists of cash or Temporary Cash Investments; provided, with respect to the sale of one or more hotel properties that up to 75% of the consideration may consist of indebtedness of the purchaser of such hotel properties; provided, further, that such indebtedness is secured by a first priority Lien on the hotel property or properties sold. In the event and to the extent that the Net Cash Proceeds received by FelCor LP, FelCor or such Restricted Subsidiary from one or more Asset Sales occurring on or after the Closing Date in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the date closest to the commencement of such 12-month period for which a consolidated balance sheet of FelCor LP, FelCor and their respective Restricted Subsidiaries has been filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant), then FelCor LP or FelCor shall or shall cause the relevant Restricted Subsidiary to (i) within twelve months after the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently reduce Senior Indebtedness of FelCor LP, FelCor, or any Restricted Subsidiary or Indebtedness of any other Restricted Subsidiary, in each case owing to a Person other than FelCor LP, FelCor or any of their respective Restricted Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a Restricted Subsidiary having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, FelCor LP or FelCor or any of their respective Restricted Subsidiaries existing on the date of such investment and (ii) apply (no later than the end of the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraph of this "Limitation on Asset Sales" covenant. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period as set forth in clause (i) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not previously subject to an Offer to Purchase pursuant to this "Limitation on Asset Sales" covenant totals at least $10 million, FelCor LP must commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Purchase from the Holders on a pro rata basis an aggregate principal amount of Notes equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount of the Notes, plus, in each case, accrued interest (if any) to the Payment Date. -84- 93 REPURCHASE OF NOTES UPON A CHANGE OF CONTROL FelCor LP must commence, within 30 days of the occurrence of a Change of Control, and consummate an Offer to Purchase for all Notes then outstanding, at a purchase price equal to 101% of the principal amount thereof, plus accrued interest (if any) to the Payment Date. There can be no assurance that FelCor LP will have sufficient funds available at the time of any Change of Control to make any debt payment (including repurchases of Notes) required by the foregoing covenant (as well as any covenant that may be contained in other securities of FelCor LP or FelCor which might be outstanding at the time). The above covenant requiring FelCor LP to repurchase the Notes will, unless consents are obtained, require FelCor LP to repay all indebtedness then outstanding which by its terms would prohibit such Note repurchase, either prior to or concurrently with such Note repurchase. COMMISSION REPORTS AND REPORTS TO HOLDERS Whether or not FelCor LP or FelCor is then required to file reports with the Commission, FelCor LP and FelCor shall file with the Commission all such reports and other information as they would be required to file with Commission by Sections 13(a) or 15(d) under the Securities Exchange Act of 1934 if they were subject thereto; provided that, if filing such documents by FelCor LP or FelCor with the Commission is not permitted under Exchange Act, FelCor LP or FelCor shall provide such documents to the Trustee and upon written request supply copies of such documents to any prospective Holder; provided, further, that if the rules and regulations of the Commission permit FelCor LP and FelCor to file combined reports or information pursuant to the Securities Exchange Act of 1934, FelCor LP and FelCor may file combined reports and information. FelCor LP and FelCor shall supply the Trustee and each Holder or shall supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other information. EVENTS OF DEFAULT The following events are defined as "Events of Default" in the Indenture: (a) default in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) default in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) default in the performance or breach of the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the assets of FelCor LP and FelCor or the failure by FelCor LP to make or consummate an Offer to Purchase in accordance with the "Limitations on Asset Sales" or "Repurchase of Notes upon a Change of Control" covenants; (d) FelCor LP or FelCor defaults in the performance of or breaches any other covenant or agreement of FelCor LP or FelCor in the Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes; (e) there occurs with respect to any issue or issues of Indebtedness of FelCor LP or FelCor or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not covered by insurance) shall be rendered against FelCor LP or FelCor or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 60 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of FelCor LP or FelCor or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of FelCor LP or FelCor or any Significant Subsidiary or for all or substantially all of the property and assets of FelCor LP or FelCor or any Significant Subsidiary or (C) the winding up -85- 94 or liquidation of the affairs of FelCor LP or FelCor or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (h) FelCor LP or FelCor or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of FelCor LP or FelCor or Significant Subsidiary or for all or substantially all of the property and assets of FelCor LP or FelCor or any Significant Subsidiary or (C) effects any general assignment for the benefit of its creditors. If an Event of Default (other than an Event of Default specified in clause (g) or (h) above that occurs with respect to FelCor LP or FelCor) occurs and is continuing under the Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes, then outstanding, by written notice to FelCor LP and FelCor (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of such Holders shall, declare the principal of, premium, if any, and accrued interest on the Notes to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued interest shall be immediately due and payable. In the event of a declaration of acceleration because an Event of Default set forth in clause (e) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (e) shall be remedied or cured by FelCor LP, FelCor or the relevant Significant Subsidiary or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event or Default specified in clause (g) or (h) above occurs with respect to FelCor LP or FelCor, the principal of, premium, if any, and accrued interest on the Notes then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of at least a majority in principal amount of the outstanding Notes by written notice to FelCor LP, FelCor and to the Trustee, may waive all past defaults and rescind and annul a declaration of acceleration and its consequences if (i) all existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. As to the waiver of defaults, see "-- Modification and Waiver." The Holders of at least a majority in aggregate principal amount of the outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or the Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders of Notes not joining in the giving of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from Holders of Notes. A Holder may not pursue any remedy with respect to the Indenture or the Notes unless; (i) the Holder gives the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount of outstanding Notes make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding Notes do not give the Trustee a direction that is inconsistent with the request. However, such limitations do not apply to the right of any Holder of a Note to receive payment of the principal of, premium, if any, or interest on, such Note or to bring suit for the enforcement of any such payment on or after the due date expressed in the Notes, which right shall not be impaired or affected without the consent of the Holder. The Indenture will require certain officers of FelCor LP and FelCor to certify, on or before a date not more than 90 days after the end of each fiscal year, that a review has been conducted of the activities of FelCor LP and FelCor and their respective Restricted Subsidiaries and of their performance under the Indenture and that FelCor LP and FelCor have fulfilled all obligations thereunder, or, if there has been a default in fulfillment of any such obligation, specifying each such default and the nature and status thereof. FelCor LP and FelCor will also be obligated to notify the Trustee of any default or defaults in the performance of any covenants or agreements under the Indenture. CONSOLIDATION, MERGER AND SALE OF ASSETS Neither FelCor LP nor FelCor will merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into FelCor LP or FelCor unless: (i) FelCor -86- 95 LP or FelCor shall be the continuing Person, or the Person (if other than FelCor LP or FelCor) formed by such consolidation or into which FelCor LP or FelCor is merged or that acquired or leased such property and assets of FelCor LP or FelCor shall be an entity organized and validly existing under the laws of the United States of America or any state or jurisdiction thereof and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, all of the obligations of FelCor LP or FelCor on the Notes and under the Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis FelCor LP or FelCor, or any Person becoming the successor obligor of the Notes, as the case may be, could Incur at least $1.00 of Indebtedness under paragraphs (a) and (b) of the "Limitation on Indebtedness" covenant; provided that this clause (iii) shall not apply to a consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a positive net worth; provided that, in connection with any such merger or consolidation, no consideration (other than Capital Stock (other than Disqualified Stock) in the surviving Person or FelCor LP or FelCor) shall be issued or distributed to the holders of Capital Stock of FelCor LP or FelCor; and (iv) FelCor LP or FelCor delivers to the Trustee an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clause (iii)) and an Opinion of Counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture complies with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with; provided that clause (iii) above does not apply if, in the good faith determination of the Board of Directors of FelCor LP or FelCor, whose determination shall be evidenced by a Board Resolution, the principal purpose of such transaction is to change the state of domicile of FelCor LP or FelCor; and provided, further, that any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. DEFEASANCE Defeasance and Discharge. The Indenture provides that FelCor LP, FelCor and the Subsidiary Guarantors will be deemed to have paid and will be discharged from any and all obligations in respect of the Notes or any Subsidiary Guarantee on the 123rd day after the deposit referred to below, and the provisions of the Indenture will no longer be in effect with respect to the Notes (except for, among other matters, certain obligations to register the transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes, to maintain paying agencies and to hold monies for payment in trust) if, among other things, (A) FelCor LP has have deposited with the Trustee, in trust, money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Notes, (B) FelCor LP has have delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not recognize income, gain or loss for federal income tax purposes as a result of FelCor LP's exercise of its option under this "Defeasance" provision and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred, which Opinion of Counsel must be based upon (and accompanied by a copy of) a ruling of the Internal Revenue Service to the same effect unless there has been a change in applicable federal income tax law after the Closing Date such that a ruling is no longer required or (y) a ruling directed to the Trustee received from the Internal Revenue Service to the same effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which FelCor LP, FelCor or any of their respective Restricted Subsidiaries is a party or by which FelCor LP, FelCor or any of their respective Restricted Subsidiaries are bound and (D) if at such time the Notes are listed on a national securities exchange, FelCor LP has delivered to the Trustee an Opinion of Counsel to the effect that the Notes will not be delisted as a result of such deposit, defeasance and discharge. Defeasance of Certain Covenants and Certain Events of Default. The Indenture further provides that the provisions of the Indenture will no longer be in effect with respect to clause (iii) under "Consolidation, Merger and Sale of Assets" and all the covenants described herein under "Covenants," clause (c) under "Events of Default" with respect to such clause (iii) under "Consolidation, Merger and Sale of Assets," clause (d) under "Events of Default" with respect to such other covenants and clauses (e) and (f) under "Events of Default" shall be deemed not to be Events of Default upon, among other things, the deposit with the Trustee, in trust, of money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an -87- 96 amount sufficient to pay the principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Notes, the satisfaction of the provisions described in clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by FelCor LP to the Trustee of an Opinion of Counsel to the effect that, among other things, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain covenants and Events of Default and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred. Defeasance and Certain Other Events of Default. In the event FelCor LP exercises its option to omit compliance with certain covenants and provisions of the Indenture with respect to the Notes as described in the immediately preceding paragraph and the Notes are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of money and/or U.S. Government Obligations on deposit with the Trustee will be sufficient to pay amounts due on the Notes at the time of their Stated Maturity but may not be sufficient to pay amounts due on the Notes at the time of the acceleration resulting from such Event of Default. However, FelCor LP, FelCor and the Subsidiary Guarantors will remain liable for such payments. MODIFICATION AND WAIVER Subject to certain limited exceptions, modifications and amendments of the Indenture may be made by FelCor LP, FelCor and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the outstanding Notes; provided that no such modification or amendment may, without the consent of each Holder affected thereby, (i) change the Stated Maturity of the principal of, or any installment of interest on, any Note, (ii) reduce the principal amount of, or premium, if any, or interest on, any Note, (iii) change the place of payment of principal of, or premium, if any, or interest on, any Note, (iv) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any Note, (v) reduce the above-stated percentages of outstanding Notes the consent of whose Holders is necessary to modify or amend the Indenture, (vi) waive a default in the payment of principal of, premium, if any, or interest on the Notes, (vii) voluntarily release a Guarantor of the Notes or (viii) reduce the percentage or aggregate principal amount of outstanding Notes the consent of whose Holders is necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults. NO PERSONAL LIABILITY OF INCORPORATORS, PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR EMPLOYEES The Indenture provides that no recourse for the payment of the principal of, premium, if any, or interest on any of the Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of FelCor LP or FelCor in the Indenture, or in any of the Notes or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, partner, stockholder, officer, director, employee or controlling person of FelCor LP, FelCor or the Subsidiary Guarantors or of any successor Person thereof. Each Holder, by accepting the Notes, waives and releases all such liability. CONCERNING THE TRUSTEE The Indenture provides that, except during the continuance of a Default, the Trustee will not be liable, except for the performance of such duties as are specifically set forth in such Indenture. If an Event of Default has occurred and is continuing, the Trustee will use the same degree of care and skill in its exercise of the rights and powers vested in it under the Indenture as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. The Indenture and provisions of the Trust Indenture Act of 1939, as amended, incorporated by reference therein contain limitations on the rights of the Trustee, should it become a creditor of FelCor LP or FelCor, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; provided that if it acquires any conflicting interest, it must eliminate such conflict or resign. -88- 97 BOOK ENTRY; DELIVERY AND FORM The certificates representing the New Notes will be issued in fully registered form without interest coupons. Old Notes sold in reliance on Rule 144A are represented by the Global Old Notes. New Notes issued in exchange for the Global Old Notes will be issued in the form of one or more Global New Notes and will be deposited with the Trustee as custodian for, and registered in the name of a nominee of, DTC. Old Notes originally purchased by or transferred to Institutional Accredited Investors who are not qualified institutional buyers ("Non-Global Purchasers") were in registered form without interest coupons and represented by the Certificated Old Notes. New Notes issued in exchange for the Certificated Old Notes will be issued in the form of one or more Certificated New Notes. Ownership of beneficial interests in a Global Note will be limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Ownership of beneficial interests in a Global Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). Qualified institutional buyers may hold their interests in a Global Note directly through DTC if they are participants in such system, or indirectly through organizations that are participants in such system. So long as DTC, or its nominee, is the registered owner or holder of a Global Note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Note for all purposes under the Indenture and the Notes. No beneficial owner of an interest in a Global Note will be able to transfer that interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Indenture. Payments of the principal of, and interest on, a Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither FelCor LP, FelCor, any Subsidiary Guarantor, the Trustee nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. FelCor LP expects that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Global Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note as shown on the records of DTC or its nominee. FelCor LP also expects that payments by participants to owners of beneficial interests in such Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds. FelCor LP expects that DTC will take any action permitted to be taken by a holder of Notes (including the presentation of Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in a Global Note is credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Notes, DTC will exchange the applicable Global Note for Certificated Notes, which it will distribute to its participants and which, in the case of a Global Old Note, may be legended with respect to the restrictions on transfer thereof. FelCor LP understands that: DTC is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic -89- 98 book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC is expected to follow the foregoing procedures in order to facilitate transfers of interests in a Global Note among its participants, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither FelCor LP, FelCor, any Subsidiary Guarantor, nor the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing its operations. If DTC is at any time unwilling or unable to continue as a depositary for the Global Notes and a successor depositary is not appointed by FelCor LP within 90 days, FelCor LP will issue Certificated Notes, which, in the case of a Global Old Note, may bear a legend with respect to the restrictions on transfer thereof, in exchange for the Global Notes. Holders of an interest in a Global Note may receive Certificated Notes, which, in the case of a Global Old Note, may bear a legend with respect to the restrictions on transfer thereof, in accordance with the DTC's rules and procedures in addition to those provided for under the Indenture. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS GENERAL In the opinion of Jenkens & Gilchrist, a Professional Corporation, the following are the material U.S. federal income tax consequences of exchanging Old Notes for New Notes pursuant to the Exchange Offer. The following opinion is based on the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations thereunder, Internal Revenue Service ("IRS") rulings and pronouncements, reports of congressional committees, judicial decisions and current administrative rulings and practice, all as in effect on the date hereof, all of which are subject to change at any time, and any such change may be applied retroactively in a manner that could adversely affect the tax consequences described below. This opinion applies only to Notes held as "capital assets" within the meaning of section 1221 of the Code (generally property held for investment and not for sale to customers in the ordinary course of a trade or business) by holders who or which are (i) citizens or residents of the United States, (ii) domestic corporations, partnerships or other entities or (iii) otherwise subject to U.S. federal income taxation on a net income basis in respect of income and gain from the Notes. This opinion does not address aspects of U.S. federal income taxation that may be applicable to holders that are subject to special tax rules, such as certain financial institutions, tax-exempt organizations, insurance companies, dealers in securities, foreign corporations and nonresident alien individuals. Moreover, this summary does not address any of the U.S. federal income tax consequences of holders that do not acquire New Notes pursuant to the Exchange Offer, nor does it address the applicability or effect of any state, local or foreign tax laws. The Company has not sought and will not seek any rulings from the IRS with respect to the position of the Company discussed below. There can be no assurance that the IRS will not take a different position concerning the tax consequences of exchanging Old Notes for New Notes. EXCHANGE OFFER The exchange of Old Notes for New Notes pursuant to the Exchange Offer will not be treated as an "exchange" for U.S. federal income tax purposes because the New Notes will not be considered to differ materially in kind or extent from the Old Notes. New Notes received by a holder of Old Notes will be treated as a continuation of the Old Notes in the hands of such holder. Accordingly, there will not be any U.S. federal income tax consequences to holders exchanging Old Notes for New Notes pursuant to the Exchange Offer. A holder's holding period of New Notes will include the holding period of the Old Notes exchanged therefor. -90- 99 POTENTIAL CONTINGENT PAYMENTS Holders of New Notes should be aware that it is possible that the IRS could assert that the Liquidated Damages which the Company would have been obligated to pay if the Exchange Offer registration statement had not been filed or is not declared effective within the time periods set forth herein (or certain other actions are not taken) (as described above under "Termination of Certain Rights") are "contingent payments" for U.S. federal income tax purposes. If so treated, the New Notes would be treated as contingent payment debt instruments and a holder of a New Note would be required to accrue interest income over the term of such New Note under the "noncontingent bond method" set forth in the U.S. Treasury Regulations issued by the IRS (the "Contingent Debt Regulations"). Under the Contingent Debt Regulations, any gain recognized by a holder on the sale, exchange or retirement of a New Note could be treated as interest income. However, the Contingent Debt Regulations provide that, for purposes of determining whether a debt instrument is a contingent payment debt instrument, remote or incidental contingencies are ignored. On the date of issue, the Company believed and has represented that to the best knowledge of the Company, prior to and on the date the New Notes are issued, the possibility of the payment of Liquidated Damages on the Old Notes is remote. Assuming this representation, counsel is of the opinion that the Old Notes will not be treated as contingent payment debt instruments. Accordingly, based on this representation, the Old Notes should not be treated as contingent payment debt instruments. EACH HOLDER SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED ABOVE TO THEIR PARTICULAR SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS. PLAN OF DISTRIBUTION Except as described below, (i) a broker-dealer may not participate in the Exchange Offer in connection with a distribution of the New Notes, (ii) such broker-dealer would be deemed an underwriter in connection with such distribution and (iii) such broker-dealer would be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. A broker-dealer may, however, receive New Notes for its own account pursuant to the Exchange Offer in exchange for Old Notes when such Old Notes were acquired as a result of market-making activities or other trading activities. Each such broker-dealer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any such broker-dealer for use in connection with any such resale. The Company will not receive any proceeds from any sales of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of New Notes and any commissions or concessions received by such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including -91- 100 the expenses of one counsel for the holders of the Notes) other than commissions or concessions of any brokers or dealers and transfer taxes and will indemnify the holders of Old Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. The New Notes will constitute a new issue of securities with no established trading market. The Company does not intend to list the New Notes on any national securities exchange or to seek approval for quotation through any automated quotation system. The Company has been advised by the Initial Purchasers that following completion of the Exchange Offer, the Initial Purchasers intend to make a market in the New Notes. However, the Initial Purchasers are not obligated to do so and any market-making activities with respect to the New Notes may be discontinued at any time without notice. Accordingly, no assurance can be given that an active public or other market will develop for the New Notes or as to the liquidity of or the trading market for the New Notes. If a trading market does not develop or is not maintained, the holders of the New Notes may experience difficulty in reselling the New Notes or may be unable to sell them at all. If a market for the New Notes develops, any such market may cease to continue at any time. If a public trading market develops for the New Notes, future trading prices of the New Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities and other factors, including the financial condition of the Company. LEGAL MATTERS Certain legal matters with respect to the legality of the Notes will be passed upon for FelCor and FelCor LP by Jenkens & Gilchrist, a Professional Corporation, Dallas, Texas. EXPERTS The consolidated financial statements of FelCor Suite Hotels, Inc., FelCor Suites Limited Partnership, and DJONT Operations, L.L.C. as of December 31, 1996 and 1995 and for the years ended December 31, 1996 and 1995 and for the period July 28, 1994 (inception of operations) through December 31, 1994, included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. -92- 101 INDEX TO FINANCIAL STATEMENTS FELCOR SUITE HOTELS, INC. Unaudited Pro Forma Financial Information: Pro Forma Consolidated Statements of Operations for the year ended December 31, 1996 and the six months ended June 30, 1997.......................................... F-3 Notes to Pro Forma Consolidated Statements of Operations............................................. F-5 Pro Forma Consolidated Balance Sheet as of June 30, 1997................................................... F-13 Notes to Pro Forma Consolidated Balance Sheet............. F-14 Unaudited Consolidated Financial Statements: Consolidated Balance Sheet at June 30, 1997............... F-15 Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996........................... F-16 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996........................... F-17 Notes to Consolidated Financial Statements................ F-18 Report of Independent Accountants........................... F-26 Consolidated Balance Sheets -- December 31, 1996 and 1995... F-27 Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994...................................................... F-28 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996 and 1995 and the period from May 16, 1994 through December 31, 1994.................... F-29 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994...................................................... F-30 Notes to Consolidated Financial Statements.................. F-31 Schedule III -- Real Estate and Accumulated Depreciation as of December 31, 1996...................................... F-47 FELCOR SUITES LIMITED PARTNERSHIP Unaudited Pro Forma Financial Information: Pro Forma Consolidated Statements of Operations for the year ended December 31, 1996 and the six months ended June 30, 1997.......................................... F-48 Notes to Pro Forma Consolidated Statements of Operations............................................. F-50 Pro Forma Consolidated Balance Sheet as of June 30, 1997................................................... F-58 Notes to Pro Forma Consolidated Balance Sheet............. F-59 Unaudited Consolidated Financial Statements: Consolidated Balance Sheet at June 30, 1997............... F-60 Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996........................... F-61 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996........................... F-62 Notes to Consolidated Financial Statements................ F-63 Report of Independent Accountants........................... F-71 Consolidated Balance Sheets -- December 31, 1996 and 1995... F-72 Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994...................................................... F-73 Consolidated Statements of Partners' Capital for the years ended December 31, 1996 and 1995 and the period from May 16, 1994 through December 31, 1994........................ F-74 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994...................................................... F-75 Notes to Consolidated Financial Statements.................. F-76 Schedule III -- Real Estate and Accumulated Depreciation as of December 31, 1996...................................... F-90
F-1 102 DJONT OPERATIONS, L.L.C. Unaudited Pro Forma Financial Information: Pro Forma Consolidated Statements of Operations for the year ended December 31, 1996 and the six months ended June 30, 1997.......................................... F-91 Notes to Pro Forma Consolidated Statements of Operations............................................. F-93 Unaudited Consolidated Financial Statements: Consolidated Balance Sheet at June 30, 1997............... F-96 Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996........................... F-97 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996........................... F-98 Notes to Consolidated Financial Statements................ F-99 Report of Independent Accountants........................... F-102 Consolidated Balance Sheets -- December 31, 1996 and 1995... F-103 Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994...................................................... F-104 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994.................................................. F-105 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994...................................................... F-106 Notes to Consolidated Financial Statements.................. F-107 F-2 103 FELCOR SUITE HOTELS, INC. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) The following unaudited Pro Forma Consolidated Statements of Operations of FelCor Suite Hotels, Inc. (the "Company") are presented as if the acquisitions of all hotels owned by the Company at December 31, 1996, those hotels acquired in 1997 through August 31, 1997 and the pending 1997 acquisition (collectively the "Hotels"), the proposed 1997 debt offering, the preferred stock offering consummated during 1996 and the common stock offerings consummated during 1997, and related transactions had occurred as of January 1, 1996 and the Hotels had all been leased to DJONT Operations, L.L.C. or its consolidated subsidiaries (the "Lessee") pursuant to Percentage Leases. Such pro forma information is based in part upon the Consolidated Statements of Operations of the Company, Pro Forma Statements of Operations of DJONT Operations, L.L.C. and the historical statements of operations of the acquired hotels. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Consolidated Statements of Operations for the periods presented are not necessarily indicative of what actual results of operations of the Company would have been assuming such transactions had been completed on January 1, 1996, nor does it purport to represent the results of operations for future periods.
YEAR ENDED DECEMBER 31, 1996 ---------------------------------------------------------------- PRO FORMA ADJUSTMENTS ----------------------------------------- 1996 ACQUISITIONS 1997 ACQUISITIONS, AND PREFERRED COMMON STOCK AND DEBT ACTUAL STOCK OFFERING(A) OFFERINGS(B) PRO FORMA -------- ----------------- --------------------- --------- Statement of Operations Data: Revenues: Percentage lease revenue(C)... $ 97,950 $12,127 $63,070 $173,147 Income from unconsolidated partnerships(D)............. 2,010 805 308 3,123 Other income(E)............... 984 (984) -------- ------- ------- -------- Total revenues........... 100,944 11,948 63,378 176,270 -------- ------- ------- -------- Expenses: General and administrative(F)........... 1,819 76 1,408 3,303 Depreciation(G)............... 26,544 4,559 15,010 46,113 Taxes, insurance and other(H).................... 13,897 1,292 9,600 24,789 Interest expense(I)........... 9,803 6,100 16,926 32,829 Minority interest in Operating Partnership(J).............. 5,590 (417) (53) 5,120 Minority interest in other partnerships(K)............. 236 236 -------- ------- ------- -------- Total expenses........... 57,653 11,610 43,127 112,390 -------- ------- ------- -------- Net income......................... 43,291 338 20,251 63,880 Preferred dividends(L)............. 7,734 4,064 11,798 -------- ------- ------- -------- Net income applicable to common shareholders(M).................. $ 35,557 $(3,726) $20,251 $ 52,082 ======== ======= ======= ======== Net income per common share(M)..... $ 1.54 $ 1.44 ======== ======== Weighted average number of common shares outstanding............... 23,076 36,237 ======== ========
F-3 104 FELCOR SUITE HOTELS, INC. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1997 ---------------------------------------------- PRO FORMA ADJUSTMENTS 1997 ACQUISITIONS COMMON STOCK AND ACTUAL DEBT OFFERINGS PRO FORMA ------- ---------------------- --------- Statement of Operations Data: Revenues: Percentage lease revenue(C)................... $74,048 $27,127 $101,175 Income from unconsolidated partnerships(D).... 3,427 (95) 3,332 Other income(E)............................... 170 (170) ------- ------- -------- Total revenues........................... 77,645 26,862 104,507 ------- ------- -------- Expenses: General and administrative(F)................. 1,846 200 2,046 Depreciation(G)............................... 21,730 6,101 27,831 Taxes, insurance and other(H)................. 10,756 4,029 14,785 Interest expense(I)........................... 12,914 5,975 18,889 Minority interest in Operating Partnership(J).............................. 2,942 64 3,006 Minority interest in other partnerships(K).... 142 88 230 ------- ------- -------- Total expenses........................... 50,330 16,457 66,787 ------- ------- -------- Net income......................................... 27,315 10,405 37,720 Preferred dividends(L)............................. 5,899 5,899 ------- ------- -------- Net income applicable to common shareholders(M).... $21,416 $10,405 $ 31,821 ======= ======= ======== Net income per common share(M)..................... $ 0.82 $ 0.87 ======= ======== Weighted average number of common shares outstanding...................................... 26,078 36,558 ======= ========
F-4 105 FELCOR SUITE HOTELS, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (A) Represents pro forma adjustments to reflect the historical results of operations prior to the acquisition by the Company for those hotels acquired by the Company in 1996 as adjusted to give effect to the provisions of the Percentage Leases; the effect of the preferred stock offering prior to the date issued in May 1996; and other pro forma adjustments reflecting additional overhead expenses and interest expenses. Those hotels acquired during 1996 and the dates of acquisition are as follows: Anaheim, California, Embassy Suites......................... January 3, 1996 Baton Rouge, Louisiana, Embassy Suites...................... January 3, 1996 Birmingham, Alabama, Embassy Suites......................... January 3, 1996 Deerfield Beach, Florida, Embassy Suites.................... January 3, 1996 Ft. Lauderdale, Florida, Embassy Suites..................... January 3, 1996 Miami (Airport), Florida, Embassy Suites.................... January 3, 1996 Milpitas, California, Embassy Suites........................ January 3, 1996 Phoenix (Camelback), Arizona, Embassy Suites................ January 3, 1996 Burlingame (S.F. Airport So.), California, Embassy Suites... January 3, 1996 Lexington, Kentucky, Hilton Suites.......................... January 10, 1996 Piscataway, New Jersey, Embassy Suites...................... January 10, 1996 Avon (Beaver Creek Resort), Colorado, Embassy Suites........ February 20, 1996 Boca Raton, Florida, Embassy Suites......................... February 28, 1996 El Segundo (LAX South), California, Embassy Suites.......... March 27, 1996 Oxnard (Mandalay Beach), California, Embassy Suites......... May 8, 1996 Napa, California, Embassy Suites............................ May 8, 1996 Deerfield, Illinois, Embassy Suites......................... June 20, 1996 San Rafael (Marin Co.), California, Embassy Suites.......... July 18, 1996 Parsippany, New Jersey, Embassy Suites...................... August 1, 1996 Charlotte, North Carolina, Embassy Suites................... August 1, 1996 Indianapolis (North), Indiana, Embassy Suites............... August 1, 1996 Atlanta (Buckhead), Georgia, Embassy Suites................. October 17, 1996 Myrtle Beach (Kingston Plantation), South Carolina, Embassy Suites.................................................... December 5, 1996
F-5 106 FELCOR SUITE HOTELS, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (B) Represents pro forma adjustments to reflect the historical results of operations prior to the acquisition by the Company for those hotels acquired by the Company in 1997 through August 31, 1997 and the pending 1997 acquisition, as adjusted to give effect to the provisions of the Percentage Leases; the effect of the Company's common stock offering in the first quarter of 1997; the common stock offering in June 1997; the proposed debt offering and other pro forma adjustments reflecting additional overhead expenses and interest expense. Those hotels acquired during 1997 and dates of acquisition are as follows: Omaha, Nebraska, Doubletree Guest Suites.................... February 1, 1997 Bloomington, Minnesota, Doubletree Guest Suites............. February 1, 1997 Atlanta (Perimeter Center), Georgia, Embassy Suites......... February 1, 1997 Kansas City (Country Club Plaza), Missouri, Embassy Suites.................................................... February 1, 1997 Overland Park, Kansas, Embassy Suites....................... February 1, 1997 Raleigh, North Carolina, Embassy Suites..................... February 1, 1997 San Antonio (Northwest), Texas, Embassy Suites.............. February 1, 1997 Austin (Airport North), Texas, Embassy Suites............... February 1, 1997 Covina, California, Embassy Suites.......................... February 1, 1997 Secaucus, New Jersey, Embassy Suites........................ February 1, 1997 Los Angeles (LAX Airport North), California, Embassy Suites.................................................... February 18, 1997 Dana Point, California, Doubletree Guest Suites............. February 21, 1997 Troy, Michigan, Doubletree Guest Suites..................... March 20, 1997 Austin (Downtown), Texas, Doubletree Guest Suites........... March 20, 1997 Baltimore, Maryland, Doubletree Guest Suites................ March 20, 1997 San Antonio (Airport), Texas, Embassy Suites................ May 16, 1997 Nashville (Airport), Tennessee, Doubletree Guest Suites..... June 5, 1997 Dallas (Market Center), Texas, Embassy Suites............... June 30, 1997 Syracuse, New York, Embassy Suites.......................... June 30, 1997 Atlanta (Airport), Georgia, Sheraton Gateway................ June 30, 1997 Atlanta (Galleria), Georgia, Sheraton Suites................ June 30, 1997 Chicago (O'Hare), Illinois, Sheraton Gateway Suites......... June 30, 1997 Dallas (Park Central), Texas, Sheraton...................... June 30, 1997 Phoenix (Crescent), Arizona, Sheraton....................... June 30, 1997 Lake Buena Vista (Disney World), Florida, Doubletree Guest Suites.................................................... July 28, 1997 Raleigh/Durham, North Carolina, Doubletree Guest Suites..... July 28, 1997 Tampa (Rocky Point), Florida, Doubletree Guest Suites....... July 28, 1997 PENDING 1997 ACQUISITION: Philadelphia (Society Hill), Pennsylvania, Sheraton
F-6 107 FELCOR SUITE HOTELS, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (C) Represents historical or pro forma lease revenue from the Lessee to the Company calculated by applying the contractual or anticipated rent provisions of the Percentage Leases to the historical suite revenues, food and beverage rents and food and beverage revenues of all the Hotels which are consolidated for financial reporting purposes. The income from unconsolidated partnerships is included as a separate line item in the accompanying Pro Forma Statement of Operations as described in Note D. Historical suite revenues for the time period prior to the acquisition by the Company, the date of acquisition, the contractual or anticipated pro forma Percentage Lease revenue for the time period prior to acquisition by the Company and a summary of contractual or anticipated Percentage Lease terms follows (in thousands):
SUITE REVENUE FOR THE PERIOD PRIOR TO ACQUISITION BY THE COMPANY --------------------------------- SIX MONTHS DATE OF ENDED YEAR ENDED DESCRIPTION OF PROPERTY ACQUISITION JUNE 30, 1997 DECEMBER 31, 1996 ----------------------- ----------------- ------------- ----------------- Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites... February 1, 1997 $ 379 $ 6,342 Omaha, NE, Doubletree Guest Suites......... February 1, 1997 336 4,754 Los Angeles (LAX Airport North), Embassy Suites................................... February 18, 1997 830 6,263 Dana Point, CA, Doubletree Guest Suites.... February 21, 1997 485 3,716 Troy, MI, Doubletree Guest Suites.......... March 20, 1997 1,489 6,342 Austin (Downtown), TX, Doubletree Guest Suites................................... March 20, 1997 1,366 5,696 Baltimore, MD, Doubletree Guest Suites..... March 20, 1997 1,167 6,236 Nashville, TN, Doubletree Guest Suites..... June 5, 1997 1,341 3,164 Dallas (Market Center), TX, Embassy Suites................................... June 30, 1997 3,938 7,716 Syracuse, NY, Embassy Suites............... June 30, 1997 2,909 5,572 Dallas (Park Central), TX, Sheraton........ June 30, 1997 6,920 13,520 Phoenix (Crescent), AZ, Sheraton........... June 30, 1997 5,738 9,581 Chicago (O'Hare), IL, Sheraton Gateway Suites................................... June 30, 1997 4,803 8,973 Atlanta (Airport), GA, Sheraton Gateway.... June 30, 1997 4,351 9,841 Atlanta (Galleria), GA, Sheraton Suites.... June 30, 1997 3,700 8,091 Lake Buena Vista (Disney World), FL, Doubletree Guest Suites.................. July 28, 1997 5,312 8,446 Raleigh/Durham, NC, Doubletree Guest Suites................................... July 28, 1997 3,111 5,327 Tampa (Rocky Point), FL, Doubletree Guest Suites................................... July 28, 1997 3,407 5,499 Philadelphia (Society Hill), PA, Sheraton................................. (1) 6,316 12,384 ------- -------- Total consolidated hotels............ $57,898 $137,463 ======= ======== Unconsolidated Partnership Hotels: Atlanta (Perimeter Center), GA, Embassy Suites................................... February 1, 1997 $ 600 $ 8,084 Austin (Airport North), TX, Embassy Suites................................... February 1, 1997 528 7,542 Covina, CA, Embassy Suites................. February 1, 1997 417 4,053 Overland Park, KS, Embassy Suites.......... February 1, 1997 403 5,624 Kansas City (Country Club Plaza), MO, Embassy Suites........................... February 1, 1997 548 7,604 Raleigh, NC, Embassy Suites................ February 1, 1997 624 7,592 San Antonio (Northwest), TX, Embassy Suites................................... February 1, 1997 337 5,614 Secaucus, NJ, Embassy Suites............... February 1, 1997 722 9,816 San Antonio (Airport), TX, Embassy Suites................................... May 16, 1997 2,874 7,235 ------- -------- Total unconsolidated hotel partnerships....................... $ 7,053 $ 63,164 ======= ======== PERCENTAGE LEASE REVENUE FOR THE PERIOD PRIOR TO ACQUISITION ANNUAL PERCENTAGE BY THE COMPANY LEASE TERMS --------------------------------- --------------------------- SIX MONTHS SUITE ENDED YEAR ENDED FIRST SECOND REVENUE DESCRIPTION OF PROPERTY JUNE 30, 1997 DECEMBER 31, 1996 TIER TIER BREAKPOINT ----------------------- ------------- ----------------- ----- ------ ---------- Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites... $ 152 $ 3,049 17% 65% $2,468 Omaha, NE, Doubletree Guest Suites......... 150 2,285 17 65 1,703 Los Angeles (LAX Airport North), Embassy Suites................................... 345 2,590 17 65 3,176 Dana Point, CA, Doubletree Guest Suites.... 175 1,395 17 65 2,211 Troy, MI, Doubletree Guest Suites.......... 791 3,316 17 65 1,935 Austin (Downtown), TX, Doubletree Guest Suites................................... 710 2,829 17 65 1,961 Baltimore, MD, Doubletree Guest Suites..... 516 2,943 17 65 2,536 Nashville, TN, Doubletree Guest Suites..... 557 1,320 17 65 1,585 Dallas (Market Center), TX, Embassy Suites................................... 1,844 3,583 17 65 3,069 Syracuse, NY, Embassy Suites............... 1,123 2,130 17 65 3,227 Dallas (Park Central), TX, Sheraton........ 3,131 6,031 17 65 6,490 Phoenix (Crescent), AZ, Sheraton........... 2,412 3,525 17 65 6,218 Chicago (O'Hare), IL, Sheraton Gateway Suites................................... 2,577 4,709 17 65 2,760 Atlanta (Airport), GA, Sheraton Gateway.... 1,725 4,156 17 65 5,033 Atlanta (Galleria), GA, Sheraton Suites.... 1,540 3,533 17 65 3,777 Lake Buena Vista (Disney World), FL, Doubletree Guest Suites.................. 2,951 4,467 17 65 2,272 Raleigh/Durham, NC, Doubletree Guest Suites................................... 1,612 2,623 17 65 1,900 Tampa (Rocky Point), FL, Doubletree Guest Suites................................... 1,785 2,703 17 65 1,939 Philadelphia (Society Hill), PA, Sheraton................................. 3,031 5,883 17 65 5,143 ------- ------- Total consolidated hotels............ $27,127 $63,070 ======= ======= Unconsolidated Partnership Hotels: Atlanta (Perimeter Center), GA, Embassy Suites................................... $ 274 $ 3,889 17% 65% $2,949 Austin (Airport North), TX, Embassy Suites................................... 249 3,792 17 65 2,378 Covina, CA, Embassy Suites................. 158 1,293 17 65 3,066 Overland Park, KS, Embassy Suites.......... 176 2,641 17 65 2,114 Kansas City (Country Club Plaza), MO, Embassy Suites........................... 240 3,594 17 65 2,976 Raleigh, NC, Embassy Suites................ 300 3,693 17 65 2,711 San Antonio (Northwest), TX, Embassy Suites................................... 120 2,487 17 65 2,474 Secaucus, NJ, Embassy Suites............... 274 4,082 17 65 4,788 San Antonio (Airport), TX, Embassy Suites................................... 1,280 3,113 17 65 3,311 ------- ------- Total unconsolidated hotel partnerships....................... $ 3,071 $28,584 ======= =======
- --------------- (1) Pending acquisition. F-7 108 FELCOR SUITE HOTELS, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (D) Represents historical or pro forma income from unconsolidated partnerships to the Company calculated by applying the Company's pro rata ownership percentage to the net income of the unconsolidated partnerships, computed using the contractual or anticipated rent provisions of the Percentage Leases to the historical suite revenues, food and beverage rents and food and beverage revenues of all the hotels; historical taxes, insurance and other; historical depreciation expense; and historical interest expenses. The amortization of the Company's cost in excess of net book value of the partnership assets is deducted to arrive at income from unconsolidated partnerships. This computation is as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- Statements of operations information: Percentage lease revenue............................ $3,071 $28,584 Depreciation........................................ 1,262 12,536 Taxes, insurance and other.......................... 531 3,166 Interest expense.................................... 1,116 9,725 ------ ------- Net income (loss)................................... 162 3,157 50% of income (loss) attributable to the Company.... 81 1,579 Amortization of cost in excess of net book value (See Note G)..................................... (176) (1,271) ------ ------- Income (loss) from unconsolidated partnerships...... $ (95) $ 308 ====== =======
(E) Represents elimination of historical interest income earned on excess cash. (F) Pro forma general and administrative expenses represent executive compensation, legal, audit and other expenses. These amounts are based on historical general and administrative expenses as well as probable 1997 expenses. F-8 109 FELCOR SUITE HOTELS, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (G) Represents depreciation on the Hotels. Depreciation is computed based on estimated useful lives of 40 years for buildings and improvements and five years for furniture, fixtures and equipment. These estimated useful lives are based on management's knowledge of the properties and the hotel industry in general. The pro forma depreciation adjustment for the hotels acquired in 1997 and for the year ended December 31, 1996 is as follows: FELCOR SUITE HOTELS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF JUNE 30, 1997 (IN THOUSANDS)
ASSET COST ------------------------------------------------- DATE OF BUILDING AND FURNITURE DESCRIPTION OF PROPERTY ACQUISITION LAND IMPROVEMENTS AND FIXTURES TOTAL ----------------------- ----------------- -------- ------------ ------------ -------- Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites........... February 1, 1997 $ 2,038 $ 17,731 $ 612 $ 20,381 Omaha, NE, Doubletree Guest Suites................. February 1, 1997 1,876 16,328 563 18,767 Los Angeles (LAX Airport North), Embassy Suites.... February 18, 1997 2,208 19,205 662 22,075 Dana Point, CA, Doubletree Guest Suites............ February 21, 1997 1,787 15,545 536 17,868 Troy, MI, Doubletree Guest Suites.................. March 20, 1997 2,957 25,794 887 29,638 Austin (Downtown), TX, Doubletree Guest Suites..... March 20, 1997 2,506 21,858 752 25,116 Baltimore, MD, Doubletree Guest Suites............. March 20, 1997 2,566 22,381 770 25,717 Nashville, TN, Doubletree Guest Suites............. June 5, 1997 1,070 9,306 321 10,697 Dallas (Market Center), TX, Embassy Suites......... June 30, 1997 2,910 25,317 873 29,100 Syracuse, NY, Embassy Suites....................... June 30, 1997 1,774 15,433 532 17,739 Atlanta (Airport), GA, Sheraton Gateway............ June 30, 1997 3,006 26,151 902 30,059 Atlanta (Galleria), GA, Sheraton Suites............ June 30, 1997 3,606 31,376 1,082 36,064 Chicago (O'Hare), IL, Sheraton Gateway Suites...... June 30, 1997 4,808 41,830 1,442 48,080 Dallas (Park Central), TX, Sheraton................ June 30, 1997 5,012 43,603 1,503 50,118 Phoenix (Crescent), AZ, Sheraton................... June 30, 1997 3,605 31,370 1,082 36,057 Lake Buena Vista (Disney World), FL, Doubletree Guest Suites..................................... July 28, 1997 2,986 25,978 896 29,860 Raleigh/Durham, NC, Doubletree Guest Suites........ July 28, 1997 2,124 18,476 637 21,237 Tampa (Rocky Point), FL, Doubletree Guest Suites... July 28, 1997 2,142 18,640 643 21,425 Philadelphia (Society Hill), PA, Sheraton hotel.... (1) 5,100 44,370 1,530 51,000 -------- -------- ------- -------- Total consolidated hotels.................... $ 54,081 $470,692 $16,225 $540,998 ======== ======== ======= ======== ANNUAL DEPRECIATION EXPENSE ------------------------------------- BUILDING AND FURNITURE DESCRIPTION OF PROPERTY IMPROVEMENTS AND FIXTURES TOTAL ----------------------- ------------ ------------ ------- Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites........... $ 443 $ 122 $ 565 Omaha, NE, Doubletree Guest Suites................. 408 113 521 Los Angeles (LAX Airport North), Embassy Suites.... 480 132 612 Dana Point, CA, Doubletree Guest Suites............ 389 107 496 Troy, MI, Doubletree Guest Suites.................. 645 177 822 Austin (Downtown), TX, Doubletree Guest Suites..... 546 150 696 Baltimore, MD, Doubletree Guest Suites............. 560 154 714 Nashville, TN, Doubletree Guest Suites............. 233 64 297 Dallas (Market Center), TX, Embassy Suites......... 633 175 808 Syracuse, NY, Embassy Suites....................... 386 106 492 Atlanta (Airport), GA, Sheraton Gateway............ 654 180 834 Atlanta (Galleria), GA, Sheraton Suites............ 784 217 1,001 Chicago (O'Hare), IL, Sheraton Gateway Suites...... 1,046 288 1,334 Dallas (Park Central), TX, Sheraton................ 1,090 301 1,391 Phoenix (Crescent), AZ, Sheraton................... 784 217 1,001 Lake Buena Vista (Disney World), FL, Doubletree Guest Suites..................................... 649 179 828 Raleigh/Durham, NC, Doubletree Guest Suites........ 462 127 589 Tampa (Rocky Point), FL, Doubletree Guest Suites... 466 130 594 Philadelphia (Society Hill), PA, Sheraton hotel.... 1,108 306 1,415 ------- ------ ------- Total consolidated hotels.................... $11,767 $3,245 $15,010 ======= ====== =======
ACQUISITION COST ANNUAL DATE OF ACQUISITION IN EXCESS OF NET AMORTIZATION ACQUISITION COST BOOK VALUE OF EXCESS COST ----------------- ----------- ----------------- -------------- Unconsolidated Partnership Hotels: Atlanta (Perimeter Center), GA, Embassy Suites..... February 1, 1997 $ 9,620 $ 9,199 $ 230 Austin (Airport North), TX, Embassy Suites......... February 1, 1997 8,965 6,486 162 Covina, CA, Embassy Suites......................... February 1, 1997 2,229 (3,329) (83) Overland Park, KS, Embassy Suites.................. February 1, 1997 5,673 4,928 123 Kansas City (Country Club Plaza), MO, Embassy Suites........................................... February 1, 1997 8,224 7,161 179 Raleigh, NC, Embassy Suites........................ February 1, 1997 9,739 8,764 219 San Antonio (Northwest), TX, Embassy Suites........ February 1, 1997 4,768 3,445 86 Secaucus, NJ, Embassy Suites....................... February 1, 1997 9,001 7,103 178 San Antonio (Airport), TX, Embassy Suites.......... May 16, 1997 6,916 7,067 177 ------- ------- ------ Total unconsolidated hotel partnerships...... $65,135 $50,824 $1,271 ======= ======= ======
- --------------- (1) Pending acquisition F-9 110 FELCOR SUITE HOTELS, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (H) Pro forma real estate, personal property tax, franchise taxes, property insurance, ground lease and other expenses for the year ended December 31, 1996 represent expenses to be paid by the Partnership. Such amounts were primarily derived from historical amounts paid with respect to the Hotels. The six months ended June 30, 1997 real estate, personal property tax, franchise taxes, property insurance, and ground lease expenses are computed in a similar manner as the year ended December 31, 1996 pro forma adjustments. A schedule of property taxes and insurance derived from the historical amounts paid for the hotels acquired in 1997 follows:
PROPERTY TAXES PROPERTY INSURANCE -------------------------- -------------------------- SIX MONTHS TWELVE MONTHS SIX MONTHS TWELVE MONTHS ENDED ENDED ENDED ENDED JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, DESCRIPTION OF PROPERTY 1997 1996 1997 1996 ----------------------- ---------- ------------- ---------- ------------- (IN THOUSANDS) Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites................................ $ 59 $ 707 $ 1 $ 17 Omaha, NE, Doubletree Guest Suites....... 16 170 1 13 Los Angeles (LAX Airport North), CA, Embassy Suites........................ 44 320 20 91 Dana Point, CA, Doubletree Guest Suites................................ 2 62 2 13 Troy, MI, Doubletree Guest Suites........ 91 354 5 21 Austin (Downtown), TX, Doubletree Guest Suites................................ 111 466 3 13 Baltimore, MD, Doubletree Guest Suites... 38 223 2 7 Lake Buena Vista (Disney World), FL, Doubletree Guest Suites............... 199 399 8 16 Raleigh, NC, Doubletree Guest Suites..... 77 149 7 14 Tampa (Rocky Point), FL, Doubletree Guest Suites................................ 118 237 19 39 Nashville, TN, Doubletree Guest Suites... 36 75 3 8 Dallas (Market Center), TX, Embassy Suites................................ 260 505 11 19 Syracuse, NY, Embassy Suites............. 167 329 9 16 Dallas (Park Central), TX, Sheraton...... 310 595 30 70 Phoenix (Crescent), AZ, Sheraton......... 404 748 12 24 Chicago (O'Hare), IL, Sheraton Gateway Suites................................ 646 1,366 10 20 Atlanta (Airport), GA, Sheraton Gateway............................... 216 443 12 25 Atlanta (Galleria), GA, Sheraton Suites................................ 191 369 7 16 Philadelphia (Society Hill), PA, Sheraton.............................. 304 609 12 24 ------ ------ ---- ---- Total consolidated hotels........ $3,289 $8,126 $174 $466 ====== ====== ==== ==== Unconsolidated Partnership Hotels: Atlanta (Perimeter Center), GA, Embassy Suites................................ $ 22 $ 172 $ 2 $ 17 Austin (Airport North), TX, Embassy Suites................................ 41 435 2 17 Covina, CA, Embassy Suites............... 14 (810) 8 96 Overland Park, KS, Embassy Suites........ 34 370 1 14 Kansas City (Country Club Plaza), MO, Embassy Suites........................ 35 359 3 29 Raleigh, NC, Embassy Suites.............. 17 171 1 16 San Antonio (Northwest), TX, Embassy Suites................................ 35 385 1 15 Secaucus, NJ, Embassy Suites............. 47 560 2 22 San Antonio (Airport), TX, Embassy Suites................................ 174 418 8 18 ------ ------ ---- ---- Total unconsolidated hotel partnerships................... $ 419 $2,060 $ 28 $244 ====== ====== ==== ====
(I) Represents both historical and pro forma interest expense computed based on borrowings outstanding for the respective periods multiplied by the applicable fixed or variable interest rate as stated in the applicable debt instruments. The pro forma adjustment assumes (i) additional borrowings against the F-10 111 FELCOR SUITE HOTELS, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS Line of Credit in the amount of $300.9 million were required in order to finance the hotels acquired in 1997 through August 31, 1997, the pending 1997 acquisition purchase and includes additional interest expense incurred prior to the acquisition date by the Company, (ii) the debt offering at the weighted average interest rate of 7.85% per annum and (iii) repayment of the $85 million term loan. The variable interest rates used to calculate the pro forma adjustment to interest expense were the same as the historical rates used to calculate the outstanding borrowings on the Line of Credit for the same respective periods ended December 31, 1996 and June 30, 1997. The period end pro forma debt balances, average interest rates and pro forma interest expense for the year end December 31, 1996 and June 30, 1997 follow:
DECEMBER 31, 1996 ---------------------------------- DEBT INTEREST INTEREST BALANCE RATE EXPENSE(1) -------- -------- ---------- (DOLLARS IN THOUSANDS) Line of Credit.......................................... $ 82,557 7.30% $ 3,206(2) Debt offering........................................... 300,000 7.85 23,545(2) Renovation loan......................................... 25,000 7.27 852 Other debt payable...................................... 1,550 6.75 3,520 Capital leases.......................................... 12,875 12.50 1,706 -------- ------- $421,982 $32,829 ======== =======
JUNE 30, 1997 ---------------------------------- DEBT INTEREST INTEREST BALANCE RATE EXPENSE(1) -------- -------- ---------- (DOLLARS IN THOUSANDS) Line of Credit.......................................... $ 73,728 7.75% $ 5,150 Debt offering........................................... 300,000 7.85 11,773 Renovation loan......................................... 25,000 6.24 774 Other debt payable...................................... 650 6.00 440 Capital leases.......................................... 12,048 12.50 752 -------- ------- $411,426 $18,889 ======== =======
- --------------- (1) Pro forma interest expense represents interest expense applicable to the pro forma weighted average borrowings outstanding during the periods presented which at times exceeds the pro forma borrowings outstanding at the end of the periods. (2) Pro forma weighted average borrowings under the Notes exceeded historical weighted average borrowings under the Line of Credit for much of 1996, resulting in additional interest expense relating to the excess amount borrowed that could not be used to repay borrowings under the Line of Credit. The pro forma statements of operations do not include a pro forma adjustment to recognize interest income on such excess cash and cash equivalents. (J) Calculated as approximately 7.38% and 7.42% of income before minority interest for pro forma results of operations for the six months ended June 30, 1997 and the year ended December 31, 1996, respectively. (K) Represents historical and pro forma minority interest expense related to 3 hotels in which the Company has a 90% general partnership interest. Minority interest is calculated as 10% of net income computed using the rent provisions of the Percentage Leases to the historical suite revenues; historical taxes, F-11 112 FELCOR SUITE HOTELS, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS insurance and other; historical depreciation expense; and historical interest expenses. This computation is as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 ---------------- ----------------- Statement of operations information: Percentage lease revenue............................. $2,017 $9,087 Depreciation......................................... 671 3,521 Taxes, insurance and other........................... 251 1,123 Interest expense..................................... 217 2,081 ------- ------- Net income (loss) before minority interest........... $ 878 $2,362 ======= ======= Minority interest expense -- 10% of net income....... $ 88 $ 236 ======= =======
(L) The 1996 pro forma adjustment to preferred dividends assumes the Series A Preferred Stock was issued on January 1, 1996. The adjustment reflects the additional dividends that would have been paid in 1996 prior to May 6, 1996, the actual date of issuance. (M) Pro forma income applicable to common shareholders excludes the extraordinary charge from write-off of deferred financing fees in the amount of approximately $2,354,000 from the "Actual" for the year ended December 31, 1996. F-12 113 FELCOR SUITE HOTELS, INC. PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (UNAUDITED, AMOUNTS IN THOUSANDS) The following unaudited Pro Forma Consolidated Balance Sheet of FelCor Suite Hotels, Inc. (the "Company") is presented as if the acquisition of the hotels acquired through August 31, 1997, the pending acquisition of one Sheraton hotel and the consummation of the 1997 issuance of additional common shares pursuant to the underwriters' overallotment option and proposed debt offerings and related transactions had occurred on June 30, 1997. Such pro forma information is based in part upon the consolidated balance sheet of the Company. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Consolidated Balance Sheet is not necessarily indicative of what the actual financial position of the Company would have been assuming such transactions had been completed as of June 30, 1997, nor does it purport to represent the future financial position of the Company.
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- ---------- ASSETS Investment in hotels................................... $1,320,982 $122,622(A) $1,443,604 Investment in unconsolidated partnerships.............. 126,714 126,714 Cash and cash equivalents.............................. 13,394 13,394 Deposits............................................... 1,616 1,616 Due from Lessee........................................ 9,059 9,059 Deferred expenses...................................... 3,363 8,861(B) 12,224 Other assets........................................... 4,446 4,446 ---------- -------- ---------- Total assets................................. $1,479,574.. $131,483 $1,611,057 ========== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Distributions payable.................................. $ 2,949 $ 2,949 Accrued expenses and other liabilities................. 6,379 6,379 Debt................................................... 302,650 $ 96,728(C) 399,378 Capital lease obligations.............................. 12,048 12,048 Minority interest in Operating Partnership............. 75,109 615(D) 75,724 Minority interest in other partnerships................ 8,164 8,164 ---------- -------- ---------- Total liabilities............................ 407,299 97,343 504,642 ---------- -------- ---------- Shareholders' Equity: Preferred stock........................................ 151,250 151,250 Common stock........................................... 368 10(E) 378 Treasury stock......................................... (41,106) (41,106) Additional paid in capital............................. 968,997 34,130(E) 1,003,127 Unearned officers' and directors' compensation......... (2,169) (2,169) Distributions in excess of earnings.................... (5,065) (5,065) ---------- -------- ---------- Total shareholders' equity................... 1,072,275 34,140 1,106,415 ---------- -------- ---------- Total liabilities and shareholders' equity... $1,479,574 $131,484 $1,611,057 ========== ======== ==========
F-13 114 FELCOR SUITE HOTELS, INC. NOTES TO PRO FORMA BALANCE SHEET (A) Increase represents the purchase of three Doubletree Guest Suites hotels on July 28, 1997 and the pending acquisition of one Sheraton hotel. (B) Increase represents deferred loan costs associated with the debt offering. (C) Increase represents additional borrowings necessary to purchase the Doubletree Guest Suites hotels on July 28, 1997 and the pending acquisition of one Sheraton hotel. (D) Increase represents the adjustment necessary to reflect a pro forma 7.35% minority interest in the Operating Partnership at June 30, 1997. (E) Increase represents the issuance of additional shares of common stock associated with the exercise of the underwriters' overallotment option from the June 30, 1997 stock offering of FelCor Suite Hotels, Inc. F-14 115 FELCOR SUITE HOTELS, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED, IN THOUSANDS) ASSETS
JUNE 30, 1997 ---------- Investment in hotels, net of accumulated depreciation of $58,411 at June 30, 1997.................................. $1,320,982 Investment in unconsolidated partnerships................... 126,714 Cash and cash equivalents................................... 13,394 Deposits.................................................... 1,616 Due from Lessee............................................. 9,059 Deferred expenses, net of accumulated amortization of $1,035 at June 30, 1997.......................................... 3,363 Other assets................................................ 4,446 ---------- Total assets...................................... $1,479,574 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Distributions payable....................................... $ 2,949 Accrued expenses and other liabilities...................... 6,379 Debt........................................................ 302,650 Capital lease obligations................................... 12,048 Minority interest in Operating Partnership, 2,904 units issued and outstanding at June 30, 1997................... 75,109 Minority interest in other partnerships..................... 8,164 ---------- Total liabilities................................. 407,299 ---------- Commitments and contingencies (Note 2) Shareholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized, 6,050 shares issued and outstanding at June 30, 1997... 151,250 Common stock, $.01 par value, 50,000 shares authorized, 35,594 shares issued, including shares in treasury, at June 30 1997........................................... 368 Additional paid in capital................................ 968,997 Unearned officers' and directors' compensation............ (2,169) Distributions in excess of earnings....................... (5,065) ---------- 1,113,381 Less common stock in treasury at cost, 1,200 shares at June 30, 1997.......................................... (41,106) ---------- Total shareholders' equity........................ 1,072,275 ---------- Total liabilities and shareholders' equity........ $1,479,574 ==========
The accompanying notes are an integral part of these consolidated financial statements. F-15 116 FELCOR SUITE HOTELS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, ------------------ 1997 1996 ------- ------- Revenues: Percentage lease revenue.................................. $74,048 $47,385 Income from unconsolidated partnerships................... 3,427 485 Other income.............................................. 170 774 ------- ------- Total revenue..................................... 77,645 48,644 ------- ------- Expenses: General and administrative................................ 1,846 848 Depreciation.............................................. 21,730 10,304 Taxes, insurance and other................................ 10,756 6,600 Interest expense.......................................... 12,914 4,513 Minority interest in Operating Partnership................ 2,942 3,142 Minority interest in other partnerships................... 142 ------- ------- Total expenses.................................... 50,330 25,407 ------- ------- Net income.................................................. 27,315 23,237 Preferred dividends......................................... 5,899 1,835 ------- ------- Net income applicable to common shareholders................ $21,416 $21,402 ======= ======= Per common share information: Net income................................................ $ 0.82 $ 0.94 ======= ======= Weighted average number of common shares outstanding...... 26,078 22,760 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-16 117 FELCOR SUITE HOTELS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ---------------------- 1997 1996 --------- --------- Cash flows from operating activities: Net income................................................ $ 27,315 $ 23,237 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation........................................... 21,730 10,304 Amortization of deferred financing fees and organization costs.................................... 672 243 Amortization of unearned officers' and directors' compensation.......................................... 510 177 Income from unconsolidated partnerships................ (3,427) (485) Cash distributions from unconsolidated partnerships.... 1,402 Minority interest in Operating Partnership............. 2,942 3,142 Minority interest in other partnerships................ 142 Changes in assets and liabilities: Due from Lessee........................................ (3,533) (1,355) Deferred expenses and other assets..................... (4,225) (689) Accrued expenses and other liabilities................. 168 (1,890) --------- --------- Net cash flow provided by operating activities.... 43,696 32,684 --------- --------- Cash flows from investing activities: Acquisition of hotels..................................... (409,587) (287,715) Acquisition of interests in unconsolidated partnerships... (59,571) Improvements and additions to hotels...................... (25,374) (30,944) --------- --------- Net cash flow used in investing activities........ (494,532) (318,659) --------- --------- Cash flows from financing activities: Proceeds from borrowings.................................. 149,000 76,150 Repayment of borrowings................................... (72,900) (119,954) Proceeds from sale of common stock........................ 480,075 40,584 Proceeds from sale of preferred stock..................... 151,250 Costs associated with public offerings.................... (25,480) (6,999) Purchase of treasury stock................................ (41,106) Proceeds from exercise of stock options................... 563 Distributions paid to limited partners.................... (2,835) (2,858) Distributions paid to preferred shareholders.............. (5,899) Distributions paid to common shareholders................. (24,981) (13,967) --------- --------- Net cash flow provided by financing activities.... 456,437 124,206 --------- --------- Net change in cash and cash equivalents..................... 5,601 (161,769) Cash and cash equivalents at beginning of periods........... 7,793 166,821 --------- --------- Cash and cash equivalents at end of periods................. $ 13,394 $ 5,052 ========= ========= Supplemental cash flow information -- Interest paid............................................. $ 9,760 $ 3,966 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-17 118 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND ACQUISITIONS FelCor Suite Hotels, Inc., is a self-administered real estate investment trust ("REIT"), which commenced operations on July 28, 1994. At the commencement of operations, FelCor Suite Hotels, Inc. ("FelCor") acquired an equity interest of approximately 75% in FelCor Suites Limited Partnership (the "Operating Partnership"), which owned six Embassy Suites(R) hotels (the "Initial Hotels") with an aggregate of 1,479 suites. The Operating Partnership had acquired the Initial Hotels through a merger with entities, originally formed in 1991, controlled by Hervey A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board of Directors and Chief Executive Officer of the Company, respectively. At June 30, 1997, FelCor owned interests in 67 hotels with an aggregate of 16,357 suites/rooms (collectively the "Hotels") through its 92.5% aggregate ownership of the Operating Partnership and its subsidiaries (collectively, the "Company"). FelCor also is the sole general partner of the Operating Partnership. The Company owns 100% equity interests in 49 of the Hotels (11,854 suites), a 90% or greater interest in partnerships owning four hotels (1,041 suites), and 50% interests in separate partnerships that own 14 hotels (3,462 suites). At June 30, 1997, 51 of the Hotels were operated as Embassy Suites hotels, nine as Doubletree Guest Suites(R) hotels, one as a Hilton Suites(R)hotel, one hotel was in the process of conversion to an Embassy Suites hotel, three hotels were operated as Sheraton(R) hotels and two were operated as Sheraton Suites(R) hotels. The Hotels are located in 25 states, with 29 hotels in California, Florida and Texas. The following table provides certain information regarding the Hotels through June 30, 1997:
NUMBER OF HOTELS AGGREGATE ACQUIRED NUMBER OF SUITES ACQUISITION PRICE ---------------- ---------------- --------------------- (DOLLARS IN MILLIONS) --------------------- 1994............................... 7 1,730 $ 107.3 1995............................... 13 2,649 237.1* 1996............................... 23 5,769 560.5** 1st Quarter 1997................... 15 3,446 209.4*** 2nd Quarter 1997................... 9 2,715 264.9**** -- ------- -------- 67 16,309 1,379.2 == Additional suites constructed by the Company......... 48 5.3 ------- -------- 16,357 $1,384.5 ======= ========
- --------------- * Includes the purchase price of the Company's 50% interest in an unconsolidated partnership owning one hotel with 262 suites. ** Includes the purchase price of the Company's 50% interests in separate unconsolidated partnerships owning four hotels with an aggregate 1,005 suites. *** Includes the purchase price of the Company's 50% interests in separate unconsolidated partnerships owning eight hotels with an aggregate 1,934 suites. **** Includes the purchase price of the Company's 50% interest in an unconsolidated partnership owning one hotel with 261 suites. The Company completed construction and placed into service on July 1, 1997, 129 net additional suites, meeting rooms and other public area upgrades at its Boston-Marlborough, Massachusetts hotel at an approximate cost of $15.8 million. The Company has also begun construction on 67 suites at its Jacksonville, Florida hotel and 67 suites at its Orlando (North), Florida hotel at an aggregate projected cost of $10.2 million with an expected completion in early 1998. F-18 119 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company leases all of the Hotels to DJONT Operations, L.L.C. ("DJONT"), or a consolidated subsidiary thereof (collectively, the "Lessee"), under operating leases providing for the payment of percentage rent (the "Percentage Leases"). Hervey A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board and President of the Company, respectively, beneficially own a 50% voting equity interest in DJONT. The remaining 50% non-voting equity interest in DJONT is beneficially owned by the children of Charles N. Mathewson, a director of the Company and shareholder of the predecessor company. The Company's partners in partnerships owning 13 of the Hotels hold special purpose non-voting equity interests in the consolidated subsidiary of DJONT which leases such Hotels, which interests entitle them to 50% of such subsidiary's net income before overhead with respect to such Hotels. In addition, the Company's partner in a partnership owning three of the Hotels holds a 50% non-voting equity interest in the consolidated subsidiary of DJONT leasing those Hotels. See Note 2 Commitments and Related Party Transactions for additional discussion regarding Lessee consolidated subsidiaries. The Lessee has entered into management agreements pursuant to which 50 of the Hotels are managed by Promus Hotels, Inc. ("Promus"), nine of the Hotels are managed by a subsidiary of Doubletree Hotel Corporation ("Doubletree"), five of the hotels are managed directly by, or by a subsidiary of, ITT Sheraton Corporation ("Sheraton"), two of the Hotels are managed by American General Hospitality, Inc. ("AGHI"), and one is managed by Coastal Hotel Group, Inc. ("Coastal"). A brief discussion of the hotels acquired and other significant transactions occurring in the six months ended June 30, 1997 follows: - On February 3, 1997, the Company sold three million shares of Common Stock to the public, at $35.50 per share, pursuant to the Company's omnibus shelf registration statement ("Shelf Registration"), which provides for offerings by the Company from time to time of up to an aggregate of $500 million in securities, which may include its debt securities, preferred stock, common stock and/or common stock warrants. The Company received net proceeds of approximately $100.7 million from this transaction. The proceeds from this offering were used to immediately fund the acquisition of 10 hotels acquired on February 4, 1997. - On February 4, 1997, the Company acquired 50% joint venture interests in eight existing Embassy Suites hotels located in Atlanta, Georgia; Kansas City, Missouri; Overland Park, Kansas; Raleigh, North Carolina; San Antonio, Texas; Austin, Texas; Covina, California; and Secaucus, New Jersey with a total of 1,934 suites for approximately $58 million, subject to a 50% share of approximately $86 million in existing non-recourse debt. Promus holds the remaining 50% joint venture interests in these properties. The Company also acquired 100% ownership in two Embassy Suites hotels located in Bloomington, Minnesota and Omaha, Nebraska with a total of 408 suites for approximately $39 million. These two hotels were subsequently converted to Doubletree Guest Suites hotels on May 1, 1997. - On February 19, 1997, the Company acquired the 215 suite Embassy Suites -- Los Angeles Airport (LAX North) hotel for approximately $22 million from a Japanese-owned limited partnership which had filed for bankruptcy. The hotel will remain an Embassy Suites hotel managed by Promus. - On February 21, 1997, the Company acquired the 198 suite Hilton Inn hotel in Dana Point, California for approximately $17.2 million. The Dana Point hotel was converted to a Doubletree Guest Suites hotel in May 1997 and is managed by Doubletree. - On March 10, 1997, the Company increased its unsecured revolving line of credit ("Line of Credit") from $250 million to $400 million, under substantially the same terms as the original Line of Credit, and agreed upon a reduction in unused commitment fees from 35 basis points to 25 basis points. At the end of the first quarter of 1997, the Company had drawn $243 million under the Line of Credit. - On March 24, 1997, the Company acquired, through a 90% owned joint venture, interests in three Doubletree Guest Suites hotels, totaling 691 suites, located in Troy, Michigan; Austin, Texas; and near the Baltimore Washington International (BWI) Airport for approximately $80 million. The Company F-19 120 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) paid approximately $72 million for its 90% ownership interest and Doubletree paid approximately $8 million for its 10% limited partnership interest. Doubletree will continue to manage these hotels. - On May 15, 1997 the Company acquired a 50% partnership interest in the 261-suite Embassy Suites -- San Antonio Airport hotel for $1.7 million cash and 139,286 Partnership Units, subject to the Company's share of $12.4 million in existing non-recourse partnership debt. The remaining 50% interest in the hotel is owned by Promus, bringing to 12 the number of hotels jointly owned with Promus. The hotel is managed by Promus. - On June 5, 1997 the Company acquired the 138-suite Doubletree Guest Suites hotel -- Nashville for $10.7 million in cash. This three story hotel opened in 1988 and is the second hotel acquired by the Company in Nashville, the other being the Embassy Suites -- Nashville Airport hotel acquired by the Company in 1994. The hotel is managed by Doubletree. - On June 30, 1997 the Company issued a net of 9 million shares of its common stock, after giving effect to the 1.2 million shares it repurchased from Promus, at an offering price of $36.625 per share, providing net proceeds to the Company of approximately $312.8 million. The proceeds of this offering were used to fund the acquisition of the two Embassy Suites hotels and five Sheraton hotels which were acquired on June 30, 1997 and were used to reduce debt outstanding under its Line of Credit. - On June 30, 1997 the Company acquired the 244-suite Embassy Suites -- Dallas Market Center and the 215-suite Embassy Suites -- Syracuse hotels from Promus for an aggregate cash purchase price of $46.7 million. These acquisitions were the Company's first hotel in New York and third hotel in Dallas, Texas. Both hotels are managed by Promus. - On June 30, 1997 the Company acquired five Sheraton hotels with a total of 1,857 rooms and suites and approximately 85,000 square feet of meeting space from Sheraton for an aggregate cash purchase price of $200.0 million. This portfolio of hotels included the Sheraton Suites hotels at Chicago O'Hare Airport and at the Galleria in Atlanta, Georgia. Also included in this portfolio were three traditional upscale full service Sheraton hotels located at the Atlanta Airport, Dallas Park Central and Phoenix Crescent. These three hotels represent the Company's first acquisition of non-suite hotels. All of these hotels are managed by Sheraton. - The Company executed a definitive agreement to acquire the Doubletree Guest Suite hotels located in Lake Buena Vista, Florida, Raleigh/Durham, North Carolina and Tampa (Rocky Point), Florida from PSH Master L.P. I, a publicly traded Master Limited Partnership. The closing occurred on July 31, 1997 following approval by the MLP's unitholders. All of these hotels are managed by Doubletree. - The Company and Promus announced the execution of a letter of intent whereby Promus would develop five to ten Embassy Suites hotels in key markets and the Company would acquire these hotels upon completion at a price agreed upon prior to the commencement of construction. - The Company completed the public space renovations at the Embassy Suites hotels in Mandalay Beach and Napa, California. These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the financial statements and notes thereto of the Company and the Lessee included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "10-K"). The notes to the financial statements included herein highlight significant changes to the notes included in the 10-K and present interim disclosures required by the SEC. F-20 121 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUPPLEMENTAL CASH FLOW INFORMATION In the first six months of 1997 the Company purchased certain assets and assumed certain liabilities of hotels. These purchases were recorded under the purchase method of accounting. The fair value of the acquired assets and liabilities recorded at the date of acquisition are as follows: Assets acquired................................... $417,609 Minority interest contribution in other partnerships.................................... (8,022) -------- Net cash paid........................... $409,587 ========
In the first six months of 1997 the Company purchased interests in nine unconsolidated partnerships that hold hotel properties. The hotels associated with these unconsolidated subsidiaries are located in Atlanta (Perimeter), GA; Austin, TX; Covina, CA; Kansas City (Plaza), MO; Overland Park, KS; Raleigh, NC; San Antonio, TX; San Antonio (Airport), TX; and Secaucus, NJ. These purchases were recorded under the equity method of accounting. The value of the assets recorded at the date of acquisition are as follows: Assets acquired.................................... $64,672 Partnership units issued........................... (5,101) ------- Net cash paid............................ $59,571 =======
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS Upon final completion of the conversion of one hotel, the Hotels will operate as Embassy Suites (52), Doubletree Guest Suites (9), Sheraton Suites (2), Sheraton (3) and Hilton Suites (1) hotels. The Embassy Suites hotels and Hilton Suites hotel will operate pursuant to franchise license agreements which require the payment of fees based on a percentage of suite revenue. These fees are paid by the Lessee. There are no separate franchise license agreements with respect to the Doubletree Guest Suites hotels, Sheraton hotels or Sheraton Suites hotels, which rights are included in the management agreement. The Hotels are managed by Promus (50), Doubletree (9), Sheraton (5), AGHI (2) and Coastal (1) on behalf of the Lessee. The Lessee generally pays the managers a base management fee based on a percentage of total revenue and an incentive management fee based on the Lessee's net income before overhead expenses. The Company is to receive rental income from the Lessee under the Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels), 2006 (19 hotels) and 2007 (15 hotels). The rental income under the Percentage Leases between the 14 unconsolidated partnerships, of which the Company owns 50%, and the Lessee are payable to the respective partnerships and as such is not included in the following schedule of future lease commitments to the Company. Minimum future rental income (i.e., base rents) to the Company under these noncancellable operating leases at June 30, 1997 is as follows (in thousands):
YEAR ---- Remainder of 1997........................................... $ 47,032 1998........................................................ 94,467 1999........................................................ 94,467 2000........................................................ 94,466 2001........................................................ 94,466 2002 and thereafter......................................... 466,588 -------- $891,486 ========
F-21 122 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Minority equity interests in two of DJONT's consolidated subsidiaries, which relate to a total of 15 of the Hotels, are held by unrelated third parties. These two subsidiaries have entered into separate revolving credit agreements with an affiliate of Messrs. Feldman and Corcoran and/or the holders of such minority equity interests or affiliates thereof, which provide these subsidiaries with the right to borrow up to an aggregate of $9.0 million, to the extent necessary to enable them to pay rent and other obligations due under the Percentage Leases relating to such Hotels. Amounts borrowed thereunder, if any, will be subordinate to the payment of rent and other obligations under such Percentage Leases. No loans were outstanding under such agreements at June 30, 1997. 4. DEBT AND CAPITAL LEASE OBLIGATIONS Debt and capital lease obligations at June 30, 1997 consist of the following (in thousands):
JUNE 30, 1997 -------- Line of Credit.................................... $192,000 Term loan......................................... 85,000 Renovation loan................................... 25,000 Other debt payable................................ 650 -------- $302,650 ========
In March 1997, the Company increased its unsecured Line of Credit from $250 million to $400 million under substantially the same terms as the original Line of Credit obtained in September 1996. As of August 14, 1997, the Company amended its existing unsecured Line of Credit to increase availability to $550 million, extend the term by one year to September 30, 2000 and to reduce the effective interest rate. Interest payable on borrowings under the Line of Credit is variable, determined from a ratings-based pricing matrix, and at June 30, 1997, was set at LIBOR plus 175 basis points. The Company had an $85 million collateralized term loan outstanding at June 30, 1997. This term loan bears interest at LIBOR plus 150 basis points. Also outstanding at June 30, 1997 was a renovation loan of $25 million that bears interest at LIBOR plus 45 basis points. At June 30, 1997, 30 day LIBOR was 5.71875%. Under its loan agreements the Company is required to satisfy various affirmative and negative covenants. The Company was in compliance with these covenants at June 30, 1997. Capital lease obligations at June 30, 1997 consist of the following (in thousands):
JUNE 30, 1997 -------- Capital land and building lease obligations........ $ 9,506 Capital equipment lease obligations................ 2,542 ------- $12,048 =======
5. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS At June 30, 1997, the Company owned 50% interests in separate partnerships, including accounting for the acquisition by the Company owning 14 hotels, a parcel of undeveloped land and a condominium management company. The Company is accounting for its investments in these unconsolidated partnerships under the equity method. F-22 123 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized combined financial information for unconsolidated partnerships, of which the Company owns 50%, is as follows (in thousands):
JUNE 30, 1997 -------- Balance sheet information: Partnership assets (primarily hotel assets)..... $393,031 Non-recourse mortgage debt...................... $159,372 Equity.......................................... $253,428
SIX MONTHS ENDED JUNE 30, ----------------- 1997 1996 ------- ------ Statement of operations information: Percentage lease revenue........................ $23,729 $1,771 Expenses: Depreciation................................. 7,214 600 Taxes, insurance and other................... 3,178 163 Interest expense............................. 5,001 ------- ------ Total expenses.......................... 15,393 763 ------- ------ Net income...................................... $ 8,336 $1,008 ======= ====== 50% of net income attributable to the Company... $ 4,168 $ 504 Amortization of cost in excess of book value.... (741) (19) ------- ------ Income from unconsolidated partnerships......... $ 3,427 $ 485 ======= ======
6. TREASURY STOCK In conjunction with the June 30, 1997 common stock offering of 10.2 million shares, the Company purchased, at the offering price of $36.625, 1.2 million shares of its common stock from Promus. The stock was purchased at an aggregate cost of $41.1 million (after allocation of offering expenses) and is recorded using the cost method of accounting. All of the acquired shares are held as common stock in treasury. 7. TAXES, INSURANCE AND OTHER Taxes, insurance and other is comprised of the following for the six months ended June 30, 1997 and 1996 (in thousands):
SIX MONTHS ENDED JUNE 30, ----------------- 1997 1996 ------- ------ Real estate and personal property taxes........... $ 8,833 $5,018 Property insurance................................ 863 618 Land lease expense................................ 660 601 State franchise taxes............................. 300 330 Other............................................. 100 33 ------- ------ Total taxes, insurance and other........ $10,756 $6,600 ======= ======
F-23 124 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. PRO FORMA INFORMATION (UNAUDITED) The following unaudited Pro Forma Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996 are presented as if the acquisitions of all hotels owned by the Company at June 30, 1997, the equity offerings consummated during 1996 and 1997 and the purchase of three hotels on July 31, 1997 (see Note 9) had occurred as of January 1, 1996 and the Hotels had all been leased to the Lessee pursuant to Percentage Leases. Such pro forma information is based in part upon the Consolidated Statements of Operations of the Company and pro forma Statements of Operations of the Lessee included elsewhere in these financial statements. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Consolidated Statements of Operations for the periods presented are not necessarily indicative of what actual results of operations of the Company would have been assuming such transactions had been completed on January 1, 1996, nor does it purport to represent the results of operations for future periods. F-24 125 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, ------------------- 1997 1996 -------- ------- Revenues: Percentage lease revenue.................................. $ 99,562 $89,209 Income from unconsolidated partnerships................... 3,316 3,023 -------- ------- Total revenue..................................... 102,878 92,232 -------- ------- Expenses: General and administrative................................ 2,046 1,648 Depreciation.............................................. 27,770 17,802 Taxes, insurance and other................................ 14,317 13,940 Interest expense.......................................... 15,520 12,627 Minority interest in Operating Partnership................ 3,365 4,698 Minority interest in other partnerships................... 230 260 -------- ------- Total expenses.................................... 63,248 50,975 -------- ------- Net income.................................................. 39,630 41,257 Preferred dividends......................................... 5,899 5,899 -------- ------- Net income applicable to common shareholders................ $ 33,731 $35,358 ======== ======= Per common share information: Net income................................................ $ 0.92 $ 0.98 ======== ======= Weighted average number of common shares outstanding...... 36,558 36,064 ======== =======
Depreciation and interest expense increased from 1996 to 1997 due to approximately $71 million in capital expenditures made in 1996 and placed in service in late 1996 or early 1997. 9. SUBSEQUENT EVENTS On July 1, 1997, the Company declared a dividend of $0.50 per share of Common Stock and $0.4875 per share on its Series A Preferred Stock, which was paid on July 30, 1997 to holders of record on July 15, 1997. In conjunction with the 10.2 million share stock offering completed on June 30, 1997, the Company issued an additional 1 million shares of its common stock pursuant to the underwriters' exercise of the overallotment option on July 15, 1997, providing the Company with additional net proceeds of approximately $34.8 million. On July 31, 1997 the Company acquired three Doubletree Guest Suites hotels, totaling 635 suites, located in Lake Buena Vista, Florida; Raleigh/Durham, North Carolina; and Tampa (Rocky Point), Florida. The Company paid approximately $71.2 million in cash. Doubletree will continue to manage the hotels. F-25 126 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of FelCor Suite Hotels, Inc. We have audited the accompanying consolidated financial statements and the financial statement schedule of FelCor Suite Hotels, Inc. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FelCor Suite Hotels, Inc. as of December 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Dallas, Texas January 22, 1997 except as to the information presented in the second paragraph of Note 5, the first paragraph of Note 6 and Note 17 for which the date is March 10, 1997 F-26 127 FELCOR SUITE HOTELS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS) ASSETS
1996 1995 -------- -------- Investment in hotels, net of accumulated depreciation of $36,718 in 1996 and $10,244 in 1995....................... $899,691 $325,155 Investment in unconsolidated partnerships................... 59,867 13,819 Cash and cash equivalents................................... 7,793 166,821 Deposits and prepayments.................................... 1,616 35,317 Due from Lessee............................................. 5,526 2,396 Deferred expenses, net of accumulated amortization of $364 in 1996 and $252 in 1995.................................. 3,235 1,713 Other assets................................................ 1,060 3,138 -------- -------- Total assets...................................... $978,788 $548,359 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Distributions payable....................................... $ 16,090 $ 4,918 Accrued expenses and other liabilities...................... 5,235 3,552 Debt........................................................ 226,550 8,410 Capital lease obligations................................... 12,875 11,256 Minority interest in Partnership, 2,786 and 2,695 units issued and outstanding at December 31, 1996 and 1995, respectively.............................................. 76,112 58,837 -------- -------- Total liabilities................................. 336,862 86,973 -------- -------- Commitments and contingencies (Notes 5 and 9) Shareholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized, 6,050 shares issued and outstanding at December 31, 1996...................................................... 151,250 Common stock, $.01 par value, 50,000 shares authorized, 23,502 and 21,135 shares issued and outstanding at December 31, 1996 and 1995, respectively.................. 235 211 Additional paid in capital.................................. 505,082 463,524 Unearned officers' and directors' compensation.............. (1,454) (473) Distributions in excess of earnings......................... (13,187) (1,876) -------- -------- Total shareholders' equity........................ 641,926 461,386 -------- -------- Total liabilities and shareholders' equity........ $978,788 $548,359 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-27 128 FELCOR SUITE HOTELS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 -------- ------- ------ Revenues: Percentage lease revenue.................................. $ 97,950 $23,787 $6,043 Income from unconsolidated partnerships................... 2,010 513 Other income.............................................. 984 1,691 207 -------- ------- ------ Total revenues.................................... 100,944 25,991 6,250 -------- ------- ------ Expenses: General and administrative................................ 1,819 870 355 Depreciation.............................................. 26,544 5,232 1,487 Taxes, insurance and other................................ 13,897 2,563 881 Interest expense.......................................... 9,803 2,004 109 Minority interest......................................... 5,590 3,131 907 -------- ------- ------ Total expenses.................................... 57,653 13,800 3,739 -------- ------- ------ Income before extraordinary charge.......................... 43,291 12,191 2,511 Extraordinary charge from write off of deferred financing fees...................................................... 2,354 -------- ------- ------ Net income.................................................. 40,937 12,191 2,511 Preferred dividends......................................... 7,734 -------- ------- ------ Net income applicable to common shareholders................ $ 33,203 $12,191 $2,511 ======== ======= ====== Per common share information: Net income applicable to common shareholders before extraordinary charge................................... $ 1.54 $ 1.70 $ 0.54 Extraordinary charge...................................... 0.10 -------- ------- ------ Net income................................................ $ 1.44 $ 1.70 $ 0.54 ======== ======= ====== Weighted average number of common shares outstanding...... 23,076 7,165 4,690 ======== ======= ======
The accompanying notes are an integral part of these consolidated financial statements. F-28 129 FELCOR SUITE HOTELS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM MAY 16, 1994 THROUGH DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK UNEARNED --------------- OFFICERS' NUMBER ADDITIONAL AND DISTRIBUTIONS TOTAL PREFERRED OF PAID-IN DIRECTORS' IN EXCESS OF SHAREHOLDERS' STOCK SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY --------- ------ ------ ---------- -------------- ------------- ------------- Issuance of common shares, net of offering expenses and allocation to minority interest................... 4,686 $ 47 $ 69,691 $ 69,738 Issuance of directors' shares......... 4 85 $ (85) Distributions declared: $0.657 per common share............. $ (3,079) (3,079) Amortization of unearned directors' compensation........................ 85 85 Net income............................ 2,511 2,511 -------- ------ ---- -------- ------- -------- -------- Balance at December 31, 1994.......... 4,690 47 69,776 (568) 69,255 Issuance of common shares, net of offering expenses................ 16,411 164 402,124 402,288 Allocation to minority interest....... (9,115) (9,115) Issuance of officers' and directors' shares.............................. 34 739 (631) 108 Distributions declared: $1.84 per common share.............. (13,499) (13,499) Amortization of unearned officers' and directors' compensation............. 158 158 Net income............................ 12,191 12,191 -------- ------ ---- -------- ------- -------- -------- Balance at December 31, 1995.......... 21,135 211 463,524 (473) (1,876) 461,386 Issuance of common shares............. 1,913 19 50,952 50,971 Issuance of officers' and directors' shares.............................. 53 1 1,486 (1,487) Conversion of Partnership units to common shares....................... 401 4 4 Issuance of preferred stock, net of offering expenses............................ $151,250 (6,998) 144,252 Distributions/dividends declared: $1.92 per common share.............. (44,514) (44,514) $1.2783 per preferred share......... (7,734) (7,734) Allocation to minority interest....... (3,882) (3,882) Amortization of unearned officers' and directors' compensation............. 506 506 Net income............................ 40,937 40,937 -------- ------ ---- -------- ------- -------- -------- Balance at December 31, 1996.......... $151,250 23,502 $235 $505,082 $(1,454) $(13,187) $641,926 ======== ====== ==== ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-29 130 FELCOR SUITE HOTELS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1994 ( IN THOUSANDS)
1996 1995 1994 --------- --------- --------- Cash flows from operating activities: Net income.............................................. $ 40,937 $ 12,191 $ 2,511 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation......................................... 26,544 5,385 1,487 Amortization of deferred financing fees and organization costs.............................................. 554 228 24 Amortization of unearned officers' and directors' compensation....................................... 506 158 85 Income from unconsolidated partnerships.............. (2,010) (513) Cash distributions from unconsolidated partnerships....................................... 1,954 Extraordinary charge for write off of deferred financing fees..................................... 2,354 Fully vested officer stock grant..................... 108 Minority interest.................................... 5,590 3,131 907 Changes in assets and liabilities: Due from Lessee...................................... (3,130) (1,137) (1,259) Deferred costs and other assets...................... 353 (2,217) (407) Accrued expenses and other liabilities............... 280 741 611 --------- --------- --------- Net cash flow provided by operating activities.................................... 73,932 18,075 3,959 --------- --------- --------- Cash flows from investing activities: Acquisition of hotels................................... (365,907) (219,164) (23,550) Prepayments under purchase agreements................... (21,701) Acquisition of unconsolidated partnerships.............. (43,424) (13,166) Improvements and additions to hotels.................... (71,051) (5,166) (77,243) --------- --------- --------- Net cash flow used in investing activities...... (480,382) (259,197) (100,793) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings................................ 303,350 128,600 8,800 Repayment of borrowings................................. (193,954) (129,850) Deferred financing fees................................. (4,484) (1,072) (721) Proceeds from sale of common stock...................... 44,978 426,502 99,583 Proceeds from sale of preferred stock................... 151,250 Costs associated with public offerings.................. (6,998) (27,874) (7,973) Proceeds from sale of partnership units................. 25,000 Distributions paid to limited partners.................. (5,353) (2,993) (462) Distributions paid to common shareholders............... (36,583) (11,488) (1,275) Dividends paid to preferred shareholders................ (4,784) --------- --------- --------- Net cash flow provided by financing activities.................................... 247,422 406,825 97,952 --------- --------- --------- Net change in cash and cash equivalents................... (159,028) 165,703 1,118 Cash and cash equivalents at beginning of periods......... 166,821 1,118 --------- --------- --------- Cash and cash equivalents at end of years................. $ 7,793 $ 166,821 $ 1,118 ========= ========= ========= Supplemental cash flow information -- interest paid....... $ 9,168 $ 1,467 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-30 131 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION FelCor Suite Hotels, Inc., formed as a self-administered real estate investment trust ("REIT"), was incorporated on May 16, 1994 and commenced operations on July 28, 1994. At the commencement of operations, FelCor Suite Hotels, Inc. ("FelCor") acquired an equity interest of approximately 75% in FelCor Suites Limited Partnership (the "Partnership"), which owned six Embassy Suites(R) hotels (the "Initial Hotels") with an aggregate of 1,479 suites. The Partnership had acquired the Initial Hotels through a merger with entities, originally formed in 1991, controlled by Hervey A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board of Directors and Chief Executive Officer of the Company, respectively. At December 31, 1996, FelCor owned interests in 43 hotels with an aggregate of 10,196 suites (collectively the "Hotels") through its 89.4% aggregate ownership of the Partnership and its consolidated subsidiaries (collectively, the "Company"). FelCor also acts as the sole general partner in the Partnership. The Company owns 100% equity interests in 37 of the Hotels, a 97% interest in the partnership that owns the Los Angeles International Airport hotel and 50% interests in separate partnerships that own five hotels. At December 31, 1996, 39 of the Hotels are operated as Embassy Suites hotels, two as Doubletree Guest Suites(R) hotels, one as a Hilton Suites(R) hotel and one hotel is in the process of being converted to an Embassy Suites hotel. The Hotels are located in 16 states, with 17 hotels in California and Florida. The following table provides certain information regarding the Company's Hotels acquired through December 31, 1996:
NUMBER NUMBER OF HOTELS OF AGGREGATE ACQUIRED SUITES ACQUISITION PRICE ---------------- -------- --------------------- (DOLLARS IN MILLIONS) 1994 Initial Hotels.......................... 6 1,479 $ 81.5 4th Quarter............................. 1 251 25.8 1995 1st Quarter............................. 2 350 27.4 2nd Quarter............................. 1 100 9.4 3rd Quarter............................. 3 542 31.3* 4th Quarter............................. 7 1,657 169.0 1996 1st Quarter............................. 14 3,501 383.5 2nd Quarter............................. 3 691 68.1 3rd Quarter............................. 4 1,005 30.8** 4th Quarter............................. 2 572 78.1 -- ------ ------- 43 10,148 904.9 == Additional suites constructed by the Company at Hotels..................... 48 5.3 ------ ------- 10,196 $910.2 ====== =======
- --------------- * Includes the purchase price of the Company's 50% interest in the unconsolidated partnership owning the 262 suite, Chicago-Lombard, Illinois hotel. ** Represents the purchase price of the Company's 50% interest in separate unconsolidated partnerships owning hotels in Marin County, California; Parsippany, New Jersey; Charlotte, North Carolina; and Indianapolis, Indiana, with an aggregate 1,005 suites. In addition, the Company has started construction on 129 net additional suites, meeting rooms and other public area upgrades at one of the Hotels, at an estimated cost of $15.8 million. F-31 132 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company leased all of the Hotels to DJONT Operations, L.L.C. or a consolidated subsidiary (collectively the "Lessee") under operating leases providing for the payment of percentage rent (the "Percentage Leases"). Messrs. Feldman and Corcoran beneficially own 50% of the common equity interest in the Lessee. The remaining 50% of the Lessee is beneficially owned by the children of Charles N. Mathewson, a director of the Company. The Lessee has entered into management agreements pursuant to which 38 of the Hotels are managed by Promus Hotels, Inc. ("Promus"), two of the Hotels are managed by a subsidiary of Doubletree Hotel Corporation ("Doubletree"), two of the Hotels are managed by American General Hospitality, Inc. ("AGHI") and one is managed by Coastal Hotel Group, Inc. ("Coastal"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of FelCor, the Partnership and the Holdings Partnerships as described in Note 8. All significant intercompany balances and transactions have been eliminated. Investment in Hotels -- Hotels are stated at cost and are depreciated using the straight-line method over estimated useful lives ranging from 31-40 years for buildings and improvements and 5 to 7 years for furniture, fixtures and equipment. The Company reviews the carrying value of each hotel to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel based on discounted future cash flows. The Company does not believe that there are any factors or circumstances indicating impairment of any of its investment in hotels. Maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts, and the related gain or loss is included in operations. Investment in Unconsolidated Partnerships -- The Company carries its investment in unconsolidated partnerships at cost, plus its equity in net earnings, less distributions received since the date of acquisition. Equity in net earnings is being adjusted for the straight-line amortization, over a 40 year period, of the difference between the Company's cost and its proportionate share of the underlying net assets at date of acquisition. Cash and Cash Equivalents -- All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Deposits and Prepayments -- Deposits and prepayments at December 31, 1996 consist of deposits associated with the capitalized land and building lease further described in Note 5. At December 31, 1995 the deposits and prepayments consisted of the aforementioned deposits and prepayments associated with hotel purchases. F-32 133 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred Expenses -- Deferred expenses at December 31, 1996 and 1995 consist of the following (in thousands):
1996 1995 ------ ------ Organization costs................................. $ 349 $ 172 Deferred financing fees............................ 3,250 1,793 ------ ------ 3,599 1,965 Accumulated amortization........................... (364) (252) ------ ------ $3,235 $1,713 ====== ======
Amortization of organization costs is computed using the straight-line method over three to five years. Amortization of deferred financing fees is computed using the interest method over the maturity of the loans. Revenue Recognition -- Percentage lease revenue is recognized when earned from the Lessee under the Percentage Lease agreements (Note 9). The Lessee is in compliance with its obligations under the Percentage Leases. Net Income Per Common Share -- Net income per common share has been computed by dividing net income applicable to common shareholders by the weighted average number of common shares and equivalents outstanding. Common share equivalents that have an immaterial dilutive effect include convertible preferred stock and outstanding common stock options. Distributions and Dividends -- The Company pays regular quarterly distributions on its common stock which are dependent on receipt of distributions from the Partnership. Additionally, the Company pays regular quarterly dividends on preferred stock in accordance with its preferred stock dividend requirements. Minority Interest -- Minority interest in the Partnership represents the limited partners' proportionate share of the equity in the Partnership. Income is allocated to minority interest based on the weighted average percentage ownership throughout the year. Stock Based Compensation Plans -- The Company applies APB Opinion No. 25 and related interpretations in its accounting for stock based compensation plans. Accordingly the Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock Based Compensation." Income Taxes -- The Company is qualified as a REIT under Sections 856 to 860 of the Internal Revenue Code. Accordingly, no provision for federal income taxes has been reflected in the financial statements. Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from income reported for financial reporting purposes primarily due to the differences for federal income tax purposes in the estimated useful lives used to compute depreciation. Distributions made in 1996 and 1995 represent approximately a 11.5% and 8.7% return of capital, respectively, for federal income tax purposes. F-33 134 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INVESTMENT IN HOTELS Investment in hotels at December 31, 1996 and 1995 consist of the following (in thousands):
1996 1995 -------- -------- Land........................................... $ 89,106 $ 31,123 Building and improvements...................... 744,758 279,349 Furniture, fixtures and equipment.............. 77,526 19,704 Construction in progress....................... 25,019 5,223 -------- -------- 936,409 335,399 Accumulated depreciation....................... (36,718) (10,244) -------- -------- $899,691 $325,155 ======== ========
4. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS The Company owned 50% interests in separate partnerships owning five hotels, a parcel of undeveloped land and a condominium management company at December 31, 1996 and one hotel at December 31, 1995. The Company is accounting for its investments in these unconsolidated partnerships under the equity method. Summarized combined financial information for unconsolidated partnerships, of which the Company owns 50%, is as follows (in thousands):
DECEMBER 31, -------------------- 1996 1995 -------- -------- Balance sheet information: Investment in hotels......................... $110,394 $ 23,385 Non-recourse mortgage debt................... $ 49,402 Equity....................................... $ 91,156 $ 24,609 Statement of operations information: Percentage lease revenue..................... $ 9,974 $ 1,420 Net income................................... $ 4,366 $ 1,050
5. DEBT AND CAPITAL LEASE OBLIGATIONS Debt at December 31, 1996 and 1995 consists of the following (in thousands):
DECEMBER 31, ------------------ 1996 1995 -------- ------ Line of Credit................................... $115,000 Term loan........................................ 85,000 Renovation Loan.................................. 25,000 Promus note related to CSS purchase.............. $7,500 Other debt payable............................... 1,550 910 -------- ------ $226,550 $8,410 ======== ======
On September 30, 1996 the Company obtained a $250 million unsecured revolving credit facility ("Line of Credit"). Under this facility, the Company has the right to borrow up to $250 million based upon its ownership of qualifying unencumbered hotel assets until October 1, 1999, at which time the principal amount then outstanding will be due and payable. Interest payable on borrowings is variable, determined from a ratings based pricing matrix, initially set at LIBOR plus 175 basis points and is paid current throughout the F-34 135 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) year. Additionally, the Company is required to pay an unused commitment fee which is variable, determined from a ratings based pricing matrix, initially set at 35 basis points. The Company paid unused commitment fees of approximately $164,000 during 1996. At December 31, 1996, the line of credit interest rate was 7.25%. On March 10, 1997 the Company announced that it increased its Line of Credit from $250 million to $400 million which included a reduction in unused commitment fees from 35 basis points to 25 basis points, under substantially the same terms as the original Line of Credit. Simultaneous with the closing of the Line of Credit in September, 1996, the Company retired a $65 million collateralized term loan and replaced an existing $100 million collateralized revolving credit facility with an $85 million four-year collateralized term loan. This term loan bears interest at LIBOR plus 150 basis points, interest is paid current throughout the year, and the note is collateralized by interests in nine of the Company's hotels. Principal payments commence on October 1, 1997 and are based on a 15 year amortization schedule, adjusted annually for the then current interest rates. All outstanding principal and accrued interest is due and payable on September 30, 2000. At December 31, 1996 the term loan interest rate was 7.125%. The Company has a $25 million loan facility ("Renovation Loan") which has been used to fund a portion of the renovation cost of the CSS Hotels (Note 8) converted to Embassy Suites hotels. The facility is guaranteed by Promus, bears interest at LIBOR plus 45 basis points (6.08% at December 31, 1996), requires monthly interest payments, and quarterly principal payments of $1.25 million beginning June 1999 and matures in June 2000. Under its loan agreements, the Company is required to satisfy various affirmative and negative covenants. The Company was in compliance with these covenants at December 31, 1996. During the fourth quarter of 1996, the Company entered into two separate interest rate swap agreements to manage the relative mix of its debt between fixed and variable rate instruments. These interest rate swap agreements modify a portion of the interest characteristics of FelCor's outstanding debt without an exchange of the underlying principal amount and effectively convert variable rate debt to a fixed rate. The fixed rates to be paid, the effective fixed rate, and the variable rate to be received by FelCor at December 31, 1996 are summarized in the following table:
SWAP RATE RECEIVED SWAP RATE EFFECTIVE (VARIABLE) AT SWAP NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 12/31/96 MATURITY - --------------- ------------ ---------- ------------- -------- 50$million... 6.11125% 7.61125% 5.53516% October 1999 25$million... 5.95500% 7.45500% 5.5000% November 1999
The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense by the Company pursuant to the terms of its interest rate agreement and will have a corresponding effect on its future cash flows. Agreements such as these contain a credit risk that the counterparties may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, which is limited to major banks and financial institutions, and does not anticipate nonperformance by the counterparties. F-35 136 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Capital lease obligations at December 31, 1996 and 1995 consists of the following (in thousands):
DECEMBER 31, ------------------ 1996 1995 ------- ------- Capital land and building lease obligations...... $ 9,675 $10,043 Capital equipment lease obligations.............. 3,200 1,213 ------- ------- $12,875 $11,256 ======= =======
The Company assumed the obligation for a capital industrial revenue bond lease for land and building associated with the purchase of the Embassy Suites hotel -- St. Paul in November 1995. The term of the lease is through August 31, 2011 and contains a provision that allows the Company to purchase the property at the termination of the lease, under certain conditions, for a nominal amount. The Company assumed various capital equipment leases associated with hotels purchased in 1995 and 1996. These capital leases are generally for telephones and televisions and vary in remaining terms from one year to four years. Minimum future lease payments under capital leases at December 31, 1996 are as follows (in thousands):
YEAR ---- 1997............................................... $ 3,297 1998............................................... 2,731 1999............................................... 1,464 2000............................................... 1,300 2001............................................... 1,217 2002 and thereafter................................ 11,770 ------- 21,779 Executory costs.................................... (846) Imputed interest................................... (8,058) ------- Present value of net minimum lease payments........ $12,875 =======
The Company's charter limits consolidated indebtedness to 40% of the Company's investment in hotels, at cost, on a consolidated basis, after giving effect to the Company's use of proceeds from any indebtedness. For purposes of this limitation, the Company's consolidated indebtedness includes borrowings and capital lease obligations and consolidated investment in hotels, at cost, is its investment, at cost, in hotels, as reflected in its consolidated financial statements plus (to the extent not otherwise reflected) the value (as determined by the Board of Directors at the time of issuance) of any equity securities issued, otherwise than for cash, by the Company or any of its subsidiaries in connection with the acquisition of hotels. Under this definition as of December 31, 1996, the Company's investment in hotels at cost was $1.0 billion. Accordingly, the Company's maximum permitted indebtedness would have been approximately $400 million (of which $239 million was borrowed at December 31, 1996). Assuming all of this additional debt capacity, and the Company's available cash and cash equivalents were used for the acquisition of additional hotels, the Company's investment in hotels would increase to approximately $1.3 billion and the maximum permitted indebtedness would increase to approximately $525 million. F-36 137 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. CAPITAL STOCK At December 31, 1996 the Company had completed the following public offerings:
OFFERING PRICE SECURITY DATE COMPLETED PER SHARE SHARES SOLD NET PROCEEDS -------- -------------- -------------- ----------- -------------- Common Stock (Initial Public Offering).................. July 28, 1994 $ 21.25 4,686,250 $ 91.6 million Common Stock................. May 30, 1995 $ 25.00 3,450,000 $ 81.0 million Common Stock................. December 20, 1995 $ 26.50 12,650,000 $312.6 million Preferred Stock.............. May 6, 1996 $ 25.00 6,050,000 $144.3 million
On April 25, 1996, the SEC declared effective the Company's omnibus shelf registration statement ("Shelf Registration"), which provides for offerings by the Company from time to time of up to an aggregate of $500 million in securities, which may include its debt securities, preferred stock, common stock and/or common stock warrants. The Company had issued approximately $151 million under the Shelf Registration at December 31, 1996 leaving approximately $349 million available. In February 1997, the Company issued approximately $107 million in common stock under the Shelf Registration. Preferred Stock The Board of Directors is authorized to provide for the issuance of up to 10,000,000 shares of Preferred Stock in one or more series, to establish the number of shares in each series and to fix the designation, powers preferences, and rights of each such series and the qualifications, limitations or restrictions thereof. On May 6, 1996, the Company completed an offering, pursuant to the Shelf Registration of six million shares of its $1.95 Series A Cumulative Convertible Preferred Stock ("Series A Preferred Stock") at $25 per share. An additional fifty thousand shares of Series A Preferred Stock were issued at $25 per share pursuant to the exercise of the underwriters' over-allotment option. The Series A Preferred Stock bears an annual dividend equal to the greater of $1.95 per share (yielding 7.8% based on the $25 purchase price) 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 and is cumulative from May 6, 1996. Each share of the Series A Preferred Stock is convertible at the shareholder's option to 0.7752 shares of common stock, subject to certain adjustments, and may not be redeemed by the Company before April 30, 2001. At December 31, 1996, all dividends then payable on the Preferred Stock had been paid. Common Stock In addition to the aforementioned public offerings of Common Stock, Promus purchased an aggregate of approximately 1.9 million shares of Common Stock, pursuant to subscription agreements, during 1995 and 1996 at a subscription price of $26.50 per share for an aggregate cost of $50 million. Promus has satisfied its commitment to purchase Common Stock under the aforementioned subscription agreements. Partnership Units The outstanding units of limited partnership interests in the Partnership ("Units") are redeemable at the option of the holder for a like number of shares of Common Stock or, at the option of the Company, for the cash equivalent thereof. Pursuant to a subscription agreement with Promus, the Partnership issued an aggregate 1.0 million Units to Promus in November and December 1995, at the subscription price of $25.00 per Unit. An aggregate of 491,703 additional Partnership Units were issued to sellers in conjunction with the purchase of two hotels and F-37 138 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the acquisition of partnership interests in two additional hotels in 1996. Promus has satisfied its commitment to purchase Units under the aforementioned subscription agreement. 7. TAXES, INSURANCE AND OTHER Taxes, insurance and other is comprised of the following for the years ended December 31, 1996 and 1995 and for the period from July 28, 1994 (inception of operations) through December 31, 1994 (in thousands):
1996 1995 1994 ------- ------ ---- Real estate and personal property taxes............. $11,110 $2,233 $620 Property insurance.................................. 1,312 155 69 Land lease expense.................................. 952 State franchise taxes............................... 472 175 192 Other............................................... 51 ------- ------ ---- Total taxes, insurance and other.......... $13,897 $2,563 $881 ======= ====== ====
8. BUSINESS COMBINATION On December 29, 1995 the Partnership acquired approximate 99% limited partnership interests in entities ("Holdings Partnerships") formed to facilitate the acquisition and financing of up to 18 Crown Sterling Suites(R) hotels ("CSS Hotels") and certain other hotels pending the completion of a common stock offering. Such common stock offering was completed on December 20, 1995 and at that date the Holdings Partnerships had acquired six of the CSS Hotels and one additional hotel. A summary of the fair values of the acquired assets and liabilities of the Holdings Partnerships recorded at the date of acquisition, at December 29, 1995, is as follows (in thousands): Investment in hotels.............................. $166,307 Prepayments under Purchase Agreements............. 13,616 Due from Lessee................................... 908 Other assets...................................... 715 -------- 181,546 -------- Debt and capital lease obligations................ 11,266 Accrued expenses and other liabilities............ 1,657 -------- 12,923 -------- Total purchase price.............................. $168,623 ========
The acquisition has been accounted for as a purchase and, accordingly, the results of operations of the Holdings Partnerships since acquisition have been included in the Company's consolidated statements of operations. 9. COMMITMENTS AND RELATED PARTY TRANSACTIONS After conversion of the Myrtle Beach hotel acquired in December 1996, the Company will own interests in 40 Embassy Suites hotels, 2 Doubletree Guest Suites hotels and one Hilton Suites hotel. The Embassy Suites hotels and the Hilton Suites hotel operate pursuant to franchise license agreements, which require the payment of fees based on a percentage of suite revenue. These fees are paid by the Lessee. There are no separate franchise license agreements for the Doubletree Guest Suites hotels. F-38 139 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Hotels are managed by Promus, Doubletree, AGHI or Coastal on behalf of the Lessee. The Lessee pays the managers a base management fee based on a percentage of suite revenue and an incentive management fee based on the Lessee's income before overhead expenses for each hotel. The Company is to receive rental income from the Lessee under the Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels) and 2006 (19 hotels). The rental income under the Percentage Leases between the partnerships owning five hotels, of which the Company owns 50%, and the Lessee is payable to the respective partnerships and as such is not included in the following schedule of future lease commitments to the Company. Minimum future rental income (base rents) under these noncancellable operating leases (excluding hotels owned by the previously noted partnerships) at December 31, 1996 is as follows (in thousands):
YEAR ---- 1997.............................................. $ 61,996 1998.............................................. 61,996 1999.............................................. 61,996 2000.............................................. 61,996 2001.............................................. 61,996 2002 and thereafter............................... 240,386 -------- $550,366 ========
At December 31, 1996 and 1995, the Lessee owed the Company approximately $5.5 million and $2.4 million, respectively, for such Percentage Lease rent to be paid in March of the subsequent year. The Percentage Lease revenue is based on a percentage of suite revenues, food and beverage revenues, and food and beverage rents of the Hotels. Both the base rent and the threshold suite revenue in each lease computation are subject to adjustments for changes in the Consumer Price Index ("CPI"). The adjustment is calculated at the beginning of each calendar year, for the hotels acquired prior to July of the previous year. The adjustment in any lease year may not exceed 7%. The CPI adjustments made in January 1997 and 1996 are 1.42% and 0.73% respectively. Under the Percentage Leases, the Partnership is obligated to pay the costs of real estate and personal property taxes, property insurance, maintenance of underground utilities and structural elements of the Hotels, and to set aside 4% of suite revenues per month, on a cumulative basis, to fund therefrom (or from other sources) capital expenditures for the periodic replacement or refurbishment of furniture, fixtures and equipment required for the retention of the franchise licenses with respect to the Hotels. In addition, the Company will incur certain additional capital expenditures in connection with the conversion and upgrade of acquired hotels, which may be funded from cash on hand or borrowings under its line of credit. At December 31, 1996 the Company is committed to fund capital improvements to certain of its hotels of approximately $22 million pursuant to product improvements plans as required by the franchisors. These capital improvements are expected to be funded in 1997. The Company has entered into employment contracts with Messrs. Feldman and Corcoran, that will continue in effect until December 31, 1999 and, unless terminated, will be automatically renewed for successive one year terms. Pursuant to such agreements, Messrs. Feldman and Corcoran each received $5,000 per month during 1994, $10,000 per month during 1995 and $10,270 per month in 1996. Effective January 1, 1997, Mr. Feldman is entitled to receive $12,500 per month and Mr. Corcoran is entitled to receive $16,667 per month. In addition, the Company is required to maintain a comprehensive medical plan for such persons. F-39 140 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company shares the executive offices and certain employees with FelCor, Inc. and the Lessee, and each company bears its share of the costs thereof, including an allocated portion of the rent, compensation of certain personnel (other than Messrs. Feldman and Corcoran, whose compensation is borne solely by the Company), office supplies, telephones and depreciation of office furniture, fixtures and equipment. Any such allocation of shared expenses to the Company must be approved by a majority of the independent directors. During 1996 and 1995, the Company paid approximately $807,000 (approximately 38%) and $316,000 (approximately 31%), respectively, of the allocable expenses under this agreement. 10. SUPPLEMENTAL CASH FLOW DISCLOSURE The Company purchased certain assets and assumed certain liabilities in connection with the acquisition of hotels. These purchases were recorded under the purchase method of accounting. The fair values of the acquired assets and liabilities recorded at the date of acquisition are as follows (in thousands):
1996 1995 1994 --------- -------- ------- Assets acquired............................ $ 494,354 $221,213 $25,750 Prepayments assumed........................ 13,616 Liabilities assumed........................ (108,744) (910) (2,200) Capital land lease assumed................. (10,045) Capital equipment leases assumed........... (2,823) (1,211) Common stock issued........................ (6,000) (3,499) Partnership units issued................... (10,880) --------- -------- ------- Net cash paid.................... $ 365,907 $219,164 $23,550 ========= ======== =======
The Company purchased interests in unconsolidated partnerships during 1996 and 1995. These unconsolidated partnerships separately own five hotels located in Chicago-Lombard, Illinois; Marin County, California; Parsippany, New Jersey; Charlotte, North Carolina; and Indianapolis, Indiana, a parcel of undeveloped land in Myrtle Beach, South Carolina and a condominium management company in Myrtle Beach, South Carolina. These purchases were recorded under the equity method of accounting. The value of the assets recorded at the date of acquisition is as follows (in thousands):
1996 1995 ------- ------- Acquisition of interests in unconsolidated partnerships................................... $45,992 $13,166 Partnership units issued......................... (2,568) ------- ------- Net cash paid.......................... $43,424 $13,166 ======= =======
In 1994, limited partnership Units in the Partnership with a net book value of $25,237 were issued in exchange for the Initial Hotels. In exchange for the limited partnership Units, the Partnership acquired hotels for approximately $79,439 (recorded on an historical cost basis) and assumed debt of approximately $75,992 resulting in a net surplus of approximately $3,447. Approximately $16,090, $3,813 and $1,804 of aggregate preferred stock dividends and common stock distributions had been declared as of December 31, 1996, 1995 and 1994, respectively. These amounts were paid in January following each such year. 11. STOCK BASED COMPENSATION PLANS The Company sponsors the FelCor Suite Hotels, Inc. 1994 Restricted Stock and Stock Option Plan ("1994 Plan"), and the FelCor Suite Hotels, Inc. 1995 Restricted Stock and Stock Option Plan (the "1995 Plan" and collectively, the "Plan"), which are stock based incentive compensation plans as described below. F-40 141 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company applies APB Opinion 25 and related interpretations in accounting for the Plan. In 1995, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 123 Accounting for Stock-Based Compensation ("SFAS 123") which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the Plan. Adoption of the cost recognition provisions of SFAS 123 is optional and the Company has decided not to adopt these provisions of SFAS 123. However, pro forma disclosures as if the Company adopted the cost recognition provisions of SFAS 123 in 1995 are required by SFAS 123 and are presented below. Stock Options The Company is authorized to issue 450,000 shares of common stock under the 1994 Plan and 1,200,000 shares of common stock under the 1995 Plan pursuant to awards granted in the form of incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options and restricted stock. All options have 10 year contractual terms and vest over five years, (20% per year), beginning in the year following the date of grant. Awards may be made to key executives and other key employees of the Company, including officers of the Company and its subsidiaries. A total of 50,000 shares of stock may be issued as restricted stock under the 1994 Plan and a total of 133,333 shares of stock may be issued as restricted stock under the 1995 Plan. Under the Plan, the Company granted a total of 345,000 nonqualified stock options in 1995 and 327,500 nonqualified stock options in 1996. A summary of the status of the Company's nonqualified stock options as of December 31, 1996 and the changes during the year ended on that date is presented below:
1996 1995 ----------------------- ----------------------- WEIGHTED WEIGHTED # SHARES OF AVERAGE # SHARES OF AVERAGE UNDERLYING EXERCISE UNDERLYING EXERCISE OPTIONS PRICES OPTIONS PRICES ----------- -------- ----------- -------- Outstanding at beginning of the year...... 515,000 $24.72 170,000 $20.81 Granted................................... 327,500 $30.08 345,000 $26.64 Exercised................................. 0 n/a 0 n/a Forfeited................................. 5,000 $30.00 0 n/a Expired................................... 0 n/a 0 n/a Outstanding at end of year................ 837,500 $26.78 515,000 $24.72 Exercisable at end of year................ 155,000 $23.17 38,000 $20.59
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ---------------------------- NUMBER WGTD. AVG. NUMBER RANGE OF OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE WGTD. AVG. EXERCISE PRICES AT 12/31/96 CONTR. LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE - ---------------- ----------- ----------- -------------- ----------- -------------- $18.75 to $22.00 170,000 6.76 $20.81 86,000 $20.38 $22.00 to $31.37 667,500 9.12 $28.30 69,000 $26.64 - ---------------- ------- ---- ------ ------- ------ $18.75 to $31.37 837,500 8.64 $26.78 155,000 $23.17
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 8.00%; risk free interest rates are different for each grant and range from 5.57% to 6.47%; the expected lives of options are 6 years; and volatility of 24.42% for all grants. The weighted average fair value of options granted during 1996 was $3.76 per share and the weighted average fair value of options granted during 1995 was $3.13 per share. F-41 142 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Restricted Stock The Company may grant restricted (i.e., nonvested) shares of common stock under the 1994 Plan and 1995 Plan. Under the 1994 Plan, the Company may grant to employees (including officers and directors who also are employees and independent directors), as restricted common stock all or a portion of the 50,000 shares of common stock reserved under the 1994 Plan. Under the 1995 Plan, the Company may grant to employees (including officers and directors who also are employees and independent directors), as restricted common stock all or a portion of the 133,333 shares of common stock reserved under the 1995 Plan. In 1995, the Company issued 46,500 shares of restricted common stock under the Plan. A total of 42,500 shares vest over a five year period (20% per year, beginning in the year following the date of grant), and the remaining 4,000 shares, granted to independent directors in lieu of cash compensation, vested immediately on the date of grant. In 1996, the Company issued 33,000 shares of restricted common stock under the Plan. A total of 26,500 of the shares vest over a five year period (20% per year, beginning in the year following the first anniversary date of the grant), 4,000 shares granted to independent directors in lieu of cash compensation, vested immediately on the date of grant, and the remaining 2,500 shares vest 100% on January 1, 1997. In accordance with APB 25, upon the issuance of restricted shares of common stock under the Plan, the Company recognized a compensation cost for the restricted common stock in the amount of $1.5 million for 1996 and $631,000 for 1995. This cost is charged to shareholders' equity and recognized as amortization expense ratably over the applicable vesting period, in the amount of $507,000 for 1996 and $158,000 for 1995. The weighted average share price at the date of grant for 33,000 restricted shares of common stock issued in 1996 is $29.99. The weighted average share price at the date of grant for 46,500 restricted shares of common stock issued in 1995 is $24.09. A summary of the status of the Company's restricted stock grants as of December 31, 1996 and the changes during the year ended on that date is presented below:
1996 1995 ------------------------- ------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE FAIR MARKET FAIR MARKET # SHARES VALUE AT GRANT # SHARES VALUE AT GRANT -------- -------------- -------- -------------- Outstanding at beginning of the year... 46,500 $24.09 0 n/a Granted: With 5 year graded vesting........... 26,500 $29.94 42,500 $24.32 Vest 100% at grant date.............. 4,000 $30.00 4,000 $21.63 Vest 100% within 12 months of grant............................. 2,500 $30.50 0 n/a Total granted.......................... 33,000 $29.99 46,500 $24.09 Outstanding at end of year............. 79,500 $26.54 46,500 $24.09 Vested at end of year.................. 16,500 $25.05 4,000 $21.63
F-42 143 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pro Forma Net Income and Net Income Per Common Share Had the compensation cost for the Company's stock based compensation plans been determined in accordance with SFAS 123, the Company's net income and net income per common share for 1996 and 1995 would approximate the pro forma amounts below (in thousands, except per share data):
AS REPORTED PRO FORMA AS REPORTED PRO FORMA 12/31/96 12/31/96 12/31/95 12/31/95 ----------- --------- ----------- --------- SFAS 123 charge......................... $ 882 $ 176 APB 25 charge........................... $ 507 $ 158 Net income.............................. $33,203 $32,828 $12,191 $12,173 Net income per common share............. $ 1.44 $ 1.42 $ 1.70 $ 1.70
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and the Company anticipates making awards in the future under its stock based compensation plans. 12. LESSEE All of the Company's percentage lease revenues is derived from the Percentage Leases with the Lessee. Certain information related to the Lessee's financial statements is as follows (in thousands):
DECEMBER 31, ----------------- 1996 1995 ------- ------ Balance Sheet Information: Cash and cash equivalents............. $ 5,208 $5,345 Total assets.......................... $18,471 $9,599 Due to FelCor Suite Hotels, Inc. ..... $ 5,526 $2,396 Shareholders' deficit................. $(6,403) $ (773)
YEAR ENDED DECEMBER 31 ------------------------------ 1996 1995 1994 -------- ------- ------- Statement of Operations Information: Suite revenue..................... $234,451 $65,649 $16,094 Percentage lease expenses......... $107,935 $26,945 $ 6,043 Net income (loss)................. $ (5,430) $ (240) $ 109
13. PREDECESSOR COMPANY The Initial Hotels have been determined to be the Predecessor of the Company and represent the hotels acquired upon the completion of the initial public offering of Common Stock. Certain information related to the Initial Hotels financial statements for the period from January 1, 1994 through July 27, 1994 (before the Company's initial public offering) is as follows (in thousands): Suite revenue........................... $21,884 Net income.............................. $ 1,562 Cash flows provided by operating activities............................ $ 3,995 Cash flows used in investing activities............................ $(1,327) Cash flows used in financing activities............................ $(1,640)
F-43 144 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards ("SFAS") 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, the Company reports the carrying amount of cash and cash equivalents, amounts due from the Lessee, accounts payable and accrued expenses at cost which approximates fair value due to the short maturity of these instruments. The carrying amount of the Company's borrowings approximates fair value due to the Company's ability to obtain such borrowings at comparable interest rates. 15. PRO FORMA INFORMATION (UNAUDITED) Due to the impact of the acquisition of hotels in 1996 and 1995, the historical results of operations may not be indicative of future results of operations and net income per common share. The following unaudited Pro Forma Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 are presented as if the acquisition of all 43 hotels owned at December 31, 1996, and the consummation of the public offerings and the application of the net proceeds therefrom had occurred by January 1, 1995, and all of the hotels had been leased to the Lessee pursuant to the Percentage Leases. The pro forma consolidated statements of operations do not purport to present what actual results of operations would have been if the acquisition of all 43 hotels owned at December 31, 1996 and the consummation of the public offerings had occurred on such date or to project results for any future period. For instance, in accordance with SEC regulations, the following unaudited Pro Forma Consolidated Statements of Operations do not include pro forma earnings associated with the Company's pro forma cash and short-term investments.
1996 1995 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Percentage lease revenue.............. $110,077 $102,878 Income from unconsolidated partnerships....................... 2,815 2,160 -------- -------- Total income.......................... 112,892 105,038 Expenses: General and administrative............ 1,895 1,783 Depreciation.......................... 31,103 26,617 Taxes, insurance and other............ 15,189 13,617 Interest expense...................... 15,903 15,004 Minority interest..................... 5,173 5,090 -------- -------- Net income.............................. 43,629 42,927 Preferred dividends..................... 11,798 11,798 -------- -------- Net income applicable to common shareholders.......................... $ 31,831 $ 31,129 ======== ======== Net income per common share............. $ 1.36 $ 1.33 ======== ======== Weighted average number of common shares outstanding........................... 23,482 23,443 ======== ========
16. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS SFAS No. 128, "Earnings Per Share" ("EPS"), was issued in October 1996. This statement specifies the computation, presentation, and disclosure requirements for EPS and is effective for financial statements issued for periods ending after December 15, 1997. The statement requires restatement of all prior period EPS data F-44 145 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) presented, including interim financial statement, summaries of earnings, and selected financial data, after the effective date. The Company has determined the effect of adoption will have an immaterial impact on previously reported EPS numbers. 17. SUBSEQUENT EVENTS On February 3, 1997 the Company announced the closing of a common stock offering pursuant to the Company's $500 million Shelf Registration, covering a variety of debt and equity securities. The offering was for 3 million shares of common stock to the public at $35.50 per share, providing the Company with net proceeds of approximately $100.7 million. The Company used the majority of the proceeds of this common stock offering to purchase 50% joint venture interests in eight existing Embassy Suite hotels and to acquire full ownership of two additional hotels. Promus continues to own the remaining 50% interest in the eight joint venture hotels, which will continue to operate as Embassy Suites under management by Promus. The two wholly-owned hotels will be converted to Doubletree Guest Suites hotels by the end of the second quarter of 1997 and are being managed by a subsidiary of Doubletree Hotels Corporation. The aggregate purchase price for the Company's interest in these 10 hotels was approximately $139 million, including the Company's pro rata share of approximately $86 million in non-recourse debt held by the joint ventures. On February 18, 1997 the Company purchased the 215-suite Embassy Suites Los Angeles Airport (LAX) North hotel for approximately $22 million cash. Promus will continue to manage the hotel as an Embassy Suites hotel. On February 20, 1997 the Company purchased a 198-suite hotel in Dana Point, CA for approximately $17.2 million cash. The Dana Point hotel will be converted to a Doubletree Guest Suites hotel and will be managed by a subsidiary of Doubletree Hotels Corporation. 18. QUARTERLY OPERATING RESULTS (UNAUDITED) The Company's unaudited consolidated quarterly operating data for the years ended December 31, 1996 and 1995 follows (in thousands, except per share data). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of quarterly results have been reflected in the data. It is also management's opinion, however, that quarterly operating data for hotel enterprises are not indicative of results to be achieved in succeeding quarters or years. In order to obtain a more accurate indication of performance, there should be a review of operating results, changes in shareholders' equity and cash flows for a period of several years. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein. F-45 146 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD FOURTH 1996 QUARTER QUARTER QUARTER QUARTER ---- ------- ------- ------- ------- Revenues: Percentage lease revenue.............................. $23,976 $23,409 $25,263 $25,302 Income from unconsolidated partnerships............... 320 165 927 598 Other income.......................................... 146 628 163 47 ------- ------- ------- ------- Total revenues................................ 24,442 24,202 26,353 25,947 ------- ------- ------- ------- Expenses: General and administrative............................ 382 466 458 513 Depreciation.......................................... 4,516 5,788 7,529 8,711 Taxes, insurance and other............................ 3,529 3,070 3,260 4,038 Interest expense...................................... 2,424 2,089 1,760 3,530 Minority interest..................................... 1,620 1,523 1,477 970 ------- ------- ------- ------- Total expenses................................ 12,471 12,936 14,484 17,762 ------- ------- ------- ------- Income before extraordinary charge...................... 11,971 11,266 11,869 8,185 Extraordinary charge from write off of deferred financing fees........................................ 2,354 ------- ------- ------- ------- Net income.............................................. 11,971 11,266 9,515 8,185 Preferred dividends..................................... 1,835 2,949 2,950 ------- ------- ------- ------- Net income applicable to common shareholders............ $11,971 $ 9,431 $ 6,566 $ 5,235 ======= ======= ======= ======= Per common share information: Net income applicable to common shareholders before extraordinary charge............................... $ 0.53 $ 0.41 $ 0.38 $ 0.22 Extraordinary charge.................................. (0.10) ------- ------- ------- ------- Net income............................................ $ 0.53 $ 0.41 $ 0.28 $ 0.22 ======= ======= ======= ======= Weighted average number of common shares outstanding........................................ 22,614 22,905 23,276 23,502 ======= ======= ======= =======
FIRST SECOND THIRD FOURTH 1995 QUARTER QUARTER QUARTER QUARTER ---- ------- ------- ------- ------- Revenues: Percentage lease revenue.............................. $ 5,372 $ 5,977 $ 6,138 $ 6,300 Income from unconsolidated partnerships............... 290 223 Other income.......................................... 8 209 215 1,259 ------- ------- ------- ------- Total revenues................................ 5,380 6,186 6,643 7,782 ------- ------- ------- ------- Expenses: General and administrative............................ 184 240 215 231 Depreciation.......................................... 1,058 1,178 1,455 1,541 Taxes, insurance and other............................ 559 580 616 808 Interest expense...................................... 353 566 143 942 Minority interest..................................... 854 814 724 739 ------- ------- ------- ------- Total expenses................................ 3,008 3,378 3,153 4,261 ------- ------- ------- ------- Net income applicable to common shareholders............ $ 2,372 $ 2,808 $ 3,490 $ 3,521 ======= ======= ======= ======= Per common share information: Net income............................................ $ 0.50 $ 0.48 $ 0.43 $ 0.36 ======= ======= ======= ======= Weighted average number of common shares outstanding........................................ 4,707 5,850 8,170 9,867 ======= ======= ======= =======
F-46 147 FELCOR SUITE HOTELS, INC. SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996 (IN THOUSANDS)
COST CAPITALIZED INITIAL COST SUBSEQUENT TO ACQUISITION ---------------------------------- ------------------------------- BUILDINGS FURNITURE BUILDINGS FURNITURE AND AND AND AND DESCRIPTION OF PROPERTY LAND IMPROVEMENTS FIXTURES LAND IMPROVEMENTS FIXTURES ----------------------- ------- ------------ --------- ---- ------------ --------- Dallas (Park Central), TX.............. $ 1,497 $ 12,722 $ 647 $ 28 1,091 Nashville, TN.......................... 1,118 9,506 961 28 1,093 Jacksonville, FL....................... 1,130 9,608 456 28 627 Orlando (North), FL.................... 1,673 14,218 684 28 664 Orlando (South), FL.................... 1,632 13,870 799 28 967 Tulsa, OK.............................. 525 7,344 3,117 139 1,523 New Orleans, LA........................ 2,570 22,300 895 523 890 Flagstaff, AZ.......................... 900 6,825 268 1,523 993 Dallas (Love Field), TX................ 1,934 16,674 757 167 899 Boston-Marlborough, MA................. 948 8,143 325 $761 721 Brunswick, GA.......................... 705 6,067 247 431 Corpus Christi, TX..................... 1,113 9,618 390 51 1,268 Burlingame (SF Airport So.), CA........ 39,929 818 55 2,041 Minneapolis (Airport), MN.............. 5,417 36,508 602 62 2,052 Boca Raton (Doubletree), FL............ 5,427 3,066 304 29 503 Minneapolis (Downtown), MN............. 818 16,820 505 56 2,462 St. Paul, MN........................... 1,156 17,315 849 27 2,210 Tampa (Busch Gardens), FL.............. 672 12,387 226 5 Cleveland, OH.......................... 1,755 15,329 527 129 236 Anaheim, CA............................ 2,548 14,832 607 491 2,517 Baton Rouge, LA........................ 2,350 19,092 525 497 2,140 Birmingham, AL......................... 2,843 29,286 160 706 2,140 Deerfield Beach, FL.................... 4,523 29,443 917 849 2,088 Ft. Lauderdale, FL..................... 5,329 47,850 903 1,142 2,558 Miami (Airport), FL.................... 4,135 24,950 1,171 684 2,658 Milpitas, CA........................... 4,021 23,677 562 912 2,920 Phoenix (Camelback), AZ................ 39,003 612 810 2,604 So. San Francisco (Airport N.), CA..... 3,418 31,737 527 769 3,378 Lexington, KY.......................... 1,955 13,604 587 79 Piscataway, NJ......................... 1,755 17,563 527 12 168 Avon (Beaver Creek Resort), CO......... 1,134 9,864 340 162 568 Boca Raton (Embassy), FL............... 1,868 16,253 560 1,604 El Segundo (LAX South), CA............. 2,660 17,997 798 179 2,595 Oxnard (Mandalay Beach), CA............ 2,930 22,125 879 529 441 Napa, CA............................... 3,287 14,205 494 398 245 Deerfield, IL.......................... 2,305 20,054 692 2 Atlanta (Buckhead), GA................. 7,303 38,996 2,437 Kingston Plantation, SC................ 2,940 24,988 1,470 ------- -------- ------- ---- ------- ------- Total.......................... $88,294 $733,768 $28,145 $812 $10,990 $49,381 ======= ======== ======= ==== ======= ======= GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE ---------------------------------- BUILDINGS AND BUILDINGS AND BUILDINGS FURNITURE IMPROVEMENTS; IMPROVEMENTS; AND AND FURNITURE & FURNITURE AND DESCRIPTION OF PROPERTY LAND IMPROVEMENTS FIXTURES TOTAL FIXTURES FIXTURES ----------------------- ------- ------------ --------- -------- ------------- ------------- Dallas (Park Central), TX.............. 1,497 $ 12,750 $ 1,738 $ 15,985 $ 1,840 $ 14,145 Nashville, TN.......................... 1,118 9,534 2,054 12,706 2,230 10,476 Jacksonville, FL....................... 1,130 9,636 1,083 11,849 1,171 10,678 Orlando (North), FL.................... 1,673 14,246 1,348 17,267 1,916 15,351 Orlando (South), FL.................... 1,632 13,898 1,766 17,296 1,823 15,473 Tulsa, OK.............................. 525 7,483 4,640 12,648 3,485 9,163 New Orleans, LA........................ 2,570 22,823 1,785 27,178 1,699 25,479 Flagstaff, AZ.......................... 900 8,348 1,261 10,509 687 9,822 Dallas (Love Field), TX................ 1,934 16,841 1,656 20,431 1,118 19,313 Boston-Marlborough, MA................. 1,709 8,143 1,046 10,898 495 10,403 Brunswick, GA.......................... 705 6,067 678 7,450 317 7,133 Corpus Christi, TX..................... 1,164 9,618 1,658 12,440 628 11,812 Burlingame (SF Airport So.), CA........ 39,984 2,859 42,843 1,514 41,329 Minneapolis (Airport), MN.............. 5,417 36,570 2,654 44,641 1,378 43,263 Boca Raton (Doubletree), FL............ 5,427 3,095 807 9,329 234 9,095 Minneapolis (Downtown), MN............. 818 16,876 2,967 20,661 845 19,816 St. Paul, MN........................... 1,156 17,342 3,059 21,557 895 20,662 Tampa (Busch Gardens), FL.............. 672 12,387 231 13,290 383 12,907 Cleveland, OH.......................... 1,755 15,458 763 17,976 511 17,465 Anaheim, CA............................ 2,548 15,323 3,124 20,995 813 20,182 Baton Rouge, LA........................ 2,350 19,589 2,665 24,604 681 23,923 Birmingham, AL......................... 2,843 29,992 2,300 35,135 804 34,331 Deerfield Beach, FL.................... 4,523 30,292 3,005 37,820 981 36,839 Ft. Lauderdale, FL..................... 5,329 48,992 3,461 57,782 1,629 56,153 Miami (Airport), FL.................... 4,135 25,634 3,829 33,598 1,031 32,567 Milpitas, CA........................... 4,021 24,589 3,482 32,092 991 31,101 Phoenix (Camelback), AZ................ 39,813 3,216 43,029 1,208 41,821 So. San Francisco (Airport N.), CA..... 3,418 32,506 3,905 39,829 1,085 38,744 Lexington, KY.......................... 1,955 13,604 666 16,225 403 15,822 Piscataway, NJ......................... 1,755 17,575 695 20,025 484 19,541 Avon (Beaver Creek Resort), CO......... 1,134 10,026 908 12,068 291 11,777 Boca Raton (Embassy), FL............... 1,868 16,253 2,164 20,285 481 19,804 El Segundo (LAX South), CA............. 2,660 18,176 3,393 24,229 1,394 22,835 Oxnard (Mandalay Beach), CA............ 2,930 22,654 1,320 26,904 512 26,392 Napa, CA............................... 3,287 14,603 739 18,629 318 18,311 Deerfield, IL.......................... 2,305 20,054 694 23,053 321 22,732 Atlanta (Buckhead), GA................. 7,303 38,996 2,437 48,736 122 48,614 Kingston Plantation, SC................ 2,940 24,988 1,470 29,398 29,398 ------- -------- ------- -------- ------- -------- Total.......................... $89,106 $744,758 $77,526 $911,390 $36,718 $874,672 ======= ======== ======= ======== ======= ======== LIFE UPON WHICH DEPRECIATION DATE OF IN STATEMENT DESCRIPTION OF PROPERTY CONSTRUCTION IS COMPUTED ----------------------- ------------ ------------ Dallas (Park Central), TX.............. 1985 5-40 Yrs Nashville, TN.......................... 1986 5-40 Yrs Jacksonville, FL....................... 1985 5-40 Yrs Orlando (North), FL.................... 1985 5-40 Yrs Orlando (South), FL.................... 1985 5-40 Yrs Tulsa, OK.............................. 1985 5-40 Yrs New Orleans, LA........................ 1984 5-40 Yrs Flagstaff, AZ.......................... 1988 5-40 Yrs Dallas (Love Field), TX................ 1986 5-40 Yrs Boston-Marlborough, MA................. 1988 5-40 Yrs Brunswick, GA.......................... 1988 5-40 Yrs Corpus Christi, TX..................... 1984 5-40 Yrs Burlingame (SF Airport So.), CA........ 1986 5-40 Yrs Minneapolis (Airport), MN.............. 1986 5-40 Yrs Boca Raton (Doubletree), FL............ 1989 5-40 Yrs Minneapolis (Downtown), MN............. 1984 5-40 Yrs St. Paul, MN........................... 1983 5-40 Yrs Tampa (Busch Gardens), FL.............. 1985 5-40 Yrs Cleveland, OH.......................... 1990 5-40 Yrs Anaheim, CA............................ 1987 5-40 Yrs Baton Rouge, LA........................ 1985 5-40 Yrs Birmingham, AL......................... 1987 5-40 Yrs Deerfield Beach, FL.................... 1987 5-40 Yrs Ft. Lauderdale, FL..................... 1986 5-40 Yrs Miami (Airport), FL.................... 1987 5-40 Yrs Milpitas, CA........................... 1987 5-40 Yrs Phoenix (Camelback), AZ................ 1985 5-40 Yrs So. San Francisco (Airport N.), CA..... 1988 5-40 Yrs Lexington, KY.......................... 1987 5-40 Yrs Piscataway, NJ......................... 1988 5-40 Yrs Avon (Beaver Creek Resort), CO......... 1990 5-40 Yrs Boca Raton (Embassy), FL............... 1989 5-40 Yrs El Segundo (LAX South), CA............. 1985 5-40 Yrs Oxnard (Mandalay Beach), CA............ 1986 5-40 Yrs Napa, CA............................... 1985 5-40 Yrs Deerfield, IL.......................... 1987 5-40 Yrs Atlanta (Buckhead), GA................. 1988 5-40 Yrs Kingston Plantation, SC................ 1987 5-40 Yrs Total.......................... (a) Reconciliation of Real Estate: Balance at July 28, 1994.................................. $ 82,979 Additions during the period............................... 26,847 -------- Balance at December 31, 1994.............................. 109,826 Additions during the period............................... 233,572 -------- Balance at December 31, 1995.............................. 343,398 Additions during the period............................... 568,073 Dispositions during the period............................ (81) -------- Balance at December 31, 1996.............................. $911,390 ======== (b) Reconciliation of Accumulated Depreciation: Balance at July 28, 1994 Accumulated depreciation assumed with predecessor historical cost basis................................... $ 3,540 Depreciation expense during the period.................... 1,486 -------- Balance at December 31, 1994.............................. 5,026 Depreciation expense during the period.................... 5,371 -------- Balance at December 31, 1995.............................. 10,397 Depreciation expense during the period.................... 26,321 -------- Balance at December 31, 1996.............................. $ 36,718 ========
F-47 148 FELCOR SUITES LIMITED PARTNERSHIP PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) The following unaudited Pro Forma Consolidated Statements of Operations of FelCor Suites Limited Partnership (the "Partnership") are presented as if the acquisitions of all hotels owned by FelCor Suite Hotels, Inc. and its consolidated subsidiaries (collectively the "Company") at December 31, 1996, those hotels acquired in 1997 through August 31, 1997 and the pending 1997 acquisition (collectively the "Hotels"), the proposed 1997 debt offering, the preferred stock offering consummated during 1996 and the common stock offerings consummated during 1997, and related transactions had occurred as of January 1, 1996 and the Hotels had all been leased to DJONT Operations, L.L.C. or its consolidated subsidiaries (the "Lessee") pursuant to Percentage Leases. Such pro forma information is based in part upon the Consolidated Statements of Operations of the Partnership, Pro Forma Statements of Operations of DJONT Operations, L.L.C. and the historical Statements of Operations of the acquired hotels. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Consolidated Statements of Operations for the periods presented are not necessarily indicative of what actual results of operations of the Partnership would have been assuming such transactions had been completed on January 1, 1996, nor does it purport to represent the results of operations for future periods.
YEAR ENDED DECEMBER 31, 1996 -------------------------------------------------------------- PRO FORMA ADJUSTMENTS -------------------------------------------------------------- 1997 ACQUISITIONS, 1996 ACQUISITIONS COMMON STOCK HISTORICAL AND PREFERRED AND DEBT PARTNERSHIP STOCK OFFERING(A) OFFERINGS(B) TOTAL ----------- ----------------- ------------- -------- Statement of Operations Data: Revenues: Percentage lease revenue(C)........... $ 97,950 $12,127 $63,070 $173,147 Income from unconsolidated partnerships(D)..................... 2,010 805 308 3,123 Other income(E)....................... 984 (984) -------- ------- ------- -------- Total revenues................... 100,944 11,948 63,378 176,270 -------- ------- ------- -------- Expenses: General and administrative(F)......... 1,819 76 1,408 3,303 Depreciation(G)....................... 26,544 4,559 15,010 46,113 Taxes, insurance and other(H)......... 13,897 1,292 9,600 24,789 Interest expense(I)................... 9,803 6,100 16,926 32,829 Minority interest in other partnerships(J)..................... 236 236 -------- ------- ------- -------- Total expenses................... 52,063 12,027 43,180 107,270 -------- ------- ------- -------- Net income................................. 48,881 (79) 20,198 69,000 Preferred distributions(K)................. 7,734 4,064 11,798 -------- ------- ------- -------- Net income applicable to unitholders(L).... $ 41,147 $(4,143) $20,198 $ 57,202 ======== ======= ======= ======== Net income per unit(L)..................... $ 1.58 $ 1.45 ======== ======== Weighted average number of units outstanding.............................. 26,037 39,407 ======== ========
F-48 149 FELCOR SUITES LIMITED PARTNERSHIP PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1997 -------------------------------- PRO FORMA ADJUSTMENTS: 1997 ACQUISITIONS, COMMON STOCK HISTORICAL AND DEBT PARTNERSHIP OFFERINGS(B) TOTAL ----------- ----------------- -------- Statement of Operations Data: Revenues: Percentage lease revenue(C)...................... $74,048 $27,127 $101,175 Income from unconsolidated partnerships(D)....... 3,427 (95) 3,332 Other income(E).................................. 170 (170) ------- ------- -------- Total revenues.............................. 77,645 26,862 104,507 ------- ------- -------- Expenses: General and administrative(F).................... 1,846 200 2,046 Depreciation(G).................................. 21,730 6,101 27,831 Taxes, insurance and other(H).................... 10,756 4,029 14,785 Interest expense(I).............................. 12,914 5,975 18,889 Minority interest in other partnerships(J)....... 142 88 230 ------- ------- -------- Total expenses.............................. 47,388 16,393 63,781 ------- ------- -------- Net income............................................ 30,257 10,469 40,726 Preferred distributions(K)............................ 5,899 5,899 ------- ------- -------- Net income applicable to unitholders(L)............... $24,358 $10,469 $ 34,827 ======= ======= ======== Net income per unit(L)................................ $ 0.84 $ 0.88 ======= ======== Weighted average number of units outstanding.......... 28,886 39,472 ======= ========
F-49 150 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (A) Represents pro forma adjustments to reflect the historical results of operations prior to the acquisition by the Company for those hotels acquired by the Company in 1996 as adjusted to give effect to the provisions of the Percentage Leases; the effect of the preferred stock offering prior to the date issued in May 1996; and other pro forma adjustments reflecting additional overhead expenses and interest expenses. Those hotels acquired during 1996 and the dates of acquisition are as follows: Anaheim, California, Embassy Suites......................... January 3, 1996 Baton Rouge, Louisiana, Embassy Suites...................... January 3, 1996 Birmingham, Alabama, Embassy Suites......................... January 3, 1996 Deerfield Beach, Florida, Embassy Suites.................... January 3, 1996 Ft. Lauderdale, Florida, Embassy Suites..................... January 3, 1996 Miami (Airport), Florida, Embassy Suites.................... January 3, 1996 Milpitas, California, Embassy Suites........................ January 3, 1996 Phoenix (Camelback), Arizona, Embassy Suites................ January 3, 1996 Burlingame (S.F. Airport So.), California, Embassy Suites... January 3, 1996 Lexington, Kentucky, Hilton Suites.......................... January 10, 1996 Piscataway, New Jersey, Embassy Suites...................... January 10, 1996 Avon (Beaver Creek Resort), Colorado, Embassy Suites........ February 20, 1996 Boca Raton, Florida, Embassy Suites......................... February 28, 1996 El Segundo (LAX South), California, Embassy Suites.......... March 27, 1996 Oxnard (Mandalay Beach), California, Embassy Suites......... May 8, 1996 Napa, California, Embassy Suites............................ May 8, 1996 Deerfield, Illinois, Embassy Suites......................... June 20, 1996 San Rafael (Marin Co.), California, Embassy Suites.......... July 18, 1996 Parsippany, New Jersey, Embassy Suites...................... August 1, 1996 Charlotte, North Carolina, Embassy Suites................... August 1, 1996 Indianapolis (North), Indiana, Embassy Suites............... August 1, 1996 Atlanta (Buckhead), Georgia, Embassy Suites................. October 17, 1996 Myrtle Beach (Kingston Plantation), South Carolina, Embassy Suites.................................................... December 5, 1996
F-50 151 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED) (B) Represents pro forma adjustments to reflect the historical results of operations prior to the acquisition by the Company for those hotels acquired by the Company in 1997 through August 31, 1997 and the pending 1997 acquisition as adjusted, to give effect to the provisions of the Percentage Leases; the effect of the Company's common stock offering in the first quarter of 1997; the common stock offering in June 1997; the proposed debt offering; and other pro forma adjustments reflecting additional overhead expenses and interest expense. Those hotels acquired during 1997 and dates of acquisition are as follows: Omaha, Nebraska, Doubletree Guest Suites.................... February 1, 1997 Bloomington, Minnesota, Doubletree Guest Suites............. February 1, 1997 Atlanta (Perimeter Center), Georgia, Embassy Suites......... February 1, 1997 Kansas City (Country Club Plaza), Missouri, Embassy Suites.................................................... February 1, 1997 Overland Park, Kansas, Embassy Suites....................... February 1, 1997 Raleigh, North Carolina, Embassy Suites..................... February 1, 1997 San Antonio (Northwest), Texas, Embassy Suites.............. February 1, 1997 Austin (Airport North), Texas, Embassy Suites............... February 1, 1997 Covina, California, Embassy Suites.......................... February 1, 1997 Secaucus, New Jersey, Embassy Suites........................ February 1, 1997 Los Angeles (LAX Airport North), California, Embassy Suites.................................................... February 18, 1997 Dana Point, California, Doubletree Guest Suites............. February 21, 1997 Troy, Michigan, Doubletree Guest Suites..................... March 20, 1997 Austin (Downtown), Texas, Doubletree Guest Suites........... March 20, 1997 Baltimore, Maryland, Doubletree Guest Suites................ March 20, 1997 San Antonio (Airport), Texas, Embassy Suites................ May 16, 1997 Nashville (Airport), Tennessee, Doubletree Guest Suites..... June 5, 1997 Dallas (Market Center), Texas, Embassy Suites............... June 30, 1997 Syracuse, New York, Embassy Suites.......................... June 30, 1997 Atlanta (Airport), Georgia, Sheraton Gateway................ June 30, 1997 Atlanta (Galleria), Georgia, Sheraton Suites................ June 30, 1997 Chicago (O'Hare), Illinois, Sheraton Gateway Suites......... June 30, 1997 Dallas (Park Central), Texas, Sheraton...................... June 30, 1997 Phoenix (Crescent), Arizona, Sheraton....................... June 30, 1997 Lake Buena Vista (Disney World), Florida, Doubletree Guest Suites.................................................... July 28, 1997 Raleigh/Durham, North Carolina, Doubletree Guest Suites..... July 28, 1997 Tampa (Rocky Point), Florida, Doubletree Guest Suites....... July 28, 1997 PENDING 1997 ACQUISITION: Philadelphia (Society Hill), Pennsylvania, Sheraton
F-51 152 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED) (C) Represents historical or pro forma lease revenue from the Lessee to the Company calculated by applying the contractual or anticipated rent provisions of the Percentage Leases to the historical suite revenues, food and beverage rents and food and beverage revenues of all the Hotels which are consolidated for financial reporting purposes. The income from unconsolidated partnerships is included as a separate line item in the accompanying Pro Forma Statements of Operations as described in Note D. Historical suite revenues for the time period prior to the acquisition by the Company, the date of acquisition, the contractual or anticipated pro forma Percentage Lease revenue for the time period prior to acquisition by the Company and a summary of contractual or anticipated Percentage Lease terms follows (in thousands):
SUITE REVENUE FOR THE PERCENTAGE LEASE REVENUE PERIOD FOR THE PERIOD PRIOR TO ACQUISITION PRIOR TO ACQUISITION BY THE COMPANY BY THE COMPANY ------------------------- ------------------------- SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED DATE OF JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, DESCRIPTION OF PROPERTY ACQUISITION 1997 1996 1997 1996 - ----------------------- ----------------- ---------- ------------ ---------- ------------ Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites.... February 1, 1997 $ 379 $ 6,342 $ 152 $ 3,049 Omaha, NE, Doubletree Guest Suites.......... February 1, 1997 336 4,754 150 2,285 Los Angeles (LAX North), Embassy Suites..... February 18, 1997 830 6,263 345 2,590 Dana Point, CA, Doubletree Guest Suites..... February 21, 1997 485 3,716 175 1,395 Troy, MI, Doubletree Guest Suites........... March 20, 1997 1,489 6,342 791 3,316 Austin (Downtown), TX, Doubletree Guest Suites.................................... March 20, 1997 1,366 5,696 710 2,829 Baltimore (BWI), MD, Doubletree Guest Suites.................................... March 20, 1997 1,167 6,236 516 2,943 Nashville, TN, Doubletree Guest Suites...... June 5, 1997 1,341 3,164 557 1,320 Dallas Market Center, TX, Embassy Suites.... June 30, 1997 3,938 7,716 1,844 3,583 Syracuse, NY, Embassy Suites................ June 30, 1997 2,909 5,572 1,123 2,130 Dallas (Park Central), TX, Sheraton......... June 30, 1997 6,920 13,520 3,131 6,031 Phoenix (Crescent), AZ, Sheraton............ June 30, 1997 5,738 9,581 2,412 3,525 Chicago (O'Hare), IL, Sheraton Gateway Suites.................................... June 30, 1997 4,803 8,973 2,577 4,709 Atlanta (Airport), GA, Sheraton Gateway..... June 30, 1997 4,351 9,841 1,725 4,156 Atlanta (Galleria), GA, Sheraton Suites..... June 30, 1997 3,700 8,091 1,540 3,533 Lake Buena Vista, FL, Doubletree Guest Suites.................................... July 28, 1997 5,312 8,446 2,951 4,467 Raleigh, NC, Doubletree Guest Suites........ July 28, 1997 3,111 5,327 1,612 2,623 Tampa (Rocky Point), FL, Doubletree Guest Suites.................................... July 28, 1997 3,407 5,499 1,785 2,703 Philadelphia (Society Hill), PA, Sheraton... (1) 6,316 12.384 3,031 5,883 ------- -------- ------- ------- Total consolidated hotels............. $57,898 $137,463 $27,127 $63,070 ======= ======== ======= ======= Unconsolidated Partnership Hotels: Atlanta (Perimeter Center), GA, Embassy Suites.................................... February 1, 1997 $ 600 $ 8,084 $ 274 $ 3,889 Austin (Airport North), TX, Embassy Suites.................................... February 1, 1997 528 7,542 249 3,792 Covina, CA, Embassy Suites.................. February 1, 1997 417 4,053 158 1,293 Overland Park, KS, Embassy Suites........... February 1, 1997 403 5,624 176 2,641 Kansas City (Plaza), MO, Embassy Suites..... February 1, 1997 548 7,604 240 3,594 Raleigh, NC, Embassy Suites................. February 1, 1997 624 7,592 300 3,693 San Antonio (NW I-10), TX, Embassy Suites... February 1, 1997 337 5,614 120 2,487 Secaucus, NJ, Embassy Suites................ February 1, 1997 722 9,816 274 4,082 San Antonio (Airport), TX, Embassy Suites... May 16, 1997 2,874 7,235 1,280 3,113 ------- -------- ------- ------- Total unconsolidated hotel partnerships........................ $ 7,053 $ 63,164 $ 3,071 $28,584 ======= ======== ======= ======= ANNUAL PERCENTAGE LEASE TERMS --------------------------- SUITE FIRST SECOND REVENUE DESCRIPTION OF PROPERTY TIER TIER BREAKPOINT - ----------------------- ----- ------ ---------- Consolidated Hotels: Bloomington, MN, Doubletree Guest 17% 65% $2,468 Omaha, NE, Doubletree Guest Suite 17 65 1,703 Los Angeles (LAX North), Embassy 17 65 3,176 Dana Point, CA, Doubletree Guest 17 65 2,211 Troy, MI, Doubletree Guest Suites 17 65 1,935 Austin (Downtown), TX, Doubletree Suites......................... 17 65 1,961 Baltimore (BWI), MD, Doubletree G Suites......................... 17 65 2,536 Nashville, TN, Doubletree Guest S 17 65 1,585 Dallas Market Center, TX, Embassy 17 65 3,069 Syracuse, NY, Embassy Suites..... 17 65 3,227 Dallas (Park Central), TX, Sherat 17 65 4,997 Phoenix (Crescent), AZ, Sheraton. 17 65 5,175 Chicago (O'Hare), IL, Sheraton Ga Suites......................... 17 65 1,602 Atlanta (Airport), GA, Sheraton G 17 65 4,215 Atlanta (Galleria), GA, Sheraton 17 65 3,185 Lake Buena Vista, FL, Doubletree Suites......................... 17 65 2,272 Raleigh, NC, Doubletree Guest Sui 17 65 1,900 Tampa (Rocky Point), FL, Doubletr Suites......................... 17 65 1,939 Philadelphia (Society Hill), PA, 17 65 5,143 Total consolidated hotels.. Unconsolidated Partnership Hotels: Atlanta (Perimeter Center), GA, E Suites......................... 17% 65% $2,949 Austin (Airport North), TX, Embas Suites......................... 17 65 2,378 Covina, CA, Embassy Suites....... 17 65 3,066 Overland Park, KS, Embassy Suites 17 65 2,114 Kansas City (Plaza), MO, Embassy 17 65 2,976 Raleigh, NC, Embassy Suites...... 17 65 2,711 San Antonio (NW I-10), TX, Embass 17 65 2,474 Secaucus, NJ, Embassy Suites..... 17 65 4,788 San Antonio (Airport), TX, Embass 17 65 3,311 Total unconsolidated hotel partnerships.............
- --------------- (1) Pending acquisition. F-52 153 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED) (D) Represents historical or pro forma income from unconsolidated partnerships to the Company calculated by applying the Company's pro rata ownership percentage to the net income of the unconsolidated partnerships, computed using the contractual or anticipated rent provisions of the Percentage Leases to the historical suite revenues, food and beverage rents and food and beverage revenues of all the hotels; historical taxes, insurance and other; historical depreciation expense; and historical interest expenses. The Company's cost in excess of net book value of the partnership assets is deducted to arrive at income from unconsolidated partnerships. This computation is as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 ---------------- ----------------- Statements of operations information: Percentage lease revenue........................ $3,071 $28,584 Depreciation.................................... 1,262 12,536 Taxes, insurance and other...................... 531 3,166 Interest expense................................ 1,116 9,725 ------- ------- Net income (loss)............................... 162 3,157 50% of income (loss) attributable to the Company...................................... 81 1,579 Amortization of cost in excess of net book value (See Note G)................................. (176) (1,271) ------- ------- Income (loss) from unconsolidated partnerships................................. $ (95) $ 308 ======= =======
(E) Represents elimination of historical interest income earned on excess cash. (F) Pro forma general and administrative expenses represent executive compensation, legal, audit and other expenses. These amounts are based on historical general and administrative expenses as well as probable 1997 expenses. (G) Represents depreciation on the Hotels. Depreciation is computed based on estimated useful lives of 40 years for buildings and improvements and five years for furniture, fixtures and equipment. These estimated useful lives are based on management's knowledge of the properties and the hotel industry in general. F-53 154 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED) The pro forma depreciation adjustment for the hotels acquired in 1997 and for the year ended December 31, 1996 is as follows: FELCOR SUITES LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF JUNE 30, 1997 (IN THOUSANDS)
ASSET COST ----------------------------------------------- DATE OF BUILDING AND FURNITURE DESCRIPTION OF PROPERTY ACQUISITION LAND IMPROVEMENTS AND FIXTURES TOTAL - ----------------------- ----------------- ------- ------------ ------------ -------- Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites...... February 1, 1997 $ 2,038 $ 17,731 $ 612 $ 20,381 Omaha, NE, Doubletree Guest Suites............ February 1, 1997 1,876 16,328 563 18,767 Los Angeles (LAX North), Embassy Suites....... February 18, 1997 2,208 19,205 662 22,075 Dana Point, CA, Doubletree Guest Suites....... February 21, 1997 1,787 15,545 536 17,868 Troy, MI, Doubletree Guest Suites............. March 20, 1997 2,957 25,794 887 29,638 Austin (Downtown), TX, Doubletree Guest Suites...................................... March 20, 1997 2,506 21,858 752 25,116 Baltimore (BWI), MD, Doubletree Guest Suites...................................... March 20, 1997 2,566 22,381 770 25,717 Nashville, TN Doubletree Guest Suites......... June 5, 1997 1,070 9,306 321 10,697 Dallas (Market Center), TX Embassy Suites..... June 30, 1997 2,910 25,317 873 29,100 Syracuse, NY Embassy Suites................... June 30, 1997 1,774 15,433 532 17,739 Atlanta (Airport), GA Sheraton Gateway........ June 30, 1997 3,006 26,151 902 30,059 Atlanta (Galleria), GA Sheraton Suites........ June 30, 1997 3,606 31,376 1,082 36,064 Chicago (O'Hare), IL Sheraton Gateway Suite... June 30, 1997 4,808 41,830 1,442 48,080 Dallas (Park Central), TX Sheraton............ June 30, 1997 5,012 43,603 1,503 50,118 Phoenix (Crescent), AZ Sheraton............... June 30, 1997 3,605 31,370 1,082 36,057 Lake Buena Vista, FL, Doubletree Guest Suites...................................... July 28, 1997 2,986 25,978 896 29,860 Raleigh, NC, Doubletree Guest Suites.......... July 28, 1997 2,124 18,476 637 21,237 Tampa (Rocky Point), FL, Doubletree Guest Suites...................................... July 28, 1997 2,142 18,640 643 21,425 Philadelphia (Society Hill), PA, Sheraton hotel....................................... (1) 5,100 44,370 1,530 51,000 ------- -------- ------- -------- Total consolidated hotels............... $54,081 $470,692 $16,225 $540,998 ======= ======== ======= ======== ANNUAL DEPRECIATION EXPENSE ------------------------------------- BUILDING AND FURNITURE DESCRIPTION OF PROPERTY IMPROVEMENTS AND FIXTURES TOTAL - ----------------------- ------------ ------------ ------- Consolidated Hotels: Bloomington, MN, Doubletree Guest $ 443 $ 122 $ 565 Omaha, NE, Doubletree Guest Suite 408 113 521 Los Angeles (LAX North), Embassy 480 132 612 Dana Point, CA, Doubletree Guest 389 107 496 Troy, MI, Doubletree Guest Suites 645 177 822 Austin (Downtown), TX, Doubletree Suites......................... 546 150 696 Baltimore (BWI), MD, Doubletree G Suites......................... 560 154 714 Nashville, TN Doubletree Guest Su 233 64 297 Dallas (Market Center), TX Embass 633 175 808 Syracuse, NY Embassy Suites...... 386 106 492 Atlanta (Airport), GA Sheraton Ga 654 180 834 Atlanta (Galleria), GA Sheraton S 784 217 1,001 Chicago (O'Hare), IL Sheraton Gat 1,046 288 1,334 Dallas (Park Central), TX Sherato 1,090 301 1,391 Phoenix (Crescent), AZ Sheraton.. 784 217 1,001 Lake Buena Vista, FL, Doubletree Suites......................... 649 179 828 Raleigh, NC, Doubletree Guest Sui 462 127 589 Tampa (Rocky Point), FL, Doubletr Suites......................... 466 130 594 Philadelphia (Society Hill), PA, hotel.......................... 1,108 306 1,415 ------- ------ ------- Total consolidated hotels.. $11,767 $3,245 $15,010 ======= ====== =======
ACQUISITION COST ANNUAL DATE OF ACQUISITION IN EXCESS OF NET AMORTIZATION ACQUISITION COST BOOK VALUE OF EXCESS COST ---------------- ----------- ---------------- -------------- Unconsolidated Partnership Hotels: Atlanta (Perimeter Center), GA, Embassy Suites............ February 1, 1997 $ 9,620 $ 9,199 $ 230 Austin (Airport North), TX, Embassy Suites................ February 1, 1997 8,965 6,486 162 Covina, CA, Embassy Suites................................ February 1, 1997 2,229 (3,329) (83) Overland Park, KS, Embassy Suites......................... February 1, 1997 5,673 4,928 123 Kansas City (Plaza), MO, Embassy Suites................... February 1, 1997 8,224 7,161 179 Raleigh, NC, Embassy Suites............................... February 1, 1997 9,739 8,764 219 San Antonio (NW I-10), TX, Embassy Suites................. February 1, 1997 4,768 3,445 86 Secaucus, NJ, Embassy Suites.............................. February 1, 1997 9,001 7,103 178 San Antonio (Airport), TX, Embassy Suites................. May 16, 1997 6,916 7,067 177 ------- ------- ------- Total unconsolidated hotel partnerships............. $65,135 $50,824 $ 1,271 ======= ======= =======
- --------------- (1) Pending acquisition F-54 155 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED) (H) Pro forma real estate, personal property tax, franchise taxes, property insurance, ground lease and other expenses for the year ended December 31, 1996 represent expenses to be paid by the Partnership. Such amounts were primarily derived from historical amounts paid with respect to the Hotels. The six months ended June 30, 1997 real estate, personal property tax, franchise taxes, property insurance, and ground lease expenses are computed in a similar manner as the year ended December 31, 1996 pro forma adjustments. A schedule of property taxes and insurance derived from the historical amounts paid for the hotels acquired in 1997 follows:
PROPERTY TAXES PROPERTY INSURANCE ----------------------- ----------------------- SIX TWELVE SIX TWELVE MONTHS MONTHS MONTHS MONTHS ENDED ENDED ENDED ENDED JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, DESCRIPTION OF PROPERTY 1997 1996 1997 1996 ----------------------- -------- ------------ -------- ------------ (IN THOUSANDS) Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites... $ 59 $ 707 $ 1 $ 17 Omaha, NE, Doubletree Guest Suites......... 16 170 1 13 Los Angeles (LAX North), CA, Embassy Suites.................................. 44 320 20 91 Dana Point, CA, Doubletree Guest Suites.... 2 62 2 13 Troy, MI, Doubletree Guest Suites.......... 91 354 5 21 Austin (Downtown), TX, Doubletree Guest Suites.................................. 111 466 3 13 Baltimore (BWI), MD, Doubletree Guest Suites.................................. 38 223 2 7 Lake Buena Vista, FL, Doubletree Guest Suites.................................. 199 399 8 16 Raleigh, NC, Doubletree Guest Suites....... 77 149 7 14 Tampa (Rocky Point), FL, Doubletree Guest Suites.................................. 118 237 19 39 Nashville, TN, Doubletree Guest Suites..... 36 75 3 8 Dallas Market Center, TX, Embassy Suites... 260 505 11 19 Syracuse, NY, Embassy Suites............... 167 329 9 16 Dallas (Park Central), TX, Sheraton........ 310 595 30 70 Phoenix Crescent, AZ, Sheraton............. 404 748 12 24 Chicago (O'Hare), IL, Sheraton Gateway Suites.................................. 646 1,366 10 20 Atlanta (Airport), GA, Sheraton Gateway.... 216 443 12 25 Atlanta (Galleria), GA, Sheraton Suites.... 191 369 7 16 Philadelphia (Society Hill), PA, Sheraton................................ 304 609 12 24 ------ ------ ---- ---- Total consolidated hotels.......... $3,289 $8,126 $174 $466 ====== ====== ==== ==== Unconsolidated Partnership Hotels: Atlanta (Perimeter Center), GA, Embassy Suites.................................. $ 22 $ 172 $ 2 $ 17 Austin (Airport North), TX, Embassy Suites.................................. 41 435 2 17 Covina, CA, Embassy Suites................. 14 (810) 8 96 Overland Park, KS, Embassy Suites.......... 34 370 1 14 Kansas City (Plaza), MO, Embassy Suites.... 35 359 3 29 Raleigh, NC, Embassy Suites................ 17 171 1 16 San Antonio (NW I-10), TX, Embassy Suites.................................. 35 385 1 15 Secaucus, NJ, Embassy Suites............... 47 560 2 22 San Antonio (Airport), TX, Embassy Suites.................................. 174 418 8 18 ------ ------ ---- ---- Total unconsolidated hotel partnerships..................... $ 419 $2,060 $ 28 $244 ====== ====== ==== ====
F-55 156 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED) (I) Represents both historical and pro forma interest expense computed based on borrowings outstanding for the respective periods multiplied by the applicable fixed or variable interest rate as stated in the applicable debt instruments. The pro forma adjustment assumes additional borrowings against the Line of Credit in the amount of $300.9 million were required in order to finance the hotels purchased in 1997 through August 31, 1997, the pending 1997 acquisition purchase, repayment of the $85 million term loan and the debt offering at the weighted average interest rate of 7.85% per annum. The variable interest rates used to calculate the pro forma adjustment to interest expense were the same as the historical rates used to calculate the outstanding borrowings on the Line of Credit for the same respective periods ended December 31, 1996 and June 30, 1997. The period end pro forma debt balances, average interest rates and pro forma interest expense for the year end December 31, 1996 and June 30, 1997 follow:
DECEMBER 31, 1996 -------------------------------- DEBT INTEREST INTEREST BALANCE RATE EXPENSE(1) -------- -------- ---------- (DOLLARS IN THOUSANDS) Line of Credit....................................... $ 82,557 7.30% $ 3,206(2) Debt offering........................................ 300,000 7.85 23,545(2) Renovation loan...................................... 25,000 7.27 852 Other debt payable................................... 1,550 6.75 3,520 Capital leases....................................... 12,875 12.50 1,706 -------- ------- $421,982 $32,829 ======== =======
JUNE 30, 1997 -------------------------------- DEBT INTEREST INTEREST BALANCE RATE EXPENSE(1) -------- -------- ---------- (DOLLARS IN THOUSANDS) Line of Credit....................................... $ 73,728 7.75% $ 5,150 Debt Offering........................................ 300,000 7.85 11,773 Renovation loan...................................... 25,000 6.24 774 Other debt payable................................... 650 6.00 440 Capital leases....................................... 12,048 12.50 752 -------- ------- $411,426 $18,889 ======== =======
- --------------- (1) Pro forma interest expense represents interest expense applicable to the pro forma weighted average borrowings outstanding during the periods presented which at times exceeds the pro forma borrowings outstanding at the end of the periods. (2) Pro forma weighted average borrowings under the Notes exceeded historical weighted average borrowings under the Line of Credit for much of 1996, resulting in additional interest expense relating to the excess amount borrowed that could not be used to repay borrowings under the Line of Credit. The pro forma statements of operations do not include a pro forma adjustment to recognize interest income on such excess cash and cash equivalents. F-56 157 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED) (J) Represents historical and pro forma minority interest expense related to 3 hotels in which the Company has a 90% general partnership interest. Minority interest is calculated as 10% of net income computed using the rent provisions of the Percentage Leases to the historical suite revenues; historical taxes, insurance and other; historical depreciation expense; and historical interest expenses. This computation is as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- Statement of operations information: Percentage lease revenue............................ $2,017 $9,087 Depreciation........................................ 671 3,521 Taxes, insurance and other.......................... 251 1,123 Interest expense.................................... 217 2,081 ------ ------- Net income (loss) before minority interest.......... $ 878 $2,362 ====== ======= Minority interest expense -- 10% of net income...... $ 88 $ 236 ====== =======
(K) The 1996 pro forma adjustment to preferred distributions assumes the Series A Preferred Stock was issued on January 1, 1996. The adjustment reflects the additional distributions that would have been paid in 1996 prior to May 6, 1996, the actual date of issuance. (L) Pro forma income applicable to unitholders excludes the extraordinary charge from write-off of deferred financing fees in the amount of approximately $2,354,000 from the "Historical Partnership" for the year ended December 31, 1996. F-57 158 FELCOR SUITES LIMITED PARTNERSHIP PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (UNAUDITED, AMOUNTS IN THOUSANDS) The following unaudited Pro Forma Consolidated Balance Sheet of FelCor Suites Limited Partnership (the "Partnership") is presented as if the acquisition of the hotels acquired through August 31, 1997, the pending acquisition of one Sheraton hotel and the consummation of the 1997 equity and proposed debt offerings and related transactions had occurred on June 30, 1997. Such pro forma information is based in part upon the consolidated balance sheet of the Partnership. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Consolidated Balance Sheet is not necessarily indicative of what the actual financial position of the Partnership would have been assuming such transactions had been completed as of June 30, 1997, nor does it purport to represent the future financial position of the Partnership.
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- ---------- ASSETS Investment in hotels............................ $1,320,982 $ 122,622(A) $1,443,604 Investment in unconsolidated partnerships....... 126,714 126,714 Cash and cash equivalents....................... 13,394 13,394 Deposits........................................ 1,616 1,616 Due from Lessee................................. 9,059 9,059 Deferred expenses............................... 3,363 8,861(B) 12,224 Other assets.................................... 4,446 4,446 ---------- ---------- ---------- Total assets.......................... $1,479,574 $ 131,483 $1,611,057 ========== ========== ========== LIABILITIES AND PARTNERS' CAPITAL Distributions payable........................... $ 2,949 $ 2,949 Accrued expenses and other liabilities.......... 6,379 6,379 Debt............................................ 302,650 $ 96,728(C) 399,378 Capital lease obligations....................... 12,048 12,048 Minority interest in other partnerships......... 8,164 8,164 ---------- ---------- ---------- Total liabilities..................... 332,190 96,728 428,918 ---------- ---------- ---------- Redeemable units, at redemption value........... 108,192 108,192 Preferred units................................. 151,250 151,250 Partners' capital............................... 887,942 34,755(D) 922,697 ---------- ---------- ---------- Total liabilities and partners' capital............................. $1,479,574 $ 131,483 $1,611,057 ========== ========== ==========
F-58 159 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET (A) Increase represents the purchase of three Doubletree Guest Suites hotels on July 28, 1997 and the pending acquisition of one Sheraton hotel. (B) Increase represents deferred loan costs associated with the debt offering. (C) Increase represents additional borrowings necessary to purchase the Doubletree Guest Suites hotels on July 28, 1997 and the pending acquisition hotel. (D) Increase represents cash contributed from the issuance of additional units associated with the exercise of the underwriters' overallotment option to purchase common stock from the June 30, 1997 stock offering of FelCor Suite Hotels, Inc. F-59 160 FELCOR SUITES LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS) ASSETS
JUNE 30, 1997 ----------- (UNAUDITED) Investment in hotels, net of accumulated depreciation of $58,411 at June 30, 1997.................................. $1,320,982 Investment in unconsolidated partnerships................... 126,714 Cash and cash equivalents................................... 13,394 Deposits.................................................... 1,616 Due from Lessee............................................. 9,059 Deferred expenses, net of accumulated amortization of $1,035 at June 30, 1997.......................................... 3,363 Other assets................................................ 4,446 ---------- Total assets...................................... $1,479,574 ========== LIABILITIES AND PARTNERS' CAPITAL Distributions payable....................................... $ 2,949 Accrued expenses and other liabilities...................... 6,379 Debt........................................................ 302,650 Capital lease obligations................................... 12,048 Minority interest in other partnerships..................... 8,164 ---------- Total liabilities................................. 332,190 ---------- Commitments and contingencies (Note 2) Redeemable units, at redemption value....................... 108,192 Preferred units............................................. 151,250 Partners' capital........................................... 887,942 ---------- Total liabilities and partners' capital........... $1,479,574 ==========
The accompanying notes are an integral part of these consolidated financial statements. F-60 161 FELCOR SUITES LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, -------------------- 1997 1996 ------- ------- Revenues: Percentage lease revenue.................................. $74,048 $47,385 Income from unconsolidated partnerships................... 3,427 485 Other income.............................................. 170 774 ------- ------- Total revenue..................................... 77,645 48,644 ------- ------- Expenses: General and administrative................................ 1,846 848 Depreciation.............................................. 21,730 10,304 Taxes, insurance and other................................ 10,756 6,600 Interest expense.......................................... 12,914 4,513 Minority interest in other partnerships................... 142 ------- ------- Total expenses.................................... 47,388 22,265 ------- ------- Net income.................................................. 30,257 26,379 Preferred distributions..................................... 5,899 1,835 ------- ------- Net income applicable to unitholders........................ $24,358 $24,544 ======= ======= Per unit information: Net income................................................ $ 0.84 $ 0.95 ======= ======= Weighted average number of units outstanding.............. 28,886 25,843 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-61 162 FELCOR SUITES LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------------ 1997 1996 --------- --------- Cash flows from operating activities: Net income................................................ $ 30,257 $ 26,379 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation........................................... 21,730 10,304 Amortization of deferred financing fees and organization costs.................................... 672 243 Amortization of unearned officers' and directors' compensation.......................................... 510 177 Income from unconsolidated partnerships................ (3,427) (485) Cash distributions from unconsolidated partnerships.... 1,402 Minority interest in other partnerships................ 142 Changes in assets and liabilities: Due from Lessee........................................ (3,533) (1,355) Deferred expenses and other assets..................... (4,225) (689) Accrued expenses and other liabilities................. 168 (1,890) --------- --------- Net cash flow provided by operating activities.... 43,696 32,684 --------- --------- Cash flows from investing activities: Acquisition of hotels..................................... (409,587) (287,715) Acquisition of interests in unconsolidated partnerships... (59,571) Improvements and additions to hotels...................... (25,374) (30,944) --------- --------- Net cash flow used in investing activities........ (494,532) (318,659) --------- --------- Cash flows from financing activities: Proceeds from borrowings.................................. 149,000 76,150 Repayment of borrowings................................... (72,900) (119,954) Contributions............................................. 414,052 33,585 Contributions from preferred units........................ 151,250 Distributions paid........................................ (27,816) (16,825) Distributions paid to preferred unitholders............... (5,899) --------- --------- Net cash flow provided by financing activities.... 456,437 124,206 --------- --------- Net change in cash and cash equivalents..................... 5,601 (161,769) Cash and cash equivalents at beginning of periods........... 7,793 166,821 --------- --------- Cash and cash equivalents at end of periods................. $ 13,394 $ 5,052 ========= ========= Supplemental cash flow information -- Interest paid............................................. $ 9,760 $ 3,966 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-62 163 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND ACQUISITIONS FelCor Suites Limited Partnership (the "Partnership"), a Delaware limited partnership, commenced operations on July 28, 1994. Simultaneously with the closing of the initial public offering (the "IPO") of FelCor Suite Hotels, Inc. ("FelCor"), which is the sole general partner of the Partnership, contributed the net proceeds of the IPO to the Partnership in exchange for an approximate 75% general partnership interest. The Partnership owned six Embassy Suites(R) hotels (the "Initial Hotels") with an aggregate of 1,479 suites, which it had acquired through a merger with entities, originally formed in 1991, controlled by Hervey A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board of Directors and Chief Executive Officer of the Company, respectively. At June 30, 1997, the Partnership owned interests in 67 hotels with an aggregate of 16,357 suites/rooms (collectively the "Hotels") through its consolidated subsidiaries (collectively, the "Company"). The Company owns 100% equity interests in 49 of the Hotels (11,854 suites), a 90% or greater interest in partnerships owning four hotels (1,041 suites), and 50% interests in separate partnerships that own 14 hotels (3,462 suites). At June 30, 1997, 51 of the Hotels were operated as Embassy Suites hotels, nine as Doubletree Guest Suites(R) hotels, one as a Hilton Suites(R)hotel, one hotel was in the process of conversion to an Embassy Suites hotel, three hotels were operated as Sheraton(R) hotels and two were operated as Sheraton Suites(R) hotels. The Hotels are located in 25 states, with 29 hotels in California, Florida and Texas. The following table provides certain information regarding the Hotels through June 30, 1997:
NUMBER OF HOTELS AGGREGATE ACQUIRED NUMBER OF SUITES ACQUISITION PRICE ---------------- ---------------- ----------------- (DOLLARS IN MILLIONS) 1994................................. 7 1,730 $ 107.3 1995................................. 13 2,649 237.1* 1996................................. 23 5,769 560.5** 1st Quarter 1997..................... 15 3,446 209.4*** 2nd Quarter 1997..................... 9 2,715 264.9**** -- ------- -------- 67 16,309 1,379.2 == Additional suites constructed by the Company............................ 48 5.3 ------- -------- 16,357 $1,384.5 ======= ========
- --------------- * Includes the purchase price of the Company's 50% interest in an unconsolidated partnership owning one hotel with 262 suites. ** Includes the purchase price of the Company's 50% interests in separate unconsolidated partnerships owning four hotels with an aggregate 1,005 suites. *** Includes the purchase price of the Company's 50% interests in separate unconsolidated partnerships owning eight hotels with an aggregate 1,934 suites. **** Includes the purchase price of the Company's 50% interest in an unconsolidated partnership owning one hotel with 261 suites. The Company completed construction and placed into service on July 1, 1997, 129 net additional suites, meeting rooms and other public area upgrades at its Boston-Marlborough, Massachusetts hotel at an approximate cost of $15.8 million. The Company has also begun construction on 67 suites at its Jacksonville, Florida hotel and 67 suites at its Orlando (North), Florida hotel at an aggregate projected cost of $10.2 million with an expected completion in early 1998. F-63 164 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company leases all of the Hotels to DJONT Operations, L.L.C. ("DJONT"), or a consolidated subsidiary thereof (collectively, the "Lessee"), under operating leases providing for the payment of percentage rent (the "Percentage Leases"). Hervey A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board and President of the Company, respectively, beneficially own a 50% voting equity interest in DJONT. The remaining 50% non-voting equity interest in DJONT is beneficially owned by the children of Charles N. Mathewson, a director of the Company and shareholder of the predecessor company. The Company's partners in partnerships owning 12 of the Hotels hold special purpose non-voting equity interests in the consolidated subsidiary of DJONT which leases such Hotels, which interests entitle them to 50% of such subsidiary's net income before overhead with respect to such Hotels. In addition, the Company's partner in a partnership owning three of the Hotels holds a 50% non-voting equity interest in the consolidated subsidiary of DJONT leasing those Hotels. See Note 2 Commitments and Related Party Transactions for additional discussion regarding Lessee consolidated subsidiaries. The Lessee has entered into management agreements pursuant to which 50 of the Hotels are managed by Promus Hotels, Inc. ("Promus"), nine of the Hotels are managed by a subsidiary of Doubletree Hotel Corporation ("Doubletree"), five of the hotels are managed directly by, or by a subsidiary of, ITT Sheraton Corporation ("Sheraton"), two of the Hotels are managed by American General Hospitality, Inc. ("AGHI"), and one is managed by Coastal Hotel Group, Inc. ("Coastal"). A brief discussion of the hotels acquired and other significant transactions occurring in the six months ended June 30, 1997 follows: - On February 3, 1997, FelCor sold three million shares of Common Stock to the public, at $35.50 per share, pursuant to their omnibus shelf registration statement ("Shelf Registration"), which provides for offerings from time to time of up to an aggregate of $500 million in securities, which may include its debt securities, preferred stock, common stock and/or common stock warrants. FelCor received net proceeds of approximately $100.7 million from this transaction and contributed the proceeds to the Partnership. The proceeds from this offering were used to immediately fund the acquisition of 10 hotels acquired on February 4, 1997. - On February 4, 1997, the Company acquired 50% joint venture interests in eight existing Embassy Suites hotels located in Atlanta, Georgia; Kansas City, Missouri; Overland Park, Kansas; Raleigh, North Carolina; San Antonio, Texas; Austin, Texas; Covina, California; and Secaucus, New Jersey with a total of 1,934 suites for approximately $58 million, subject to a 50% share of approximately $86 million in existing non-recourse debt. Promus holds the remaining 50% joint venture interests in these properties. The Company also acquired 100% ownership in two Embassy Suites hotels located in Bloomington, Minnesota and Omaha, Nebraska with a total of 408 suites for approximately $39 million. These two hotels were subsequently converted to Doubletree Guest Suites hotels on May 1, 1997. - On February 19, 1997, the Company acquired the 215 suite Embassy Suites -- Los Angeles Airport (LAX North) hotel for approximately $22 million from a Japanese-owned limited partnership which had filed for bankruptcy. The hotel will remain an Embassy Suites hotel managed by Promus. - On February 21, 1997, the Company acquired the 198 suite Hilton Inn hotel in Dana Point, California for approximately $17.2 million. The Dana Point hotel will be converted to a Doubletree Guest Suites hotel by May 1997 and is managed by Doubletree. - On March 10, 1997, the Company increased its unsecured revolving line of credit ("Line of Credit") from $250 million to $400 million, under substantially the same terms as the original Line of Credit, and agreed upon a reduction in unused commitment fees from 35 basis points to 25 basis points. At the end of the first quarter of 1997, the Company had drawn $243 million under the Line of Credit. - On March 24, 1997, the Company acquired, through a 90% owned joint venture, interests in three Doubletree Guest Suites hotels, totaling 691 suites, located in Troy, Michigan; Austin, Texas; and near the Baltimore Washington International (BWI) Airport for approximately $80 million. The Company F-64 165 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) paid approximately $72 million for its 90% ownership interest and Doubletree paid approximately $8 million for its 10% limited partnership interest. Doubletree will continue to manage the capitalized hotels. - On May 15, 1997 the Company acquired a 50% partnership interest in the 261-suite Embassy Suites -- San Antonio Airport hotel for $1.7 million cash and 139,286 Partnership Units, subject to the Company's share of $12.4 million in existing non-recourse partnership debt. The remaining 50% interest in the hotel is owned by Promus, bringing to 12 the number of hotels jointly owned with Promus. The hotel is managed by Promus. - On June 5, 1997 the Company acquired the 138-suite Doubletree Guest Suites hotel -- Nashville for $10.7 million in cash. This three story hotel opened in 1988 and is the second hotel acquired by the Company in Nashville, the other being the Embassy Suites -- Nashville Airport hotel acquired by the Company in 1994. The hotel is managed by a subsidiary of Doubletree. - On June 30, 1997 FelCor issued a net of 9 million shares of its common stock, after giving effect to the 1.2 million shares it repurchased from Promus, at an offering price of $36.625 per share, providing net proceeds of approximately $312.8 million which were contributed to the Company. The proceeds of this offering were used to fund the acquisition of the two Embassy Suites hotels and five Sheraton hotels which were acquired on June 30, 1997 and were used to reduce debt outstanding under its Line of Credit. - On June 30, 1997 the Company acquired the 244-suite Embassy Suites -- Dallas Market Center and the 215-suite Embassy Suites -- Syracuse hotels from Promus for an aggregate cash purchase price of $46.7 million. These acquisitions were the Company's first hotel in New York and third hotel in Dallas, Texas. Both hotels are managed by Promus. - On June 30, 1997 the Company acquired five Sheraton hotels with a total of 1,857 rooms and suites and approximately 85,000 square feet of meeting space from Sheraton for an aggregate cash purchase price of $200.0 million. This portfolio of hotels included the Sheraton Suites hotels at Chicago O'Hare Airport and at the Galleria in Atlanta, Georgia. Also included in this portfolio were three traditional upscale full service Sheraton hotels located at the Atlanta Airport, Dallas Park Central and Phoenix Crescent. These three hotels represent the Company's first acquisition of non-suite hotels. All of these hotels are managed by Sheraton. - The Company executed a definitive agreement to acquire the Doubletree Guest Suite hotels located in Lake Buena Vista, Florida, Raleigh/Durham, North Carolina and Tampa (Rocky Point), Florida from PSH Master L.P. I, a publicly traded Master Limited Partnership. The closing occurred on July 31, 1997 following approval by the MLP's unitholders. All of these hotels are managed by Doubletree. - The Company and Promus announced the execution of a letter of intent whereby Promus would develop five to ten Embassy Suites hotels in key markets and the Company would acquire these hotels upon completion at a price agreed upon prior to the commencement of construction. - The Company completed the public space renovations at the Embassy Suites hotels in Mandalay Beach and Napa, California. These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited financial statements and notes thereto of the Company and the Lessee included herein. The notes to the financial statements included herein highlight significant changes to the notes included in the audited financial statements and present interim disclosures required by the SEC. F-65 166 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUPPLEMENTAL CASH FLOW INFORMATION In the first six months of 1997 the Company purchased certain assets and assumed certain liabilities of hotels. These purchases were recorded under the purchase method of accounting. The fair value of the acquired assets and liabilities recorded at the date of acquisition are as follows: Assets acquired................................... $417,609 Minority interest contribution in other partnerships.................................... (8,022) -------- Net cash paid........................... $409,587 ========
In the first six months of 1997 the Company purchased interests in nine unconsolidated partnerships that hold hotel properties. The hotels associated with these unconsolidated subsidiaries are located in Atlanta (Perimeter), GA; Austin, TX; Covina, CA; Kansas City (Plaza), MO; Overland Park, KS; Raleigh, NC; San Antonio, TX; San Antonio (Airport), TX; and Secaucus, NJ. These purchases were recorded under the equity method of accounting. The value of the assets recorded at the date of acquisition are as follows: Assets acquired.................................... $64,672 Partnership units issued........................... (5,101) ------- Net cash paid............................ $59,571 =======
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS Upon final completion of the conversion of one hotel, the Hotels will operate as Embassy Suites (52), Doubletree Guest Suites (9), Sheraton Suites (2), Sheraton (3) and Hilton Suites (1) hotels. The Embassy Suites hotels and Hilton Suites hotel will operate pursuant to franchise license agreements which require the payment of fees based on a percentage of suite revenue. These fees are paid by the Lessee. There are no separate franchise license agreements with respect to the Doubletree Guest Suites hotels, Sheraton hotels or Sheraton Suites hotels, which rights are included in the management agreement. The Hotels are managed by Promus (50), Doubletree (9), Sheraton (5), AGHI (2) and Coastal (1) on behalf of the Lessee. The Lessee generally pays the managers a base management fee based on a percentage of total revenue and an incentive management fee based on the Lessee's net income before overhead expenses. The Company is to receive rental income from the Lessee under the Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels), 2006 (19 hotels) and 2007 (15 hotels). The rental income under the Percentage Leases between the 14 unconsolidated partnerships, of which the Company owns 50%, and the Lessee are payable to the respective partnerships and as such is not included in the following schedule of future lease commitments to the Company. Minimum future rental income (i.e., base rents) to the Company under these noncancellable operating leases at June 30, 1997 is as follows (in thousands):
YEAR ---- Remainder of 1997................................. $ 47,032 1998.............................................. 94,467 1999.............................................. 94,467 2000.............................................. 94,466 2001.............................................. 94,466 2002 and thereafter............................... 466,588 -------- $891,486 ========
F-66 167 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Minority equity interests in two of DJONT's consolidated subsidiaries, which relate to a total of 15 of the Hotels, are held by unrelated third parties. These two subsidiaries have entered into separate revolving credit agreements with an affiliate of Messrs. Feldman and Corcoran and/or the holders of such minority equity interests or affiliates thereof, which provide these subsidiaries with the right to borrow up to an aggregate of $9.0 million, to the extent necessary to enable them to pay rent and other obligations due under the Percentage Leases relating to such Hotels. Amounts borrowed thereunder, if any, will be subordinate to the payment of rent and other obligations under such Percentage Leases. No loans were outstanding under such agreements at June 30, 1997. 4. DEBT AND CAPITAL LEASE OBLIGATIONS Debt and capital lease obligations at June 30, 1997 consist of the following (in thousands):
JUNE 30, 1997 -------- Line of Credit.................................... $192,000 Term loan......................................... 85,000 Renovation loan................................... 25,000 Other debt payable................................ 650 -------- $302,650 ========
In March 1997, the Company increased its unsecured Line of Credit from $250 million to $400 million under substantially the same terms as the original Line of Credit obtained in September 1996. As of August 14, 1997, the Company amended its existing unsecured Line of Credit to increase availability to $550 million, extend the term by one year to September 30, 2000 and to reduce the effective interest rate. Interest payable on borrowings under the Line of Credit is variable, determined from a ratings-based pricing matrix, and at June 30, 1997, was at LIBOR plus 175 basis points. The Company had an $85 million collateralized term loan outstanding at June 30, 1997. This term loan bears interest at LIBOR plus 150 basis points. Also outstanding at June 30, 1997 was a renovation loan of $25 million that bears interest at LIBOR plus 45 basis points. At June 30, 1997, 30 day LIBOR was 5.71875%. Under its loan agreements the Company is required to satisfy various affirmative and negative covenants. The Company was in compliance with these covenants at June 30, 1997. Capital lease obligations at June 30, 1997 consist of the following (in thousands):
JUNE 30, 1997 -------- Capital land and building lease obligations........ $ 9,506 Capital equipment lease obligations................ 2,542 ------- $12,048 =======
5. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS At June 30, 1997, the Company owned 50% interests in separate partnerships, including accounting for the acquisition by the Company owning 14 hotels, a parcel of undeveloped land and a condominium management company. The Company is accounting for its investments in these unconsolidated partnerships under the equity method. F-67 168 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized combined financial information for unconsolidated partnerships, of which the Company owns 50%, is as follows (in thousands):
JUNE 30, 1997 -------- Balance sheet information: Partnership assets (primarily hotel assets)..... $393,031 Non-recourse mortgage debt...................... $159,372 Equity.......................................... $253,428
SIX MONTHS ENDED JUNE 30, ----------------- 1997 1996 ------- ------ Statement of operations information: Percentage lease revenue........................ $23,729 $1,771 Expenses: Depreciation................................. 7,214 600 Taxes, insurance and other................... 3,178 163 Interest expense............................. 5,001 ------- ------ Total expenses.......................... 15,393 763 ------- ------ Net income...................................... $ 8,336 $1,008 ======= ====== 50% of net income attributable to the Company... $ 4,168 $ 504 Amortization of cost in excess of book value.... (741) (19) ------- ------ Income from unconsolidated partnerships......... $ 3,427 $ 485 ======= ======
6. TAXES, INSURANCE AND OTHER Taxes, insurance and other is comprised of the following for the six months ended June 30, 1997 and 1996 (in thousands):
SIX MONTHS ENDED JUNE 30, ----------------- 1997 1996 ------- ------ Real estate and personal property taxes........... $ 8,833 $5,018 Property insurance................................ 863 618 Land lease expense................................ 660 601 State franchise taxes............................. 300 330 Other............................................. 100 33 ------- ------ Total taxes, insurance and other........ $10,756 $6,600 ======= ======
7. PRO FORMA INFORMATION (UNAUDITED) The following unaudited Pro Forma Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996 are presented as if the acquisitions of all hotels owned by the Company at June 30, 1997, the equity offerings (and subsequent contribution of proceeds to the Company) consummated during 1996 and 1997 and the purchase of three hotels on July 31, 1997 (see Note 9) had occurred as of January 1, 1996 and the Hotels had all been leased to the Lessee pursuant to Percentage Leases. Such pro forma information is based in part upon the Consolidated Statements of Operations of the Company and pro forma F-68 169 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Statements of Operations of the Lessee included elsewhere in these financial statements. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Consolidated Statements of Operations for the periods presented are not necessarily indicative of what actual results of operations of the Company would have been assuming such transactions had been completed on January 1, 1996, nor does it purport to represent the results of operations for future periods. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, ------------------ 1997 1996 -------- ------- Revenues: Percentage lease revenue.................................. $ 99,562 $89,209 Income from unconsolidated partnerships................... 3,316 3,023 -------- ------- Total revenue..................................... 102,878 92,232 -------- ------- Expenses: General and administrative................................ 2,046 1,648 Depreciation.............................................. 27,770 17,802 Taxes, insurance and other................................ 14,317 13,940 Interest expense.......................................... 15,520 12,627 Minority interest in other partnerships................... 230 260 -------- ------- Total expenses.................................... 59,883 46,277 -------- ------- Net income.................................................. 42,995 45,955 Preferred distributions..................................... 5,899 5,899 -------- ------- Net income applicable to unitholders........................ $ 37,096 $40,056 ======== ======= Per unit information: Net income................................................ $ 0.94 $ 1.02 ======== ======= Weighted average number of units outstanding.............. 39,472 39,412 ======== =======
Depreciation and interest expense increased from 1996 to 1997 due to approximately $71 million in capital expenditures made in 1996 and placed in service in late 1996 or early 1997. F-69 170 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. CONSOLIDATING FINANCIAL INFORMATION FelCor/CSS Holdings, L.P.; FelCor/St. Paul Holdings, L.P.; and FelCor/LAX Holdings, L.P. (collectively "Subsidiary Guarantors") are subsidiaries of the Partnership that are guarantors of the proposed debt offering. The following tables show consolidating information for the Subsidiary Guarantors.
CONSOLIDATED FELCOR/ NON- FELCOR SUITES FELCOR/CSS ST. PAUL FELCOR/LAX GUARANTOR LIMITED HOLDINGS, L.P. HOLDINGS, L.P. HOLDINGS, L.P. SUBSIDIARIES PARTNERSHIP -------------- -------------- -------------- ------------ ------------- (IN THOUSANDS) Selected balance sheet data, at June 30, 1997: Investment in hotels, net of depreciation................. $538,481 $21,991 $22,835 $737,675 $1,320,982 Capitalized lease liability..... 1,924 9,568 232 324 12,048 Partners' Capital............... 536,557 12,423 22,603 316,359 887,942 Selected operating statement data, for the six months ended June 30, 1997 Percentage lease revenue........ $ 33,725 $ 983 $ 1,954 $ 37,386 $ 74,048 Property tax expense............ 4,246 306 151 4,130 8,833 Property insurance expense...... 524 9 63 267 863 Interest expense................ 221 454 30 12,209 12,914 Depreciation expense............ 11,090 748 1,214 8,678 21,730
9. SUBSEQUENT EVENTS On July 1, 1997, the Company declared a distribution of $0.50 per unit and $0.4875 per preferred unit, which was paid on July 30, 1997 to holders of record on July 15, 1997. In conjunction with the 10.2 million share stock offering completed on June 30, 1997, FelCor issued an additional 1 million shares of its common stock pursuant to the underwriters' exercise of the overallotment option on July 15, 1997, with additional net proceeds of approximately $34.8 million which were subsequently contributed to the Company. On July 31, 1997 the Company acquired three Doubletree Guest Suites hotels, totaling 635 suites, located in Lake Buena Vista, Florida; Raleigh/Durham, North Carolina; and Tampa (Rocky Point), Florida. The Company paid approximately $71.2 million in cash. Doubletree will continue to manage the hotels. F-70 171 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of FelCor Suite Hotels, Inc. We have audited the accompanying consolidated financial statements and the financial statement schedule of FelCor Suites Limited Partnership. These financial statements and financial statement schedule are the responsibility of FelCor Suite Hotels, Inc.'s (the "Company") management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FelCor Suites Limited Partnership as of December 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Dallas, Texas January 22, 1997 except as to the information presented in the second paragraph of Note 5, the first paragraph of Note 6 and Note 16 for which the date is March 10, 1997 F-71 172 FELCOR SUITES LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS) ASSETS
1996 1995 -------- -------- Investment in hotels, net of accumulated depreciation of $36,718 in 1996 and $10,244 in 1995....................... $899,691 $325,155 Investment in unconsolidated partnerships................... 59,867 13,819 Cash and cash equivalents................................... 7,793 166,821 Deposits and prepayments.................................... 1,616 35,317 Due from Lessee............................................. 5,526 2,396 Deferred expenses, net of accumulated amortization of $364 in 1996 and $252 in 1995.................................. 3,235 1,713 Other assets................................................ 1,060 3,138 -------- -------- Total assets...................................... $978,788 $548,359 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Distributions payable....................................... $ 16,090 $ 4,918 Accrued expenses and other liabilities...................... 5,235 3,552 Debt........................................................ 226,550 8,410 Capital lease obligations................................... 12,875 11,256 -------- -------- Total liabilities................................. 260,750 28,136 -------- -------- Commitments and contingencies (Notes 5 and 9) Redeemable units, at redemption value....................... 98,542 74,790 Preferred units............................................. 151,250 Partners' capital........................................... 468,247 445,433 -------- -------- Total liabilities and partners' capital........... $978,789 $548,359 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-72 173 FELCOR SUITES LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 -------- ------- ------ Revenues: Percentage lease revenue.............................. $ 97,950 $23,787 $6,043 Income from unconsolidated partnerships............... 2,010 513 Other income.......................................... 984 1,691 207 -------- ------- ------ Total revenues................................ 100,944 25,991 6,250 -------- ------- ------ Expenses: General and administrative............................ 1,819 870 355 Depreciation.......................................... 26,544 5,232 1,487 Taxes, insurance and other............................ 13,897 2,563 881 Interest expense...................................... 9,803 2,004 109 -------- ------- ------ Total expenses................................ 52,063 10,669 2,832 -------- ------- ------ Income before extraordinary charge...................... 48,881 15,322 3,418 Extraordinary charge from write off of deferred financing fees.................................................. 2,354 -------- ------- ------ Net income.............................................. 46,527 15,322 3,418 Preferred distributions................................. 7,734 -------- ------- ------ Net income applicable to unitholders.................... $ 38,793 $15,322 $3,418 ======== ======= ====== Per unit information: Net income applicable to unit holders before extraordinary charge............................... $ 1.58 $ 1.70 $ 0.54 Extraordinary charge.................................. 0.09 -------- ------- ------ Net income............................................ $ 1.49 $ 1.70 $ 0.54 ======== ======= ====== Weighted average number of units outstanding.......... 26,037 8,956 6,385 ======== ======= ======
The accompanying notes are an integral part of these consolidated financial statements. F-73 174 FELCOR SUITES LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM MAY 16, 1994 THROUGH DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PARTNERS' CAPITAL ----------------- Contributions............................................... $ 59,694 Distributions declared...................................... (4,194) Allocations to redeemable units............................. 2,967 Net income.................................................. 3,418 -------- Balance, December 31, 1994.................................. 61,885 Contributions............................................... 402,554 Distributions declared...................................... (17,593) Allocation to redeemable units.............................. (16,735) Net income.................................................. 15,322 -------- Balance at December 31, 1995................................ 445,433 Contributions............................................... 44,483 Distributions declared...................................... (57,892) Allocation to redeemable units.............................. (10,304) Net income.................................................. 46,527 -------- Balance, December 31, 1996.................................. $468,247 ========
The accompanying notes are an integral part of these consolidated financial statements. F-74 175 FELCOR SUITES LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1994 ( IN THOUSANDS)
1996 1995 1994 --------- --------- --------- Cash flows from operating activities: Net income........................................... $ 46,527 $ 15,322 $ 3,418 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation...................................... 26,544 5,385 1,487 Amortization of deferred financing fees and organization costs.............................. 554 228 24 Amortization of unearned officers' and directors' compensation.................................... 506 158 85 Income from unconsolidated partnerships........... (2,010) (513) Cash distributions from unconsolidated partnerships.................................... 1,954 Extraordinary charge for write off of deferred financing fees.................................. 2,354 Fully vested officer stock grant.................. 108 Changes in assets and liabilities: Due from Lessee................................... (3,130) (1,137) (1,259) Deferred costs and other assets................... 353 (2,217) (407) Accrued expenses and other liabilities............ 280 741 611 --------- --------- --------- Net cash flow provided by operating activities................................. 73,932 18,075 3,959 --------- --------- --------- Cash flows from investing activities: Acquisition of hotels................................ (365,907) (219,164) (23,550) Prepayments under purchase agreements................ (21,701) Acquisition of unconsolidated partnerships........... (43,424) (13,166) Improvements and additions to hotels................. (71,051) (5,166) (77,243) --------- --------- --------- Net cash flow used in investing activities... (480,382) (259,197) (100,793) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings............................. 303,350 128,600 8,800 Repayment of borrowings.............................. (193,954) (129,850) Deferred financing fees.............................. (4,484) (1,072) (721) Contributions........................................ 37,980 423,628 91,610 Proceeds from sale of preferred units................ 151,250 Distributions paid to unitholders.................... (41,936) (14,481) (1,737) Distributions paid to preferred unitholders.......... (4,784) --------- --------- --------- Net cash flow provided by financing activities................................. 247,422 406,825 97,952 --------- --------- --------- Net change in cash and cash equivalents................ (159,028) 165,703 1,118 Cash and cash equivalents at beginning of periods...... 166,821 1,118 --------- --------- --------- Cash and cash equivalents at end of years.............. $ 7,793 $ 166,821 $ 1,118 ========= ========= ========= Supplemental cash flow information -- interest paid.... $ 9,168 $ 1,467 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-75 176 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION FelCor Suites Limited Partnership (the "Partnership"), a Delaware limited partnership, commenced operations on July 28, 1994. Simultaneously with the closing of the initial public offering (the "IPO") of FelCor Suite Hotels, Inc. ("FelCor"), which is the sole general partner of the Partnership, contributed the net proceeds of the IPO to the Partnership in exchange for an approximate 75% general partnership interest. The Partnership owned six Embassy Suites(R) hotels (the "Initial Hotels") with an aggregate of 1,479 suites, which it had acquired through a merger with entities, originally formed in 1991, controlled by Hervey A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board of Directors and Chief Executive Officer of the Company, respectively. At December 31, 1996, FelCor Suite Hotels, Inc. and its consolidated subsidiaries (collectively the "Company") owned interests in 43 hotels with an aggregate of 10,196 suites (collectively the "Hotels"). The Company owns 100% equity interests in 37 of the Hotels, a 97% interest in the partnership that owns the Los Angeles International Airport hotel and 50% interests in separate partnerships that own five hotels. At December 31, 1996, 39 of the Hotels are operated as Embassy Suites hotels, two as Doubletree Guest Suites(R) hotels, one as a Hilton Suites(R) hotel and one hotel is in the process of being converted to an Embassy Suites hotel. The Hotels are located in 16 states, with 17 hotels in California and Florida. The following table provides certain information regarding the Company's Hotels acquired through December 31, 1996:
NUMBER OF NUMBER AGGREGATE HOTELS ACQUIRED OF SUITES ACQUISITION PRICE --------------- --------- --------------------- (DOLLARS IN MILLIONS) 1994 Initial Hotels............................ 6 1,479 $ 81.5 4th Quarter............................... 1 251 25.8 1995 1st Quarter............................... 2 350 27.4 2nd Quarter............................... 1 100 9.4 3rd Quarter............................... 3 542 31.3* 4th Quarter............................... 7 1,657 169.0 1996 1st Quarter............................... 14 3,501 383.5 2nd Quarter............................... 3 691 68.1 3rd Quarter............................... 4 1,005 30.8** 4th Quarter............................... 2 572 78.1 -- ------ ------- 43 10,148 904.9 == Additional suites constructed by the Company at Hotels....................... 48 5.3 ------ ------- 10,196 $910.2 ====== =======
- --------------- * Includes the purchase price of the Company's 50% interest in the unconsolidated partnership owning the 262 suite, Chicago-Lombard, Illinois hotel. ** Represents the purchase price of the Company's 50% interest in separate unconsolidated partnerships owning hotels in Marin County, California; Parsippany, New Jersey; Charlotte, North Carolina; and Indianapolis, Indiana, with an aggregate 1,005 suites. In addition, the Company has started construction on 129 net additional suites, meeting rooms and other public area upgrades at one of the Hotels, at an estimated cost of $15.8 million. F-76 177 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company leased all of the Hotels to DJONT Operations, L.L.C. or a consolidated subsidiary (collectively the "Lessee") under operating leases providing for the payment of percentage rent (the "Percentage Leases"). Messrs. Feldman and Corcoran beneficially own 50% of the common equity interest in the Lessee. The remaining 50% of the Lessee is beneficially owned by the children of Charles N. Mathewson, a director of the Company. The Lessee has entered into management agreements pursuant to which 38 of the Hotels are managed by Promus Hotels, Inc. ("Promus"), two of the Hotels are managed by a subsidiary of Doubletree Hotel Corporation ("Doubletree"), two of the Hotels are managed by American General Hospitality, Inc. ("AGHI") and one is managed by Coastal Hotel Group, Inc. ("Coastal"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of the Partnership and the Holdings Partnerships as described in Note 8. All significant intercompany balances and transactions have been eliminated. Investment in Hotels -- Hotels are stated at cost and are depreciated using the straight-line method over estimated useful lives ranging from 31-40 years for buildings and improvements and 5 to 7 years for furniture, fixtures and equipment. The Company reviews the carrying value of each hotel to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel based on discounted future cash flows. The Company does not believe that there are any factors or circumstances indicating impairment of any of its investment in hotels. Maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts, and the related gain or loss is included in operations. Investment in Unconsolidated Partnerships -- The Company carries its investment in unconsolidated partnerships at cost, plus its equity in net earnings, less distributions received since the date of acquisition. Equity in net earnings is being adjusted for the straight-line amortization, over a 40 year period, of the difference between the Company's cost and its proportionate share of the underlying net assets at date of acquisition. Cash and Cash Equivalents -- All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Deposits and Prepayments -- Deposits and prepayments at December 31, 1996 consist of deposits associated with the capitalized land and building lease further described in Note 5. At December 31, 1995 the deposits and prepayments consisted of the aforementioned deposits and prepayments associated with hotel purchases. F-77 178 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred Expenses -- Deferred expenses at December 31, 1996 and 1995 consist of the following (in thousands):
1996 1995 ------ ------ Organization costs................................. $ 349 $ 172 Deferred financing fees............................ 3,250 1,793 ------ ------ 3,599 1,965 Accumulated amortization........................... (364) (252) ------ ------ $3,235 $1,713 ====== ======
Amortization of organization costs is computed using the straight-line method over three to five years. Amortization of deferred financing fees is computed using the interest method over the maturity of the loans. Revenue Recognition -- Percentage lease revenue is recognized when earned from the Lessee under the Percentage Lease agreements (Note 9). The Lessee is in compliance with its obligations under the Percentage Leases. Net Income Per Unit -- Net income per unit has been computed by dividing net income applicable to unitholders by the weighted average number of units outstanding. Distributions -- The Partnership pays regular quarterly distributions on its units. Additionally, the Partnership pays regular quarterly dividends on preferred units in accordance with its preferred unit dividend requirements. Income Taxes -- No provision for income taxes is provided since all taxable income or loss or tax credits are passed through to the partners. FelCor qualifies as a real estate investment trust ("REIT") and generally will not be subject to federal income tax to the extent it distributes its REIT taxable income to shareholders. REITs are subject to a number of organizational and operational requirements. If FelCor fails to qualify as a REIT in any taxable year, FelCor will be subject to federal income tax on its taxable income at regular corporate rates. 3. INVESTMENT IN HOTELS Investment in hotels at December 31, 1996 and 1995 consist of the following (in thousands):
1996 1995 -------- -------- Land........................................... $ 89,106 $ 31,123 Building and improvements...................... 744,758 279,349 Furniture, fixtures and equipment.............. 77,526 19,704 Construction in progress....................... 25,019 5,223 -------- -------- 936,409 335,399 Accumulated depreciation....................... (36,718) (10,244) -------- -------- $899,691 $325,155 ======== ========
4. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS The Company owned 50% interests in separate partnerships owning five hotels, a parcel of undeveloped land and a condominium management company at December 31, 1996 and one hotel at December 31, 1995. The Company is accounting for its investments in these unconsolidated partnerships under the equity method. F-78 179 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized combined financial information for unconsolidated partnerships, of which the Company owns 50%, is as follows (in thousands):
DECEMBER 31, ------------------- 1996 1995 -------- ------- Balance sheet information: Investment in hotels.......................... $110,394 $23,385 Non-recourse mortgage debt.................... $ 49,402 Equity........................................ $ 91,156 $24,609 Statement of operations information: Percentage lease revenue...................... $ 9,974 $ 1,420 Net income.................................... $ 4,366 $ 1,050
5. DEBT AND CAPITAL LEASE OBLIGATIONS Debt at December 31, 1996 and 1995 consists of the following (in thousands):
DECEMBER 31, ------------------ 1996 1995 -------- ------ Line of Credit................................... $115,000 Term loan........................................ 85,000 Renovation Loan.................................. 25,000 Promus note related to CSS purchase.............. $7,500 Other debt payable............................... 1,550 910 -------- ------ $226,550 $8,410 ======== ======
On September 30, 1996 the Company obtained a $250 million unsecured revolving credit facility ("Line of Credit"). Under this facility, the Company has the right to borrow up to $250 million based upon its ownership of qualifying unencumbered hotel assets until October 1, 1999, at which time the principal amount then outstanding will be due and payable. Interest payable on borrowings is variable, determined from a ratings based pricing matrix, initially set at LIBOR plus 175 basis points and is paid current throughout the year. Additionally, the Company is required to pay an unused commitment fee which is variable, determined from a ratings based pricing matrix, initially set at 35 basis points. The Company paid unused commitment fees of approximately $164,000 during 1996. At December 31, 1996, the line of credit interest rate was 7.25%. On March 10, 1997 the Company announced that it increased its Line of Credit from $250 million to $400 million which included a reduction in unused commitment fees from 35 basis points to 25 basis points, under substantially the same terms as the original Line of Credit. Simultaneous with the closing of the Line of Credit in September, 1996, the Company retired a $65 million collateralized term loan and replaced an existing $100 million collateralized revolving credit facility with an $85 million four-year collateralized term loan. This term loan bears interest at LIBOR plus 150 basis points, interest is paid current throughout the year, and the note is collateralized by interests in nine of the Company's hotels. Principal payments commence on October 1, 1997 and are based on a 15 year amortization schedule, adjusted annually for the then current interest rates. All outstanding principal and accrued interest is due and payable on September 30, 2000. At December 31, 1996 the term loan interest rate was 7.125%. The Company has a $25 million loan facility ("Renovation Loan") which has been used to fund a portion of the renovation cost of the CSS Hotels (Note 8) converted to Embassy Suites hotels. The facility is guaranteed by Promus, bears interest at LIBOR plus 45 basis points (6.08% at December 31, 1996), requires F-79 180 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) monthly interest payments, and quarterly principal payments of $1.25 million beginning June 1999 and matures in June 2000. Under its loan agreements, the Company is required to satisfy various affirmative and negative covenants. The Company was in compliance with these covenants at December 31, 1996. During the fourth quarter of 1996, the Company entered into two separate interest rate swap agreements to manage the relative mix of its debt between fixed and variable rate instruments. These interest rate swap agreements modify a portion of the interest characteristics of the Company's outstanding debt without an exchange of the underlying principal amount and effectively convert variable rate debt to a fixed rate. The fixed rates to be paid, the effective fixed rate, and the variable rate to be received by FelCor at December 31, 1996 are summarized in the following table:
SWAP RATE RECEIVED SWAP RATE EFFECTIVE (VARIABLE) AT SWAP NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 12/31/96 MATURITY - --------------- ------------ ---------- ------------- ------------- 50 million 6.11125% 7.61125% 5.53516% October 1999 25 million 5.95500% 7.45500% 5.5000% November 1999
The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense by the Company pursuant to the terms of its interest rate agreement and will have a corresponding effect on its future cash flows. Agreements such as these contain a credit risk that the counterparties may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, which is limited to major banks and financial institutions, and does not anticipate nonperformance by the counterparties. Capital lease obligations at December 31, 1996 and 1995 consists of the following (in thousands):
DECEMBER 31, ------------------ 1996 1995 ------- ------- Capital land and building lease obligations...... $ 9,675 $10,043 Capital equipment lease obligations.............. 3,200 1,213 ------- ------- $12,875 $11,256 ======= =======
The Company assumed the obligation for a capital industrial revenue bond lease for land and building associated with the purchase of the Embassy Suites hotel -- St. Paul in November 1995. The term of the lease is through August 31, 2011 and contains a provision that allows the Company to purchase the property at the termination of the lease, under certain conditions, for a nominal amount. The Company assumed various capital equipment leases associated with hotels purchased in 1995 and 1996. These capital leases are generally for telephones and televisions and vary in remaining terms from one year to four years. F-80 181 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Minimum future lease payments under capital leases at December 31, 1996 are as follows (in thousands):
YEAR ---- 1997............................................... $ 3,297 1998............................................... 2,731 1999............................................... 1,464 2000............................................... 1,300 2001............................................... 1,217 2002 and thereafter................................ 11,770 ------- 21,779 Executory costs.................................... (846) Imputed interest................................... (8,058) ------- Present value of net minimum lease payments........ $12,875 =======
The Company's charter limits consolidated indebtedness to 40% of the Company's investment in hotels, at cost, on a consolidated basis, after giving effect to the Company's use of proceeds from any indebtedness. For purposes of this limitation, the Company's consolidated indebtedness includes borrowings and capital lease obligations and consolidated investment in hotels, at cost, is its investment, at cost, in hotels, as reflected in its consolidated financial statements plus (to the extent not otherwise reflected) the value (as determined by the Board of Directors of the general partner at the time of issuance) of any equity securities issued, otherwise than for cash, by the Company or any of its subsidiaries in connection with the acquisition of hotels. Under this definition as of December 31, 1996, the Company's investment in hotels at cost was $1.0 billion. Accordingly, the Company's maximum permitted indebtedness would have been approximately $400 million (of which $239 million was borrowed at December 31, 1996). Assuming all of this additional debt capacity, and the Company's available cash and cash equivalents were used for the acquisition of additional hotels, the Company's investment in hotels would increase to approximately $1.3 billion and the maximum permitted indebtedness would increase to approximately $525 million. 6. PARTNERS' CAPITAL At December 31, 1996 FelCor had completed the following public offerings the proceeds of which were contributed to the Company:
OFFERING PRICE SECURITY DATE COMPLETED PER SHARE SHARES SOLD NET PROCEEDS -------- ----------------- -------------- ----------- -------------- Common Stock (Initial Public Offering)........ July 28, 1994 $21.25 4,686,250 $91.6 million Common Stock.............. May 30, 1995 $25.00 3,450,000 $81.0 million Common Stock.............. December 20, 1995 $26.50 12,650,000 $312.6 million Preferred Stock........... May 6, 1996 $25.00 6,050,000 $144.3 million
On April 25, 1996, the SEC declared effective FelCor's omnibus shelf registration statement ("Shelf Registration"), which provides for offerings by FelCor from time to time of up to an aggregate of $500 million in securities, which may include its debt securities, preferred stock, common stock and/or common stock warrants. FelCor had issued approximately $151 million under the Shelf Registration at December 31, 1996 leaving approximately $349 million available. In February 1997, FelCor issued approximately $107 million in common stock under the Shelf Registration. F-81 182 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Preferred Units FelCor's Board of Directors is authorized to provide for the issuance of up to 10,000,000 shares of Preferred Stock in one or more series, to establish the number of shares in each series and to fix the designation, powers preferences, and rights of each such series and the qualifications, limitations or restrictions thereof. On May 6, 1996, FelCor completed an offering, pursuant to the Shelf Registration of six million shares of its $1.95 Series A Cumulative Convertible Preferred Stock ("Series A Preferred Stock") at $25 per share. An additional fifty thousand shares of Series A Preferred Stock were issued at $25 per share pursuant to the exercise of the underwriters' over-allotment option. The Series A Preferred Stock bears an annual dividend equal to the greater of $1.95 per share (yielding 7.8% based on the $25 purchase price) 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 and is cumulative from May 6, 1996. Each share of the Series A Preferred Stock is convertible at the shareholder's option to 0.7752 shares of common stock, subject to certain adjustments, and may not be redeemed by FelCor before April 30, 2001. At December 31, 1996, all dividends then payable on the Preferred Stock had been paid. All preferred stock proceeds have been contributed to the Partnership in exchange for preferred units. Common Stock In addition to the aforementioned public offerings of Common Stock, Promus purchased an aggregate of approximately 1.9 million shares of Common Stock, pursuant to subscription agreements, during 1995 and 1996 at a subscription price of $26.50 per share for an aggregate cost of $50 million which was then contributed to the Partnership. Promus has satisfied its commitment to purchase Common Stock under the aforementioned subscription agreements. The proceeds of these subscription agreements were contributed to the Partnership. Partnership Units The outstanding units of limited partnership interests in the Partnership ("Units") are redeemable at the option of the holder for a like number of shares of Common Stock of FelCor Suite Hotels, Inc. or, at the option of FelCor, for the cash equivalent thereof. Due to these redemption rights, these limited partnership units have been excluded from partners' capital included in redeemable units and measured at redemption value as of the end of the periods presented. Pursuant to a subscription agreement with Promus, the Partnership issued an aggregate 1.0 million Units to Promus in November and December 1995, at the subscription price of $25.00 per Unit. An aggregate of 491,703 additional Partnership Units were issued to sellers in conjunction with the purchase of two hotels and the acquisition of partnership interests in two additional hotels in 1996. Promus has satisfied its commitment to purchase Units under the aforementioned subscription agreement. F-82 183 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. TAXES, INSURANCE AND OTHER Taxes, insurance and other is comprised of the following for the years ended December 31, 1996 and 1995 and for the period from July 28, 1994 (inception of operations) through December 31, 1994 (in thousands):
1996 1995 1994 ------- ------ ---- Real estate and personal property taxes............. $11,110 $2,233 $620 Property insurance.................................. 1,312 155 69 Land lease expense.................................. 952 State franchise taxes............................... 472 175 192 Other............................................... 51 ------- ------ ---- Total taxes, insurance and other.......... $13,897 $2,563 $881 ======= ====== ====
8. BUSINESS COMBINATION On December 29, 1995 the Partnership acquired approximate 99% limited partnership interests in entities ("Holdings Partnerships") formed to facilitate the acquisition and financing of up to 18 Crown Sterling Suites(R) hotels ("CSS Hotels") and certain other hotels pending the completion of a common stock offering. Such common stock offering was completed on December 20, 1995 and at that date the Holdings Partnerships had acquired six of the CSS Hotels and one additional hotel. A summary of the fair values of the acquired assets and liabilities of the Holdings Partnerships recorded at the date of acquisition, at December 29, 1995, is as follows (in thousands): Investment in hotels.............................. $166,307 Prepayments under Purchase Agreements............. 13,616 Due from Lessee................................... 908 Other assets...................................... 715 -------- 181,546 -------- Debt and capital lease obligations................ 11,266 Accrued expenses and other liabilities............ 1,657 -------- 12,923 -------- Total purchase price.............................. $168,623 ========
The acquisition has been accounted for as a purchase and, accordingly, the results of operations of the Holdings Partnerships since acquisition have been included in the Company's consolidated statements of operations. 9. COMMITMENTS AND RELATED PARTY TRANSACTIONS After conversion of the Myrtle Beach hotel acquired in December 1996, the Company will own interests in 40 Embassy Suites hotels, 2 Doubletree Guest Suites hotels and one Hilton Suites hotel. The Embassy Suites hotels and the Hilton Suites hotel operate pursuant to franchise license agreements, which require the payment of fees based on a percentage of suite revenue. These fees are paid by the Lessee. There are no separate franchise license agreements for the Doubletree Guest Suites hotels. The Hotels are managed by Promus, Doubletree, AGHI or Coastal on behalf of the Lessee. The Lessee pays the managers a base management fee based on a percentage of suite revenue and an incentive management fee based on the Lessee's income before overhead expenses for each hotel. F-83 184 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company is to receive rental income from the Lessee under the Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels) and 2006 (19 hotels). The rental income under the Percentage Leases between the partnerships owning five hotels, of which the Company owns 50%, and the Lessee is payable to the respective partnerships and as such is not included in the following schedule of future lease commitments to the Company. Minimum future rental income (base rents) under these noncancellable operating leases (excluding hotels owned by the previously noted partnerships) at December 31, 1996 is as follows (in thousands):
YEAR ---- 1997.............................................. $ 61,996 1998.............................................. 61,996 1999.............................................. 61,996 2000.............................................. 61,996 2001.............................................. 61,996 2002 and thereafter............................... 240,386 -------- $550,366 ========
At December 31, 1996 and 1995, the Lessee owed the Company approximately $5.5 million and $2.4 million, respectively, for such Percentage Lease rent to be paid in March of the subsequent year. The Percentage Lease revenue is based on a percentage of suite revenues, food and beverage revenues, and food and beverage rents of the Hotels. Both the base rent and the threshold suite revenue in each lease computation are subject to adjustments for changes in the Consumer Price Index ("CPI"). The adjustment is calculated at the beginning of each calendar year, for the hotels acquired prior to July of the previous year. The adjustment in any lease year may not exceed 7%. The CPI adjustments made in January 1997 and 1996 are 1.42% and 0.73% respectively. Under the Percentage Leases, the Partnership is obligated to pay the costs of real estate and personal property taxes, property insurance, maintenance of underground utilities and structural elements of the Hotels, and to set aside 4% of suite revenues per month, on a cumulative basis, to fund therefrom (or from other sources) capital expenditures for the periodic replacement or refurbishment of furniture, fixtures and equipment required for the retention of the franchise licenses with respect to the Hotels. In addition, the Company will incur certain additional capital expenditures in connection with the conversion and upgrade of acquired hotels, which may be funded from cash on hand or borrowings under its line of credit. At December 31, 1996 the Company is committed to fund capital improvements to certain of its hotels of approximately $22 million pursuant to product improvements plans as required by the franchisors. These capital improvements are expected to be funded in 1997. The Company has entered into employment contracts with Messrs. Feldman and Corcoran, that will continue in effect until December 31, 1999 and, unless terminated, will be automatically renewed for successive one year terms. Pursuant to such agreements, Messrs. Feldman and Corcoran each received $5,000 per month during 1994, $10,000 per month during 1995 and $10,270 per month in 1996. Effective January 1, 1997, Mr. Feldman is entitled to receive $12,500 per month and Mr. Corcoran is entitled to receive $16,667 per month. In addition, the Company is required to maintain a comprehensive medical plan for such persons. The Company shares the executive offices and certain employees with FelCor, Inc. and the Lessee, and each company bears its share of the costs thereof, including an allocated portion of the rent, compensation of certain personnel (other than Messrs. Feldman and Corcoran, whose compensation is borne solely by the Company), office supplies, telephones and depreciation of office furniture, fixtures and equipment. Any such allocation of shared expenses to the Company must be approved by a majority of the independent directors of F-84 185 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the general partner. During 1996 and 1995, the Company paid approximately $807,000 (approximately 38%) and $316,000 (approximately 31%), respectively, of the allocable expenses under this agreement. 10. SUPPLEMENTAL CASH FLOW DISCLOSURE The Company purchased certain assets and assumed certain liabilities in connection with the acquisition of hotels. These purchases were recorded under the purchase method of accounting. The fair values of the acquired assets and liabilities recorded at the date of acquisition are as follows (in thousands):
1996 1995 1994 --------- -------- ------- Assets acquired.............................. $ 494,354 $221,213 $25,750 Prepayments assumed.......................... 13,616 Liabilities assumed.......................... (108,744) (910) (2,200) Capital land lease assumed................... (10,045) Capital equipment leases assumed............. (2,823) (1,211) Units issued................................. (6,000) (3,499) Partnership units issued..................... (10,880) --------- -------- ------- Net cash paid...................... $ 365,907 $219,164 $23,550 ========= ======== =======
The Company purchased interests in unconsolidated partnerships during 1996 and 1995. These unconsolidated partnerships separately own five hotels located in Chicago-Lombard, Illinois; Marin County, California; Parsippany, New Jersey; Charlotte, North Carolina; and Indianapolis, Indiana, a parcel of undeveloped land in Myrtle Beach, South Carolina and a condominium management company in Myrtle Beach, South Carolina. These purchases were recorded under the equity method of accounting. The value of the assets recorded at the date of acquisition is as follows (in thousands):
1996 1995 ------- ------- Acquisition of interests in unconsolidated partnerships.................................... $45,992 $13,166 Partnership units issued.......................... (2,568) ------- ------- Net cash paid........................... $43,424 $13,166 ======= =======
In 1994, limited partnership Units in the Partnership with a net book value of $25,237 were issued in exchange for the Initial Hotels. In exchange for the limited partnership Units, the Partnership acquired hotels for approximately $79,439 (recorded on an historical cost basis) and assumed debt of approximately $75,992 resulting in a net surplus of approximately $3,447. Approximately $16,090, $3,813 and $1,804 of aggregate preferred unit distributions and unit distributions had been declared as of December 31, 1996, 1995 and 1994, respectively. These amounts were paid in January following each such year. F-85 186 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. LESSEE All of the Company's percentage lease revenues is derived from the Percentage Leases with the Lessee. Certain information related to the Lessee's financial statements is as follows (in thousands):
DECEMBER 31, ----------------- 1996 1995 ------- ------ Balance Sheet Information: Cash and cash equivalents............. $ 5,208 $5,345 Total assets.......................... $18,471 $9,599 Due to FelCor Suite Hotels Limited Partnership........................ $ 5,526 $2,396 Shareholders' deficit................. $(6,403) $ (773)
YEAR ENDED DECEMBER 31 ------------------------------ 1996 1995 1994 -------- ------- ------- Statement of Operations Information: Suite revenue............................. $234,451 $65,649 $16,094 Percentage lease expenses................. $107,935 $26,945 $ 6,043 Net income (loss)......................... $ (5,430) $ (240) $ 109
12. PREDECESSOR COMPANY The Initial Hotels have been determined to be the Predecessor of the Company. Certain information related to the Initial Hotels financial statements for the period from January 1, 1994 through July 27, 1994 (before the Company's initial public offering) is as follows (in thousands): Suite revenue..................................... $21,884 Net income........................................ $ 1,562 Cash flows provided by operating activities....... $ 3,995 Cash flows used in investing activities........... $(1,327) Cash flows used in financing activities........... $(1,640)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards ("SFAS") 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, the Company reports the carrying amount of cash and cash equivalents, amounts due from the Lessee, accounts payable and accrued expenses at cost which approximates fair value due to the short maturity of these instruments. The carrying amount of the Company's borrowings approximates fair value due to the Company's ability to obtain such borrowings at comparable interest rates. 14. PRO FORMA INFORMATION (UNAUDITED) Due to the impact of the acquisition of hotels in 1996 and 1995, the historical results of operations may not be indicative of future results of operations and net income per unit. The following unaudited Pro Forma Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 are presented as if the acquisition of all 43 hotels owned at December 31, 1996, and the consummation of the public offerings and the application of the net proceeds therefrom had occurred by January 1, 1995, and all of the hotels had been leased to the Lessee pursuant to the Percentage Leases. F-86 187 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The pro forma consolidated statements of operations do not purport to present what actual results of operations would have been if the acquisition of all 43 hotels owned at December 31, 1996 and the consummation of the public offerings had occurred on such date or to project results for any future period. For instance, in accordance with SEC regulations, the following unaudited Pro Forma Consolidated Statements of Operations do not include pro forma earnings associated with the Company's pro forma cash and short-term investments.
1996 1995 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Percentage lease revenue.............. $110,077 $102,878 Income from unconsolidated partnerships....................... 2,815 2,160 -------- -------- Total income.......................... 112,892 105,038 Expenses: General and administrative............ 1,895 1,783 Depreciation.......................... 31,103 26,617 Taxes, insurance and other............ 15,189 13,617 Interest expense...................... 15,903 15,004 Net income.............................. 48,802 48,017 Preferred distributions................. 11,798 11,798 -------- -------- Net income applicable to unitholders.... $ 37,004 $ 36,219 ======== ======== Net income per unit..................... $ 1.41 $ 1.38 ======== ======== Weighted average number of units outstanding........................... 26,268 26,228 ======== ========
15. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS SFAS No. 128, "Earnings Per Share" ("EPS"), was issued in October 1996. This statement specifies the computation, presentation, and disclosure requirements for EPS and is effective for financial statements issued for periods ending after December 15, 1997. The statement requires restatement of all prior period EPS data presented, including interim financial statement, summaries of earnings, and selected financial data, after the effective date. The Company has determined the effect of adoption will have an immaterial impact on previously reported EPS numbers. 16. SUBSEQUENT EVENTS On February 3, 1997 FelCor announced the closing of a common stock offering pursuant to their $500 million Shelf Registration, covering a variety of debt and equity securities. The offering was for 3 million shares of common stock to the public at $35.50 per share, providing FelCor with net proceeds of approximately $100.7 million which were contributed to the Partnership. The Company used the majority of the proceeds of this common stock offering to purchase 50% joint venture interests in eight existing Embassy Suite hotels and to acquire full ownership of two additional hotels. Promus continues to own the remaining 50% interest in the eight joint venture hotels, which will continue to operate as Embassy Suites under management by Promus. The two wholly-owned hotels will be converted to Doubletree Guest Suites hotels by the end of the second quarter of 1997 and are being managed by a subsidiary of Doubletree Hotels Corporation. The aggregate purchase price for the Company's interest in these 10 hotels was approximately $139 million, including the Company's pro rata share of approximately $86 million in non-recourse debt held by the joint ventures. F-87 188 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On February 18, 1997 the Company purchased the 215-suite Embassy Suites Los Angeles Airport (LAX) North hotel for approximately $22 million cash. Promus will continue to manage the hotel as an Embassy Suites hotel. On February 20, 1997 the Company purchased a 198-suite hotel in Dana Point, CA for approximately $17.2 million cash. The Dana Point hotel will be converted to a Doubletree Guest Suites hotel and will be managed by a subsidiary of Doubletree Hotels Corporation. 17. QUARTERLY OPERATING RESULTS (UNAUDITED) The Company's unaudited consolidated quarterly operating data for the years ended December 31, 1996 and 1995 follows (in thousands, except per share data). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of quarterly results have been reflected in the data. It is also management's opinion, however, that quarterly operating data for hotel enterprises are not indicative of results to be achieved in succeeding quarters or years. In order to obtain a more accurate indication of performance, there should be a review of operating results, changes in shareholders' equity and cash flows for a period of several years. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein.
FIRST SECOND THIRD FOURTH 1996 QUARTER QUARTER QUARTER QUARTER ---- ------- ------- ------- ------- Revenues: Percentage lease revenue.......................... $23,976 $23,409 $25,263 $25,302 Income from unconsolidated partnerships........... 320 165 927 598 Other income...................................... 146 628 163 47 ------- ------- ------- ------- Total revenues............................ 24,442 24,202 26,353 25,947 ------- ------- ------- ------- Expenses: General and administrative........................ 382 466 458 513 Depreciation...................................... 4,516 5,788 7,529 8,711 Taxes, insurance and other........................ 3,529 3,070 3,260 4,038 Interest expense.................................. 2,424 2,089 1,760 3,530 ------- ------- ------- ------- Total expenses............................ 10,851 11,413 13,007 16,792 ------- ------- ------- ------- Income before extraordinary charge.................. 13,591 12,789 13,346 9,155 Extraordinary charge from write off of deferred financing fees.................................... 2,354 ------- ------- ------- ------- Net income.......................................... 13,591 12,789 10,992 9,155 Preferred distributions............................. 1,835 2,949 2,950 ------- ------- ------- ------- Net income applicable to unitholders................ $13,591 $10,954 $ 8,043 $ 6,205 ======= ======= ======= ======= Per unit information: Net income applicable to unitholders before extraordinary charge........................... $ 0.53 $ 0.42 $ 0.40 $ 0.24 Extraordinary charge.............................. (0.09) ------- ------- ------- ------- Net income........................................ $ 0.53 $ 0.42 $ 0.31 $ 0.24 ======= ======= ======= ======= Weighted average number of units outstanding...... 25,675 26,011 26,172 26,288 ======= ======= ======= =======
F-88 189 FELCOR SUITES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD FOURTH 1995 QUARTER QUARTER QUARTER QUARTER ---- ------- ------- ------- ------- Revenues: Percentage lease revenue.......................... $ 5,372 $ 5,977 $ 6,138 $ 6,300 Income from unconsolidated partnerships........... 290 223 Other income...................................... 8 209 215 1,259 ------- ------- ------- ------- Total revenues............................ 5,380 6,186 6,643 7,782 ------- ------- ------- ------- Expenses: General and administrative........................ 184 240 215 231 Depreciation...................................... 1,058 1,178 1,455 1,541 Taxes, insurance and other........................ 559 580 616 808 Interest expense.................................. 353 566 143 942 ------- ------- ------- ------- Total expenses............................ 2,154 2,564 2,429 3,522 ------- ------- ------- ------- Net income applicable to unitholders................ $ 3,226 $ 3,622 $ 4,214 $ 4,260 ======= ======= ======= ======= Per unit information: Net income........................................ $ 0.50 $ 0.48 $ 0.43 $ 0.36 ======= ======= ======= ======= Weighted average number of units outstanding...... 6,402 7,545 9,866 11,940 ======= ======= ======= =======
F-89 190 FELCOR SUITES LIMITED PARTNERSHIP SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996 (IN THOUSANDS)
COST CAPITALIZED INITIAL COST SUBSEQUENT TO ACQUISITION ---------------------------------- ------------------------------- BUILDINGS FURNITURE BUILDINGS FURNITURE AND AND AND AND DESCRIPTION OF PROPERTY LAND IMPROVEMENTS FIXTURES LAND IMPROVEMENTS FIXTURES ----------------------- ------- ------------ --------- ---- ------------ --------- Dallas (Park Central), TX.............. $ 1,497 $ 12,722 $ 647 $ 28 1,091 Nashville, TN.......................... 1,118 9,506 961 28 1,093 Jacksonville, FL....................... 1,130 9,608 456 28 627 Orlando (North), FL.................... 1,673 14,218 684 28 664 Orlando (South), FL.................... 1,632 13,870 799 28 967 Tulsa, OK.............................. 525 7,344 3,117 139 1,523 New Orleans, LA........................ 2,570 22,300 895 523 890 Flagstaff, AZ.......................... 900 6,825 268 1,523 993 Dallas (Love Field), TX................ 1,934 16,674 757 167 899 Boston-Marlborough, MA................. 948 8,143 325 $761 721 Brunswick, GA.......................... 705 6,067 247 431 Corpus Christi, TX..................... 1,113 9,618 390 51 1,268 Burlingame (SF Airport So.), CA........ 39,929 818 55 2,041 Minneapolis (Airport), MN.............. 5,417 36,508 602 62 2,052 Boca Raton (Doubletree), FL............ 5,427 3,066 304 29 503 Minneapolis (Downtown), MN............. 818 16,820 505 56 2,462 St. Paul, MN........................... 1,156 17,315 849 27 2,210 Tampa (Busch Gardens), FL.............. 672 12,387 226 5 Cleveland, OH.......................... 1,755 15,329 527 129 236 Anaheim, CA............................ 2,548 14,832 607 491 2,517 Baton Rouge, LA........................ 2,350 19,092 525 497 2,140 Birmingham, AL......................... 2,843 29,286 160 706 2,140 Deerfield Beach, FL.................... 4,523 29,443 917 849 2,088 Ft. Lauderdale, FL..................... 5,329 47,850 903 1,142 2,558 Miami (Airport), FL.................... 4,135 24,950 1,171 684 2,658 Milpitas, CA........................... 4,021 23,677 562 912 2,920 Phoenix (Camelback), AZ................ 39,003 612 810 2,604 So. San Francisco (Airport N.), CA..... 3,418 31,737 527 769 3,378 Lexington, KY.......................... 1,955 13,604 587 79 Piscataway, NJ......................... 1,755 17,563 527 12 168 Avon (Beaver Creek Resort), CO......... 1,134 9,864 340 162 568 Boca Raton (Embassy), FL............... 1,868 16,253 560 1,604 El Segundo (LAX South), CA............. 2,660 17,997 798 179 2,595 Oxnard (Mandalay Beach), CA............ 2,930 22,125 879 529 441 Napa, CA............................... 3,287 14,205 494 398 245 Deerfield, IL.......................... 2,305 20,054 692 2 Atlanta (Buckhead), GA................. 7,303 38,996 2,437 Kingston Plantation, SC................ 2,940 24,988 1,470 ------- -------- ------- ---- ------- ------- Total.................................. $88,294 $733,768 $28,145 $812 $10,990 $49,381 ======= ======== ======= ==== ======= ======= GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE ---------------------------------- BUILDINGS AND BUILDINGS AND BUILDINGS FURNITURE IMPROVEMENTS; IMPROVEMENTS; AND & FURNITURE & FURNITURE AND DESCRIPTION OF PROPERTY LAND IMPROVEMENTS FIXTURES TOTAL FIXTURES FIXTURES ----------------------- ------- ------------ --------- -------- ------------- ------------- Dallas (Park Central), TX.............. 1,497 $ 12,750 $ 1,738 $ 15,985 $ 1,840 $ 14,145 Nashville, TN.......................... 1,118 9,534 2,054 12,706 2,230 10,476 Jacksonville, FL....................... 1,130 9,636 1,083 11,849 1,171 10,678 Orlando (North), FL.................... 1,673 14,246 1,348 17,267 1,916 15,351 Orlando (South), FL.................... 1,632 13,898 1,766 17,296 1,823 15,473 Tulsa, OK.............................. 525 7,483 4,640 12,648 3,485 9,163 New Orleans, LA........................ 2,570 22,823 1,785 27,178 1,699 25,479 Flagstaff, AZ.......................... 900 8,348 1,261 10,509 687 9,822 Dallas (Love Field), TX................ 1,934 16,841 1,656 20,431 1,118 19,313 Boston-Marlborough, MA................. 1,709 8,143 1,046 10,898 495 10,403 Brunswick, GA.......................... 705 6,067 678 7,450 317 7,133 Corpus Christi, TX..................... 1,164 9,618 1,658 12,440 628 11,812 Burlingame (SF Airport So.), CA........ 39,984 2,859 42,843 1,514 41,329 Minneapolis (Airport), MN.............. 5,417 36,570 2,654 44,641 1,378 43,263 Boca Raton (Doubletree), FL............ 5,427 3,095 807 9,329 234 9,095 Minneapolis (Downtown), MN............. 818 16,876 2,967 20,661 845 19,816 St. Paul, MN........................... 1,156 17,342 3,059 21,557 895 20,662 Tampa (Busch Gardens), FL.............. 672 12,387 231 13,290 383 12,907 Cleveland, OH.......................... 1,755 15,458 763 17,976 511 17,465 Anaheim, CA............................ 2,548 15,323 3,124 20,995 813 20,182 Baton Rouge, LA........................ 2,350 19,589 2,665 24,604 681 23,923 Birmingham, AL......................... 2,843 29,992 2,300 35,135 804 34,331 Deerfield Beach, FL.................... 4,523 30,292 3,005 37,820 981 36,839 Ft. Lauderdale, FL..................... 5,329 48,992 3,461 57,782 1,629 56,153 Miami (Airport), FL.................... 4,135 25,634 3,829 33,598 1,031 32,567 Milpitas, CA........................... 4,021 24,589 3,482 32,092 991 31,101 Phoenix (Camelback), AZ................ 39,813 3,216 43,029 1,208 41,821 So. San Francisco (Airport N.), CA..... 3,418 32,506 3,905 39,829 1,085 38,744 Lexington, KY.......................... 1,955 13,604 666 16,225 403 15,822 Piscataway, NJ......................... 1,755 17,575 695 20,025 484 19,541 Avon (Beaver Creek Resort), CO......... 1,134 10,026 908 12,068 291 11,777 Boca Raton (Embassy), FL............... 1,868 16,253 2,164 20,285 481 19,804 El Segundo (LAX South), CA............. 2,660 18,176 3,393 24,229 1,394 22,835 Oxnard (Mandalay Beach), CA............ 2,930 22,654 1,320 26,904 512 26,392 Napa, CA............................... 3,287 14,603 739 18,629 318 18,311 Deerfield, IL.......................... 2,305 20,054 694 23,053 321 22,732 Atlanta (Buckhead), GA................. 7,303 38,996 2,437 48,736 122 48,614 Kingston Plantation, SC................ 2,940 24,988 1,470 29,398 29,398 ------- -------- ------- -------- ------- -------- Total.................................. $89,106 $744,758 $77,526 $911,390 $36,718 $874,672 ======= ======== ======= ======== ======= ======== LIFE UPON WHICH DEPRECIATION DATE OF IN STATEMENT DESCRIPTION OF PROPERTY CONSTRUCTION IS COMPUTED ----------------------- ------------ ------------ Dallas (Park Central), TX.............. 1985 5-40 Yrs Nashville, TN.......................... 1986 5-40 Yrs Jacksonville, FL....................... 1985 5-40 Yrs Orlando (North), FL.................... 1985 5-40 Yrs Orlando (South), FL.................... 1985 5-40 Yrs Tulsa, OK.............................. 1985 5-40 Yrs New Orleans, LA........................ 1984 5-40 Yrs Flagstaff, AZ.......................... 1988 5-40 Yrs Dallas (Love Field), TX................ 1986 5-40 Yrs Boston-Marlborough, MA................. 1988 5-40 Yrs Brunswick, GA.......................... 1988 5-40 Yrs Corpus Christi, TX..................... 1984 5-40 Yrs Burlingame (SF Airport So.), CA........ 1986 5-40 Yrs Minneapolis (Airport), MN.............. 1986 5-40 Yrs Boca Raton (Doubletree), FL............ 1989 5-40 Yrs Minneapolis (Downtown), MN............. 1984 5-40 Yrs St. Paul, MN........................... 1983 5-40 Yrs Tampa (Busch Gardens), FL.............. 1985 5-40 Yrs Cleveland, OH.......................... 1990 5-40 Yrs Anaheim, CA............................ 1987 5-40 Yrs Baton Rouge, LA........................ 1985 5-40 Yrs Birmingham, AL......................... 1987 5-40 Yrs Deerfield Beach, FL.................... 1987 5-40 Yrs Ft. Lauderdale, FL..................... 1986 5-40 Yrs Miami (Airport), FL.................... 1987 5-40 Yrs Milpitas, CA........................... 1987 5-40 Yrs Phoenix (Camelback), AZ................ 1985 5-40 Yrs So. San Francisco (Airport N.), CA..... 1988 5-40 Yrs Lexington, KY.......................... 1987 5-40 Yrs Piscataway, NJ......................... 1988 5-40 Yrs Avon (Beaver Creek Resort), CO......... 1990 5-40 Yrs Boca Raton (Embassy), FL............... 1989 5-40 Yrs El Segundo (LAX South), CA............. 1985 5-40 Yrs Oxnard (Mandalay Beach), CA............ 1986 5-40 Yrs Napa, CA............................... 1985 5-40 Yrs Deerfield, IL.......................... 1987 5-40 Yrs Atlanta (Buckhead), GA................. 1988 5-40 Yrs Kingston Plantation, SC................ 1987 5-40 Yrs Total.................................. (a) Reconciliation of Real Estate: Balance at July 28, 1994.................................. $ 82,979 Additions during the period............................... 26,847 -------- Balance at December 31, 1994.............................. 109,826 Additions during the period............................... 233,572 -------- Balance at December 31, 1995.............................. 343,398 Additions during the period............................... 568,073 Dispositions during the period............................ (81) -------- Balance at December 31, 1996.............................. $911,390 ======== (b) Reconciliation of Accumulated Depreciation: Balance at July 28, 1994 Accumulated depreciation assumed with predecessor historical cost basis................................... $ 3,540 Depreciation expense during the period.................... 1,486 -------- Balance at December 31, 1994.............................. 5,026 Depreciation expense during the period.................... 5,371 -------- Balance at December 31, 1995.............................. 10,397 Depreciation expense during the period.................... 26,321 -------- Balance at December 31, 1996.............................. $ 36,718 ========
F-90 191 DJONT OPERATIONS, L.L.C. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED, AMOUNTS IN THOUSANDS) The following unaudited Pro Forma Consolidated Statements of Operations of DJONT Operations, L.L.C. (the "Lessee") are presented as if the acquisitions of all hotels owned by FelCor Suite Hotels, Inc. (the "Company") at December 31, 1996 and those hotels acquired in 1997, through August 31, 1997, the pending 1997 acquisition and related transactions had occurred as of January 1, 1996 and the Hotels had all been leased to the Lessee pursuant to Percentage Leases. Such pro forma information is based in part upon the Pro Forma Consolidated Statements of Operations of the Company, the historical Consolidated Financial Statements of the Lessee and the historical Statements of Operations of the 1997 Acquisitions. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Consolidated Statements of Operations for the periods presented are not necessarily indicative of what actual results of operations of the Lessee would have been assuming such transactions had been completed on January 1, 1996, nor does it purport to represent the results of operations for future periods.
YEAR ENDED DECEMBER 31, 1996 ---------------------------------------------------- 1996 ACQUISITIONS 1997 ACQUISITIONS AND PREFERRED AND EQUITY PRO FORMA HISTORICAL STOCK OFFERING(A) OFFERINGS(B) ADJUSTMENTS TOTAL ---------- ----------------- ----------------- ----------- -------- Revenues: Suite revenue.......... $234,451 $46,393 $200,627 $481,471 Food and beverage revenue............. 15,119 8,194 41,616 64,929 Food and beverage rent................ 2,334 408 538 3,280 Other revenue.......... 17,340 2,802 14,382 $ (316)(C) 34,208 -------- ------- -------- -------- -------- Total revenues..... 269,244 57,797 257,163 (316) 583,887 -------- ------- -------- -------- -------- Expenses: Property operating costs and expenses............ 66,236 12,417 60,752 139,405 Other operating expenses............ 81,045 20,182 90,252 191,479 Management and franchise fees...... 11,770 5,491 11,480 (2,498)(D) 26,243 Taxes, insurance and other............... 5,912 (862) 19,212 (13,207)(E) 11,055 Interest expense....... 30,850 (30,850)(F) Depreciation and amortization........ 32,953 (32,953)(G) Percentage lease payments............ 107,935 20,248 3,396 88,129(H) 219,708 Lessee overhead expenses............ 1,776 (236) -- 1,540 -------- ------- -------- -------- -------- Income (loss) before minority interest...... (5,430) 557 8,268 (8,938) (5,543) Minority interest........ (92)(I) (92) -------- ------- -------- -------- -------- Net loss................. $ (5,430) $ 557 $ 8,268 $ (8,846) $ (5,451) ======== ======= ======== ======== ========
F-91 192 DJONT OPERATIONS, L.L.C. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 ----------------------------------------- 1997 ACQUISITIONS HISTORICAL AND EQUITY PRO FORMA COMPANY OFFERING(B) ADJUSTMENTS TOTAL ---------- ------------ ----------- -------- Revenues: Suite revenue....................... $202,085 $ 64,951 $267,036 Food and beverage revenue........... 10,189 18,472 28,661 Food and beverage rent.............. 2,023 55 2,078 Other revenue....................... 16,720 4,331 21,051 -------- --------- --------- -------- Total revenues.............. 231,017 87,809 318,826 -------- --------- --------- -------- Expenses: Property operating costs and expenses......................... 56,366 17,545 73,911 Other operating expenses............ 60,291 34,081 94,372 Management and franchise fees....... 11,472 4,528 1,337(D) 17,337 Taxes, insurance and other.......... 3,382 6,185 (3,918)(E) 5,649 Interest expense.................... 6,622 (6,622)(F) Depreciation and amortization....... 9,542 (9,542)(G) Percentage lease payments........... 97,074 1,871 28,646(H) 127,591 Lessee overhead expenses............ 1,044 1,044 -------- --------- --------- -------- Income before minority interest....... 1,388 7,435 (9,901) (1,078) Minority interest..................... 375 851(I) (476) -------- --------- --------- -------- Net income............................ $ 1,013 $ 7,435 $ (9,050) $ (602) ======== ========= ========= ========
F-92 193 DJONT OPERATIONS, L.L.C. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (A) Represents the historical results of operations and pro forma adjustments, for the period prior to the acquisition by the Company, of the hotels acquired by the Company in 1996. Those hotels acquired in 1996 and dates of acquisition are as follows: Anaheim, California, Embassy Suites......................... January 3, 1996 Baton Rouge, Louisiana, Embassy Suites...................... January 3, 1996 Birmingham, Alabama, Embassy Suites......................... January 3, 1996 Deerfield Beach, Florida, Embassy Suites.................... January 3, 1996 Ft. Lauderdale, Florida, Embassy Suites..................... January 3, 1996 Miami (Airport), Florida, Embassy Suites.................... January 3, 1996 Milpitas, California, Embassy Suites........................ January 3, 1996 Phoenix (Camelback), Arizona, Embassy Suites................ January 3, 1996 Burlingame (S.F. Airport So.), California, Embassy Suites... January 3, 1996 Lexington, Kentucky, Hilton................................. January 10, 1996 Piscataway, New Jersey, Embassy Suites...................... January 10, 1996 February 20, Avon (Beaver Creek Resort), Colorado, Embassy Suites........ 1996 February 28, Boca Raton, Florida, Embassy Suites......................... 1996 El Segundo (LAX South), California, Embassy Suites.......... March 27, 1996 Oxnard (Mandalay Beach), California, Embassy Suites......... May 8, 1996 Napa, California, Embassy Suites............................ May 8, 1996 Deerfield, Illinois, Embassy Suites......................... June 20, 1996 San Rafael (Marin Co.), California, Embassy Suites.......... July 18, 1996 Parsippany, New Jersey, Embassy Suites...................... August 1, 1996 Charlotte, North Carolina, Embassy Suites................... August 1, 1996 Indianapolis (North), Indiana, Embassy Suites............... August 1, 1996 Atlanta (Buckhead), Georgia, Embassy Suites................. October 17, 1996 Myrtle Beach (Kingston Plantation), South Carolina, Embassy December 5, 1996 Suites....................................................
F-93 194 DJONT OPERATIONS, L.L.C. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (B) Represents the historical results of operations for the period prior to the acquisition by the Company, for those hotels acquired by the Company in 1997. Those hotels acquired during 1997 and dates of acquisition are as follows: 1997 Acquisitions Omaha, Nebraska, Embassy Suites........................... February 1, 1997 Bloomington, Minnesota, Embassy Suites.................... February 1, 1997 Atlanta (Perimeter Center), Georgia, Embassy Suites....... February 1, 1997 Kansas City (Country Club Plaza), Missouri, Embassy Suites................................................. February 1, 1997 Overland Park, Kansas, Embassy Suites..................... February 1, 1997 Raleigh, North Carolina, Embassy Suites................... February 1, 1997 San Antonio (I-10), Texas, Embassy Suites................. February 1, 1997 Austin (Downtown), Texas, Embassy Suites.................. February 1, 1997 Covina, California, Embassy Suites........................ February 1, 1997 Secaucus, New Jersey, Embassy Suites...................... February 1, 1997 Los Angeles (LAX Airport North), California, Embassy Suites................................................. February 18, 1997 Dana Point, California, Hilton Inn........................ February 21, 1997 Troy, Michigan, Doubletree Guest Suites................... March 20, 1997 Austin, Texas, Doubletree Guest Suites.................... March 20, 1997 Baltimore, Maryland, Doubletree Guest Suites.............. March 20, 1997 San Antonio (Airport), Texas, Embassy Suites.............. May 16, 1997 Nashville (Airport), Tennessee, Doubletree Guest Suites... June 5, 1997 Dallas (Market Center), Texas, Embassy Suites............. June 30, 1997 Syracuse, New York, Embassy Suites........................ June 30, 1997 Atlanta (Gateway), Georgia, Sheraton...................... June 30, 1997 Atlanta (Galleria), Georgia, Sheraton Suites.............. June 30, 1997 Chicago (O'Hare), Illinois, Sheraton Suites............... June 30, 1997 Dallas (Park Central), Texas, Sheraton.................... June 30, 1997 Phoenix (Crescent), Arizona, Sheraton..................... June 30, 1997 Lake Buena Vista (Disney World), Florida, Doubletree Guest Suites................................................. July 28, 1997 Raleigh/Durham, North Carolina, Doubletree Guest Suites... July 28, 1997 Tampa (Rocky Point), Florida, Doubletree Guest Suites..... July 28, 1997 Pending 1997 Acquisition: Philadelphia (Society Hill), Pennsylvania, Sheraton
(C) Reflects the elimination of historical interest income earned on excess cash. (D) Represents the elimination of historical management and franchise fees, and the addition of management and franchise fees to be incurred under the new management agreements for the 1997 Acquisitions. The management fees were calculated based on the terms of the management agreements. Also included in the pro forma adjustment are computations for the incentive management fee which varies according to the management agreement. (E) Reflects the elimination of historical real estate and personal property taxes and property insurance which is to be paid by the Partnership for the 1997 Acquisitions. (F) Reflects the elimination of historical interest expense for the 1997 Acquisitions. Any future interest expense related to debt will be paid by the Partnership. (G) Reflects the elimination of historical depreciation and amortization for the 1997 Acquisitions. F-94 195 DJONT OPERATIONS, L.L.C. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (H) Represents lease expenses calculated on a pro forma basis by applying the contractual or anticipated rent provisions of the Percentage Leases to the historical suite revenues, pro forma restaurant rent and historical food and beverage revenues of the Hotels. (I) Represents minority interest from preferred equity positions in subsidiaries of DJONT. F-95 196 DJONT OPERATIONS, L.L.C. CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (UNAUDITED, IN THOUSANDS) ASSETS
JUNE 30, 1997 -------- Cash and cash equivalents................................... $19,705 Accounts receivable, net.................................... 18,111 Inventories................................................. 2,727 Prepaid expenses............................................ 251 Other assets................................................ 3,829 ------- Total assets...................................... $44,623 ======= LIABILITIES AND SHAREHOLDERS' DEFICIT Accounts payable, trade..................................... $ 4,702 Accounts payable, other..................................... 8,860 Due to FelCor Suite Hotels, Inc............................. 9,059 Due to other partnerships................................... 4,961 Accrued expenses and other liabilities...................... 22,431 ------- Total liabilities................................. 50,013 ------- Shareholders' deficit: Capital..................................................... 1 Distributions in excess of earnings......................... (5,391) ------- Total shareholders' deficit....................... (5,390) ------- Total liabilities and shareholders' deficit....... $44,623 =======
The accompanying notes are an integral part of these consolidated financial statements. F-96 197 DJONT OPERATIONS, L.L.C. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------- 1997 1996 -------- -------- Revenue: Suite revenue............................................. $202,085 $105,557 Food and beverage revenue................................. 10,189 8,144 Food and beverage rent.................................... 2,023 998 Other revenue............................................. 16,720 7,839 -------- -------- Total revenues.................................... 231,017 122,538 Expenses: Property operating costs and expenses..................... 56,366 28,451 General and administrative................................ 16,317 8,741 Advertising and promotion................................. 15,523 7,850 Repair and maintenance.................................... 11,071 5,987 Utilities................................................. 8,691 5,146 Management fee............................................ 5,288 3,013 Franchise fee............................................. 6,184 2,221 Food and beverage expenses................................ 8,689 8,412 Percentage lease expenses................................. 97,074 49,156 Lessee overhead expenses.................................. 1,044 727 Liability insurance....................................... 1,500 800 Other..................................................... 1,882 2,238 -------- -------- Total expenses.................................... 229,629 122,742 -------- -------- Income (loss) before minority interest...................... 1,388 (204) Minority interest........................................... 375 -------- -------- Net income (loss)........................................... $ 1,013 $ (204) ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-97 198 DJONT OPERATIONS, L.L.C. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------ 1996 1997 ------- ------- Cash flows from operating activities: Net income (loss)......................................... $ 1,013 $ (204) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Changes in assets and liabilities: Accounts receivable.................................. (9,411) (4,583) Inventories.......................................... (622) 379 Prepaid expenses..................................... 4 (369) Other assets......................................... (1,626) (169) Due to FelCor Suite Hotels, Inc...................... 3,533 1,355 Accounts payable, accrued expenses and other liabilities......................................... 21,606 7,930 ------- ------- Net cash flow provided by operating activities.... 14,497 4,339 ------- ------- Net change in cash and cash equivalents..................... 14,497 4,339 Cash and cash equivalents at beginning of periods........... 5,208 5,345 ------- ------- Cash and cash equivalents at end of periods................. $19,705 $ 9,684 ======= =======
The accompany notes are an integral part of these consolidated financial statements. F-98 199 DJONT OPERATIONS, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION DJONT Operations, L.L.C. is a Delaware limited liability company ("DJONT") which began operations on July 28, 1994. All of the voting Class A membership interest in DJONT (representing a 50% equity interest) is beneficially owned by Hervey A. Feldman and Thomas J. Corcoran, Jr. who serve as directors and officers of FelCor Suite Hotels, Inc., (the "Company") and as managers and officers of DJONT. All of the non-voting Class B membership interest in DJONT (representing the remaining 50% equity interest) is owned by RGC Leasing, Inc., a Nevada corporation owned by the children of Mr. Mathewson, a director of the Company and shareholder of the predecessor company. Each of the 67 hotels in which FelCor Suites Limited Partnership (the "Operating Partnership") had an ownership interest at June 30, 1997 (the "Hotels"), is leased to DJONT or a consolidated subsidiary thereof (collectively, the "Lessee") pursuant to percentage leases ("Percentage Leases"). The Company's partners in partnerships owning interests in 12 of the Hotels hold special purpose non-voting equity interests in the consolidated subsidiary of DJONT which leases such Hotels, which interests entitle them to 50% of such subsidiary's net income before overhead with respect to such Hotels. In addition, the Company's partner in a partnership owning three of the Hotels holds a 50% non-voting equity interest in the consolidated subsidiary of DJONT leasing those Hotels. These subsidiaries of DJONT have entered into separate revolving credit agreements with an affiliate of Messrs. Feldman and Corcoran and/or the holders of such non-voting equity interests, or affiliates thereof, which provide these subsidiaries with the right to borrow up to an aggregate of $9.0 million, to the extent necessary to enable them to pay rent and other obligations due under the Percentage Leases relating to such hotels. Amounts borrowed thereunder, if any, will be subordinated in right of repayment to rent and other obligations under such Percentage Leases. No loans were outstanding under such agreements at June 30, 1997. Messrs. Feldman and Corcoran, as the beneficial owners of an aggregate 50% of DJONT, have entered into an agreement with the Company pursuant to which they have agreed that, for a period of ten years, any distributions received by them from DJONT (in excess of their tax liabilities with respect to the income of DJONT) will be utilized to purchase common stock from the Company or units of limited partner interest in the Operating Partnership at then current market prices. The agreement stipulates that Messrs. Feldman and Corcoran are restricted from selling any stock or unit so acquired for a period of two years from the date of purchase. RGC Leasing, Inc., which owns the other 50% of DJONT, may elect to purchase common stock or units upon similar terms, at its option. The independent directors of the Company may suspend or terminate such agreement at any time. Fifty-one of the Hotels are, and the Radisson at Kingston Plantation in Myrtle Beach, South Carolina is in the process of conversion to, Embassy Suites(R) hotels, 50 of which are being managed for the Lessee by a subsidiary of Promus Hotel Corporation ("Promus"). Two Embassy Suites hotels are managed for the Lessee by American General Hospitality, Inc., ("AGHI") and Coastal Hotel Group, Inc., ("Coastal"). Nine of the Hotels are Doubletree Guest Suites(R) hotels and are managed by a subsidiary of Doubletree Hotels Corporation ("Doubletree"). Five of the Hotels are Sheraton Suites (2) or Sheraton hotels (3) and are being managed for the Lessee directly by, or by a subsidiary of, ITT Sheraton Corporation ("Sheraton"). One of the Hotels is operated under a Hilton Suites(R) hotel franchise and managed by AGHI. F-99 200 DJONT OPERATIONS, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. COMMITMENTS AND RELATED PARTY TRANSACTIONS The Lessee has future lease commitments under the Percentage Leases which expire in 2004 (7 hotels), 2005 (13 hotels), 2006 (23 hotels) and 2007 (24 hotels). Minimum future rental payments are computed based on the base rent as defined under these noncancellable operating leases and are as follows (in thousands):
YEAR AMOUNT ---- ---------- Remainder of 1997........................................... $ 60,525 1998........................................................ 121,453 1999........................................................ 121,453 2000........................................................ 121,452 2001........................................................ 121,452 2002 and thereafter......................................... 599,761 ---------- $1,146,096 ==========
The Lessee typically pays a franchise fee ranging up to 5% of suite revenue, and marketing and reservation fees ranging from 1% to 3.5% of suite revenue. In the cases where there is not a separate franchise agreement, the right to use the brand name is included in the management agreement. Base management fees typically range from 2% to 3% of total revenues. Incentive management fees are based upon the hotel's net income before overhead and typically range from 50% to 75% subject to a maximum annual payment of between 2% and 3% of applicable hotel revenues. In many cases managers and franchisors have agreed to subordinate all or a portion of their fees at a specific hotel or group of hotels either for a set period of time, or until the hotel or group of hotels provides a predetermined return to the Lessee, or both. 3. PRO FORMA INFORMATION (UNAUDITED) The following unaudited Pro Forma Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996 are presented as if Lessee had leased and operated all of the Hotels, including the three hotels acquired July 31, 1997, beginning on January 1, 1996. Such information should be read in conjunction with the financial statements listed in the Index on page 2. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The Pro Forma Consolidated Statements of Operations do not purport to present what actual results of operations would have been if such hotels had been operated by Lessee pursuant to the Percentage Leases since such date or to project the results of operations for any future periods. F-100 201 DJONT OPERATIONS, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIX MONTHS ENDED JUNE 30, -------------------- 1997 1996 -------- -------- (IN THOUSANDS) Revenue: Suite revenue............................................. $260,058 $236,677 Food and beverage revenue................................. 25,157 30,166 Food and beverage rent.................................... 2,078 1,631 Other revenue............................................. 20,450 16,705 -------- -------- Total revenues.................................... 307,743 285,179 -------- -------- Expenses: Property operating costs and expenses..................... 71,283 64,444 General and administrative................................ 22,208 21,604 Advertising and promotion................................. 20,284 19,434 Repair and maintenance.................................... 14,511 14,318 Utilities................................................. 11,505 11,461 Management fee............................................ 8,766 6,605 Franchise fee............................................. 8,029 7,563 Food and beverage expenses................................ 20,271 25,856 Percentage lease payments................................. 124,554 110,754 Lessee overhead expenses.................................. 1,044 730 Liability insurance....................................... 1,942 1,913 Other..................................................... 3,357 4,201 -------- -------- Total expenses.................................... 307,754 288,883 -------- -------- Loss before minority interest............................... (11) (3,704) Minority interest......................................... 1,218 1,032 -------- -------- Net loss.................................................... $ (1,229) $ (4,736) ======== ========
F-101 202 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors FelCor Suite Hotels, Inc. We have audited the accompanying balance sheets of DJONT Operations, L.L.C. as of December 31, 1996 and 1995 and the related statements of operations, shareholders' equity, and cash flows for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DJONT Operations, L.L.C. as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Memphis, Tennessee January 22, 1997 except as to the information presented in Note 7 for which the date is February 21, 1997 F-102 203 DJONT OPERATIONS, L.L.C. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS) ASSETS
1996 1995 ------- ------- Cash and cash equivalents................................... $ 5,208 $ 5,345 Accounts receivable, net.................................... 8,700 3,129 Inventories................................................. 2,105 532 Prepaid expenses............................................ 255 288 Other assets................................................ 2,203 305 ------- ------- Total assets...................................... $18,471 $ 9,599 ======= ======= LIABILITIES AND SHAREHOLDERS' DEFICIT Accounts payable, trade..................................... $ 1,273 $ 1,393 Accounts payable, other..................................... 2,398 605 Due to FelCor Suite Hotels Limited Partnership.............. 5,526 2,396 Accrued expenses and other liabilities...................... 15,677 5,978 ------- ------- Total liabilities................................. 24,874 10,372 ------- ------- Commitments and contingencies (Note 4) Shareholders' deficit: Capital................................................... 1 1 Distributions in excess of earnings....................... (6,404) (774) ------- ------- Total shareholders' deficit....................... (6,403) (773) ------- ------- Total liabilities and shareholders' deficit....... $18,471 $ 9,599 ======= =======
The accompanying notes are an integral part of these financial statements. F-103 204 DJONT OPERATIONS, L.L.C. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1994 (IN THOUSANDS)
1996 1995 1994 -------- ------- ------- Revenues: Suite revenue............................................. $234,451 $65,649 $16,094 Food and beverage revenue................................. 15,119 2,462 1,112 Food and beverage rent.................................... 2,334 534 61 Other revenue............................................. 17,340 3,924 1,020 -------- ------- ------- Total revenues.................................... 269,244 72,569 18,287 -------- ------- ------- Expenses: Property operating costs and expenses..................... 66,236 18,455 4,699 General and administrative................................ 20,123 5,547 1,506 Advertising and promotion................................. 18,520 5,410 1,572 Repair and maintenance.................................... 14,453 4,010 994 Utilities................................................. 12,248 3,384 866 Management fee............................................ 6,077 1,561 333 Franchise fee............................................. 5,693 2,473 642 Food and beverage expenses................................ 15,701 2,723 1,143 Percentage lease payments................................. 107,935 26,945 6,043 Lessee overhead expenses.................................. 1,776 834 106 Liability insurance....................................... 1,818 468 106 Conversion cost........................................... 2,165 297 Other expenses............................................ 1,929 702 168 -------- ------- ------- Total Expenses.................................... 274,674 72,809 18,178 -------- ------- ------- Net income (loss)......................................... $ (5,430) $ (240) $ 109 ======== ======= =======
The accompanying notes are an integral part of these financial statements. F-104 205 DJONT OPERATIONS, L.L.C CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1994 (IN THOUSANDS) Capital contributions.............................. $ 1 Distributions declared............................. (443) Net income......................................... 109 ------- Balance at December 31, 1994....................... (333) Distributions declared............................. (200) Net loss........................................... (240) ------- Balance at December 31, 1995....................... (773) Distributions declared............................. (200) Net loss........................................... (5,430) ------- Balance at December 31, 1996....................... $(6,403) =======
The accompanying notes are an integral part of these financial statements. F-105 206 DJONT OPERATIONS, L.L.C. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM JULY 28, 1994 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1994 (IN THOUSANDS)
1996 1995 1994 ------- ------ ------- Cash flows from operating activities: Net income (loss)......................................... $(5,430) $ (240) $ 109 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Changes in assets and liabilities: Accounts receivable.................................. (5,571) (2,003) (1,126) Inventories.......................................... (1,573) (205) (327) Prepaid expenses..................................... 33 (262) (26) Other assets......................................... (1,898) (141) (164) Due to FelCor Suite Hotels Limited Partnership....... 3,130 1,137 1,259 Accounts payable, accrued expenses and other liabilities....................................... 11,372 4,000 3,976 ------- ------ ------- Net cash flow provided by operating activities.... 63 2,286 3,701 ------- ------ ------- Cash flows from financing activities: Capital contributions..................................... 1 Distributions paid........................................ (200) (200) (443) ------- ------ ------- Net cash flow used in financing activities........ (200) (200) (442) ------- ------ ------- Net change in cash and cash equivalents..................... (137) 2,086 3,259 Cash and cash equivalents at beginning of periods........... 5,345 3,259 ------- ------ ------- Cash and cash equivalents at end of years................... $ 5,208 $5,345 $ 3,259 ======= ====== =======
The accompanying notes are an integral part of these financial statements. F-106 207 DJONT OPERATIONS, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION DJONT Operations, L.L.C. is a Delaware limited liability company (together with its consolidated subsidiaries, the "Lessee") which was formed on June 29, 1994 and began operations on July 28, 1994. All of the voting Class A membership interest in the Lessee (representing a 50% equity interest) is owned by Hervey A. Feldman and Thomas J. Corcoran, Jr. who serve as directors and officers of FelCor Suite Hotels Limited Partnership (the "Company") and as managers and officers of the Lessee. All of the non-voting Class B membership interest in the Lessee (representing the remaining 50% equity interest) is owned by RGC Leasing, Inc., a Nevada corporation owned by the children of Mr. Charles N. Mathewson, a director of the Company. The Lessee leases each of the 43 hotels (the "Hotels") in which FelCor Suites Limited Partnership (the "Partnership") had an ownership interest at December 31, 1996, pursuant to percentage leases ("Percentage Leases"). Messrs. Feldman and Corcoran, as the beneficial owners of an aggregate 50% of the Lessee, have entered into an agreement with the Company pursuant to which they have agreed that, for a period of ten years, any distributions received by them from the Lessee (in excess of their tax liabilities with respect to the income of the Lessee) will be utilized to purchase common stock from the Company annually, at a price based upon a formula approved by the independent directors of the Company relating to the then current market prices. The agreement stipulates that Messrs. Feldman and Corcoran are restricted from selling any stock so acquired for a period of two years from the date of purchase. RGC Leasing, Inc., which owns the other 50% of the Lessee, may elect to purchase common stock of the Company or Partnership units upon similar terms, at its option. The independent directors of the Company may suspend or terminate such agreement at any time. At December 31, 1996, 39 of the Hotels are operated as Embassy Suites(R) hotels, two as Doubletree Guest Suites(R) hotels, one as a Hilton Suites(R) hotel and one hotel is in the process of being converted to an Embassy Suites hotel. The Lessee has entered into management agreements pursuant to which 38 of the Hotels are managed by Promus Hotels, Inc. ("Promus"), two of the Hotels are managed by a subsidiary of Doubletree Hotel Corporation ("Doubletree"), two of the Hotels are managed by American General Hospitality, Inc. ("AGHI") and one is managed by Coastal Hotel Group, Inc. ("Coastal"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents -- All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Inventories -- Inventories are stated at the lower of cost or market. Revenue Recognition -- Revenue is recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable which is estimated to be uncollectible. Such losses have been within management's expectations. Franchise Costs -- The cost of obtaining the franchise licenses is paid by the Partnership and the ongoing franchise fees are paid by the Lessee. These fees are generally computed as a percentage of suite revenue for each hotel in accordance with franchise agreements. Income Taxes -- The Lessee is a limited liability Company which is taxed for federal income taxes purposes as a limited partnership and, accordingly, all taxable income or loss flows through to the shareholders. 3. ACCUMULATED DEFICIT During 1996, the Lessee incurred a net loss of approximately $5.4 million and a cumulative shareholder's deficit of approximately $6.4 million. Management's analyses indicate that a significant portion of such loss is attributable to the one-time costs of converting the Crown Sterling Suites(R) hotels to Embassy Suites and F-107 208 DJONT OPERATIONS, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Doubletree Guest Suites, and operations of hotels during periods of substantial renovation. Such renovations are required under the terms of the related franchise agreements. In accordance with the terms of the Percentage Leases, although a portion of the suites are not available for guests to rent, the Lessee is required to pay the full required lease payment. In addition, during periods of renovation, management believes, and operating data indicates, that overall the performances of the hotels is impacted as evidenced by improved operating performances immediately following completion of renovations. Management is exploring several options to anticipate negative operating cash flow during renovations, including potential changes to the terms of leases for future renovation hotels which might mitigate losses for the Lessee during such renovation periods. At December 31, 1996 the Lessee had paid all amounts then due the Company under the Percentage Leases. It is anticipated that a substantial portion of any future profits of the Lessee will be retained until a positive shareholder's equity is restored. Although it is currently anticipated that the lessee may sustain a smaller loss during 1997, it is anticipated that its future earnings will be sufficient to enable it to continue to make necessary payments when due. Accordingly, management deems the Lessee to be a viable going concern and, as such, no adjustments are required to the accompanying financial statements. 4. COMMITMENTS AND RELATED PARTY TRANSACTIONS The Lessee has future lease commitments under the Percentage Leases which expire in 2004 (7 hotels), 2005 (13 hotels) and 2006 (23 hotels). Minimum future rental payments are computed based on the base rent as defined under these noncancellable operating leases and are as follows (in thousands):
YEAR AMOUNT ---- -------- 1997.............................................. $ 72,140 1998.............................................. 72,140 1999.............................................. 72,140 2000.............................................. 72,140 2001.............................................. 72,140 2002 and thereafter............................... 285,928 -------- $646,628 ========
The Lessee recognized Percentage Lease rent expense of approximately $107,935,000, $26,945,000 and $6,043,000 for the years ended December 31, 1996 and 1995 and for the period from July 28, 1994 (inception of operations) through December 31, 1994 respectively. At December 31, 1996 and 1995, the Lessee owed the Company $5,526,000 and $2,396,000 for such lease rent. In accordance with the terms of the lease, the Lessee intends to pay such balances by March of each subsequent year. The Percentage Lease expense is based on a percentage of suite revenues, food and beverage revenues and food and beverage rents of the Hotels. Both the base rent and the threshold suite revenue in each lease computation is subject to adjustments in the Consumer Price Index. The adjustment is calculated at the beginning of each calendar year for the hotels acquired prior to July of the previous year. The adjustment in any lease year may not exceed 7%. The adjustments made in January 1997 and 1996 are 1.42% and 0.73% respectively. Other than real estate and personal property taxes, casualty insurance, capital improvements and maintenance of underground utilities and structural elements, which are obligations of the Partnership, the Percentage Leases require the Lessee to pay rent, liability insurance premiums, all costs, expenses, utilities and other charges incurred in the operation of the leased hotels. F-108 209 DJONT OPERATIONS, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Lessee is also obligated to indemnify and hold harmless the Partnership from and against all liabilities, costs and expenses incurred by or asserted against the Partnership in the normal course of operating the Hotels. The Lessee is not permitted to sublet all or any substantial part of the Hotels or assign its interest under any of the Percentage Leases without the prior written consent of the Partnership. The Lessee has agreed that during the term of the Percentage Leases it will maintain a ratio of total debt to consolidated net worth (as defined in the Percentage Leases) of less than or equal to 50%, exclusive of capital leases. In addition, the Lessee has agreed that it will not pay fees to any affiliate of the Lessee. The Lessee typically pays a franchise fee ranging from 0% to 5% of suite revenue, and marketing and reservation fees ranging from 1% to 3.5% of suite revenue. In the cases where there is not a separate franchise agreement, the right to use the brand name is included in the management agreement. Base management fees typically range from 2% to 3% of total revenues. Incentive management fees are based upon the hotel's net income before overhead and typically range from 50% to 75% subject to a maximum annual payment of between 2% and 3% of total revenues. In many cases managers and franchisors have agreed to subordinate all or a portion of their fees at a specific hotel either for a set period of time, or until the hotel provides a predetermined return to the Lessee, or both. In the event the Company enters into an agreement to sell or otherwise transfer a leased hotel, the Company has the right to terminate the Percentage Lease with respect to such leased hotel upon 90 days' prior written notice upon either (1) paying the Lessee the fair market value of the Lessee's leasehold interest in the remaining term of the Percentage Lease to be terminated or (2) offering to lease to the Lessee a substitute hotel on terms that would create a leasehold interest in such hotel with a fair market value equal to or exceeding the fair market value of the Lessee's remaining leasehold interest under the Percentage Lease to be terminated. The Company also is obligated to pay or reimburse the Lessee for any assignment fees, termination fees or other liabilities arising under any franchise license agreement and restaurant sublease agreements. The Lessee and the Company share executive offices and the services of certain employees. Each Company bears its share of the costs including an allocated portion of the rent, salaries of personnel (other than Messrs. Feldman and Corcoran), office supplies and telephones. 5. PRO FORMA INFORMATION (UNAUDITED) Due to the impact of the additional hotels operated by the Lessee pursuant to the Percentage Leases discussed in Note 1, historical results of operations may not be indicative of future results of operations. The following unaudited Pro Forma Statements of Operations for the years ended December 31, 1996 and 1995 are presented as if the Lessee leased and operated all Hotels owned by the Partnership at December 31, 1996, from January 1, 1995. F-109 210 DJONT OPERATIONS, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Pro Forma Statement of Operations does not purport to present what actual results of operations would have been if the 43 hotels were operated by the Lessee pursuant to the Percentage Leases from the beginning of the periods presented or to project results for any future period.
1996 1995 -------- -------- (IN THOUSANDS) Suite revenue.................................. $280,844 $266,834 Food and beverage rent......................... 2,742 2,967 Food and beverage revenue...................... 23,313 26,160 Other revenue.................................. 20,142 19,463 -------- -------- Total revenues....................... 327,041 315,424 Property operating costs and expenses.......... 78,653 74,894 Other operating costs.......................... 101,227 96,731 Management and franchise fees.................. 17,261 16,225 Taxes, insurance and other..................... 5,050 6,830 Percentage lease expenses...................... 128,183 119,566 Lessee overhead expenses....................... 1,540 1,446 -------- -------- Net income (loss).................... $ (4,873) $ (268) ======== ========
6. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, the Lessee reports the carrying amount of cash and cash equivalents, accounts payable and accrued expenses at cost which approximate fair value due to the short maturity of these instruments. 7. SUBSEQUENT EVENTS On February 3, 1997, DJONT entered into 10-year operating leases with partnerships owning eight hotel properties, of which the Partnership concurrently acquired a 50% joint venture partnership interest. These properties are located in Atlanta, Georgia (241 suites); Austin, Texas (261 suites); Covina, California (264 suites); Kansas City -- Overland Park, Kansas (199 suites); Kansas City -- Plaza, Missouri (266 suites); Raleigh, North Carolina (255 suites); San Antonio, Texas (217 suites); and Secaucus -- Meadowlands, New Jersey (261 suites). On February 3, 1997 the Lessee also entered into 10-year operating leases with the Partnership with respect to hotels located in Omaha, Nebraska and Bloomington, Minnesota. On February 19, 1997 the Lessee and the Partnership entered into a ten year operating lease on the 215 suite Embassy Suite -- Los Angeles Airport (LAX) North. On February 21, 1997 the Lessee and the Partnership entered into a ten year operating lease on a 198 suite hotel in Dana Point, California. The leases are substantially similar to the leases with the Partnership for the other hotels owned by the Partnership, with a 10-year term and rental payments according to a formula based on restaurant rents, food and beverage and suite revenues of the hotels. F-110 211 ================================================================================ ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE DELIVERED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS: BY REGISTERED OR CERTIFIED MAIL, HAND DELIVERY OR OVERNIGHT COURIER: SunTrust Bank, Atlanta 58 Edgewood Avenue, 4th Floor Annex Atlanta, Georgia 30302 Attention: David M. Kaye or SunTrust Bank, Atlanta c/o First Chicago Trust Company 14 Wall Street, 8th Floor New York, New York 10005 or BY FACSIMILE: (404) 332-3966 (GA) or (212) 240-8938 (NY) ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY BY HAND, OVERNIGHT COURIER, OR REGISTERED OR CERTIFIED MAIL. NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ================================================================================ ================================================================================ OFFER TO EXCHANGE ALL OUTSTANDING 7 3/8% SENIOR NOTES DUE 2004 AND 7 5/8% SENIOR NOTES DUE 2007 FOR 7 3/8% SENIOR NOTES DUE 2004 AND 7 5/8% SENIOR NOTES DUE 2007 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 FELCOR SUITES LIMITED PARTNERSHIP ---------------------- PROSPECTUS ---------------------- NOVEMBER __, 1997 ================================================================================ 212 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 6.7 of the Amended and Restated Agreement of Limited Partnership of FelCor Suites Limited Partnership (the "Partnership"), as amended (the "Partnership Agreement"), provides that, to the fullest extent permitted by law, but subject to the limitations expressly provided in the Partnership Agreement, FelCor Suite Hotels, Inc., or its successor or assigns (the "General Partner"), and any person who is or was an officer or director of the General Partner shall be indemnified and held harmless by the Partnership from and against any and all losses, claims, damages, liabilities (joint or several), expenses (including, without limitation, legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any such party may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as (i) the General Partner, or any of its affiliates, (ii) an officer, director, employee, partner, agent or trustee of the General Partner, or any of its affiliates or (iii) a person serving at the request of the Partnership in another entity in a similar capacity; provided, that in each case such party acted in good faith, in a manner which such party believed to be in, or not opposed to, the best interests of the Partnership and, with respect to any criminal proceeding, had no reasonable cause to believe its conduct was unlawful. Any indemnification pursuant to Section 6.7 shall be made only out of the Partnership assets. The Charter of the General Partner, generally, limits the liability of the General Partner's directors and officers to the General Partner and the shareholders for money damages to the fullest extent permitted from time to time by the laws of the State of Maryland. The Charter also provides, generally, for the indemnification of directors and officers, among others, against judgments, settlements, penalties, fines, and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities except in connection with a proceeding by or in the right of the General Partner in which the director was adjudged liable to the General Partner or in connection with any other proceeding, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him. Insofar as indemnification for liabilities arising under the Securities Act of 1933 ("Securities Act") may be permitted to directors and officers of the General Partner pursuant to the foregoing provisions or otherwise, the General Partner has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. The General Partner may purchase director and officer liability insurance for the purpose of providing a source of funds to pay any indemnification described above. ITEM 21. EXHIBITS 3.1 - Certificate of Limited Partnership of the Partnership dated May 20, 1994, as filed with the Secretary of State of Delaware. 3.2 - Amended and Restated Agreement of Limited Partnership of the Partnership (filed as Exhibit 10.1 to the General Partner's Annual Report on Form 10-K/A Amendment No. 1 for the fiscal year ended December 31, 1994 (the "1994 10-K/A") and incorporated herein by reference). 3.2.1 - First Amendment to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of November 17, 1995 by and among the General Partner, Promus Hotels, Inc. and all of the persons or entities who are or shall in the future become of the limited partners of the Partnership (filed as Exhibit 10.1.1 to the General Partner's Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 1995 (the "1995 10-K") and incorporated herein by reference) II-1 213 3.2.2 - Second Amendment to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of January 9, 1996 between the General Partner and all of the persons or entities who are or shall in the future become limited partners of the Partnership (filed as Exhibit 10.1.2 to the 1995 10-K and incorporated herein by reference). 3.2.3 - Third Amendment to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of January 10, 1996 by and among the General Partner, MarRay-LexGreen, Inc. and all of the persons and entities who are or shall in the future become limited partners of the Partnership (filed as Exhibit 10.1.3 to the 1995 10-K and incorporated herein by reference). 3.2.4 - Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of the Partnership dated as of January 10, 1996 by and among the General Partner, Piscataway-Centennial Associates Limited Partnership and all of the persons or entities who are or shall in the future become limited partners of the Partnership (filed as Exhibit 10.1.4 to the 1995 10-K and incorporated herein by reference). 3.2.5 - Fifth Amendment to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of May 2, 1996, between the Registrant and all of the persons or entities who are or shall in the future become limited partners of the Partnership, adopting Addendum No. 2 to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of May 2, 1996 (filed as Exhibit 10.1.5 to the General Partner's Form 10-Q for the quarter ended June 30, 1996 (the "1996 Second Quarter 10-Q") and incorporated herein by reference). 3.2.6 - Sixth Amendment to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of September 16, 1996, by and among the Registrant, John B. Urbahns, II and all of the persons or entities who are or shall in the future become limited partners of the Partnership (filed as Exhibit 10.1.6 to the General Partner's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 10-K") and incorporated herein by reference). 4.1 - Indenture dated as of October 1, 1997 by and among the Partnership, the General Partner, the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee. 5.1 - Opinion of Jenkens & Gilchrist, P.C. 10.2.1 - Form of Lease Agreement between the Partnership as Lessor and DJONT Operations, L.L.C. ("DJONT") as Lessee (filed as Exhibit 10.2.1 to the 1995 10-K and incorporated herein by reference). 10.2.2 - Schedule of executed Lease Agreements identifying material variations from the form of Lease Agreement with respect to hotels acquired by the Partnership through September 30, 1997. 10.3 - Amended and Restated Loan Agreement dated as of September 26, 1996, among the General Partner and the Partnership, as Borrowers, Boatmen's National Bank of Oklahoma, as Agent and Lender, and First Tennessee Bank National Association, Liberty Bank and Trust Company of Tulsa, National Association, Bank One, Texas, N.A., First National Bank of Commerce, and AmSouth Bank of Alabama, as Lenders (filed as Exhibit 10.3.4 to the General Partner's Form 10-Q for the quarter ended September 30, 1996 (the "1996 Third Quarter 10-Q") and incorporated herein by reference). 10.4 - Agreement to Assign Incentive Management Fee dated as of May 19, 1994 between the General Partner and Embassy Suites, Inc. (filed as Exhibit 10.14 to the General Partner's Registration Statement on Form S- 11 (File No. 33-79214) (the "IPO Registration Statement") and incorporated herein by reference). II-2 214 10.5 - Employment Agreement dated as of July 28, 1994 between the General Partner and Hervey A. Feldman (filed as Exhibit 10.7 to the 1994 10-K/A and incorporated herein by reference). 10.6 - Employment Agreement dated as of July 28, 1994 between the General Partner and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to the 1994 10-K/A and incorporated herein by reference). 10.7.1 - Restricted Stock and Stock Option Plan of the General Partner (filed as Exhibit 10.9 to the 1994 10-K/A and incorporated herein by reference). 10.7.2 - 1995 Restricted Stock and Stock Option Plan of the General Partner (filed as Exhibit 10.9.2 to the 1995 10-K and incorporated herein by reference). 10.8 - Savings and Investment Plan of the General Partner (filed as Exhibit 10.10 to the 1994 10-K/A and incorporated herein by reference). 10.9 - Registration Rights Agreement dated as of July 21, 1994 between the General Partner and the parties named therein (filed as Exhibit 10.11 to the 1994 10-K/A and incorporated herein by reference). 10.10 - Agreement dated as of April 15, 1995 among the General Partner, the Partnership, FelCor, Inc., Thomas J. Corcoran, Jr. and Hervey A. Feldman relating to purchase of securities (filed as Exhibit 10.15 to the Registration Statement on Form S-11 (File No. 33-91870) (the "May 1995 Registration Statement") and incorporated herein by reference). 10.11.1 - Subscription Agreement dated as of May 3, 1995 among the General Partner, the Partnership and Embassy Suites, Inc. (filed as Exhibit 10.16 to the May 1995 Registration Statement and incorporated hereby by reference). 10.11.2 - Subscription Agreement dated as of October 17, 1995 among the General Partner, the Partnership and Promus Hotels, Inc. (filed as Exhibit 10.27.1 to the December 1995 Registration Statement and incorporated herein by reference). 10.11.3 - First Amendment to Subscription Agreements dated as of November 16, 1995 among the General Partner, the Partnership and Promus Hotels, Inc. (filed as Exhibit 10.27.2 to the December 1995 Registration Statement and incorporated herein by reference). 10.11.4 - Second Amendment to Subscription Agreements dated as of December 12, 1995 among the General Partner, the Partnership and Promus Hotels, Inc. (filed as Exhibit 10.27.3 to the December 1995 Registration Statement and incorporated herein by reference). 10.12.1 - Master Agreement with respect to the purchase of the CSS Hotels between Minnesota Hotel Company, Inc. ("MHCI") and FelCor/CSS Holdings, L.P. ("Holdings") dated as of September 19, 1995 (filed as Exhibit 10.20.1 to the General Partner's Form 10-Q for the quarter ended September 30, 1995 (the "1995 Third Quarter 10-Q") and incorporated herein by reference). 10.12.2 - Letter agreement with respect to amendments to Master Agreement between MHCI and Holdings dated as of November 6, 1995 (filed as Exhibit 10.20.2 to the 1995 Third Quarter 10-Q and incorporated herein by reference). II-3 215 10.12.3 - Letter agreement dated January 3, 1996, among MHCI, Crown Sterling Management, Inc. ("CSM"), Crown Sterling Incorporated ("CSI"), Holdings, and PFS Ventures, Inc. ("PFS") relating to amendments to Master Agreement dated as of September 19, 1995 between MHCI and Holdings ("Master Agreement") and Asset Purchase Agreement dated as of September 19, 1995 among CSM, CSI and PFS ("Asset Purchase Agreement") (filed as Exhibit 10.20.3 to the 1996 Form 8-K and incorporated herein by reference). 10.12.4 - Letter agreement dated March 26, 1996, among MHCI, Napa Wine Country Hotel, a California Limited Partnership, Mandalay Beach, California Hotel Associates, a California Limited Partnership ("MBC"), CSM, CSI, Holdings and PFS relating to amendments to Master Agreement, Asset Purchase Agreement and Partnership Interests Purchase Agreement dated as of September 19, 1995 among MHCI, MBC, Robert E. Woolley and Holdings ("Partnership Interests Purchase Agreement") (filed as Exhibit 10.20.4 to the 1996 Form 8-K and incorporated herein by reference). 10.13 - Partnership Interests Purchase Agreement with respect to the LAX Airport and Mandalay Beach hotels among MHCI, MBC, Robert E. Woolley and Holdings dated as of September 19, 1995 (filed as Exhibit 10.21 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.13.1 - Letter agreement dated March 27, 1996 among MHCI, MBC, Holdings and PFS relating to amendments to Partnership Interests Purchase Agreement (filed as Exhibit 10.21.1 to the 1996 Form 8-K and incorporated herein by reference). 10.13.2 - Letter agreement dated March 27, 1996, among MHCI, MBC, CSM, CSI, Holdings and PFS relating to amendments to Partnership Interests Purchase Agreement and Asset Purchase Agreement (filed as Exhibit 10.21.2 to the 1996 Form 8-K and incorporated herein by reference). 10.14.1 - Asset Purchase Agreement with respect to the CSS Hotels among CSM, CSI and PFS dated as of September 19, 1995 (filed as Exhibit 10.22.1 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.14.2 - Letter agreement with respect to amendments to Asset Purchase Agreement among CSM, CSI and PFS dated as of November 6, 1995 (filed as Exhibit 10.22.2 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.15 - Escrow Agreement among MHCI, CSM, CSI, Robert E. Woolley, Charles M. Sweeney, Holdings and PFS dated as of September 19, 1995 (filed as Exhibit 10.23 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.16 - Purchase Agreement relating to the purchase of all of the limited partner interest in Holdings between the Partnership and DJONT/CSS Holdings, Inc. dated as of September 19, 1995 (filed as Exhibit 10.24 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.17 - Purchase Agreement related to the purchase of all of the general partner interest in Holdings between the Partnership and PFS dated as of September 19, 1995 (filed as Exhibit 10.25 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.18 - Letter agreement among the General Partner, the Partnership, Holdings, and Smith Barney Mortgage Capital Group, Inc. ("SBMCG") dated as of September 28, 1995 with respect to the commitment of SBMCG to provide up to $220 million principal amount of interim recourse secured financing to Holdings (filed as Exhibit 10.26 to the 1995 Third Quarter 10-Q and incorporated herein by reference). II-4 216 10.19 - Registration Rights Agreement dated as of November 17, 1995 between the General Partner and Cleveland Finance Associates Limited Partnership (filed as Exhibit 10.27 to the 1995 10-K and incorporated herein by reference). 10.20 - Registration Rights Agreement dated as of January 3, 1996 between the General Partner and Robert E. Woolley and Charles M. Sweeney (filed as Exhibit 10.28 to the 1995 10-K and incorporated herein by reference). 10.21 - Credit Agreement dated as of January 31, 1996, by and among Holdings, as borrower, the Partnership, the General Partner and The Bank of Nova Scotia, New York Agency (filed as Exhibit 10.29 to the 1995 10-K and incorporated herein by reference). 10.22 - Credit Agreement dated as of February 6, 1996, by and among the Partnership, as borrower, Holdings and the General Partner, as guarantors, and Canadian Imperial Bank of Commerce, as agent (filed as Exhibit 10.30 to the 1996 Form 8-K and incorporated herein by reference). 10.23 - Third Amended and Restated Revolving Credit Agreement dated as of August 14, 1997 among the General Partner and the Partnership, as Borrower, the Lenders party thereto, The Chase Manhattan Bank, as Administrative Agent, and Wells Fargo Bank, National Association, as Documentation Agent. 10.24 - Contract for Purchase and Sale of Hotels, dated as of June 5, 1997, by and among ITT Sheraton Corporation, Sheraton Savannah Corp., Sheraton Peachtree Corp., Sheraton Crescent Corp., Sheraton Dallas Corp., Sheraton Gateway Suites O'Hare Investment Partnership and the Partnership (filed as Exhibit 10.24 to the General Partner's Form 8-K dated July 11, 1997 and incorporated herein by reference). 10.25 - Registration Rights Agreement dated as of September 26, 1997 among the General Partner, the Partnership, Morgan Stanley & Co. Incorporated, NationsBank Capital Markets, Inc. and Salomon Brothers Inc. 12.1 - Statement re Computation of Ratios. 21.1 - List of Subsidiaries of the Registrant. 23.1 - Consent of Jenkens & Gilchrist, P.C. (included in Exhibit 5.1). 23.2 - Consent of Coopers & Lybrand L.L.P. 23.3 - Consent of Arthur Andersen, LLP 23.4 - Consent of Ernst & Young LLP 23.5 - Consent of Deloitte & Touche LLP 24.1 - Power of Attorney (set forth on signature page). 25.1 - Statement of Eligibility of Sun Trust Bank - Atlanta, as Trustee (bound separately). 27.1 - Financial Data Schedule. 99.1 - Form of Letter of Transmittal. II-5 217 ITEM 22. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Exchange Offer Registration Statement through the date of responding to the request. (c) The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Exchange Offer Registration Statement when it became effective. II-6 218 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 3rd day of November, 1997. FELCOR SUITES LIMITED PARTNERSHIP a Delaware limited partnership (Co-Registrant) By: FelCor Suite Hotels, Inc., Its General Partner By:/s/ THOMAS J. CORCORAN, JR., ----------------------------- Thomas J. Corcoran, Jr., President POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including post-effective amendments) to this Registration Statement, to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, to sign any and all applications, registration statements, notices and other documents necessary or advisable to comply with the applicable state securities laws, and to file the same, together with all other documents in connection therewith, with the appropriate state securities authorities, granting unto said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, full power and authority to perform and do each and every act and thing necessary and advisable as fully to all intents and purposes as he might or could perform and do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ HERVEY A. FELDMAN Chairman of the Board and November 3, 1997 ----------------------------- Director Hervey A. Feldman /s/ THOMAS J. CORCORAN, JR. President and Chief Executive November 3, 1997 ----------------------------- Officer and Director Thomas J. Corcoran, Jr. /s/ RANDY L. CHURCHEY Senior Vice President, Chief November 3, 1997 ----------------------------- Financial Officer and Treasurer Randy L. Churchey /s/ LESTER C. JOHNSON Vice President and Controller November 3, 1997 ----------------------------- (Principal Accounting Officer) Lester C. Johnson /s/ CHARLES N. MATHEWSON ----------------------------- Director November 3, 1997 Charles N. Mathewson ----------------------------- Director November ___, 1997 Donald J. McNamara /s/ RICHARD S. ELLWOOD ----------------------------- Director November 3, 1997 Richard S. Ellwood /s/ RICHARD O. JACOBSON ----------------------------- Director November 3, 1997 Richard O. Jacobson ----------------------------- Director November ___, 1997 Thomas A. McChristy
219 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 3rd day of November, 1997. FELCOR SUITE HOTELS, INC., a Maryland corporation (Co-Registrant) By: /s/ THOMAS J. CORCORAN, JR., ------------------------------ Thomas J. Corcoran, Jr., President POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including post-effective amendments) to this Registration Statement, to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, to sign any and all applications, registration statements, notices and other documents necessary or advisable to comply with the applicable state securities laws, and to file the same, together with all other documents in connection therewith, with the appropriate state securities authorities, granting unto said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, full power and authority to perform and do each and every act and thing necessary and advisable as fully to all intents and purposes as he might or could perform and do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ HERVEY A. FELDMAN Chairman of the Board and November 3, 1997 ---------------------------- Director Hervey A. Feldman /s/ THOMAS J. CORCORAN, JR. President and Chief Executive November 3, 1997 ----------------------------- Officer and Director Thomas J. Corcoran, Jr. /s/ RANDY L. CHURCHEY Senior Vice President, Chief November 3, 1997 ----------------------------- Financial Officer and Treasurer Randy L. Churchey /s/ LESTER C. JOHNSON Vice President and Controller November 3, 1997 ----------------------------- (Principal Accounting Officer) Lester C. Johnson /s/ CHARLES N. MATHEWSON ----------------------------- Director November 3, 1997 Charles N. Mathewson ----------------------------- Director November ___, 1997 Donald J. McNamara /s/ RICHARD S. ELLWOOD ----------------------------- Director November 3, 1997 Richard S. Ellwood /s/ RICHARD O. JACOBSON ----------------------------- Director November 3, 1997 Richard O. Jacobson ----------------------------- Director November ___, 1997 Thomas A. McChristy
220 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 3rd day of November, 1997. FELCOR/CSS HOTELS, L.L.C. a Delaware limited liability company (Co-Registrant) By:/s/ THOMAS J. CORCORAN, JR., ---------------------------------- Thomas J. Corcoran, Jr., President POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including post-effective amendments) to this Registration Statement, to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, to sign any and all applications, registration statements, notices and other documents necessary or advisable to comply with the applicable state securities laws, and to file the same, together with all other documents in connection therewith, with the appropriate state securities authorities, granting unto said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, full power and authority to perform and do each and every act and thing necessary and advisable as fully to all intents and purposes as he might or could perform and do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ THOMAS J. CORCORAN, JR. President and Chief Executive November 3, 1997 ----------------------------- Officer and Manager Thomas J. Corcoran, Jr. Senior Vice President, Chief November 3, 1997 /s/ RANDY L. CHURCHEY Financial Officer, Treasurer and ----------------------------- Manager Randy L. Churchey /s/ LESTER C. JOHNSON Vice President and Controller November 3, 1997 ----------------------------- (Principal Accounting Officer) Lester C. Johnson /s/ LAWRENCE D. ROBINSON ----------------------------- Manager November 3, 1997 Lawrence D. Robinson
221 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 3rd day of November, 1997. FELCOR/CSS HOLDINGS, L.P. a Delaware limited partnership (Co-Registrant) By: FelCor/CSS Hotels, L.L.C., Its General Partner By: /s/ THOMAS J. CORCORAN, JR., ------------------------------- Thomas J. Corcoran, Jr., President POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including post-effective amendments) to this Registration Statement, to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, to sign any and all applications, registration statements, notices and other documents necessary or advisable to comply with the applicable state securities laws, and to file the same, together with all other documents in connection therewith, with the appropriate state securities authorities, granting unto said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, full power and authority to perform and do each and every act and thing necessary and advisable as fully to all intents and purposes as he might or could perform and do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ THOMAS J. CORCORAN, JR. President and Chief Executive November 3, 1997 ----------------------------- Officer and Manager Thomas J. Corcoran, Jr. Senior Vice President, Chief November 3, 1997 /s/ RANDY L. CHURCHEY Financial Officer, Treasurer and ----------------------------- Manager Randy L. Churchey /s/ LESTER C. JOHNSON Vice President and Controller November 3, 1997 ----------------------------- (Principal Accounting Officer) Lester C. Johnson /s/ LAWRENCE D. ROBINSON ----------------------------- Manager November 3, 1997 Lawrence D. Robinson
222 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 3rd day of November, 1997. FELCOR/ST. PAUL HOLDINGS, L.P. a Delaware limited partnership (Co-Registrant) By: FelCor/CSS Hotels, L.L.C., Its General Partner By: /s/ THOMAS J. CORCORAN, JR., ------------------------------ Thomas J. Corcoran, Jr., President POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including post-effective amendments) to this Registration Statement, to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, to sign any and all applications, registration statements, notices and other documents necessary or advisable to comply with the applicable state securities laws, and to file the same, together with all other documents in connection therewith, with the appropriate state securities authorities, granting unto said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, full power and authority to perform and do each and every act and thing necessary and advisable as fully to all intents and purposes as he might or could perform and do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ THOMAS J. CORCORAN, JR. President and Chief Executive November 3, 1997 ----------------------------- Officer and Manager Thomas J. Corcoran, Jr. Senior Vice President, Chief November 3, 1997 /s/ RANDY L. CHURCHEY Financial Officer, Treasurer and ----------------------------- Manager Randy L. Churchey /s/ LESTER C. JOHNSON Vice President and Controller November 3, 1997 ----------------------------- (Principal Accounting Officer) Lester C. Johnson /s/ LAWRENCE D. ROBINSON ----------------------------- Manager November 3, 1997 Lawrence D. Robinson
223 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 3rd day of November, 1997. FELCOR/LAX HOTELS, L.L.C. a Delaware limited liability company (Co-Registrant) By: THOMAS J. CORCORAN, JR., ------------------------------- Thomas J. Corcoran, Jr., President POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including post-effective amendments) to this Registration Statement, to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, to sign any and all applications, registration statements, notices and other documents necessary or advisable to comply with the applicable state securities laws, and to file the same, together with all other documents in connection therewith, with the appropriate state securities authorities, granting unto said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, full power and authority to perform and do each and every act and thing necessary and advisable as fully to all intents and purposes as he might or could perform and do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ THOMAS J. CORCORAN, JR. President and Chief Executive November 3, 1997 ----------------------------- Officer and Manager Thomas J. Corcoran, Jr. Senior Vice President, Chief November 3, 1997 /s/ RANDY L. CHURCHEY Financial Officer, Treasurer and ----------------------------- Manager Randy L. Churchey /s/ LESTER C. JOHNSON Vice President and Controller November 3, 1997 ----------------------------- (Principal Accounting Officer) Lester C. Johnson /s/ LAWRENCE D. ROBINSON ----------------------------- Manager November 3, 1997 Lawrence D. Robinson
224 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 3rd day of November, 1997. FELCOR/LAX HOLDINGS, L.P. a Delaware limited partnership (Co-Registrant) By: FelCor/LAX Hotels, L.L.C., Its General Partner By: /s/ THOMAS J. CORCORAN, JR., ------------------------------ Thomas J. Corcoran, Jr., President POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including post-effective amendments) to this Registration Statement, to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, to sign any and all applications, registration statements, notices and other documents necessary or advisable to comply with the applicable state securities laws, and to file the same, together with all other documents in connection therewith, with the appropriate state securities authorities, granting unto said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, full power and authority to perform and do each and every act and thing necessary and advisable as fully to all intents and purposes as he might or could perform and do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ THOMAS J. CORCORAN, JR. President and Chief Executive November 3, 1997 ----------------------------- Officer and Manager Thomas J. Corcoran, Jr. Senior Vice President, Chief November 3, 1997 /s/ RANDY L. CHURCHEY Financial Officer, Treasurer and ----------------------------- Manager Randy L. Churchey /s/ LESTER C. JOHNSON Vice President and Controller November 3, 1997 ----------------------------- (Principal Accounting Officer) Lester C. Johnson /s/ Lawrence D. Robinson ----------------------------- Manager November 3, 1997 Lawrence D. Robinson
225 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 3rd day of November, 1997. FELCOR EIGHT HOTELS, L.L.C. a Delaware limited liability company (Co-Registrant) By:/s/ THOMAS J. CORCORAN, JR., ------------------------------- Thomas J. Corcoran, Jr., President POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including post-effective amendments) to this Registration Statement, to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, to sign any and all applications, registration statements, notices and other documents necessary or advisable to comply with the applicable state securities laws, and to file the same, together with all other documents in connection therewith, with the appropriate state securities authorities, granting unto said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, full power and authority to perform and do each and every act and thing necessary and advisable as fully to all intents and purposes as he might or could perform and do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ THOMAS J. CORCORAN, JR. President and Chief Executive November 3, 1997 ----------------------------- Officer and Manager Thomas J. Corcoran, Jr. Senior Vice President, Chief November 3, 1997 /s/ RANDY L. CHURCHEY Financial Officer, Treasurer and ----------------------------- Manager Randy L. Churchey /s/ LESTER C. JOHNSON Vice President and Controller November 3, 1997 ----------------------------- (Principal Accounting Officer) Lester C. Johnson /s/ LAWRENCE D. ROBINSON ----------------------------- Manager November 3, 1997 Lawrence D. Robinson
226 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 - Certificate of Limited Partnership of the Partnership dated May 20, 1994, as filed with the Secretary of State of Delaware. 3.2 - Amended and Restated Agreement of Limited Partnership of the Partnership (filed as Exhibit 10.1 to the General Partner's Annual Report on Form 10-K/A Amendment No. 1 for the fiscal year ended December 31, 1994 (the "1994 10-K/A") and incorporated herein by reference). 3.2.1 - First Amendment to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of November 17, 1995 by and among the General Partner, Promus Hotels, Inc. and all of the persons or entities who are or shall in the future become of the limited partners of the Partnership (filed as Exhibit 10.1.1 to the General Partner's Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 1995 (the "1995 10-K") and incorporated herein by reference) 3.2.2 - Second Amendment to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of January 9, 1996 between the General Partner and all of the persons or entities who are or shall in the future become limited partners of the Partnership (filed as Exhibit 10.1.2 to the 1995 10-K and incorporated herein by reference). 3.2.3 - Third Amendment to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of January 10, 1996 by and among the General Partner, MarRay-LexGreen, Inc. and all of the persons and entities who are or shall in the future become limited partners of the Partnership (filed as Exhibit 10.1.3 to the 1995 10-K and incorporated herein by reference). 3.2.4 Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of the Partnership dated as of January 10, 1996 by and among the General Partner, Piscataway-Centennial Associates Limited Partnership and all of the persons or entities who are or shall in the future become limited partners of the Partnership (filed as Exhibit 10.1.4 to the 1995 10-K and incorporated herein by reference). 3.2.5 - Fifth Amendment to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of May 2, 1996, between the Registrant and all of the persons or entities who are or shall in the future become limited partners of the Partnership, adopting Addendum No. 2 to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of May 2, 1996 (filed as Exhibit 10.1.5 to the General Partner's Form 10-Q for the quarter ended June 30, 1996 (the "1996 Second Quarter 10-Q") and incorporated herein by reference). 3.2.6 - Sixth Amendment to Amended and Restated Agreement of Limited Partnership of the Partnership dated as of September 16, 1996, by and among the Registrant, John B. Urbahns, II and all of the persons or entities who are or shall in the future become limited partners of the Partnership (filed as Exhibit 10.1.6 to the General Partner's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 10-K") and incorporated herein by reference). 4.1 - Indenture dated as of October 1, 1997 by and among the Partnership, the General Partner, the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee. 5.1 - Opinion of Jenkens & Gilchrist, P.C. 10.2.1 - Form of Lease Agreement between the Partnership as Lessor and DJONT Operations, L.L.C. ("DJONT") as Lessee (filed as Exhibit 10.2.1 to the 1995 10-K and incorporated herein by reference). 10.2.2 - Schedule of executed Lease Agreements identifying material variations from the form of Lease Agreement with respect to hotels acquired by the Partnership through September 30, 1997. 10.3 - Amended and Restated Loan Agreement dated as of September 26, 1996, among the General Partner and the Partnership, as Borrowers, Boatmen's National Bank of Oklahoma, as Agent and Lender, and First Tennessee Bank National Association, Liberty Bank and Trust Company of Tulsa, National Association, Bank One, Texas, N.A., First National Bank of Commerce, and AmSouth Bank of Alabama, as Lenders (filed as Exhibit 10.3.4 to the General Partner's Form 10-Q for the quarter ended September 30, 1996 (the "1996 Third Quarter 10-Q") and incorporated herein by reference). 10.4 - Agreement to Assign Incentive Management Fee dated as of May 19, 1994 between the General Partner and Embassy Suites, Inc. (filed as Exhibit 10.14 to the General Partner's Registration Statement on Form S- 11 (File No. 33-79214) (the "IPO Registration Statement") and incorporated herein by reference).
227 10.5 - Employment Agreement dated as of July 28, 1994 between the General Partner and Hervey A. Feldman (filed as Exhibit 10.7 to the 1994 10-K/A and incorporated herein by reference). 10.6 - Employment Agreement dated as of July 28, 1994 between the General Partner and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to the 1994 10-K/A and incorporated herein by reference). 10.7.1 - Restricted Stock and Stock Option Plan of the General Partner (filed as Exhibit 10.9 to the 1994 10-K/A and incorporated herein by reference). 10.7.2 - 1995 Restricted Stock and Stock Option Plan of the General Partner (filed as Exhibit 10.9.2 to the 1995 10-K and incorporated herein by reference). 10.8 - Savings and Investment Plan of the General Partner (filed as Exhibit 10.10 to the 1994 10-K/A and incorporated herein by reference). 10.9 - Registration Rights Agreement dated as of July 21, 1994 between the General Partner and the parties named therein (filed as Exhibit 10.11 to the 1994 10-K/A and incorporated herein by reference). 10.10 - Agreement dated as of April 15, 1995 among the General Partner, the Partnership, FelCor, Inc., Thomas J. Corcoran, Jr. and Hervey A. Feldman relating to purchase of securities (filed as Exhibit 10.15 to the Registration Statement on Form S-11 (File No. 33-91870) (the "May 1995 Registration Statement") and incorporated herein by reference). 10.11.1 - Subscription Agreement dated as of May 3, 1995 among the General Partner, the Partnership and Embassy Suites, Inc. (filed as Exhibit 10.16 to the May 1995 Registration Statement and incorporated hereby by reference). 10.11.2 - Subscription Agreement dated as of October 17, 1995 among the General Partner, the Partnership and Promus Hotels, Inc. (filed as Exhibit 10.27.1 to the December 1995 Registration Statement and incorporated herein by reference). 10.11.3 - First Amendment to Subscription Agreements dated as of November 16, 1995 among the General Partner, the Partnership and Promus Hotels, Inc. (filed as Exhibit 10.27.2 to the December 1995 Registration Statement and incorporated herein by reference). 10.11.4 - Second Amendment to Subscription Agreements dated as of December 12, 1995 among the General Partner, the Partnership and Promus Hotels, Inc. (filed as Exhibit 10.27.3 to the December 1995 Registration Statement and incorporated herein by reference). 10.12.1 - Master Agreement with respect to the purchase of the CSS Hotels between Minnesota Hotel Company, Inc. ("MHCI") and FelCor/CSS Holdings, L.P. ("Holdings") dated as of September 19, 1995 (filed as Exhibit 10.20.1 to the General Partner's Form 10-Q for the quarter ended September 30, 1995 (the "1995 Third Quarter 10-Q") and incorporated herein by reference). 10.12.2 - Letter agreement with respect to amendments to Master Agreement between MHCI and Holdings dated as of November 6, 1995 (filed as Exhibit 10.20.2 to the 1995 Third Quarter 10-Q and incorporated herein by reference).
228 10.12.3 - Letter agreement dated January 3, 1996, among MHCI, Crown Sterling Management, Inc. ("CSM"), Crown Sterling Incorporated ("CSI"), Holdings, and PFS Ventures, Inc. ("PFS") relating to amendments to Master Agreement dated as of September 19, 1995 between MHCI and Holdings ("Master Agreement") and Asset Purchase Agreement dated as of September 19, 1995 among CSM, CSI and PFS ("Asset Purchase Agreement") (filed as Exhibit 10.20.3 to the 1996 Form 8-K and incorporated herein by reference). 10.12.4 - Letter agreement dated March 26, 1996, among MHCI, Napa Wine Country Hotel, a California Limited Partnership, Mandalay Beach, California Hotel Associates, a California Limited Partnership ("MBC"), CSM, CSI, Holdings and PFS relating to amendments to Master Agreement, Asset Purchase Agreement and Partnership Interests Purchase Agreement dated as of September 19, 1995 among MHCI, MBC, Robert E. Woolley and Holdings ("Partnership Interests Purchase Agreement") (filed as Exhibit 10.20.4 to the 1996 Form 8-K and incorporated herein by reference). 10.13 - Partnership Interests Purchase Agreement with respect to the LAX Airport and Mandalay Beach hotels among MHCI, MBC, Robert E. Woolley and Holdings dated as of September 19, 1995 (filed as Exhibit 10.21 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.13.1 - Letter agreement dated March 27, 1996 among MHCI, MBC, Holdings and PFS relating to amendments to Partnership Interests Purchase Agreement (filed as Exhibit 10.21.1 to the 1996 Form 8-K and incorporated herein by reference). 10.13.2 - Letter agreement dated March 27, 1996, among MHCI, MBC, CSM, CSI, Holdings and PFS relating to amendments to Partnership Interests Purchase Agreement and Asset Purchase Agreement (filed as Exhibit 10.21.2 to the 1996 Form 8-K and incorporated herein by reference). 10.14.1 - Asset Purchase Agreement with respect to the CSS Hotels among CSM, CSI and PFS dated as of September 19, 1995 (filed as Exhibit 10.22.1 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.14.2 - Letter agreement with respect to amendments to Asset Purchase Agreement among CSM, CSI and PFS dated as of November 6, 1995 (filed as Exhibit 10.22.2 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.15 - Escrow Agreement among MHCI, CSM, CSI, Robert E. Woolley, Charles M. Sweeney, Holdings and PFS dated as of September 19, 1995 (filed as Exhibit 10.23 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.16 - Purchase Agreement relating to the purchase of all of the limited partner interest in Holdings between the Partnership and DJONT/CSS Holdings, Inc. dated as of September 19, 1995 (filed as Exhibit 10.24 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.17 - Purchase Agreement related to the purchase of all of the general partner interest in Holdings between the Partnership and PFS dated as of September 19, 1995 (filed as Exhibit 10.25 to the 1995 Third Quarter 10-Q and incorporated herein by reference). 10.18 - Letter agreement among the General Partner, the Partnership, Holdings, and Smith Barney Mortgage Capital Group, Inc. ("SBMCG") dated as of September 28, 1995 with respect to the commitment of SBMCG to provide up to $220 million principal amount of interim recourse secured financing to Holdings (filed as Exhibit 10.26 to the 1995 Third Quarter 10-Q and incorporated herein by reference).
229 10.19 - Registration Rights Agreement dated as of November 17, 1995 between the General Partner and Cleveland Finance Associates Limited Partnership (filed as Exhibit 10.27 to the 1995 10-K and incorporated herein by reference). 10.20 - Registration Rights Agreement dated as of January 3, 1996 between the General Partner and Robert E. Woolley and Charles M. Sweeney (filed as Exhibit 10.28 to the 1995 10-K and incorporated herein by reference). 10.21 - Credit Agreement dated as of January 31, 1996, by and among Holdings, as borrower, the Partnership, the General Partner and The Bank of Nova Scotia, New York Agency (filed as Exhibit 10.29 to the 1995 10-K and incorporated herein by reference). 10.22 - Credit Agreement dated as of February 6, 1996, by and among the Partnership, as borrower, Holdings and the General Partner, as guarantors, and Canadian Imperial Bank of Commerce, as agent (filed as Exhibit 10.30 to the 1996 Form 8-K and incorporated herein by reference). 10.23 - Third Amended and Restated Revolving Credit Agreement dated as of August 14, 1997 among the General Partner and the Partnership, as Borrower, the Lenders party thereto, The Chase Manhattan Bank, as Administrative Agent, and Wells Fargo Bank, National Association, as Documentation Agent. 10.24 - Contract for Purchase and Sale of Hotels, dated as of June 5, 1997, by and among ITT Sheraton Corporation, Sheraton Savannah Corp., Sheraton Peachtree Corp., Sheraton Crescent Corp., Sheraton Dallas Corp., Sheraton Gateway Suites O'Hare Investment Partnership and the Partnership (filed as Exhibit 10.24 to the General Partner's Form 8-K dated July 11, 1997 and incorporated herein by reference). 10.25 - Registration Rights Agreement dated as of September 26, 1997 among the General Partner, the Partnership, Morgan Stanley & Co. Incorporated, NationsBank Capital Markets, Inc. and Salomon Brothers Inc. 12.1 - Statement re Computation of Ratios. 21.1 - List of Subsidiaries of the Registrant. 23.1 - Consent of Jenkens & Gilchrist, P.C. (included in Exhibit 5.1). 23.2 - Consent of Coopers & Lybrand L.L.P. 23.3 - Consent of Arthur Andersen, LLP 23.4 - Consent of Ernst & Young LLP 23.5 - Consent of Deloitte & Touche LLP 24.1 - Power of Attorney (set forth on signature page). 25.1 - Statement of Eligibility of Sun Trust Bank - Atlanta, as Trustee (bound separately). 27.1 - Financial Data Schedule. 99.1 - Form of Letter of Transmittal.
EX-3.1 2 CERTIFICATE OF LIMITED PARTNERSHIP 1 EXHIBIT 3.1 State of Delaware OFFICE OF THE SECRETARY OF STATE -------------------------------- I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF LIMITED PARTNERSHIP OF "FELCOR A SUITES LIMITED PARTNERSHIP", FILED IN THIS OFFICE ON THE TWENTY-THIRD DAY OF MAY, A.D. 1994, AT 10 O'CLOCK A.M. [SEAL] /s/ WILLIAM T. QUILLEN ---------------------- WILLIAM T. QUILLEN, SECRETARY OF STATE 2404748 8100 AUTHENTICATION: 7127212 944091178 DATE: 05-23-94 2 CERTIFICATE OF LIMITED PARTNERSHIP OF FELCOR SUITES LIMITED PARTNERSHIP This Certificate of Limited Partnership of FelCor Suites Limited Partnership (the "Partnership") is being executed by the undersigned for the purpose of forming a limited partnership pursuant to the Delaware Revised Uniform Limited Partnership Act. 1. The name of the Partnership is FelCor Suites Limited Partnership. 2. The address of the registered office of the Partnership in Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The Partnership's registered agent at that address is The Corporation Trust Company. 3. The name and business address of the general partner is: FelCor Suite Hotels, Inc. 5215 N. O'Connor Blvd., Suite 330 Irving, Texas 75039 IN WITNESS WHEREOF, the undersigned, constituting all of the general partners of the Partnership, have caused this Certificate of Limited Partnership to be duly executed as of the 20th day of May, 1994. FELCOR SUITE HOTELS, INC. General Partner By: /s/ THOMAS J. CORCORAN, JR. ----------------------------- Thomas J. Corcoran, Jr. President EX-4.1 3 INDENTURE (10/01/97) 1 EXHIBIT 4.1 FELCOR SUITES LIMITED PARTNERSHIP, as Issuer FELCOR SUITE HOTELS, INC., FELCOR/CSS HOTELS, L.L.C., FELCOR/LAX HOTELS, L.L.C., FELCOR/CSS HOLDINGS, L.P., FELCOR/ST. PAUL HOLDINGS, L.P., FELCOR/LAX HOLDINGS, L.P., FELCOR EIGHT HOTELS, L.L.C., as Guarantors, and SUNTRUST BANK, ATLANTA as Trustee Indenture Dated as of October 1, 1997 7 3/8% Senior Notes Due 2004 7 5/8% Senior Notes Due 2007 2 CROSS-REFERENCE TABLE
TIA Sections Indenture Sections ------------ ------------------ Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.08 Section 313(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06; 10.02 Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.17; 10.02 (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . 4.16; 10.02 (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 10.03 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 10.03 (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.04 Section 315(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05; 10.02 Section 316(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . 6.05 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . 6.04 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.01
Note: The Cross-Reference Table shall not for any purpose be deemed to be a part of the Indenture. i 3 ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.01 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. . . . . . . . . . . . . . . . 20 SECTION 1.03 RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE 2 NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 2.01 FORM AND DATING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 2.02 RESTRICTIVE LEGENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 2.03 EXECUTION, AUTHENTICATION AND DENOMINATIONS. . . . . . . . . . . . . . . . . . . 25 SECTION 2.04 REGISTRAR AND PAYING AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 2.05 PAYING AGENT TO HOLD MONEY IN TRUST. . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 2.06 TRANSFER AND EXCHANGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 2.07 BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES. . . . . . . . . . . . . . . . . . . . . . 27 SECTION 2.08 SPECIAL TRANSFER PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 2.09 REPLACEMENT NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 2.10 OUTSTANDING NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 2.11 TEMPORARY NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 2.12 CANCELLATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 2.13 CUSIP NUMBERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 2.14 DEFAULTED INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 2.15 ISSUANCE OF ADDITIONAL NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE 3 REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 3.01 OPTIONAL REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 3.02 NOTICES TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 3.03 SELECTION OF NOTES TO BE REDEEMED . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 3.04 NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 3.05 EFFECT OF NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 3.06 DEPOSIT OF REDEMPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 3.07 PAYMENT OF NOTES CALLED FOR REDEMPTION . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 3.08 NOTES REDEEMED IN PART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE 4 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 4.01 PAYMENT OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 4.02 MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 4.03 LIMITATION ON INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 4.04 LIMITATION ON RESTRICTED PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 40
ii 4 SECTION 4.05 LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 4.06 LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 4.07 LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES . . . . . . . . . 44 SECTION 4.08 LIMITATION ON TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . . 44 SECTION 4.09 LIMITATION ON LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 4.10 LIMITATION ON ASSET SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 4.11 REPURCHASE OF NOTES UPON A CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . . 46 SECTION 4.12 EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 4.13 PAYMENT OF TAXES AND OTHER CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 4.14 MAINTENANCE OF PROPERTIES AND INSURANCE . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 4.15 NOTICE OF DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 4.16 COMPLIANCE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 4.17 COMMISSION REPORTS AND REPORTS TO HOLDERS . . . . . . . . . . . . . . . . . . . . . 48 SECTION 4.18 WAIVER OF STAY, EXTENSION OR USURY LAWS . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 4.19 LIMITATION ON SALE-LEASEBACK TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . 49 SECTION 4.20 MAINTENANCE OF TOTAL UNENCUMBERED ASSETS . . . . . . . . . . . . . . . . . . . . . 49 SECTION 4.21 INVESTMENT GRADE RATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE 5 SUCCESSOR CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 5.01 WHEN FELCOR OR FELCOR LP MAY MERGE, ETC. . . . . . . . . . . . . . . . . . . . . . 50 SECTION 5.02 SUCCESSOR SUBSTITUTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE 6 DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 6.01 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 6.02 ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 6.03 OTHER REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 6.04 WAIVER OF PAST DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 6.05 CONTROL BY MAJORITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 6.06 LIMITATION ON SUITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 6.07 RIGHTS OF HOLDERS TO RECEIVE PAYMENT . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 6.08 COLLECTION SUIT BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 6.09 TRUSTEE MAY FILE PROOFS OF CLAIM . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 6.10 PRIORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 6.11 UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 6.12 RESTORATION OF RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 6.13 RIGHTS AND REMEDIES CUMULATIVE . . . . . . . . . . . . . . . . . . . . . . . . . . 56
iii 5 SECTION 6.14 DELAY OR OMISSION NOT WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ARTICLE 7 TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 7.01 GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 7.02 CERTAIN RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 7.03 INDIVIDUAL RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 7.04 TRUSTEE'S DISCLAIMER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 7.05 NOTICE OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 7.06 REPORTS BY TRUSTEE TO HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 7.07 COMPENSATION AND INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 7.08 REPLACEMENT OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 7.09 SUCCESSOR TRUSTEE BY MERGER, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 7.10 ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 7.11 MONEY HELD IN TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 7.12 WITHHOLDING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ARTICLE 8 DISCHARGE OF INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 8.01 TERMINATION OF COMPANY'S OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 8.02 DEFEASANCE AND DISCHARGE OF INDENTURE . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 8.03 DEFEASANCE OF CERTAIN OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 8.04 APPLICATION OF TRUST MONEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 8.05 REPAYMENT TO COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 8.06 REINSTATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 ARTICLE 9 AMENDMENTS, SUPPLEMENTS AND WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 9.01 WITHOUT CONSENT OF HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 9.02 WITH CONSENT OF HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 9.03 REVOCATION AND EFFECT OF CONSENT . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 9.04 NOTATION ON OR EXCHANGE OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 9.05 TRUSTEE TO SIGN AMENDMENTS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 9.06 CONFORMITY WITH TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . . 69 ARTICLE 10 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 10.01 TRUST INDENTURE ACT OF 1939 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
iv 6 SECTION 10.02 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 10.03 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . 71 SECTION 10.04 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION . . . . . . . . . . . . . . . . . . . 71 SECTION 10.05 RULES BY TRUSTEE, PAYING AGENT OR REGISTRAR . . . . . . . . . . . . . . . . . . . . 71 SECTION 10.06 PAYMENT DATE OTHER THAN A BUSINESS DAY . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 10.07 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 10.08 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . 72 SECTION 10.09 NO RECOURSE AGAINST OTHERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 10.10 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 10.11 DUPLICATE ORIGINALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 10.12 SEPARABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 10.13 TABLE OF CONTENTS, HEADINGS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . 72 ARTICLE 11 GUARANTEE OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 11.01 GUARANTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 11.02 OBLIGATIONS OF GUARANTOR UNCONDITIONAL. . . . . . . . . . . . . . . . . . . . . . 74 SECTION 11.03 NOTICE TO TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 11.04 THIS ARTICLE NOT TO PREVENT EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . 74 SECTION 11.05 TRUSTEE'S COMPENSATION NOT PREJUDICED. . . . . . . . . . . . . . . . . . . . . . 74 SECTION 11.06 PAYMENTS MAY BE PAID PRIOR TO DISSOLUTION. . . . . . . . . . . . . . . . . . . . . 74 SECTION 11.07 SUSPENSION OF GUARANTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
v 7 INDENTURE, dated as of October 1, 1997, among FelCor Suites Limited Partnership ("FelCor LP"), a Delaware limited partnership, FelCor Suite Hotels, Inc. ("FelCor"), a Maryland corporation, FelCor/CSS Hotels, L.L.C., a Delaware limited liability company, FelCor/LAX Hotels, L.L.C., a Delaware limited liability company, FelCor/CSS Holdings, L.P., FelCor/St. Paul Holdings, L.P., FelCor/LAX Holdings, L.P., FelCor Eight Hotels, L.L.C. and SunTrust Bank, Atlanta, a Georgia banking corporation (the "Trustee"). RECITALS OF COMPANY FelCor LP has duly authorized the execution and delivery of this Indenture to provide for the issuance initially of up to $175,000,000 aggregate principal amount at maturity of FelCor LP's 7 3/8% Senior Notes Due 2004 (the "7 3/8 Notes") and $125,000,000 aggregate principal amount at maturity of FelCor LP's 7 5/8% Senior Notes Due 2007 ("the "7 5/8 Notes"; and, together with the 7 3/8 Notes, the "Notes") issuable as provided in this Indenture. Each Guarantor has duly authorized the execution and delivery of this Indenture to provide for a guarantee of the Notes and of certain of FelCor LP's obligations hereunder. All things necessary to make this Indenture a valid agreement of FelCor LP and the Guarantors in accordance with its terms, have been done, and FelCor LP and the Guarantors have done all things necessary to make the Notes, when executed by FelCor LP and authenticated and delivered by the Trustee hereunder and duly issued by FelCor LP, the valid obligations of FelCor LP and the Guarantors as hereinafter provided. This Indenture is subject to, and shall be governed by, the provisions of the Trust Indenture Act of 1939, as amended, that are required to be a part of and to govern indentures qualified under the Trust Indenture Act of 1939, as amended. AND THIS INDENTURE FURTHER WITNESSETH For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders, as follows: ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 DEFINITIONS. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition from such Person by a Restricted Subsidiary and not incurred by such Person in connection with, or in anticipation of, such Person becoming a Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness of such Person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon consummation of the transactions by which such 8 Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness. "Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of FelCor, FelCor LP and their respective Restricted Subsidiaries for such period determined on a consolidated basis in conformity with GAAP plus the minority interest in FelCor LP, if applicable; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income of any Person (other than FelCor LP, FelCor or a Restricted Subsidiary), except to the extent of the amount of dividends or other distributions actually paid to FelCor LP, FelCor or any of their respective Restricted Subsidiaries by such Person during such period; (ii) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary; (iii) any gains or losses (on an after-tax basis) attributable to Asset Sales; (iv) for so long as the Notes are not rated Investment Grade, any amount paid or accrued as dividends on Preferred Stock of FelCor LP, FelCor or any Restricted Subsidiary owned by Persons other than FelCor or FelCor LP and any of their respective Restricted Subsidiaries; and (v) all extraordinary gains and extraordinary losses. "Adjusted Consolidated Net Tangible Assets" means the total amount of assets of FelCor LP, FelCor and their respective Restricted Subsidiaries (less applicable depreciation, amortization and other valuation reserves), except to the extent resulting from write-ups of capital assets (excluding write-ups in connection with accounting for acquisitions in conformity with GAAP), after deducting therefrom (i) all current liabilities of FelCor LP, FelCor and their respective Restricted Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set forth on the most recent quarterly or annual consolidated balance sheet of FelCor LP or FelCor and their respective Restricted Subsidiaries, prepared in conformity with GAAP and filed with the Commission or provided to the Trustee pursuant to Section 4.17. "Adjusted Total Assets" means, for any Person, the sum of (i) Total Assets for such Person as of the end of the calendar quarter preceding the Transaction Date as set forth on the most recent quarterly or annual consolidated balance sheet of FelCor LP or FelCor and their respective Restricted Subsidiaries, prepared in conformity with GAAP and filed with the Commission or provided to the Trustee pursuant to Section 4.17 and (ii) any increase in Total Assets following the end of such quarter including, without limitation, any increase in Total Assets resulting from the application of the proceeds of any additional Indebtedness. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, 2 9 means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" means any Registrar, Paying Agent, authenticating agent or co-Registrar. "Agent Members" has the meaning provided in Section 2.07(a). "Asset Acquisition" means (i) an investment by FelCor LP or FelCor or any of their respective Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary or shall be merged into or consolidated with FelCor LP or FelCor or any of their respective Restricted Subsidiaries; provided that such Person's primary business is related, ancillary, incidental or complementary to the businesses of FelCor LP or FelCor or any of their respective Restricted Subsidiaries on the date of such investment or (ii) an acquisition by FelCor LP or FelCor or any of their respective Restricted Subsidiaries from any other Person that constitutes substantially all of a division or line of business, or one or more hotel properties, of such Person; provided that the property and assets acquired are related, ancillary, incidental or complementary to the businesses of FelCor LP or FelCor or any of their respective Restricted Subsidiaries on the date of such acquisition. "Asset Disposition" means the sale or other disposition by FelCor LP or FelCor or any of their respective Restricted Subsidiaries (other than to FelCor LP, FelCor or another Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of any Restricted Subsidiary or (ii) all or substantially all of the assets that constitute a division or line of business, or one or more hotel properties, of FelCor LP or FelCor or any of their respective Restricted Subsidiaries. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transaction) in one transaction or a series of related transactions by FelCor LP or FelCor or any of their Restricted Subsidiaries to any Person other than FelCor LP or FelCor or any of their respective Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary other than sales permitted under clause (iv) of Section 4.06, (ii) all or substantially all of the property and assets of an operating unit or business of FelCor LP or FelCor or any of their respective Restricted Subsidiaries or (iii) any other property and assets of FelCor LP or FelCor or any of their respective Restricted Subsidiaries outside the ordinary course of business of FelCor LP or FelCor or such Restricted Subsidiary and, in each case, that is not governed by the provisions of the Indenture applicable to mergers, consolidations and sales of assets of FelCor LP and FelCor; provided that "Asset Sale" shall not include (a) sales or other dispositions of inventory, receivables and other current assets, (b) sales, transfers or other dispositions of assets with a fair market value not in excess of $1 million in any transaction or series of related transactions or (c) sales or other dispositions of assets for consideration at least equal to the fair market value of the assets sold or disposed of, to the extent that the consideration received would satisfy clause (i)(B) of the second sentence of Section 4.10. 3 10 "Average Life" means at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (b) the amount of such principal payment by (ii) the sum of all such principal payments. "Board of Directors" means (i) with respect to FelCor the Board of Directors of FelCor, (ii) with respect to FelCor LP, the Board of Directors of its general partner, and (iii) with respect to the Subsidiary Guarantors, the board of directors of its general partner or manager, as the case may be, or, in each case, any committee of such Board of Directors duly authorized to act under this Indenture. "Board Resolution" means a copy of a resolution, certified by the Secretary of such Person to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in The City of New York, or in the city of the Corporate Trust Office of the Trustee, are authorized by law to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated, whether voting or non-voting), including partnership interests, whether general or limited, in the equity of such Person, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all Common Stock, Preferred Stock and Units. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person. "Capitalized Lease Obligations" means the discounted present value of the rental obligations under a Capitalized Lease as reflected on the balance sheet of such Person in accordance with GAAP. "Change of Control" means such time as (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total voting power of the Voting Stock of FelCor or, other than by FelCor, of FelCor LP on a fully diluted basis; or (ii) individuals who on the Closing Date constitute the Board of Directors (together with any new or replacement directors whose election by the Board of Directors or whose nomination by the Board of Directors for election by FelCor's shareholders was approved by a vote of at least a majority of the members of the Board of Directors then still in office who either were members 4 11 of the Board of Directors on the Closing Date or whose election or nomination for election was so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office. "Closing Date" means the date on which the Notes are originally issued under the Indenture. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the TIA, then the body performing such duties at such time. "Common Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting), which have no preference on liquidation or with respect to distributions over any other class of Capital Stock, including partnership interests, whether general or limited, of such Person's equity, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all series and classes of common stock. "Company Order" means a written request or order signed in the name of a Person (i) by its Chairman, a Vice Chairman, its President, a Vice President, manager or similar officer of its general partner and (ii) by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, manager or similar officer of its general partner and delivered to the Trustee; provided, however, that such written request or order may be signed by any two of the officers or directors listed in clause (i) above in lieu of being signed by one of such officers or directors listed in such clause (i) and one of the officers listed in clause (ii) above. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Note to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Note. "Comparable Treasury Price" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, the average of the Reference Treasury Dealer Quotations actually obtained by the Trustee for such Redemption Date. 5 12 "Consolidated EBITDA" means, for any period, Adjusted Consolidated Net Income for such period plus, to the extent such amount was deducted in calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest Expense, (ii) income taxes (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets), (iii) depreciation expense, (iv) amortization expense and (v) all other non-cash items reducing Adjusted Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), less all non-cash items increasing Adjusted Consolidated Net Income, all as determined on a consolidated basis for FelCor LP, FelCor and their respective Restricted Subsidiaries in conformity with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Adjusted Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the percentage ownership interest in the income of such Restricted Subsidiary not owned on the last day of such period by FelCor LP or FelCor or any of their respective Restricted Subsidiaries. "Consolidated Interest Expense" means, for any period, without duplication, the aggregate amount of interest expense in respect of Indebtedness (including, without limitation, amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with GAAP; all commissions, discounts and other fees and expenses owed with respect to letters of credit and bankers' acceptance financing; the net costs associated with Interest Rate Agreements and Indebtedness that is Guaranteed or secured by assets of FelCor LP, FelCor or any of their respective Restricted Subsidiaries and all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by FelCor LP, FelCor and their respective Restricted Subsidiaries) during such period, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP; excluding (i) the amount of such interest expense of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income pursuant to clause (ii) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income pursuant to clause (ii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the offering of the Notes or paid in connection with any other Indebtedness outstanding on August 31, 1997, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. 6 13 "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date of this Indenture, located at 58 Edgewood Avenue, Room 400 Annex, Atlanta, Georgia 30303, Attention: Corporate Trust Administration. "Depositary" shall mean The Depository Trust Company, its nominees, and their respective successors. "Disqualified Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock, other than Units, at any time prior to the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Notes; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in Sections 4.10 and 4.11 and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to FelCor LP's repurchase of such Notes as are required to be repurchased pursuant to Sections 4.10 and 4.11. "DJONT" means DJONT Operations, L.L.C., a Delaware limited liability company. "Event of Default" has the meaning provided in Section 6.01. "Excess Proceeds" has the meaning provided in Section 4.10. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" means any securities of FelCor LP containing terms identical to a series of Notes (except that such Exchange Notes shall be registered under the Securities Act) that are issued and exchanged for such Notes pursuant to the Registration Rights Agreement and this Indenture. "fair market value" means the price that would be paid in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Board of Directors, whose determination shall be conclusive if evidenced by a Board Resolution. "Funds From Operations" for any period means the consolidated net income of FelCor LP, FelCor and their respective Restricted Subsidiaries for such period in conformity with GAAP 7 14 excluding gains or losses from debt restructurings and sales of property, plus depreciation of real property (including furniture and equipment) and after adjustments for unconsolidated partnerships and joint ventures plus the minority interest in FelCor LP, if applicable; provided that for purposes of the payment of any dividend or distribution by FelCor LP or FelCor, "Funds From Operations" shall be equal to $80 million plus the amount thereof computed for the period commencing with the first day of the fiscal quarter in which the Closing Date occurs and ending on the last day of the last fiscal quarter preceding the payment of such dividend or distribution. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Closing Date, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations contained or referred to in the Indenture shall be computed in conformity with GAAP applied on a consistent basis, except that calculations made for purposes of determining compliance with the terms of the covenants and with other provisions of the Indenture shall be made without giving effect to (i) the amortization of any expenses incurred in connection with the offering of the Notes and (ii) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. "Global Notes" has the meaning provided in Section 2.01. "Government Securities" means direct obligations of, obligations guaranteed by, or participations in pools consisting solely of obligations of or obligations guaranteed by, the United States of America for the payment of which obligations or guarantee the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the option of the issuer thereof. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm's-length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. 8 15 "Guarantors" means FelCor and the Subsidiary Guarantors, collectively, so long as they remain obligors on any Indebtedness of FelCor or FelCor LP which is pari passu with or subordinated to the Notes. "Holder" or "Noteholder" means the registered holder of any Note. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) the face amount of letters of credit or other similar instruments (excluding obligations with respect to letters of credit (including trade letters of credit) securing obligations (other than obligations described in (i) or (ii) above or (v), (vi) or (vii) below) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if drawn upon, to the extent such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement), (iv) all unconditional obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all Capitalized Lease Obligations, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise included in this definition or the definition of Consolidated Interest Expense, obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations of the type described above and, with respect to obligations under any Guarantee, the maximum liability upon the occurrence of the contingency giving rise to the obligation; provided that (A) the amount outstanding at any time of any Indebtedness issued with original issue discount shall be deemed to be the face amount with respect to such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at the date of determination in conformity with GAAP, and (B) Indebtedness shall not include any liability for federal, state, local or other taxes. "Indenture" means this Indenture as originally executed or as it may be amended or supplemented from time to time by one or more indentures supplemental to this Indenture entered into pursuant to the applicable provisions of this Indenture. 9 16 "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with FelCor LP. "Institutional Accredited Investor" means an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Interest Coverage Ratio" means, on any Transaction Date, the ratio of (i) the aggregate amount of Consolidated EBITDA for the then most recent four fiscal quarters prior to such Transaction Date for which reports have been filed with the Commission or provided to the Trustee pursuant to Section 4.17 ("Four Quarter Period") to (ii) the aggregate Consolidated Interest Expense during such Four Quarter Period. In making the foregoing calculation, (A) pro forma effect shall be given to any Indebtedness Incurred or repaid (other than in connection with an Asset Acquisition or Asset Disposition) during the period ("Reference Period") commencing on the first day of the Four Quarter Period and ending on the Transaction Date (other than Indebtedness Incurred or repaid under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) in effect on the last day of such Four Quarter Period unless any portion of such Indebtedness is projected, in the reasonable judgment of the senior management of FelCor LP or FelCor (as evidenced by an Officer's Certificate), to remain outstanding for a period in excess of 12 months from the date of the Incurrence thereof), in each case as if such Indebtedness had been Incurred or repaid on the first day of such Reference Period; (B) Consolidated Interest Expense attributable to interest on any Indebtedness (whether existing or being Incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the Transaction Date (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months or, if shorter, at least equal to the remaining term of such Indebtedness) had been the applicable rate for the entire period; (C) pro forma effect shall be given to Asset Dispositions and Asset Acquisitions (including giving pro forma effect to the application of proceeds of any Asset Disposition and any Indebtedness Incurred or repaid in connection with any such Asset Acquisitions or Asset Dispositions) that occur during such Reference Period but subsequent to the end of the related Four Quarter Period as if they had occurred and such proceeds had been applied on the first day of such Reference Period; and (D) pro forma effect shall be given to asset dispositions and asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition and any Indebtedness Incurred or repaid in connection with any such asset acquisitions or asset dispositions) that have been made by any Person that has become a Restricted Subsidiary or has been merged with or into FelCor LP or FelCor or any of their respective Restricted Subsidiaries during such Reference Period but subsequent to the end of the related Four Quarter Period and that would have constituted Asset Dispositions or Asset Acquisitions during such Reference Period but subsequent to the end of the related Four Quarter Period had such transactions occurred when such Person was a Restricted Subsidiary as if such asset dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions and had occurred on the first day of such Reference Period; provided that to the extent that clause (C) or (D) of this sentence requires that pro forma effect be given to an Asset Acquisition or Asset 10 17 Disposition, such pro forma calculation shall be based upon the four full fiscal quarters immediately preceding the Transaction Date of the Person, or division or line of business, or one or more hotel properties, of the Person that is acquired or disposed of to the extent that such financial information is available. "Interest Payment Date" means each semiannual interest payment date on April 1 and October 1, of each year, commencing April 1, 1998. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement, option or future contract or other similar agreement or arrangement with respect to interest rates. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including without limitation by way of Guarantee or similar arrangement, but excluding advances to customers in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable on the consolidated balance sheet of FelCor LP, FelCor and their respective Restricted Subsidiaries) or capital contribution to (by means of any transfer of cash or other property (tangible or intangible) to others or any payment for property or services solely for the account or use of others, or otherwise), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by, such Person and shall include (i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market value of the Capital Stock (or any other Investment), held by FelCor LP or FelCor or any of their respective Restricted Subsidiaries of (or in) any Person that has ceased to be a Restricted Subsidiary, including without limitation, by reason of any transaction permitted by clause (iii) of Section 4.06; provided that the fair market value of the Investment remaining in any Person that has ceased to be a Subsidiary shall be deemed not to exceed the aggregate amount of Investments previously made in such Person valued at the time such Investments were made, less the net reduction of such Investments. For purposes of the definition of "Unrestricted Subsidiary" and Section 4.04, (i) "Investment" shall include the fair market value of the assets (net of liabilities (other than liabilities to FelCor LP or FelCor or any of their respective Restricted Subsidiaries)) of any Restricted Subsidiary at the time such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of liabilities (other than liabilities to FelCor LP or FelCor or any of their respective Restricted Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary shall be considered a reduction in outstanding Investments and (iii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer. "Investment Grade" means a rating of the Notes by both S&P and Moody's, each such rating being in one of such agency's four highest generic rating categories that signifies investment grade (i.e. BBB- (or the equivalent) or higher by S&P and Baa3 (or the equivalent) or higher by Moody's); provided, in each case, such ratings are publicly available; provided, further, 11 18 that in the event Moody's or S&P is no longer in existence for purposes of determining whether the Notes are rated "Investment Grade," such organization may be replaced by a nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) designated by FelCor LP and FelCor, notice of which shall be given to a Responsible Officer of the Trustee. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including without limitation, any conditional sale or other title retention agreement or lease in the nature thereof or any agreement to give any security interest). "Line of Credit" means the credit facility established pursuant to the Third Amended and Restated Revolving Credit Agreement dated as of August 14, 1997 among FelCor LP, FelCor, the lenders party thereto, The Chase Manhattan Bank, as Administrative Agent, Wells Fargo Bank, National Association, as Documentation Agent, together with all other agreements, instruments and documents executed or delivered pursuant thereto or in connection therewith, in each case as such agreements, instruments or documents may be amended, supplemented, extended, renewed, replaced or otherwise modified from time to time; provided that, with respect to an agreement providing for the refinancing of Indebtedness under the Line of Credit, such agreement shall be the Line of Credit under the Indenture only if a notice to that effect is delivered by FelCor LP and FelCor to a Responsible Officer of the Trustee and there shall be at any time only one instrument that is (together with the aforementioned related agreements, instruments and documents) the Line of Credit under the Indenture. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to FelCor LP or FelCor or any of their respective Restricted Subsidiaries) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes actually paid or payable as a result of such Asset Sale by FelCor LP, FelCor and their respective Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) amounts reserved by FelCor LP, FelCor and their respective Restricted Subsidiaries against any liabilities associated with such Asset Sale, including without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined on a consolidated basis in conformity with GAAP and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or 12 19 cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to FelCor LP or FelCor or any of their respective Restricted Subsidiaries) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of attorney's fees, accountants's fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of tax paid or payable as a result thereof. "Non-U.S. Person" means a person who is not a U.S. person, as defined in Regulation S. "Note Register" has the meaning provided in Section 2.04. "Notes" means any of the securities, as defined in the first paragraph of the recitals hereof, that are authenticated and delivered under this Indenture. For all purposes of this Indenture, the term "Notes" shall include the Notes initially issued on the Closing Date, any Exchange Notes to be issued and exchanged for any Notes pursuant to the Registration Rights Agreement and this Indenture and any other Notes issued after the Closing Date under this Indenture. For purposes of this Indenture, all Notes shall vote together as one series of Notes under this Indenture. "Offer to Purchase" means an offer to purchase Notes by FelCor LP, from the Holders commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all Notes validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) ("Payment Date"); (iii) that any Note not tendered will continue to accrue interest pursuant to its terms; (iv) that, unless FelCor LP defaults in the payment of the purchase price, any Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest on and after the Payment Date; (v) that Holders electing to have a Note purchased pursuant to the Offer to Purchase will be required to surrender the Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the Payment Agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and (vii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. On the Payment Date, FelCor LP shall (i) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase; and (ii) deposit with the Paying Agent money 13 20 sufficient to pay the purchase price of all Notes or portions thereof so accepted; and shall promptly thereafter deliver, or cause to be delivered, to the Trustee all Notes or portions thereof so accepted together with an Officers' Certificate specifying the Notes or portions thereof accepted for payment by FelCor LP. The Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Note equal in principal amount to any unpurchased portion of any Note surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. FelCor LP will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. FelCor LP will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that FelCor LP is required to repurchase Notes pursuant to an Offer to Purchase. "Officer" means, with respect to any Person, (i) the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, and (ii) the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant Secretary or Person holding a similar position at the general partner or manager of such Person. "Officers' Certificate" means a certificate signed by one Officer listed in clause (i) of the definition thereof and one Officer listed in clause (ii) of the definition thereof. Each Officers' Certificate (other than certificates provided pursuant to TIA Section 314(a)(4)) shall include the statements provided for in TIA Section 314(e). "Offshore Global Note" has the meaning provided in Section 2.01. "Offshore Physical Notes" has the meaning provided in Section 2.01. "Offshore Notes Exchange Date" has the meaning provided in Section 2.01. "Opinion of Counsel" means a written opinion signed by legal counsel who may be an employee of or counsel to FelCor or FelCor LP. Each such Opinion of Counsel shall include the statements provided for in TIA Section 314(e). "Paying Agent" has the meaning provided in Section 2.04, except that, for the purposes of Article Eight, the Paying Agent shall not be FelCor LP, a Subsidiary of FelCor LP, any Guarantor or an Affiliate of any of them. The term "Paying Agent" includes any additional Paying Agent. "Permanent Offshore Global Note" has the meaning provided in Section 2.01. "Permitted Investment" means (i) an Investment in FelCor LP or FelCor or any of their Restricted Subsidiaries or a Person which will, upon the making of such Investment, become a Restricted Subsidiary or be merged or consolidated with or into or transfer or convey all or substantially all its assets to, FelCor LP or FelCor or any of their Restricted Subsidiaries; 14 21 provided that such person's primary business is related, ancillary, incidental or complementary to the businesses of FelCor LP or FelCor or any of their respective Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash Investments; (iii) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordances with GAAP; and (iv) stock, obligations or securities received in satisfaction of judgments. "Physical Notes" has the meaning provided in Section 2.01. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated, whether voting or non-voting), which have a preference on liquidation or with respect to distributions over any other class of Capital Stock, including preferred partnership interests, whether general or limited, or such Person's preferred or preference stock, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all series and classes of such preferred or preference stock. "Private Placement Legend" means the legend initially set forth on the Notes in the form set forth in Section 2.02. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Redemption Date", when used with respect to any Note to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Note to be redeemed, means the price at which such Note is to be redeemed pursuant to this Indenture. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, NationsBanc Capital Markets, Inc. and Salomon Brothers Inc and their respective successors; provided, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), FelCor LP shall substitute therefor another Primary Treasury Dealer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Redemption Date. "Registrar" has the meaning provided in Section 2.04. "Registration" has the meaning provided in Section 4.17. 15 22 "Registration Rights Agreement" means the Registration Rights Agreement, dated September 26, 1997, among FelCor LP, FelCor, Morgan Stanley & Co. Incorporated, NationsBank Capital Markets, Inc. and Salomon Brothers Inc and certain permitted assigns specified therein. "Registration Statement" means the Registration Statement as defined and described in the Registration Rights Agreement. "Regular Record Date" for the interest payable on any Interest Payment Date means the March 15 or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice chairman of the board of directors, the chairman or any vice chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, any assistant vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Subsidiary" means any Subsidiary of FelCor LP or FelCor other than an Unrestricted Subsidiary. "Rule 144A" means Rule 144A under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended. "Secured Indebtedness" means any Indebtedness secured by a Lien upon the property of FelCor LP or FelCor or any of their respective Restricted Subsidiaries. "Senior Indebtedness" means the following obligations of FelCor LP or FelCor or any of their respective Restricted Subsidiaries, whether outstanding on the Closing Date or thereafter Incurred: (i) all Indebtedness and all other monetary obligations (including expenses fees and other monetary obligations) of FelCor LP and FelCor under the Line of Credit; (ii) all Indebtedness and all other monetary obligations of FelCor LP or FelCor or any of their respective Restricted Subsidiaries (other than the Notes), including principal and interest on such Indebtedness, unless such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued is expressly subordinated in right of payment to the Notes; and (iii) Subsidiary Debt. Senior Indebtedness will also include interest 16 23 accruing subsequent to events of bankruptcy of FelCor LP and FelCor and their respective Restricted Subsidiaries at the rate provided for the document governing such Senior Indebtedness, whether or not such interest is an allowed claim enforceable against the debtor in a bankruptcy case under bankruptcy law. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "Significant Subsidiary" means, at any date of determination, any Restricted Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal year of FelCor LP and FelCor, accounted for more than 10% of the consolidated revenues of FelCor LP, FelCor and their respective Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of FelCor LP, FelCor and their respective Restricted Subsidiaries, all as set forth on the most recently available consolidated financial statements thereof for such fiscal year. "S&P" means Standard & Poor's Ratings Services and its successors. "Specified Date" means any Redemption Date, Change of Control Payment Date, Excess Proceeds Payment Date or any date on which the Notes first become due and payable after an Event of Default. "Stated Maturity" means, (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person and the accounts of which would be consolidated with those of such Person in its consolidated financial statements in accordance with GAAP, if such statements were prepared as of such date. "Subsidiary Debt" means all unsecured Indebtedness of which a Restricted Subsidiary is the primary obligor. "Subsidiary Guarantee" means a Guarantee by each Subsidiary Guarantor for payment of the Notes by such Subsidiary Guarantor. The Subsidiary Guarantee will be an unsecured senior obligation of each Subsidiary Guarantor and will be unconditional regardless of the enforceability of the Notes and the Indenture. Notwithstanding the foregoing, each Subsidiary Guarantee by a Subsidiary Guarantor shall provide by its terms that it shall remain in effect only so long as such Subsidiary Guarantor remains an obligor on other Indebtedness of FelCor or 17 24 FelCor LP which is pari passu with or subordinated to the Notes and that it shall be automatically and unconditionally released and discharged upon any sale, exchange or transfer, to any Person not an Affiliate of FelCor LP or FelCor, of all of the Capital Stock owned by FelCor LP, FelCor and their respective Restricted Subsidiaries in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not then prohibited by the Indenture). "Subsidiary Guarantor" means each of (i) FelCor/CSS Hotels, L.L.C., a Delaware limited liability company, (ii) FelCor/LAX Hotels, L.L.C., a Delaware limited liability company, (iii) FelCor/CSS Holdings, L.P., a Delaware limited partnership, (iv) FelCor/St. Paul Holdings, L.P., a Delaware limited partnership, (v) FelCor/LAX Holdings, L.P., a Delaware limited partnership and (vi) FelCor Eight Hotels, L.L.C., a Delaware limited liability company and each other Restricted Subsidiary that executes a Subsidiary Guarantee in compliance with Section 4.07. "Temporary Cash Investment" means any of the following: (i) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (ii) time deposits accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50 million and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of FelCor LP or FelCor) organized and in existence under the laws of the United States of America, any state thereof with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, and (v) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or Moody's. "Temporary Offshore Global Note" has the meaning provided in Section 2.01. "TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended (15 U.S. Code Section 77aaa- 77bbb), as in effect on the date this Indenture was executed, except as provided in Section 9.06. 18 25 "Total Assets" means the sum of (i) Undepreciated Real Estate Assets and (ii) all other assets of FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis determined in conformity with GAAP (but excluding intangibles and accounts receivables). "Total Unencumbered Assets" as of any date means the sum of (i) those Undepreciated Real Estate Assets not securing any portion of Secured Indebtedness and (ii) all other assets (but excluding intangibles and accounts receivable) of FelCor LP, FelCor and their respective Restricted Subsidiaries not securing any portion of Secured Indebtedness determined on a consolidated basis in accordance with GAAP. "Trade Payables" means, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transaction Date" means, with the respect to the Incurrence of any Indebtedness by FelCor LP or FelCor or any of their respective Restricted Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Treasury Rate" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date. "Trustee" means the party named as such in the first paragraph of this Indenture until a successor replaces it in accordance with the provisions of Article Seven of this Indenture and thereafter means such successor. "Undepreciated Real Estate Assets" means, as of any date, the cost (being the original cost to FelCor LP or FelCor or any of their respective Restricted Subsidiaries plus capital improvements) of real estate assets of FelCor LP, FelCor and their Restricted Subsidiaries on such date, before depreciation and amortization of such real estate assets, determined on a consolidated basis in conformity with GAAP. "United States Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as amended and as codified in Title 11 of the United States Code, as amended from time to time hereafter, or any successor federal bankruptcy law. "U.S. Global Note" has the meaning provided in Section 2.01. "U.S. Physical Notes" has the meaning provided in Section 2.01. 19 26 "Units" means the limited partnership units of FelCor LP, that by their terms are redeemable at the option of the holder thereof and that, if so redeemed, at the election of FelCor are redeemable for cash or Common Stock of FelCor. "Unrestricted Subsidiary" means (i) any Subsidiary of FelCor LP or FelCor that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of FelCor LP or FelCor) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, FelCor LP or FelCor or any of their respective Restricted Subsidiaries; provided that (A) any Guarantee by FelCor LP or FelCor or any of their respective Restricted Subsidiaries of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by FelCor LP or FelCor or such Restricted Subsidiary (or all, if applicable) at the time of such designation, (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under Section 4.04 and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under Sections 4.03 and 4.04. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such designation; and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately after such designation would, if Incurred at such time, have been permitted to be Incurred (and shall be deemed to have been Incurred) for all purposes of the Indenture. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Unsecured Indebtedness" means any Indebtedness of FelCor LP or FelCor or any of their respective Restricted Subsidiaries that is not Secured Indebtedness. "Voting Stock" means with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. "Wholly Owned" means, with respect to any Subsidiary of any Person, the ownership of all of the outstanding Capital Stock of such Subsidiary (other than any director's qualifying shares or Investments by individuals mandated by applicable law) by such Person or one or more Wholly Owned Subsidiaries of such Person. SECTION 1.02 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made 20 27 a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture notes" means the Notes; "indenture note holder" means a Holder or a Noteholder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means FelCor LP, the Guarantors or any other obligor on the Notes. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by a rule of the Commission and not otherwise defined herein have the meanings assigned to them therein. SECTION 1.03 RULES OF CONSTRUCTION. Unless the context otherwise requires: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (iii) "or" is not exclusive; (iv) words in the singular include the plural, and words in the plural include the singular; (v) provisions apply to successive events and transactions; (vi) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (vii) all ratios and computations based on GAAP contained in this Indenture shall be computed in accordance with the definition of GAAP set forth in Section 1.01; and (viii) all references to Sections or Articles refer to Sections or Articles of this Indenture unless otherwise indicated. 21 28 ARTICLE 2 NOTES SECTION 2.01 FORM AND DATING. The Notes and the Trustee's certificate of authentication shall be substantially in the form annexed hereto as Exhibit A with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture. The Notes may have notations, legends or endorsements required by law, stock exchange agreements to which FelCor LP or the Guarantors are subject or usage. FelCor LP shall approve the form of the Notes and any notation, legend or endorsement on the Notes. Each Note shall be dated the date of its authentication. The terms and provisions contained in the form of the Notes annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, FelCor LP, the Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Notes offered and sold in reliance on Rule 144A shall be issued initially in the form of one or more permanent global Notes in registered form, substantially in the form set forth in Exhibit A (collectively, the "U.S. Global Notes"), deposited with the Trustee, as custodian for the Depositary, duly executed by FelCor LP and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the U.S. Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Notes offered and sold in offshore transactions in reliance on Regulation S shall be issued initially in the form of one or more temporary global Notes in registered form substantially in the form set forth in Exhibit A (the "Temporary Offshore Global Notes") deposited with the Trustee, as custodian for the Depositary, duly executed by FelCor LP and authenticated by the Trustee as hereinafter provided. At any time following 40 days from the initial issuance of a series of notes (the "Offshore Notes Exchange Date"), upon receipt by the Trustee and FelCor LP of a certificate substantially in the form of Exhibit B hereto, one or more permanent global Notes in registered form substantially in the form set forth in Exhibit A (the "Permanent Offshore Global Notes"; and together with the Temporary Offshore Global Notes, the "Offshore Global Notes") duly executed by FelCor LP and authenticated by the Trustee as hereinafter provided shall be deposited with the Trustee, as custodian for the Depositary, and the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Temporary Offshore Global Notes in an amount equal to the principal amount of the beneficial interest in the Temporary Offshore Global Notes transferred. Notes offered and sold in reliance on Regulation D under the Securities Act shall be issued in the form of permanent certificated Notes in registered form in substantially the form set forth in Exhibit A (the "U.S. Physical Notes"). Notes issued pursuant to Section 2.07 in exchange for interests in the Offshore Global Note shall be in the form of permanent certificated 22 29 Notes in registered form substantially in the form set forth in Exhibit A (the "Offshore Physical Notes"). The Offshore Physical Notes and U.S. Physical Notes are sometimes collectively herein referred to as the "Physical Notes". The U.S. Global Notes and the Offshore Global Notes are sometimes referred to herein as the "Global Notes". The definitive Notes shall be typed, printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Notes may be listed, all as determined by the Officers executing such Notes, as evidenced by their execution of such Notes. SECTION 2.02 RESTRICTIVE LEGENDS. Unless and until a Note is exchanged for an Exchange Note or sold in connection with an effective Registration pursuant to the Registration Rights Agreement, the U.S. Global Notes, Temporary Offshore Global Notes and each U.S. Physical Note shall bear the following legend on the face thereof: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR"), (2) AGREES THAT IT WILL NOT, WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THE NOTES, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO FELCOR OR FELCOR LP OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (E) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES AT THE TIME OF TRANSFER OF LESS THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO FELCOR AND FELCOR LP 23 30 THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THE NOTES, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND FELCOR AND FELCOR LP SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS. Each Global Note, whether or not an Exchange Note, shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, TO FELCOR LP OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.08 OF THE INDENTURE. 24 31 SECTION 2.03 EXECUTION, AUTHENTICATION AND DENOMINATIONS. The Notes shall be executed by two Officers of FelCor, as general partner of FelCor LP. The signature of any of these Officers on the Notes may be by facsimile or manual signature in the name and on behalf of FelCor or FelCor LP, as the case may be. If an Officer whose signature is on a Note no longer holds that office at the time the Trustee or authenticating agent authenticates the Note, the Note shall be valid nevertheless. A Note shall not be valid until the Trustee or authenticating agent manually signs the certificate of authentication on the Note. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. At any time and from time to time after the execution of this Indenture, the Trustee or an authenticating agent shall upon receipt of a Company Order authenticate for original issue Notes in the aggregate principal amount specified in such Company Order; provided that the Trustee shall be entitled to receive an Officers' Certificate and an Opinion of Counsel of FelCor LP in connection with such authentication of Notes. Such Company Order shall specify the amount of Notes to be authenticated and the date on which the original issue of Notes is to be authenticated and in case of an issuance of Notes pursuant to Section 2.15, shall certify that such issuance is in compliance with Article Four. The Trustee may appoint an authenticating agent to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such authenticating agent. An authenticating agent has the same rights as an Agent to deal with FelCor LP or an Affiliate of FelCor LP. The Notes shall be issuable only in registered form without coupons and only in denominations of $1,000 in principal amount at maturity and any integral multiple of $1,000 in excess thereof. SECTION 2.04 REGISTRAR AND PAYING AGENT. FelCor LP shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange (the "Registrar"), an office or agency where Notes may be presented for payment (the "Paying Agent") and an office or agency where notices and demands to or upon FelCor LP in respect of the Notes and this Indenture may be served, which shall be in the Borough of Manhattan, The City of New York. FelCor LP shall cause the Registrar to keep a register of the Notes and of their transfer and exchange (the "Note Register"). FelCor LP may have one or more co-Registrars and one or more additional Paying Agents. FelCor LP shall enter into an appropriate agency agreement with any Agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. FelCor LP shall give prompt written notice to the Trustee of the name and address of any 25 32 such Agent and any change in the address of such Agent. If FelCor LP fails to maintain a Registrar, Paying Agent and/or agent for service of notices and demands, the Trustee shall act as such Registrar, Paying Agent and/or agent for service of notices and demands. FelCor LP may remove any Agent upon written notice to such Agent and the Trustee; provided that no such removal shall become effective until (i) the acceptance of an appointment by a successor Agent to such Agent as evidenced by an appropriate agency agreement entered into by FelCor LP and such successor Agent and delivered to the Trustee or (ii) notification to the Trustee that the Trustee shall serve as such Agent until the appointment of a successor Agent in accordance with clause (i) of this proviso. Except with respect to Article 8, FelCor, FelCor LP, any Subsidiary of FelCor or FelCor LP, or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar, and/or agent for service of notice and demands. FelCor LP initially appoints the Trustee as Registrar, Paying Agent, authenticating agent and agent for service of notice and demands. If, at any time, the Trustee is not the Registrar, the Registrar shall make available to the Trustee on or before each Interest Payment Date and at such other times as the Trustee may reasonably request, the names and addresses of the Holders as they appear in the Note Register. SECTION 2.05 PAYING AGENT TO HOLD MONEY IN TRUST. Not later than each due date of the principal, premium, if any, and interest on any Notes, FelCor LP shall deposit with the Paying Agent money in immediately available funds sufficient to pay such principal, premium, if any, and interest so becoming due; provided that if the Trustee is then serving as Paying Agent, FelCor LP agrees to use its best efforts to deposit or otherwise transfer such funds to the Trustee by no later than 11:00 a.m., Atlanta, Georgia time on the applicable due date. FelCor LP shall require each Paying Agent other than the Trustee to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, and interest on the Notes (whether such money has been paid to it by FelCor LP or any other obligor on the Notes), and such Paying Agent shall promptly notify the Trustee of any default by FelCor LP (or any other obligor on the Notes) in making any such payment. FelCor LP at any time may require a Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed, and the Trustee may at any time during the continuance of any payment default, upon written request to a Paying Agent, require such Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed. Upon doing so, the Paying Agent shall have no further liability for the money so paid over to the Trustee. If FelCor, FelCor LP or any Subsidiary of FelCor or FelCor LP or any Affiliate of any of them acts as Paying Agent, it will, on or before each due date of any principal of, premium, if any, or interest on the Notes, segregate and hold in a separate trust fund for the benefit of the Holders a sum of money sufficient to pay such principal, premium, if any, or interest so becoming due until such sum of money shall be paid to such Holders or otherwise disposed of as provided in this Indenture, and will promptly notify the Trustee of its action or failure to act. 26 33 SECTION 2.06 TRANSFER AND EXCHANGE. The Notes are issuable only in registered form. A Holder may transfer a Note only by written application to the Registrar stating the name of the proposed transferee and otherwise complying with the terms of this Indenture. No such transfer shall be effected until, and such transferee shall succeed to the rights of a Holder only upon, final acceptance and registration of the transfer by the Registrar in the Note Register. Prior to the registration of any transfer by a Holder as provided herein, FelCor LP, the Guarantors, the Trustee, and any agent of FelCor LP shall treat the person in whose name the Note is registered as the owner thereof for all purposes whether or not the Note shall be overdue, and neither FelCor LP, the Guarantors, the Trustee, nor any such agent shall be affected by notice to the contrary. Furthermore, any Holder of a Global Note shall, by acceptance of such Global Note, agree that transfers of beneficial interests in such Global Note may be effected only through a book entry system maintained by the Holder of such Global Note (or its agent) and that ownership of a beneficial interest in the Note shall be required to be reflected in a book entry. When Notes are presented to the Registrar or a co-Registrar with a request to register the transfer or to exchange them for an equal principal amount of Notes of other authorized denominations (including an exchange of Notes for Exchange Notes), the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided that no exchanges of Notes for Exchange Notes shall occur until a Registration Statement shall have been declared effective by the Commission and that any Notes that are exchanged for Exchange Notes shall be cancelled by the Trustee. To permit registrations of transfers and exchanges, FelCor LP shall execute and the Trustee shall authenticate Notes at the Registrar's request. No service charge shall be made for any registration of transfer or exchange or redemption of the Notes, but FelCor LP may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or other similar governmental charge payable upon exchanges pursuant to Section 2.11, 3.08 or 9.04). The Registrar shall not be required (i) to issue, register the transfer of or exchange any Note during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Notes selected for redemption under Section 3.03 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. SECTION 2.07 BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES. (a) The U.S. Global Note and Offshore Global Note initially shall (i) be registered in the name of the Depositary for such Global Notes or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 2.02. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Note, and the Depositary may be treated by FelCor LP, the Guarantors, the Trustee and any agent of FelCor LP, the Guarantors, or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding 27 34 the foregoing, nothing herein shall prevent FelCor LP, the Guarantors, the Trustee or any agent of FelCor LP, the Guarantors, or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Note. (b) Transfers of a Global Note shall be limited to transfers of such Global Note in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Note may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 2.08. In addition, U.S. Physical Notes and Offshore Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in the U.S. Global Note or the Offshore Global Note, respectively, if (i) the Depositary notifies FelCor LP that it is unwilling or unable to continue as Depositary for the U.S. Global Note or the Offshore Global Note, as the case may be, and a successor depositary is not appointed by FelCor LP within 90 days of such notice, (ii) an Event of Default has occurred and is continuing and the Registrar has received a request therefor from the Depositary or (iii) in accordance with the rules and procedures of the Depositary and the provisions of Section 2.08. (c) Any beneficial interest in one of the Global Notes that is transferred to a person who takes delivery in the form of an interest in the other Global Note will, upon transfer, cease to be an interest in such Global Note and become an interest in the other Global Note and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to beneficial interests in such other Global Note for as long as it remains such an interest. (d) In connection with any transfer of a portion of the beneficial interests in the U.S. Global Note or Permanent Offshore Global Note to beneficial owners pursuant to paragraph (b) of this Section, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Note or Permanent Offshore Global Note in an amount equal to the principal amount of the beneficial interest in the U.S. Global Note or Permanent Offshore Global Note to be transferred, and FelCor LP shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Physical Notes or Offshore Physical Notes, as the case may be, of like tenor and amount. (e) In connection with the transfer of the entire U.S. Global Note or Offshore Global Note to beneficial owners pursuant to paragraph (b) of this Section, the U.S. Global Note or Offshore Global Note, as the case may be, shall be deemed to be surrendered to the Trustee for cancellation, and FelCor LP shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the U.S. Global Note or Offshore Global Note, as the case may be, an equal aggregate principal amount of U.S. Physical Notes or Offshore Physical Notes, as the case may be, of authorized denominations. 28 35 (f) Any U.S. Physical Note delivered in exchange for an interest in the U.S. Global Note pursuant to paragraph (b), (d) or (e) of this Section shall, except as otherwise provided by paragraph (f) of Section 2.08, bear the legend regarding transfer restrictions applicable to the U.S. Physical Note set forth in Section 2.02. (g) Any Offshore Physical Note delivered in exchange for an interest in the Temporary Offshore Global Note pursuant to paragraph (b), (d) or (e) of this Section shall, except as otherwise provided by paragraph (f) of Section 2.08, bear the legend regarding transfer restrictions applicable to the Offshore Physical Note set forth in Section 2.02. (h) The registered holder of a Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. SECTION 2.08 SPECIAL TRANSFER PROVISIONS. Unless and until a Note is exchanged for an Exchange Note or sold in connection with an effective Registration Statement pursuant to the Registration Rights Agreement, the following provisions shall apply: (a) Transfers to Non-QIB Institutional Accredited Investors. The following provisions shall apply with respect to the registration of any proposed transfer of a Note to any Institutional Accredited Investor which is not a QIB (excluding Non-U.S. Persons): (i) The Registrar shall register the transfer of any Note, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is two years after the original issuance of the Notes or (y) the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit C hereto. (ii) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Note, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (i) and (y) instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and a decrease in the principal amount at maturity of the U.S. Global Note in an amount equal to the principal amount at maturity of the beneficial interest in the U.S. Global Note to be transferred, and FelCor LP shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Physical Certificates of like tenor and amount. (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a U.S. Physical Note or an interest in the U.S. Global Note to a QIB (excluding Non-U.S. Persons): (i) If the Note to be transferred consists of (x) U.S. Physical Notes, the Registrar shall register the transfer if such transfer is being made by a proposed transferor 29 36 who has checked the box provided for on the form of Note stating, or has otherwise advised FelCor LP and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Note stating, or has otherwise advised FelCor LP and the Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding FelCor LP and the Guarantors as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A or (y) an interest in the U.S. Global Note, the transfer of such interest may be effected only through the book entry system maintained by the Depositary. (ii) If the proposed transferee is an Agent Member, and the Note to be transferred consists of U.S. Physical Notes, upon receipt by the Registrar of the documents referred to in clause (i) and instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount at maturity of the U.S. Global Note in an amount equal to the principal amount at maturity of the U.S. Physical Notes, to be transferred, and the Trustee shall cancel the U.S. Physical Note so transferred. (c) Transfers of Interests in the Temporary Offshore Global Note. The following provisions shall apply with respect to registration of any proposed transfer of interests in the Temporary Offshore Global Note: (i) The Registrar shall register the transfer of any Note (x) if the proposed transferee is a Non-U.S. Person and the proposed transferor has delivered to the Registrar a certificate substantially in the form of Exhibit D hereto or (y) if the proposed transferee is a QIB and the proposed transferor has checked the box provided for on the form of Note stating, or has otherwise advised FelCor LP and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Note stating, or has otherwise advised FelCor LP and the Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding FelCor LP and the Guarantors as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A. 30 37 (ii) If the proposed transferee is an Agent Member, upon receipt by the Registrar of the documents referred to in clause (i)(y) above and instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount at maturity of the U.S. Global Note, in an amount equal to the principal amount at maturity of the Temporary Offshore Global Note to be transferred, and the Trustee shall decrease the amount of the Temporary Offshore Global Note in such an amount. (d) Transfers of Interests in the Permanent Offshore Global Note or Unlegended Offshore Physical Notes. The following provisions shall apply with respect to any transfer of interests in the Permanent Offshore Global Note or unlegended Offshore Physical Notes. The Registrar shall register the transfer of any such Note without requiring any additional certification. (e) Transfers to Non-U.S. Persons at Any Time. The following provisions shall apply with respect to any transfer of a Note to a Non-U.S. Person: (i) Prior to 40 days from the initial issuance of a series of notes, the Registrar shall register any proposed transfer of a Note to a Non-U.S. Person upon receipt of a certificate substantially in the form of Exhibit D hereto from the proposed transferor. (ii) On and after 40 days from the initial issuance of a series of notes, the Registrar shall register any proposed transfer to any Non-U.S. Person if the Note to be transferred is a U.S. Physical Note or an interest in the U.S. Global Note, upon receipt of a certificate substantially in the form of Exhibit D from the proposed transferor. (ii) (a) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Note, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (ii) and (y) instructions in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and a decrease in the principal amount at maturity of the U.S. Global Note in an amount equal to the principal amount at maturity of the beneficial interest in the U.S. Global Note to be transferred, and (b) if the proposed transferee is an Agent Member, upon receipt by the Registrar of instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount at maturity of the Offshore Global Note in an amount equal to the principal amount at maturity of the U.S. Physical Notes or the U.S. Global Note, as the case may be, to be transferred, and the Trustee shall cancel the U.S. Physical Note, if any, so transferred or decrease the amount of the U.S. Global Note. (f) Private Placement Legend. Upon the transfer, exchange or replacement of Notes not bearing the Private Placement Legend, the Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Registrar shall deliver only Notes that bear the Private 31 38 Placement Legend unless either (i) the circumstances contemplated by the second sentence of the fourth paragraph of Section 2.01 or paragraphs (a)(i)(x) or (e)(ii) of this Section 2.08 exist or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to FelCor and FelCor LP and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (g) General. By its acceptance of any Note bearing the Private Placement Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. The Registrar shall not register a transfer of any Note unless such transfer complies with the restrictions on transfer of such Note set forth in this Indenture. In connection with any transfer of Notes, each Holder agrees by its acceptance of the Notes to furnish the Registrar or FelCor LP such certifications, legal opinions or other information as either of them may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or a transaction not subject to, the registration requirements of the Securities Act; provided that the Registrar shall not be required to determine (but may rely on a determination made by FelCor LP with respect to) the sufficiency of any such certifications, legal opinions or other information. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.07 or this Section 2.08. FelCor LP shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar. SECTION 2.09 REPLACEMENT NOTES. If a mutilated Note is surrendered to the Trustee or if the Holder claims that the Note has been lost, destroyed or wrongfully taken, FelCor LP shall issue and the Trustee shall authenticate a replacement Note of like tenor and amount and bearing a number not contemporaneously outstanding; provided that the requirements of this Section 2.09 are met. If required by the Trustee or FelCor LP, an indemnity bond must be furnished that is sufficient in the judgment of both the Trustee and FelCor LP to protect FelCor LP, the Guarantors, the Trustee or any Agent from any loss that any of them may suffer if a Note is replaced. FelCor LP may charge such Holder for its expenses and the expenses of the Trustee in replacing a Note. In case any such mutilated, lost, destroyed or wrongfully taken Note has become or is about to become due and payable, FelCor LP in its discretion may pay such Note instead of issuing a new Note in replacement thereof. Every replacement Note is an additional obligation of FelCor LP and shall be entitled to the benefits of this Indenture. SECTION 2.10 OUTSTANDING NOTES. Notes outstanding at any time are all Notes that have been authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.10 as not outstanding. 32 39 If a Note is replaced pursuant to Section 2.09, it ceases to be outstanding unless and until the Trustee and FelCor LP receive proof satisfactory to them that the replaced Note is held by a bona fide purchaser. If the Paying Agent (other than FelCor, FelCor LP or an Affiliate of FelCor or FelCor LP) holds on the maturity date money sufficient to pay Notes payable on that date, then on and after that date such Notes cease to be outstanding and interest on them shall cease to accrue. A Note does not cease to be outstanding because FelCor or FelCor LP or one of their Affiliates holds such Note; provided that, in determining whether the Holders of the requisite principal amount of the outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by FelCor, FelCor LP, the Guarantors or any other obligor upon the Notes or any Affiliate of FelCor LP or the Guarantors or of such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not FelCor LP or the Guarantors or any other obligor upon the Notes or any Affiliate of FelCor LP or the Guarantors or of such other obligor. SECTION 2.11 TEMPORARY NOTES. Until definitive Notes are ready for delivery, FelCor LP may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have insertions, substitutions, omissions and other variations determined to be appropriate by the Officers executing the temporary Notes, as evidenced by their execution of such temporary Notes. If temporary Notes are issued, FelCor LP will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of FelCor LP designated for such purpose pursuant to Section 4.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes FelCor LP shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall be entitled to the same benefits under this Indenture as definitive Notes. SECTION 2.12 CANCELLATION. FelCor LP at any time may deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which FelCor LP may have acquired in any manner whatsoever, and may deliver to the Trustee for cancellation any Notes previously authenticated hereunder which FelCor LP has not issued and sold. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for transfer, exchange or payment. The Trustee shall cancel all Notes surrendered for transfer, exchange, payment or cancellation in accordance with its normal procedure. 33 40 SECTION 2.13 CUSIP NUMBERS. FelCor LP in issuing the Notes may use "CUSIP," "CINS" or "ISIN" numbers (if then generally in use), and the Trustee shall use CUSIP, CINS or ISIN numbers, as the case may be, in notices of redemption or exchange as a convenience to Holders; provided that any such notice shall state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Notes. SECTION 2.14 DEFAULTED INTEREST. If FelCor LP or the Guarantors default in a payment of interest on the Notes, FelCor LP or the Guarantors shall pay, or shall deposit with the Paying Agent money in immediately available funds sufficient to pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date. A special record date, as used in this Section 2.14 with respect to the payment of any defaulted interest, shall mean the 15th day next preceding the date fixed by FelCor LP for the payment of defaulted interest, whether or not such day is a Business Day. At least 15 days before the subsequent special record date, FelCor LP shall mail to each Holder and to the Trustee a notice that states the subsequent special record date, the payment date and the amount of defaulted interest to be paid. SECTION 2.15 ISSUANCE OF ADDITIONAL NOTES. FelCor LP may, subject to Article Four of this Indenture, issue additional Notes under this Indenture. The Notes issued on the Closing Date and any additional Notes subsequently issued shall be treated as a single class for all purposes under this Indenture. ARTICLE 3 REDEMPTION SECTION 3.01 OPTIONAL REDEMPTION. The Notes will be redeemable in whole at any time or in part from time to time, at the option of FelCor LP, at a price equal to the greater of (i) 100% of the principal amount of such Notes and (ii) the sum of the present values of the remaining payments of principal and interest thereon from the Redemption Date to the applicable maturity date discounted, in each case, to the Redemption Date on a semiannual basis (assuming a 360- day year consisting of twelve 30-day months) at the Treasury Rate plus 25 basis points (the "Redemption Price"), plus, in each case, accrued interest thereon to the Redemption Date. SECTION 3.02 NOTICES TO TRUSTEE. If FelCor elects to redeem Notes pursuant to Section 3.01, it shall notify the Trustee in writing of the Redemption Date and the principal amount of Notes to be redeemed in an Officers' Certificate at least 45 days before the Redemption Date (unless a shorter period shall be satisfactory to the Trustee). 34 41 SECTION 3.03 SELECTION OF NOTES TO BE REDEEMED. If less than all of the Notes are to be redeemed at any time, the Trustee shall select the Notes to be redeemed in compliance with the requirements, as certified to it by FelCor LP, of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on a national securities exchange, by lot or by such other method as the Trustee in its sole discretion shall deem fair and appropriate; provided that no Notes of $1,000 in principal amount at maturity shall be redeemed in part. The Trustee shall make the selection from the Notes outstanding and not previously called for redemption. Notes in denominations of $1,000 in principal amount at maturity may only be redeemed in whole. The Trustee may select for redemption portions (equal to $1,000 in principal amount at maturity or any integral multiple thereof) of Notes that have denominations larger than $1,000 in principal amount at maturity. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. The Trustee shall notify FelCor LP and the Registrar promptly in writing of the Notes or portions of Notes to be called for redemption. SECTION 3.04 NOTICE OF REDEMPTION. With respect to any redemption of Notes pursuant to Section 3.01, at least 30 days but not more than 60 days before a Redemption Date, FelCor LP shall mail a notice of redemption by first class mail to each Holder whose Notes are to be redeemed. The notice shall identify the Notes to be redeemed and shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the name and address of the Paying Agent; (iv) that Notes called for redemption must be surrendered to the Paying Agent in order to collect the Redemption Price; (v) that, unless FelCor LP defaults in making the redemption payment, interest on Notes called for redemption ceases to accrue on and after the Redemption Date and the only remaining right of the Holders is to receive payment of the Redemption Price plus accrued interest to the Redemption Date upon surrender of the Notes to the Paying Agent; (vi) that, if any Note is being redeemed in part, the portion of the principal amount (equal to $1,000 in principal amount at maturity or any integral multiple thereof) of such Note to be redeemed and that, on and after the Redemption Date, upon surrender of such Note, a new Note or Notes in principal amount at maturity equal to the unredeemed portion thereof will be reissued; and 35 42 (vii) that, if any Note contains a CUSIP, CINS or ISIN number as provided in Section 2.13, no representation is being made as to the correctness of the CUSIP, CINS or ISIN number either as printed on the Notes or as contained in the notice of redemption and that reliance may be placed only on the other identification numbers printed on the Notes. At FelCor LP's request (which request may be revoked by FelCor LP at any time prior to the time at which the Trustee shall have given such notice to the Holders), made in writing to the Trustee at least 30 days (or such shorter period as shall be satisfactory to the Trustee) before a Redemption Date, the Trustee shall give the notice of redemption in the name and at the expense of FelCor LP. If, however, FelCor LP gives such notice to the Holders, FelCor LP shall concurrently deliver to the Trustee an Officers' Certificate stating that such notice has been given. SECTION 3.05 EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed, Notes called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender of any Notes to the Paying Agent, such Notes shall be paid at the Redemption Price, plus accrued interest, if any, to the Redemption Date. Notice of redemption shall be deemed to be given when mailed, whether or not the Holder receives the notice. In any event, failure to give such notice, or any defect therein, shall not affect the validity of the proceedings for the redemption of Notes held by Holders to whom such notice was properly given. SECTION 3.06 DEPOSIT OF REDEMPTION PRICE. On or prior to any Redemption Date, FelCor LP shall deposit with the Paying Agent (or, if FelCor LP is acting as its own Paying Agent, shall segregate and hold in trust as provided in Section 2.05) money sufficient to pay the Redemption Price of and accrued interest on all Notes to be redeemed on that date other than Notes or portions thereof called for redemption on that date that have been delivered by FelCor LP to the Trustee for cancellation. SECTION 3.07 PAYMENT OF NOTES CALLED FOR REDEMPTION. If notice of redemption has been given in the manner provided above, the Notes or portion of Notes specified in such notice to be redeemed shall become due and payable on the Redemption Date at the Redemption Price stated therein, together with accrued interest to such Redemption Date, and on and after such date (unless FelCor LP shall default in the payment of such Notes at the Redemption Price and accrued interest to the Redemption Date, in which case the principal, until paid, shall bear interest from the Redemption Date at the rate prescribed in the Notes), such Notes shall cease to accrue interest. Upon surrender of any Note for redemption in accordance with a notice of redemption, such Note shall be paid and redeemed by FelCor LP at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders registered as such at the close of business on the relevant Regular Record Date. 36 43 SECTION 3.08 NOTES REDEEMED IN PART. Upon surrender of any Note that is redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder a new Note equal in principal amount to the unredeemed portion of such surrendered Note. ARTICLE 4 COVENANTS SECTION 4.01 PAYMENT OF NOTES. FelCor LP shall pay the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes and this Indenture. An installment of principal, premium, if any, or interest shall be considered paid on the date due if the Trustee or Paying Agent (other than FelCor LP, a Subsidiary of FelCor LP, a Guarantor or any Affiliate of any of them) holds on that date money designated for and sufficient to pay the installment. If FelCor LP, any Subsidiary of FelCor LP, a Guarantor or any Affiliate of any of them, acts as Paying Agent, an installment of principal, premium, if any, or interest shall be considered paid on the due date if the entity acting as Paying Agent complies with the last sentence of Section 2.05. As provided in Section 6.09, upon any bankruptcy or reorganization procedure relative to FelCor LP or any Guarantor, the Trustee shall serve as the Paying Agent and conversion agent, if any, for the Notes. FelCor LP shall pay interest on overdue principal, premium, if any, and interest on overdue installments of interest, to the extent lawful, at the rate per annum specified in the Notes. SECTION 4.02 MAINTENANCE OF OFFICE OR AGENCY. FelCor LP will maintain in the Borough of Manhattan, The City of New York an office or agency where Notes may be surrendered for registration of transfer or exchange or for presentation for payment and where notices and demands to or upon FelCor LP in respect of the Notes and this Indenture may be served. FelCor LP will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time FelCor LP shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 10.02. FelCor LP may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided that no such designation or rescission shall in any manner relieve FelCor LP of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. FelCor LP will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. 37 44 FelCor LP hereby initially designates First Chicago Trust Company of New York, 14 Wall Street, Suite 4607, New York, New York 10005, as agent for FelCor LP, located in the Borough of Manhattan, The City of New York as such office of FelCor LP in accordance with Section 2.04. SECTION 4.03 LIMITATION ON INDEBTEDNESS. (a)(i) Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, Incur any Indebtedness if, immediately after giving effect to the Incurrence of such additional Indebtedness, the aggregate principal amount of all outstanding Indebtedness of FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis determined in accordance with GAAP is greater than 60% of Adjusted Total Assets. (ii) In addition to the foregoing limitations on the Incurrence of Indebtedness, neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, Incur any Subsidiary Debt or any Secured Indebtedness if, immediately after giving effect to the Incurrence of such additional Subsidiary Debt or Secured Indebtedness, the aggregate principal amount of all outstanding Subsidiary Debt and Secured Indebtedness of FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis is greater than 40% of Adjusted Total Assets. (b) In addition to the covenants specified in (a) above, neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, Incur any Indebtedness (other than the Notes, the Subsidiary Guarantees and other Indebtedness existing on the Closing Date); provided that FelCor LP or FelCor or any of their respective Restricted Subsidiaries may Incur Indebtedness if, after giving effect to the Incurrence of such Indebtedness and the receipt and application of the proceeds therefrom, the Interest Coverage Ratio of FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis would be greater than 2.0 to 1. (c) Notwithstanding paragraphs (a) or (b) of this Section 4.03, FelCor LP or FelCor or any of their respective Restricted Subsidiaries (except as specified below) may Incur each and all of the following: (i) Indebtedness outstanding under the Line of Credit at any time in an aggregate principal amount not to exceed $550 million less any amount of such Indebtedness permanently repaid as provided under Section 4.10; (ii) Indebtedness owed (A) to FelCor LP or FelCor evidenced by an unsubordinated promissory note or (B) to any Restricted Subsidiary; provided that any event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to FelCor LP or FelCor or any other Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance or refund, outstanding Indebtedness (other than Indebtedness Incurred under clause (i), (ii), (iv) or (vi) of this paragraph) and any refinancings thereof in an amount not to exceed the amount so refinanced or refunded (plus premiums, accrued interest, fees and expenses); provided that Indebtedness the proceeds of which are used to refinance or refund the Notes or Indebtedness that is pari passu with or subordinated in right of payment to, the Notes shall only be permitted under this clause (iii) if (A) in case the Notes are refinanced in part or the Indebtedness to be refinanced is pari passu with the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is outstanding, is pari passu with or is expressly made subordinate in right of 38 45 payment to the remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated in right of payment to the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Notes at least to the extent that the Indebtedness to be refinanced is subordinated to the Notes and (C) such new indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such New Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; and provided further that in no event may Indebtedness of FelCor LP or FelCor that is pari passu with or subordinated in right of payment to the Notes be refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in respect of performance, surety or appeal bonds provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements; provided that such agreements (a) are designed solely to protect FelCor LP or FelCor or any of their respective Restricted Subsidiaries against fluctuations in foreign currency exchange rates or interest rates and (b) do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder, and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of FelCor LP or FelCor or any of their respective Restricted Subsidiaries pursuant to such agreements, in any case Incurred in connection with the disposition of any business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition), in a principal amount not to exceed the gross proceeds actually received by FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis in connection with such disposition; (v) Indebtedness of FelCor LP or FelCor, to the extent the net proceeds thereof are promptly (A) used to purchase Notes tendered in an Offer to Purchase made as a result of a Change in Control or (B) deposited to defease the Notes in accordance with Section 8.02 or 8.03; or (vi) Guarantees of the Notes and Guarantees of Indebtedness of FelCor LP or FelCor by any of their respective Restricted Subsidiaries provided the guarantee of such Indebtedness is permitted by and made in accordance with Section 4.07. (d) Notwithstanding any other provision of this Section 4.03, the maximum amount of Indebtedness that FelCor LP or FelCor or any of their respective Restricted Subsidiaries may Incur pursuant to this Section 4.03 shall not be deemed to be exceeded, with respect to any outstanding Indebtedness due solely to the result of fluctuations in the exchange rates of currencies. (e) For purposes of determining any particular amount of Indebtedness under this Section 4.03, (1) Indebtedness Incurred under the Line of Credit on or prior to the Closing Date shall be treated as Incurred pursuant to clause (i) of paragraph (c) of this Section 4.03, (2) Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness 39 46 otherwise included in the determination of such particular amount shall not be included and (3) any Liens granted pursuant to the equal and ratable provisions referred to in Section 4.09 shall not be treated as Indebtedness. For purposes of determining compliance with Section 4.03, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in the above clauses (other than Indebtedness referred to in clause (2) of the preceding sentence), each of FelCor LP and FelCor, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses; provided that FelCor LP and FelCor must classify such item of Indebtedness in an identical fashion. SECTION 4.04 LIMITATION ON RESTRICTED PAYMENTS. Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, directly or indirectly, (i) declare or pay any dividend or make any distribution on or with respect to its Capital Stock (other than (x) dividends or distributions payable solely in shares of its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire shares of such Capital Stock and (y) pro rata dividends or distributions on Common Stock of FelCor LP or any Restricted Subsidiary held by minority stockholders) held by Persons other than FelCor LP or FelCor or any of their respective Restricted Subsidiaries, (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of (A) FelCor LP, FelCor or an Unrestricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Person other than FelCor LP or FelCor or any of their respective Restricted Subsidiaries unless in connection with such purchase the Unrestricted Subsidiary is designated as a Restricted Subsidiary or (B) a Restricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by an Affiliate of FelCor LP or FelCor (other than a Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock of FelCor LP or FelCor, (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of FelCor LP or FelCor that is subordinated in right of payment to the Notes or (iv) make an Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (i) through (iv) above being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (A) a Default or Event of Default shall have occurred and be continuing, (B) FelCor LP or FelCor could not Incur at least $1.00 of Indebtedness under paragraphs (a) and (b) of Section 4.03 or (C) the aggregate amount of all Restricted Payments (the amount, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) made after the Closing Date shall exceed the sum of (1) 95% of the aggregate amount of the Funds From Operations (or, if the Funds From Operations is a loss, minus 100% of the amount of such loss) (determined by excluding income resulting from transfers of assets by FelCor LP or FelCor or any of their respective Restricted Subsidiaries to an Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter in which the Closing Date occurs and ending on the last day of the last fiscal quarter preceding the Transaction Date for which reports have been filed with the Commission or provided to the Trustee pursuant to 40 47 Section 4.17 plus (2) the aggregate Net Cash Proceeds received by FelCor LP or FelCor after the Closing Date from the issuance and sale permitted by the Indenture of its Capital Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of FelCor LP or FelCor, including an issuance or sale permitted by the Indenture of Indebtedness of FelCor LP or FelCor for cash subsequent to the Closing Date upon the conversion of such Indebtedness into Capital Stock (other than Disqualified Stock) of FelCor LP or FelCor, or from the issuance to a Person who is not a Subsidiary of FelCor LP or FelCor of any options, warrants or other rights to acquire Capital Stock of FelCor LP or FelCor (in each case, exclusive of any Disqualified Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated Maturity of the Notes), plus (3) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to FelCor LP or FelCor or any of their respective Restricted Subsidiaries or from the Net Cash Proceeds from the sale of any such Investment (except, in each case, to the extent any such payment or proceeds are included in the calculation of Funds From Operations) or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments") not to exceed, in each case, the amount of Investments previously made by FelCor LP, FelCor and their respective Restricted Subsidiaries in such Person or Unrestricted Subsidiary, plus (4) the purchase price of noncash tangible assets acquired in exchange for an issuance of Capital Stock (other than Disqualified Stock) of FelCor LP or FelCor; provided that in any event FelCor LP or FelCor may declare or pay any dividend or make any distribution that is necessary to maintain FelCor's status as a REIT under the Code if (1) the aggregate principal amount of all outstanding Indebtedness of FelCor LP or FelCor on a consolidated basis at such time is less than 60% of Adjusted Total Assets and (2) no Default or Event of Default shall have occurred and be continuing. The provisions of the foregoing paragraph shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at said date of declaration, such payment would comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Notes including premium, if any, and accrued and unpaid interest, with the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of paragraph (c) of Section 4.03; (iii) the repurchase, redemption or other acquisition of Capital Stock of FelCor LP or FelCor or an Unrestricted Subsidiary (or options, warrants or other rights to acquire such Capital Stock) in exchange for, or out of the proceeds of a substantially 41 48 concurrent issuance of, shares of Capital Stock (other than Disqualified Stock) of FelCor LP or FelCor (or options, warrants or other rights to acquire such Capital Stock); (iv) the making of any principal payment on, or the repurchase, redemption, retirement, defeasance or other acquisition for value of, Indebtedness of FelCor LP or FelCor which is subordinated in right of payment to the Notes in exchange for, or out of the proceeds of, a substantially concurrent issuance of, shares of the Capital Stock (other than Disqualified Stock) of FelCor LP or FelCor (or options, warrants or other rights to acquire such Capital Stock); (v) payments or distributions, to dissenting stockholders pursuant to applicable law pursuant to or in connection with a consolidation, merger or transfer of assets that complies with the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the property and assets of FelCor LP or FelCor; (vi) Investments in any Person or Persons in an aggregate amount not to exceed $150 million; or (vii) the payment of any dividend or distribution on the Capital Stock of FelCor LP or FelCor declared prior to the Closing Date, provided that, except in the case of clauses (i), (iii) and (vii), no Default or Event of Default shall have occurred and be continuing or occur as a direct consequence of the actions or payments set forth therein. Each Restricted Payment permitted pursuant to the preceding paragraph (other than the Restricted Payment referred to in clause (ii) thereof, an exchange of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or (iv) thereof, an Investment referred to in clause (vi) thereof or the dividends or distributions referred to in clause (vii) thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred to in clauses (iii) and (iv), shall be included in calculating whether the conditions of clause (C) of the first paragraph of this Section 4.04 have been met with respect to any subsequent Restricted Payments. SECTION 4.05 LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by FelCor LP or FelCor or any of their respective Restricted Subsidiaries, (ii) pay any Indebtedness owed to FelCor LP, FelCor or any other Restricted Subsidiary, (iii) make loans or advances to FelCor LP, FelCor or any other Restricted Subsidiary or (iv) transfer its property or assets to FelCor LP, FelCor or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: (i) existing on the Closing Date in the Indenture or in the Line of Credit, and any extensions, refinancings, renewals or replacements of such agreements; provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) existing under or by reason of applicable law; (iii) existing with respect to any Person or the property or assets of such Person acquired by FelCor LP, FelCor or any Restricted Subsidiary, existing at the time of 42 49 such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in the case of clause (iv) of the first paragraph of this Section 4.05, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of FelCor LP, FelCor or any Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of FelCor LP, FelCor or any Restricted Subsidiary in any manner material to FelCor LP, FelCor and their respective Restricted Subsidiaries taken as a whole; (v) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary; or (vi) contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was issued if (A) the encumbrance or restriction applies only in the event of a payment default or a default with respect to a financial covenant contained in such Indebtedness or agreement, (B) the encumbrance or restriction is not materially more disadvantageous to the Holders of the Notes than is customary in comparable financings (as determined by FelCor LP and FelCor) and (C) each of FelCor LP and FelCor determines that any such encumbrance or restriction will not materially affect such Persons' ability to make principal or interest payments on the Notes. Nothing contained in this Section 4.05 shall prevent FelCor LP, FelCor or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted in Section 4.09 or (2) restricting the sale or other disposition of property or assets of FelCor LP or FelCor or any of their respective Restricted Subsidiaries that secure Indebtedness of FelCor LP, FelCor or any of their respective Restricted Subsidiaries. SECTION 4.06 LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. Neither FelCor LP nor FelCor will sell, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to FelCor LP, FelCor or a Wholly Owned Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales to individuals of shares of Restricted Subsidiaries, to the extent required by applicable law or to the extent necessary to obtain local liquor licenses; (iii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Subsidiary and any Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under Section 4.04 if made on the date of such issuance or sale or (iv) sales of not greater than 20% of the Capital Stock of a newly-created Restricted Subsidiary made in connection with, or in contemplation of, the acquisition or development by such Restricted Subsidiary of one or more properties to any Person that is, or is an Affiliate of, 43 50 the entity that provides, franchise, management or other services, as the case may be, to one or more properties owned by such Restricted Subsidiary. SECTION 4.07 LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES. Neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries, directly or indirectly, to Guarantee any Indebtedness of FelCor LP or FelCor which is pari passu with or subordinate in right of payment to the Notes ("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Subsidiary Guarantee by such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against FelCor LP, FelCor or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not Incurred in connection with, or in contemplation of, such person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of such Guarantee Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated to the Notes. Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted Subsidiary may provide by its terms that it shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of FelCor LP or FelCor, of all of Capital Stock held by FelCor LP, FelCor and their respective Restricted Subsidiaries in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the Indenture) or (ii) the release or discharge of the Guarantee which resulted in the creation of such Subsidiary Guarantee, except a discharge or release by or as a result of payment under such Guarantee. SECTION 4.08 LIMITATION ON TRANSACTIONS WITH AFFILIATES. Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, directly or indirectly, enter into, renew or extend any transaction (including, without limitations, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any holder (or any Affiliate of such holder) of 5% or more of any class of Capital Stock of FelCor LP or FelCor or with any Affiliate of FelCor LP or FelCor or any of their respective Restricted Subsidiaries, except upon fair and reasonable terms no less favorable to FelCor LP, FelCor or such Restricted Subsidiary than could be obtained, at the time of such transaction or, if such transaction is pursuant to a written agreement, at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. 44 51 The foregoing limitation does not limit, and shall not apply to (i) transactions (A) approved by a majority of the independent directors of FelCor or (B) for which FelCor LP, FelCor or any Restricted Subsidiary delivers to the Trustee a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to FelCor LP, FelCor or such Restricted Subsidiary from a financial point of view; (ii) any transaction solely between FelCor LP or FelCor and any of their respective Wholly Owned Restricted Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable and customary fees and expenses to directors of FelCor who are not employees of FelCor; (iv) any payments or other transactions pursuant to any tax-sharing agreement between FelCor LP or FelCor and any other Person with which FelCor LP or FelCor files a consolidated tax return or with which FelCor LP or FelCor is part of a consolidated group for tax purposes; or (v) any Restricted Payments not prohibited by Section 4.04. Notwithstanding the foregoing, any transaction or series of related transactions covered by the first paragraph of Section 4.08 and not covered by clauses (ii) through (v) of this paragraph, (a) the aggregate amount of which exceeds $2 million in value or relates to the leasing of one or more hotel properties to DJONT, must be approved or determined to be fair in the manner provided for in clause (i)(A) or (B) above and (b) the aggregate amount of which exceeds $5 million in value, must be determined to be fair in the manner provided for in clause (i)(B) above. SECTION 4.09 LIMITATION ON LIENS. Neither FelCor LP nor FelCor shall secure any Indebtedness under the Line of Credit by a Lien unless contemporaneously therewith effective provision is made to secure the Notes equally and ratably with the Indebtedness under the Line of Credit for so long as the Indebtedness under the Line of Credit is secured by a Lien. SECTION 4.10 LIMITATION ON ASSET SALES. Neither FelCor LP nor FelCor will, and neither FelCor LP or FelCor will permit any of their respective Restricted Subsidiaries to, consummate any Asset Sale, unless (i) the consideration received by FelCor LP, FelCor or such Restricted Subsidiary is at least equal to the fair market value of the assets sold or disposed of and (ii) at least 75% of the consideration received consists of cash or Temporary Cash Investments; provided, with respect to the sale of one or more hotel properties that up to 75% of the consideration may consist of indebtedness of the purchaser of such hotel properties; provided, further, that such indebtedness is secured by a first priority Lien on the hotel property or properties sold. In the event and to the extent that the Net Cash Proceeds received by FelCor LP, FelCor or such Restricted Subsidiary from one or more Asset Sales occurring on or after the Closing Date in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the date closest to the commencement of such 12-month period for which a consolidated balance sheet of FelCor LP, FelCor and their respective Restricted Subsidiaries has been filed with the Commission or provided to the Trustee pursuant to Section 4.17), then FelCor LP or FelCor shall or shall cause the relevant Restricted Subsidiary to (i) within twelve months after the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently reduce Senior Indebtedness of FelCor LP, FelCor, or any Restricted Subsidiary or Indebtedness of any other Restricted Subsidiary, in each case 45 52 owing to a Person other than FelCor LP, FelCor or any of their respective Restricted Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a Restricted Subsidiary having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, FelCor LP or FelCor or any of their respective Restricted Subsidiaries existing on the date of such investment and (ii) apply (no later than the end of the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraph of this Section 4.10. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period as set forth in clause (i) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not previously subject to an Offer to Purchase pursuant to this Section 4.10 totals at least $10 million, FelCor LP must commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Purchase from the Holders on a pro rata basis an aggregate principal amount of Notes equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount of the Notes, plus, in each case, accrued interest (if any) to the Payment Date. SECTION 4.11 REPURCHASE OF NOTES UPON A CHANGE OF CONTROL. FelCor LP must commence, within 30 days of the occurrence of a Change of Control, and consummate an Offer to Purchase for all Notes then outstanding, at a purchase price equal to 101% of the principal amount thereof, plus accrued interest (if any) to the Payment Date. SECTION 4.12 EXISTENCE. Subject to Articles Four and Five of this Indenture, FelCor LP and the Guarantors will do or cause to be done all things necessary to preserve and keep in full force and effect their existence and the existence of each Restricted Subsidiary in accordance with the respective organizational documents of FelCor LP, the Guarantors and each Restricted Subsidiary and the rights (whether pursuant to charter, partnership certificate, agreement, statute or otherwise), material licenses and franchises of FelCor LP, the Guarantors and each Restricted Subsidiary; provided that neither FelCor nor FelCor LP shall be required to preserve any such right, license or franchise, or the existence of any Restricted Subsidiary or Subsidiary Guarantor, if the maintenance or preservation thereof is no longer desirable in the conduct of the business of FelCor LP, the Guarantors and their Restricted Subsidiaries taken as a whole. SECTION 4.13 PAYMENT OF TAXES AND OTHER CLAIMS. FelCor and FelCor LP will pay or discharge and shall cause each of their respective Restricted Subsidiaries to pay or discharge, or cause to be paid or discharged, before the same shall become delinquent (i) all material taxes, assessments and governmental charges levied or imposed upon (a) FelCor and FelCor LP or any such Restricted Subsidiary, (b) the income or profits of any such Restricted Subsidiary which is a 46 53 corporation or (c) the property of FelCor, FelCor LP or any such Restricted Subsidiaries and (ii) all material lawful claims for labor, materials and supplies that, if unpaid, might by law become a lien upon the property of FelCor, FelCor LP or any such Restricted Subsidiary; provided that FelCor and FelCor LP shall not be required to pay or discharge, or cause to be paid or discharged, any such tax, assessment, charge or claim the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and for which adequate reserves have been established. SECTION 4.14 MAINTENANCE OF PROPERTIES AND INSURANCE. FelCor and FelCor LP will cause all properties used or useful in the conduct of their business or the business of any of their Restricted Subsidiaries, to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of FelCor or FelCor LP may be necessary so that the business carried on in connection therewith may be properly conducted at all times; provided that nothing in this Section 4.14 shall prevent FelCor, FelCor LP or any such Restricted Subsidiary from discontinuing the use, operation or maintenance of any of such properties or disposing of any of them, if such discontinuance or disposal is, in the judgment of FelCor, FelCor LP, desirable in the conduct of the business of FelCor, FelCor LP or such Restricted Subsidiary. Each of FelCor and FelCor LP will provide or cause to be provided, for itself and its Restricted Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds customarily insured against by corporations similarly situated and owning like properties, with reputable insurers or with the government of the United States of America, or an agency or instrumentality thereof, in such amounts, with such deductibles and by such methods as shall be customary for corporations similarly situated in the industry in which FelCor, FelCor LP or such Restricted Subsidiary, as the case may be, is then conducting business. SECTION 4.15 NOTICE OF DEFAULTS. In the event that FelCor LP becomes aware of any Default or Event of Default, FelCor LP, promptly after it becomes aware thereof, will give written notice thereof to the Trustee. SECTION 4.16 COMPLIANCE CERTIFICATES. (a) FelCor and FelCor LP shall deliver to the Trustee, within 45 days after the end of each fiscal quarter (90 days after the end of the last fiscal quarter of each year), an Officers' Certificate stating whether or not the signers know of any Default or Event of Default that occurred during such fiscal quarter. In the case of the Officers' Certificate delivered within 90 days of the end of FelCor's and FelCor LP's fiscal year, such certificate shall contain a certification from the principal executive officer, principal financial officer or principal accounting officer that a review has been conducted of the activities of FelCor and FelCor LP and their Restricted Subsidiaries and FelCor's and FelCor LP's and their Restricted Subsidiaries' performance under this Indenture and that, to the knowledge of such Officers, FelCor and FelCor LP have complied with all conditions and covenants under this Indenture. For purposes of this Section 4.16, such compliance shall be determined without 47 54 regard to any period of grace or requirement of notice provided under this Indenture. If they do know of such a Default or Event of Default, the certificate shall describe any such Default or Event of Default and its status. The first certificate to be delivered pursuant to this Section 4.16(a) shall be for the first fiscal quarter beginning after the execution of this Indenture. (a) So long as (and to the extent) not prohibited by the then current recommendations of the American Institute of Certified Public Accountants, FelCor and FelCor LP shall deliver to the Trustee, within 90 days after the end of FelCor's and FelCor LP's fiscal year, a certificate signed by FelCor's and FelCor LP's independent certified public accountants stating (i) that their audit examination has included a review of the terms of this Indenture and the Notes as they relate to accounting matters, (ii) that they have read the most recent Officers' Certificate delivered to the Trustee pursuant to paragraph (a) of this Section 4.16 and (iii) whether, in connection with their audit examination, anything came to their attention that caused them to believe that FelCor and FelCor LP were not in compliance with any of the terms, covenants, provisions or conditions of Article Four and Section 5.01 of this Indenture as they pertain to accounting matters and, if any Default or Event of Default has come to their attention, specifying the nature and period of existence thereof; provided that such independent certified public accountants shall not be liable in respect of such statement by reason of any failure to obtain knowledge of any such Default or Event of Default that would not be disclosed in the course of an audit examination conducted in accordance with generally accepted auditing standards in effect at the date of such examination. (b) Within 90 days of the end of each of FelCor and FelCor LP's fiscal years, FelCor and FelCor LP shall deliver to the Trustee a list of all Significant Subsidiaries. The Trustee shall have no duty with respect to any such list except to keep it on file and available for inspection by the Holders. SECTION 4.17 COMMISSION REPORTS AND REPORTS TO HOLDERS. At all times from and after the earlier of (i) the date of the commencement of a registered exchange offer for the Notes by FelCor LP or the effectiveness of the Shelf Registration Statement pursuant to and in accordance with the terms of the Registration Rights Agreement (the "Registration") and (ii) April 1, 1998, in either case, whether or not FelCor or FelCor LP is then required to file reports with the Commission, FelCor and FelCor LP shall file with the Commission all such reports and other information as they would be required to file with the Commission by Sections 13(a) or 15(d) under the Securities Exchange Act of 1934 if they were subject thereto; provided that, if filing such documents by FelCor LP or FelCor with the Commission is not permitted under Exchange Act, FelCor LP or FelCor shall provide such documents to the Trustee and upon written request supply copies of such documents to any prospective Holder; provided, further, that if the rules and regulations of the Commission permit FelCor LP and FelCor to file combined reports or information pursuant to the Securities Exchange Act of 1934, FelCor LP and FelCor may file combined reports and information. FelCor LP and FelCor shall supply the Trustee and each Holder or shall supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other information. Delivery of such 48 55 reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including FelCor or FelCor LP's compliance with any of their covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). In addition, at all times prior to the earlier of the date of the Registration and April 1, 1998, FelCor LP shall, at its cost, deliver to each Holder of the Notes quarterly and annual reports substantially equivalent to those which would be required by the Exchange Act. In addition, at all times prior to the Registration, upon the request of any Holder or any prospective purchaser of the Notes designated by a Holder, FelCor LP shall supply to such Holder or such prospective purchaser the information required under Rule 144A under the Securities Act. FelCor LP also shall comply with the other provisions of TIA Section 314(a). SECTION 4.18 WAIVER OF STAY, EXTENSION OR USURY LAWS. FelCor LP covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive FelCor LP from paying all or any portion of the principal of, premium, if any, or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) FelCor LP hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 4.19 LIMITATION ON SALE-LEASEBACK TRANSACTIONS. Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will permit any of their respective Restricted Subsidiaries to, enter into any sale-leaseback transaction involving any of its assets or properties whether now owned or hereafter acquired, whereby any of them sells or transfers such assets or properties and then or thereafter leases such assets or properties or any substantial part thereof. The foregoing restriction does not apply to any sale-leaseback transaction if (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the lease secures or relates to industrial revenue or pollution control bonds; (iii) the transaction is solely between FelCor LP or FelCor and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted Subsidiaries; or (iv) FelCor LP or FelCor or any of their respective Restricted Subsidiaries, within 12 months after the sale or transfer of any assets or properties is completed, applies an amount not less than the net proceeds received from such sale in accordance with clause (A) or (B) of the first paragraph of Section 4.10. SECTION 4.20 MAINTENANCE OF TOTAL UNENCUMBERED ASSETS. FelCor LP, FelCor and their respective Restricted Subsidiaries will maintain Total Unencumbered Assets of not less than 150% of the aggregate outstanding principal amount of the Unsecured Indebtedness of FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis. 49 56 SECTION 4.21 INVESTMENT GRADE RATING. Notwithstanding anything to the contrary in this Indenture, Sections 4.04, 4.05, 4.06, 4.07, 4.08, 4.09 and 4.19 will not be applicable in the event, and only for so long as, the Notes are rated Investment Grade. ARTICLE 5 SUCCESSOR CORPORATION SECTION 5.01 WHEN FELCOR OR FELCOR LP MAY MERGE, ETC. Neither FelCor LP nor FelCor will merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into FelCor LP or FelCor unless: (i) FelCor LP or FelCor shall be the continuing Person, or the Person (if other than FelCor LP or FelCor) formed by such consolidation or into which FelCor LP or FelCor is merged or that acquired or leased such property and assets of FelCor LP or FelCor shall be an entity organized and validly existing under the laws of the United States of America or any state or jurisdiction thereof and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, all of the obligations of FelCor LP or FelCor on the Notes and under the Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis FelCor LP or FelCor, or any Person becoming the successor obligor of the Notes, as the case may be, could Incur at least $1.00 of Indebtedness under paragraphs (a) and (b) of Section 4.03; provided that this clause (iii) shall not apply to a consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a positive net worth; provided that, in connection with any such merger or consolidation, no consideration (other than Capital Stock (other than Disqualified Stock) in the surviving Person or FelCor LP or FelCor) shall be issued or distributed to the holders of Capital Stock of FelCor LP or FelCor; and (iv) FelCor LP or FelCor delivers to the Trustee an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clause (iii)) and an Opinion of Counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture complies with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with; provided that clause (iii) above does not apply if, in the good faith determination of the Board of Directors of FelCor LP or FelCor, whose determination shall be evidenced by a Board Resolution, the principal purpose of such transaction is to change the state of domicile of FelCor LP or FelCor; and provided, further, that any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. SECTION 5.02 SUCCESSOR SUBSTITUTED. Upon any consolidation or merger, or any sale, conveyance, transfer, lease or other disposition of all or substantially all of the property and 50 57 assets of FelCor LP in accordance with Section 5.01 of this Indenture, the successor Person formed by such consolidation or into which FelCor LP is merged or to which such sale, conveyance, transfer, lease or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, FelCor LP under this Indenture with the same effect as if such successor Person had been named as FelCor LP herein and thereafter the predecessor corporation shall be relieved of all obligations and covenants under this Indenture and the Notes; provided that FelCor LP shall not be released from its obligation to pay the principal of, premium, if any, or interest on the Notes in the case of a lease of all or substantially all of its property and assets. ARTICLE 6 DEFAULT AND REMEDIES SECTION 6.01 EVENTS OF DEFAULT. An "Event of Default" shall occur with respect to the Notes if: (a) default in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) default in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) default in the performance or breach of the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the assets of FelCor LP and FelCor or the failure by FelCor LP to make or consummate an Offer to Purchase in accordance with Section 4.10 or Section 4.11; (d) FelCor LP or FelCor defaults in the performance of or breaches any other covenant or agreement of FelCor LP or FelCor in the Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes; (e) there occurs with respect to any issue or issues of Indebtedness of FelCor LP or FelCor or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; 51 58 (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not covered by insurance) shall be rendered against FelCor LP or FelCor or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 60 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of FelCor LP or FelCor or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of FelCor LP or FelCor or any Significant Subsidiary or for all or substantially all of the property and assets of FelCor LP or FelCor or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of FelCor LP or FelCor or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (h) FelCor LP or FelCor or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of FelCor LP or FelCor or Significant Subsidiary or for all or substantially all of the property and assets of FelCor LP or FelCor or any Significant Subsidiary or (C) effects any general assignment for the benefit of its creditors. SECTION 6.02 ACCELERATION. If an Event of Default (other than an Event of Default specified in clause (g) or (h) above that occurs with respect to FelCor LP or FelCor) occurs and is continuing under the Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes, then outstanding, by written notice to FelCor LP and FelCor (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of such Holders shall, declare the principal of, premium, if any, and accrued interest on the Notes to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued interest shall be immediately due and payable. In the event of a declaration of acceleration because an Event of Default set forth in clause (e) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (e) shall be remedied or cured by FelCor LP, FelCor or the relevant Significant Subsidiary or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event or Default specified in clause (g) or (h) above occurs with respect to FelCor LP or FelCor, the principal of, premium, if any, and accrued interest on the Notes then outstanding shall ipso facto become and be immediately due and payable without 52 59 any declaration or other act on the part of the Trustee or any Holder. The Holders of at least a majority in principal amount of the outstanding Notes by written notice to FelCor LP, FelCor and to the Trustee, may waive all past defaults and rescind and annul a declaration of acceleration and its consequences if (i) all existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. SECTION 6.03 OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of, premium, if any, or interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. SECTION 6.04 WAIVER OF PAST DEFAULTS. Subject to Sections 6.02, 6.07 and 9.02, the Holders of at least a majority in principal amount of the outstanding Notes, by notice to the Trustee, may waive an existing Default or Event of Default and its consequences, except a Default in the payment of principal of, premium, if any, or interest on any Note as specified in clause (a) or (b) of Section 6.01 or in respect of a covenant or provision of this Indenture which cannot be modified or amended without the consent of the holder of each outstanding Note affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereto. SECTION 6.05 CONTROL BY MAJORITY. The Holders of at least a majority in aggregate principal amount at maturity of the outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders of Notes not joining in the giving of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from Holders of Notes. SECTION 6.06 LIMITATION ON SUITS. A Holder may not institute any proceeding, judicial or otherwise, with respect to this Indenture or the Notes, or for the appointment of a receiver or trustee, or for any other remedy hereunder unless: (i) such Holder has previously given the Trustee written notice of a continuing Event of Default; 53 60 (ii) the Holders of at least 25% in aggregate principal amount at maturity of outstanding Notes shall have made a written request to the Trustee institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (iii) such Holder or Holders have offered the Trustee indemnity reasonably satisfactory to the Trustee against any costs, liabilities or expenses to be incurred in compliance with such request; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity and has failed to institute any such proceeding; and (v) during such 60-day period, the Holders of a majority in aggregate principal amount at maturity of the outstanding Notes do not give the Trustee a direction that is inconsistent with such written request. For purposes of Section 6.05 and this Section 6.06, the Trustee shall comply with TIA Section 316(a) in making any determination of whether the Holders of the required aggregate principal amount of outstanding Notes have concurred in any request or direction of the Trustee to pursue any remedy available to the Trustee or the Holders with respect to this Indenture or the Notes or otherwise under the law. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder. SECTION 6.07 RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of the principal of, premium, if any, or interest on, such Note or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Notes, shall not be impaired or affected without the consent of such Holder. SECTION 6.08 COLLECTION SUIT BY TRUSTEE. If an Event of Default in payment of principal, premium or interest specified in clause (a), (b) or (c) of Section 6.01 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against FelCor LP, the Guarantors or any other obligor of the Notes for the whole amount of principal, premium, if any, and accrued interest remaining unpaid, together with interest on overdue principal, premium, if any, and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate specified in the Notes, and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. 54 61 SECTION 6.09 TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07) and the Holders allowed in any judicial proceedings relative to FelCor LP (or any other obligor of the Notes), its creditors or its property and shall be entitled and empowered to collect and receive any monies, securities or other property payable or deliverable upon conversion or exchange of the Notes or upon any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due the Trustee under Section 7.07. Nothing herein contained shall be deemed to empower the Trustee to authorize or consent to, or accept or adopt on behalf of any Holder, any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10 PRIORITIES. If the Trustee collects any money pursuant to this Article Six, it shall pay out the money in the following order: First: to the Trustee for all amounts due under Section 7.07; Second: to Holders for amounts then due and unpaid for principal of, premium, if any, and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal, premium, if any, and interest, respectively; and Third: to FelCor LP or any other obligors of the Notes, as their interests may appear, or as a court of competent jurisdiction may direct. The Trustee, upon prior written notice to FelCor LP, may fix a record date and payment date for any payment to Holders pursuant to this Section 6.10. SECTION 6.11 UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of the suit, and the court may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 of this Indenture, or a suit by Holders of more than 10% in principal amount of the outstanding Notes. 55 62 SECTION 6.12 RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then, and in every such case, subject to any determination in such proceeding, FelCor LP, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of FelCor LP, the Guarantors, Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 6.13 RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or wrongfully taken Notes in Section 2.09, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 6.14 DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Six or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. ARTICLE 7 TRUSTEE SECTION 7.01 GENERAL. The duties and responsibilities of the Trustee shall be as provided by the TIA and as set forth herein. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. The Trustee shall not be required to give any bond or surety with respect to the performance of its duties or the exercise of its powers under this Indenture. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Article Seven. 56 63 SECTION 7.02 CERTAIN RIGHTS OF TRUSTEE. Subject to TIA Sections 315(a) through (d): (i) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document; (ii) before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Section 10.04. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion; (iii) the Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care; (iv) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction; (v) the Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within its rights or powers or for any action it takes or omits to take in accordance with the direction of the Holders of a majority in principal amount at maturity of the outstanding Notes relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; provided that the Trustee's conduct does not constitute gross negligence or bad faith; (vi) whenever in the administration of this Indenture the Trustee shall deem it desirable that a making be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officer's Certificate; and (vii) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of FelCor LP personally or by agent or attorney. 57 64 SECTION 7.03 INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with FelCor LP, the Guarantors, or their Affiliates with the same rights it would have if it were not the Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to TIA Sections 310(b) and 311. SECTION 7.04 TRUSTEE'S DISCLAIMER. The Trustee (i) makes no representation as to the validity or adequacy of this Indenture or the Notes, (ii) shall not be accountable for FelCor LP's use or application of the proceeds from the Notes and (iii) shall not be responsible for any statement in the Notes other than its certificate of authentication. SECTION 7.05 NOTICE OF DEFAULT. If any Default or any Event of Default occurs and is continuing and if such Default or Event of Default is known to a Responsible Officer of the Trustee, the Trustee shall mail to each Holder in the manner and to the extent provided in TIA Section 313(c) notice of the Default or Event of Default within 45 days after it occurs, unless such Default or Event of Default has been cured; provided, however, that, except in the case of a default in the payment of the principal of, premium, if any, or interest on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders. SECTION 7.06 REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each May 15, beginning with May 15, 1998, the Trustee shall mail to each Holder as provided in TIA Section 313(c) a brief report dated as of such May 15, if required by TIA Section 313(a). SECTION 7.07 COMPENSATION AND INDEMNITY. FelCor LP shall pay to the Trustee such compensation as shall be agreed upon in writing for its services. The compensation of the Trustee shall not be limited by any law on compensation of a trustee of an express trust. FelCor LP shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses and advances incurred or made by the Trustee. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. FelCor LP shall indemnify the Trustee for, and hold it harmless against, any loss or liability or expense, including taxes (other than taxes based upon, measured by or determined by the income of the Trustee) incurred by it without negligence or bad faith on its part in connection with the acceptance or administration of this Indenture and its duties under this Indenture and the Notes, including the costs and expenses of defending itself against any claim or liability and of complying with any process served upon it or any of its officers in connection with the exercise or performance of any of its powers or duties under this Indenture and the Notes. To secure FelCor LP's payment obligations in this Section 7.07, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee, in its capacity as 58 65 Trustee, except money or property held in trust to pay principal of, premium, if any, and interest on particular Notes. If the Trustee incurs expenses or renders services after the occurrence of an Event of Default specified in clause (g) or (h) of Section 6.01, the expenses and the compensation for the services will be intended to constitute expenses of administration under Title 11 of the United States Bankruptcy Code or any applicable federal or state law for the relief of debtors. The provisions of this Section shall survive the termination of this Indenture. SECTION 7.08 REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign at any time by so notifying FelCor LP in writing at least 30 days prior to the date of the proposed resignation. The Holders of a majority in principal amount of the outstanding Notes may remove the Trustee by so notifying the Trustee in writing and may appoint a successor Trustee with the consent of FelCor LP. FelCor LP may at any time remove the Trustee, by Company Order given at least 30 days prior to the date of the proposed removal. If the Trustee resigns or is removed, or if a vacancy exists in the office of Trustee for any reason, FelCor LP shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by FelCor LP. If the successor Trustee does not deliver its written acceptance required by the next succeeding paragraph of this Section 7.08 within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, FelCor LP or the Holders of a majority in principal amount of the outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to FelCor LP. Immediately after the delivery of such written acceptance, subject to the lien provided in Section 7.07, (i) the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, (ii) the resignation or removal of the retiring Trustee shall become effective and (iii) the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. If the Trustee is no longer eligible under Section 7.10, any Holder who satisfies the requirements of TIA Section 310(b) may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. 59 66 FelCor LP shall give notice of any resignation and any removal of the Trustee and each appointment of a successor Trustee to all Holders. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, FelCor LP's obligation under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09 SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation or national banking association, the resulting, surviving or transferee corporation or national banking association without any further act shall be the successor Trustee with the same effect as if the successor Trustee had been named as the Trustee herein. SECTION 7.10 ELIGIBILITY. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee shall have a combined capital and surplus of at least $25,000,000 as set forth in its most recent published annual report of condition. SECTION 7.11 MONEY HELD IN TRUST. The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with FelCor LP. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law and except for money held in trust under Article Eight of this Indenture. SECTION 7.12 WITHHOLDING TAXES. The Trustee, as agent for FelCor LP, shall exclude and withhold from each payment of principal and interest and other amounts due hereunder or under the Notes any and all withholding taxes applicable thereto as required by law. The Trustee agrees to act as such withholding agent and, in connection therewith, whenever any present or future taxes or similar charges are required to be withheld with respect to any amounts payable in respect of the Notes, to withhold such amounts and timely pay the same to the appropriate authority in the name of and on behalf of the holders of the Notes, that it will file any necessary withholding tax returns or statements when due. FelCor LP or the Trustee shall, as promptly as possible after the payment of the taxes described above, deliver to each holder of a Note appropriate documentation showing the payment thereof, together with such additional documentary evidence as such holders may reasonably request from time to time. ARTICLE 8 DISCHARGE OF INDENTURE SECTION 8.01 TERMINATION OF COMPANY'S OBLIGATIONS. Except as otherwise provided in this Section 8.01, FelCor LP may terminate its obligations under the Notes and this Indenture if: 60 67 (i) all Notes previously authenticated and delivered (other than destroyed, lost or stolen Notes that have been replaced or Notes that are paid pursuant to Section 4.01 or Notes for whose payment money or securities have theretofore been held in trust and thereafter repaid to FelCor LP, as provided in Section 8.05) have been delivered to the Trustee for cancellation and FelCor LP has paid all sums payable by it hereunder; or (ii) (A) the Notes mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption, (B) the Company irrevocably deposits in trust with the Trustee during such one-year period, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds solely for the benefit of the Holders for that purpose, money or U.S. Government Obligations sufficient (in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee), without consideration of any reinvestment of any interest thereon, to pay principal, premium, if, any, and interest on the Notes to maturity or redemption, as the case may be, and to pay all other sums payable by it hereunder, (C) no Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit, (D) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which FelCor or FelCor LP is a party or by which they are bound and (E) FelCor and FelCor LP have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been complied with. With respect to the foregoing clause (i), FelCor LP's obligations under Section 7.07 shall survive. With respect to the foregoing clause (ii), FelCor LP's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the Notes are no longer outstanding. Thereafter, only FelCor LP's obligations in Sections 7.07, 8.05 and 8.06 shall survive. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of FelCor LP's obligations under the Notes and this Indenture except for those surviving obligations specified above. SECTION 8.02 DEFEASANCE AND DISCHARGE OF INDENTURE. FelCor LP and the Guarantors will be deemed to have paid and will be discharged from any and all obligations in respect of the Notes or any Guarantee pursuant to Article 11 on the 123rd day after the date of the deposit referred to in clause (A) of this Section 8.02, and the provisions of this Indenture will no longer be in effect with respect to the Notes, and the Trustee, at the expense of FelCor LP, shall execute proper instruments acknowledging the same; provided that the following conditions shall have been satisfied: (A) with reference to this Section 8.02, FelCor LP has irrevocably deposited or caused to be irrevocably deposited with the 61 68 Trustee (or another trustee satisfying the requirements of Section 7.10 of this Indenture) and conveyed all right, title and interest for the benefit of the Holders, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee as trust funds in trust, specifically pledged to the Trustee for the benefit of the Holders as security for payment of the principal of, premium, if any, and interest, if any, on the Notes, and dedicated solely to, the benefit of the Holders, in and to (1) money in an amount, (2) U.S. Government Obligations that, through the payment of interest, premium, if any, and principal in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment referred to in this clause (A), money in an amount or (3) a combination thereof in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the Trustee, the principal of, premium, if any, and accrued interest on the outstanding Notes at the Stated Maturity of such principal or interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of such principal, premium, if any, and interest with respect to the Notes; (B) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which FelCor LP, FelCor or any of their respective Restricted Subsidiaries is a party or by which FelCor LP, FelCor or any of their respective Restricted Subsidiaries is a party or by which FelCor LP is bound; (C) immediately after giving effect to such deposit on a pro forma basis, no Default or Event of Default shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date of deposit; (D) FelCor LP shall have delivered to the Trustee (1) either (x) a ruling directed to the Trustee received from the Internal Revenue Service to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of FelCor LP's exercise of its option under this Section 8.02 and will be subject to federal income tax on the same amount and in the same 62 69 manner and at the same times as would have been the case if such option had not been exercised or (y) an Opinion of Counsel to the same effect as the ruling described in clause (x) above accompanied by a ruling to that effect published by the Internal Revenue Service, unless there has been a change in the applicable federal income tax law since the date of this Indenture such that a ruling from the Internal Revenue Service is no longer required and (2) an Opinion of Counsel to the effect that (x) the creation of the defeasance trust does not violate the Investment Company Act of 1940 and (y) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the United States Bankruptcy Code, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against FelCor LP or a Guarantor under either such statute, and either (I) the trust funds will no longer remain the property of FelCor LP or a Guarantor (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (II) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of FelCor LP or a Guarantor, (a) assuming such trust funds remained in the possession of the Trustee prior to such court ruling to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected security interest in such trust funds that is not avoidable in bankruptcy or otherwise except for the effect of Section 552(b) of the United States Bankruptcy Code on interest on the trust funds accruing after the commencement of a case under such statute and (b) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding; (E) if the Notes are then listed on a national securities exchange, FelCor LP shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit defeasance and discharge will not cause the Notes to be delisted; and (F) FelCor LP has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.02 have been complied with. 63 70 Notwithstanding the foregoing, prior to the end of the 123-day (or one year) period referred to in clause (D)(2)(y) of this Section 8.02, none of FelCor LP's obligations under this Indenture shall be discharged. Subsequent to the end of such 123-day (or one year) period with respect to this Section 8.02, FelCor LP's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.05 and 8.06 shall survive until the Notes are no longer outstanding. Thereafter, only FelCor LP's obligations in Sections 7.07, 8.05 and 8.06 shall survive. If and when a ruling from the Internal Revenue Service or an Opinion of Counsel referred to in clause (D)(1) of this Section 8.02 is able to be provided specifically without regard to, and not in reliance upon, the continuance of FelCor LP's obligations under Section 4.01, then FelCor LP's obligations under such Section 4.01 shall cease upon delivery to the Trustee of such ruling or Opinion of Counsel and compliance with the other conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.02. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of FelCor LP's obligations under the Notes and this Indenture except for those surviving obligations in the immediately preceding paragraph. SECTION 8.03 DEFEASANCE OF CERTAIN OBLIGATIONS. FelCor LP may omit to comply with any term, provision or condition set forth in clause (iii) under Section 5.01 and Sections 4.03 through 4.17 and Sections 4.19 and 4.20, clauses (c) and (d) under Section 6.01 with respect to such clause (iii) under Section 5.01 and Sections 4.03 through 4.17 and Sections 4.19 and 4.20, and clauses (e) and (f) under Section 6.01 shall be deemed not to be Events of Default, in each case with respect to the outstanding Notes if: (i) with reference to this Section 8.03, FelCor LP has irrevocably deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10) and conveyed all right, title and interest to the Trustee for the benefit of the Holders, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee as trust funds in trust, specifically pledged to the Trustee for the benefit of the Holders as security for payment of the principal of, premium, if any, and interest, if any, on the Notes, and dedicated solely to, the benefit of the Holders, in and to (A) money in an amount, (B) U.S. Government Obligations that, through the payment of interest and principal in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment referred to in this clause (i), money in an amount or (C) a combination thereof in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the Trustee, the principal of, premium, if any, and interest on the outstanding Notes on the Stated Maturity of such principal or interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of 64 71 such U.S. Government Obligations to the payment of such principal, premium, if any, and interest with respect to the Notes; (ii) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which FelCor LP, FelCor or any of their Restricted Subsidiaries is a party or by which FelCor LP, FelCor or any of their Restricted Subsidiaries is bound; (iii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit; (iv) FelCor LP has delivered to the Trustee an Opinion of Counsel to the effect that (A) the creation of the defeasance trust does not violate the Investment Company Act of 1940, (B) the Holders have a valid first-priority security interest in the trust funds, (C) the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred and (D) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the United States Bankruptcy Code, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against FelCor LP under either such statute, and either (1) the trust funds will no longer remain the property of FelCor LP or a Guarantor (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (2) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of FelCor LP or a Guarantor, (x) assuming such trust funds remained in the possession of the Trustee prior to such court ruling to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected security interest in such trust funds that is not avoidable in bankruptcy or otherwise (except for the effect of Section 552(b) of the United States Bankruptcy Code on interest on the trust funds accruing after the commencement of a case under such statute), (y) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding and (z) no property, rights in property or other interests granted to the Trustee or the Holders in exchange for, or with respect to, such trust funds will be subject to any prior rights of holders of other Indebtedness of FelCor LP, FelCor or any of their Subsidiaries; (v) if the Notes are then listed on a national securities exchange, FelCor LP shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit defeasance and discharge will not cause the Notes to be delisted; and 65 72 (vi) FelCor LP has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.03 have been complied with. SECTION 8.04 APPLICATION OF TRUST MONEY. Subject to Section 8.06, the Trustee or Paying Agent shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03, as the case may be, and shall apply the deposited money and the money from U.S. Government Obligations in accordance with the Notes and this Indenture to the payment of principal of, premium, if any, and interest on the Notes; but such money need not be segregated from other funds except to the extent required by law. SECTION 8.05 REPAYMENT TO COMPANY. Subject to Sections 7.07, 8.01, 8.02 and 8.03, the Trustee and the Paying Agent shall promptly pay to FelCor LP upon request set forth in an Officers' Certificate any excess money held by them at any time and thereupon shall be relieved from all liability with respect to such money. The Trustee and the Paying Agent shall pay to FelCor LP upon request any money held by them for the payment of principal, premium, if any, or interest that remains unclaimed for two years; provided that the Trustee or such Paying Agent before being required to make any payment may cause to be published at the expense of FelCor LP once in a newspaper of general circulation in the City of New York or mail to each Holder entitled to such money at such Holder's address (as set forth in the Note Register) notice that such money remains unclaimed and that after a date specified therein (which shall be at least 30 days from the date of such publication or mailing) any unclaimed balance of such money then remaining will be repaid to FelCor LP. After payment to FelCor LP, Holders entitled to such money must look to FelCor LP for payment as general creditors unless an applicable law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. SECTION 8.06 REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the case may be, by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, FelCor LP's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01, 8.02 or 8.03, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the case may be; provided that, if FelCor LP has made any payment of principal of, premium, if any, or interest on any Notes because of the reinstatement of its obligations, FelCor LP shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. 66 73 ARTICLE 9 AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01 WITHOUT CONSENT OF HOLDERS. FelCor, FelCor LP and the Subsidiary Guarantors when authorized by a resolution of their Board of Directors, and the Trustee may amend or supplement this Indenture or the Notes without notice to or the consent of any Holder: (1) to cure any ambiguity, defect or inconsistency in this Indenture; provided that such amendments or supplements shall not adversely affect the interests of the Holders in any material respect; (2) to comply with Article Five; (3) to comply with any requirements of the Commission in connection with the qualification of this Indenture under the TIA; (4) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee; or (5) to make any change that, in the good faith opinion of the Board of Directors as evidenced by a Board Resolution, does not materially and adversely affect the rights of any Holder. SECTION 9.02 WITH CONSENT OF HOLDERS. Subject to Sections 6.04 and 6.07 and without prior notice to the Holders, FelCor, FelCor LP and the Subsidiary Guarantors, when authorized by their Board of Directors (as evidenced by a Board Resolution), and the Trustee may amend this Indenture and the Notes with the written consent of the Holders of a majority in aggregate principal amount at maturity of the Notes then outstanding, and the Holders of a majority in aggregate principal amount at maturity of the Notes then outstanding by written notice to the Trustee may waive future compliance by FelCor or FelCor LP with any provision of this Indenture or the Notes. Notwithstanding the provisions of this Section 9.02, without the consent of each Holder affected, an amendment or waiver, including a waiver pursuant to Section 6.04, may not: (i) change the Stated Maturity of the principal of, or any installment of interest on, any Note, (ii) reduce the principal amount of, or premium, if any, or interest on, any Note, (iii) change the place of payment of principal of, or premium, if any, or interest on, any Note or adversely affect any right of repayment at the option of any Holder of any Note, 67 74 (iv) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes, the consent of whose Holders is necessary to modify or amend this Indenture, (vi) waive a Default in the payment of principal of, premium, if any, or interest on the Notes, (vii) voluntarily release a Guarantor of the Notes, (viii) modify any of the provisions of this Section 9.02, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Note affected thereby, or (ix) reduce the percentage or aggregate principal amount at maturity of outstanding Notes the consent of whose Holders is necessary for waiver of compliance with certain provisions of this Indenture or for waiver of certain defaults. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, FelCor LP shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. FelCor LP will mail supplemental indentures to Holders upon request. Any failure of FelCor LP to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. SECTION 9.03 REVOCATION AND EFFECT OF CONSENT. Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the Note of the consenting Holder, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to its Note or portion of its Note. Such revocation shall be effective only if the Trustee receives the notice of revocation before the date the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver shall become effective on receipt by the Trustee of written consents from the Holders of the requisite percentage in principal amount of the outstanding Notes. FelCor LP may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record 68 75 date is fixed, then, notwithstanding the last two sentences of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies) and only those persons shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder unless it is of the type described in any of clauses (i) through (ix) of Section 9.02. In case of an amendment or waiver of the type described in clauses (i) through (ix) of Section 9.02, the amendment or waiver shall bind each Holder who has consented to it and every subsequent Holder of a Note that evidences the same indebtedness as the Note of the consenting Holder. SECTION 9.04 NOTATION ON OR EXCHANGE OF NOTES. If an amendment, supplement or waiver changes the terms of a Note, the Trustee may require the Holder to deliver it to the Trustee. The Trustee may place an appropriate notation on the Note about the changed terms and return it to the Holder and the Trustee may place an appropriate notation on any Note thereafter authenticated. Alternatively, if FelCor LP or the Trustee so determines, FelCor LP in exchange for the Note shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. SECTION 9.05 TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture. Subject to the preceding sentence, the Trustee shall sign such amendment, supplement or waiver if the same does not adversely affect the rights of the Trustee. The Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.06 CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of the TIA as then in effect. ARTICLE 10 MISCELLANEOUS SECTION 10.01 TRUST INDENTURE ACT OF 1939. Prior to the effectiveness of the Registration Statement, this Indenture shall incorporate and be governed by the provisions of the TIA that are required to be part of and to govern indentures qualified under the TIA. After the effectiveness of the Registration Statement, this Indenture shall be subject to the provisions of 69 76 the TIA that are required to be a part of this Indenture and shall, to the extent applicable, be governed by such provisions. SECTION 10.02 NOTICES. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first class mail addressed as follows: if to FelCor, FelCor LP or any Subsidiary Guarantor: c/o FelCor Suite Hotels, Inc. 545 East John Carpenter Freeway Suite 1300 Irving, Texas 75062 Attention: General Counsel if to the Trustee: SunTrust Bank, Atlanta 58 Edgewood Avenue Room 400 Annex Atlanta, Georgia 30303 Attention: Corporate Trust Department FelCor, FelCor LP or a Subsidiary Guarantor or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Holder shall be mailed to him at his address as it appears on the Note Register by first class mail and shall be sufficiently given to him if so mailed within the time prescribed. Copies of any such communication or notice to a Holder shall also be mailed to the Trustee and each Agent at the same time. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. Except for a notice to the Trustee, which is deemed given only when received, and except as otherwise provided in this Indenture, if a notice or communication is mailed in the manner provided in this Section 10.02, it is duly given, whether or not the addressee receives it. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. 70 77 In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 10.03 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by FelCor LP to the Trustee to take any action under this Indenture, FelCor LP shall furnish to the Trustee: (i) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (ii) an Opinion of Counsel stating that, in the opinion of such Counsel, all such conditions precedent have been complied with. SECTION 10.04 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (i) a statement that each person signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based; (iii) a statement that, in the opinion of each such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of each such person, such condition or covenant has been complied with; provided, however, that, with respect to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. SECTION 10.05 RULES BY TRUSTEE, PAYING AGENT OR REGISTRAR. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. SECTION 10.06 PAYMENT DATE OTHER THAN A BUSINESS DAY. If an Interest Payment Date, Redemption Date, Payment Date, Stated Maturity or date of maturity of any Note shall not be a Business Day, then payment of principal of, premium, if any, or interest on such Note, as the case may be, need not be made on such date, but may be made on the next succeeding Business Day 71 78 with the same force and effect as if made on the Interest Payment Date, Payment Date, or Redemption Date, or at the Stated Maturity or date of maturity of such Note; provided that no interest shall accrue for the period from and after such Interest Payment Date, Payment Date, Redemption Date, Stated Maturity or date of maturity, as the case may be. SECTION 10.07 GOVERNING LAW. The laws of the State of New York shall govern this Indenture and the Notes. The Trustee, FelCor LP and the Holders agree to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Indenture or the Notes. SECTION 10.08 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of FelCor LP, the Guarantors or any Subsidiary of any such Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 10.09 NO RECOURSE AGAINST OTHERS. No recourse for the payment of the principal of, premium, if any, or interest on any of the Notes, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of FelCor LP or the Guarantors contained in this Indenture, or in any of the Notes, or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator or against any past, present or future limited partner, stockholder, other equity holder (other than a general partner), officer, director, employee or controlling person, as such, of FelCor LP, FelCor or the Subsidiary Guarantors or of any successor Person, either directly or through FelCor LP or any successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes. SECTION 10.10 SUCCESSORS. All agreements of FelCor LP, FelCor or the Subsidiary Guarantors in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 10.11 DUPLICATE ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 10.12 SEPARABILITY. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 10.13 TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and headings of the Articles and Sections of this Indenture have been inserted 72 79 for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms and provisions hereof. ARTICLE 11 GUARANTEE OF THE NOTES SECTION 11.01 GUARANTEE. Subject to the provisions of this Article Eleven, each Guarantor, jointly and severally, hereby unconditionally guarantees to each Holder and to the Trustee on behalf of the Holders: (i) the due and punctual payment of the principal of, premium if any, on and interest on the Notes, when and as the same shall become due and payable, whether at maturity, by acceleration, redemption or otherwise, the due and punctual payment of interest on the overdue principal of and interest, if any, on the Notes, to the extent lawful, and the due and punctual performance of all other obligations of FelCor LP to the Holders or the Trustee, all in accordance with the terms of such Note and this Indenture and (ii) in the case of any extension of time of payment or renewal of any Notes or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, at stated maturity, by acceleration, redemption or otherwise. Each Guarantor hereby waives diligence, presentment, filing of claims with a court in the event of merger or bankruptcy of FelCor LP, any right to require a proceeding first against FelCor LP, the benefit of discussion, protest or notice with respect to any such Note or the debt evidenced thereby and all demands whatsoever (except as specified above), and covenants that this Article Eleven will not be discharged as to any such Note except by payment in full of the principal thereof and interest thereon and as provided in Sections 8.01 and 8.02. The maturity of the obligations guaranteed hereby may be accelerated as provided in Article Six for the purposes of this Article Eleven. In the event of any declaration of acceleration of such obligations as provided in Article Eleven, such obligations (whether or not due and payable) shall become due and payable immediately by the Guarantor for the purpose of this Article Eleven. In addition, without limiting the foregoing provisions, upon the effectiveness of an acceleration under Article Six, the Trustee shall promptly make a demand for payment on the Notes under the Guarantees provided for in this Article Eleven. Each Guarantor hereby irrevocably waives any claim or other rights which it may now or hereafter acquire against performance or enforcement of such Guarantor's obligations under this Indenture, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, any right to participate in any claim or remedy of the Holders against FelCor LP, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from FelCor LP, directly or indirectly, in cash or other property or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to any Guarantor in violation of the preceding sentence and the principal of, premium if any, and accrued interest on the Notes shall not have been paid in full, such amount shall be deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Holders, and shall immediately be paid to the Trustee for the benefit of the Holders to be credited and applied upon 73 80 the principal of, premium, if any, and accrued interest on the Notes. Each Guarantor acknowledges that it will receive direct and indirect benefits from the issuance of the Notes pursuant to this Indenture and that the waiver set forth in this paragraph is knowingly made in contemplation of such benefits. The Guarantee set forth in this Section 11.01 shall not be valid or become obligatory for any purpose with respect to a Note until the certificate of authentication on such Note shall have been signed by or on behalf of the Trustee. SECTION 11.02 OBLIGATIONS OF GUARANTOR UNCONDITIONAL. Except as provided in Section 11.07, nothing contained in this Article Eleven or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among each Guarantor and the holders of the Notes, the obligation of each Guarantor, which is absolute and unconditional, upon failure by FelCor LP, to pay to the holders of the Notes and principal of, premium, if any, and interest on the Notes as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Notes and creditors of each Guarantor, nor shall anything herein or therein prevent the holder of any Note or the Trustee on their behalf from exercising all remedies otherwise permitted by applicable law upon default under this Indenture. Without limiting the generality of the foregoing, nothing contained in this Article Eleven will restrict the right of the Trustee or the holders of the Notes to take any action to declare the Guarantees to be due and payable prior to the stated maturity of the Notes pursuant to Section 6.02 or to pursue any rights or remedies hereunder. SECTION 11.03 NOTICE TO TRUSTEE. Each Guarantor shall give prompt written notice to the Trustee of any fact known to such Guarantor which would prohibit the making of any payment to or by the Trustee in respect of the Guarantee pursuant to the provisions of this Article Eleven. SECTION 11.04 THIS ARTICLE NOT TO PREVENT EVENTS OF DEFAULT. The failure to make a payment on account of principal, of premium, if any, or interest on the Notes by reason of any provision of this Article Eleven will not be construed as preventing the occurrence of an Event of Default. SECTION 11.05 TRUSTEE'S COMPENSATION NOT PREJUDICED. Nothing in this Article Eleven will apply to amounts due to the Trustee pursuant to other sections in the Indenture. SECTION 11.06 PAYMENTS MAY BE PAID PRIOR TO DISSOLUTION. Nothing contained in this Article Eleven or elsewhere in this Indenture shall prevent (i) a Guarantor from making payments of principal of, premium if any, and interest on the Notes, or from depositing with the Trustee any monies for such payments or (ii) the application by the Trustee of any monies deposited with it for the purpose of making such payments of principal of, premium, if any, and interest on the Notes to the holders entitled thereto, each Guarantor shall give prompt written notice to the Trustee of any dissolution, winding up, liquidation or reorganization of such Guarantor. 74 81 SECTION 11.07 SUSPENSION OF GUARANTEE. The Guarantee provided pursuant to this Article 11 shall be suspended with respect to any Guarantor for so long as such Guarantor is no longer an obligor (other than in the case of FelCor, in its capacity as the general partner of FelCor LP) with respect to other Indebtedness of FelCor or FelCor LP. The Guarantee provided pursuant to this Article 11 by each Subsidiary Guarantor shall be automatically and unconditionally released and discharged upon any sale, exchange or transfer, to any Person not an Affiliate of FelCor LP or FelCor, of all of the Capital Stock owned by FelCor LP, FelCor and their respective Restricted Subsidiaries in, or all or substantially all the assets of such Subsidiary Guarantor; provided such transfer is permitted by this Indenture. To the extent the Guarantee provided pursuant to this Article 11 is suspended pursuant to this Section 11.07 with respect to FelCor, the covenants contained in Article 4 and Article 5 governing FelCor and its Restricted Subsidiaries shall be similarly suspended. 75 82 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. FELCOR SUITES LIMITED PARTNERSHIP By: FELCOR SUITE HOTELS, INC., as general partner By: /s/ LAWRENCE D. ROBINSON ---------------------------- Name: Lawrence D. Robinson Title: Senior Vice President & General Counsel FELCOR SUITE HOTELS, INC. By: /s/ LAWRENCE D. ROBINSON ---------------------------- Name: Lawrence D. Robinson Title: Senior Vice President & General Counsel SUNTRUST BANK, ATLANTA, as Trustee By: /s/ DAVID M. KAYE ---------------------------- Name: David M. Kaye Title: Group Vice President By: /s/ PHILLIP D. DEMOUEY ---------------------------- Name: Phillip D. DeMouey Title: Assistant Vice President FELCOR/CSS HOTELS, L.L.C. By: /s/ LAWRENCE D. ROBINSON ---------------------------- Name: Lawrence D. Robinson Title: Senior Vice President & General Counsel FELCOR/LAX HOTELS, L.L.C. By: /s/ LAWRENCE D. ROBINSON ---------------------------- Name: Lawrence D. Robinson Title: Senior Vice President & General Counsel 83 FELCOR/CSS HOLDINGS, L.P. By: FELCOR/CSS HOTELS, L.L.C., as general partner By: /s/ LAWRENCE D. ROBINSON ---------------------------- Name: Lawrence D. Robinson Title: Senior Vice President & General Counsel FELCOR/ST. PAUL HOLDINGS, L.P. By: FELCOR/CSS HOTELS, L.L.C., as general partner By: /s/ LAWRENCE D. ROBINSON ---------------------------- Name: Lawrence D. Robinson Title: Senior Vice President & General Counsel FELCOR/LAX HOLDINGS, LP. By: FELCOR/LAX HOTELS, L.L.C., as general partner By: /s/ LAWRENCE D. ROBINSON ---------------------------- Name: Lawrence D. Robinson Title: Senior Vice President & General Counsel FELCOR EIGHT HOTELS, L.L.C. By: /s/ LAWRENCE D. ROBINSON ---------------------------- Name: Lawrence D. Robinson Title: Senior Vice President & General Counsel 84 EXHIBIT A [FACE OF NOTE] [7 3/8% Senior Note Due 2004] [7 5/8% Senior Notes Due 2007] [CUSIP] _______ No. $_______ FELCOR SUITES LIMITED PARTNERSHIP, a Delaware limited partnership ("FelCor LP"), which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to __________, or its registered assigns, the principal sum of ___________ ($_________) on ____________, [2004][2007]. Interest Payment Dates: April 1 and October 1, commencing April 1, 1998. Regular Record Dates: March 15 and September 15. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, FelCor LP has caused this Note to be signed manually or by facsimile by its duly authorized officers. FELCOR SUITES LIMITED PARTNERSHIP BY: FELCOR SUITE HOTELS, INC., general partner By: ---------------------------- Name: Title: By: ---------------------------- Name: Title: A-1 85 (Trustee's Certificate of Authentication) This is one of the [7 3/8% Senior Notes Due 2004] [7 5/8% Senior Notes Due 2007] described in the within-mentioned Indenture. Date: SUNTRUST BANK, ATLANTA, as Trustee By: ---------------------------- Authorized Signatory A-2 86 [REVERSE SIDE OF NOTE] FELCOR SUITES LIMITED PARTNERSHIP [7 3/8% Senior Note Due 2004] [7 5/8% Senior Note Due 2007] 1. Principal and Interest. FelCor LP will pay the principal of this Note on October 1, [2004][2007]. FelCor LP promises to pay interest on the principal amount of this Note on each Interest Payment Date, as set forth below, at the rate per annum shown above. Interest will be payable semiannually (to the holders of record of the Notes at the close of business on March 15 or September 15 immediately preceding the Interest Payment Date) on each Interest Payment Date, commencing April 1, 1998. If an exchange offer registered under the Securities Act is not consummated and a shelf registration statement under the Securities Act with respect to resales of the Notes is not declared effective by the Commission, on or before April 1, 1998 in accordance with the terms of the Registration Rights Agreement dated September 26, 1997 among FelCor LP, FelCor, Morgan Stanley & Co. Incorporated, NationsBanc Capital Markets, Inc. and Salomon Brothers, Inc the interest due on the Notes will accrue, at an annual rate of .5% plus the interest rate specified on the face hereof, until the exchange offer is consummated or the shelf registration statement is declared effective. The Holder of this Note is entitled to the benefits of such Registration Rights Agreement. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from October 1, 1997; provided that, if there is no existing default in the payment of interest and this Note is authenticated between a Regular Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such Interest Payment Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. FelCor LP shall pay interest on overdue principal and premium, if any, and interest on overdue installments of interest, to the extent lawful, at a rate per annum that is 2% in excess of the rate otherwise payable. A-3 87 2. Method of Payment. FelCor LP will pay interest (except defaulted interest) on the principal amount of the Notes as provided above on each April 1 and October 1 to the persons who are Holders (as reflected in the Note Register at the close of business on such March 15 and September 15 immediately preceding the Interest Payment Date), in each case, even if the Note is canceled on registration of transfer or registration of exchange after such record date; provided that, with respect to the payment of principal, FelCor LP will make payment to the Holder that surrenders this Note to a Paying Agent on or after October 1, [2004][2007]. FelCor LP will pay principal, premium, if any, and as provided above, interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, FelCor LP may pay principal, premium, if any, and interest by its check payable in such money. It may mail an interest check to a Holder's registered address (as reflected in the Note Register). If a payment date is a date other than a Business Day at a place of payment, payment may be made at that place on the next succeeding day that is a Business Day and no interest shall accrue for the intervening period. 3. Paying Agent and Registrar. Initially, the Trustee will act as authenticating agent, Paying Agent and Registrar. FelCor LP may change any authenticating agent, Paying Agent or Registrar without notice. FelCor LP, any Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar. 4. Indenture; Limitations. FelCor LP issued the Notes under an Indenture dated as of October 1, 1997 (the "Indenture"), among FelCor LP, FelCor, the Subsidiary Guarantors and SunTrust Bank, Atlanta (the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Note and the terms of the Indenture, the terms of the Indenture shall control. The Notes are general unsecured obligations of FelCor LP. 5. Redemption. The Notes will be redeemable in whole at any time or in part from time to time, at the option of FelCor LP, at a Redemption Price equal to the greater of (i) 100% of the principal amount of such Notes and (ii) the sum of the present values of the remaining payments of A-4 88 principal and interest thereon from the Redemption Date to the applicable maturity date discounted, in each case, to the Redemption Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 25 basis points, plus, in each case, accrued interest thereon to the date of redemption. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Note to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Note. "Comparable Treasury Price" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, the average of the Reference Treasury Dealer Quotations actually obtained by the Trustee for such Redemption Date. "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with FelCor LP. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, NationsBanc Capital Markets, Inc. and Salomon Brothers Inc and their respective successors; provided, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), FelCor LP shall substitute therefor another Primary Treasury Dealer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Redemption Date. "Treasury Rate" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date. Notice of any optional redemption will be mailed at least 30 but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at its last address as it appears in the Note Register. Notes in original principal amount greater than $1,000 may be A-5 89 redeemed in part. On and after the Redemption Date, interest ceases to accrue on Notes or portions thereof called for redemption, unless FelCor LP defaults in the payment of the amount due upon redemption. 6. Repurchase upon Change in Control. Upon the occurrence of any Change of Control, each Holder shall have the right to require the repurchase of its Notes by FelCor LP in cash pursuant to the offer described in the Indenture at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Change of Control Payment"). A notice of such Change of Control will be mailed within 30 days after any Change of Control occurs to each Holder at his last address as it appears in the Note Register. Notes in original denominations larger than $1,000 may be sold to FelCor LP in part. On and after the Change of Control Payment Date, interest ceases to accrue on Notes or portions of Notes surrendered for purchase by FelCor LP, unless FelCor LP defaults in the payment of the Change of Control Payment. 7. Denominations; Transfer; Exchange. The Notes are in registered form without coupons in denominations of $1,000 of principal amount at maturity and multiples of $1,000 in excess thereof. A Holder may register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer or exchange of any Notes selected for redemption. Also, it need not register the transfer or exchange of any Notes for a period of 15 days before a selection of Notes to be redeemed is made. 8. Persons Deemed Owners. A Holder shall be treated as the owner of a Note for all purposes. 9. Unclaimed Money. If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to FelCor LP at its request. After that, Holders entitled to the money must look to FelCor LP for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. A-6 90 10. Discharge Prior to Redemption or Maturity. If FelCor LP deposits with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest on the Notes (a) to redemption or maturity, FelCor LP will be discharged from the Indenture and the Notes, except in certain circumstances for certain sections thereof, and (b) to the Stated Maturity, FelCor LP will be discharged from certain covenants set forth in the Indenture. 11. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency and make any change that does not materially and adversely affect the rights of any Holder. 12. Restrictive Covenants. The Indenture imposes certain limitations on the ability of FelCor, FelCor LP and their respective Restricted Subsidiaries, among other things, to Incur additional Indebtedness, make Restricted Payments, use the proceeds from Asset Sales, engage in transactions with Affiliates or merge, consolidate or transfer substantially all of its assets. Within 45 days after the end of each fiscal quarter (90 days after the end of the last fiscal quarter of each year), FelCor and FelCor LP must report to the Trustee on compliance with such limitations. 13. Successor Persons. When a successor person or other entity assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor person will be released from those obligations. 14. Defaults and Remedies. The following events constitute "Events of Default" under the Indenture: (a) default in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) default in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; A-7 91 (c) default in the performance or breach of the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the assets of FelCor LP and FelCor or the failure by FelCor LP to make or consummate an Offer to Purchase in accordance with Section 4.10 or Section 4.11; (d) FelCor LP or FelCor defaults in the performance of or breaches any other covenant or agreement of FelCor LP or FelCor in the Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes; (e) there occurs with respect to any issue or issues of Indebtedness of FelCor LP or FelCor or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not covered by insurance) shall be rendered against FelCor LP or FelCor or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 60 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of FelCor LP or FelCor or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of FelCor LP or FelCor or any Significant Subsidiary or for all or substantially all of the property and assets of FelCor LP or FelCor or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of FelCor LP or FelCor or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (h) FelCor LP or FelCor or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under such law, (B) consents A-8 92 to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of FelCor LP or FelCor or Significant Subsidiary or for all or substantially all of the property and assets of FelCor LP or FelCor or any Significant Subsidiary or (C) effects any general assignment for the benefit of its creditors. If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes may declare all the Notes to be due and payable. If a bankruptcy or insolvency default with respect to FelCor LP occurs and is continuing, the Notes automatically become due and payable. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of at least a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power. 15. Trustee Dealings with Company. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from and perform services for FelCor LP or its Affiliates and may otherwise deal with FelCor LP or its Affiliates as if it were not the Trustee. 16. No Recourse Against Others. No incorporator or any past, present or future limited partner, shareholder, other equity holder, officer, director, employee or controlling person as such, of FelCor LP or of any successor Person shall have any liability for any obligations of FelCor LP under the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 17. Authentication. This Note shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on the other side of this Note. 18. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). FelCor LP will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to FelCor Suites Limited Partnership, 545 East A-9 93 John Carpenter Freeway, Suite 1300, Irving, Texas 75062 or at such other address provided for in the Indenture. 19. Guarantee. Repayment of principal and interest on the Notes is guaranteed on a senior basis by the Guarantors pursuant to Article Eleven of the Indenture. A-10 94 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. __________________________________ _____________________________________________________ Please print or typewrite name and address including zip code of assignee _______________________________ ____________ ___________ the within Note and all rights thereunder, hereby irrevocably constituting _______ ___________________________________ and appointing _______________________ attorney to transfer said Note on the books of FelCor LP with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL NOTES OTHER THAN EXCHANGE NOTES, PERMANENT OFFSHORE GLOBAL NOTES AND OFFSHORE PHYSICAL NOTES] In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date the shelf registration statement with respect to resales of the Notes is declared effective or (ii) two years after the original issuance of the Notes, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] [ ] (a) this Note is being transferred in compliance with the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder. or [ ] (b) this Note is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. A-11 95 If none of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.08 of the Indenture shall have been satisfied. Date: ---------------- --------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding FelCor LP as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ---------------- --------------------------------------------- NOTICE: To be executed by an executive officer A-12 96 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by FelCor LP pursuant to Section 4.10 or Section 4.11 of the Indenture, check the Box: [_] If you wish to have a portion of this Note purchased by FelCor LP pursuant to Section 4.10 or Section 4.11 of the Indenture, state the amount (in principal amount at maturity): $___________________. Date: ------------- Your Signature: ---------------------------------------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ---------------------------- A-13 97 EXHIBIT B Form of Certificate , ----------- ----- FelCor Suites Limited Partnership 545 East John Carpenter Freeway Suite 1300 Irving, Texas 75062 FelCor Suite Hotels, Inc. 545 East John Carpenter Freeway Suite 1300 Irving, Texas 75062 SunTrust Bank, Atlanta 58 Edgewood Avenue Room 400 Annex Atlanta, Georgia 30303 Attention: Corporate Trust Department Re: FelCor Suites Limited Partnership ("FelCor LP") [7 3/8% Senior Notes Due 2004] [7 5/8% Senior Notes Due 2007] (the "Notes") ------------------------------------------------------------- Dear Sirs: This letter relates to U.S. $______ principal amount at maturity of Notes represented by a Note (the "Legended Note") which bears a legend outlining restrictions upon transfer of such Legended Note. Pursuant to Section 2.01 of the Indenture (the "Indenture") dated as of October 1, 1997 relating to the Notes, we hereby certify that we are (or we will hold such securities on behalf of) a person outside the United States to whom the Notes could be transferred in accordance with Rule 904 of Regulation S promulgated under the U.S. Securities Act of 1933, as amended. Accordingly, you are hereby requested to exchange the legended certificate for an unlegended certificate representing an identical principal amount at maturity of Notes, all in the manner provided for in the Indenture. You are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [NAME OF HOLDER] By: ---------------------------- Authorized Signature B-1 98 EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors , ------------- ---- FelCor Suites Limited Partnership 545 East John Carpenter Freeway Suite 1300 Irving, Texas 75062 FelCor Suite Hotels, Inc. 545 East John Carpenter Freeway Suite 1300 Irving, Texas 75062 SunTrust Bank, Atlanta 58 Edgewood Avenue Room 400 Annex Atlanta, Georgia 30303 Attention: Corporate Trust Department Re: FelCor Suites Limited Partnership ("FelCor LP") [7 3/8% Senior Notes Due 2004] [7 5/8% Senior Notes Due 2007] (the "Notes") ------------------------------------------------------------- Dear Sirs: In connection with our proposed purchase of $____________ aggregate principal amount at maturity of the Notes, we confirm that: 1. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture dated as of October 1, 1997, relating to the Notes (the "Indenture") and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). C-1 99 2. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Notes, we will do so only (A) to FelCor, FelCor LP or any subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (C) to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to you a signed letter substantially in the form of this letter, and, if this letter relates to a proposed transfer in respect of an aggregate principal amount of Notes less than $100,000, an opinion of counsel acceptable to FelCor and FelCor LP that such transfer is in compliance with the Securities Act, (D) outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, (E) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing any of the Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein. 3. We understand that, on any proposed resale of any Notes, we will be required to furnish to you such certifications, legal opinions and other information as you may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Notes purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [NAME OF TRANSFEREE] By: ---------------------------- Authorized Signature C-2 100 EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S , ----------- ---- FelCor Suites Limited Partnership 545 East John Carpenter Freeway Suite 1300 Irving, Texas 75062 FelCor Suite Hotels, Inc. 545 East John Carpenter Freeway Suite 1300 Irving, Texas 75062 SunTrust Bank, Atlanta 58 Edgewood Avenue Room 400 Annex Atlanta, Georgia 30303 Attention: Corporate Trust Department Re: FelCor Suites Limited Partnership ("FelCor LP") [7 3/8% Senior Notes Due 2004] [7 5/8% Senior Notes Due 2007] (the "Notes") ------------------------------------------------------------- Dear Sirs: In connection with our proposed sale of U.S.$________ aggregate principal amount at maturity of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Notes was not made to a person in the United States; (2) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States; D-1 101 (3) no directed selling efforts have been made by us in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. You are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [NAME OF TRANSFEROR] By: ---------------------------- Authorized Signature D-2 EX-5.1 4 OPINON OF JENKENS & GILCHRIST 1 Exhibit 5.1 November 5, 1997 FelCor Suites Limited Partnership c/o FelCor Suite Hotels, Inc. 545 E. John Carpenter Frwy., Suite 1300 Irving, Texas 75062-3933 Re: Registration Statement on Form S-4;$175,000,000 Aggregate Principal Amount of 7 3/8% Senior Notes Due 2004 and $125,000,000 Aggregate Principal Amount of 7 5/8% Senior Notes Due 2007 Dear Ladies and Gentlemen: In connection with the registration of $175,000,000 aggregate principal amount of 7 3/8% Senior Notes due 2004 and $125,000,000 aggregate principal amount of 7 5/8% Senior Notes Due 2007 (collectively, the "Exchange Notes") by FelCor Suites Limited Partnership (the "Partnership") under the Securities Act of 1933, as amended (the "Act"), on Form S-4 filed with the Securities and Exchange Commission on November 5, 1997 (File No. 333-______), as amended (the "Registration Statement"), and the concurrent registration of guarantees (the "Guarantees") of the Exchange Notes by FelCor Suite Hotels, Inc., FelCor/CSS Hotels, L.L.C., FelCor/LAX Hotels, L.L.C., FelCor Eight Hotels, L.L.C., FelCor/CSS Holdings, L.P., FelCor/St. Paul Holdings, L.P. and FelCor/LAX Holdings, L.P. (collectively, the "Guarantors"), you have requested our opinion with respect to the matters set forth below. The Exchange Notes will be offered in exchange for like principal amounts of outstanding 7 3/8% Senior Notes due 2004 and 7 5/8% Senior Notes Due 2007 (collectively, the "Old Notes"). The Exchange Notes and Guarantees will be issued pursuant to an indenture (the "Indenture") dated as of October 1, 1997 among the Partnership, the Guarantors and SunTrust Bank, Atlanta, as Trustee (the "Trustee"). In our capacity as your special counsel in connection with such registration, we are familiar with the proceedings taken and proposed to be taken by the Partnership and the Guarantors in connection with the authorization and issuance of the Exchange Notes and Guarantees, and, for the purposes of this opinion, have assumed such proceedings will be timely completed in the manner presently proposed. In addition, we have made such legal and factual examinations and inquiries, including an examination of originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records and instruments, as we have deemed necessary or appropriate for purposes of this opinion. 2 In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to authentic original documents of all documents submitted to us as copies. We are opining herein as to the effect on the subject transaction only of the internal laws of the State of Texas and the Delaware Revised Uniform Limited partnership Act, and we express no opinion with respect to the applicability thereto, or the effect thereon of the laws of any other jurisdiction or as to any matters of municipal law or the laws of any other local agencies within any state. Subject to the foregoing and the other matters set forth herein, it is our opinion that, as of the date hereof, when (a) the Indenture under which the Exchange Notes will be issued has been qualified under the Trust Indenture Act of 1939, as amended, (b) the Exchange Notes have been executed by the Partnership and authenticated by the Trustee in accordance with the terms of the Indenture, and (c) the Exchange Notes have been delivered in exchange for the Old Notes in the manner and for the consideration stated in the Registration Statement and the Indenture, the Exchange Notes will constitute valid and binding obligations of the Partnership and the Guarantees will constitute valid and binding obligations of the Guarantors. To the extent that the obligations of the Partnership and the Guarantors under the Indenture may be dependent upon such matters, we assume for purposes of this opinion that the Trustee is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; that the Trustee is duly qualified to engage in the activities contemplated by the Indenture; that the Indenture has been duly authorized, executed and delivered by the Trustee and constitutes the legally valid and binding obligation of the Trustee, enforceable against the Trustee in accordance with its terms; that the Trustee is in compliance, generally and with respect to acting as a trustee under the Indenture, with all applicable laws and regulations; and that the Trustee has the requisite organizational and legal power and authority to perform its obligations under the Indenture. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Registration Statement and in the Prospectus included therein. In giving such consent, we do not admit that we come within the category of persons whose consent is required by Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, JENKENS & GILCHRIST, A Professional Corporation /s/ ROBERT W. DOCKERY ------------------------------- By: Robert W. Dockery RWD/ws EX-10.2.2 5 SCHEDULE OF EXECUTED LEASE AGREEMENTS 1 EXHIBIT 10.2.2 SCHEDULE OF EXECUTED LEASE AGREEMENTS SHOWING MATERIAL VARIATIONS FROM FORM OF LEASE AGREEMENT (AS OF SEPTEMBER 30, 1997) (Dollar Amounts in Thousands)
Annual Percentage Rent Hotel Location/Franchise/ --------------- Suite - ------------------------- Commencement Annual First Second Revenue Manager (1) Lessor (2) Lessee (3) Date Base Rent (4) Tier (5) Tier (6) Breakpoint (4) - ----------- ---------- ---------- ------------ ------------- -------- -------- -------------- Dallas (Park Central), TX -- 7/28/94 $1,477 17% 65% $3,590 Jacksonville, FL -- 7/28/94 882 17% 65% 3,490 Nashville, TN -- 7/28/94 1,667 17% 65% 4,290 Orlando (North), FL -- 7/28/94 1,571 19% 65% 2,650 Orlando (South), FL -- 7/28/94 1,413 17% 65% 4,580 Tulsa, OK -- 7/28/94 1,268 19% 65% 2,770 New Orleans, LA -- 12/1/94 1,960 19% 65% 4,290 Flagstaff, AZ -- 2/15/95 570 17% 65% 1,160 Dallas (Love Field), TX (7) -- 3/29/95 1,836 17% 65% 3,060 Boston-Marlborough, MA -- 6/30/95 720 19% 65% 940 Corpus Christi, TX -- 7/19/95 1,000 17% 65% 1,495 Brunswick, GA -- 7/19/95 370 17% 65% 1,350 Chicago-Lombard, IL (8) 8/1/95 1,900 17% 65% 3,270 Burlingame (SF Airport), CA (9) 11/6/95 3,147 17% 65% 3,174 Minneapolis (Airport) MN (9) 11/6/95 2,778 17% 65% 2,138 Minneapolis (Downtown), MN (9) 11/15/95 1,387 17% 65% 2,091 St. Paul, MN (10) 11/15/95 1,085 17% 65% 3,115 Boca Raton, FL (11) (9) 11/15/95 654 17% 65% 1,421 Tampa (Busch Gardens), FL (11) (9) 11/15/95 786 17% 65% 1,287 Cleveland, OH (9) 11/17/95 1,258 17% 65% 4,929 Anaheim, CA (9) 1/3/96 1,272 17% 65% 2,062 Baton Rouge, LA (9) 1/3/96 1,204 17% 65% 2,281 Birmingham, AL (9) 1/3/96 1,898 17% 65% 1,273 Deerfield Beach, FL (9) 1/3/96 2,163 17% 65% 2,568
2
Annual Percentage Rent Hotel Location/Franchise/ --------------- Suite - ------------------------- Commencement Annual First Second Revenue Manager (1) Lessor (2) Lessee (3) Date Base Rent (4) Tier (5) Tier (6) Breakpoint (4) - ----------- ---------- ---------- ------------ ------------- -------- -------- -------------- Ft. Lauderdale, FL (9) 1/3/96 3,228 17% 65% 1,969 Miami (Airport), FL (9) 1/3/96 2,222 17% 65% 2,882 Milpitas, CA (9) 1/3/96 2,143 17% 65% 1,402 Phoenix (Camelback), AZ (9) 1/3/96 2,812 17% 65% 1,428 South San Francisco (SF Airport), (9) 1/3/96 1,876 17% 65% 3,103 CA Piscataway, NJ -- 1/10/96 1,355 17% 65% 3,574 Lexington, KY (12) -- 1/10/96 1,149 17% 65% 2,135 Beaver Creek, CO -- 2/20/96 375 17% 65% 2,284 Boca Raton, FL -- 2/28/96 1,368 17% 65% 3,670 Los Angeles (LAX), CA (13) 3/27/96 1,600 17% 65% 4,130 Mandalay Beach, CA (9) 5/8/96 1,927 17% 65% 2,909 Napa, CA (9) 5/8/96 1,215 17% 65% 3,145 Deerfield, IL (14) -- (15) 6/20/96 1,743 17% 65% 2,505 San Rafael, CA (17) (15) 7/18/96 2,107 17% 65% 2,917 Parsippany, NJ (18) (15) 7/31/96 2,440 17% 65% 3,930 Charlotte, NC (19) (15) 9/12/96 2,200 17% 65% 3,352 Indianapolis, IN (20) (15) 9/12/96 1,470 17% 65% 2,794 Atlanta (Buckhead), GA -- (15) 10/17/96 3,667 17% 65% 3,872 Myrtle Beach, SC -- (15) 12/5/96 1,963 17% 65% 6,236 San Antonio, TX (21) (16) 2/1/97 1,400 17% 65% 2,474 Raleigh, NC (22) (16) 2/1/97 2,100 17% 65% 2,711 Overland Park, KS (23) (16) 2/1/97 1,600 17% 65% 2,114 Secaucus, NJ (24) (16) 2/1/97 2,400 17% 65% 4,788 Kansas City, MO (25) (16) 2/1/97 2,100 17% 65% 2,976 Covina, CA (26) (16) 2/1/97 900 17% 65% 3,066 Austin, TX (27) (16) 2/1/97 2,200 17% 65% 2,378 Atlanta (Perimeter Center), GA (28) (16) 2/1/97 2,300 17% 65% 2,949
-2- 3
Annual Percentage Rent Hotel Location/Franchise/ --------------- Suite - ------------------------- Commencement Annual First Second Revenue Manager (1) Lessor (2) Lessee (3) Date Base Rent (4) Tier (5) Tier (6) Breakpoint (4) - ----------- ---------- ---------- ------------ ------------- -------- -------- -------------- Bloomington, MN (11) (16) 2/1/97 1,800 17% 65% 2,468 Omaha, NE (11) (16) 2/1/97 1,400 17% 65% 1,703 Los Angeles (LAX North), CA (16) 2/18/97 1,669 17% 65% 3,176 Dana Point, CA (11) (29) 2/20/97 992 17% 65% 2,211 (1997) 983 (1998) Anne Arundel County (30) (29) 3/20/97 (32) 1,900 17% 65% 2,536 (BWI), MD (11) Troy, MI (11) (31) (29) 3/20/97 (32) 2,100 17% 65% 1,935 Austin, TX (11) (31) (29) 3/20/97 (32) 1,900 17% 65% 1,961 San Antonio, TX (33) (16) 5/16/97 1,773 17% 65% 3,640 Nashville, TN (2) (34) 6/05/97 900 17% 65% 1,585 Dallas (Market Center), TX (2) (16) 6/30/97 2,300 17% 65% 2,896 Syracuse, NY (2) (16) 6/30/97 1,400 17% 65% 3,245 Atlanta (Galleria), GA (32) (2) (35) 6/30/97 2,155 17% 65% 3,777 College Park (Atlanta Airport), (2) (35) 6/30/97 2,426 17% 65% 5,033 GA (32) Dallas (Park Central), TX (32) (2) (35) 6/30/97 2,284 17% 65% 6,490 (36) Rosemont (O'Hare Airport), IL (2) (35) 6/30/97 3,522 17% 65% 2,760 (32) Phoenix (Crescent), AZ (32) (2) (35) 6/30/97 2,908 17% 65% 6,218 Durham, NC (2) (34) 7/28/97 1,700 17% 65% 1,900 Lake Buena Vista, FL (2) (34) 7/28/97 2,900 17% 65% 2,272 Tampa (Rocky Point), FL (2) (34) 7/28/97 1,700 17% 65% 1,939 Philadelphia Society Hill, PA (32) (37) (35) 9/30/97 3,833 17% 65% 5,220
- -------------------- (1) Unless otherwise noted, the hotels under each Lease Agreement are operated as Embassy Suites(R) Hotels under a commitment or license agreement with Promus Hotels, Inc., and the Manager as defined in each Lease Agreement is Promus Hotels, Inc. or an affiliate thereof. (2) Unless otherwise noted, Lessor as defined in each Lease Agreement is FelCor Suites Limited Partnership ("Partnership"). -3- 4 (3) Unless otherwise noted, Lessee as defined in each Lease Agreement is DJONT Operations, L.L.C., a Delaware limited liability company. (4) The amount shown represents the amount set forth in each Lease Agreement as the annual Base Rent and the threshold suite revenue amount. Both of these amounts are subject to adjustment for changes in the consumer price index and may not represent the actual amount currently required under each Lease Agreement. (5) Represents percentage of suite revenue payable as Percentage Rent up to suite revenue breakpoint. (6) Represents percentage of suite revenue payable as Percentage Rent in excess of suite revenue breakpoint. (7) The Manager as defined in this Lease Agreement is American General Hospitality, Inc. (8) The Lessor as defined in this Lease Agreement is Embassy/GACL Lombard Venture, a joint venture between the Partnership and Promus Hotels, Inc. (9) The Lessor as defined in these Lease Agreements is FelCor/CSS Holdings, L.P., of which the Partnership is a 99% limited partner. (10) The Lessor as defined in this Lease Agreement is FelCor/St. Paul Holdings, L.P., of which the Partnership is a 99% limited partner and another subsidiary of the Company is a 1% general partner. (11) The hotels under these Lease Agreements are operated as Doubletree Guest Suites(R) Hotels; the Manager as defined in these Lease Agreements is DT Management, Inc. (12) The hotel under this Lease Agreement is operated as a Hilton Suites(R) Hotel under a franchise or license agreement with Hilton Inns, Inc., and the Manager as defined in this Lease Agreement is American General Hospitality, Inc. (13) The Lessor as defined in this Lease Agreement is Los Angeles International Airport Hotel Associates, a limited partnership of which the Partnership is the sole general partner and of which the Partnership has an approximate 97% partnership interest. (14) The Manager as defined in this Lease Agreement is Coastal Hotel Group, Inc. (15) The Lessee as defined in the Lease Agreement for these hotels is DJONT Leasing, L.L.C., a Delaware limited liability company, pursuant to an assignment of the applicable Lease Agreement from DJONT Operations, L.L.C. (16) The Lessee as defined in the Lease Agreement for these hotels is DJONT Leasing, L.L.C., a Delaware limited liability company. (17) The Lessor as defined in this Lease Agreement is MHV Joint Venture, a joint venture between the Partnership and Promus Hotels, Inc. (18) The Lessor as defined in this Lease Agreement is Embassy/Shaw Parsippany Venture, a joint venture between the Partnership and Promus Hotels, Inc. (19) The Lessor as defined in this Lease Agreement is E.S. Charlotte, a Minnesota limited partnership, of which the Partnership owns a 49% limited partner interest and FelCor/CSS Hotels, L.L.C., a Delaware limited liability company, owns a 1% general partner interest. (20) The Lessor as defined in this Lease Agreement is E.S. North, a Indiana Limited Partnership, an Indiana limited partnership, of which the Partnership owns a 49% limited partner interest and FelCor/CSS Hotels, L.L.C., a Delaware limited liability company, owns a 1% general partner interest. (21) The Lessor as defined in this Lease Agreement is EPT San Antonio Limited Partnership, of which the Partnership owns 49% and FelCor Eight Hotels, L.L.C. ("FelCor Eight") owns 1%. (22) The Lessor as defined in this Lease Agreement is EPT Raleigh Limited Partnership, of which the Partnership owns 49% and FelCor Eight owns 1%. -4- 5 (23) The Lessor as defined in this Lease Agreement is EPT Overland Park Limited Partnership, of which the Partnership owns 49% and FelCor Eight owns 1%. (24) The Lessor as defined in this Lease Agreement is EPT Meadowlands Limited Partnership, of which the Partnership owns 49% and FelCor Eight owns 1%. (25) The Lessor as defined in this Lease Agreement is EPT Kansas City Limited Partnership, of which the Partnership owns 49% and FelCor Eight owns 1%. (26) The Lessor as defined in this Lease Agreement is EPT Covina Limited Partnership, of which the Partnership owns 49% and FelCor Eight owns 1%. (27) The Lessor as defined in this Lease Agreement is EPT Austin Limited Partnership, of which the Partnership owns 49% and FelCor Eight owns 1%. (28) The Lessor as defined in this Lease Agreement is EPT Atlanta-Perimeter Center Limited Partnership, of which the Partnership owns 49% and FelCor Eight owns 1%. (29) The Lessee as defined in the Lease Agreement for this hotel is FCH/DT Leasing, L.L.C., a Delaware limited liability company. (30) The Lessor as defined in the Lease Agreement is FCH/DT BWI Holdings, L.P., a Delaware limited partnership. (31) The Lessor as defined in these Lease Agreements is FCH/DT Holdings, L.P., a Delaware limited partnership. (32) The Lease is for a term of 15 years and contains an automatic renewal provision, pursuant to which the Lease shall be extended for an additional five-year term if the corresponding Management Agreement is extended pursuant to the terms thereof for an additional five-year period. (33) The Lessor is Promus/FelCor San Antonio Venture, a Texas general partnership. (34) The Lessee is FCH/DT Leasing II, L.L.C., a Delaware limited liability company. (35) The Lessee is FCH/SH Leasing, L.L.C., a Delaware limited liability company. (36) The hotel under this Lease Agrement is operated as a Sheraton Suites Hotel. (37) The Lessor is FCH/Society Hill, L.P., a Pennsylvania limited partnership. -5- EX-10.23 6 AMENDMENT NO. 3 - RESTATED REVOLVING CREDIT 1 EXHIBIT 10.23 U.S. $550,000,000 THIRD AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT Dated as of August 14, 1997 Among FELCOR SUITE HOTELS, INC. and FELCOR SUITES LIMITED PARTNERSHIP as Borrower and THE LENDERS PARTY HERETO and THE CHASE MANHATTAN BANK as Administrative Agent and WELLS FARGO BANK, NATIONAL ASSOCIATION as Documentation Agent ____________________________________________________________ THE CHASE MANHATTAN BANK and WELLS FARGO BANK, NATIONAL ASSOCIATION as Arrangers 2 TABLE OF CONTENTS
SECTION PAGE - ------- ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . 2 1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2. Computation of Time Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 1.3. Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 1.4. Certain Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE II AMOUNTS AND TERMS OF THE LOANS AND LETTERS OF CREDIT . . . . . . . . . . . . . . . 38 2.1. The Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.2. Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.3. Making the Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.4. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2.5. Reduction and Termination of the Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.6. Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.7. Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.8. Conversion/Continuation Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 2.9. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.10. Interest Rate Determination and Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.11. Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.12. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 2.13. Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 2.14. Payments and Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 2.15. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 2.16. Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 2.17. Swing Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 2.18. Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ARTICLE III CONDITIONS TO EFFECTIVENESS OF THIS AGREEMENT AND OF LENDING AND OF ISSUANCE OF LETTERS OF CREDIT . . . . . . . . . . . . . . . . . . . 60 3.1. Conditions Precedent to Effectiveness of this Agreement, to Initial Loans and Letters of Credit . . . 60 3.2. Additional Conditions Precedent to Effectiveness of this Agreement, to Initial Loans and Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 3.3. Conditions Precedent to Each Loan and Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . 63 ARTICLE IV REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . 64
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SECTION PAGE - ------- ---- 4.1. Existence; Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 4.2. Power; Authorization; Enforceable Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 4.3. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4.4. Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.5. Financial Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.6. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 4.7. Margin Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 4.8. Ownership of Borrower and DJONT; Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 4.9. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 4.10. Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 4.11. Restricted Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 4.12. No Burdensome Restrictions; No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 4.13. Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 4.14. Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 4.15. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 4.16. Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 4.17. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 4.18. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 4.19. Environmental Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 4.20. Contractual Obligations Concerning Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 4.21. Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 4.22. Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 4.23. Status as REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 4.24. Operator: Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 4.25. Operating Leases, Licenses and Management Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 80 4.26. FF&E Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 4.27. $100MM Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 ARTICLE V FINANCIAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 81 5.1. Gross Interest Expense Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 5.2. Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 5.3. Maintenance of Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 5.4. Limitations on Total Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 5.5. Limitations on Total Secured Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 5.6. Adjusted NOI and Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 ARTICLE VI AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . 82 6.1. Compliance with Laws, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 6.2. Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 6.3. Payment of Taxes, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 6.4. Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 6.5. Preservation of Existence, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 6.6. Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 6.7. Keeping of Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 6.8. Maintenance of Properties, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 6.9. Performance and Compliance with Other Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 6.10. Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
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SECTION PAGE - ------- ---- 6.11. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 6.12. Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 6.13. Leases and Operating Leases; Management Agreements and Licenses. . . . . . . . . . . . . . . . . . . 90 6.14. Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 6.15. Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 6.16. Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 6.17. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 6.18. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 6.19. REIT Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 6.20. Maintenance of FF&E Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 6.21. Hotel Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 6.22. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 6.23. Borrowing Base Determination/Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 ARTICLE VII NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 95 7.1. Restrictions on Creation of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 7.2. Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 7.3. Lease Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 7.4. Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 7.5. Mergers, Stock Issuances, Asset Sales, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 7.6. Restrictions on Construction/Budget Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 7.7. Change in Nature of Business or in Capital Structure . . . . . . . . . . . . . . . . . . . . . . . . . 97 7.8. Modification of Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 7.9. Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 7.10. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 7.11. Adverse or Speculative Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 7.12. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 7.13. Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 7.14. Management Continuity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 7.15. ERISA Plan Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 ARTICLE VIII EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 99 8.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 8.2. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 ARTICLE IX THE ADMINISTRATIVE AGENT . . . . . . . . . . . . . . . . . . . . . . 103 9.1. Authorization and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 9.2. Administrative Agent's Reliance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 9.3. Chase and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 9.4. Lender Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 9.5. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 9.6. Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 ARTICLE X
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SECTION PAGE - ------- ---- MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 107 10.1. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 10.2. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 10.3. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 10.4. Costs; Expenses; Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 10.5. Right of Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 10.6. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 10.7. Assignments and Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 10.8. Governing Law; Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 10.9. Submission to Jurisdiction; Service of Process . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 10.10. Section Titles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 10.11. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 10.12. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 10.13. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 10.14. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 10.15. Joint and Several Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
6 SCHEDULES Schedule I - Commitments Schedule II - Applicable Lending Offices and Addresses for Notices Schedule 4.8 - Subsidiaries and Unconsolidated Entities Schedule 4.10 - Existing Indebtedness Schedule 4.13 - Existing Investments Schedule 4.19 - Environmental Protection Schedule 4.22(a) - Owned Real Estate Schedule 4.22(b) - Leased Real Estate Schedule 6.23 - Initial Eligible Hotels
7 EXHIBITS Exhibit A - Form of Note Exhibit B - Form of Notice of Borrowing Exhibit C - Form of Notice of Conversion or Continuation Exhibit D - Form(s) of Opinion(s) of Counsel for the Loan Parties Exhibit E - Form of Assignment and Acceptance Exhibit F - Form of Borrowing Base Certificate Exhibit G - Form of Compliance Certificate Exhibit H - Form of Operating Lease Exhibit I - Form of Subsidiary Guaranty Exhibit J - Crown Sterling Hotels Exhibit K - Form of Letter of Credit Request
8 THIRD AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT, dated as of August 14, 1997, among FELCOR SUITE HOTELS, INC., a Maryland corporation ("FelCor") and FELCOR SUITES LIMITED PARTNERSHIP, a Delaware limited partnership ("FelCor LP" and collectively with FelCor, the "Borrower"), the financial institutions listed on the signature pages hereof (each individually a "Lender" and collectively the "Lenders") and THE CHASE MANHATTAN BANK ("Chase"), as administrative agent for the Lenders (in such capacity, the "Administrative Agent") and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Wells Fargo") as documentation agent. W I T N E S S E T H: WHEREAS, pursuant to that certain Revolving Credit Agreement dated as of September 30, 1996, among the Borrower, the financial institutions listed on the signature page thereof, the Administrative Agent and Wells Fargo as documentation agent (the "Original Revolving Credit Agreement"), the Original Lenders agreed to make to the Borrower revolving credit advances of up to $250,000,000 (the "Loan Amount") in aggregate principal amount outstanding at any one time, for the purposes and upon the terms and subject to the conditions set forth therein; WHEREAS, pursuant to that certain Amended and Restated Revolving Credit Agreement dated as of October 18, 1996, among the Borrower, the Lenders, the Administrative Agent and Wells Fargo as documentation agent (the "Amended Revolving Credit Agreement") the terms and provisions of the Original Revolving Credit Agreement were amended and restated as more particularly set forth therein. WHEREAS, pursuant to that certain Second Amended and Restated Revolving Credit Agreement dated as of March 10, 1997, among the Borrower, the Lenders, the Administrative Agent and Wells Fargo as documentation agent (the "Second Amended Revolving Credit Agreement") the terms and provisions of the Amended Revolving Credit Agreement were amended and restated as more particularly set forth therein. WHEREAS, as of the date hereof, Loans (hereinafter defined) in the aggregate principal amount of Two Hundred Forty-Four Million Dollars ($244,000,000) have been advanced to the Borrower pursuant to the terms of the Second Amended Revolving Credit Agreement; and 9 WHEREAS, the Borrower has requested, and the Lenders have agreed, to increase the Loan Amount and to amend certain terms and provisions of the Second Amended Revolving Credit Agreement and to restate the same as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, the parties hereto hereby agree that the aforementioned recitals are true and correct and hereby incorporated herein and that the Second Amended Revolving Credit Agreement is hereby amended and restated in its entirety so that all of the terms and conditions contained in this Agreement shall supersede and control the terms and conditions of the Second Amended Revolving Credit Agreement. ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1. Defined Terms. As used in this Agreement, the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Adjusted EBITDA" means, for any Person for any period, EBITDA of such Person for such period less the aggregate FF&E Reserves for such period in respect of each Hotel owned or leased by such Person or its Subsidiaries. "Adjusted Funds From Operations" means, for any Person, for any period, Net Income (Loss) of such Person for such period plus (a) the sum of the following amounts of such Person and its Subsidiaries for such period determined on a consolidated basis in conformity with GAAP to the extent included in the determination of such Net Income (Loss): (i) depreciation expense, (ii) amortization expense and other non-cash charges of such Person and its Subsidiaries with respect to their real estate assets for such period, (iii) losses from Asset Sales of such Person and its Subsidiaries, losses resulting from restructuring of Indebtedness of such Person and its Subsidiaries and other extraordinary losses, and (iv) minority interests attributable to FelCor LP's partnership units; less (b) the sum of the following amounts of such Person and its Subsidiaries for such period determined on a consolidated basis in conformity with GAAP to the extent included in the determination of such Net Income (Loss): (i) gains from Asset Sales of such Person and its Subsidiaries, gains 10 resulting from restructuring of Indebtedness of such Person and its Subsidiaries and other extraordinary gains, and (ii) the applicable share of Net Income (Loss) of such Person's Unconsolidated Entities; plus (c) such Person's Pro Rata Share of Adjusted Funds From Operations of such Person's Unconsolidated Entities. "Adjusted NOI" means, with respect to any Hotel owned or leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures, for any period, the Net Operating Income for such Hotel for such period less the FF&E Reserve for such Hotel for such period. "Affiliate" means, to any Person, any Subsidiary of such Person and any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person and includes each executive officer, director, trustee, limited liability company manager or general partner of such Person, and each Person who is the beneficial owner of 10% or more of any class of voting Stock of such Person. For the purposes of this definition, "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Aggregate Value" means, with respect to the Eligible Hotels, at any date, the aggregate value thereof to be calculated as follows: (a) For Eligible Hotels owned or leased for four (4) Fiscal Quarters or more, Adjusted NOI on a consolidated basis from such Eligible Hotels for the preceding four (4) Fiscal Quarters divided by ten percent (10%); (b) For Eligible Hotels owned or leased for less than four (4) Fiscal Quarters (including newly acquired Hotels and Hotels to be immediately acquired using the proceeds of any Loans), the Borrower's Investment in such Eligible Hotels; and (c) Notwithstanding the foregoing subparagraphs, for the Hotels set forth on Exhibit J, but only for the fiscal year ending December 31, 1997, the Borrower's Investment in such Hotels provided such Hotels are Eligible Hotels; 11 provided that in no event shall more than (i) 20% of the Aggregate Value be attributable to Joint Venture Hotels which are not owned by an Eligible Entity, or (ii) 15% of the Aggregate Value be attributable to Eligible Hotels leased pursuant to Qualified Leases. "Agreement" means the Second Amended Revolving Credit Agreement, together with all Exhibits and Schedules thereto, as amended and restated by this Third Amended and Restated Revolving Credit Agreement, together with all Exhibits and Schedules hereto and as the same may be further amended, supplemented or otherwise modified from time to time. "Applicable Lending Office" means, with respect to each Lender, its Domestic Lending Office in the case of a Base Rate Loan and its Eurodollar Lending Office in the case of a Eurodollar Rate Loan. "Applicable Margin" means, with respect to each Loan, the applicable percentage per annum set forth below based upon (i) with respect to Level I through IV Status, the Status then in effect and (ii) with respect to Level V through VIII Status, the Status in effect on the most recent Applicable Margin Reset Date, it being understood that the Applicable Margin for (i) Base Rate Loans shall be the percentage set forth under the column "Base Rate Loans", (ii) Eurodollar Rate Loans shall be the percentage set forth under the column "Eurodollar Rate Loans", and (iii) the Commitment Fee shall be the percentage set forth under the column "Commitment Fee":
Base Rate Eurodollar Commitment Loans Rate Loans Fee --------- ---------- ---------- Level I Status 0% 1.00% 0.125% Level II Status 1.125% 0.15% Level III Status 0% 1.25% 0.15% Level IV Status 0% 1.375% 0.20% Level V Status 0% 1.4% 0.20%
12
Base Rate Eurodollar Commitment Loans Rate Loans Fee --------- ---------- ---------- Level VI Status 0% 1.5% 0.20% Level VII Status 0.125% 1.625% 0.25% Level VIII 0.25% 1.75% 0.30%
"Applicable Margin Reset Date" shall mean the 45th day following the end of the most recent Fiscal Quarter. "Asset Sale" means any sale, conveyance, transfer, assignment, lease or other disposition (including, without limitation, by merger or consolidation, and by condemnation, eminent domain, loss, damage, or destruction, and whether by operation of law or otherwise) by the Borrower or any of its Subsidiaries to any Person (other than to Borrower or any of its Subsidiaries) of any Stock of any of its Subsidiaries, any Stock Equivalents of any of its Subsidiaries or any Hotel, but excluding Operating Leases. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit E. "Available Credit" means, at any time, an amount equal to (a) the lower of (i) the then effective Commitments of the Lenders and (ii) the Borrowing Base at such time less the sum of any Indebtedness of the Borrower or any of its Subsidiaries plus their respective Pro Rata Shares of Indebtedness of their Eligible Joint Ventures (excluding (A) Indebtedness evidenced by the Notes, (B) Indebtedness secured by first priority mortgages on Hotels provided that with respect to each such secured Indebtedness the ratio of such Indebtedness to the Borrower's Investment in such Hotel, is less than 65%, (C) Non-Recourse Indebtedness, and (D) Borrower's Capitalized Lease Obligations in connection with the St. Paul Lease), minus (b) the sum of (x) the aggregate of the outstanding principal amount of the Loans at such time and (y) the Letter of Credit Outstandings. "Base Rate" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall be equal at all times to the higher of: 13 (a) the rate of interest announced publicly by Chase at its principal office, from time to time, as Chase's base rate; and (b) the sum (adjusted to the nearest 1/8 of one percent or, if there is no nearest 1/8 of one percent, to the next higher 1/8 of one percent) of (i) 1/2 of one percent per annum plus (ii) the Federal Funds Rate. "Base Rate Loan" means any outstanding principal amount of the Loans of any Lender that bears interest with reference to the Base Rate, other than Swing Advances. "Borrower's Investment" means, with respect to any Hotel, the Borrower's or any of its Subsidiaries' investment in such Hotel (including all investments constituting, evidencing or secured by an interest in property, whether tangible or intangible and whether real, personal or mixed, that is used or intended for use in, or in any manner connected with or relating to, the ownership or leasing of such Hotel, specifically including, without limitation, investments in Subsidiaries and Unconsolidated Entities owning or leasing Hotels), at cost, on a consolidated basis, provided that in determining the cost of such investments, there shall be included (i) the amount of all cash paid and the value (as determined by the Board of Directors of FelCor for purposes of such investment) of any other property transferred therefor by the Borrower or its Subsidiary, (ii) the amount of all indebtedness and other obligations assumed or incurred by the Borrower or its Subsidiary or to which the Borrower or its Subsidiary takes subject, and (iii) the value (as determined by the Board of Directors of FelCor for the purposes of such investment) of all equity securities of which the issuer is an entity that is, or upon such investment will be, included within the Borrower or its Subsidiary and which are issued (otherwise than for cash) to, or retained by, any person other than the Borrower or its Subsidiary in connection with such investment. For purposes of this definition only "indebtedness" of the Borrower or its Subsidiary shall mean the consolidated liabilities of the Borrower and its Subsidiaries for borrowed money (including all notes payable and drafts accepted representing extensions of credit) and all obligations evidenced by bonds, debentures, notes or other similar instruments on which interest charges are customarily paid, including obligations under Capitalized Leases. 14 "Borrowing" means a borrowing consisting of Loans made on the same day by the Lenders ratably according to their respective Commitments. "Borrowing Base" means, at any time, the sum of 50% of the Aggregate Value of Eligible Hotels. "Borrowing Base Certificate" means a certificate of the Borrower substantially in the form of Exhibit F. "Business Day" means a day of the year on which banks are not required or authorized to close in New York City and California and, if the applicable Business Day relates to a Eurodollar Rate Loan, a day on which dealings are also carried on in the London interbank market. "Capital Expenditures" means, for any Person for any period, the aggregate of all expenditures by such Person and its Subsidiaries, except interest capitalized during construction, during such period for property, plant or equipment, including, without limitation, renewals, improvements, replacements and capitalized repairs, that would be reflected as additions to property, plant or equipment on a consolidated balance sheet of such Person and its Subsidiaries prepared in conformity with GAAP. For the purpose of this definition, the purchase price of equipment which is acquired simultaneously with the trade-in of existing equipment owned by such Person or any of its Subsidiaries or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less the credit granted by the seller of such equipment being traded in at such time or the amount of such proceeds, as the case may be. "Capitalized Lease" means, as to any Person, any lease of property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in conformity with GAAP. "Capitalized Lease Obligations" means, as to any Person, the capitalized amount of all obligations of such Person or any of its Subsidiaries under Capitalized Leases, as determined on a consolidated basis in conformity with GAAP. "Cash" shall mean coin or currency of the United States of America or immediately available federal funds. 15 "Cash Equivalents" means (i) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States government or any agency thereof, (ii) certificates of deposit, eurodollar time deposits, overnight bank deposits and bankers' acceptances of any commercial bank organized under the laws of the United States, or any State thereof, and having total assets in excess of $5,000,000,000 having maturities of one year or less from the date of acquisition, and (iii) commercial paper of an issuer rated at least "A-1" by S&P or "P-1" by Moody's, or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments. "Closing Date" means September 30, 1996. "Code" means the Internal Revenue Code of 1986 (or any successor legislation thereto), as amended from time to time. "Commitment" means, as to each Lender, the commitment of such Lender to make Loans to the Borrower pursuant to Section 2.1 in the aggregate principal amount outstanding not to exceed the amount set forth opposite such Lender's name on Schedule I under the caption "Commitment", as such amount may be reduced or modified pursuant to this Agreement, and "Commitments" means the aggregate Commitments of all Lenders. "Commitment Fee" has the meaning specified in Section 2.4(a). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any Indebtedness or Contractual Obligation of another Person, if the purpose or intent of such Person in incurring the Contingent Obligation is to provide assurance to the obligee of such Indebtedness or Contractual Obligation that such Indebtedness or Contractual Obligation will be paid or discharged, or that any agreement relating thereto will be complied with, or that any holder of such Indebtedness or Contractual Obligation will be protected (in whole or in part) against loss in respect thereof. Contingent Obligations of a Person include, without limitation, (a) the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse 16 by such Person of an obligation of another Person (including, in the case of any Guarantor, its obligations under its Subsidiary Guaranty), and (b) any liability of such Person for an obligation of another Person through any agreement (contingent or otherwise) (i) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of a loan, advance, stock purchase, capital contribution or otherwise), (ii) to maintain the solvency or any balance sheet item, level of income or financial condition of another Person, (iii) to make take-or-pay or similar payments, if required, regardless of non-performance by any other party or parties to an agreement, (iv) to purchase, sell or lease (as lessor or lessee) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such obligation or to assure the holder of such obligation against loss, or (v) to supply funds to or in any other manner invest in such other Person (including, without limitation, to pay for property or services irrespective of whether such property is received or such services are rendered), if in the case of any agreement described under subclause (i), (ii), (iii), (iv) or (v) of this sentence the primary purpose or intent thereof is as described in the preceding sentence. Anything herein to the contrary notwithstanding, no agreement entered into by the Borrower or any of its Subsidiaries or Unconsolidated Entities with respect to its acquisition of any direct or indirect interest in any Hotel shall, prior to the satisfaction in full of all conditions precedent to the obligations of such Person pursuant to the agreement, be deemed or construed to constitute a "Contingent Obligation" or "Indebtedness" of such Person hereunder, provided that pursuant to any such agreement, the Borrower or its Subsidiary or Unconsolidated Entity is not liable or responsible for, and does not assume any, development or construction risks. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. "Contractual Obligation" of any Person means any obligation, agreement, undertaking or similar provision of any security issued by such Person or of any agreement (including, without limitation, any management or franchise agreement), undertaking, contract, lease, indenture, mortgage, deed of trust or other instrument (excluding a Loan Document) to which such Person is a party or by which it or any of its property is bound or to which any of its properties is subject. 17 "Default" means any event which with the passing of time or the giving of notice or both would become an Event of Default. "DJONT" means DJONT Operations, L.L.C., a Delaware limited liability company. "DOL" means the United States Department of Labor, or any successor thereto. "Dollars" and the sign "$" each mean the lawful money of the United States of America. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule II or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Drawing" shall have the meaning provided in Section 2.21(a). "DT" shall mean DT Management, Inc. or any Person controlled by Doubletree Hotels Corporation, that is a Manager. "EBITDA" means, for any Person for any period, the Net Income (Loss) of such Person for such period taken as a single accounting period, plus (a) the sum of the following amounts of such Person and its Subsidiaries for such period determined on a consolidated basis in conformity with GAAP to the extent included in the determination of such Net Income (Loss): (i) depreciation expense, (ii) amortization expense and other non-cash charges, (iii) interest expense, (iv) income tax expense, (v) extraordinary losses (and other losses on Asset Sales not otherwise included in extraordinary losses determined on a consolidated basis in conformity with GAAP), and (vi) minority interests attributable to FelCor LP's partnership units, less (b) the sum of the following amounts of such Person and its Subsidiaries determined on a consolidated basis in conformity with GAAP to the extent included in the determination of such Net Income (Loss): (i) extraordinary gains (and in the case of the Borrower, other gains on Asset Sales not otherwise included in extraordinary gains determined on a consolidated basis in conformity with GAAP), (ii) the applicable share of Net Income (Loss) of such Person's Unconsolidated Entities; plus (c) such Person's Pro 18 Rata Share of EBITDA of such Person's Unconsolidated Entities. "Effective Date" has the meaning specified in Section 3.1. "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any State thereof, and having total assets in excess of $5,000,000,000; (ii) a commercial bank organized under the laws of any other country which is a member of the OECD, or a political subdivision of any such country, and having total assets in excess of $5,000,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD or the Cayman Islands; (iii) the central bank of any country which is a member of the OECD; corporation organized under the laws of the United States, or any State thereof, and having total assets in excess of $3,000,000,000; (iv) an insurance company organized under the laws of the United States, or any State thereof, and having total assets in excess of $5,000,000,000; (v) any Lender; (vi) any Affiliate of any Lender; and (vii) any Person other than an Affiliate of a Loan Party, in each case acceptable (a) to the Administrative Agent, and (b) provided no Default or Event of Default exists, to the Borrower, which acceptance will not be unreasonably withheld, conditioned or delayed. "Eligible Entity" shall mean any Eligible Joint Venture in which the Borrower owns, directly or indirectly, at least a 90% equity interest and the remainder of such equity interest is owned by either (i) Promus, (ii) DT, or (iii) Sheraton, provided, however, such Eligible Joint Venture shall only be an Eligible Entity if (i) Borrower (x) is the sole general partner (or equivalent) in such Eligible Joint Venture or (y) owns directly or indirectly at least 90% of the Stock of the sole general partner (or equivalent) in such Eligible Joint Venture and all other Stock of such sole general partner (or equivalent) which is not owned by Borrower is owned by either Promus, DT or Sheraton, (ii) such sole general partner (or equivalent) is the only Person who can unilaterally authorize the sale or encumbrance of the assets of such Eligible Joint Venture (iii) Borrower alone controls the sole general partner (or equivalent) and (iv) such Eligible Joint Venture has no debt other than unsecured trade debt incurred in the the ordinary course of business. For the purposes of this definition, "control" means the possession of the power to direct or cause the direction of 19 management and policies of such Person (including without limitation the power to authorize the sale or encumbrance of the assets of such Person), whether through the ownership of voting securities, by contract or otherwise. "Eligible Hotels" means, collectively, (a) such of the Hotels owned or leased by the Borrower or any of its direct or indirect wholly-owned Subsidiaries, and (b) such of the Joint Venture Hotels, as shall meet at any time and from time to time, each of the following minimum criteria: (a) such Hotel is Unencumbered; (b) such Hotel is free of all material structural and title defects and other material adverse matters; (c) such Hotel is, as of the date upon which such Hotel is included in the Aggregate Value and as of the end of each succeeding Fiscal Quarter, (i) in compliance, in all material respects, with all applicable Environmental Laws, and (ii) not subject to any material Environmental Liabilities and Costs, in each case as initially verified by a written report of an environmental consultant reasonably acceptable to the Administrative Agent; (d) such Hotel is fully-operating with less than 20% of "keys" out of service due to casualty or condemnation loss or as a consequence of a material structural repair, alteration or addition; (e) such Hotel is (i) leased to the Operating Lessee pursuant to an Operating Lease, (ii) managed by a Manager pursuant to a Management Agreement, and (iii) operated pursuant to and has the benefit of, a License; and no material defaults exist under such Operating Lease, Management Agreement or License; (f) such Hotel is (i) owned in fee simple or (ii) leased pursuant to a Qualified Lease in favor of, the Borrower or its direct or indirect wholly-owned Subsidiary or an Eligible Joint Venture; 20 provided that, if a Joint Venture Hotel is owned by an Eligible Joint Venture which owns more than a single Hotel, such Joint Venture Hotel shall only be an Eligible Hotel if it satisfies all of the requirements set forth in subparagraphs (a) through (f) above and all other Hotels owned by such Eligible Joint Venture satisfy the conditions set forth in subparagraphs (a) and (c) above. "Eligible Hotel Documents" means, with respect to any Eligible Hotel, the following documents: (i) A description of such Hotel, such description to include the age, location and number of rooms or suites of such Hotel; (ii) Details of the Borrower's Investment in such Hotel and, if such Hotel has been owned for more than four (4) Fiscal Quarters or more, details of the Adjusted NOI of such Hotel for the prior four (4) Fiscal Quarters; (iii) A copy of the most recent ALTA Owner's Policy of Title Insurance (or commitment to issue such a policy to the Loan Party (or Eligible Joint Venture) owning or to own such Hotel) relating to such Hotel showing the identity of the fee titleholder thereto and all matters of record as of its date; (iv) Copies of each of the Operating Lease, Management Agreement and License relating to such Hotel; (v) Copies of all engineering, mechanical, structural and maintenance studies performed by third party consultants with respect to such Hotel; (vi) A "Phase I" environmental assessment of such Hotel prepared by an environmental engineering firm acceptable to the Administrative Agent, and any additional environmental studies or assessments available to the Borrower performed with respect to such Hotel; (vii) If such Hotel is owned pursuant to a Qualified Lease, a copy of such Lease together with all and any amendments thereto or modifications thereof; 21 (viii) A Borrowing Base Certificate setting forth on a pro forma basis the Available Credit assuming that such Hotel is accepted as an Eligible Hotel for the purposes of the Borrowing Base; and (ix) Such other information as the Administrative Agent may reasonably request in order to evaluate the Hotel. "Eligible Joint Venture" means any joint venture, corporation, partnership or other business entity in which the Borrower (i) owns directly or indirectly a JV% of at least 50% and (ii) except in the case of Eligible Entities, is (or owns directly or indirectly all of the voting Stock of) the managing general partner or equivalent thereof for such entity. "Environmental Claim" means any accusation, allegation, notice of violation, action, claim, Environmental Lien, demand, abatement or other Order or direction (conditional or otherwise) by any Governmental Authority or any other Person for personal injury (including sickness, disease or death), tangible or intangible property damage, damage to the environment, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restriction, resulting from or based upon (i) the existence, or the continuation of the existence, of a Release (including, without limitation, sudden or non-sudden accidental or non-accidental Releases) of, or exposure to, any Hazardous Material or other nuisance (to the extent the same relates to any Hazardous Materials), or other Release in, into or onto the environment (including, without limitation, the air, soil, surface water or groundwater) at, in, by, from or related to any property owned or leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures or any activities or operations thereof; (ii) the environmental aspects of the transportation, storage, treatment or disposal of Hazardous Materials in connection with any property owned or leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures or their operations or facilities; or (iii) the violation, or alleged violation, of any Environmental Laws, Orders or Environmental Permits of or from any Governmental Authority relating to environmental matters connected with any property owned or leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures. 22 "Environmental Laws" means any applicable federal, state, local or foreign law (including common law), statute, code, ordinance, rule, regulation or other requirement having the force or effect of law relating to the environment, natural resources, or public or employee health and safety and includes, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Section 136 et seq., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Clean Water Act, 33 U.S.C. Section 1251 et seq., the Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq. (to the extent the same relates to any Hazardous Materials), and the Oil Pollution Act of 1990, 33 U.S.C. Section 2701 et seq., as such laws have been amended or supplemented, and the regulations promulgated pursuant thereto, and all analogous state and local statutes. "Environmental Liabilities and Costs" means, as to any Person, all liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including, without limitation, all reasonable fees, disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand by any other Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, including, without limitation, any thereof arising under any Environmental Law, Environmental Permit, order or agreement with any Governmental Authority or other Person, and which relate to any environmental, health or safety condition, or a Release or threatened Release, and result from the past, present or future operations of, or ownership of property by, such Person or any of its Subsidiaries or Eligible Joint Ventures. "Environmental Lien" means any Lien in favor of any Governmental Authority arising under any Environmental Law. "Environmental Permit" means any Permit required under any applicable Environmental Laws or Order and all supporting documents associated therewith. 23 "ERISA" means the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control or treated as a single employer with any Loan Party within the meaning of Section 414 (b), (c), (m) or (o) of the Code. "ERISA Event" means (i) an event described in Sections 4043(c)(1), (2), (3), (5), (6), (8) or (9) of ERISA with respect to a Pension Plan; (ii) the withdrawal of any Loan Party or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (iii) the complete or partial withdrawal of any Loan Party or any ERISA Affiliate from any Multiemployer Plan or the insolvency of any Multiemployer Plan; (iv) the filing of a notice of intent to terminate a Pension Plan or the treatment of a plan amendment as a termination under Section 4041 of ERISA; (v) the institution of proceedings by the PBGC to terminate or appoint a trustee to administer a Pension Plan or Multiemployer Plan; (vi) the failure to make any required contribution to a Pension Plan; (vii) any other event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; (viii) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA; (ix) a prohibited transaction (as described in Code Section 4975 or ERISA Section 406) shall occur with respect to any Plan; or (x) any Loan Party or ERISA Affiliate shall request a minimum funding waiver from the IRS with respect to any Pension Plan. "Eurodollar Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" below its name on Schedule II (or, if no such office is specified, its Domestic Lending Office) or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eurodollar Rate" means, for any Interest Period, an interest rate per annum equal to the rate per annum obtained by multiplying (a) a rate per annum equal to the rate for U.S. dollar deposits with maturities comparable to such Interest Period which appears on Telerate Page 3750 as 24 of 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period, provided, however, that if such rate does not appear on Telerate Page 3750, the "Eurodollar Rate" applicable to a particular Interest Period shall mean a rate per annum equal to the rate at which U.S. dollar deposits in an amount approximately equal to the Principal Balance (or the portion thereof which will bear interest at a rate determined by reference to the Eurodollar Rate during the Interest Period to which such Eurodollar Rate is applicable in accordance with the provisions hereof), and with maturities comparable to the last day of the Interest Period with respect to which such Eurodollar Rate is applicable, are offered in immediately available funds in the London Interbank Market to the London office of Chase by leading banks in the Eurodollar market at 11:00 a.m., London time, two (2) Business Days prior to the commencement of the Interest Period to which such Eurodollar Rate is applicable, by (b) a fraction (expressed as a decimal) the numerator of which shall be the number one and the denominator of which shall be the number one minus the Eurodollar Rate Reserve Percentage for such Interest Period. "Eurodollar Rate Loan" means any outstanding principal amount of the Loans of any Lender that, for an Interest Period, bears interest at a rate determined with reference to the Eurodollar Rate. "Eurodollar Rate Reserve Percentage" for any Interest Period means the aggregate reserve percentages (expressed as a decimal) from time to time established by the Board of Governors of the Federal Reserve System of the United States and any other banking authority to which any of the Lenders are now or hereafter subject, including, but not limited to any reserve on Eurocurrency Liabilities as defined in Regulation D of the Board of Governors of the Federal Reserve System of the United States at the ratios provided in such Regulation from time to time, it being agreed that any portion of the Principal Balance bearing interest at a rate determined by reference to the Eurodollar Rate shall be deemed to constitute Eurocurrency Liabilities, as defined by such Regulation, and it being further agreed that such Eurocurrency Liabilities shall be deemed to be subject to such reserve requirements without benefit of or credit for prorations, exceptions or offsets that may be available to any of the Lenders from time to time under such Regulation and irrespective of whether such Lender actually maintains all or any portion of such reserve. 25 "Existing Guarantors" means (i) FelCor/CSS Hotels, L.L.C., a Delaware limited liability company, (ii) FelCor/LAX Hotels, L.L.C., a Delaware limited liability company, (iii) FelCor/CSS Holdings, L.P., a Delaware limited partnership, (iv) FelCor/St. Paul Holdings, L.P., a Delaware limited partnership, (v) FelCor/LAX Holdings, L.P., a Delaware limited partnership and (vi) FelCor Eight Hotels L.L.C., a Delaware limited liability company. "Existing Subsidiary Guaranty" means each Subsidiary Guaranty dated as of the Closing Date and executed by each Existing Guarantor in favor of the Lenders, as reaffirmed and ratified pursuant to that certain Reaffirmation and Ratification of Subsidiary Guaranties dated as of the Effective Date and executed by the Existing Guarantors in favor of the Lenders. "Event of Default" has the meaning specified in Section 8.1. "$100MM Facility" means that certain revolving credit facility in the aggregate principal sum of $100,000,000 made by Boatmen's National Bank of Oklahoma, as Agent for certain banks, as lenders, in favor of the Borrower, as borrowers. "Facing Fee" shall have the meaning provided in Section 2.4(c). "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FF&E Reserve" means, for any Person (or with respect to any Hotel) for any period, a reserve equal to four percent (4%) of Suite Revenues from any Hotel owned by such Person (or from such Hotel), for such Period, plus, (a) for any Person, such Person's Pro Rata Share of any FF&E Reserve for any Hotel owned by such Person's Unconsolidated Entities or, (b) with respect to any Joint Venture Hotel, 26 the FF&E Reserve for such Joint Venture Hotel multiplied by the applicable JV%. "Final Maturity Date" means October 1, 2000. "Fiscal Quarter" means each of the three month periods ending on March 31, June 30, September 30 and December 31. "Fiscal Year" means the twelve month period ending on December 31. "Fixed Charges" means, for any Person for any period, (a) Gross Interest Expense for such period plus (b) the aggregate amount of scheduled principal payments on the Total Indebtedness of such Person (excluding optional prepayments and scheduled principal payments in respect of any such Total Indebtedness which is payable in a single installment at final maturity) required to be made during such period plus (c) dividends required to be paid by such Person in connection with preferred Stock issued by such Person. "Free Cash Flow" means, for any Person for any period, the Adjusted Funds From Operations for such period less (a) the aggregate FF&E Reserves for such Person and its Subsidiaries for such period, and (b) the aggregate amount of scheduled principal payments on the Total Indebtedness of such Person (excluding optional prepayments and scheduled principal payments in respect of any such Indebtedness which is payable in a single installment at final maturity) required to be made during such period. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination except that, for purposes of Articles V and VII, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements referred to in Section 4.5. 27 "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity duly exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Gross Interest Expense" means, for any Person for any period, the sum of (a) the total interest expense in respect of all Indebtedness (excluding all Contingent Obligations) of such Person and its Subsidiaries for such period determined on a consolidated basis in conformity with GAAP, plus capitalized interest of such Person and its Subsidiaries, plus (b) such Person's Pro Rata Share of Gross Interest Expense of such Person's Unconsolidated Entities. "Guarantor" means each direct and indirect wholly owned Subsidiary of the Borrower, comprising, as of the date hereof, the Existing Guarantors. "Hazardous Material" means any substance, material or waste which is regulated by any Governmental Authority of the United States as a "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste," "restricted hazardous waste," "contaminant," "toxic waste," "toxic substance" or words of similar meaning or import under any provision of Environmental Law, which includes, but is not limited to, petroleum, petroleum products, asbestos, urea formaldehyde and polychlorinated biphenyls. "Hotel" means any Real Estate or Lease comprising an operating facility offering hotel or other lodging services. "Improvements" has the meaning specified in Section 4.22(c). "Indebtedness" of any Person means, without duplication, the principal amount of (i) all indebtedness of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured) or for the deferred purchase price of property or services, (ii) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments (including, in the case of the Borrower, the Loans outstanding), (iii) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property 28 acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all Capitalized Lease Obligations of such Person, (v) all Contingent Obligations of such Person, (vi) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value (other than for other equity securities) any Stock or Stock Equivalents of such Person, valued, in the case of mandatorily redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (vii) all Indebtedness referred to in clause (i), (ii), (iii), (iv), (v) or (vi) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including, without limitation, accounts and general intangibles) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, and (viii) all liabilities of such Person under Title IV of ERISA. "Indemnitees" has the meaning specified in Section 10.4. "Interest Period" means, (a) in the case of any Eurodollar Rate Loan, (i) initially, the period commencing on the date such Eurodollar Rate Loan is made or on the date of conversion of a Base Rate Loan to such Eurodollar Rate Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its Notice of Borrowing or Notice of Conversion or Continuation given to the Administrative Agent pursuant to Section 2.3 or 2.8, and (ii) thereafter, if such Loan is continued, in whole or in part, as a Eurodollar Rate Loan pursuant to Section 2.8, a period commencing on the last day of the immediately preceding Interest Period therefor and ending one, two, three or six months thereafter, as selected by the Borrower in its Notice of Conversion or Continuation given to the Administrative Agent pursuant to Section 2.8; provided, however, that: (A) if any Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless the result of such extension would be to extend such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; 29 (B) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; (C) the Borrower may not select any Interest Period which ends after the Final Maturity Date; (D) Intentionally Omitted. (E) the Borrower may not select any Interest Period in respect of Loans having an aggregate principal amount of less than $5,000,000; and (F) there shall be outstanding at any one time no more than twelve (12) Interest Periods in the aggregate. "Interest Rate Contracts" means interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, interest rate insurance, and other agreements or arrangements designed to provide protection against fluctuations in interest rates. "Investment" means, with respect to any Person, (a) any loan or advance to any other Person, (b) the ownership, purchase or other acquisition of, any Stock, Stock Equivalents, other equity interest, obligations or other securities of, (i) any other Person, (ii) or all or substantially all of the assets of any other Person, or (iii) all or substantially all of the assets constituting the business of a division, branch or other unit operation of any other Person, or (c) any joint venture or partnership with, or any capital contribution to, or other investment in, any other Person or any real property. "Issuing Lender" shall mean Chase. "IRS" means the Internal Revenue Service, or any successor thereto. "Joint Venture Hotel" means any Hotel owned by an Eligible Joint Venture "JV%" means, with respect to any Eligible Joint Venture, the percentage ownership interest of Borrower in such Eligible Joint Venture. 30 "L/C Supportable Obligations" shall mean (i) obligations of the Borrower, or any of its wholly-owned Subsidiaries incurred in the ordinary course of business with respect to insurance obligations and workers' compensation, surety bonds and other similar statutory obligations (ii) earnest money or performance obligations in respect of acquisitions permitted pursuant to the terms of this Agreement and (iii) such other obligations of the Borrower, or any of its wholly-owned Subsidiaries as are permitted to exist pursuant to the terms of this Agreement. "Leases" means, with respect to the Borrower or any of its Subsidiaries or Eligible Joint Ventures, all of those leasehold estates in real property owned by the Borrower or such Subsidiary or Eligible Joint Venture, as lessee, as such may be amended, supplemented or otherwise modified from time to time to the extent permitted by this Agreement. "Legal Proceedings" means any judicial, administrative or arbitral actions, suits, proceedings (public or private) or governmental proceedings. "Letter of Credit" shall have the meaning provided in Section 2.18(a). "Letter of Credit Fee" shall have the meaning provided in Section 2.4(b). "Letter of Credit Outstandings" shall mean, at any time, the sum of (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the amount of all Unpaid Drawings. "Letter of Credit Request" shall have the meaning provided in Section 2.19(a). "Leverage Ratio" shall mean, at any date, a fraction (expressed as a percentage) the numerator of which is Total Indebtedness, on such date, and the denominator of which is Total Value, on such date. "License" means either (x) an agreement in favor of either the Borrower or the Operating Lessee as licensee, permitting the use of hotel system trademarks, trade names and any related rights in connection with the ownership or operation of any Hotel or (y) a Management Agreement, provided the Manager under such Management Agreement owns the rights to hotel system trademarks, trade names and any 31 related rights in connection with the ownership or operation of any Hotel. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever intended to assure payment of any Indebtedness or other obligation, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a Capitalized Lease Obligation, any financing lease having substantially the same economic effect as any of the foregoing, and the filing, under the Uniform Commercial Code or comparable law of any jurisdiction, of any financing statement naming the owner of the asset to which such Lien relates as debtor. "Loan" or "Loans" means the revolving credit loan or loans made or to be made by a Lender to the Borrower pursuant to Article II. "Loan Documents" means, collectively, this Agreement, the Notes, the Subsidiary Guaranties and each certificate, agreement or document executed by a Loan Party and delivered to the Administrative Agent or any Lender in connection with or pursuant to any of the foregoing. "Loan Party" means each of the Borrower and each Guarantor. "Majority Lenders" means, at any time, Lenders holding at least 51% of the then aggregate unpaid principal amount of Loans (excluding Loans held by Non-Funding Lenders) or, if no such Loans are then outstanding, Lenders having at least 51% of the Commitments of all Lenders (excluding Non-Funding Lenders). "Management Agreement" means an agreement relating to the operation and/or management of any Hotel between the Operating Lessee and the Manager. "Manager" means Promus, DT, Sheraton, American General Hospitality, Inc., Coastal Hotel Group, Inc., or such other manager as shall be reasonably approved by the Borrower and engaged by the Operating Lessee, as manager under the Management Agreement. 32 "Material Adverse Change" means a material adverse change in any of (i) the condition (financial or otherwise), business, performance, prospects, operations or properties of (A) any Borrower, (B) the Borrower and its Subsidiaries taken as one enterprise or (C) DJONT (ii) the legality, validity or enforceability of any Loan Document, or any material Operating Lease or the Operating Leases taken as a whole, (iii) the ability of the Borrower or its Significant Subsidiaries to repay the Obligations or to perform its obligations under any Loan Document, (iv) the ability of DJONT to perform its obligations under any material Operating Lease or the Operating Leases taken as a whole, or (v) the rights and remedies of the Lenders or the Administrative Agent under the Loan Documents. "Material Adverse Effect" means an effect that results in or causes, or has a reasonable likelihood of resulting in or causing, a Material Adverse Change. "Minimum Tangible Net Worth" means, with respect to the Borrower, at any time, the sum of (a) $825,000,000.00; plus (b) 50% of the aggregate net proceeds received by the Borrower or any of its Subsidiaries after June 30, 1997 in connection with any offering of Stock or Stock Equivalents of the Borrower and its Subsidiaries taken as a whole. "Moody's" means Moody's Investor Service Inc. "Multiemployer Plan" means, as of any applicable date, a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, and to which any Loan Party, any of its Subsidiaries or any ERISA Affiliate is making, is obligated to make, or within the six-year period ending at such date, has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. "Net Income (Loss)" means, for any Person for any period, the aggregate of net income (or loss) of such Person and its Subsidiaries for such period, determined on a consolidated basis in conformity with GAAP. "Net Operating Income" means, with respect to any Hotel, for any period, the sum of the following (without duplication) (a) all gross income, revenues, receipts and all other consideration received by the lessor under the Operating Lease for such Hotel, including, without limitation, base rent, percentage and similar rentals, late charges and interest payments, but excluding extraordinary 33 income and, until earned, security deposits, prepaid rents and other refundable receipts, minus (b) all expenses incurred by the owner of such Hotel during such period pursuant to its obligations as lessor under the Operating Lease for such Hotel, including, without limitation, real estate taxes, personal property taxes, maintenance and repair costs of a non-capital nature for the structural portions of such Hotel and premiums payable for insurance required to be carried by the lessor on or with respect to such Hotels pursuant to the Operating Lease therefor, but excluding extraordinary expenses; provided that, with respect to any Joint Venture Hotel, "Net Operating Income" shall mean the Net Operating Income from such Hotel multiplied by the applicable JV%. "Non-Funding Lender" has the meaning specified in Section 2.14(f). "Non-Recourse Indebtedness" of any Person means all Indebtedness of such Person with respect to which recourse for payment is limited to specific assets encumbered by a Lien securing such Indebtedness; provided, however, that personal recourse of a holder of Indebtedness against any obligor with respect thereto for fraud, misrepresentation, misapplication of cash, waste and other circumstances customarily excluded from non-recourse provisions in non-recourse financing of real estate shall not, by itself, prevent any Indebtedness from being characterized as Non-Recourse Indebtedness, provided further that if a personal recourse claim is made in connection therewith, such claim shall not constitute Non-Recourse Indebtedness for the purposes of this Agreement). "Non-Suite Hotel" means a Hotel that is not a Suite Hotel. "Note" means a promissory note of the Borrower payable to the order of any Lender in a stated principal amount equal to the amount of such Lender's Commitment as originally in effect, in substantially the form of Exhibit A, evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from the Loans made by such Lender, and "Notes" means, collectively, the Notes. "Notice of Borrowing" has the meaning specified in Section 2.3(a). "Obligations" means the Loans, the obligation to pay Unpaid Drawings and all other advances, debts, 34 liabilities, obligations, covenants and duties owing by the Borrower to the Administrative Agent, any Lender, the Issuing Lender, any Affiliate of any of them or any Indemnitee, of every type and description, present or future, arising under this Agreement or under any other Loan Document, whether direct or indirect (including, without limitation, those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term "Obligations" includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and disbursements and any other sum then payable by the Borrower under this Agreement or any other Loan Document. "OECD" means the Organization for Economic Cooperation and Development. "Operating Lease" means a lease or sublease relating to any Hotel, between the Borrower or any of its Subsidiaries or Eligible Joint Ventures, as lessor, and the Operating Lessee, as lessee, substantially in the form of the lease annexed as Exhibit H hereto or such other form as shall be approved by the Lender. "Operating Lessee" means DJONT or its Subsidiary (provided DJONT owns at least 50% of the voting Stock in such Subsidiary and maintains voting control over such Subsidiary), as lessee under an Operating Lease. "Operator" means the Operating Lessee and/or the Manager or both (as the case may be) responsible for the operation and management of any Hotel. "Order" means any order, injunction, judgment, decree, ruling, assessment or arbitration award. "Other Taxes" has the meaning specified in Section 2.15(b). "Participant" shall have the meaning provided in Section 2.20(a). "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Pension Plan" means a plan, other than a Multiemployer Plan, which is covered by Title IV of ERISA or Code Section 412 and which any Loan Party, any of its Subsidiaries or any ERISA Affiliate maintains, contributes 35 to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. "Permit" means any permit, approval, authorization, license, variance, registration, permission or consent required from a Governmental Authority under an applicable Requirement of Law. "Permitted Liens" means, collectively, (a) Liens arising by operation of law in favor of materialmen, mechanics, warehousemen, carriers, lessors or other similar Persons incurred by the Borrower or any of its Subsidiaries or Eligible Joint Ventures in the ordinary course of business which secure its obligations to such Person; provided, however, that (i) the Borrower or such Subsidiary or Eligible Joint Venture is not in default with respect to such payment obligation to such Person, or (ii) the Borrower or such Subsidiary or Eligible Joint Venture is in good faith and by appropriate proceedings diligently contesting such obligation and adequate provision is made for the payment thereof; (b) Liens (excluding Environmental Liens) securing taxes, assessments or governmental charges or levies; provided, however, that neither the Borrower nor any of its Subsidiaries or Eligible Joint Ventures is in default in respect of any payment obligation with respect thereto unless the Borrower or such Subsidiary or Eligible Joint Venture is in good faith and by appropriate proceedings diligently contesting such obligation and adequate provision is made for the payment thereof; and (c) Zoning restrictions, subleases, licenses or concessions for restaurants, bars, gift shops, antennas, communications equipment and similar agreements entered into in the ordinary course of such Person's business in connection with the ownership and operation of a hotel; and easements, licenses, reservations, restrictions on the use of real property or minor irregularities incident thereto which do not in the aggregate materially detract from the value or use of the property or assets of the Borrower or any of its Subsidiaries or Eligible Joint Venture or impair, in any material manner, the use of such property for the purposes for which such property is held by the Borrower or any such Subsidiary or Eligible Joint Venture. "Person" means an individual, partnership, corporation (including, without limitation, a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a Governmental Authority. 36 "Plan" means an employee benefit plan, as defined in Section 3(3) of ERISA, which any Loan Party or any of its Subsidiaries maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. "Principal Balance" means, collectively, the outstanding principal balances of the Notes from time to time. "Projections" means those financial projections covering the fiscal years ending in 1996 through 2000, inclusive, delivered to the Lenders by the Borrower. "Promus" means Promus Hotels, Inc., a Delaware corporation or any Person controlled by Promus Hotel Corporation, that is a Manager. "Pro Rata Share" means, for any Person, with respect to such Person's Unconsolidated Entities (including, without limitation, any Eligible Joint Ventures), the percentage ownership interest of such Person in such Unconsolidated Entity, provided that, in the event that such Person is the general partner of such Unconsolidated Entity, such Person's Pro Rata Share with respect to such Unconsolidated Entity shall be the percentage of the general partner interests owned by such Person in such Unconsolidated Entity with respect to any Indebtedness for which recourse may be made against any general partner of such Unconsolidated Entity. "Qualified Lease" means any Lease (a) which is a direct ground lease granted by the fee owner of real property, (b) which may be transferred and/or assigned without the consent of the lessor (or as to which the Lease expressly provides that (i) such Lease may be transferred and/or assigned with the consent of the lessor and (ii) such consent shall not be unreasonably withheld or delayed), (c) which has a remaining term (including any renewal terms exercisable at the sole option of the lessee) of at least 40 years, (d) under which no material default has occurred and is continuing, (e) with respect to which a security interest may be granted without the consent of the lessor, and (f) which contains lender protection provisions reasonably acceptable to the Administrative Agent including, without limitation, provisions to the effect that (i) the lessor shall notify any holder of a security interest in such Lease of the occurrence of any default by the lessee under such Lease and shall afford such holder the right to 37 cure such default, and (ii) in the event that such Lease is terminated, such holder shall have the option to enter into a new lease having terms substantially identical to those contained in the terminated Lease. Upon the submission to the Administrative Agent of a written request for approval of the lender protection provisions and other terms of a proposed Qualified Lease, the Administrative Agent shall respond by accepting or rejecting such proposal within ten Business Days following receipt of such request. "Ratable Portion" or "ratably" means, except as otherwise specifically provided herein, with respect to any Lender, the quotient obtained by dividing the Commitment of such Lender by the Commitments of all Lenders and that payments of principal of the Loans and interest thereon shall be made pro rata in accordance with the respective unpaid principal amounts of the Loans held by the Lenders. "Real Estate" means all of those plots, pieces or parcels of land now owned or hereafter acquired by the Borrower or any of its Subsidiaries or Eligible Joint Ventures (the "Land"), including, without limitation, those listed on Schedule 4.22(a), together with the right, title and interest of the Borrower or such Subsidiary or Eligible Joint Venture, if any, in and to the streets, the land lying in the bed of any streets, roads or avenues, opened or proposed, in front of, adjoining or abutting the Land to the center line thereof, the air space and development rights pertaining to the Land and the right to use such air space and development rights, all rights of way, privileges, liberties, tenements, hereditaments and appurtenances belonging or in any way appertaining thereto, all fixtures, all easements now or hereafter benefiting the Land and all royalties and rights appertaining to the use and enjoyment of the Land, including, without limitation, all alley, vault, drainage, mineral, water, oil and gas rights, together with all of the buildings and other improvements now or hereafter erected on the Land, and any fixtures appurtenant thereto. "Register" has the meaning specified in Section 10.7. "Release" means any release, spill, emission, leaking, pumping, pouring, dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching or migration on or into the indoor or outdoor environment or into or out of any property. 38 "Remedial Action" means all actions, including without limitation any Capital Expenditures, required or necessary to (i) clean up, remove, treat or in any other way address any Hazardous Material or other substance in the indoor or outdoor environment, (ii) prevent the Release or threat of Release, or minimize the further Release, of any Hazardous Material or other substance so it does not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (iii) perform pre-remedial studies and investigations or post-remedial monitoring and care, or (iv) bring facilities on any property owned or leased by the Borrower or any of its Subsidiaries into compliance with all Environmental Laws and Environmental Permits. "Requirement of Law" means, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and all federal, state and local laws, rules and regulations, including, without limitation, federal, state or local securities, antitrust and licensing laws, all food, health and safety laws, and all applicable trade laws and requirements, including, without limitation, all disclosure requirements of Environmental Laws, ERISA and all orders, judgments, decrees or other determinations of any Governmental Authority or arbitrator, applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer" means, with respect to any Person, any of the principal executive officers or general partners of such Person. "Restricted Payments" has the meaning specified in Section 7.4. "S&P" means Standard & Poor's Ratings Group and its successors. "Sheraton" shall mean Sheraton Operating Corporation or any Person controlled by ITT Sheraton Corporation that is a Manager. "Significant Subsidiary" means, at any date of determination, (i) any Subsidiary of the Borrower which, or (ii) any group of Subsidiaries of the Borrower which when aggregated, at such date, directly or indirectly own(s) or lease(s) one or more Hotels having an aggregate value 39 (calculated on the basis of the Borrower's Investment therein) in excess of $75,000,000. "St. Paul Lease" means the Lease relating to the Hotel located in St. Paul, Minnesota "Solvent" means, with respect to any Person, that the value of the assets of such Person (at fair value) is, on the date of determination, greater than the total amount of liabilities (including, without limitation, contingent and unliquidated liabilities) of such Person as of such date and that, as of such date, such Person is able to pay all liabilities of such Person as such liabilities mature and does not have unreasonably small capital. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Stated Amount" of each Letter of Credit shall, at any time, mean the maximum amount available to be drawn thereunder (in each case determined without regard to whether any conditions to drawing could then be met). "Status" means the existence of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status, Level VI Status, Level VII Status or Level VIII Status, as the case may be. As used in this definition: "Level I Status" exists on any date if, on such date, either Borrower has a long-term senior unsecured actual or implied debt rating of A- or better by S&P and A3 or better by Moody's; "Level II Status" exists on any date if, on such date, either Borrower has a long-term senior unsecured actual or implied debt rating of BBB+ by S&P and Baa1 by Moody's; "Level III Status" exists on any date if, on such date, either Borrower has a long-term senior unsecured actual or implied debt rating of BBB by S&P and Baa2 by Moody's; "Level IV Status" exists on any date if, on such date, either Borrower has a long-term senior 40 unsecured actual or implied debt rating of BBB- by S&P and Baa3 by Moody's; "Level V Status" exists on any date if, on such date (y) none of Level I Status through Level IV Status exist and (z) the Leverage Ratio is less than 25%; "Level VI Status" exists on any date if, on such date (y) none of Level I Status through Level IV Status exist and (z) the Leverage Ratio is equal to or greater than 25% but less than 35%; "Level VII Status" exists on any date if, on such date (y) none of Level I Status through Level IV Status exist and (z) the Leverage Ratio is equal to or greater than 35% but less than 40%; "Level VIII Status" exists on any date if, on such date (y) none of Level I Status through Level IV Status exist and (z) the Leverage Ratio is equal to or greater than 40% but less than or equal to 50%; provided that (i) if S&P and/or Moody's shall cease to issue ratings of debt securities of real estate investment trusts generally, then the Administrative Agent and the Borrower shall negotiate in good faith to agree upon a substitute rating agency or agencies (and to correlate the system of ratings of each substitute rating agency with that of the rating agency for which it is substituting) and (a) until such substitute rating agency or agencies are agreed upon, Status shall be determined on the basis of the rating assigned by the other rating agency (or, if both S&P and Moody's shall have so ceased to issue such ratings, on the basis of the Status in effect immediately prior thereto) and (b) after such substitute rating agency or agencies are agreed upon, Status shall be determined on the basis of the rating assigned by the other rating agency and such substitute rating agency or the two substitute rating agencies, as the case may be; (ii) if the long term senior unsecured actual or implied debt ratings of either Borrower by S&P and Moody's are not equivalent, the higher rating will apply for the purposes of determining Status; and (iii) if the long term senior unsecured actual or implied debt ratings of either Borrower by S&P and Moody's are two or more Levels apart, the rating one Level below the higher rating will apply for the purposes of determining Status. 41 "Stock" means shares of capital stock, beneficial or partnership interests, participations or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or non-voting, and includes, without limitation, common stock and preferred stock. "Stock Equivalents" means all securities (other than Stock) convertible into or exchangeable for Stock and all warrants, options or other rights to purchase or subscribe for any stock, whether or not presently convertible, exchangeable or exercisable. "Subsidiary" means, with respect to any Person (other than FelCor LP with respect to FelCor), at any date, any corporation, partnership or other business entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements in accordance with GAAP, if such statements were prepared as of such date. "Subsidiary Guaranty" means a guaranty, in substantially the form of Exhibit I, executed by each Guarantor, as such guaranty may be amended, supplemented or otherwise modified from time to time and includes the Existing Subsidiary Guaranties. "Suite Hotel" means a Hotel offering substantially all suite accommodations. "Suite Revenues" has the meaning ascribed to such term in the form of Operating Lease attached as Exhibit H hereto. "Super Majority Lenders" means, at any time, Lenders holding at least 66-2/3% of the then aggregate unpaid principal amount of Loans (excluding Loans held by Non-Funding Lenders) or, if no such Loans are then outstanding, Lenders having at least 66-2/3% of the Commitments of all Lenders (excluding Non-Funding Lenders). "Swing Advance" has the meaning set forth in Section 2.17. "Swing Advance Bank" means Chase. "Tangible Net Worth" means, with respect to the Borrower at any date, (a) the sum of (i) the total shareholders' equity of FelCor, and (ii) the value of all 42 partnership interests in FelCor LP owned by Persons other than FelCor; minus (b) the sum of all intangible assets of FelCor, each as shown on the consolidated balance sheet of FelCor as of such date. "Tax Affiliate" means, as to any Person, (i) any Subsidiary of such Person, and (ii) any Affiliate of such Person with which such Person files or is eligible to file consolidated, combined or unitary tax returns. "Tax Return" has the meaning specified in Section 4.3. "Taxes" has the meaning specified in Section 2.15(a). "Telerate Page 3750" means the display designated as "Page 3750" on the Associated Press-Dow Jones Telerate Service (or such other page as may replace Page 3750 on the Associated Press-Dow Jones Telerate Service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association interest settlement rates for U.S. Dollar deposits). Any Eurodollar Rate determined on the basis of the rate displayed on Telerate Page 3750 in accordance with the provisions hereof shall be subject to corrections, if any, made in such rate and displayed by the Associated Press-Dow Jones Telerate Service within one hour of the time when such rate is first displayed by such Service. "Termination Date" means the earliest of (i) the Final Maturity Date, and (ii) the date of termination in whole of the Commitments pursuant to Section 2.5 or 8.2. "Total Assets" of any Person means, at any date, the total assets of such Person and its Subsidiaries at such date determined on a consolidated basis in conformity with GAAP. "Total Indebtedness" of any Person means the sum of the following (without duplication): (a) all Indebtedness of such Person and its Subsidiaries determined on a consolidated basis in conformity with GAAP, plus (b) such Person's Pro Rata Share of Indebtedness (excluding Non-Recourse Indebtedness) of such Person's Unconsolidated Entities. 43 "Total Secured Indebtedness" of any Person means any Total Indebtedness of such Person for which the obligations thereunder are secured by a pledge of or other encumbrance on any assets of such Person or its Subsidiaries or Unconsolidated Entities. "Total Value" means the sum of: (A) for Hotels owned or leased for four (4) Fiscal Quarters or more, Adjusted NOI on a consolidated basis from such Hotels for the preceding four (4) Fiscal Quarters divided by ten percent (10%); plus (B) for Hotels (x) owned or leased for less than four (4) Fiscal Quarters (including newly acquired Hotels and Hotels to be immediately acquired using the proceeds of any Loans) and (y) set forth on Exhibit J, but only for the fiscal year ending December 31, 1997, the Borrower's Investment in such Hotels; plus (C) the sum of $15,000,000, being the agreed aggregate sum of the Borrower's investment at cost in (x) certain vacant land at the Kingston Plantation Hotel in Myrtle Beach, South Carolina, and (y) the Myrtle Beach Condo Management Company; plus (D) the Borrower's Pro-Rata Share of unencumbered Cash or Cash Equivalents held by the Borrower, the Borrower's Subsidiaries or an Unconsolidated Entity; provided, however, that in the case of (A) above, Net Operating Income with respect to a Hotel shall only be included in the calculation of Total Value if such Hotel is, as at the date of such calculation, owned or leased by Borrower, its Subsidiary or an Unconsolidated Entity but only to the extent of the Borrower's Pro-Rata Share of such Net Operating Income and, provided, further, in the case of (B) above, the Borrower's Investment with respect to a Hotel shall only be included in the calculation of Total Value if such Hotel is, as of the date of such calculation, owned by Borrower, its Subsidiary or Unconsolidated Entity. "Unconsolidated Entity" means, with respect to any Person, at any date, any other Person in whom such Person holds an Investment, which Investment is accounted for in the financial statements of such Person on an equity basis of accounting and whose financial results would not be consolidated under GAAP with the financial results of such 44 Person on the consolidated financial statements of such Person, if such statements were prepared as of such date. "Unencumbered" means, with respect to any Hotel, at any date of determination, the circumstance that such Hotel on such date: (a) is not subject to any Liens (including restrictions on transferability or assignability) of any kind (including any such Lien or restriction imposed by (i) any agreement governing Indebtedness, and (ii) the organizational documents of the Borrower or any of its Subsidiaries or Eligible Joint Ventures, but excluding Permitted Liens and, in the case of any Qualified Lease (to the extent permitted by the definition thereof), restrictions on transferability or assignability in respect of such Lease); (b) is not subject to any agreement (including (i) any agreement governing Indebtedness, and (ii) if applicable, the organizational documents of the Borrower or any of its Subsidiaries or Eligible Joint Ventures) which prohibits or limits the ability of the Borrower or any of its Subsidiaries or Eligible Joint Ventures to create, incur, assume or suffer to exist any Lien upon such Hotel, other than Permitted Liens (excluding any agreement or organizational document (x) which limits generally the amount of Indebtedness which may be incurred by the Borrower or its Subsidiaries or Eligible Joint Ventures or (y) in the case of an Eligible Joint Venture which is not an Eligible Entity, which requires the consent of partners (or the equivalent) in such Eligible Joint Venture (other than the Borrower or its wholly owned Subsidiaries) to create, incur, assume or suffer to exist any Lien upon such Hotel); and (c) is not subject to any agreement (including any agreement governing Indebtedness) which entitles any Person to the benefit of any Lien (other than Permitted Liens) on such Hotel, or would entitle any Person to the benefit of any such Lien upon the occurrence of any contingency (including, without limitation, pursuant to an "equal and ratable" clause). For the purposes of this Agreement, any Joint Venture Hotel or Hotel owned by a Subsidiary or Eligible Joint Venture of the Borrower shall not be deemed to be Unencumbered unless both (i) such Hotel and (ii) all Stock owned directly or indirectly by Borrower in such Eligible Joint Venture or Subsidiary, is Unencumbered. 45 "Unpaid Drawing" shall have the meaning set forth in Section 2.21(a). 1.2. Computation of Time Periods. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding" and the word "through" means "to and including". 1.3. Accounting Terms. All accounting terms not specifically defined herein shall be construed in conformity with GAAP and all accounting determinations required to be made pursuant hereto shall, unless expressly otherwise provided herein, be made in conformity with GAAP. 1.4. Certain Terms. (a) The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole, and not to any particular Article, Section, subsection or clause in this Agreement. References herein to an Exhibit, Schedule, Article, Section, subsection or clause refer to the appropriate Exhibit or Schedule to, or Article, Section, subsection or clause in this Agreement. (b) The terms "Lender" and "Administrative Agent" include their respective successors and the term "Lender" includes each assignee of such Lender who becomes a party hereto pursuant to Section 10.7. ARTICLE II AMOUNTS AND TERMS OF THE LOANS AND LETTERS OF CREDIT 2.1. The Loans. On the terms and subject to the conditions contained in this Agreement, each Lender severally agrees to make loans (each a "Loan") to the Borrower from time to time on any Business Day during the period from the date hereof until the Termination Date in an aggregate amount not to exceed at any time outstanding such Lender's Commitment; provided, however, that at no time shall any Lender be obligated to make a Loan in excess of such Lender's Ratable Portion of the Available Credit. Within the limits of each Lender's Commitment, amounts prepaid pursuant to Section 2.7(b) may be reborrowed under this Section 2.1. The Loans of each Lender shall be evidenced by the Note to the order of such Lender. 46 2.2. Intentionally Omitted. 2.3. Making the Loans. (a) Each Borrowing shall be made on notice, given by the Borrower to the Administrative Agent not later than (i) 11:00 A.M. (New York City time) on the third (3rd) Business Day prior to the date of the proposed Borrowing in the case of Eurodollar Rate Loans, and (ii) 11:00 A.M. (New York City time) on the Business Day prior to the date of the proposed Borrowing in the case of Base Rate Loans. Each such notice (a "Notice of Borrowing") shall be in substantially the form of Exhibit B, specifying therein (i) the date of such proposed Borrowing, (ii) the aggregate amount of such proposed Borrowing, (iii) the amount thereof, if any, requested to be Eurodollar Rate Loans, and (iv) the initial Interest Period or Periods for any such Eurodollar Rate Loans. The Loans shall be made as Base Rate Loans unless (subject to Section 2.12) the Notice of Borrowing specifies that all or a pro rata portion thereof shall be Eurodollar Rate Loans; provided, however, that the aggregate of the Eurodollar Rate Loans for each Interest Period must be in an amount of not less than $5,000,000 or an integral multiple of $500,000 in excess thereof. (b) The Administrative Agent shall give to each Lender prompt notice of the Administrative Agent's receipt of a Notice of Borrowing and, if Eurodollar Rate Loans are properly requested in such Notice of Borrowing, the applicable interest rate under Section 2.9, and each Lender's Ratable Portion of the proposed Borrowing. Each Lender shall, before 12:00 Noon (New York City time) on the date of the proposed Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 10.2, in immediately available funds, such Lender's Ratable Portion of such proposed Borrowing. By 12:00 Noon (New York City time) in the case of Eurodollar Rate Loans and Base Rate Loans, on the date specified by the Borrower in the Notice of Borrowing, subject to fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address; provided that in the event that the Administrative Agent shall have received notice from a Lender prior to the date of any proposed Borrowing that such Lender will not make available to the Administrative Agent such Lender's Ratable Portion of such Borrowing, the Administrative Agent shall be under no obligation to fund such Lender's Ratable Portion of such Borrowing. 47 (c) Each Base Rate Loan shall be in an aggregate amount of not less than $1,000,000 or an integral multiple of $100,000 in excess thereof. (d) Intentionally omitted. (e) Each Notice of Borrowing shall be irrevocable and binding on the Borrower. In the case of any proposed Borrowing which the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Loans, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing for such proposed Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (including, without limitation, loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund any Eurodollar Rate Loan to be made by such Lender as part of such proposed Borrowing when such Eurodollar Rate Loan, as a result of such failure, is not made on such date. (f) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any proposed Borrowing that such Lender will not make available to the Administrative Agent such Lender's Ratable Portion of such Borrowing, the Administrative Agent may assume that such Lender has made such Ratable Portion available to the Administrative Agent on the date of such Borrowing in accordance with this Section 2.3 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such Ratable Portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. If the Borrower shall repay to the Administrative Agent such corresponding amount, such payment shall not relieve such 48 Lender of any obligation it may have to the Borrower hereunder. (g) The failure of any Lender to make the Loan to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Loan on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on the date of any Borrowing. 2.4. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender, a commitment fee (the "Commitment Fee") equal to the Applicable Margin times the average daily unused portion of such Lender's Commitment, from the date hereof until the Termination Date, payable in arrears with respect to each full calendar quarter on (i) the last day of each calendar quarter during the term of such Lender's Commitment, commencing December 31, 1996, (ii) on the date of any reduction of the Commitments pursuant to Section 2.5 and (iii) on the Termination Date. For purposes of this Section 2.4, Swing Advances shall be included as part of the unused portion of the Commitments. (b) The Borrower agrees to pay to the Administrative Agent for distribution to each Lender (based on its respective Ratable Portion) a fee in respect of each Letter of Credit issued hereunder (the "Letter of Credit Fee"), for the period from and including the date of issuance of such Letter of Credit to and including the termination of such Letter of Credit, computed at a rate per annum equal to the Applicable Margin then in effect for Loans maintained as Eurodollar Rate Loans on the daily average Stated Amount of such Letter of Credit. Accrued Letter of Credit Fees shall be payable in arrears with respect to each calendar quarter on (i) the last day of each calendar quarter in which any Letter of Credit is outstanding, (ii) on the date on which no Letters of Credit remain outstanding and (iii) on the Termination Date. (c) The Borrower agrees to pay to the Issuing Lender, for its own account, a facing fee in respect of each Letter of Credit issued by it hereunder (the "Facing Fee") for the period from and including the date of issuance of such Letter of Credit to and including the termination of such Letter of Credit, computed at a rate per annum equal to 0.125% of the daily average Stated Amount of such Letter of Credit. Accrued Facing Fees shall be payable in arrears 49 with respect to each calendar quarter on (i) the last day of each calendar quarter in which such Letter of Credit is outstanding, (ii) on the date upon which such Letter of Credit has been terminated in accordance with its terms and (iii) on the Termination Date. (d) The Borrower shall pay, upon each Drawing under, issuance of, or amendment to, any Letter of Credit, such amount as shall at the time of such event be the administrative charge which the Issuing Lender is generally imposing in connection with such occurrence with respect to letters of credit. (e) The Borrower has agreed to pay to Chase additional fees, the amount and dates of payment of which are embodied in a separate agreement between the Borrower and Chase. 2.5. Reduction and Termination of the Commitments. The Borrower may, upon at least three Business Days' prior notice to the Administrative Agent, terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders; provided, however, that each partial reduction shall be in the aggregate amount of not less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof. 2.6. Repayment. The Borrower shall repay the entire unpaid principal amount of the Loans on the Termination Date. 2.7. Prepayments. (a) The Borrower shall have no right to prepay the principal amount of any Loan other than as provided in this Section 2.7. (b) The Borrower may, upon at least two (2) Business Days' prior notice to the Administrative Agent, stating the proposed date and aggregate principal amount of the prepayment, prepay the outstanding principal amount of the Loans in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that any prepayment of any Eurodollar Rate Loan made other than on the last day of an Interest Period for such Loan shall be subject to payment by the Borrower to the Administrative Agent of any costs, fees or expenses incurred by any Lender in connection with such prepayment including without limitation any costs to unwind any Eurodollar Rate contracts; and, provided, further, that each partial prepayment shall be in an 50 aggregate principal amount not less than $3,000,000 or integral multiples of $100,000 in excess thereof. Upon the giving of such notice of prepayment, the principal amount of the Loans specified to be prepaid shall become due and payable on the date specified for such prepayment. (c) If at any time the aggregate principal amount of Loans outstanding plus the Letter of Credit Outstandings at such time exceeds the lower of the Borrowing Base or the Commitments at such time (a "Borrowing Base Imbalance"), the Borrower shall prepay the Loans then outstanding in an amount equal to such excess, together with accrued interest as follows: (i) in the event that the Borrowing Base Imbalance is due to (A) any sale, conveyance, transfer, assignment or other disposition of an Eligible Hotel, (B) a financing secured by an Eligible Hotel or (C) a Drawing, the prepayment shall be made within one (1) Business Day of such event occurring; (ii) in the event that the Borrowing Base Imbalance is due to any (A) condemnation or taking by eminent domain of an Eligible Hotel, or (B) loss, damage or destruction by casualty to any Eligible Hotel, the prepayment shall be made within one (1) Business Day after receipt by the Borrower or its Subsidiary or Eligible Joint Venture of the condemnation award or insurance proceeds relating to such event; (iii) in the event that the Borrowing Base Imbalance is due to (A) a decrease in the value of any Eligible Hotels, or (B) any of the Eligible Hotels ceasing, for whatever reason, to meet the requirements for Eligible Hotels set forth herein, the prepayment shall be made within 180 days of such event; or (iv) in the event that the Borrowing Base Imbalance is due to a determination by the Administrative Agent, after review of the applicable Eligible Hotel Documents, that a Hotel, represented by Borrower to be an Eligible Hotel pursuant to Section 6.23(b)(z), fails to meet the requirements for Eligible Hotels set forth herein, the prepayment shall be made within 5 Business Days of the Administrative Agent notifying Borrower of such Hotel's failure to meet the Eligible Hotel requirements. 51 2.8. Conversion/Continuation Option. (a) Swing Advances shall be automatically converted to Base Rate Loans on the Business Day following the date of borrowing thereof. (b) The Borrower may elect (i) at any time to convert Base Rate Loans or any portion thereof to Eurodollar Rate Loans, (ii) at any time to convert Swing Advances or any portion thereof to Base Rate Loans or Eurodollar Rate Loans, or (iii) at the end of any Interest Period with respect thereto, to convert Eurodollar Rate Loans or any portion thereof into Base Rate Loans, or to continue such Eurodollar Rate Loans or any portion thereof for an additional Interest Period; provided, however, that the aggregate of the Eurodollar Rate Loans for each Interest Period therefor must be in the amount of $5,000,000 or an integral multiple of $500,000 in excess thereof. Each conversion or continuation shall be allocated among the Loans of all Lenders in accordance with their Ratable Portion. Each such election shall be in substantially the form of Exhibit C hereto (a "Notice of Conversion or Continuation") and shall be made by giving the Administrative Agent at least three (3) Business Days' prior written notice thereof specifying (A) the amount and type of conversion or continuation, (B) in the case of a conversion to or a continuation of Eurodollar Rate Loans, the Interest Period therefor, and (C) in the case of a conversion, the date of conversion (which date shall be a Business Day and, if a conversion from Eurodollar Rate Loans, shall also be the last day of the Interest Period therefor). The Administrative Agent shall promptly notify each Lender of its receipt of a Notice of Conversion or Continuation and of the contents thereof and such Lender's Ratable Portion of the Loans to be converted. Notwithstanding the foregoing, no conversion in whole or in part of Base Rate Loans or Swing Advances to Eurodollar Rate Loans, and no continuation in whole or in part of Eurodollar Rate Loans upon the expiration of any Interest Period therefor, shall be permitted at any time at which a Default or an Event of Default shall have occurred and be continuing. If, within the time period required under the terms of this Section 2.8, the Administrative Agent does not receive a Notice of Conversion or Continuation from the Borrower containing a permitted election to continue any Eurodollar Rate Loans for an additional Interest Period or to convert any such Loans, then, upon the expiration of the Interest Period therefor, such Loans will be automatically converted to Base Rate Loans. Each Notice of Conversion or Continuation shall be irrevocable. 52 2.9. Interest. (a) The Borrower shall pay interest on the unpaid principal amount of each Loan from the date thereof until the principal amount thereof shall be paid in full, at the following rates per annum: (i) For Base Rate Loans, at a rate per annum equal at all times to the Base Rate in effect from time to time plus the Applicable Margin, payable monthly on the first day of each month, on the Termination Date and on the date any Base Rate Loan is converted or paid in full. (ii) For Eurodollar Rate Loans, at a rate per annum equal at all times during the applicable Interest Period for each Eurodollar Rate Loan to the sum of the Eurodollar Rate for such Interest Period plus the Applicable Margin in effect on the first day of such Interest Period, payable on the last day of such Interest Period, on the Termination Date and, if such Interest Period has a duration of more than three months, on the last day of each calendar quarter during such Interest Period commencing on December 31, 1996. (b) If the principal indebtedness is declared immediately due and payable by the Administrative Agent pursuant to the provisions of this Agreement or any other Loan Document, or if the Loans are not paid in full on the Termination Date, the Borrower shall thereafter, unless and until such date, if any, as the Super Majority Lenders may elect, in their sole and absolute discretion, to waive, in writing, all or any portion of such default rate interest, pay interest on the principal sum then remaining unpaid from the date of such declaration or the Termination Date, as the case may be, until the date on which the principal sum then outstanding is paid in full (whether before or after judgment), at a rate per annum (calculated for the actual number of days elapsed on the basis of a 360-day year) equal to the greater, on a daily basis, of (a) 13% or (b) 4% plus the Base Rate, provided, however, that such interest rate shall in no event exceed the maximum interest rate which the Borrower may by law pay. 2.10. Interest Rate Determination and Protection. (a) The Eurodollar Rate for each Interest Period for Eurodollar Rate Loans shall be determined by the Administrative Agent two Business Days before the first day of such Interest Period. 53 (b) The Administrative Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.9(a) or (b). (c) If, with respect to Eurodollar Rate Loans, the Majority Lenders in good faith notify the Administrative Agent that the Eurodollar Rate for any Interest Period therefor will not adequately reflect the cost to such Majority Lenders of making such Loans or funding or maintaining their respective Eurodollar Rate Loans for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Loan will automatically, on the last day of the then existing Interest Period therefor, convert into a Base Rate Loan; and (ii) the obligations of the Lenders to make Eurodollar Rate Loans or to convert Base Rate Loans into Eurodollar Rate Loans shall be suspended until the Administrative Agent shall notify the Borrower that such Lenders have determined that the circumstances causing such suspension no longer exist. 2.11. Increased Costs. If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation (other than any change by way of imposition or increase of reserve requirements included in determining the Eurodollar Rate Reserve Percentage) or (ii) compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining any Eurodollar Rate Loans, then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. If the Borrower so notifies the Administrative Agent within five Business Days after any Lender notifies the Borrower of any increased cost pursuant to the foregoing provisions of this Section 2.11, the Borrower may either (A) prepay in full all Eurodollar Rate Loans of such Lender then outstanding in 54 accordance with Section 2.7(b) and, additionally, reimburse such Lender for such increased cost in accordance with this Section 2.11 or (B) convert all Eurodollar Rate Loans of all Lenders then outstanding into Base Rate Loans in accordance with Section 2.8 and, additionally, reimburse such Lender for such increased cost in accordance with this Section 2.11. 2.12. Illegality. Notwithstanding any other provision of this Agreement, if the introduction of or any change in or in the interpretation of any law or regulation shall make it unlawful, or any central bank or other Governmental Authority shall assert that it is unlawful, for any Lender or its Eurodollar Lending Office to make Eurodollar Rate Loans or to continue to fund or maintain Eurodollar Rate Loans, then, on notice thereof and demand therefor by such Lender to the Borrower through the Administrative Agent, (i) the obligation of such Lender to make or to continue Eurodollar Rate Loans and to convert Base Rate Loans into Eurodollar Rate Loans shall terminate and (ii) the Borrower shall forthwith prepay in full all Eurodollar Rate Loans of such Lender then outstanding, together with interest accrued thereon, unless the Borrower, within five Business Days of such notice and demand, converts all Eurodollar Rate Loans of all Lenders then outstanding into Base Rate Loans. 2.13. Capital Adequacy. If (i) the introduction of or any change in or in the interpretation of any law or regulation, (ii) compliance with any law or regulation, or (iii) compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by any Lender or any corporation controlling any Lender and such Lender reasonably determines that such amount is based upon the existence of such Lender's Commitments, Letters of Credit or Loans and its other commitments, letters of credit or loans of this type, then, upon demand by such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's Commitments, Loans, Letter of Credit Outstandings or commitments to issue Letters of Credit. A certificate as to such amounts submitted to the Borrower and the 55 Administrative Agent by such Lender shall be conclusive and binding for all purposes absent manifest error. 2.14. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Notes not later than 11:00 A.M. (New York City time) on the day when due, in Dollars, to the Administrative Agent at its address referred to in Section 10.2 in immediately available funds without set-off or counterclaim. The Administrative Agent will promptly thereafter cause to be distributed immediately available funds relating to the payment of principal or interest or fees (other than amounts payable pursuant to Section 2.11, 2.12, 2.13, 2.15 or 2.17) to the Lenders, in accordance with their respective Ratable Portions, for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. To the extent the foregoing payments are received by the Administrative Agent prior to 11:00 A.M. (New York City time) and are not distributed to the Lenders on the same day, the Administrative Agent shall pay to each Lender in addition to the amount distributed to such Lender, interest thereon, for each day from the date such amount is received by the Administrative Agent until the date such amount is distributed to such Lender, at the Federal Funds Rate. Payment received by the Administrative Agent after 11:00 A.M. (New York City time) shall be deemed to be received on the next Business Day. (b) The Borrower hereby authorizes each Lender, if and to the extent payment owed to such Lender is not made when due hereunder or under any Loan held by such Lender, to charge from time to time against any or all of the Borrower's accounts with such Lender any amount so due. (c) All computations of interest based on the Base Rate, the Eurodollar Rate or the Federal Funds Rate and of fees shall be made by the Administrative Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest and fees are payable. Each determination by the Administrative Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. 56 (d) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fee, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of any Eurodollar Rate Loan to be made in the next calendar month, such payment shall be made on the next preceding Business Day. (e) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due hereunder to the Lenders that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. (f) If any Lender (a "Non-Funding Lender") has (x) failed to make a Loan required to be made by it hereunder, and the Administrative Agent has determined that such Lender is not likely to make such Loan, (y) given notice to the Borrower or the Administrative Agent that it will not make, or that it has disaffirmed or repudiated any obligation to make, Loans, in each case by reason of the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 or otherwise or (z) failed to comply with its obligations pursuant to Section 2.20(c), (i) such Non-Funding Lender shall lose any and all voting rights hereunder, and (ii) any payment made on account of the principal of the Loans outstanding or Unpaid Drawings shall be made as follows: (A) in the case of any such payment made on any date when and to the extent that, in the determination of the Administrative Agent, the Borrower would be able, under the terms and conditions hereof, to reborrow the amount of such payment under the 57 Commitments and to satisfy any applicable conditions precedent set forth in Article III to such reborrowing, such payment shall be made on account of the outstanding Loans or Unpaid Drawings held by the Lenders other than the Non-Funding Lender pro rata according to the respective outstanding principal amounts of the Loans or Unpaid Drawings of such Lenders; (B) otherwise, such payment shall be made on account of the outstanding Loans or Unpaid Drawings held by the Lenders pro rata according to the respective outstanding principal amounts of such Loans or Unpaid Drawings; and (C) any payment made on account of interest on the Loans or Unpaid Drawings shall be made pro rata according to the respective amounts of accrued and unpaid interest due and payable on the Loans or Unpaid Drawings with respect to which such payment is being made. 2.15. Taxes. (a) Any and all payments by the Borrower under each Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes measured by its net income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes measured by its net income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities (excluding, in the case of such Lender or the Administrative Agent, taxes imposed by reason of any failure of such Lender or the Administrative Agent, if such Lender or the Administrative Agent is entitled at such time to a total or partial exemption from withholding that is required to be evidenced by a United States Internal Revenue Service Form 1001 or 4224 or any successor or additional form, to deliver to the Administrative Agent or the Borrower, from time to time as required by the Administrative Agent or the Borrower, such Form 1001 or 4224 (as applicable) or any successor or additional form, completed in a manner reasonably satisfactory to the Administrative Agent or the 58 Borrower) being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender or the Administrative Agent (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including, without limitation, deductions applicable to additional sums payable under this Section 2.15) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law, and (iv) the Borrower shall deliver to the Administrative Agent evidence of such payment to the relevant taxation or other authority. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies of the United States or any political subdivision thereof or any applicable foreign jurisdiction which arise from any payment made under any Loan Document or from the execution, delivery or registration of, or otherwise with respect to, any Loan Document (collectively, "Other Taxes"). (c) The Borrower will indemnify each Lender and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.15) paid by such Lender or the Administrative Agent (as the case may be) and any liability (including, without limitation, for penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender or the Administrative Agent (as the case may be) makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes or Other Taxes, the Borrower will furnish to the Administrative Agent, at its address referred to in Section 10.2, the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.15 shall survive the payment in full of the Obligations. 59 (f) Prior to the Effective Date in the case of each Lender that is a signatory hereto, and on the date of the Assignment and Acceptance pursuant to which it becomes a Lender in the case of each other Lender and from time to time thereafter if requested by the Borrower or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States that is entitled to an exemption from United States withholding tax, or that is subject to such tax at a reduced rate under an applicable tax treaty, shall provide the Administrative Agent and the Borrower with an IRS Form 4224 or Form 1001 or other applicable form, certificate or document prescribed by the IRS certifying as to such Lender's entitlement to such exemption or reduced rate with respect to all payments to be made to such Lender hereunder and under the Notes. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments hereunder or under any Note are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States. (g) Any Lender claiming any additional amounts payable pursuant to this Section 2.15 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. 2.16. Sharing of Payments, Etc. If any Lender (other than the Swing Advance Bank or the Issuing Lender) shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set off or otherwise) on account of Loans made by it (other than pursuant to Section 2.13 or 2.15), and there is either (x) any Swing Advance outstanding in respect of which the Swing Advance Bank has not received payment in full from the Lenders pursuant to Section 2.17(d) or (e) or (y) any Unpaid Drawing in respect of which the Issuing Lender has not received payment in full from the Lenders pursuant to Section 2.20 or 2.21, such Lender (a "Purchasing Lender") shall purchase a participation in all such Swing Advances or Unpaid Drawings, as applicable, in an amount equal to the lesser of such 60 payment and the amount of such Swing Advances or Unpaid Drawings, as applicable, for which the Swing Advance Bank or Issuing Lender has not so received payment in full. If, after giving effect to the foregoing, any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Loans made by it (other than pursuant to Sections 2.13 or 2.15) in excess of its Ratable Portion of payments on account of the Loans obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in their Loans as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them. 2.17. Swing Advances. (a) The Swing Advance Bank, on the terms and subject to the conditions contained in this Agreement, shall make advances (each a "Swing Advance") to the Borrower from time to time on any Business Day during the period from the date hereof until the day preceding the Termination Date in an aggregate amount not to exceed at any time outstanding the lesser of (i) $15,000,000, and (ii) the Available Credit; provided that the Swing Advance Bank shall not be requested to make a Swing Advance to refinance an outstanding Swing Advance. The Swing Advance Bank shall be entitled to rely on the most recent Borrowing Base Certificate delivered to the Administrative Agent. Within the limits set forth above, Swing Advances repaid may be reborrowed under this Section 2.17. (b) Each Swing Advance shall be made upon a Notice of Borrowing for a Swing Advance being given by the Borrower to the Swing Advance Bank by no later than 11:00 A.M. (New York City time) on the Business Day of the proposed Swing Advance. Upon fulfillment of the applicable conditions set forth in Article III, the Swing Advance Bank will make each Swing Advance available on the same day to the Borrower at the Agent's address referred to in Section 10.2. All Swing Advances shall bear interest at the same rate, and be payable on the same basis, as Base Rate Loans and shall be converted to Base Rate Loans pursuant to Section 2.8(a). (c) Each Swing Advance shall be in an aggregate amount of not less than $1,000,000.00 or an integral multiple of $100,000.00 in excess thereof. (d) The Administrative Agent shall give to each Lender prompt notice of the Administrative Agent's receipt 61 of a Notice of Borrowing for a Swing Advance and each Lender's Ratable Portion thereof. Each Lender shall before 12:00 Noon (New York City time) on the next Business Day (the "Settlement Date") make available to the Administrative Agent, in immediately available funds, the amount of its Ratable Portion of the principal amount of such Swing Advance. Upon such payment by a Lender, such Lender shall be deemed to have made a Loan to the Borrower in the amount of such payment. The Administrative Agent shall use such funds to repay the Swing Advance to the Swing Advance Bank. To the extent that any Lender fails to make such payment to the Swing Advance Bank, the Borrower shall repay such Swing Advance on demand and in any event on the Termination Date. (e) During the continuance of a Default under Section 8.1(e), each Lender shall acquire, without recourse or warranty, an undivided participation in each Swing Advance otherwise required to be repaid by such Lender pursuant to the preceding paragraph, which participation shall be in a principal amount equal to such Lender's Ratable Portion of such Swing Advance, by paying to the Swing Advance Bank on the date on which such Lender would otherwise have been required to make a payment in respect of such Swing Advance pursuant to the preceding paragraph, in immediately available funds, an amount equal to such Lender's Ratable Portion of such Swing Advance. If such amount is not in fact made available to the Swing Advance Bank on the date when the Swing Advance would otherwise be required to be made pursuant to the preceding paragraph, the Swing Advance Bank shall be entitled to recover such amount on demand from that Lender together with interest accrued from such date at the Federal Funds Rate. From and after the date on which any Lender purchases an undivided participation interest in a Swing Advance pursuant to this paragraph (e), the Swing Advance Bank shall promptly distribute to such Lender such Lender's Ratable Portion of all payments of principal and of interest on such Swing Advance, other than those received from a Lender pursuant to Section 2.16 or this or the preceding paragraph (d). If any payment made by or on behalf of the Borrower and received by the Swing Advance Bank with respect to any Swing Advance is rescinded or must otherwise be returned by the Swing Advance Bank for any reason and the Swing Advance Bank has made a payment to the Administrative Agent, on account thereof, each Lender shall, upon notice to the Swing Advance Bank, forthwith pay over to the Swing Advance Bank an amount equal to such Lender's pro rata share of the payment so rescinded or returned based on the respective amounts paid in respect 62 thereof to the Lenders pursuant to the preceding paragraph (d). 2.18. Letter of Credit. (a) Subject to and upon the terms and conditions herein set forth, the Borrower may request that the Issuing Lender issue, at any time and from time to time on and after the Closing Date and prior to the Termination Date, for the account of the Borrower and for the benefit of any holder (or any trustee, agent or other similar representative for any such holders) of L/C Supportable Obligations of the Borrower, an irrevocable standby letter of credit, in a form customarily used by the Issuing Lender or in such other form as has been approved by the Issuing Lender in its discretion (each such standby letter of credit, a "Letter of Credit") in support of such L/C Supportable Obligations. (b) Subject to the terms and conditions contained herein, the Issuing Lender hereby agrees that it will, at any time and from time to time on or after the Closing Date and prior to the Termination Date, following its receipt of the respective Letter of Credit Request, issue for the account of the Borrower one or more Letters of Credit in support of such L/C Supportable Obligations of the Borrower as are permitted to remain outstanding without giving rise to a Default or Event of Default hereunder, provided that the Issuing Lender shall be under no obligation to issue any Letter of Credit if at the time of such issuance: (i) any order, judgment or decree of any governmental authority or arbitrator shall purport by its terms to enjoin or restrain the Issuing Lender from issuing such Letter of Credit or any requirement of law applicable to the Issuing Lender or any request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over the Issuing Lender shall prohibit, or request that the Issuing Lender refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Lender with respect to such Letter of Credit any restriction or reserve or capital requirement (for which the Issuing Lender is not otherwise compensated) not in effect on the date hereof, or any unreimbursed loss, cost or expense which was not applicable, or known to the Issuing Lender as of the date hereof and which the Issuing Lender in good faith deems material to it; or 63 (ii) the Issuing Lender shall have received notice from any Lender prior to the issuance of such Letter of Credit of the type described in the second sentence of Section 2.19(b). (c) Notwithstanding the foregoing, (i) no Letter of Credit shall be issued the Stated Amount of which, when added to the Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid on the date of, and prior to the issuance of, the respective Letter of Credit) and the aggregate principal amount of all Loans then outstanding, would exceed the lesser of (x) the Commitments at such time and (y) the Borrowing Base at such time, (ii) each Letter of Credit shall be denominated in Dollars, (iii) each Letter of Credit shall by its terms terminate on or before the earlier of (A) the date which occurs 12 months after the date of the issuance thereof (although any such Letter of Credit may be automatically extendable for successive periods of up to 12 months, but not beyond the tenth Business Day prior to the Termination Date, on terms acceptable to the Issuing Lender) and (B) the tenth Business Day prior to the Termination Date, (iv) the Stated Amount of each Letter of Credit upon issuance shall be not less than $100,000 or such lesser amount as is acceptable to the Issuing Lender and (v) no Letter of Credit shall be issued the Stated Amount of which, when added to (y) the Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid on the date of, and prior to the issuance of, the respective Letter of Credit) and (z) any Loans made for working capital purposes would exceed 10% of the total Commitments then in effect. 2.19 Letter of Credit Requests. (a) Whenever the Borrower desires that a Letter of Credit be issued for its account, the Borrower shall give the Administrative Agent and the Issuing Lender at least five Business Days' (or such shorter period as is acceptable to the Issuing Lender) written notice thereof. Each notice shall be in the form of Exhibit K (each a "Letter of Credit Request"). (b) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the Borrower that such Letter of Credit may be issued in accordance with, and will not violate the requirements of, Section 2.18(c). Unless the Issuing Lender has received notice from any Lender before it issues a Letter of Credit that one or more of the conditions specified in Article III, are not then satisfied, or that the issuance of such Letter of Credit would violate Section 2.18(c), then the Issuing Lender may issue the requested Letter of Credit for the 64 account of the Borrower in accordance with the Issuing Lender's usual and customary practices. Upon the issuance of any Letter of Credit, the Issuing Lender shall promptly notify each Lender of such issuance and such notice shall be accompanied by a copy of the issued Letter of Credit. 2.20 Letter of Credit Participations. (a) Immediately upon the issuance by the Issuing Lender of any Letter of Credit, the Issuing Lender shall be deemed to have sold and transferred to each Lender, other than the Issuing Lender (each such Lender, in its capacity under Section 2.20, a "Participant"), and each such Participant shall be deemed irrevocably and unconditionally to have purchased and received from the Issuing Lender, without recourse or warranty, an undivided interest and participation, to the extent of such Participant's Ratable Portion, in such Letter of Credit, each drawing made thereunder and the obligations of the Borrower under this Agreement with respect thereto (excluding the Facing Fee), and any security therefor or guaranty pertaining thereto. Upon any change in the Commitments of the Lenders, it is hereby agreed that, with respect to any outstanding Letters of Credit and Unpaid Drawings, there shall be an automatic adjustment to the participations pursuant to this Section 2.20 to reflect the new Ratable Portions of the Lenders. (b) In determining whether to pay under any Letter of Credit, the Issuing Lender shall have no obligation relative to the other Lenders other than to confirm that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by the Issuing Lender under or in connection with any Letter of Credit if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for the Issuing Lender any resulting liability to the Borrower or any Lender. (c) In the event that the Issuing Lender makes any payment under any Letter of Credit and the Borrower shall not have reimbursed such amount in full to the Issuing Lender pursuant to Section 2.21(a), the Issuing Lender shall promptly notify the Administrative Agent, which shall promptly notify each Participant, of such failure, and each Participant shall promptly and unconditionally pay to the Issuing Lender the amount of such Participant's Ratable Portion of such unreimbursed payment in Dollars and same day funds. If the Administrative Agent so notifies any 65 Participant prior to 11:00 A.M. (New York time) on any Business Day, such Participant shall make available such funds to the Issuing Lender on such Business Day. If and to the extent such Participant shall not have so made its Ratable Portion of the amount of such payment available to the Issuing Lender, such Participant agrees to pay to the Issuing Lender, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Issuing Lender at the overnight Federal Funds Rate. The failure of any Participant to make available to the Issuing Lender its Ratable Portion of any payment under any Letter of Credit shall not relieve any other Participant of its obligation hereunder to make available to the Issuing Lender its Ratable Portion of any payment under Letter of Credit on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to the Issuing Lender such other Participant's Ratable Portion of any such payment. (d) Whenever the Issuing Lender receives a payment of a reimbursement obligation as to which it has received any payments from the Participants pursuant to clause (c) above, the Issuing Lender shall forward such payment to the Administrative Agent, which in turn shall distribute such funds to each Participant in accordance with the terms of Section 2.14. (e) Upon the request of any Participant, the Issuing Lender shall furnish to such Participant copies of any Letter of Credit issued by it and such other documentation as may reasonably be requested by such Participant. (f) The obligations of the Participants to make payments to the Issuing Lender with respect to Letters of Credit issued by it shall be irrevocable and not subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, setoff, defense or other right which the Borrower or any of its Subsidiaries may have at any time against a beneficiary named in a Letter of Credit, any transferee of any 66 Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, the Issuing Lender, any Participant, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or (v) the occurrence of any Default or Event of Default. 2.21 Agreement to Repay Letter of Credit Drawings. (a) The Borrower hereby agrees to reimburse the Issuing Lender, by making payment to the Administrative Agent in accordance with the terms of the first sentence of Section 2.14, for any drawing (each, a "Drawing") made by it under any Letter of Credit (each such Drawing until reimbursed, an "Unpaid Drawing"), no later than five Business Days after the date of such Drawing, with interest on the amount of such Drawing, to the extent not reimbursed prior to 11:00 A.M. (New York time) on the date of such Drawing, from and including the date of such Drawing to but excluding the date the Issuing Lender was reimbursed by the Borrower therefor at a rate per annum which shall be the Base Rate in effect from time to time plus the Applicable Margin for Loans maintained as Base Rate Loans, provided, however, to the extent such amounts are not reimbursed prior to 11:00 A.M. (New York time) on the sixth Business Day following such Drawing, interest shall thereafter accrue on the amount (and until reimbursed by the Borrower) at a rate per annum which shall be the Base Rate in effect from time to time plus 4%, in each such case, with interest to be payable on demand. The Issuing Lender shall give the Borrower prompt written notice of each Drawing under any Letter of Credit, provided that the failure to give any such notice shall in no way affect, impair or diminish the Borrower's obligations hereunder. 67 (b) The obligations of the Borrower under this Section 2.21 to reimburse the Issuing Lender with respect to Drawings (including interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against any Lender (including in its capacity as the Issuing Lender or as a Participant), or any nonapplication or misapplication by the beneficiary of the proceeds of such Drawing, the Issuing Lender's only obligation to the Borrower being to confirm that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by the Issuing Lender under or in connection with any Letter of Credit if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for the Issuing Lender any resulting liability to the Borrower. ARTICLE III CONDITIONS TO EFFECTIVENESS OF THIS AGREEMENT AND OF LENDING AND OF ISSUANCE OF LETTERS OF CREDIT 3.1. Conditions Precedent to Effectiveness of this Agreement, to Initial Loans and Letters of Credit. The effectiveness of this Agreement and the obligation of each Lender to make its initial Loan hereunder and the obligation of the Issuing Lender to issue a Letter of Credit hereunder is subject to satisfaction of the conditions precedent that the Administrative Agent shall have received counterparts of this Agreement duly executed by each Borrower, each Lender, the Administrative Agent and Wells Fargo, together with the following, each dated the Effective Date (hereinafter defined) unless otherwise indicated, in form and substance satisfactory to the Administrative Agent and (except for the Notes) in sufficient copies for each Lender (the date of satisfaction of the conditions precedent set forth in this Section 3.1 and in Section 3.2 being the "Effective Date"): (a) The Notes to the order of the Lenders, respectively. (b) A certificate of the Secretary or an Assistant Secretary of each Loan Party (or, as applicable, of such Loan Party's partners) certifying (i) the resolutions of its Board of Trustees or Directors, as 68 appropriate, approving each Loan Document to which it is a party, (ii) all documents evidencing other necessary trust, partnership or corporate action, as appropriate, and required governmental and third party approvals, licenses and consents with respect to each Loan Document to which it is a party and the transactions contemplated thereby, (iii) a copy of its and each of its Subsidiaries' and Eligible Joint Ventures' declaration of trust, certificates of incorporation, by-laws, partnership agreements and certificates of partnership as appropriate, as of the Effective Date, and (iv) the names and true signatures of each of its officers who has been authorized to execute and deliver any Loan Document or other document required hereunder to be executed and delivered by or on behalf of such Person. (c) A copy of the declaration of trust or articles or certificate of incorporation or partnership agreement or certificate of partnership, as appropriate, of each Loan Party and of each of its Subsidiaries and Eligible Joint Ventures which is not a Loan Party certified as of a recent date by the Secretary of State of the state of formation of such Loan Party or Subsidiary, together with certificates of such official attesting to the good standing of each such Loan Party, Subsidiary and Eligible Joint Ventures. (d) Favorable opinion(s) of counsel to the Loan Parties, in substantially the form(s) of Exhibit D, and as to such other matters as any Lender through the Administrative Agent may reasonably request. (e) A certificate of the chief financial officer of the Borrower, stating that the Borrower is Solvent after giving effect to the initial Loans, the application of the proceeds thereof in accordance with Section 6.10 and the payment of all estimated legal, accounting and other fees related hereto and thereto. (f) Evidence that the insurance required by Section 6.4 is in full force and effect. (g) Such additional documents, information and materials as any Lender, through the Administrative Agent, may reasonably request. (h) A certificate, signed by a Responsible Officer of the Borrower, stating that the following statements are true and correct on the Effective Date: 69 (i) The statements set forth in Section 3.3 are true after giving effect to the Loans being made on the Effective Date. (ii) All costs and accrued and unpaid fees and expenses (including, without limitation, legal fees and expenses) required to be paid to the Lenders on or before the Effective Date, including, without limitation, those referred to in Sections 2.4 and 10.4, to the extent then due and payable, have been paid. (iii) All necessary governmental and third party approvals required to be obtained by any Loan Party in connection with the transactions contemplated hereby have been obtained and remain in effect, and all applicable waiting periods have expired without any action being taken by any competent authority which restrains, prevents, impedes, delays or imposes materially adverse conditions upon any of the transactions contemplated hereby. (iv) There exists no judgment, order, injunction or other restraint prohibiting or imposing materially adverse conditions upon any of the transactions contemplated hereby. (v) There exists no claim, action, suit, investigation or proceeding (including, without limitation, shareholder or derivative litigation) pending or, to the knowledge of the Borrower, threatened in any court or before any arbitrator or Governmental Authority which relates to the Loan Documents or the financing hereunder or which, if adversely determined, would have a Material Adverse Effect. (vi) There has been no Material Adverse Change since June 30, 1996 in the corporate, capital or legal structure of the Borrower or any of its Subsidiaries without the consent of the Administrative Agent. (vii) The Borrower's Tangible Net Worth is not less than the Minimum Tangible Net Worth. (i) A Borrowing Base Certificate, executed by a Responsible Officer of the Borrower, satisfactory to the Administrative Agent, together with copies of the Eligible 70 Hotel Documents in respect of each of the Eligible Hotels shown listed thereon. (j) A Compliance Certificate, executed by the Chief Financial Officer of the Borrower substantially in the form attached as Exhibit G hereto. (k) Each Subsidiary Guaranty, duly executed by the Guarantor party thereto. 3.2. Additional Conditions Precedent to Effectiveness of this Agreement, to Initial Loans and Letters of Credit. The effectiveness of this Agreement, the obligation of each Lender to make its initial Loan hereunder and the obligation of the Issuing Lender to issue Letters of Credit hereunder is subject to the further conditions precedent that: (a) No Lender or the Issuing Lender in its sole judgment exercised reasonably shall have determined (i) that there has been any Material Adverse Change since June 30, 1996 or (ii) that there has occurred any adverse change which such Lender deems material in the financial markets generally, since June 30, 1996 or (iii) that there is any claim, action, suit, investigation, litigation or proceeding (including, without limitation, shareholder or derivative litigation) pending or threatened in any court or before any arbitrator or Governmental Authority which, if adversely determined, would have a Material Adverse Effect; and nothing shall have occurred since June 30, 1996 which, in the judgment of any Lender, has had a Material Adverse Effect. (b) Each Lender and the Issuing Lender shall be satisfied, in its sole judgment, exercised reasonably, with the corporate, capital, legal and management structure of the Borrower and its Subsidiaries, and shall be satisfied, in its sole judgment exercised reasonably, with the nature and status of all Contractual Obligations, securities, labor, tax, ERISA, employee benefit, environmental, health and safety matters, in each case, involving or affecting the Borrower or any of its Subsidiaries. 3.3. Conditions Precedent to Each Loan and Letter of Credit. The obligation of each Lender to make any Loan (including the Loan being made by such Lender on the Effective Date) and the obligation of the Issuing Lender to issue a Letter of Credit shall be subject to the further conditions precedent that: 71 (a) The following statements shall be true on the date of such Loan or issuance, before and after giving effect thereto and to the application of the proceeds therefrom (and the acceptance by the Borrower of the proceeds of such Loan or such Letter of Credit shall constitute a representation and warranty by the Borrower that on the date of such Loan or issuance such statements are true): (i) The representations and warranties of the Borrower contained in Article IV and of each Loan Party in the other Loan Documents are correct on and as of such date as though made on and as of such date (it being understood and agreed that any representation or warranty which by its terms is made on a specified date shall be required to be true and correct only as of such specified date); and (ii) No Default or Event of Default exists or will result from the Loans being made or the Letters of Credit being issued on such date. (b) The making of the Loans or the issuance of the Letters of Credit on such date does not violate any Requirement of Law and is not enjoined, temporarily, preliminarily or permanently. (c) The Administrative Agent shall have received a Borrowing Base Certificate, executed by a Responsible Officer of the Borrower, satisfactory to the Administrative Agent, together with (to the extent not previously delivered) copies of the Eligible Hotel Documents in respect of each of the Eligible Hotels shown listed thereon. (d) The Administrative Agent shall have received such additional documents, information and materials as any Lender, through the Administrative Agent, may reasonably request. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Lenders and the Administrative Agent to enter into this Agreement, the Borrower represents and warrants to the Lenders and the Administrative Agent that on and after the Effective Date: 72 4.1. Existence; Compliance with Law. Each Loan Party and each of its Subsidiaries and Eligible Joint Ventures (i) is a real estate investment trust or a corporation, limited liability company or limited partnership, as specified herein, duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation; (ii) is duly qualified as a foreign corporation, limited liability company or limited partnership and in good standing under the laws of each jurisdiction where such qualification is necessary, except for failures which in the aggregate have no Material Adverse Effect; (iii) has all requisite corporate, limited liability company or partnership power and authority and the legal right to own, pledge and mortgage its properties, to lease (as lessee) the properties that it leases as lessee, to lease or sublease (as lessor) the properties it owns and/or leases (as lessee) and to conduct its business as now or currently proposed to be conducted; (iv) is in compliance with its declaration of trust or certificate of or formation and by-laws, regulations or partnership agreement, as appropriate; (v) is in compliance with all other applicable Requirements of Law except for such non-compliances as in the aggregate have no Material Adverse Effect; and (vi) has all necessary licenses, permits, consents or approvals from or by, has made all necessary filings with, and has given all necessary notices to, each Governmental Authority having jurisdiction, to the extent required for such ownership, leasing and conduct, except for licenses, permits, consents or approvals which can be obtained by the taking of ministerial action to secure the grant or transfer thereof or failures which in the aggregate have no Material Adverse Effect. 4.2. Power; Authorization; Enforceable Obligations. (a) The execution, delivery and performance by each Loan Party of the Loan Documents to which it is a party and the consummation of the transactions related to the financing contemplated hereby: (i) are within such Loan Party's corporate, partnership or trust powers, as appropriate; (ii) have been duly authorized by all necessary corporate, partnership or trust action, as appropriate, including, without limitation, the consent of stockholders and general and/or limited partners where required; 73 (iii) do not and will not (A) contravene any Loan Party's or any of its Subsidiaries' or Eligible Joint Ventures' respective declaration of trust, certificate of incorporation or formation or by-laws, regulations, partnership agreement or other comparable governing documents, (B) violate any other applicable Requirement of Law (including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System), or any order or decree of any Governmental Authority or arbitrator, (C) conflict with or result in the breach of, or constitute a default under, or result in or permit the termination or acceleration of, any material Contractual Obligation of any Loan Party or any of its Subsidiaries or Eligible Joint Ventures, or (D) result in the creation or imposition of any Lien upon any of the property of any Loan Party or any of its Subsidiaries or Eligible Joint Ventures; and (iv) do not require the consent of, authorization by, approval of, notice to, or filing or registration with, any Governmental Authority or any other Person, other than those which have been obtained or made and copies of which have been or will be delivered to the Administrative Agent pursuant to Section 3.1, and each of which on the Effective Date will be in full force and effect. (b) This Agreement has been, and each of the other Loan Documents has been, or will have been upon delivery thereof pursuant to Section 3.1, duly executed and delivered by each Loan Party thereto. This Agreement is, and the other Loan Documents are or will be, when delivered hereunder, the legal, valid and binding obligation of each Loan Party thereto, enforceable against it in accordance with its terms except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting the enforcement of creditor's rights and remedies generally. 4.3. Taxes. All federal, state, local and foreign tax returns, reports and statements (collectively, the "Tax Returns") required to be filed by the Borrower or any of its Tax Affiliates have been filed with the appropriate governmental agencies in all jurisdictions in which such Tax Returns, are required to be filed, all such Tax Returns are true and correct in all material respects, and all taxes, charges and other impositions due and payable 74 have been timely paid prior to the date on which any fine, penalty, interest, late charge or loss may be added thereto for non-payment thereof, except where contested in good faith and by appropriate proceedings if (i) adequate reserves therefor have been established on the books of the Borrower or such Tax Affiliate in conformity with GAAP and (ii) all such non-payments in the aggregate have no Material Adverse Effect. Proper and accurate amounts have been withheld by the Borrower and each of its respective Tax Affiliates from their respective employees for all periods in full and complete compliance with the tax, social security and unemployment withholding provisions of applicable federal, state, local and foreign law and such withholdings have been timely paid to the respective Governmental Authorities. None of the Borrower or any of its Tax Affiliates has (i) executed or filed with the IRS any agreement or other document extending, or having the effect of extending, the period for assessment or collection of any charges; (ii) agreed or been requested to make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise; or (iii) any obligation under any written tax sharing agreement. 4.4. Full Disclosure. No written statement prepared or furnished by or on behalf of any Loan Party or any of its Affiliates in connection with any of the Loan Documents or the consummation of the transactions contemplated thereby, and no financial statement delivered pursuant hereto or thereto, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading. 4.5. Financial Matters. (a) The consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 1995, and the related consolidated statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, certified by Coopers & Lybrand, L.L.P. and the consolidated balance sheets of the Borrower and its Subsidiaries as at June 30, 1996, and the related consolidated statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for the six months then ended, certified by the chief financial officer of the Borrower, copies of which have been furnished to each Lender, fairly present, subject, in the case of said balance sheets as at June 30, 1996, and said statements of income, retained earnings and cash flows for the six months then ended, to year-end audit adjustments, the consolidated financial condition of the 75 Borrower and its Subsidiaries as at such dates and the consolidated results of the operations of the Borrower and its Subsidiaries for the period ended on such dates, all in conformity with GAAP. (b) Since June 30, 1996, there has been no Material Adverse Change and there have been no events or developments that in the aggregate have had a Material Adverse Effect. (c) Neither the Borrower nor any of its Subsidiaries had at June 30, 1996 any material obligation, contingent liability or liability for taxes, long-term leases or unusual forward or long-term commitment which is not reflected in the balance sheet at such date referred to in subsection (a) above or in the notes thereto. (d) The Projections that have been delivered to each Lender, were prepared on the basis of the assumptions expressed therein, which assumptions the Borrower believed to be reasonable based on the information available to the Borrower at the time so furnished and on the Closing Date. (e) The Borrower is, and on a consolidated basis the Borrower and its Subsidiaries are, Solvent. 4.6. Litigation. There are no pending or, to the knowledge of the Borrower, threatened actions, investigations or proceedings affecting the Borrower, any of its Subsidiaries or Eligible Joint Ventures, or (to the best knowledge of the Borrower) any Operating Lessee or any of their respective properties or revenues before any court, Governmental Authority or arbitrator, other than those that in the aggregate, if adversely determined, would have no Material Adverse Effect. The performance of any action by (a) any Loan Party required or contemplated by any of the Loan Documents or (b) any Operator required or contemplated by any Operating Lease or Management Agreement is not, to the best knowledge of the Borrower, restrained or enjoined (either temporarily, preliminarily or permanently), and, to the best knowledge of the Borrower, no material adverse condition has been imposed by any Governmental Authority or arbitrator upon any of the foregoing transactions contemplated by the aforementioned documents. 4.7. Margin Regulations. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the 76 Federal Reserve System), and no proceeds of any Borrowing will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. 4.8. Ownership of Borrower and DJONT; Subsidiaries. (a) The authorized capital stock of FelCor consists of (i) 50,000,000 shares of common stock, $.01 par value per share, of which 36,588,733 shares are issued and outstanding as of the date hereof, and (ii) 10,000,000 shares of preferred stock, $.01 par value per share, of which 6,050,000 shares, designated as $1.95 Series A Cumulative Convertible Preferred Stock, $25.00 per share liquidation preference, are outstanding as of the date hereof. All of the outstanding capital stock of FelCor has been validly issued, is fully paid and non-assessable. At least 200,000 shares of FelCor common stock, and/or units of limited partner interest in FelCor LP that are redeemable for common stock of FelCor is owned, in the aggregate, beneficially by Hervey A. Feldman and Thomas J. Corcoran, Jr., free and clear of all Liens. (b) FelCor is the sole general partner of FelCor LP and, as of the date hereof, owns beneficially and of record at least 90.6% of the partnership interests of FelCor LP free and clear of all Liens. (c) As of the date hereof (x) the outstanding membership interests of DJONT consist of 50% voting Class A membership interests, 50% non-voting Class B membership interests and (y) other than Class A and Class B membership interests, there are no other outstanding classes of membership interests of DJONT. Hervey A. Feldman and Thomas J. Corcoran, Jr. own, beneficially, all of the voting Class A membership interests in DJONT, free and clear of all Liens. (d) Set forth on Schedule 4.8 hereto is a complete and accurate list showing, as of the Effective Date, all Subsidiaries and Unconsolidated Entities of the Borrower and, as to each such Subsidiary and Unconsolidated Entity, the jurisdiction of its formation and the percentage of the outstanding Stock of each class owned (directly or indirectly) by the Borrower. No Stock of any Subsidiary or Unconsolidated Entity of the Borrower is subject to any outstanding option, warrant, right of conversion or purchase or any similar right other than certain rights of first refusal contained in partnership agreements to which the Borrower or a Subsidiary is a party. All of the outstanding 77 capital Stock of each such Subsidiary and Unconsolidated Entity owned by the Borrower has been validly issued, is fully paid and (except for partnership interests) non-assessable, and all outstanding capital Stock of its Subsidiaries and Unconsolidated Entities owned by the Borrower is free and clear of all Liens. Neither the Borrower nor any such Subsidiary or Unconsolidated Entity is a party to, or has knowledge of, any agreement restricting the transfer or hypothecation of any shares of Stock of any such Subsidiary or Unconsolidated Entity, other than those imposed by Requirements of Law, or the Loan Documents. 4.9. ERISA. (a) There are no Multiemployer Plans. (b) Each Plan and any related trust intended to qualify under Code Section 401 or 501 has been determined by the IRS to be so qualified and to the best knowledge of the Borrower nothing has occurred which would cause the loss of such qualification. (c) None of the Borrower, any of its Subsidiaries or any ERISA Affiliate, with respect to any Pension Plan, has failed to make any contribution or pay any amount due as required by Section 412 of the Code or Section 302 of ERISA or the terms of any such plan, and all required contributions and benefits have been paid in accordance with the provisions of each such plan. (d) There are no pending or, to the knowledge of the Borrower, threatened claims, actions or proceedings (other than claims for benefits in the normal course), relating to any Plan other than those that in the aggregate, if adversely determined, would have no Material Adverse Effect. (e) No Pension Plan has any unfunded accrued benefit liabilities, as determined by using reasonable actuarial assumptions utilized by such plan's actuary for funding purposes. Within the last five years none of the Borrower, any of its Subsidiaries or any ERISA Affiliate has caused a Pension Plan with any such liabilities to be transferred outside of its "controlled group" (within the meaning of Section 4001(a)(14) of ERISA). (f) No Plan provides for continuing health, disability, accident or death benefits or coverage for any participant or his or her beneficiary after such participant's termination of employment (except as may be 78 required by Section 4980B of the Code and at the sole expense of the participant or the beneficiary) which would result in the aggregate under all Plans in a liability in an amount which would have a Material Adverse Effect. (g) None of the assets of any of the Loan Parties are subject to Title I of ERISA because they consist of "plan assets" within the meaning of DOL Regulation Section 2510.3-101 by reason of an equity investment in any of the Loan Parties. 4.10. Indebtedness. Except as disclosed on Schedule 4.10, as of the date hereof, none of the Borrower or any of its Subsidiaries or Unconsolidated Entities has any Indebtedness. 4.11. Restricted Payments. From and after the Closing Date, the Borrower has not declared or made any Restricted Payments (other than those permitted pursuant to Section 7.4). 4.12. No Burdensome Restrictions; No Defaults. (a) No Loan Party nor any of its Subsidiaries or Eligible Joint Ventures (i) is a party to any Contractual Obligation the compliance with which would have a Material Adverse Effect or the performance of which by any thereof, either unconditionally or upon the happening of an event, will result in the creation of a Lien on the property or assets of any such Loan Party or its Subsidiaries, or (ii) is subject to any charter or corporate restriction which has a Material Adverse Effect. (b) No Loan Party or Subsidiary or Eligible Joint Venture of any Loan Party is in default under or with respect to any Contractual Obligation owed by it and, to the knowledge of the Borrower, no other party is in default under or with respect to any Contractual Obligation owed to any Loan Party or to any Subsidiary or Eligible Joint Venture of a Loan Party, other than those defaults which in the aggregate have no Material Adverse Effect. (c) No Event of Default or Default has occurred and is continuing. (d) There is no Requirement of Law the compliance with which by any Loan Party would have a Material Adverse Effect. 79 (e) As of the date hereof, no Subsidiary or Eligible Joint Venture of the Borrower is subject to any Contractual Obligation (other than as set forth in the governing documents thereof) restricting or limiting its ability to transfer its assets to the Borrower or to declare or make any dividend payment or other distribution on account of any shares of any class of its Stock or its ability to purchase, redeem, or otherwise acquire for value or make any payment in respect of any such shares or any shareholder rights. 4.13. Investments. Except as disclosed on Schedule 4.8 or 4.13, the Borrower and its Subsidiaries considered as a single enterprise, is not engaged in any joint venture or partnership with any other Person nor does it maintain any Investment, as of the date hereof. 4.14. Government Regulation. Neither the Borrower nor any of its Subsidiaries or Eligible Joint Ventures is an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended, or subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, or any other federal or state statute or regulation such that its ability to incur Indebtedness is limited, or its ability to consummate the transactions contemplated hereby or by any other Loan Document, or the exercise by the Administrative Agent or any Lender of rights and remedies hereunder or thereunder, is impaired. The making of the Loans by the Lenders, the application of the proceeds and repayment thereof by the Borrower and the consummation of the transactions contemplated by the Loan Documents will not cause the Borrower or any of its Subsidiaries or Eligible Joint Ventures to violate any provision of any of the foregoing or any rule, regulation or order issued by the Securities and Exchange Commission thereunder. 4.15. Insurance. All policies of insurance of any kind or nature owned by or issued to or for the benefit of any Loan Party or any of its Subsidiaries or Eligible Joint Ventures, or issued in respect of any real property owned or leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures including, without limitation, policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, workers' compensation and employee health and welfare insurance, are in full force and effect and are of a 80 nature and provide such coverage as is sufficient and as is customarily carried by companies of the size and character of such Person. No Loan Party or any of its Subsidiaries or Eligible Joint Ventures has been refused insurance for which it applied or had any policy of insurance terminated (other than at its request). 4.16. Labor Matters. (a) There are no strikes, work stoppages, slowdowns or lockouts pending or threatened against or involving the Borrower or its Subsidiaries or their respective Hotels, other than those which in the aggregate have no Material Adverse Effect. (b) There are no unfair labor practice charges, arbitrations or grievances pending against or involving, or to the knowledge of the Borrower threatened against or involving the Borrower or its Subsidiaries or Eligible Joint Ventures, other than those which, in the aggregate, if resolved adversely to the Borrower or such Subsidiary or Eligible Joint Venture, would have no Material Adverse Effect. (c) As of the Effective Date, neither the Borrower nor any of its Subsidiaries or Eligible Joint Ventures are parties to, or have any obligations under, any collective bargaining agreement. (d) There is no organizing activity involving the Borrower or any of its Subsidiaries or Eligible Joint Ventures pending or, to the Borrower's knowledge, threatened by any labor union or group of employees, other than those which in the aggregate have no Material Adverse Effect. There are no representation proceedings pending or, to the Borrower's knowledge, threatened with the National Labor Relations Board, and no labor organization or group of employees of the Borrower or any of its Subsidiaries or Eligible Joint Ventures have made a pending demand for recognition, other than those which in the aggregate have no Material Adverse Effect. 4.17. Force Majeure. Neither the business nor the properties of any Loan Party or any of their respective Subsidiaries or Eligible Joint Ventures are currently suffering from the effects of any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance), other than those which in the aggregate have no Material Adverse Effect. 81 4.18. Use of Proceeds. The proceeds of the Loans will be used by the Borrower solely as follows: (a) subject to the limitations set forth herein, to fund any direct or indirect investment in existing Hotels, in Hotels and/or interests in Hotels which are to be acquired by the Borrower or any of its Subsidiaries, and for the payment of related transaction costs, fees and expenses, and (b) as to the sum of up to $55,000,000 only, for general corporate or working capital purposes or for Letters of Credit. 4.19. Environmental Protection. Except as disclosed on Schedule 4.19 (and the Borrower represents and warrants to the Lenders and the Administrative Agent that the matters disclosed in the reports identified on Schedule 4.19 would not reasonably be expected to have a Material Adverse Effect): (a) to the best knowledge of Borrower and its Subsidiaries, all real property leased or owned by the Borrower or any of its Subsidiaries or Eligible Joint Ventures is free from contamination by any Hazardous Material which could reasonably be expected to subject the Borrower or any of its Subsidiaries to Environmental Liabilities and Costs of $1,000,000 or more; (b) the operations of the Borrower and each of its Subsidiaries or Eligible Joint Ventures, and the operations at any real property leased or owned by the Borrower or any of its Subsidiaries or Eligible Joint Ventures are in material compliance in all respects with all applicable Environmental Laws; (c) neither the Borrower nor any of its Subsidiaries or Eligible Joint Ventures have liabilities with respect to Hazardous Materials and, to the best knowledge of the Borrower and its Subsidiaries, no facts or circumstances exist which could give rise to liabilities with respect to Hazardous Materials which could reasonably be expected to subject the Borrower or any of its Subsidiaries to Environmental Liabilities and Costs of $1,000,000 or more; (d) (i) the Borrower and its Subsidiaries and Eligible Joint Ventures and all real property owned or leased by the Borrower or its Subsidiaries and Eligible Joint Ventures have all Environmental Permits necessary for the operations at such real property and are in material compliance with such Environmental Permits, (ii) there are no Legal Proceedings pending nor, to the best knowledge of 82 the Borrower and its Subsidiaries, threatened to revoke, or alleging the violation of, such Environmental Permits, and (iii) neither the Borrower nor any of its Subsidiaries or Eligible Joint Ventures or to the best knowledge of the Borrower and its Subsidiaries the Operators have received any notice from any source to the effect that there is lacking any Environmental Permit required in connection with the current use or operation of any property leased or owned by the Borrower or any of its Subsidiaries or Eligible Joint Ventures; (e) neither the Borrower's nor any of its Subsidiaries' or Eligible Joint Ventures' current facilities and operations, nor, to the best knowledge of the Borrower and its Subsidiaries, any Operator, any predecessor of the Borrower or any of its Subsidiaries or Eligible Joint Ventures, nor any of the Borrower's or its Subsidiaries' or Eligible Joint Ventures' past facilities and operations, nor to the best knowledge of the Borrower and its Subsidiaries, any owner of premises leased or operated by the Borrower and its Subsidiaries and Eligible Joint Ventures, are subject to any outstanding written Order or Contract, including Environmental Liens, with any Governmental Authority or other Person, or to any federal, state, local, foreign or territorial investigation respecting (i) Environmental Laws, (ii) Remedial Action, (iii) any Environmental Claim, or (iv) the Release or threatened Release of any Hazardous Material; (f) neither the Borrower nor any of its Subsidiaries or Eligible Joint Ventures or, to the best knowledge of the Borrower and its Subsidiaries, Operators are subject to any pending Legal Proceeding alleging the violation of any Environmental Law with respect to a Hotel nor, to the best knowledge of the Borrower and its Subsidiaries, are any such proceedings threatened; (g) neither the Borrower nor any of its Subsidiaries or Eligible Joint Ventures nor, to the best knowledge of the Borrower and its Subsidiaries, any Operators or predecessor of the Borrower or any of its Subsidiaries or Eligible Joint Ventures, nor to the best knowledge of the Borrower and its Subsidiaries any owner of premises leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures, have filed any notice under federal, state or local, territorial or foreign law indicating past or present treatment, storage, or disposal of or reporting a Release of Hazardous Material into the environment; 83 (h) none of the operations of the Borrower or any of its Subsidiaries or Eligible Joint Ventures or, to the best knowledge of the Borrower and its Subsidiaries, of any Operators or predecessor of the Borrower or any of its Subsidiaries or Eligible Joint Ventures, or, to the best knowledge of the Borrower and its Subsidiaries, of any owner of premises leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures, involve or previously involved the generation, transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Part 261.3 (in effect as of the date of this Agreement) or any state, local, territorial or foreign equivalent; and (i) there is not now, nor to the best knowledge of the Borrower and its Subsidiaries, has there been in the past, on, in or under any real property leased or owned by the Borrower or any of its Subsidiaries or Eligible Joint Ventures, to the best knowledge of the Borrower and its Subsidiaries or any of their predecessors (i) any underground storage tanks or surface tanks, dikes or impoundments (other than for surface water), (ii) any friable asbestos-containing materials, (iii) any polychlorinated biphenyls, or (iv) any radioactive substances other than naturally-occurring radioactive material. 4.20. Contractual Obligations Concerning Assets. As of the date hereof, neither the Borrower nor any of its Subsidiaries owns or holds, or is obligated under or a party to, any option, right of first refusal, or other contractual right to purchase or acquire, or any Contractual Obligation to effect an Asset Sale of, any Hotel owned or leased by the Borrower or any of its Subsidiaries, except those that in the aggregate would not have a Material Adverse Effect whether or not exercised. 4.21. Intellectual Property. The Loan Parties and its Subsidiaries and Eligible Joint Ventures or the Operating Lessee own or license or otherwise have the right to use all material licenses, permits, patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, copyright applications, franchises, authorizations and other intellectual property rights that are necessary for the operations of their respective businesses, without infringement upon or conflict with the rights of any other Person with respect thereto, including, without limitation, the Licenses and all trade names associated with any private label brands of any Loan 84 Party or any of its Subsidiaries or Eligible Joint Ventures. To the best knowledge of the Borrower, no material slogan or other advertising device, product, process, method, substance, part or component, or other material now employed, or now contemplated to be employed, by any Loan Party or any of their respective Subsidiaries or Eligible Joint Ventures or the Operating Lessee infringes upon or conflicts with any rights owned by any other Person, and no claim or litigation regarding any of the foregoing is pending or threatened. 4.22. Title. (a) Each Loan Party and their respective Subsidiaries and Eligible Joint Ventures own good and marketable fee simple absolute title to all of the Real Estate purported to be owned by them, which Real Estate is at the date hereof described in Schedule 4.22(a), and good and marketable title to, or valid leasehold interests in, all other properties and assets purported to be leased by any Loan Party or any of their respective Subsidiaries or Eligible Joint Ventures, including, without limitation, valid leasehold interests pursuant to the Leases and all property reflected in the balance sheet referred to in Section 4.5(a). Each Loan Party and its respective Subsidiaries or Eligible Joint Ventures received all deeds, assignments, waivers, consents, non-disturbance and recognition or similar agreements, bills of sale and other documents, and have duly effected all recordings, filings and other actions necessary to establish, protect and perfect such Loan Party's and their respective Subsidiaries' or Eligible Joint Ventures' right, title and interest in and to all such property except for such documents or actions the failure to obtain or accomplish which would not have a Material Adverse Effect. (b) All material real property leased at the date hereof by the Borrower or any of their respective Subsidiaries or Eligible Joint Ventures is listed on Schedule 4.22(b). Each of such leases is valid and enforceable in accordance with its terms and is in full force and effect. The Borrower has delivered to the Administrative Agent true and complete copies of each of such leases and all documents affecting the rights or obligations of the Borrower or any of its Subsidiaries or Eligible Joint Ventures which is a party thereto, including, without limitation, any non- disturbance and recognition agreements, subordination agreements, attornment agreements and agreements regarding the term or rental of any of the leases. None of the Borrower or any of its respective Subsidiaries or Eligible Joint Ventures nor, to the 85 knowledge of the Borrower, any other party to any such lease is in default of its obligations thereunder or has delivered or received any notice of default under any such lease, nor has any event occurred which, with the giving of notice, the passage of time or both, would constitute a default under any such lease, except for defaults which in the aggregate have no Material Adverse Effect. (c) All components of all improvements included within the Hotels owned or leased, as lessee, by any Loan Party or Eligible Joint Venture (collectively, "Improvements"), including, without limitation, the roofs and structural elements thereof and the heating, ventilation, air conditioning, plumbing, electrical, mechanical, sewer, waste water, storm water, paving and parking equipment, systems and facilities included therein, are in good working order and repair, subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. All water, gas, electrical, steam, compressed air, telecommunication, sanitary and storm sewage lines and systems and other similar systems serving the Hotels owned or leased by any Loan Party or any of their respective Subsidiaries or Eligible Joint Ventures are installed and operating and are sufficient to enable the real property owned or leased by any Loan Party and their respective Subsidiaries or Eligible Joint Ventures to continue to be used and operated in the manner currently being used and operated, and no Loan Party or any of its Subsidiaries or Eligible Joint Ventures has any knowledge of any factor or condition that reasonably could be expected to result in the termination or material impairment of the furnishing thereof. No Improvement or portion thereof is dependent for its access, operation or utility on any land, building or other Improvement not included in the real property owned or leased by any Loan Party or any of its Subsidiaries or Eligible Joint Ventures other than for access provided pursuant to a recorded easement or other right of way establishing the right of such access. (d) All Permits required to have been issued or appropriate to enable all real property owned or leased by any Loan Party or any of its Subsidiaries or Eligible Joint Ventures to be lawfully occupied and used for all of the purposes for which they are currently occupied and used have been lawfully issued and are in full force and effect, other than those which in the aggregate have no Material Adverse Effect. 86 (e) No Loan Party or any of its Subsidiaries or Eligible Joint Ventures has received any notice, or has any knowledge, of any pending, threatened or contemplated condemnation proceeding affecting any real property owned or leased by any Loan Party or any of its Subsidiaries or Eligible Joint Ventures or any part thereof, or any proposed termination or impairment of any parking at any such owned or leased real property or of any sale or other disposition of any real property owned or leased by any Loan Party or any of its Subsidiaries or Eligible Joint Ventures or any part thereof in lieu of condemnation, which in the aggregate, are reasonably likely to have a Material Adverse Effect. (f) Except for events or conditions not reasonably likely to have, in the aggregate, a Material Adverse Effect, (i) no portion of any real property owned or leased by any Loan Party or any of its Subsidiaries or Eligible Joint Ventures has suffered any material damage by fire or other casualty loss which has not heretofore been completely repaired and restored to its condition prior to such casualty, and (ii) no portion of any real property owned or leased by any Loan Party or any of its Subsidiaries or Eligible Joint Ventures is located in a special flood hazard area as designated by any Federal Governmental Authorities. 4.23. Status as REIT. The Borrower is organized in conformity with the requirements for qualification as an equity-oriented real estate investment trust under the Code. Borrower has met all of the requirements for qualification as an equity-oriented real estate investment trust under the Code for its Fiscal Year ended December 31, 1996. The Borrower is in a position to qualify for its current Fiscal Year as a real estate investment trust under the Code and its proposed methods of operation will enable it to so qualify. 4.24. Operator: Compliance with Law. To the best knowledge of the Borrower and its Subsidiaries, each Operator (i) has full power and authority and the legal right to own, lease (or sublease), manage and operate (as applicable) the properties it operates and to conduct the business in which it is currently engaged with respect to any real property owned or leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures (ii) is duly qualified or licensed and is in good standing under the laws of each jurisdiction where its ownership, lease (or sublease), management or operation of any real property 87 owned or leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures requires such qualification, and (iii) is in compliance with all Requirements of Law applicable to the real property owned or leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures, or applicable to the operation or management thereof except to the extent that the failure to comply therewith is not reasonably likely to have, in the aggregate, a Material Adverse Effect. 4.25. Operating Leases, Licenses and Management Agreement. (a) Each of the Hotels (i) is leased to an Operating Lessee under an Operating Lease (ii) is the subject of a License, and (iii) is managed and operated for the Operating Lessee pursuant to a Management Agreement. (b) Each of the Operating Leases, Licenses and Management Agreements in respect of the Hotels (i) is in full force and effect, (ii) is a legally valid and binding obligation of each of the parties thereto, subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect, and (iii) has not been modified, amended or supplemented in any material or adverse way. Neither the Borrower nor any of its Subsidiaries or Eligible Joint Ventures has collected any rents becoming due under any Operating Lease more than 30 days in advance. All rent and other sums and charges payable by any Operating Lessee under each Operating Lease to which it is a party are current, no notice of default or termination under any such Operating Lease is outstanding, no termination event or condition or uncured default on the part of the Operating Lessee exists under any Operating Lease, and no event of default has occurred which, with the giving of notice or the lapse of time or both, would constitute such a default or termination event or condition or uncured default on the part of the Borrower or its Subsidiaries or Eligible Joint Ventures or the Operators (as the case may be), subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. As to all of the Leases, Borrower and each of its Subsidiaries or Eligible Joint Ventures has performed all of its repair and maintenance obligations (if any) and, to the best knowledge and belief of Borrower, each Operating Lessee under each Operating Lease to which it is a party has performed all of its repair and maintenance obligations, subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. 88 4.26. FF&E Reserves. An FF&E Reserve has been established in respect of each of the Hotels and the Borrower or its Subsidiaries or Eligible Joint Ventures have made any contributions to such FF&E Reserve as required by the terms of the Operating Lease and/or the Management Agreement relating thereto. 4.27. $100MM Facility. The $100MM Facility has been converted to a secured term loan in an aggregate principal sum which does not exceed $85,000,000 and with a final maturity of September 30, 2000. All material documentation evidencing such conversion has been delivered to the Administrative Agent. ARTICLE V FINANCIAL COVENANTS As long as any of the Obligations or Commitments remain outstanding, unless the requisite Lenders specified in Section 10.1 otherwise consent in writing, the Borrower agrees with the Lenders and the Administrative Agent that: 5.1. Gross Interest Expense Coverage. The Borrower shall maintain at the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending on June 30, 1997, a ratio of (a) Adjusted EBITDA to (b) Gross Interest Expense, in each case determined on the basis of the four (4) Fiscal Quarters ending on the date of determination, of not less than 2.5:1.0. 5.2. Fixed Charge Coverage Ratio. The Borrower shall maintain at the end of each Fiscal Quarter commencing with the Fiscal Quarter ending on June 30, 1997, a ratio of (a) Adjusted EBITDA to (b) Fixed Charges, in each case determined on the basis of the four (4) Fiscal Quarters ending on the date of determination, of not less than 2.0:1.0. 5.3. Maintenance of Tangible Net Worth. The Borrower shall maintain during each Fiscal Quarter a Tangible Net Worth of not less than the Minimum Tangible Net Worth. 5.4. Limitations on Total Indebtedness. The Borrower shall not, during each Fiscal Quarter on a consolidated basis, permit the Total Indebtedness (including, without limitation, the Obligations and all 89 Capitalized Lease Obligations) of the Borrower for borrowed money to exceed 50% of Total Value. 5.5. Limitations on Total Secured Indebtedness. The Borrower shall not, during each Fiscal Quarter on a consolidated basis, permit the Total Secured Indebtedness (including, without limitation, secured Obligations and Capitalized Lease Obligations) of the Borrower, to exceed 20% of Total Value. 5.6. Adjusted NOI and Hotels. The Borrower shall ensure that at the end of each Fiscal Quarter commencing with the Fiscal Quarter ending on June 30, 1997 at least 50% of the aggregate Adjusted NOI generated by all Hotels during the preceding four (4) Fiscal Quarters shall be generated by Hotels wholly owned or leased by the Borrower or its wholly-owned Subsidiaries, provided that, for Hotels owned or leased for less than four (4) Fiscal Quarters only the Adjusted NOI generated by such Hotels since the date of acquisition of such Hotel shall be included in calculating such aggregate Adjusted NOI. ARTICLE VI AFFIRMATIVE COVENANTS As long as any of the Obligations or the Commitments remain outstanding, unless the Majority Lenders otherwise consent in writing, the Borrower agrees with the Lenders and the Administrative Agent that: 6.1. Compliance with Laws, Etc. The Borrower shall comply, and shall cause each of its Subsidiaries and Eligible Joint Ventures to comply, in all material respects with all Requirements of Law, Contractual Obligations, commitments, instruments, licenses, permits and franchises, including, without limitation, all Permits; provided, however, that the Borrower shall not be deemed in default of this Section 6.1 if all such non-compliances in the aggregate have no Material Adverse Effect. 6.2. Conduct of Business. The Borrower shall (a) conduct, and shall cause each of its Subsidiaries and Eligible Joint Ventures to conduct, its business in the ordinary course and consistent with past practice; (b) use, and cause each of its Subsidiaries and Eligible Joint Ventures to use, its reasonable efforts, in the ordinary course and consistent with past practice, to (i) preserve 90 its business and the goodwill and business of the customers, advertisers, suppliers and others having business relations with the Borrower or any of its Subsidiaries or Eligible Joint Ventures, and (ii) keep available the services and goodwill of its present employees; (c) preserve, and cause each of its Subsidiaries and Eligible Joint Ventures to preserve, all registered patents, trademarks, trade names, copyrights and service marks with respect to its business; and (d) perform and observe, and cause each of its Subsidiaries and Eligible Joint Ventures to perform and observe, all the terms, covenants and conditions required to be performed and observed by it under its Contractual Obligations (including, without limitation, to pay all rent and other charges payable under any lease and all debts and other obligations as the same become due), and do, and cause its Subsidiaries and Eligible Joint Ventures to do, all things necessary to preserve and to keep unimpaired its rights under such Contractual Obligations; provided, however, that, in the case of each of clauses (a) through (d), the Borrower shall not be deemed in default of this Section 6.2 if all such failures in the aggregate have no Material Adverse Effect. 6.3. Payment of Taxes, Etc. The Borrower shall pay and discharge, and shall cause each of its Subsidiaries and Eligible Joint Ventures, as appropriate, to pay and discharge, before the same shall become delinquent, all lawful governmental claims, taxes, assessments, charges and levies, except where contested in good faith, by proper proceedings, if adequate reserves therefor have been established on the books of the Borrower or the appropriate Subsidiary or Eligible Joint Venture in conformity with GAAP; provided, however, that the Borrower shall not be deemed in default of this Section 6.3 if all such non-payments in the aggregate have no Material Adverse Effect. 6.4. Maintenance of Insurance. The Borrower shall maintain, and shall cause each of its Subsidiaries and Eligible Joint Ventures to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks (including, without limitation, fire, extended coverage, vandalism, malicious mischief, public liability, product liability, and business interruption) as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary or Eligible Joint Venture. The Borrower will furnish to the Lenders from time to time such information as may be requested as to such insurance. 91 6.5. Preservation of Existence, Etc. The Borrower shall preserve and maintain, and shall cause each of its Subsidiaries and Eligible Joint Ventures to preserve and maintain, its corporate or partnership existence, rights (charter and statutory) and franchises, except as permitted under Section 7.5. 6.6. Access. The Borrower shall, at any reasonable time and from time to time, permit the Administrative Agent or any of the Lenders, or any agents or representatives thereof, at the expense of the Lenders (but such expense to be reimbursed by the Borrower in the event that any of the following reveal a material Default by the Borrower), to (a) examine and make copies of and abstracts from the records and books of account of the Borrower and each of its Subsidiaries and Eligible Joint Ventures, (b) visit the properties of the Borrower and each of its Subsidiaries and Eligible Joint Ventures, (c) discuss the affairs, finances and accounts of the Borrower and each of its Subsidiaries and Eligible Joint Ventures with any of their respective officers or directors, and (d) communicate directly with the Borrower's independent certified public accountants. 6.7. Keeping of Books. The Borrower shall keep, and shall cause each of its Subsidiaries and Eligible Joint Ventures to keep, proper books of record and account, in which proper entries shall be made of all financial transactions and the assets and business of the Borrower and each such Subsidiary or Eligible Joint Venture. 6.8. Maintenance of Properties, Etc. The Borrower shall maintain and preserve, and shall cause each of its Subsidiaries and Eligible Joint Ventures to maintain and preserve, (i) all of its properties which are used or useful or necessary in the conduct of its business in good working order and condition, and (ii) all rights, permits, licenses, approvals and privileges (including, without limitation, all Permits) which are used or useful or necessary in the conduct of its business; provided, however, that the Borrower shall not be deemed in default of this Section 6.8 if all such failures in the aggregate have no Material Adverse Effect. 6.9. Performance and Compliance with Other Covenants. The Borrower shall perform and comply with, and shall cause each of its Subsidiaries and Eligible Joint Ventures to perform and comply with, each of the covenants and agreements set forth in each Contractual Obligation to 92 which it or any of its Subsidiaries or Eligible Joint Ventures is a party; provided, however, that the Borrower shall not be deemed in default of this Section 6.9 if all such failures in the aggregate have no Material Adverse Effect. 6.10. Application of Proceeds. The Borrower shall use the entire amount of the proceeds of the Loans as provided in Section 4.18. 6.11. Financial Statements. The Borrower shall furnish to the Lenders: (a) as soon as available and in any event within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year, consolidated balance sheets of the Borrower and its Subsidiaries and DJONT as of the end of such quarter and consolidated statements of income, retained earnings and cash flow of the Borrower and its Subsidiaries and DJONT for the period commencing at the end of the previous Fiscal Year and ending with the end of such Fiscal Quarter, all prepared in conformity with GAAP and certified by the chief financial officer of the Borrower or the chief financial officer of DJONT, as appropriate, as fairly presenting the financial condition and results of operations of the Borrower and its Subsidiaries and DJONT at such date and for such period, together with (i) a certificate of said officer stating that no Default or Event of Default has occurred and is continuing or, if a Default or an Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower or DJONT, as appropriate, proposes to take with respect thereto, (ii) a schedule in form satisfactory to the Administrative Agent of the computations used by the Borrower or DJONT, as appropriate, in determining compliance with all financial covenants contained herein, and (iii) a written discussion and analysis by the management of the Borrower or DJONT, as appropriate, of the financial statements furnished in respect of such Fiscal Quarter; (b) as soon as available and in any event within 90 days after the end of each Fiscal Year, consolidated balance sheets of the Borrower and its Subsidiaries and DJONT as of the end of such year and consolidated statements of income, retained earnings and cash flow of the Borrower and its Subsidiaries and DJONT for such Fiscal Year, all prepared in conformity with GAAP and certified, in the case of such consolidated financial statements, in a manner reasonably acceptable to the Administrative Agent without 93 qualification as to the scope of the audit by Coopers & Lybrand or other independent public accountants of recognized national standing together with (i) a schedule in form satisfactory to the Administrative Agent of the computations used by the Borrower in determining, as of the end of such Fiscal Year, the Borrower's or DJONT's, as appropriate, compliance with all financial covenants contained herein, and (ii) a written discussion and analysis by the management of the Borrower or DJONT, as appropriate, of the financial statements furnished in respect of such Fiscal Year; and (c) promptly after the same are received by the Borrower, a copy of each management letter provided to the Borrower by its independent certified public accountants which refers in whole or in part to any inadequacy, defect, problem, qualification or other lack of fully satisfactory accounting controls utilized by the Borrower or any of its Subsidiaries. (d) within 45 days after the end of each Fiscal Quarter, (i) a Borrowing Base Certificate as of the end of such Fiscal Quarter, executed by a Responsible Officer of the Borrower, together with (to the extent not previously delivered) copies of the Eligible Hotel Documents in respect of each of the Eligible Hotels shown listed thereon, and (ii) a Compliance Certificate as of the end of such Fiscal Quarter, executed by the Chief Financial Officer of the Borrower. 6.12. Reporting Requirements. The Borrower shall furnish to the Lenders: (a) prior to any Asset Sale generating proceeds in excess of 10% of the value of Total Assets of the Borrower, a notice (i) describing the assets being sold, (ii) stating the estimated Asset Sales proceeds in respect of such Asset Sale and (iii) accompanied by a Borrowing Base Certificate and a certificate of the chief financial officer of the Borrower stating that before and after giving effect to such Asset Sale, the Borrower shall be in compliance with all of its covenants set forth in the Loan Documents and that no Default or Event of Default will result from such Asset Sale. (b) as soon as available and in any event within 90 days after the end of each Fiscal Year (or earlier if approved earlier by the Board of Directors of the Borrower), an annual budget of the Borrower and its Subsidiaries for 94 the succeeding Fiscal Year, displaying on a monthly and quarterly basis anticipated balance sheets, forecasted Capital Expenditures, working capital requirements, revenues, net income, cash flow, EBITDA, all on a consolidated basis; (c) promptly and in any event within 30 days after the Borrower, any of its Subsidiaries or any ERISA Affiliate knows or has reason to know that any ERISA Event has occurred, a written statement of the chief financial officer or other appropriate officer of the Borrower describing such ERISA Event or waiver request and the action, if any, which the Borrower, its Subsidiaries and ERISA Affiliates propose to take with respect thereto and a copy of any notice filed by or with the PBGC or the IRS pertaining thereto; (d) promptly and in any event within 10 days after receipt thereof, a copy of any adverse notice, determination letter, ruling or opinion the Borrower, any of its Subsidiaries or any ERISA Affiliate receives from the PBGC, DOL or IRS with respect to any Plan, other than those which, in the aggregate, do not have any reasonable likelihood of resulting in a Material Adverse Change; (e) promptly after the commencement thereof, notice of all actions, suits and proceedings before any domestic or foreign Governmental Authority or arbitrator, affecting the Borrower or any of its Subsidiaries, except those which in the aggregate, if adversely determined, would have no Material Adverse Effect; (f) promptly and in any event within two Business Days after the Borrower becomes aware of the existence of (i) any Default or Event of Default, (ii) any breach or non-performance of, or any default under, any Operating Lease, Management Agreement or any Contractual Obligation which is material to the business, prospects, operations or financial condition of the Borrower and its Subsidiaries taken as one enterprise, or (iii) any Material Adverse Change or any event, development or other circumstance which has any reasonable likelihood of causing or resulting in a Material Adverse Change, telephonic or telecopied notice in reasonable detail specifying the nature of the Default, Event of Default, breach, non-performance, default, event, development or circumstance, including, without limitation, the anticipated effect thereof, which notice shall be promptly confirmed in writing within five days; 95 (g) promptly after the sending or filing thereof, copies of all reports which the Borrower sends to its security holders generally, and copies of all reports and registration statements which the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange or the National Association of Securities Dealers, Inc.; (h) promptly upon the request of any Lender, through the Administrative Agent, copies of all federal tax returns and reports filed by the Borrower or any of its Subsidiaries in respect of taxes measured by income (excluding sales, use and like taxes); (i) promptly and in any event within ten days of the Borrower or any Subsidiary learning of any of the following, written notice to the Administrative Agent of any of the following: (i) the Release or threatened Release of any Hazardous Material on or from any property owned or leased by the Borrower of any of its Subsidiaries or Eligible Joint Ventures and any written order, notice, permit, application or other written communication or report received by the Borrower, any of its Subsidiaries or Eligible Joint Ventures in connection with or relating to any such Release or threatened Release, unless such Release or threatened Release is not reasonably likely to subject the Borrower or any of its Subsidiaries to Environmental Liabilities and Costs of $500,000 or more; (ii) any notice or claim to the effect that the Borrower, any of its Subsidiaries or any Eligible Joint Ventures is or may be liable to any Person as a result of the Release or threatened Release of any Hazardous Material into the environment; (iii) receipt by the Borrower, any of its Subsidiaries or Eligible Joint Ventures or any Operator of notification that any real or personal property of the Borrower or any of its Subsidiaries is subject to an Environmental Lien; (iv) any Remedial Action taken by the Borrower or any of its Subsidiaries or Eligible Joint Ventures or any other Person on their behalf in response to any Hazardous Material on, under or about any real property owned or leased by the Borrower or 96 any of its Subsidiaries or Eligible Joint Ventures, unless such Remedial Action is not reasonably likely to subject the Borrower or any of its Subsidiaries or Eligible Joint Ventures to Environmental Liabilities and Costs of $500,000 or more; (v) receipt by the Borrower or any of its Subsidiaries or Eligible Joint Ventures of any notice of violation of, or knowledge by the Borrower or any of its Subsidiaries or any Eligible Joint Ventures that there exists a condition which may result in a violation by the Borrower or any of its Subsidiaries or Eligible Joint Ventures of, any Environmental Law, unless such violation is not reasonably likely to subject the Borrower or any of its Subsidiaries to Environmental Liabilities and Costs of $500,000 or more; (vi) any proposed Capital Expenditure by the Borrower or any of its Subsidiaries or Eligible Joint Ventures intended or designed to implement any existing or additional Remedial Action, unless such expenditures are not reasonably likely to exceed $500,000; (vii) the commencement of any judicial or administrative proceeding or investigation alleging a violation of any Environmental Law; or (viii) any proposed acquisition of stock, assets or real property, or any proposed leasing of property by the Borrower, or any of its Subsidiaries or Eligible Joint Ventures, unless such action is not reasonably likely to subject the Borrower and its Subsidiaries to Environmental Liabilities and Costs to the Borrower in excess of $500,000; (j) promptly, such additional financial and other information respecting the financial or other condition of the Borrower or any of its Subsidiaries or Eligible Joint Ventures or the Operating Lessee or the status or condition of any real property owned or leased by the Borrower or its Subsidiaries or Eligible Joint Ventures, or the operation thereof which the Borrower is entitled to or can otherwise reasonably obtain, as the Administrative Agent from time to time reasonably requests; and (k) upon written request by any Lender through the Administrative Agent, a report providing an update of the status of any Environmental Claim, Remedial Action or 97 any other issue identified in any notice or report required pursuant to this Section 6.12. 6.13. Leases and Operating Leases; Management Agreements and Licenses. (a) The Borrower shall provide the Administrative Agent with a copy of each Qualified Lease and each Operating Lease relating to an Eligible Hotel. The Borrower shall, and shall cause each of its Subsidiaries and Eligible Joint Ventures to, (i) comply in all material respects with all of their respective obligations under all of their respective Leases and Operating Leases now or hereafter held respectively by them with respect to real property, including, without limitation, the Leases set forth in Schedule 4.22(b); (ii) not modify, amend, cancel, extend or otherwise change in any materially adverse manner any of the terms, covenants or conditions of any such Leases or Operating Leases; (iii) not assign any Leases or sublet any portion of the premises if such assignment or sublet would have a Material Adverse Effect; (iv) provide the Administrative Agent with a copy of each notice of default under any Lease or Operating Lease received by the Borrower or any Subsidiary or Eligible Joint Venture of the Borrower immediately upon receipt thereof and deliver to the Administrative Agent a copy of each notice of default sent by the Borrower or any Subsidiary or Eligible Joint Venture of the Borrower under any Lease or Operating Lease simultaneously with its delivery of such notice under such Lease or Operating Lease except to the extent that such defaults, in the aggregate, would not have a Material Adverse Effect; (v) notify the Administrative Agent, not later than 30 days prior to the date of the expiration of the term of any Qualified Lease, of the Borrower's or any Subsidiary or Eligible Joint Venture of the Borrower's intention either to renew or to not renew any such Qualified Lease, and, if the Borrower or any Subsidiary or Eligible Joint Venture of the Borrower intends to renew such Qualified Lease, the terms and conditions of such renewal; and (vi) maintain each Operating Lease in full force and effect and enforce the obligations of the Operating Lessee thereunder, in a timely manner except to the extent that the failure to do so, in the aggregate, would not have a Material Adverse Effect. (b) The Borrower shall take all actions and do all things within its power or control necessary or required to cause each Operating Lessee to (i) keep, observe, comply with and perform all of the terms, provisions, covenants and undertakings on its part required by each Operating Lease, each License, each sublease and Management Agreement 98 relating to any Hotel, and (ii) to enforce the provisions of each License and each Management Agreement, if the failure to comply or enforce such agreements would be reasonably likely, in the aggregate, to have a Material Adverse Effect. 6.14. Intentionally Omitted. 6.15. Employee Plans. For each Plan and any related trust hereafter adopted or maintained by a Loan Party or any of its ERISA Affiliates intended to qualify under Code Section 125, 401 or 501, the Borrower shall (i) seek, and cause such of its ERISA Affiliates to seek, and receive determination letters from the IRS to the effect that such plan is so qualified; and (ii) cause such plan to be so qualified. 6.16. Intentionally Omitted. 6.17. Fiscal Year. The Borrower shall maintain as its Fiscal Year the twelve month period ending on December 31 of each year. 6.18. Environmental Matters. (a) The Borrower shall comply and shall cause each of its Subsidiaries and Eligible Joint Ventures and each property owned or leased by such parties to comply in all material respects with all applicable Environmental Laws currently or hereafter in effect. (b) If Administrative Agent or Lenders at any time have a reasonable basis to believe that there may be a material violation of any Environmental Law by the Borrower or any of its Subsidiaries and Eligible Joint Ventures or any Operator related to any real property owned or leased by the Borrower or any of its Subsidiaries and Eligible Joint Ventures, or real property adjacent to such real property, then the Borrower agrees, upon request from the Administrative Agent, to provide the Administrative Agent, at the Borrower's expense, with such reports, certificates, engineering studies or other written material or data as the Administrative Agent or Lenders may reasonably require so as to reasonably satisfy the Administrative Agent and Lenders that the Borrower or such Subsidiary, Eligible Joint Venture or real property owned or leased by them is in material compliance with all applicable Environmental Laws. Furthermore, Administrative Agent shall have the right to inspect during normal business hours any real property owned or leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures if at any time Administrative Agent 99 or Lenders have a reasonable basis to believe that there may be such a material violation of Environmental Law. (c) The Borrower shall, and shall cause each of its Subsidiaries and Eligible Joint Ventures and each Operating Lessee to, take such Remedial Action or other action as required by Environmental Laws, as any Governmental Authority requires, except to the extent contested in good faith and by proper proceedings, or as is appropriate and consistent with good business practice. 6.19. REIT Requirements. The Borrower shall operate its business at all times so as to satisfy all requirements necessary to qualify as an equity-oriented real estate investment trust under Sections 856 through 860 of the Code. The Borrower will maintain adequate records so as to comply with all record-keeping requirements relating to the qualification of the Borrower as an equity-oriented real estate investment trust as required by the Code and applicable regulations of the Department of the Treasury promulgated thereunder and will properly prepare and timely file with the IRS all returns and reports required thereby. The Borrower will request from its shareholders all shareholder information required by the Code and applicable regulations of the Department of Treasury promulgated thereunder. 6.20. Maintenance of FF&E Reserves. The Borrower shall cause to be maintained the FF&E Reserves pursuant to the terms of the Operating Leases. 6.21. Hotel Requirements. The Borrower shall cause: (a) at least 60% of the "keys" to be maintained and operated as Suite Hotels; (b) at least 75% of the "keys" to be maintained and operated under "Embassy Suites", "Doubletree" or "Sheraton" Licenses or to be in the process of conversion to "Embassy Suites", "Doubletree" or "Sheraton" Hotels; (c) at least 70% of the "keys" to be managed by Promus, DT, or Sheraton; provided, that in no event shall less than 50% of the "suites" be maintained and operated under "Embassy Suites" Licenses and managed by Promus. 100 6.22. Further Assurances. At any time upon the request of the Administrative Agent, the Borrower will, promptly and at its expense, execute, acknowledge and deliver such further documents and do such other acts and things as the Administrative Agent may reasonably request to evidence the Loans made hereunder and interest thereon in accordance with the terms of this Agreement; 6.23. Borrowing Base Determination/Requirements. (a) Subject to compliance with the terms and conditions of Section 3.1, the Administrative Agent has accepted the Hotels listed on Schedule 6.23 as Eligible Hotels for the purposes of the Borrowing Base as of the Effective Date, provided that the parties acknowledge and agree that (i) the Embassy Suites Hotel located at Los Angeles Airport, CA is subject to a mortgage in favor of FelCor LP but the Administrative Agent has agreed, as a one time waiver only, to accept such Hotel as an Eligible Hotel provided that such Hotel shall cease to be an Eligible Hotel, inter alia, in the event that FelCor LP assigns its mortgage to any other Person, and (ii) the Administrative Agent's acceptance of the Hotels listed on Schedule 6.23 is based on outdated title insurance policies for such Hotels. To the extent not already delivered by the Borrower, the Borrower covenants and agrees to deliver to the Administrative Agent, within 45 days of the Effective Date, title updates with respect to each of the Hotels listed on Schedule 6.23 and, to the extent that such title updates reveal that any of such Hotels are not Unencumbered, such Hotels shall cease to qualify as Eligible Hotels. (b) If the Borrower desires that the Administrative Agent accept an additional Hotel as an Eligible Hotel for the purposes of the Borrowing Base, the Borrower shall so notify the Administrative Agent in writing. The Administrative Agent's acceptance of such Hotel in the Borrowing Base shall not be unreasonably withheld, conditioned or delayed, provided such Hotel shall meet the requirements for Eligible Hotels specified herein and unless and until the Borrower has delivered to the Administrative Agent either (y) the Eligible Hotel Documents relating to such Hotel in form and substance reasonably satisfactory to the Administrative Agent or (z) a Borrowing Base Certificate containing a representation that the Eligible Hotel Documents to be delivered to the Administrative Agent will demonstrate that such Hotel is an Eligible Hotel. In the case of (z) within five Business Days of the designation of a Hotel as eligible and delivery of the Borrowing Base Certificate pursuant to this Section, 101 the Borrower shall deliver the Eligible Hotel Documents relating to such Hotel to the Administrative Agent; if the Administrative Agent determines that such Hotel, based upon its review of the applicable Eligible Hotel Documents, is not an Eligible Hotel, then Borrower shall repay any Borrowing Base Imbalance pursuant to the terms of Section 2.7(c)(iv) and, if so repaid, the representation regarding the Eligible Hotel Documents for such Hotel contained in the Borrowing Base Certificate delivered pursuant to (z) shall be deemed withdrawn. Notwithstanding the foregoing, a Hotel shall remain included in the Borrowing Base so long as such Hotel shall meet the requirements for Eligible Hotels specified herein. (c) The Borrower shall promptly notify the Administrative Agent in writing in the event that at any time the Borrower or any of its Subsidiaries receives or otherwise gains knowledge that (i) any Hotel included in a prior Borrowing Base Certificate as an Eligible Hotel, ceases, for any reason whatsoever, to be an Eligible Hotel, or (ii) that the Aggregate Value of the Eligible Hotel is less than 90% of the Aggregate Value reflected in the most recent Borrowing Base Certificate delivered pursuant hereto, or (iii) the Loans outstanding at such time exceed the Available Credit at such time as a result of any decrease in the Borrowing Base, and the amount of such excess. (d) The Administrative Agent, at the expense of the Lenders, which expense shall not exceed $10,000 without the consent of the Majority Lenders (but such expense to be reimbursed by the Borrower in the event that a Hotel fails to meet requirements for an Eligible Hotel in any material respect) may make physical and other verifications of any Hotels included as Eligible Hotels in any reasonable manner and through any medium that the Administrative Agent considers advisable, and the Borrower shall furnish all such assistance and information as the Administrative Agent may require in connection therewith. (e) Notwithstanding anything to the contrary set forth herein, a Hotel shall cease to be an Eligible Hotel if it shall cease to comply with the requirements therefor set forth herein. 102 ARTICLE VII NEGATIVE COVENANTS As long as any of the Obligations or Commitments remain outstanding, without the written consent of the Administrative Agent, the Borrower agrees with the Lenders and the Administrative Agent that: 7.1. Restrictions on Creation of Subsidiaries. The Borrower shall not create or acquire any direct or indirect wholly-owned Subsidiary after the Closing Date unless, concurrently with the creation or acquisition thereof, such Subsidiary executes and delivers to the Administrative Agent a Subsidiary Guaranty. 7.2. Intentionally Omitted. 7.3. Lease Obligations. (a) The Borrower shall not create or suffer to exist, or permit any of its Subsidiaries or Eligible Joint Ventures to create or suffer to exist, any obligations as lessee for the rental or hire of real or personal property of any kind under other leases or agreements to lease entered into otherwise than in the ordinary course of business. (b) The Borrower shall not, and shall not permit any of its Subsidiaries or Eligible Joint Ventures to, become or remain liable as lessee or guarantor or other surety with respect to any lease, whether an operating lease or a Capitalized Lease, of any property (whether real or personal or mixed), whether now owned or hereafter acquired, which (i) the Borrower or any of its Subsidiaries or Eligible Joint Ventures has sold or transferred or is to sell or transfer to any other Person, or (ii) the Borrower or any of its Subsidiaries or Eligible Joint Ventures intends to use for substantially the same purposes as any other property which has been or is to be sold or transferred by that entity to any other Person in connection with such lease. 7.4. Restricted Payments. The Borrower, unless otherwise required in order to maintain FelCor's status as a real estate investment trust in accordance with the written advice of independent counsel to the Borrower, the Borrower shall not declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account or in respect of any of its Stock or Stock Equivalents (collectively, "Restricted 103 Payments"); provided, that, notwithstanding the foregoing, during any period of four consecutive Fiscal Quarters, (i) the Borrower may make Restricted Payments in an aggregate amount not to exceed 85% of the consolidated Adjusted Funds From Operations of the Borrower for such period and (ii) the aggregate amount of Restricted Payments made shall not exceed 100% of Free Cash Flow of the Borrower for such period. 7.5. Mergers, Stock Issuances, Asset Sales, Etc. (a) The Borrower shall not sell, convey, transfer, lease or otherwise dispose of all or substantially all of its assets or properties, and shall not, and shall not permit any of its Subsidiaries or Eligible Joint Ventures to, (i) merge with any Person, or (ii) consolidate with any Person, unless the Borrower or its Subsidiary or Eligible Joint Venture is the surviving or resulting entity and, following such merger or consolidation, no Default or Event of Default shall have occurred. (b) The Borrower shall not and shall not permit any of its Subsidiaries or Eligible Joint Ventures to effect, enter into, consummate or suffer to exist any Asset Sale(s) of any Hotel(s) generating proceeds aggregating more than 25% of the value of the Hotels owned by the Borrower, its Subsidiaries and Eligible Joint Ventures as at the Closing Date and shown listed on Schedules 4.22(a) and (b) of the Original Revolving Credit Agreement. (c) The Borrower shall not sell or otherwise dispose of, or factor at maturity or collection, or permit any of its Subsidiaries or Eligible Joint Ventures to sell or otherwise dispose of, or factor at maturity or collection, any accounts receivables. 7.6. Restrictions on Construction/Budget Hotels. The Borrower shall not, and shall not permit any of its Subsidiaries or Eligible Joint Ventures to (a) engage in the construction of new hotels (provided that nothing herein shall prohibit expansions to existing Hotels), (b) make investments in any Non-Suite Hotels that will not be maintained as first class full service hotels, (c) make Investments in any budget hotels, or (d) enter into any commitments or agreements to purchase any Hotels under, or to be under, original construction (provided that nothing herein shall limit commitments or agreements for expansions to existing Hotels), pursuant to which (i) such Persons' obligations, in the aggregate, exceed the lesser of (x) 15% of the Total Assets of the Borrower as of the end of the 104 Fiscal Quarter immediately preceding the date of any such commitment or agreement and (y) $200,000,000, or (ii) any such Person is or may be liable for, or otherwise assumes, any risks relating to the development or construction (but not operation) of such Hotel, whether by way of providing any guaranties of completion, payment of any construction loans, payment of construction cost overruns, or otherwise. 7.7. Change in Nature of Business or in Capital Structure. (a) The Borrower shall not make, and shall not permit any of its Subsidiaries or Eligible Joint Ventures to make, any material change in the nature or conduct of its business as carried on at the Closing Date. (b) The Borrower shall not make, and shall not permit any of its Subsidiaries or Eligible Joint Ventures to make, any change in its capital structure (including, without limitation, in the terms of its outstanding Stock) or amend its declaration of trust, certificate of incorporation or by-laws or other equivalent documents other than for changes or amendments which in the aggregate have no Material Adverse Effect. 7.8. Modification of Material Agreements. The Borrower shall not, and shall not permit any of its Subsidiaries or Eligible Joint Ventures to, alter, amend, modify, rescind, terminate, supplement or waive any of their respective rights under, or fail to comply in all material respects with, any of its material Contractual Obligations unless approved by the Administrative Agent, which approval shall not be unreasonably withheld, conditioned or delayed; provided, however, that, with respect to any such failure to comply with any Contractual Obligation, the Borrower shall not be deemed in default of this Section 7.8 if all such failures in the aggregate would have no Material Adverse Effect; and provided, further, that in the event of any breach or event of default by a Person other than the Borrower or any of its Subsidiaries or Eligible Joint Ventures, the Borrower shall promptly notify the Administrative Agent of any such breach or event of default and take all such action as may be reasonably necessary in order to endeavor to avoid having such breach or event of default have a Material Adverse Effect. 7.9. Accounting Changes. The Borrower shall not make, nor permit any of its Subsidiaries to make, any change in accounting treatment and reporting practices or tax reporting treatment, except as required by GAAP or law and disclosed to the Lenders and the Administrative Agent. 105 7.10. Transactions with Affiliates. The Borrower shall not, and shall not permit any of its Subsidiaries or Eligible Joint Ventures, to enter into any transaction or series of related transactions, including, without limitation, any Asset Sale or the rendering of any service, with any Affiliate (other than among the Borrower and its wholly owned Subsidiaries) unless (a) no Default or Event of Default would occur as a result thereof, and (b) such transaction is (i) in the ordinary course of the Borrower's or such Subsidiary's or Eligible Joint Venture's business, and (ii) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary or Eligible Joint Venture, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. 7.11. Adverse or Speculative Transactions. The Borrower shall not and shall not permit any of its Subsidiaries or Eligible Joint Ventures to engage in any transaction involving contracts for commodity options or futures contracts other than Interest Rate Contracts. 7.12. Environmental Matters. (a) The Borrower shall not, and shall not permit any of its Subsidiaries or Eligible Joint Ventures or any Operating Lessee, or, to the extent reasonably practicable, any other Person to dispose of any Hazardous Material by placing it in or on the ground or waters of any property owned or leased by the Borrower or any of its Subsidiaries or Eligible Joint Ventures. (b) The Borrower shall not, and shall not permit any of its Subsidiaries or Eligible Joint Ventures, or, to the extent practicable, authorize any other Person to, dispose or to arrange for the disposal of any Hazardous Material on behalf of the Borrower or any of its Subsidiaries or Eligible Joint Ventures except in material compliance with all applicable Environmental Laws currently and hereinafter in effect. 7.13. Intentionally Omitted. 7.14. Management Continuity. The Borrower acknowledges that the Lenders have made their determination to enter into this Agreement and the transactions contemplated herein on the basis of reliance upon the experience, expertise and reputations of Messrs. Hervey A. Feldman and Thomas J. Corcoran, Jr. as experts in the ownership and asset management of Suite Hotels, and the Borrower will not suffer or permit its business to be 106 without the active management of at least one such Person, provided that, in the event of death, incapacitation or dismissal of both Messrs. Hervey A. Feldman and Thomas J. Corcoran, Jr. a replacement management team shall be appointed for the Borrower, such team to be (i) proposed by the Borrower within 120 days of the event referred to above, and (ii) approved by the Majority Lenders in their sole and absolute discretion. 7.15. ERISA Plan Assets. The Borrower shall not and shall not permit any of its Subsidiaries to have any of their assets become subject to Title I of ERISA because they constitute "plan assets" within the meaning of the DOL Regulation Section 2510.3-101 and by reason of an investment in the Borrower or any Subsidiary. ARTICLE VIII EVENTS OF DEFAULT 8.1. Events of Default. Each of the following events shall be an Event of Default: (a) The Borrower shall fail to pay any principal (including, without limitation, mandatory prepayments of principal) of, or interest on, any Loan, any Unpaid Drawing, any fee, any other amount due hereunder or under the other Loan Documents or other of the Obligations when the same becomes due and payable; or (b) Any representation or warranty made or deemed made by any Loan Party in any Loan Document or by any Loan Party (or any of its officers) in connection with any Loan Document shall prove to have been incorrect in any material respect when made or deemed made; or (c) Any Loan Party shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or in any other Loan Document if such failure shall remain unremedied for thirty days after the earlier of the date on which (A) a Responsible Officer of the Borrower becomes aware of such failure or (B) written notice thereof shall have been given to the Borrower by the Administrative Agent or any Lender; or (d) Any Loan Party or any of its Subsidiaries shall fail to pay any principal of or premium or 107 interest on any Recourse Indebtedness of such Loan Party or Subsidiary having a principal amount of $10,000,000 or more (excluding Indebtedness evidenced by the Notes and any Non-Recourse Indebtedness), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise); or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall become or be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), or any Loan Party or any of its Subsidiaries shall be required to repurchase or offer to repurchase such Indebtedness, prior to the stated maturity thereof; or (e) The Borrower or any of its Significant Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Borrower or any of its Significant Subsidiaries seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a custodian, receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against the Borrower or any of its Significant Subsidiaries (but not instituted by it), either such proceedings shall remain undismissed or unstayed for a period of 60 days or any of the actions sought in such proceedings shall occur; or the Borrower or any of its Significant Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order for the payment of money in excess of $10,000,000 to the extent not fully covered by insurance shall be rendered against any Loan Party or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or 108 (ii) there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) An ERISA Event shall occur which, in the reasonable determination of the Majority Lenders, has a reasonable possibility of a liability, deficiency or waiver request of the Borrower or any ERISA Affiliate,whether or not assessed, exceeding $1,000,000; or (h) The Borrower or any of its Subsidiaries shall have entered into any consent or settlement decree or agreement or similar arrangement with an Governmental Authority or any judgment, order, decree or similar action shall have been entered against the Borrower or any of its Subsidiaries, in each case based on or arising from the violation of or pursuant to any Environmental Law, or the generation, storage, transportation, treatment, disposal or Release of any Hazardous Material and, in connection with all the foregoing, the Borrower and its Subsidiaries are likely to incur Environmental Liabilities and Costs in excess of $1,000,000; or (i) There shall occur a Material Adverse Change or an event which is reasonably likely to have a Material Adverse Effect; or (j) FelCor shall cease, for any reason, to maintain its status as an equity-oriented real estate investment trust under Sections 856 through 860 of the Code; or (k) FelCor shall cease at any time to be the sole general partner of FelCor LP; or (l) Hervey A. Feldman and Thomas J. Corcoran, Jr. (or (i) members of their respective families, (ii) entities controlled by them, or (iii) trusts for the benefit of any of the foregoing) shall cease at any time to hold beneficially, in the aggregate, at least 200,000 of the issued and outstanding common shares of FelCor and/or units of limited partner interests of FelCor LP redeemable for such number of shares of stock (adjusted for any division, reclassification or stock dividend in respect of common shares); or 109 (m) Hervey A. Feldman or Thomas J. Corcoran, Jr. shall sell, transfer or encumber (otherwise than to (i) members of their respective families, (ii) entities controlled by them, or (iii) trusts for the benefit of any of the foregoing) their voting Class A membership interest in DJONT; or (n) Hervey A. Feldman and Thomas J. Corcoran, Jr. shall cease to be active in the management of the Borrower or, in the event of death, in-capacitation or dismissal of both such Persons either (i) the Borrower shall fail to propose a replacement senior management team, or (ii) the Majority Lenders shall not approve any proposed replacement senior management team, in each case pursuant to and in accordance with Section 7.14 hereof; or (o) Any provision of any Subsidiary Guaranty after delivery thereof under Section 3.1 shall for any reason cease to be valid and binding on any Significant Subsidiary party thereto, or any Significant Subsidiary Party shall so state in writing. 8.2. Remedies. (a) If there shall occur and be continuing any Event of Default, the Administrative Agent (i) shall at the request, or may with the consent, of the Majority Lenders by notice to the Borrower, declare the obligation of each Lender to make Loans and the Issuing Lender to issue a Letter of Credit to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders by notice to the Borrower, declare the Loans, all interest thereon and all other amounts and Obligations payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts and Obligations shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that upon the occurrence of the Event of Default specified in subparagraph 8.1(e) above, (A) the obligation of each Lender to make Loans and of the Issuing Lender to issue Letters of Credit shall automatically be terminated and (B) the Loans, all such interest and all such amounts and Obligations shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. In addition to the remedies set forth above, the Administrative Agent may exercise any remedies provided by applicable law. 110 (b) If the Administrative Agent exercises any rights or remedies pursuant to subparagraph 8.2(a), the Administrative Agent shall not, without the consent of the Majority Lenders, rescind the exercise of said rights or remedies. ARTICLE IX THE ADMINISTRATIVE AGENT 9.1. Authorization and Action. (a) Each Lender hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. Without limitation of the foregoing, each Lender hereby authorizes the Administrative Agent to execute and deliver, and to perform its obligations under, each of the Loan Documents to which the Administrative Agent is a party, and to exercise all rights, powers and remedies that the Administrative Agent may have under such Loan Documents. (b) As to any matters not expressly provided for by this Agreement and the other Loan Documents (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Administrative Agent shall not be required to take any action which the Administrative Agent in good faith believes exposes it to personal liability or is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Lender prompt notice of (a) each notice and, (b) to the extent the Administrative Agent grants any consents, approvals, disapprovals or waivers to the Borrower pursuant to the directions of the Majority Lenders or all of the Lenders as required hereunder, notice of such consent, approval, disapproval or waiver, given to it by, or by it to, any Loan Party pursuant to the terms of this Agreement or the other Loan Documents. 111 9.2. Administrative Agent's Reliance, Etc. Neither the Administrative Agent, nor any of its Affiliates or any of the respective directors, officers, agents or employees of the Administrative Agent or any such Affiliate shall be liable for any action taken or omitted to be taken by it, him, her or them under or in connection with this Agreement or the other Loan Documents, except for its, his, her or their own gross negligence or wilful misconduct. Without limitation of the generality of the foregoing, the Administrative Agent (i) may treat the payee of any Note as the holder thereof until such note has been assigned in accordance with Section 10.7; (ii) may rely on the Register to the extent set forth in Section 10.7(c); (iii) may consult with legal counsel (including, without limitation, counsel to the Borrower or any other Loan Party), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iv) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made in or in connection with this Agreement or any of the other Loan Documents; (v) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any of the other Loan Documents on the part of the Borrower or any other Loan Party or to inspect the property (including, without limitation, the books and records) of the Borrower or any other Loan Party; (vi) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; and (vii) shall incur no liability under or in respect of this Agreement or any of the other Loan Documents by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, cable, telex or facsimile transmission) believed by it to be genuine and signed or sent by the proper party or parties. 9.3. Chase and Affiliates. With respect to its Commitment, the Loans made by it and each Note issued to it, Chase shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Administrative Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Chase in its individual capacity. Chase and its affiliates may accept deposits from, lend money to, 112 act as trustee under indentures of, and generally engage in any kind of business with, the Borrower or any other Loan Party or any of their respective Subsidiaries and any Person who may do business with or own securities of the Borrower or any other Loan Party or any of their respective Subsidiaries, all as if Chase were not the Administrative Agent and without any duty to account therefor to the Lenders. 9.4. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on the financial statements referred to in Article IV and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and other Loan Documents. 9.5. Indemnification. The Lenders agree to indemnify the Issuing Lender, the Administrative Agent and their Affiliates, and their respective directors, officers, employees, agents and advisors (to the extent not reimbursed by the Borrower or other Loan Parties), ratably according to the respective principal amounts of the Notes then held by each of them (or if no Notes are at the time outstanding, ratably according to the respective amounts of the aggregate of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements (including, without limitation, fees and disbursements of legal counsel) of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against, the Administrative Agent in any way relating to or arising out of this Agreement or the other Loan Documents or any action taken or omitted by the Administrative Agent under this Agreement or the other Loan Documents; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's or such Affiliate's gross negligence or wilful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including, 113 without limitation, fees and disbursements of legal counsel) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of its rights or responsibilities under, this Agreement or the other Loan Documents, to the extent that the Administrative Agent is not reimbursed for such expenses by the Borrower or another Loan Party. 9.6. Successor Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed by the Super Majority Lenders in the event that the Administrative Agent commits a willful breach of, or is grossly negligent in the performance of, its material obligations hereunder. Furthermore, in the event that at any time the Administrative Agent assigns its entire interest as a Lender hereunder to an Eligible Assignee as permitted by Section 10.7 hereof, which Eligible Assignee is not an Affiliate of the Administrative Agent, then the Administrative Agent shall resign as Administrative Agent. Upon any such resignation or removal (which shall be effective upon such date as a successor Agent accepts its appointment), the Majority Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Super Majority Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof, having a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. 114 ARTICLE X MISCELLANEOUS 10.1. Amendments, Etc. (a) No amendment or waiver of any provision of this Agreement nor consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that, subject to Sections 10.1(b) and (c) below, the Administrative Agent shall have the right to make non-material waivers of non-economic provisions of this Agreement or consent to non- material departures therefrom. The parties hereto agree that any non-material waiver of any provision of this Agreement or any other Loan Document shall be effective upon the execution by the party so charged of a written agreement to such effect. (b) Notwithstanding anything set forth in subparagraph (a) above, no amendment, waiver or consent shall, unless in writing and signed by all the Lenders do any of the following: (i) waive any of the conditions specified in Article III except as otherwise provided therein; (ii) increase the Commitments of the Lenders or subject the Lenders to any additional obligations; (iii) reduce the principal of, or interest on, the Loans or any fees or other amounts payable hereunder; (iv) waive or postpone any date fixed for any payment of principal of, or interest on, the Loans or any fees or other amounts payable hereunder; (v) change the percentage of the Commitments, the aggregate unpaid principal amount of the Loans, or the number of Lenders which shall be required for the Lenders or any of them to take any action hereunder; (vi) waive any of the financial covenants specified in Sections 5.1, 5.2 or 5.4; (vii) change the definitions of Available Credit, Borrowing Base or Aggregate Value (provided that the foregoing shall not include changes in any defined terms used in such definitions), (viii) release any Loan Party from its obligations under any Note or any Subsidiary Guaranty, or (ix) amend this Section 10.1; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Administrative Agent under this Agreement or the other Loan Documents. 115 (c) Notwithstanding anything set forth in subparagraph (a) above, no amendment, waiver or consent shall, unless in writing and signed by the Super Majority Lenders do any of the following: (i) waive any of the covenants specified in Sections 5.3 or 5.5, (ii) change the definitions of Eligible Hotels, Eligible Joint Venture or Qualified Lease (provided that the foregoing shall not include changes in any defined terms used in such definitions), (iii) waive payment of any default rate interest pursuant to Section 2.9(b), or (iv) remove the Administrative Agent for a willful breach of, or gross negligence in the performance of, its material obligations hereunder pursuant to Section 9.6. (d) Each Lender shall reply promptly, but in any event within ten (10) Business Days of receipt by such Lender of a request for consent, approval, disapproval or waiver, from the Administrative Agent (the "Lender Reply Period"). Unless a Lender shall give written notice to the Administrative Agent that it objects to consenting, approving, disapproving or waiving any matter as requested by the Administrative Agent (together with a written explanation of the reasons behind such objection) within the Lender Reply Period, such Lender shall be deemed to have consented, approved, disapproved or waived such matters as specified in the Administrative Agent's request. 10.2. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including, without limitation, telegraphic, telex, telecopy or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered by hand, if to the Borrower, at its address at 545 East John Carpenter Freeway, Suite 1300, Irving, Texas 75062 (telecopy number: 972-444-4949) (telephone number: 972-444-4900), Attention: Chief Financial Officer, with a copy to Attention: General Counsel; if to any Lender, at its Domestic Lending Office specified opposite its name on Schedule II; and if to the Administrative Agent, at its address at 380 Madison Avenue, 10th Floor, New York, New York 10017 (telecopy number: 212-622-3395) (telephone number: 212-622-3275), Attention Denise Durham Williams; or, as to the Borrower or the Administrative Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Administrative Agent. All such notices and communications shall, when mailed, telegraphed, telexed, telecopied, cabled or delivered, be effective when deposited 116 in the mails, delivered to the telegraph company, confirmed by telex answerback, telecopied with confirmation of receipt, delivered to the cable company or delivered by hand to the addressee or its agent, respectively, except that notices and communications to the Administrative Agent pursuant to Article II or IX shall not be effective until received by the Administrative Agent. 10.3. No Waiver; Remedies. No failure on the part of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 10.4. Costs; Expenses; Indemnities. (a) The Borrower agrees to pay on demand (i) all costs and expenses of the Administrative Agent and its respective Affiliates in connection with the preparation, execution, delivery, administration, syndication, modification and amendment of this Agreement, each of the other Loan Documents and each of the other documents to be delivered hereunder and thereunder, including, without limitation, the fees and out-of-pocket expenses of counsel, accountants, appraisers, consultants or industry experts retained by the Administrative Agent with respect thereto and, as to the Administrative Agent, with respect to advising it as to its rights and responsibilities under this Agreement and the other Loan Documents, and (ii) all costs and expenses of the Administrative Agent or any of the Lenders (including, without limitation, the fees and out-of-pocket expenses of counsel, accountants, appraisers, consultants or industry experts retained by the Administrative Agent or any Lender) in connection with the restructuring or enforcement (whether through negotiation, legal proceedings or otherwise) of this Agreement and the other Loan Documents. (b) The Borrower agrees to indemnify and hold harmless the Administrative Agent, each Lender and the Issuing Lender and their respective Affiliates, and the directors, officers, employees, agents, attorneys, consultants and advisors of or to any of the foregoing (including, without limitation, those retained in connection with the satisfaction or attempted satisfaction of any of the conditions set forth in Article III) (each of the foregoing being an "Indemnitee") from and against any and all claims, damages, liabilities, obligations, losses, 117 penalties, actions, judgments, suits, costs, disbursements and expenses of any kind or nature (including, without limitation, fees and disbursements of counsel to any such Indemnitee and experts, engineers and consultants and the costs of investigation and feasibility studies) which may be imposed on, incurred by or asserted against any such Indemnitee in connection with or arising out of any investigation, litigation or proceeding, whether or not any such Indemnitee is a party thereto, whether direct, indirect, or consequential and whether based on any federal, state or local law or other statutory regulation, securities or commercial law or regulation, or under common law or in equity, or on contract, tort or otherwise, in any manner relating to or arising out of or based upon or attributable to this Agreement, any other Loan Document, any document delivered hereunder or thereunder, any Obligation, or any act, event or transaction related or attendant to any thereof, including, without limitation, (i) arising from any misrepresentation or breach of warranty under Section 4.18 or any Environmental Claim or any Environmental Lien or any Remedial Action arising out of or based upon anything relating to real property owned or leased by the Borrower or any of its Subsidiaries (collectively, the "Indemnified Matters"); provided, however, that the Borrower shall not have any obligation under this Section 10.4(b) to an Indemnitee with respect to any Indemnified Matter caused by or resulting from the gross negligence or willful misconduct of that Indemnitee, as determined by a court of competent jurisdiction in a final non-appealable judgment or order. (c) If any Lender receives any payment of principal of, or is subject to a conversion of, any Eurodollar Rate Loan other than on the last day of an Interest Period relating to such Loan, as a result of any payment or conversion made by the Borrower or acceleration of the maturity of the Notes pursuant to Section 8.2 or for any other reason, the Borrower shall, upon demand by such Lender (with a copy of such demand to the Administrative Agent), to the extent not previously paid to such Lender pursuant to any other provision hereof, pay to the Administrative Agent for the account of such Lender all amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment or conversion, including, without limitation, any loss (including, without limitation, loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund or maintain such Loan. 118 (d) The Borrower shall indemnify the Administrative Agent, the Lenders and the Issuing Lender for, and hold the Administrative Agent, the Lenders and the Issuing Lender harmless from and against, any and all claims for brokerage commissions, fees and other compensation made against the Administrative Agent and the Lenders for any broker, finder or consultant with respect to any agreement, arrangement or understanding made by or on behalf of any Loan Party or any of its Subsidiaries in connection with the transactions contemplated by this Agreement. (e) The Borrower agrees that any indemnification or other protection provided to any Indemnitee pursuant to this Agreement (including, without limitation, pursuant to this Section 10.4) or any other Loan Document shall (i) survive payment of the Obligations and (ii) inure to the benefit of any Person who was at any time an Indemnitee under this Agreement or any other Loan Document. 10.5. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default each Lender and the Issuing Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the Obligations now or hereafter existing whether or not such Lender shall have made any demand under this Agreement or any Note or any other Loan Document and although such Obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section are in addition to the other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have. 10.6. Binding Effect. This Agreement shall become effective as of the Effective Date and thereafter shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent, each Lender and the Issuing Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. 119 10.7. Assignments and Participations. (a) Each Lender and the Issuing Lender may sell, transfer, negotiate or assign to one or more other Lenders or Eligible Assignees all or a portion of its Commitments, commitment to issue Letters of Credit, the Loans and Letter of Credit Outstandings owing to it and the Notes held by it and a commensurate portion of its rights and obligations hereunder and under the other Loan Documents; provided, however, that (i) the aggregate amount of the Commitments, Loans and Letter of Credit Outstandings being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than the assignor's entire interest, except (x) with the consent of the Borrower and the Administrative Agent, or (y) during the continuance of an Event of Default, or (z) a Lender may assign a portion of its Commitments, Loans and Letter of Credit Outstandings to another existing Lender or Lenders only, provided that the aggregate amount of the Commitments, Loans and Letter of Credit Outstandings retained by the assignor shall in no event be less than $10,000,000, and (ii) each assignee hereunder shall also be an Eligible Assignee. The parties to each assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording, an Assignment and Acceptance, together with the Notes (or an Affidavit of Loss and Indemnity with respect to such Notes satisfactory to the Administrative Agent) subject to such assignment. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (A) the assignee thereunder shall become a party hereto and, to the extent that rights and obligations under the Loan Documents have been assigned to such assignee pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and thereunder, and (B) the assignor thereunder shall, to the extent that rights and obligations under this Agreement have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except those which survive the payment in full of the Obligations) and be released from its obligations under the Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under the Loan Documents, such Lender shall cease to be a party hereto). (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided 120 in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any of the statements, warranties or representations made in or in connection with this Agreement or any other Loan Document furnished pursuant thereto or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document or any other instrument or document furnished pursuant hereto or thereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party or the performance or observance by any Loan Party of any of its obligations under this Agreement or any other Loan Document or of any other instrument or document furnished pursuant hereto or thereto; (iii) such assigning Lender confirms that it has delivered to the assignee and the assignee confirms that it has received a copy of this Agreement and each of the Loan Documents together with a copy of the most recent financial statements delivered by the Borrower to the Lenders pursuant to each of the clauses of Section 6.11 (or if no such statements have been delivered, the financial statements referred to in Section 4.5 of this Agreement) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender and if such assignor was the Issuing Lender, of the Issuing Lender. (c) The Administrative Agent shall maintain at its address referred to in Section 10.2 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitments of and 121 principal amount of the Loans and Letters of Credit Outstandings owing to each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Loan Parties, the Administrative Agent, the Issuing Lender and the Lenders may treat each Person whose name is recorded in the Register as a Lender for all purposes of this Agreement. The Register shall be available for inspection by the Borrower, the Administrative Agent, the Issuing Lender or any Lender at any reasonable time and from time to time upon reasonable prior notice. The Administrative Agent shall supply to the Borrower promptly after any amendment thereto, a copy of the amended Register. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender or Issuing Lender and an assignee representing that it is an Eligible Assignee, together with the Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent, in exchange for such surrendered Notes, new Notes to the order of such Eligible Assignee in an amount equal to the Commitments assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained Commitments hereunder, new Notes to the order of the assigning Lender in an amount equal to the Commitments retained by it hereunder. Such new Notes shall be dated the same date as the Surrendered Notes and be in substantially the form of Exhibit A hereto. (e) In addition to the other assignment rights provided in this Section 10.7, each Lender may assign, as collateral or otherwise, any of its rights under this Agreement (including, without limitation, rights to payments of principal or interest on the Loans) to any Federal Reserve Bank without notice to or consent of the Borrower or the Administrative Agent; provided, however, that no such assignment shall release the assigning Lender from any of its obligations hereunder. The terms and conditions of any such assignment and the documentation evidencing such assignment shall be in form and substance satisfactory to the assigning Lender and the assignee Federal Reserve Bank. 122 (f) Each Lender may sell participations to one or more banks or other Persons in or to all or a portion of its rights and obligations under the Loan Documents (including, without limitation, all or a portion of its Commitments, the Loans and Letters of Credit Outstandings owing to it and the Notes held by it). The terms of such participation shall not, in any event, require the participant's consent to any amendments, waivers or other modifications of any provision of any Loan Documents, the consent to any departure by any Loan Party therefrom, or to the exercising or refraining from exercising any powers or rights which such Lender may have under or in respect of the Loan Documents (including, without limitation, the right to enforce the obligations of the Loan Parties), except if any such amendment, waiver or other modification or consent would reduce the amount, or postpone any date fixed for, any amount (whether of principal, interest or fees) payable to such participant under the Loan Documents, to which such participant would otherwise be entitled under such participation. In the event of the sale of any participation by any Lender, (i) such Lender's obligations under the Loan Documents (including, without limitation, its Commitments) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of such Notes and Obligations for all purposes of this Agreement, and; (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. (g) Each participant shall be entitled to the benefits of Sections 2.11, 2.13 and 2.15 as if it were a Lender; provided, however, that anything herein to the contrary notwithstanding, the Borrower shall not, at any time, be obligated to pay to any assignee or participant of any interest of any Lender, under Section 2.11, 2.13 or 2.15, any sum in excess of the sum which if the Borrower would not at the time of such assignment have been obligated to pay to such assignor Lender any such amount in respect of such interest had such assignment not been effected or had such participation not been sold. (h) Notwithstanding the foregoing provisions of this Section 10.7, (i) the aggregate Commitments and Loans of Chase shall not be less than $20,000,000, and (ii) the aggregate Commitments and Loans of Wells Fargo shall not be less than $20,000,000; provided that, if an Event of Default 123 exists, either Chase or Wells Fargo may assign all or any portion of their respective Commitments and Loans. 10.8. Governing Law; Severability. This Agreement and the Notes and the rights and obligations of the parties hereto and thereto shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10.9. Submission to Jurisdiction; Service of Process. (a) Any legal action or proceeding with respect to this Agreement or the Notes or any document related thereto may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The parties hereto hereby irrevocably waive any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which any of them may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. (b) The Borrower irrevocably consents to the service of process of any of the aforesaid courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower at its address provided herein. (c) Nothing contained in this Section 10.9 shall affect the right of the agent, any Lender or any holder of a Note to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. 10.10. Section Titles. The Section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 124 10.11. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 10.12. Entire Agreement. This Agreement, together with all of the other Loan Documents and all certificates and documents delivered hereunder or thereunder, and the agreements referred to in Section 2.4(b) embody the entire agreement of the parties and supersedes all prior agreements and understandings relating to the subject matter hereof. 10.13. Confidentiality. Each Lender and the Administrative Agent agree to keep information obtained by it pursuant hereto and the other Loan Documents confidential and agrees that it will only use such information in connection with the transactions contemplated by this Agreement and not disclose any of such information other than (i) to such Lender's or the Administrative Agent's, as the case may be, employees, representatives and agents who are or are expected to be involved in the evaluation of such information in connection with the transactions contemplated by this Agreement and who are advised of the confidential nature of such information, (ii) to the extent such information presently is or hereafter becomes available to such Lender or the Administrative Agent, as the case may be, on a non- confidential basis from a source other than the Borrower, (iii) to the extent disclosure is required by law, regulation or judicial order or requested or required by bank regulators or auditors, or (iv) to assignees or participants or potential assignees or participants who agree to be bound by the provisions of this sentence. 10.14. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, VERBAL OR WRITTEN STATEMENT OR ACTION OF ANY PARTY HERETO. 10.15. Joint and Several Obligations. Unless the context clearly indicates otherwise each covenant, agreement, undertaking, condition or other matter stated herein as a covenant, agreement, undertaking or matter involving the Borrower shall be jointly and severally binding upon each of the parties comprising Borrower. 125 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. FELCOR SUITE HOTELS, INC. By: /s/ LAWRENCE D. ROBINSON ------------------------------ Name: Lawrence D. Robinson Title: Senior Vice President FELCOR SUITES LIMITED PARTNERSHIP By: FelCor Suite Hotels, Inc. its general partner By /s/ LAWRENCE D. ROBINSON ------------------------------ Name: Lawrence D. Robinson Title: Senior Vice President THE CHASE MANHATTAN BANK as Administrative Agent By: /s/ DENISE D. WILLIAMS ------------------------------ Name: Denise D. Williams Title: Vice President WELLS FARGO BANK, NATIONAL ASSOCIATION as Documentation Agent By: /s/ STEPHEN P. PRINZ ------------------------------ Name: Stephen P. Prinz Title: Executive Vice President
126 Lenders THE CHASE MANHATTAN BANK By: /s/ DENISE D. WILLIAMS ------------------------------ Name: Denise D. Williams Title: Vice President WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ STEPHEN P. PRINZ ------------------------------ Name: Stephen P. Prinz Title: Executive Vice President BANK ONE, TEXAS, N.A. By: /s/ Eddie Hodges ------------------------------ Name: Eddie Hodges Title: Assistant Vice President THE FIRST NATIONAL BANK OF BOSTON By: /s/ S. SELBO ------------------------------ Name: Steven P. Selbo Title: Vice President PNC BANK, NATIONAL ASSOCIATION By: /s/ THERON D. IMBRIE ------------------------------ Name: Theron D. Imbrie Title: Vice President
127 NATIONSBANK OF TEXAS, N.A. By: /s/ RICK BOWEN ------------------------------ Name: Rick Bowen Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/ GREGORY A. GILBERT ------------------------------ Name: Gregory A. Gilbert Title: Vice President AMSOUTH BANK OF ALABAMA By: /s/ LAWRENCE CLARK ------------------------------ Name: Lawrence Clark Title: Vice President SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ THOMAS K. DAY ------------------------------ Name: Thomas K. Day Title: Vice President CREDIT LYONNAIS, NEW YORK BRANCH By: /s/ LINDA D. TULLOCK ------------------------------ Name: Linda D. Tullock Title: Assistant Vice President BANK OF MONTREAL (CHICAGO BRANCH) By: /s/ MAUREEN T. MILLS ------------------------------ Name: Maureen T. Mills Title: Director
128 CIBC INC. By: CIBC WOOD GUNDY SECURITIES, CORP., AS AGENT By: /s/ CHERYL L. ROOT ------------------------------ Name: Cheryl L. Root Title: Director THE SUMITOMO BANK, LIMITED By: /s/ PETER F. SCHERER ------------------------------ Name: Peter F. Scherer Title: Joint General Manager THE BANK OF NOVA SCOTIA By: /s/ MELVIN MANDELBAUM ------------------------------ Name: Melvin Mandelbaum Title: Unit Head SIGNET BANK By: /s/ ERIC A. LAWRENCE ------------------------------ Name: Eric A. Lawrence Title: Senior Vice President BANKERS TRUST COMPANY By: /s/ GARRETT W. THELANDER ------------------------------ Name: Garrett W. Thelander Title: Vice President
129 FIRST NATIONAL BANK OF COMMERCE By: /s/ HONORE ASCHAFFERINING ------------------------------ Name: Honore Aschafferining Title: Assistant Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW YORK BRANCH By: /s/ ISMAIL IBRAHIM ------------------------------ Name: Ismail Ibrahim Title: Deputy General Manager
130 SCHEDULE I COMMITMENTS
Commitment ---------- Administrative Agent and Arranger - --------------------------------- The Chase Manhattan Bank $42,000,000 Documentation Agent and Arranger - -------------------------------- Wells Fargo Bank $42,000,000 Co-Lead Agents - -------------- Bank of Montreal (Chicago Branch) $40,000,000 The Bank of Nova Scotia $40,000,000 CIBC Inc. $40,000,000 The First National Bank of Chicago $40,000,000 NationsBank of Texas, N.A. $40,000,000 Societe Generale Southwest Agency $40,000,000 Co-Agents - --------- Credit Lyonnais, New York Branch $33,000,000 PNC Bank, National Association $33,000,000 Other Lenders - ------------- AmSouth Bank of Alabama $30,000,000 The First National Bank of Boston $30,000,000 Bank One, Texas, N.A. $20,000,000 Bankers Trust Company $20,000,000 Signet Bank $20,000,000 The Sumitomo Bank, Limited $20,000,000
131 First National Bank of Commerce $10,000,000 The Long-Term Credit Bank $10,000,000 of Japan, Limited, New York Branch TOTAL: $550,000,000 ============
132 SCHEDULE II APPLICABLE LENDING OFFICES AND ADDRESSES FOR NOTICES
Domestic Lending Office and Address Eurodollar Lender for Notices Lending Office - ------ ------------------ -------------- Chase 380 Madison Avenue 380 Madison Avenue 10th Floor 10th Floor New York, NY 10017 New York, NY 10017 Attention: Linda Rodriguez Attention: Linda Rodriguez Telecopy: (212) 622-3395 Telecopy: (212) 622-3395 Wells Fargo 2120 East Park Place 2120 East Park Place Suite 100 Suite 100 El Segundo, CA 90245 El Segundo, CA 90245 Attention: Disbursements Attention: Match Fundings Administrator Administrator Telecopy: (310) 335-1014 Telecopy: (310) 335-1014 Bank One Bank One, Texas Bank One, Texas Texas 1717 Main 1717 Main Dallas, TX 75201 Dallas, TX 75201 Attention: Eddie Hodges Attention: Eddie Hodges Telecopy: (214) 290-2275 Telecopy: (214) 290-2275 BankBoston, 115 Perimeter Ctr Place 115 Perimeter Ctr Place N.A. Suite 500 Suite 500 Atlanta, GA 30346 Atlanta, GA 30346 Attention: Steven P. Attention: Jeanette Selbo Streander Telecopy: (770) 390-8434 Telecopy: (770) 390-8434 PNC Bank, One PNC Plaza, P1-POPP-19-2 One PNC Plaza, P1-POPP-19-2 National 249 Fifth Avenue 249 Fifth Avenue Association Pittsburgh, PA 15222-2702 Pittsburgh, PA 15222-2707 Attention: Jan Dotchin Attention: Jan Dotchin Telecopy: (412) 768-5754 Telecopy: (412) 768-5754 NationsBank 901 Main 901 Main 51st Floor 51st Floor Dallas, TX 75224 Dallas, TX 75224 Attn: John Lamb Attn: Michael Green Telecopy: (214) 508-0085 Telecopy: (214) 508-1571
133 The First One First National Plaza One First National Plaza National Suite 0151 Suite 0151 Bank of Chicago, IL 60607 Chicago, IL 60607 Chicago Attention: Rebecca Attention: Ernest M. McCloskey Misioria Telecopy: (312) 732-1117 Telecopy: (312) 732-1117 AmSouth Bank P.O. Box 11007 P.O. Box 11007 of Alabama Birmingham, AL 35288 Birmingham, AL 35288 Attention: Buddy Sharbel Attention: Buddy Sharbel Telecopy: (205) 326-4075 Telecopy: (205) 326-4075 Societe 2001 Ross Avenue 2001 Ross Avenue Generale Suite 4900 Suite 4900 Southwest Dallas, TX 75201 Dallas, TX 75201 Agency Attention: Carina Huynh Attention: Becky Aduddell Telecopy: (214) 979-2727 Telecopy: (214) 979-2727 Credit 1301 Avenue of the Americas 1301 Avenue of the Americas Lyonnais New York, NY 10019 New York, NY 10019 Attention: Mischa Zabotin Attention: Hotel Finance/ 18th Floor Telecopy: (212) 261-7540 Telecopy: (212) 261-7890 Bank of 115 South La Salle St. 115 South La Salle St. Montreal Chicago, IL 60603 Chicago, IL 60603 (Chicago Attention: David Mazujian Attention: Debra Sandt Branch) Telecopy: (312) 750-4352 Telecopy: (312) 750-4345 CIBC Inc. 2727 Paces Road 2727 Paces Road Suite 1200 Suite 1200 Atlanta, GA 30339 Atlanta, GA 30339 Attention: Ken Auchter Attention: Ken Auchter Telecopy: (770) 319-4950 Telecopy: (770) 319-4950 The Sumitomo Sears Tower Sears Tower Bank Suite 4800 Suite 4800 Limited 233 South Wacker Drive 233 South Wacker Drive Chicago, IL 60606 Chicago, IL 60606 Attention: Tom Batterham Attention: Tom Batterham Telecopy: (312) 876-6436 Telecopy: (312) 876-6436
134 The Bank of Real Estate Banking 600 Peachtree St., N.E. Nova Scotia One Liberty Plaza Suite 2700 New York, NY 10006 Atlanta, GA 30308 Attention: Attention: Craig Subryan Telecopy: (212) 225-5166 Telecopy: (404) 888-8998 Signet Bank 7799 Leesburg Pike 7799 Leesburg Pike 3rd Floor 4th Floor Falls Church, VA 22043 Falls Church, VA 22043 Attention: Eric Lawrence Attention: Nancy Richards Telecopy: (703) 206-0284 Telecopy: (703) 206-0284 First National First NBC Center First NBC Center Bank of 201 St. Charles Ave. 201 St. Charles Ave. Commerce 28th Floor 28th Floor New Orleans, LA 70170 New Orleans, LA 70170 Attention: Honore Kamala Hutchinson Aschaffenburg Telecopy: (504) 623-1378 Telecopy: (504) 623-1738 Bankers Trust 130 Liberty Street,25th Flr. 103 Liberty Street Company New York, NY 10006 New York, NY 10006 Attention: Caryl Mooney Attention: Wendy Williams Telecopy: (212) 669-0732 Telecopy: (212) 250-7351 The Long-Term 165 Broadway 165 Broadway Credit Bank New York, NY 10006 New York, NY 10006 of Japan, Attention: Nozomi Moue Attention: James Schiavone Limited, New Telecopy: (212) 608-3058 Telecopy: (212) 608-3452 York Branch
EX-10.25 7 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.25 EXECUTION COPY REGISTRATION RIGHTS AGREEMENT Dated September 26, 1997 AMONG FELCOR SUITES LIMITED PARTNERSHIP, FELCOR SUITE HOTELS, INC. and MORGAN STANLEY & CO. INCORPORATED NATIONSBANC CAPITAL MARKETS, INC. SALOMON BROTHERS INC 2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into September 26, 1997, between FELCOR SUITES LIMITED PARTNERSHIP, a Delaware limited partnership (the "Operating Partnership"), FELCOR SUITE HOTELS, INC., a Maryland corporation ("FelCor" and, together with the Operating Partnership, the "Company"), and MORGAN STANLEY & CO. INCORPORATED, NATIONSBANC CAPITAL MARKETS, INC. AND SALOMON BROTHERS INC (the "Placement Agents"). This Agreement is made pursuant to the Placement Agreement dated the date hereof, between the Operating Partnership, FelCor and the Placement Agents (the "Placement Agreement"), which provides for the sale by the Operating Partnership to the Placement Agents of $175,000,000 aggregate principal amount of 7 3/8% Senior Notes Due 2004 of the Operating Partnership and $125,000,000 aggregate principal amount of 7 5/8% Senior Notes Due 2007 of the Operating Partnership (collectively, the "Notes") to be issued pursuant to the Indenture (as defined below). The Notes will be guaranteed on a senior unsecured basis by FelCor and the Subsidiary Guarantors (as defined herein) so long as they are obligors on other indebtedness of FelCor and the Operating Partnership which is pari passu with or subordinated to the Notes. In order to induce the Placement Agents to enter into the Placement Agreement, the Company has agreed to provide to the Placement Agents and their direct and indirect transferees the registration rights with respect to the Notes set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Placement Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "1933 Act" shall mean the Securities Act of 1933, as amended from time to time. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Closing Date" shall mean the Closing Date as defined in the Placement Agreement. "Company" shall have the meaning set forth in the preamble to this Agreement and shall also include the Company's successors. "Exchange Offer" shall mean the exchange offer by the Company of Exchange Notes for Registrable Notes pursuant to Section 2(a) hereof. "Exchange Offer Registration" shall mean a registration under the 1933 Act effected pursuant to Section 2(a) hereof. "Exchange Offer Registration Statement" shall mean an exchange offer registration 1 3 statement on Form S-4 (or, if applicable, on another appropriate form) and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchange Notes" shall mean Notes issued by Operating Partnership under the Indenture containing terms identical to the Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Notes or, if no such interest has been paid, from October 1, 1997, (ii) the Exchange Notes will not contain restrictions on transfer and (iii) certain provisions relating to an increase in the stated rate of interest thereon shall be eliminated) and to be offered to Holders of Notes in exchange for Notes pursuant to the Exchange Offer. "Holder" shall mean the Placement Agents, for so long as they own any Registrable Notes, and each of their successors, assigns and direct and indirect transferees who become registered owners of Registrable Notes under the Indenture; provided that for purposes of Sections 4 and 5 of this Agreement, the term "Holder" shall include Participating Broker-Dealers (as defined in Section 4(a)). "Indenture" shall mean the Indenture relating to the Notes to be dated as of October 1, 1997, between the Operating Partnership, FelCor, the Subsidiary Guarantors and SunTrust Bank, Atlanta, as trustee, and as the same may be amended from time to time in accordance with the terms thereof. "Majority Holders" shall mean the Holders of a majority of the aggregate principal amount of outstanding Registrable Notes; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Notes is required hereunder, Registrable Notes held by the Company or any of its affiliates (as such term is defined in Rule 405 under the 1933 Act) (other than the Placement Agents or subsequent holders of Registrable Notes if such subsequent holders are deemed to be such affiliates solely by reason of their holding of such Registrable Notes) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage or amount. "Notes" shall have the meaning set forth in the second paragraph of this Agreement. "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Placement Agents" shall have the meaning set forth in the preamble to this Agreement. "Placement Agreement" shall have the meaning set forth in the preamble to this Agreement. "Prospectus" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any 2 4 prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Notes covered by a Shelf Registration Statement, and by all other amendments and supplements to such prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Notes or Registrable Notes), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the fees and disbursements of the Trustee and its counsel, (vii) the fees and disbursements of counsel for the Company and, in the case of a Shelf Registration Statement, the reasonable fees and disbursements of one counsel for the Holders (which counsel shall be selected by the Majority Holders and which counsel may also be counsel for the Placement Agents) and (viii) the fees and disbursements of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the underwriters (other than reasonable fees and expenses set forth in clause (ii) above) or the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Notes by a Holder. "Registrable Notes" shall mean the Notes other than the Exchanges Notes; provided, however, that the Notes shall cease to be Registrable Notes (i) when a Registration Statement with respect to such Notes shall have been declared effective under the 1933 Act and such Notes shall have been disposed of pursuant to such Registration Statement, (ii) when such Notes have been sold to the public pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the 1933 Act or (iii) when such Notes shall have ceased to be outstanding. "Registration Statement" shall mean any registration statement of FelCor and the Operating Partnership that covers any of the Exchange Notes or Registrable Notes pursuant to the provisions of this Agreement and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SEC" shall mean the Securities and Exchange Commission. "Shelf Registration" shall mean a registration effected pursuant to Section 2(b) hereof. 3 5 "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(b) of this Agreement which covers all of the Registrable Notes (but no other Notes unless approved by the Holders whose Registrable Notes are covered by such Shelf Registration Statement) on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Subsidiary Guarantors" shall mean each of (i) FelCor/CSS Hotels, L.L.C., a Delaware limited liability company, (ii) FelCor/LAX Hotels, L.L.C., a Delaware limited liability company, (iii) FelCor/CSS Holdings, L.P., a Delaware limited partnership, (iv) FelCor/St. Paul Holdings, L.P., a Delaware limited partnership, (v) FelCor/LAX Holdings, L.P., a Delaware limited partnership and (vi) FelCor Eight Hotels, L.L.C., a Delaware limited liability company and each other entity that becomes a Subsidiary Guarantor in accordance with the terms of the Indenture. "Trustee" shall mean the trustee with respect to the Securities under the Indenture. "Underwritten Registration" or "Underwritten Offering" shall mean a registration in which Registrable Notes are sold to an Underwriter (as hereinafter defined) for reoffering to the public. 2. Registration Under The 1933 Act. (a) To the extent not prohibited by any applicable law or applicable interpretation of the Staff of the SEC, the Company shall cause to be filed after the Closing Date an Exchange Offer Registration Statement covering the offer by the Company to the Holders to exchange all of the Registrable Notes for Exchange Notes, to have such Registration Statement declared effective by the SEC, and to have such Exchange Offer Registration Statement remain effective until the closing of the Exchange Offer. The Company shall commence the Exchange Offer promptly after the Exchange Offer Registration Statement has been declared effective by the SEC and use its best efforts to have the Exchange Offer consummated not later than six months after the Closing Date. The Company shall commence the Exchange Offer by mailing the related exchange offer Prospectus and accompanying documents to each Holder stating, in addition to such other disclosures as are required by applicable law (i) that the Exchange Offer is being made pursuant to this Registration Rights Agreement and that all Registrable Notes validly tendered will be accepted for exchange; (ii) the dates of acceptance for exchange (which shall be a period of at least 20 business days from the date such notice is mailed) (the "Exchange Dates"); (iii) that any Registrable Note not tendered will remain outstanding and continue to accrue interest in accordance with the terms of the Notes, but will not retain any rights under this Registration Rights Agreement; 4 6 (iv) that Holders electing to have a Registrable Note exchanged pursuant to the Exchange Offer will be required to surrender such Registrable Note, together with the enclosed letters of transmittal, to the institution and at the address located in the Borough of Manhattan, The City of New York, specified in the notice prior to the close of business on the last Exchange Date; and (v) that Holders will be entitled to withdraw their election, not later than the close of business on the last Exchange Date, by sending to the institution and at the address located in the Borough of Manhattan, The City of New York, specified in the notice a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Notes delivered for exchange and a statement that such Holder is withdrawing his election to have such Notes exchanged. As soon as practicable after the last Exchange Date, the Company shall: (i) accept for exchange Registrable Notes or portions thereof tendered and not validly withdrawn pursuant to the Exchange Offer; and (ii) deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Notes or portions thereof so accepted for exchange by the Company and issue, and cause the Trustee to promptly authenticate and mail to each Holder, an Exchange Note equal in principal amount to the principal amount of the Registrable Notes surrendered by such Holder. The Company shall use its best efforts to complete the Exchange Offer as provided above and shall comply with the applicable requirements of the 1933 Act, the 1934 Act and other applicable laws and regulations in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate applicable law or any applicable interpretation of the Staff of the SEC. The Company shall inform the Placement Agents, if requested by the Placement Agents, of the names and addresses of the Holders to whom the Exchange Offer is made, and the Placement Agents shall have the right, subject to applicable law, to contact such Holders and otherwise facilitate the tender of Registrable Notes in the Exchange Offer. (b) In the event that (i) the Company determines that the Exchange Offer Registration provided for in Section 2(a) above is not available or may not be consummated as soon as practicable after the last Exchange Date because it would violate applicable law or the applicable interpretations of the Staff of the SEC, (ii) the Exchange Offer is not for any other reason consummated on or prior to April 1, 1998, or (iii) in the opinion of counsel for the Placement Agents a Registration Statement must be filed and a Prospectus must be delivered by the Placement Agents in connection with any offering or sale of Registrable Notes, the Company shall cause to be filed as soon as practicable after such determination, date or notice of such opinion of counsel is given to the Company, a Shelf Registration Statement providing for the sale by the 5 7 Holders of all of the Registrable Notes and to have such Shelf Registration Statement declared effective by the SEC. In the event the Company is required to file a Shelf Registration Statement solely as a result of the matters referred to in clause (iii) of the preceding sentence, the Company shall file and use its best efforts to have declared effective by the SEC both an Exchange Offer Registration Statement pursuant to Section 2(a) with respect to all Registrable Notes and a Shelf Registration Statement (which may be a combined Registration Statement with the Exchange Offer Registration Statement) with respect to offers and sales of Registrable Notes held by such Placement Agent after completion of the Exchange Offer. The Company agrees to use its best efforts to keep the Shelf Registration Statement continuously effective until the expiration of the period referred to in Rule 144(k) with respect to all Registrable Notes covered by the Shelf Registration Statement or such shorter period that will terminate when all of the Registrable Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. The Company further agrees to supplement or amend the Shelf Registration Statement if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the 1933 Act or by any other rules and regulations thereunder for shelf registration or if reasonably requested by a Holder with respect to information relating to such Holder, and to use its best efforts to cause any such amendment to become effective and such Shelf Registration Statement to become usable as soon as thereafter practicable. The Company agrees to furnish to the Holders of Registrable Notes copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) or Section 2(b). Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Notes pursuant to the Shelf Registration Statement. (d) An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that, if, after it has been declared effective, the offering of Registrable Notes pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have become effective during the period of such interference until the offering of Registrable Notes pursuant to such Registration Statement may legally resume. As provided for in the Indenture, in the event that the Exchange Offer is not consummated, and if a Shelf Registration Statement is required hereby, the Shelf Registration Statement is not declared effective on or prior to April 1, 1998, the interest rate on the Notes (and the Exchange Notes) will increase by 0.5% per annum until the Exchange Offer is consummated or a Shelf Registration Statement is declared effective. (e) Without limiting the remedies available to the Placement Agents and the Holders, the Company acknowledges that any failure by the Company to comply with its obligations under 6 8 Section 2(a) and Section 2(b) hereof may result in material irreparable injury to the Placement Agents or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Placement Agents or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Section 2(a) and Section 2(b) hereof. 3. Registration Procedures. In connection with the obligations of the Company with respect to the Registration Statements pursuant to Section 2(a) and Section 2(b) hereof, the Company shall as expeditiously as possible: (a) prepare and file with the SEC a Registration Statement on the appropriate form under the 1933 Act, which form (x) shall be selected by the Company and (y) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Notes by the selling Holders thereof and (z) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, and use its best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period and cause each Prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424 under the 1933 Act; to keep each Prospectus current during the period described under Section 4(3) and Rule 174 under the 1933 Act that is applicable to transactions by brokers or dealers with respect to the Registrable Notes or Exchanges Notes; (c) in the case of a Shelf Registration, furnish to each Holder of Registrable Notes, to counsel for the Placement Agents, to counsel for the Holders and to each Underwriter of an Underwritten Offering of Registrable Notes, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or Underwriter may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Notes; and the Company consents to the use of such Prospectus and any amendment or supplement thereto in accordance with applicable law by each of the selling Holders of Registrable Notes and any such Underwriters in connection with the offering and sale of the Registrable Notes covered by and in the manner described in such Prospectus or any amendment or supplement thereto in accordance with applicable law; (d) use its reasonable best efforts to register or qualify the Registrable Notes under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Notes covered by a Registration Statement shall reasonably request in writing by the time the applicable Registration Statement is declared effective by the SEC, to cooperate with such Holders in connection with any filings required to be made with the National Association of Securities Dealers, Inc. and do any and all other acts and things which may be reasonably 7 9 necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Registrable Notes owned by such Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a broker or dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process or (iii) subject itself to taxation in any such jurisdiction if it is not so subject; (e) in the case of a Shelf Registration, notify each Holder of Registrable Notes, counsel for the Holders and counsel for the Placement Agents promptly and, if requested by any such Holder or counsel, confirm such advice in writing (i) when such Registration Statement has become effective and when any post-effective amendment thereto has been filed and becomes effective, (ii) of any request by the SEC or any state Notes authority for amendments and supplements to such Registration Statement and Prospectus or for additional information after such Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of such Registration Statement or the initiation of any proceedings for that purpose, (iv) if, between the effective date of such Registration Statement and the closing of any sale of Registrable Notes covered thereby, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in all material respects or if the Company receives any notification with respect to the suspension of the qualification of the Registrable Notes for sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event during the period a Shelf Registration Statement is effective such that such Registration Statement or the related Prospectus contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make statements therein not misleading and (vi) of any determination by the Company that a post-effective amendment to such Registration Statement would be appropriate; (f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment and provide immediate notice to each Holder of the withdrawal of any such order; (g) in the case of a Shelf Registration, furnish to each Holder of Registrable Notes, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); (h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Notes to facilitate the timely preparation and delivery of certificates representing Registrable Notes to be sold and not bearing any restrictive legends and enable such Registrable Notes to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders may reasonably request at least one business day prior to the closing of any sale of Registrable Notes; 8 10 (i) in the case of a Shelf Registration, upon the occurrence of any event contemplated by Section 3(e)(v) or (vi) hereof, use its best efforts to prepare and file with the SEC a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Notes, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company agrees to notify the Holders to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and the Holders hereby agree to suspend use of the Prospectus upon receipt of such notice until the Company has amended or supplemented the Prospectus to correct such misstatement or omission; (j) a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Placement Agents and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) and make such of the representatives of the Company as shall be reasonably requested by the Placement Agents or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) available for discussion of such document, and shall not at any time file or make any amendment to the Registration Statement, any Prospectus or any amendment of or supplement to a Registration Statement or a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus, of which the Placement Agents and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) shall not have previously been advised and furnished a copy or to which the Placement Agents or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) shall reasonably object; (k) obtain CUSIP numbers for all Exchanges Notes or Registrable Notes, as the case may be, not later than the effective date of a Registration Statement; (l) cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), in connection with the registration of the Exchanges Notes or Registrable Notes, as the case may be, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and execute, and use its reasonable best efforts to cause the Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (m) in the case of a Shelf Registration, make available for inspection by a representative of the Holders of the Registrable Notes, any Underwriter participating in any disposition pursuant to such Shelf Registration Statement, and attorneys and accountants designated by the Holders, at reasonable times and in a reasonable manner, all financial and other records, pertinent documents 9 11 and properties of the Company, and cause the respective officers, directors and employees of the Company to supply all information reasonably requested by any such representative, Underwriter, attorney or accountant in connection with a Shelf Registration Statement; (n) in the case of a Shelf Registration, use its best efforts to cause all Registrable Notes to be listed on any securities exchange or any automated quotation system on which similar securities issued by FelCor or the Operating Partnership are then listed if requested by the Majority Holders, to the extent such Registrable Notes satisfy applicable listing requirements; (o) use its best efforts to cause the Exchange Notes or Registrable Notes, as the case may be, to be rated by two nationally recognized statistical rating organizations (as such term is defined in Rule 436(g)(2) under the 1933 Act); (p) if reasonably requested by any Holder of Registrable Notes covered by a Registration Statement in order to accurately reflect information regarding such Holder or such Holder's plan of distribution as required by such Registration Statement, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such required information with respect to such Holder as such Holder reasonably requests to be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as the Company has received notification of the matters to be incorporated in such filing; and (q) in the case of a Shelf Registration, use its reasonable best efforts to enter into such customary agreements and take all such other actions in connection therewith (including those requested by the Holders of a majority of the Registrable Notes being sold) in order to expedite or facilitate the disposition of such Registrable Notes including, but not limited to, an Underwritten Offering and in such connection, (i) to the extent possible, make such representations and warranties to the Holders and any Underwriters of such Registrable Notes with respect to the business of the Company and its subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorporated by reference, if any, in each case, in form, substance and scope as are customarily made by issuers to underwriters in Underwritten Offerings (but in no event more onerous to the Company than those contained in the Placement Agreement), and confirm the same if and when requested, (ii) obtain opinions of counsel to the Company (which counsel and opinions, in form, scope and substance, shall be reasonably satisfactory to the Holders and such Underwriters and their respective counsel) addressed to each selling Holder and Underwriter of Registrable Notes covering the matters customarily covered in opinions requested in Underwritten Offerings (but in no event more onerous to the Company than those opinions required in the Placement Agreement), (iii) obtain "cold comfort" letters from the independent certified public accountants of FelCor and the Operating Partnership (and, if necessary, any other certified public accountant of any subsidiary of the Company, or of any business acquired by the Company for which financial statements and financial data are or are required to be included in the Registration Statement) addressed to each selling Holder and Underwriter of Registrable Notes, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with Underwritten 10 12 Offerings, and (iv) deliver such documents and certificates as may be reasonably requested by the Holders of a majority in principal amount of the Registrable Notes being sold or the Underwriters, and which are customarily delivered in Underwritten Offerings, to evidence the continued validity of the representations and warranties of the Company made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in an underwriting agreement. In the case of a Shelf Registration Statement, the Company may require each Holder of Registrable Notes to furnish to the Company such information regarding the Holder and the proposed distribution by such Holder of such Registrable Notes as the Company may from time to time reasonably request in writing. In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e)(v) or (vi) hereof, such Holder will forthwith discontinue disposition of Registrable Notes pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in its possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Notes current at the time of receipt of such notice. The Company may suspend the availability of any Shelf Registration Statement for not more than two times during any 365 day period and any such suspensions may not exceed 30 days for each suspension. If the Company shall give any such notice to suspend the disposition of Registrable Notes pursuant to a Registration Statement, the Company shall extend the period during which the Registration Statement shall be maintained effective pursuant to this Agreement by the number of days during the period from and including the date of the giving of such notice to and including the date when the Company shall have made available to the Holders copies of the supplemented or amended Prospectus necessary to resume such dispositions. The Holders of Registrable Notes covered by a Shelf Registration Statement who desire to do so may sell such Registrable Notes in an Underwritten Offering; provided that the Company shall be required to use its best efforts to make an Underwritten Offering only upon the request of Holders of at least 25% of the Registrable Notes outstanding at the time such request is delivered to the Company. In the case of any Underwritten Offering, the Company shall (x) provide written notice to the Holders of all Registrable Notes of such Underwritten Offering at least 30 days prior to the filing of a prospectus for such Underwritten Offering, (y) specify a date, which shall be no earlier than 10 days following the date of such notice, by which each such Holder must inform the Company of its intent to participate in such Underwritten Offering and (z) include reasonable procedures that are customary to underwritten offerings of the type contemplated herein that such Holder must follow in order to participate in such Underwritten Offering. In any such Underwritten Offering, the investment banker or investment bankers and manager or managers (the "Underwriters") that will administer the offering will be selected by the Majority Holders of the Registrable Notes included in such offering and shall be approved by the Company, which approval shall not be unreasonably withheld. 11 13 4. Participation of Broker-Dealers In Exchange Offer. (a) The Staff of the SEC has taken the position that any broker-dealer that receives Exchange Notes for its own account in the Exchange Offer in exchange for Notes that were acquired by such broker-dealer as a result of market-making or other trading activities (a "Participating Broker- Dealer"), may be deemed to be an "underwriter" within the meaning of the 1933 Act and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchanges Notes. The Company understands that it is the Staff's position that if the Prospectus contained in the Exchange Offer Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating Broker-Dealers may resell the Exchange Notes, without naming the Participating Broker-Dealers or specifying the amount of Exchange Notes owned by them, such Prospectus may be delivered by Participating Broker-Dealers to satisfy their prospectus delivery obligation under the 1933 Act in connection with resales of Exchange Notes for their own accounts, so long as the Prospectus otherwise meets the requirements of the 1933 Act. (b) In light of the above, notwithstanding the other provisions of this Agreement, the Company agrees that the provisions of this Agreement as they relate to a Shelf Registration shall also apply to an Exchange Offer Registration to the extent, and with such reasonable modifications thereto as may be, reasonably requested by the Placement Agents or by one or more Participating Broker-Dealers, in each case as provided in clause (ii) below, in order to expedite or facilitate the disposition of any Exchange Notes by Participating Broker-Dealers consistent with the positions of the Staff recited in Section 4(a) above; provided that: (i) the Company shall not be required to amend or supplement the Prospectus contained in the Exchange Offer Registration Statement, as would otherwise be contemplated by Section 3(i), for a period exceeding 180 days after the last Exchange Date (as such period may be extended pursuant to the penultimate paragraph of Section 3 of this Agreement) and Participating Broker-Dealers shall not be authorized by the Company to deliver and shall not deliver such Prospectus after such period in connection with the resales contemplated by this Section 4; and (ii) the application of the Shelf Registration procedures set forth in Section 3 of this Agreement to an Exchange Offer Registration, to the extent not required by the positions of the Staff of the SEC or the 1933 Act and the rules and regulations thereunder, will be in conformity with the reasonable request to the Company by the Placement Agents or with the reasonable request in writing to the Company by one or more broker- dealers who certify to the Placement Agents and the Company in writing that they anticipate that they will be Participating Broker-Dealers; and provided further that, in connection with such application of the Shelf Registration procedures set forth in Section 3 to an Exchange Offer Registration, the Company shall be obligated (x) to deal only with one entity representing the Participating Broker-Dealers, which shall be Morgan Stanley & Co. Incorporated unless it elects not to act as such representative, (y) to pay the fees and 12 14 expenses of only one counsel representing the Participating Broker-Dealers, which shall be counsel to the Placement Agents unless such counsel elects not to so act and (z) to cause to be delivered only one, if any, "cold comfort" letter with respect to the Prospectus in the form existing on the last Exchange Date and with respect to each subsequent amendment or supplement, if any, effected during the period specified in clause (i) above. (c) The Placement Agents shall have no liability to the Company or any Holder with respect to any request that it may make pursuant to Section 4(b) above. 5. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless the Placement Agents, each Holder and each person, if any, who controls any Placement Agent or any Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, or is under common control with, or is controlled by, any Placement Agent or any Holder, from and against all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by any Placement Agent, any Holder or any such controlling or affiliated person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Exchange Notes or Registrable Notes were registered under the 1933 Act, including all documents incorporated therein by reference, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or caused by any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein in light of the circumstances under which they were made not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to the Placement Agents or any Holder furnished to the Company in writing by the Placement Agents or any selling Holder expressly for use therein. In connection with any Underwritten Offering permitted by Section 3, the Company will also indemnify the Underwriters, if any, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act and the Exchange Act) to the same extent as provided above with respect to the indemnification of the Holders, if requested in connection with any Registration Statement. (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, the Placement Agents and the other selling Holders, and each of their respective directors, officers who sign the Registration Statement and each person, if any, who controls the Company, any Placement Agent and any other selling Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as the foregoing indemnity from the Company to the Placement Agents and the Holders, but only with reference to information relating to such Holder furnished to the Company in writing by such Holder expressly for use in any Registration Statement (or any amendment thereto) or any Prospectus 13 15 (or any amendment or supplement thereto). (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (a) the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for the Placement Agents and all persons, if any, who control any Placement Agent within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, (b) the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors and officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (c) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Holders and all persons, if any, who control any Holders within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In such case involving the Placement Agents and persons who control the Placement Agent, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated. In such case involving the Holders and such persons who control Holders, such firm shall be designated in writing by the Majority Holders. In all other cases, such firm shall be designated by the Company. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but, if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party for such fees and expenses of counsel in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which such indemnified party is 14 16 or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) If the indemnification provided for in paragraph (a) or paragraph (b) of this Section 4 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company and the Holders shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Holders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Holders' respective obligations to contribute pursuant to this Section 5(d) are several in proportion to the respective number of Registrable Notes of such Holder that were registered pursuant to a Registration Statement. (e) The Company and each Holder agree that it would not be just or equitable if contribution pursuant to this Section 5 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5, no Holder shall be required to indemnify or contribute any amount in excess of the amount by which the total price at which Registrable Notes were sold by such Holder exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 5 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution provisions contained in this Section 5 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Placement Agents, any Holder or any person controlling any Placement Agent or any Holder, or by or on behalf of the Company, its officers or directors or any person controlling the Company, (iii) acceptance of any of the Exchange Notes and (iv) 15 17 any sale of Registrable Notes pursuant to a Shelf Registration Statement. 6. Miscellaneous. (a) No Inconsistent Agreements. The Company has not entered into, and on or after the date of this Agreement will not enter into, any agreement which is inconsistent with the rights granted to the Holders of Registrable Notes in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities under any such agreements. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Notes affected by such amendment, modification, supplement, waiver or consent; provided, however, that no amendment, modification, supplement, waiver or consents to any departure from the provisions of Section 5 hereof shall be effective as against any Holder of Registrable Notes unless consented to in writing by such Holder. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 6(c), which address initially is, with respect to the Placement Agents, the address set forth in the Placement Agreement; and (ii) if to the Company, initially at the Company's address set forth in the Placement Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the person giving the same to the Trustee, at the address specified in the Indenture. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Notes in violation of the terms of the Placement Agreement. If any transferee of any Holder shall acquire 16 18 Registrable Notes, in any manner, whether by operation of law or otherwise, such Registrable Notes shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Notes such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such person shall be entitled to receive the benefits hereof. The Placement Agents (in their capacity as Placement Agents) shall have no liability or obligation to the Company with respect to any failure by a Holder to comply with, or any breach by any Holder of, any of the obligations of such Holder under this Agreement. (e) Purchases and Sales of Notes. The Company shall not, and shall use its best efforts to cause its affiliates (as defined in Rule 405 under the 1933 Act) not to, purchase and then resell or otherwise transfer any Notes other than Notes acquired and cancelled. (f) Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Placement Agents, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 17 19 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. FELCOR SUITE HOTELS, INC. By: /s/ LAWRENCE D. ROBINSON ----------------------------------- Name: Lawrence D. Robinson Title: Senior Vice President & General Counsel FELCOR SUITES LIMITED PARTNERSHIP By: /s/ LAWRENCE D. ROBINSON ----------------------------------- Name: Lawrence D. Robinson Title: Senior Vice President & General Counsel Confirmed and accepted as of the date first above written: MORGAN STANLEY & CO. INCORPORATED NATIONSBANC CAPITAL MARKETS, INC. SALOMON BROTHERS INC By: MORGAN STANLEY & CO. INCORPORATED By: /s/ THOMAS A. Grier ----------------------------------- Name: Thomas A. Grier Title: Principal EX-12.1 8 STATEMENT RE: COMPUTATION OF RATIOS 1 EXHIBIT 12.1 FELCOR SUITES LIMITED PARTNERSHIP COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND THE RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS (Dollars in Thousands)
HISTORICAL PERIOD FROM JULY 28, 1994 (INCEPTION OF YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, OPERATIONS) ----------------------------------- ---------------------------------- THROUGH HISTORICAL PRO FORMA HISTORICAL PRO FORMA DECEMBER 31, ---------------------- --------- ---------------------- --------- 1994 1995 1996 1996 1996 1997 1997 --------- --------- --------- --------- --------- --------- --------- Earnings: Income from continuing operations before extraordinary items $ 3,418 $ 15,322 $ 46,527 $ 69,000 $ 26,379 $ 30,257 $ 40,726 Adjustments: Fixed charges, as below 109 2,004 11,133 34,159 4,780 13,428 19,455 Interest capitalized (1,330) (1,330) (267) (566) --------- --------- --------- --------- --------- --------- --------- Earnings as adjusted $ 3,527 $ 17,326 $ 56,330 $ 101,829 $ 30,892 $ 43,119 $ 59,615 ========= ========= ========= ========= ========= ========= ========= Fixed Charges: Interest expense $ 109 $ 2,004 $ 9,803 $ 32,829 $ 4,513 $ 12,862 $ 18,889 Interest capitalized 1,330 1,330 267 566 566 --------- --------- --------- --------- --------- --------- --------- Total fixed charges $ 109 $ 2,004 $ 11,133 $ 34,159 $ 4,780 $ 13,428 $ 19,455 ========= ========= ========= ========= ========= ========= ========= Preferred distribution $ $ $ 7,734 $ 11,798 $ 1,835 $ 5,899 $ 5,899 ========= ========= ========= ========= ========= ========= ========= Fixed Charge Coverage Ratio (1) 32.4 x 8.6 x 5.1 x 3.0 x 6.5 x 3.2 x 3.1x Fixed Charges and Preferred Distribution Coverage Ratio (2) 32.4 x 8.6 x 3.0 x 2.2 x 4.7 x 2.2 x 2.4x
- ---------- (1) Computed as Earnings divided by Fixed Charges (2) Computed as Earnings divided by Fixed Charges and Preferred Distributions 2 FELCOR SUITE HOTELS, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND THE RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in Thousands)
HISTORICAL PERIOD FROM JULY 28, 1994 (INCEPTION OF YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, OPERATIONS) ----------------------------------- --------------------------------- THROUGH HISTORICAL PRO FORMA HISTORICAL PRO FORMA DECEMBER 31, --------------------- --------- -------------------- --------- 1994 1995 1996 1996 1996 1997 1997 ------- -------- -------- --------- -------- ------- --------- Earnings: Income from continuing operations before extraordinary items $ 2,511 $ 12,191 $ 40,937 $ 63,880 $ 23,237 $27,315 $37,720 Adjustments: Minority interest in Operating Partnership 907 3,131 5,590 5,120 3,142 2,942 3,006 Fixed charges, as below 109 2,004 11,133 34,159 4,780 13,428 19,455 Interest capitalized (1,330) (1,330) (267) (566) (566) ------- -------- -------- --------- -------- ------- ------- Earnings as adjusted $ 3,527 $ 17,326 $ 56,330 $ 101,829 $ 30,892 $43,119 $59,615 ======== ======== ========= ======== ======= ======= Fixed Charges: Interest expense $ 109 $ 2,004 $ 9,803 $ 32,829 $ 4,513 $12,862 $18,889 Interest capitalized 1,330 1,330 267 566 566 ------- -------- -------- --------- -------- ------- ------- Total fixed charges $ 109 $ 2,004 $ 11,133 $ 34,159 $ 4,780 $13,428 $19,455 ======= ======== ======== ========= ======== ======= ======= Preferred stock dividend $ $ $ 7,734 $ 11,798 $ 1,835 $ 5,899 $ 5,899 ======= ======== ======== ========= ======== ======= ======= Fixed Charge Coverage Ratio (1) 32.4 x 8.6 x 5.1 x 3.0 x 6.5 x 3.2 x 3.1x Fixed Charges and Preferred Stock Dividend Coverage Ratio (2) 32.4 x 8.6 x 3.0 x 2.2 x 4.7 x 2.2 x 2.4x
- --------- (1) Computed as Earnings divided by Fixed Charges (2) Computed as Earnings divided by Fixed Charges and Preferred Distributions EX-21.1 9 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 THE FOLLOWING IS A TRUE AND CORRECT LIST OF THE SUBSIDIARIES (INCLUDING UNCONSOLIDATED SUBSIDIARIES) OF THE FELCOR SUITE HOTELS, INC. AS OF OCTOBER 31, 1997.
STATE AND FORM OF NAME ORGANIZATION OWNERSHIP INTEREST (1) - ---- --------------------- ---------------------- FelCor Suites Limited Partnership Delaware; Limited 90.5% GP interest owned by Partnership FelCor FelCor/CSS Hotels, L.L.C. Delaware; Limited 100% owned by FelCor LP ("FelCor/CSS Hotels") Liability Company FelCor/LAX Hotels, L.L.C. Delaware; Limited 100% owned by FelCor LP ("FelCor/LAX Hotels") Liability Company FelCor/CSS Holdings, L.P. Delaware; 1% GP interest owned by ("FelCor/CSS Holdings") Limited Partnership FelCor/CSS Hotels; 99% LP interest owned by FelCor LP FelCor/St. Paul Holdings, L.P. Delaware; 1% GP interest owned by ("FelCor/St. Paul Holdings") Limited Partnership FelCor/CSS Hotels; 99% LP interest owned by FelCor LP FelCor/LAX Holdings, L.P. Delaware; 1% GP Interest owned by ("FelCor/LAX Holdings") Limited Partnership FelCor/LAX Hotels; 99% LP interest owned by FelCor LP Los Angeles International Airport Hotel Texas; 50% GP interest and Associates Limited Partnership 47.2% LP interest owned by FelCor/LAX Holdings Promus/FelCor Lombard Venture Illinois; 50% GP interest owned by General Partnership FelCor LP MHV Joint Venture Texas; 50% GP interest owned by General Partnership FelCor LP Promus/FelCor Parsippany Joint Venture New Jersey; 50% GP interest owned by General Partnership FelCor LP
2 Charlotte Limited Partnership Minnesota; 1% GP interest owned by Limited Partnership FelCor/CSS Hotels; 49% LP interest owned by FelCor LP E.S. North, an Indiana Limited Indiana; 1% GP interest owned by Partnership Limited Partnership FelCor/CSS Hotels; 49% LP interest owned by FelCor LP Promus/FCH Development Company, L.L.C. Delaware; 50% owned by FelCor LP Limited Liability Company Promus/FCH Condominium Company, L.L.C. Delaware; 50% owned by FelCor LP Limited Liability Company FelCor Eight Hotels, L.L.C. Delaware; 100% owned by FelCor LP ("FelCor Eight Hotels") Limited Liability Company EPT Atlanta - Perimeter Center Limited Delaware; 1% GP interest owned by FelCor Partnership Limited Partnership Eight Hotels; 49% LP interest owned by FelCor LP EPT - Austin Limited Partnership Delaware; 1% GP interest owned by FelCor Limited Partnership Eight Hotels; 49% LP interest owned by FelCor LP EPT - Covina Limited Partnership Delaware; 1% GP interest owned by FelCor Limited Partnership Eight Hotels; 49% LP interest owned by FelCor LP EPT - Kansas City Limited Partnership Delaware; 1% GP interest owned by FelCor Limited Partnership Eight Hotels; 49% LP interest owned by FelCor LP EPT - Meadowlands Limited Partnership Delaware; 1% GP interest owned by FelCor Limited Partnership Eight Hotels; 49% LP interest owned by FelCor LP EPT - Overland Park Limited Partnership Delaware; 1% GP interest owned by FelCor Limited Partnership Eight Hotels; 49% LP interest owned by FelCor LP
3 EPT - Raleigh Limited Partnership Delaware; 1% GP interest owned by FelCor Limited Partnership Eight Hotels; 49% LP interest owned by FelCor LP EPT - San Antonio Limited Partnership Delaware; 1% GP interest owned by FelCor Limited Partnership Eight Hotels; 49% LP interest owned by FelCor LP FCH/DT Hotels, L.L.C. Delaware; Limited 90% owned by FelCor LP Liability Company FCH/DT Holdings, L.P. Delaware; 1% GP interest owned by FCH/DT Limited Partnership Hotels, L.L.C.; 89.1% LP interest owned by FelCor LP FCH/DT BWI Holdings, L.P. Delaware; 1% GP interest owned by FCH/DT Limited Partnership Hotels, L.L.C.; 99% LP interest owned by FCH/DT Holdings, LP Barshop-HII Joint Venture Texas; 50% GP interest owned by FelCor General Partnership LP Kingston Plantation Development Delaware; 97% non-voting Class B Corporation Corporation interest owned by FelCor LP FCH/Society Hill, L.P.2 Pennsylvania; 1% GP interest owned by Limited Partnership FelCor/CSS Hotels, L.L.C.;99% LP interest owned by FelCor LP FelCor/Charlotte Hotel, L.L.C. Delaware; Limited 50% interest owned by Liability Company FelCor/CSS Hotels, L.L.C.
# # # # (1) THE PERCENTAGE INTERESTS REFLECTED ABOVE REPRESENT THE PERCENTAGES OF AGGREGATE EQUITY INTEREST IN THE RESPECTIVE ENTITIES. EACH OF THE GP INTERESTS REFLECTED ABOVE REPRESENTS EITHER THE ENTIRE GENERAL PARTNER INTEREST IN SUCH ENTITY OR AN INTEREST AS THE SOLE ADMINISTRATIVE GENERAL PARTNER OF SUCH ENTITY WITH POWER TO CONTROL THE DAY-TO-DAY OPERATIONS THEREOF. EX-23.2 10 CONSENT OF COOPERS & LYBRAND LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of FelCor Suites Hotels, Inc. We consent to the inclusion in this registration statement on Form S-4 (File No. ___) of our report dated January 22, 1997, except as to the information presented in the second paragraph of Note 5, the first paragraph of Note 6 and Note 16 for which the date is March 10, 1997, on our audits of the consolidated financial statements and financial statement schedule of FelCor Suites Limited Partnership as of December 31, 1996 and 1995 and for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994; our report dated January 22, 1997, except as to the information presented in the second paragraph of Note 5, the first paragraph of Note 6 and Note 17 for which the date is March 10, 1997, on our audits of the consolidated financial statements and financial statement schedule of FelCor Suite Hotels, Inc. as of December 31, 1996 and 1995 and for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994; and our report dated January 22, 1997, except as to the information presented in Note 7 for which the date is February 21, 1997, on our audits of the financial statements of DJONT Operations, L.L.C. as of December 31, 1996 and 1995 and for the years ended December 31, 1996 and 1995 and the period from July 28, 1994 (inception of operations) through December 31, 1994. We consent to the incorporation by reference in this registration statement on Form S-4 (File No. ____) of our report dated June 2, 1997 on our audit of the combined financial statements of the DS Hotels as of and for the year ended December 31, 1996, which report is included in FelCor Suite Hotels, Inc.'s Current Report on Form 8-K dated June 3, 1997; and our report dated July 25, 1997 on our audit of the combined financial statements of the Sheraton Acquisition Hotels as of and for the year ended December 31, 1996, which report is included in FelCor Suite Hotels, Inc.'s Current Report on Form 8-K/A dated August 13, 1997. We also consent to the references to our firm under the captions "Experts" and "Selected Historical and Pro Forma Financial Information." /s/ COOPERS & LYBRAND LLP Memphis, Tennessee October 31, 1997 EX-23.3 11 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this registration statement of our reports with respect to the audited financial statements of EPT Meadowlands Limited Partnership, Promus Hotels, Inc. GE EPT Combined Limited Partnerships, and Barshop - HII Joint Venture as of December 31, 1996 and 1995, and for the years then ended, included in the Company's previously filed Form 8-K dated June 4, 1997. /s/ ARTHUR ANDERSEN LLP Memphis, Tennessee, November 3, 1997. EX-23.4 12 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-4 of FelCor Suites Limited Partnership of our report dated February 7, 1997 (except Note 5, as to which the date is March 20, 1997), with respect to the financial statements of AEW Doubletree Portfolio for the year ended December 31, 1996 included in the Current Report on Form 8-K of FelCor Suite Hotels, Inc. dated June 5, 1997 filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Ernst & Young LLP Columbus, Ohio November 3, 1997 EX-23.5 13 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.5 INDEPENDENT AUDITORS' REPORT We consent to the incorporation by reference in this Registration Statement of FelCor Suite Hotels, Inc. on Form S-4 of our report regarding PSH Master L.P.I. dated February 14, 1997 (except for Note 12 as to which the date is May 30, 1997), which expresses an unqualified opinion on those financial statements and includes an explanatory paragraph about the entity's ability to continue as a going concern, appearing in Form 8-K of FelCor Suite Hotels, Inc. /s/ DELOITTE/TOUCHE LLP Columbus, Ohio October 31, 1997 EX-25.1 14 STATEMENT OF ELIGIBILITY 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ------------------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) [ ] ------------------- SUNTRUST BANK, ATLANTA (Exact name of trustee as specified in its charter) 58-0466330 (I.R.S. employer identification no.) 25 PARK PLACE, N.E. ATLANTA, GEORGIA 30303 (Address of principal executive offices) (Zip Code) ------------------- DAVID M. KAYE SUNTRUST BANK, ATLANTA 58 EDGEWOOD AVENUE, N.E. ROOM 400A ATLANTA, GEORGIA 30303 (404) 588-8060 (Name, address and telephone number of agent for service) FELCOR SUITES LIMITED PARTNERSHIP FELCOR SUITE HOTELS, INC. FELCOR/CSS HOTELS, L.L.C. FELCOR/LAX HOTELS, L.L.C. FELCOR EIGHT HOTELS, L.L.C. FELCOR/CSS HOLDINGS, L.P. FELCOR/ST. PAUL HOLDINGS, L.P. FELCOR/LAX HOLDINGS, L.P. (Exact name of co-obligor as specified in its charter) DELAWARE 75-2564994 MARYLAND 72-2541756 DELAWARE 75-2624290 DELAWARE 75-2647535 DELAWARE 75-2582006 DELAWARE 75-2620463 DELAWARE 75-2624292 DELAWARE 75-2624293 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 545 E. JOHN CARPENTER FRWY. SUITE 1300 IRVING, TEXAS 75062 (Address of principal executive offices) (Zip Code) ----------------- 7 3/8% SENIOR NOTES DUE 2004 7 5/8% SENIOR NOTES DUE 2007 GUARANTEES OF SENIOR NOTES(1) (Title of the indenture securities) (1) FelCor Suite Hotels, Inc. and the following wholly-owned subsidiaries of the Registrant: FelCor/CSS Hotels, L.L.C., Felcor/LAX Hotels, L.L.C., FelCor Eight Hotels, L.L.C., FelCor/CSS Holdings, L.P., FelCor/St. Paul Holdings, L.P. and FelCor/LAX Holdings, L.P., have each guaranteed the notes being registered pursuant hereto. - -------------------------------------------------------------------------------- 2 1. General information. (a) Name and address of each examining or supervising authority to which it is subject. DEPARTMENT OF BANKING AND FINANCE STATE OF GEORGIA ATLANTA, GEORGIA FEDERAL RESERVE BANK OF ATLANTA 104 MARIETTA STREET, N.W. ATLANTA, GEORGIA FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. (b) Whether it is authorized to exercise corporate trust powers. YES. 2. Affiliations with obligor. NONE. 3. Voting Securities of the Trustee. NOT APPLICABLE. 4. Trusteeships under Other Indentures. NOT APPLICABLE. 5. Interlocking Directorates and Similar Relationships with the Obligor or Underwriters. NOT APPLICABLE. 6. Voting Securities of the Trustee Owned by the Obligor or its Officials. NOT APPLICABLE. 7. Voting Securities of the Trustee Owned by Underwriters or their Officials. NOT APPLICABLE. 8. Securities of the Obligor Owned or Held by the Trustee. NOT APPLICABLE. 3 9. Securities of Underwriters Owned or held by the Trustee. NOT APPLICABLE. 10. Ownership or Holdings by the Trustee of Voting Securities of Certain Affiliates or Security Holders of the Obligor. NOT APPLICABLE. 11. Ownership or Holdings by the Trustee of any Securities or a Person Owning 50 Percent or More of the Voting Securities of the Obligor. NOT APPLICABLE. 12. Indebtedness of the Obligor to the Trustee. NOT APPLICABLE. 13. Defaults by the Obligor. (a) Whether there is or has been a default with respect to the securities under this indenture. THERE IS NOT AND HAS NOT BEEN ANY SUCH DEFAULT. (b) If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, or is trustee for more than one outstanding series of securities under the indenture, state whether there has been a default under any such indenture or series. THERE HAS NOT BEEN ANY SUCH DEFAULT. 14. Affiliations with the Underwriters. NOT APPLICABLE. 15. Foreign Trustee. NOT APPLICABLE. -2- 4 16. List of Exhibits. The additional exhibits listed below are filed herwith; exhibits, if any, identified in parentheses are on file with the Commission and are incorporated herein by reference as exhibits hereto pursuant to Rule 7a-29 under the Trust Indenture Act of 1939, as amended, and Rule 24 of the Commission's Rules of Practice. Exhibit Number 1 A copy of the Articles of Amendment and Restated Articles of Incorporation as now in effect. (Exhibit 1 to Form T-1, Registration No. 333-25463.) 2 A copy of the certificate of authority of the Trustee to commence business. (Included in Exhibit 1.) 3 A copy of the authorization of the Trustee to exercise trust powers. (Included in Exhibit 1.) 4 By-laws of the Trustee. (Included in Exhibit 4 to Form T-1, Registration No. 333-25463.) 5 Not applicable. 6 Consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939, as amended. 7 Latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority as of the close of business on June 30, 1997. 8 Not applicable. 9 Not applicable. -3- 5 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the trustee, SunTrust Bank, Atlanta, a banking corporation organized and existing under the laws of the State of Georgia, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Atlanta and the State of Georgia, on the 4th day of November, 1997 SUNTRUST BANK, ATLANTA By: /s/ David M. Kaye ------------------------------ Group Vice President -4- 6 EXHIBIT 6 TO FORM T-1 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939 in connection with the proposed issuance of FelCor Suites Limited Partnership, et al, 7 3/8% Senior Notes Due 2004, 7 5/8% Senior Notes Due 2007 and Guarantees of Senior Notes to be issued under the Indenture, SunTrust Bank, Atlanta hereby consents that reports of examinations by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. SUNTRUST BANK, ATLANTA By: /s/ David M. Kaye ------------------------------- Group Vice President 7 EXHIBIT 7 FORM T-1 LATEST REPORT OF CONDITION OF SUNTRUST BANK, ATLANTA 8 SUNTRUST BANK ATLANTA Call Date: 06/30/97 State #: 130330 FFIEC 031 P. O. BOX 4418 CENTER 63Z Vendor ID: D Cert #: 00867 RC-1 ATLANTA, GA 30302 Transit #: 6100D104 11 CONSOLIDATION REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED SAVINGS BANKS FOR JUNE 30, 1997 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. SCHEDULE RC - BALANCE SHEET C400< Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------------------- ASSETS 1. Cash and balances due from depository institutions (from Schedule RC-A): RCFD ---- a. Noninterest-bearing balances and currency and coin (1)...................................... 0061 1,107,326 1.a b. Interest-bearing balances(2)................................................................ 0071 4,501 1.b 2. Securities: a. Held-to-maturity securities (from Schedule RC-B, column A).................................. 1754 0 2.a b. Available-for-sale securities (from Schedule RC-B, column D)................................ 1773 3,075,005 2.b 3. Federal funds sold and securities purchased under agreements to resell.......................... 1350 2,074,409 3 4. Loans and lease financing receivables: RCFD ---- a. Loans and leases, net of unearned income (from Schedule RC-C)............ 2122 10,146,000 4.a b. LESS: Allowance for loan and lease losses............................... 3123 131,278 4.b c. LESS: Allocated transfer risk reserve................................... 3128 0 RCFD 4.c d. Loans and leases, net of unearned income, allowance, and reserve (item ---- 4.a minus 4.b and 4.c)...................................................................... 2125 10,014,722 4.d 5. Trading assets (from Schedule RC-D)............................................................. 3545 21,092 5. 6. Premises and fixed assets (including capitalized leases)........................................ 2145 96,777 6. 7. Other real estate owned (from Schedule RC-M).................................................... 2150 1,831 7. 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M)........ 2130 12,664 8. 9. Customers' liability to this bank on acceptances outstanding.................................... 2155 449,863 9. 10. Intangible assets (from Schedule RC-M).......................................................... 2143 18,090 10. 11. Other assets (from Schedule RC-F)............................................................... 2160 171,594 11. 12. Total assets (sum of items 1 through 11)........................................................ 2170 17,047,874 12.
- --------------- (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading. 9 SUNTRUST BANK ATLANTA Call Date: 06/30/97 State #: 13033D FFIEC 031 P. O. BOX 4418 CENTER 632 Vendor ID: D Cert #: 00867 RC-2 ATLANTA, GA 30302 Transit #: 610001D4 12 SCHEDULE RC - CONTINUED Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------- LIABILITIES 13. Deposits a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, RCON ---- part I) ............................................................. RCON 2200 7,050,141 13.a ---- (1) Noninterest-bearing(1).......................................... 5631 2,919,686 13.a.1 (2) Interest-bearing................................................. 6536 4,130,455 13.a.2 b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from RCFN ---- Schedule RC-E, part II).............................................. RCFN 2200 1,558,328 13.b ---- (1) Noninterest-bearing.............................................. 6631 0 13.b1 (2) Interest-bearing................................................. 5536 1,558,328 13.b2 14. Federal funds purchased and securities sold under agreements to RCFD ---- repurchase .............................................................................. 2800 3,666,404 14 RCON ---- 15. a. Demand notes issued to the U.S. Treasury............................................. 2840 0 15.a RCFD ---- b. Trading liabilities (from Schedule RC-D)............................................. 3548 1,685 15.b 16. Other borrowed money (includes mortgage indebtedness and obligations under capitalized leases): a. With a remaining maturity of one year or less........................................ 2332 748,160 16.a b. With a remaining maturity of more than one year through three years.................. A547 0 16.b c. With a remaining maturity of more than three years................................... A548 2,502 16.c 17. Not applicable 18. Bank's liability on acceptances executed and outstanding.................................. 2920 449,863 18 19. Subordinated notes and debentures(2)...................................................... 3200 250,000 19 20. Other liabilities (from Schedule RC-G).................................................... 2930 1,084,678 20 21. Total liabilities (sum of items 13 through 20)............................................ 2948 14,811,761 21 22. Not applicable EQUITY CAPITAL 23. Perpetual preferred stock and related surplus............................................. 3838 0 23 24. Common stock.............................................................................. 3230 21,601 24 25. Surplus (exclude all surplus related to preferred stock).................................. 3839 553,406 25 26. a. Undivided profits and capital reserves................................................ 3632 605,599 26.a b. Net unrealized holding gains (losses) on available-for-sale securities................. 3434 1,055,507 26.b 27. Cumulative foreign currency translation adjustments....................................... 3284 0 27 28. Total equity capital (sum of items 23 through 27)......................................... 3210 2,236,113 28 29. Total liabilities and equity capital (sum of items 21 and 28)............................. 3300 17,047,874 29 MEMORANDUM TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION. 1 Indicate in the box at the right the number of the statement below that best describes the most comprehensive level of auditing work performed for the bank by RCFD NUMBER ---- independent external auditors as of any date during 1996.................................. 6724 N/A M.1 1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other with generally accepted auditing standards by a cert- external auditors (may be required by state chartering ified public accounting firm which submits a report on authority) the bank 5 = Review of the bank's financial statements by external 2 = Independent audit of the bank's parent holding company auditors conducted in accordance with generally accepted audit- 6 = Compilation of the bank's financial statements by ing standards by a certified public accounting firm external auditors which submits a report on the consolidated holding 7 = Other audit procedures (excluding tax preparation work) company (but not on the bank separately) 8 = No external audit work 3 = Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm (may be required by state chartering authority)
- ------------ (1) Includes total demand deposits and noninterest-bearing time and savings deposits. (2) Includes limited-life preferred stock and related surplus. EX-27.1 15 FINANCIAL DATA SCHEDULE
5 0001048789 FELCOR SUITES LP 1,000 YEAR DEC-31-1996 JAN-1-1996 DEC-31-1996 7,793 0 5,526 0 0 0 936,409 36,718 976,788 0 0 0 151,250 468,249 98,542 978,789 0 100,944 0 52,063 0 0 9,803 48,881 0 48,881 0 2,354 0 46,527 1.58 1.58
EX-99.1 16 FORM OF LETTER OF TRANSMITTAL 1 EXHIBIT 99.1 LETTER OF TRANSMITTAL OFFER FOR ALL OUTSTANDING PRIVATELY PLACED 7 3/8% SENIOR NOTES DUE 2004 AND 7 5/8% SENIOR NOTES DUE 2007 IN EXCHANGE FOR 7 3/8% SENIOR SUBORDINATED NOTES DUE 2004 AND 7 5/8% SENIOR NOTES DUE 2007 OF FELCOR SUITES LIMITED PARTNERSHIP THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _____ __, 1997 (AS SUCH DATE MAY BE EXTENDED, BUT SHALL NOT BE LATER THAN ______ __, 1997) THE EXCHANGE AGENT IS SUNTRUST BANK, ATLANTA, WHOSE MAILING ADDRESS, FACSIMILE NUMBER AND TELEPHONE NUMBER ARE AS FOLLOWS: BY REGISTERED OR CERTIFIED BY FACSIMILE: MAIL, HAND DELIVERY OR OVERNIGHT DELIVERY: (404) 332-3966 (GA) (212) 240-8938 (NY) SUNTRUST BANK, ATLANTA 58 EDGEWOOD AVENUE, 4TH FLOOR ANNEX ATLANTA, GA 30302 ATTENTION: DAVID M. KAYE OR SUNTRUST BANK, ATLANTA C/O FIRST CHICAGO TRUST COMPANY 14 WALL STREET, 8TH FLOOR NEW YORK, NEW YORK 10005 2 DESCRIPTION OF SECURITIES TENDERED
7 3/8% SENIOR NOTES DUE 2004 PRINCIPAL NAMES AND ADDRESS OF REGISTERED HOLDER CERTIFICATE NUMBER(S) AMOUNT OF AS IT APPEARS ON THE PRIVATELY PLACED OF OLD 7 3/8% NOTES OLD 7 3/8% NOTES 7 3/8% SENIOR NOTES TRANSMITTED TRANSMITTED DUE 2004 ("OLD 7 3/8% NOTES") - --------------------------------------- ---------------------- -------------------- - --------------------------------------- ---------------------- -------------------- - --------------------------------------- ---------------------- -------------------- - --------------------------------------- ---------------------- -------------------- - --------------------------------------- ---------------------- --------------------
7 5/8% SENIOR NOTES DUE 2007 PRINCIPAL NAMES AND ADDRESS OF REGISTERED HOLDER CERTIFICATE NUMBER(S) AMOUNT OF AS IT APPEARS ON THE PRIVATELY PLACED OF OLD 7 5/8% NOTES OLD 7 5/8% NOTES 7 5/8% SENIOR NOTES TRANSMITTED TRANSMITTED DUE 2007 ("OLD 7 5/8% NOTES") - --------------------------------------- ---------------------- -------------------- - --------------------------------------- ---------------------- -------------------- - --------------------------------------- ---------------------- -------------------- - --------------------------------------- ---------------------- -------------------- - --------------------------------------- ---------------------- --------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. 2 3 Ladies and Gentlemen: 1. The undersigned hereby agrees to exchange the aggregate principal amount of privately placed 7 3/8% Senior Notes Due 2004 (the "Old 7 3/8% Notes"), and 7 5/8% Senior Notes Due 2007 (the "Old 7 5/8% Notes" and together with the Old 7 3/8% Notes, the "Old Notes") for a like principal amount of 7 3/8% Senior Notes Due 2004 (the "New 7 5/8% Notes") and 7 5/8% Senior Notes Due 2007 (the "New 7 5/8% Notes" and, together with the New 7 3/8% Notes, the "New Notes") of FelCor Suites Limited Partnership, a Delaware limited partnership (the "Company"), upon the terms and subject to the conditions contained in the Registration Statement on Form S-4 (the "Registration Statement"), filed by the Company with the Securities and Exchange Commission (the "Commission") and the accompanying Prospectus dated November __, 1997 included therein (the "Prospectus"), receipt of each of which is hereby acknowledged. 2. The undersigned hereby acknowledges and agrees that the New 7 3/8% Notes will bear interest at a rate equal to 7 3/8% per annum and the New 7 5/8% Notes will bear interest at a rate equal to 7 5/8% per annum. Interest on the New Notes is payable semiannually, commencing April 1, 1998, on April 1 and October 1 of each year (each, an "Interest Payment Date") and shall accrue from October 1, 1997 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. The New 7 3/8% Notes will mature on October 1, 2004, and the New 7 5/8% Notes will mature October 1, 2007. Accordingly, the undersigned will forego accrued but unpaid interest on his, her or its Old Notes that are exchanged for New Notes from and including such date, but will receive such interest under the New Notes. 3. The undersigned hereby represents and warrants that he, she or it has full authority to tender the Old Notes described above. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the exchange of the Old Notes. 4. The undersigned understands that the tender of the Old Notes pursuant to all of the procedures set forth in the Prospectus will constitute an agreement between the undersigned and the Company as to the terms and conditions set forth in the Prospectus. 5. The undersigned hereby represents and warrants that the undersigned is not an affiliate the Company of any of the Guarantors (as defined in the Prospectus), that the undersigned is acquiring the New Notes in the ordinary course of the business of the undersigned and that the undersigned is not engaged in, and does not intend to engage in, a distribution of the New Notes. 6. If the undersigned is a broker-dealer (i) it hereby represents and warrants that it acquired the Old Notes for its own account as a result of market-making activities or other trading activities, (ii) it hereby acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act of 1933, as amended (the "Securities Act"), in connection with any resale of the New Notes received hereby and (iii) such broker-dealer has not entered into any arrangement or understanding with the Company or any affiliate of the Company to distribute the New Notes. The acknowledgment contained in the foregoing sentence shall not be deemed an admission that the undersigned is an "underwriter" within the meaning of the Securities Act. 7. Any obligation of the undersigned hereunder shall be binding upon the successors, assigns, executors, administrators, trustees in bankruptcy and legal and personal representatives of the undersigned. 3 4 SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS (SEE INSTRUCTION 1) To be completed ONLY IF the New Notes are to be issued in the name of someone other than the undersigned or are to be sent to someone other than the undersigned or to the undersigned at an address other than that provided above. Issue to: Name --------------------------------------- (Please Print) Address --------------------------------------- --------------------------------------- (Include Zip Code) Mail to: Name --------------------------------------- (Please Print) Address --------------------------------------- --------------------------------------- --------------------------------------- (Include Zip Code) SIGNATURE ----------------------------------------------- (Name of Registered Holder) By: --------------------------------------- Name: Title: Date: --------------------------------------- (Must be signed by registered holder exactly as name appears on the Old Notes. If signature is by trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3.) Address: --------------------------------------- Telephone No. ----------------------------------- Taxpayer Identification No.: -------------------------------------- Signature Guaranteed By: -------------------------------------- (See Instruction 1) Title: Name of Institution: Address: Date: PLEASE READ THE INSTRUCTIONS BELOW, WHICH FORM A PART OF THIS LETTER OF TRANSMITTAL. 4 5 INSTRUCTIONS 1. GUARANTEE OF SIGNATURES. Signatures on this Letter of Transmittal must be guaranteed by a firm that is a member of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company having an office in the United States which is a member of a recognized Medallion Signature Program approved by the Securities Transfer Association, Inc. (an "Eligible Institution") unless (i) the "Special Issuance and Delivery Instructions" above have not been completed or (ii) the Old Notes described above are tendered for the account of an Eligible Institution. 2. DELIVERY OF LETTER OF TRANSMITTAL AND OLD NOTES. The Old Notes, together with a properly completed and duly executed Letter of Transmittal (or a facsimile thereof), should be mailed or delivered to the Exchange Agent at the address set forth above. The method of delivery of Old Notes and other documents is at the election and risk of the respective holder. If delivery is by mail, registered mail (with return receipt), properly insured, is suggested. 3. GUARANTEED DELIVERY PROCEDURES. Registered holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available, or (ii) who cannot deliver their Old Notes, the Letter of Transmittal or any other required documents to the Exchange Agent prior to the Expiration Date, may effect a tender if: (a) The tender is made through an Eligible Institution; (b) Prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the registered holder of the Old Notes, the certificate number or numbers of such Old Note(s) and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof) together with the certificate(s) representing the Old Notes and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and (c) Such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as the certificate(s) representing all tendered Old Notes in proper form for transfer and all other documents required by the Letter of Transmittal are received by the Exchange Agent within five New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to registered holders who wish to tender their Old Notes according to the guaranteed delivery procedures set forth above. 4. SIGNATURES ON LETTER OF TRANSMITTAL, BOND POWERS AND ENDORSEMENTS. If this Letter of Transmittal is signed by a person other than a registered holder of any Old Notes, such Old Notes must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name or names of the registered holder or holders appear on the Old Notes. If this Letter of Transmittal or any Old Notes or bond power is signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such person should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company or their authority to so act must be submitted. 5. EXCHANGE OF OLD NOTES ONLY. Only the above-described Old Notes may be exchanged for New Notes pursuant to the Exchange Offer. 5 6 6. MISCELLANEOUS. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be resolved by the Company, whose determination will be final and binding. The Company reserves the absolute right to reject any or all tenders that are not in proper form or the acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any irregularities or conditions of tender as to particular Old Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) will be final and binding. Unless waived, any irregularities in connection with tenders or consents must be cured within such time as the Company shall determine. Neither the Company nor the Exchange Agent shall be under any duty to give notification of defects in such tenders or shall incur liabilities for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holder thereof. IMPORTANT TAX INFORMATION Under current Federal income tax law, a holder of Old Notes (an "Old Noteholder"), whose tendered Old Notes are accepted for payment generally is required to provide the Exchange Agent (as agent for the payer) with his or her correct taxpayer identification number ("TIN") on Form W-9, attached hereto. If such Old Noteholder is an individual, the TIN is his or her social security number. If the Exchange Agent is not provided with the correct TIN, the Old Noteholder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such Old Noteholders with respect to New Notes exchanged pursuant to the Offer may be subject to backup withholding. Certain Old Noteholders (including, among others, all corporations and certain foreign individuals) may not be subject to these backup withholding and reporting requirements. Exempt Old Noteholders should indicate their exempt status on the Form W-9. In order for a foreign individual to qualify as an exempt recipient, that Old Noteholder must submit a properly completed Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to his or her exempt status. Such statements can be obtained from the Exchange Agent. See the Form W-9 for additional instructions. If backup withholding applies, the Exchange Agent is required to withhold 31 percent of any such payments made to the Old Noteholder. Backup withholding is not an additional tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained. PURPOSE OF FORM W-9 To prevent backup withholding on payments that are made to an Old Noteholder with respect to Old Notes exchanged pursuant to the Exchange Offer, each Old Noteholder is required to notify the Exchange Agent of his, her or its correct TIN by completing the Form W-9 below certifying the TIN provided on such form is correct (or that such Old Noteholder is awaiting a TIN) and that (1) the Old Noteholder has not been notified by the Internal Revenue Service that he, she or it is subject to backup withholding as a result of a failure to report all interest or dividends or (2) the Internal Revenue Service has notified the Old Noteholder that he, she or it is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE EXCHANGE AGENT The Old Noteholder is required to give the Exchange Agent the social security number or employer identification number of the record owner of the Old Notes. If the Old Notes are in more than one name or are not in the name of the actual owner, consult the enclosed Form W-9 for additional guidelines on which number to report. 6 7 Please print or type Form W-9 GIVE THIS FORM TO (Rev. March 1994) THE REQUESTER. DO REQUEST FOR TAXPAYER NOT SEND TO IRS. Department of the IDENTIFICATION NUMBER AND CERTIFICATION Treasury Internal Revenue Service - ------------------------------------------------------------------------------------------------------------------------------- Name (if joint names, list first and circle the name of the person or entity whose number you enter in Part 1 below. SEE INSTRUCTIONS ON PAGE 2 IF YOUR NAME HAS CHANGED.) ---------------------------------------------------------------------------------------------------------------------------- Business name (Sole proprietors see instructions on page 2). ---------------------------------------------------------------------------------------------------------------------------- Please check appropriate box: [ ] Individual/Sole Proprietor [ ] Corporation [ ] Partnership [ ] Other >................................................................................................. ---------------------------------------------------------------------------------------------------------------------------- Address (number and street) Requester's name and address (optional) ---------------------------------------------------------------------------------------------------------------------------- City, state, and ZIP code - ------------------------------------------------------------------------------------------------------------------------------- PART I TAXPAYER IDENTIFICATION NUMBER (TIN) List account number(s) here (optional) - ------------------------------------------------------- Enter your TIN in the appropriate box. For individuals, this is your social security number (SSN). For sole proprietors, see the instructions Social Security number on page 2. For other entities, it is your employer identification number (EIN). If you do not have a number, see HOW TO GET A TIN below. - - -------------------------------- -------------------------------------- NOTE: If the account is in more than one name, PART II see the chart on page 2 for guidelines on whose OR number to enter. For Payees Exempt From Backup Withholding (See Employer identification number Exempt Payees and - Payments on page 2) -------------------------------- -------------------------------------- > --------------------------------------
- -------------------------------------------------------------------------------- PART III CERTIFICATION - -------------------------------------------------------------------------------- Under penalties of perjury, I certify that: 1. The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me), and 2. I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATION INSTRUCTIONS.-- You must cross out item 2 above if you have been notified by the IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. For real estate transactions, item 2 does not apply. For mortgage interest paid, the acquisition or abandonment of secured property, contributions to an individual retirement arrangement (IRA), and generally payments other than interest and dividends, you are not required to sign the Certification, but you must provide your correct TIN. (Also see SIGNING THE CERTIFICATION on page 2). - -------------------------------------------------------------------------------- SIGN HERE SIGNATURE > Date > - -------------------------------------------------------------------------------- Section references are to the Internal Revenue Code. PURPOSE OF FORM.-- A person who is required to file an information return with the IRS must obtain your correct TIN to report income paid to you, real estate transactions, mortgage interest you paid, the acquisition or abandonment of secured property, cancellation of debt, or contributions you made to an IRA. Use Form W-9 to give your correct TIN to the requester (the person requesting your TIN) and, when applicable, (1) to certify that the TIN you are giving is correct (or that you are waiting for a number to be issued), (2) to certify that you are not subject to backup withholding, or (3) to claim exemption from backup withholding if you are an exempt payee. Giving your correct TIN and making the appropriate certifications will prevent certain payments from being subject to backup withholding. NOTE: If a requester gives you a form other than a W-9 to request your TIN, you must use the requester's form if it substantially similar to this Form W-9. WHAT IS BACKUP WITHHOLDING?-- Persons making certain payments to you must withhold and pay to the IRS 31% of such payments under certain conditions. This is called "backup withholding." Payments that could be subject to backup withholding include interest, dividends, broker and barter exchange transactions, rents, royalties, nonemployee pay, and certain payments from fishing boat operators. Real estate transactions are not subject to backup withholding. If you give the requester your correct TIN, make the appropriate certifications, and report all your taxable interest and dividends on your tax return, your payments will not be subject to backup withholding. Payments you receive will be subject to backup withholding if: 1. You do not furnish your TIN to the requester, or 2. The IRS tells the requester that you furnished an incorrect TIN, or 3. The IRS tells you that you are subject to backup withholding because you did not report all your interest and dividends on your tax return (for reportable interest and dividends only), or 4. You do not certify to the requester that you are not subject to backup withholding under 3 above (for reportable interest and dividend accounts opened after 1983 only), or 5. You do not certify your TIN. See the Part III instructions for exceptions. Certain payees and payments are exempt from backup withholding and information reporting. See the Part II instructions and the separate INSTRUCTIONS FOR THE REQUESTER OF FORM W-9. HOW TO GET A TIN.-- If you do not have a TIN, apply for one immediately. To apply, get FORM SS-5, Application for a Social Security Card (for individuals), from your local office of the Social Security Administration, or FORM SS-4, Application for Employer Identification Number (for businesses and all other entities), from your local IRS office. If you do not have a TIN, write "Applied for" in the space for the TIN in Part 1, sign and date the form, and give it to the requester. Generally, you will then have 60 days to get a TIN and give it to the requester. If the requester does not receive your TIN within 60 days, backup withholding, if applicable, will begin and continue until you furnish your TIN. - -------------------------------------------------------------------------------- 4/4/94 Cat. No. 10231X Form W-9 (Rev. 3-94) 8 Form W-9 (Rev. 1-93) Page 2 - -------------------------------------------------------------------------------- NOTE: Writing "Applied for" on the form means that you have already applied for a TIN OR that you intend to apply for one soon. As soon as you receive your TIN, complete another Form W-9, include your TIN, sign and date the form, and give it to the requester. PENALTIES FAILURE TO FURNISH TIN.-- If you fail to furnish your correct TIN to a requester, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.-- If you make a false statement with no reasonable basis that results in no backup withholding, you are subject to a $500 penalty. CRIMINAL PENALTY FOR FALSIFYING INFORMATION.-- Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. MISUSE OF TINS.-- If the requester discloses or uses TINs in violation of Federal law, the requester may be subject to civil and criminal penalties. SPECIFIC INSTRUCTIONS NAME.-- If you are an individual, you must generally provide the name shown on your social security card. However, if you have changed your last name, for instance, due to marriage, without informing the Social Security Administration of the name change, please enter your first name, the last name shown on your social security card, and your new last name. Sole proprietor.-- You must furnish your INDIVIDUAL name. (Enter either your SSN or EIN in Part 1). You may also enter your business name or "doing business as" name on the business name line. Enter your name as shown on your social security card and business name as it was used to apply for your EIN on Form SS-4. PART 1 -- TAXPAYER IDENTIFICATION NUMBER (TIN) You must enter your TIN in the appropriate box. If you are a sole proprietor, you may enter your SSN or EIN. Also see the chart on this page for further classification of name and TIN combinations. If you do not have a TIN, follow the instructions under HOW TO GET A TIN on page 1. PART II -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING Individuals (including sole proprietors) are NOT exempt from backup withholding. Corporations are exempt from backup withholding for certain payments, such as interest and dividends. For a complete list of exempt payees, see the separate Instructions for the Requester of Form W-9. If you are exempt from backup withholding, you should still complete this form to avoid possible erroneous backup withholding. Enter your correct TIN in Part I, write "Exempt" in Part II, and sign and date the form. If you are a nonresident alien or a foreign entity not subject to backup withholding, give the requester a completed FORM W-8, Certificate of Foreign Status. PART III -- CERTIFICATION For a joint account, only the person whose TIN is shown in Part I should sign. 1. INTEREST, DIVIDEND, AND BARTER EXCHANGE ACCOUNTS OPENED BEFORE 1984 AND BROKER ACCOUNTS CONSIDERED ACTIVE DURING 1983. You must give your correct TIN, but you do not have to sign the certification. 2. INTEREST, DIVIDEND, BROKER, AND BARTER EXCHANGE ACCOUNTS OPENED AFTER 1983 AND BROKER ACCOUNTS CONSIDERED INACTIVE DURING 1983. You must sign the certification or backup withholding will apply. If you are subject to backup withholding and you are merely providing your correct TIN to the requester, you must cross out item 2 in the certification before signing the form. 3. REAL ESTATE TRANSACTIONS. You must sign the certification. You may cross out item 2 of the certification. 4. OTHER PAYMENTS. You must give your correct TIN, but you do not have to sign the certification unless you have been notified of an incorrect TIN. Other payments include payments made in the course of the requester's trade or business for rents, royalties, goods (other than bills for merchandise), medical and health care services, payments to a nonemployee for services (including attorney and accounting fees), and payments to certain fishing boat crew members. 5. MORTGAGE INTEREST PAID BY YOU, ACQUISITION OR ABANDONMENT OF SECURED PROPERTY, OR IRA CONTRIBUTIONS. You must give your correct TIN, but you do not have to sign the certification. PRIVACY ACT NOTICE.-- Section 6109 requires you to give your correct TIN to persons who must file information returns with the IRS to report interest, dividends, and certain other income paid to you, mortgage interest you paid, the acquisition or abandonment of secured property, cancellation of debt or contributions you made to an IRA. The IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. You must provide your TIN whether or not you are required to file a tax return. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a TIN to a payer. Certain penalties may also apply. WHAT NAME AND NUMBER TO GIVE THE REQUESTER - ---------------------------------------------------- FOR THIS TYPE OF ACCOUNT: GIVE NAME AND SSN OF: - ---------------------------------------------------- 1. Individual The individual 2. Two or more The actual owner of the individuals account or, if combined (joint account) funds, the first individual on the account.(1) 3. Custodian account of The minor(2) a minor (Uniform Gift to Minors Act) 4. a. The usual The grantor-trustee(1) revocable savings trust (grantor is also trustee) b. So-called trust The actual owner(1) account that is not a legal or valid trust under state law 5. Sole proprietorship The owner(3) - ---------------------------------------------------- FOR THIS TYPE OF ACCOUNT: GIVE NAME AND EIN OF: - ---------------------------------------------------- 6. Sole proprietorship The owner(3) 7. A valid trust, Legal entity(4) estate, or pension trust 8. Corporate The corporation 9. Association, club, The organization religious, charitable, educational, or other tax-exempt organization 10. Partnership The partnership 11. A broker or The broker or nominee registered nominee 12. Account with the The public entity Department of Agriculture in the name of a public entity (such as a state or local government, school district, or prison) that receives agricultural program payments - -------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's SSN. (3) You must show your individual name but you may also enter your business or "doing business as" name. You may use either your SSN or EIN. (4) List first and circle the name of the legal trust, estate, or pension trust. (Do not furnish the TIN of the personal representative or trustee unless the legal entity itself is not designated in the account title.) NOTE: If no name is circled when more than one name is listed, the number will be considered to be that of the first name listed. W-9.2 -----END PRIVACY-ENHANCED MESSAGE-----