-----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, PYFr8eyS3NXWkDKxF+0HJsXaya3NS4gE4hYZ6Best6WEm1NIhVfXqBqIiStcPHKG 84KGUvKfYs1UAfUszW/q/Q== 0000950134-97-004459.txt : 19970606 0000950134-97-004459.hdr.sgml : 19970606 ACCESSION NUMBER: 0000950134-97-004459 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970201 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970605 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14236 FILM NUMBER: 97619807 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 8-K 1 FORM 8-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (Date of earliest event reported) JUNE 4, 1997 (February 1, 1997) FELCOR SUITE HOTELS, INC. (Exact name of registrant specified in its charter) MARYLAND 0-24250 72-2541756 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062 (Address of principal executive offices) (Zip Code) (972) 444-4900 (Registrant's telephone number, including area code) 2 ITEM 5. OTHER EVENTS. This Current Report on Form 8-K is filed to report 1997 acquisitions of hotels and proposed acquisitions of hotels by FelCor Suites Limited Partnership, a Delaware limited partnership (the Partnership), of which FelCor Suite Hotels, Inc., a Maryland corporation (individually and collectively, the "Company"), is its sole general partner. RECENT ACQUISITIONS From January 1, 1997 through May 16, 1997, the Company completed in five separate transactions, the acquisition of interests in 16 hotels with 3,707 suites at an aggregate purchase price of approximately $216 million plus the Company's prorata share of unconsolidated nonrecourse debt of $49.2 million. On February 1, 1997, the Company acquired 50% partnership interests in eight existing Embassy Suites(R) hotels located in Atlanta (Perimeter Center), Georgia; Kansas City (Country Club Plaza), Missouri; Overland Park, Kansas; Raleigh, North Carolina; San Antonio (Northwest), Texas; Austin (Airport North), Texas; Covina, California; and Secaucus, New Jersey with a total of 1,934 suites for approximately $58 million, plus a 50% share of approximately $86 million in existing non-recourse debt. A subsidiary of Promus Hotel Corporation ("Promus") holds the remaining 50% partnership interests in these hotels. 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(R) hotels on May 1, 1997. The purchase of the interests in these hotels was financed primarily from the proceeds of an underwritten public offering of 3 million shares of Common Stock of the Company, which resulted in net proceeds to the Company of approximately $100.7 million. On February 18, 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 and Suites (R) hotel in Dana Point, California for approximately $18 million. The Dana Point hotel was converted to a Doubletree Guest Suites hotel in May 1997 and is managed by a subsidiary of Doubletree Hotels Corporation ("Doubletree"). On March 20, 1997, the Company acquired, through a 90% owned partnership, interests in three Doubletree Guest Suites hotels, totaling 691 suites, located in Troy, Michigan; Austin (Downtown), Texas; and near the Baltimore Washington International (BWI) Airport, Maryland. The Company paid approximately $72 million for its 90% partnership interest and Doubletree paid approximately $8 million for its 10% limited partnership interest. Doubletree will continue to manage the hotels. On May 16, 1997, the Company acquired a 50% interest in the 261-suite San Antonio (Airport), Texas Embassy Suites hotel for approximately $6.5 million in cash and units of limited partnership interests ("Units") of the Partnership plus a 50% share of approximately $12.4 million in existing nonrecourse debt. A brief description of the hotels recently acquired follows: Atlanta (Perimeter Center), Georgia. This ten-story, 241-suite Embassy Suites hotel, is located in the Perimeter Office Park in Atlanta, Georgia. The hotel opened in 1985. Kansas City (Country Club Plaza), Missouri. This 12-story, 266-suite Embassy Suites hotel, is located adjacent to the Country Club Plaza in Kansas City, Missouri. This hotel, which was opened in 1976, is situated upon land leased under a ground lease expiring in 2023, under which the ground lessor has an option, exercisable in 2002, to purchase the hotel at its fair market value. Overland Park, Kansas. This seven-story, 199-suite Embassy Suites hotel is located in Overland Park, Kansas, a suburb of Kansas City, Missouri. The hotel opened in 1984. Raleigh, North Carolina. This nine-story, 225-suite Embassy Suites hotel is located in Raleigh, North Carolina. The hotel opened in 1987. 2 3 San Antonio (Northwest), Texas. This eight-story, 217-suite Embassy Suites hotel, is located near the intersection of Interstate Highways 10 and 410 (West) in San Antonio, Texas. This hotel, which was opened in 1979, is situated upon land leased under a ground lease expiring in 2030, but under which lease the lessee has an option exercisable in 2011 to purchase the land at fair market value. Austin (Airport North), Texas. This ten-story, 261-suite Embassy Suites hotel, is located near Austin's Robert Mueller Airport, currently the principal airport in Austin, Texas. The hotel opened in 1984. Covina, California. This three-story, 264-suite Embassy Suites hotel is located in Covina, California, near Ontario International Airport. The hotel opened in 1980. Secaucus, New Jersey. This nine-story, 261-suite Embassy Suites hotel, is located in the Plaza in the Meadows in the Meadowlands area of Secaucus, New Jersey. This hotel, which was opened in 1986, is leased under a ground lease expiring in 2011, but under which the lessee has two consecutive ten-year renewal options. Bloomington, Minnesota. This eight-story, 219-suite Doubletree Guest Suites hotel is located in Bloomington, Minnesota. The hotel opened in 1980. Omaha, Nebraska. This six-story, 189-suite Doubletree Guest Suites hotel is located in Omaha, Nebraska. The hotel opened in 1973. Los Angeles (LAX Airport North), California. This 215-suite Embassy Suites hotel is located near the Los Angeles International Airport in Los Angeles, California. The hotel opened in 1990 and is situated on land leased pursuant to a ground lease that expires in 2008, and in which the lessee has renewal options through the year 2062. The hotel will continue to operate as an Embassy Suites Hotel. Dana Point, California. This 198-suite Doubletree Guest Suites hotel is readily accessible from the Pacific Coast Highway and offers ocean views. The hotel opened in 1992. Troy, Michigan. This eight-story, 251-suite Doubletree Guest Suites hotel is located in Troy, Michigan, close to major commercial centers and approximately 15 miles from downtown Detroit. The hotel opened in 1987. Austin (Downtown), Texas. This 15-story, 189-suite Doubletree Guest Suites hotel is located in downtown Austin, Texas, convenient to the central business district, the Capitol and the historic Sixth Street entertainment district. The hotel opened in 1987. Baltimore/Washington International Airport (BWI), Washington. This eight-story, 251-suite Doubletree Guest Suites hotel is located in Anne Arundel County, Maryland, approximately 1.5 miles from the Baltimore/Washington International airport. The hotel opened in 1987. 3 4 San Antonio (Airport), Texas. This nine-story, 261-suite Embassy Suites hotel is located in San Antonio, Texas and is located near the San Antonio International Airport. The hotel was opened in 1985. PROPOSED ACQUISITIONS The Company has entered into letters of intent or agreements pursuant to which it expects to acquire 11 hotels from four sellers ("Proposed Acquisitions"). The Proposed Acquisitions are as follows: SELLER HOTEL LOCATION BRAND PURCHASE PRICE ------ -------------- ----- -------------- ITT Sheraton Corporation Atlanta (Airport), Georgia Sheraton(R) $200 million Atlanta (Galleria), Georgia Sheraton Suites(R) Chicago (O'Hare), Illinois Sheraton Suites Dallas (Park Central), Texas Sheraton Phoenix, Arizona Sheraton SELLER HOTEL LOCATION BRAND PURCHASE PRICE ------ -------------- ----- -------------- PSH Master L.P. I Lake Buena Vista (Disney World), Florida Doubletree Guest Suites $72.3 million Raleigh/Durham, North Carolina Doubletree Guest Suites Tampa (Rocky Point), Florida Doubletree Guest Suites SELLER HOTEL LOCATION BRAND PURCHASE PRICE ------ -------------- ----- -------------- PC Development I L.P. Nashville (Airport), Tennessee Doubletree Guest Suites $10.8 million SELLER HOTEL LOCATION BRAND PURCHASE PRICE ------ -------------- ----- -------------- Promus Hotels, Inc. Dallas (Market Center), Texas Embassy Suites $46.7 million Syracuse, New York Embassy Suites
The proposed acquisitions from ITT Sheraton Corporation and Promus are subject to normal due diligence and approvals. Additionally, the ITT Sheraton transaction is contingent upon the proposed June 1997 common stock offering. A brief description of the Proposed Acquisitions follows: Atlanta (Airport), Georgia. This 12-story, 395-room Sheraton Gateway hotel is located near Hartsfield International Airport in Atlanta, Georgia and was opened in 1986. This hotel is attached to the Georgia International Convention Center. Atlanta (Galleria), Georgia. This 17-story, 278-suite Sheraton Suites hotel is located adjacent to the Cumberland Mall and Cobb Galleria Convention Centre in Atlanta, Georgia. The hotel opened in 1990. Chicago (O'Hare), Illinois. This 11-story, 297-suite Sheraton Suites hotel is located in Rosemont, Illinois near Chicago's O'Hare International Airport. The hotel opened in 1994. Dallas (Park Central), Texas. This 20-story, 545-room Sheraton hotel is located near the intersection of I-635 and U.S. 75 in Dallas, Texas. The hotel opened in 1983 and offers 28 meeting rooms with an aggregate of approximately 28,000 sq. ft. of meeting space. The Grand Ballroom will accommodate up to 2,000 guests. Phoenix, Arizona. This eight-story, 342-room Sheraton Crescent Hotel is located adjacent to Metrocenter, one of Arizona's largest shopping and entertainment complexes, in Phoenix, Arizona. The hotel opened in 1986. This hotel offers 17 meeting rooms with an aggregate of approximately 28,000 sq. ft. of meeting space and can accommodate groups up to 1,000. 4 5 Lake Buena Vista (Disney World), Florida. This seven-story, 229-suite Doubletree Guest Suites hotel, is located on the Walt Disney World property and leased under a ground lease expiring in 2032, with renewal options through the year 2057. The hotel opened in 1987. Raleigh/Durham, North Carolina. This seven-story, 203-suite Doubletree Guest Suites hotel is located within Research Triangle Park, Raleigh, North Carolina. The hotel opened in 1987. Tampa (Rocky Point), Florida. This seven-story, 203-suite Doubletree Guest Suites hotel is located on Tampa Bay in the Rocky Point business district of Tampa. The hotel opened in 1986. Nashville (Airport), Tennessee. This three-story, 138-suite Doubletree Guest Suites hotel is located near Century City Plaza and Highland Ridge office parks and approximately two miles from Nashville International Airport. The hotel opened in 1988. Dallas (Market Center), Texas. This nine-story, 244-suite Embassy Suites Hotel, is located near the World Trade Center, the Infomart and the garment district of Dallas, Texas. The hotel was opened in 1980. Syracuse, New York. This five-story, 215-suite Embassy Suites Hotel, is located near the Syracuse central business district and Syracuse University in Syracuse, New York. The hotel was opened in 1989. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS (a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. Included on the index on page 8 are audited financial statements that represent a majority of the individually insignificant acquisitions by the Company from January 1, 1997 through May 16, 1997 and the Proposed Acquisitions. (b) PRO FORMA FINANCIAL INFORMATION. The unaudited pro forma statements of operations of the Company and DJONT Operations L.L.C. and subsidiaries (the "Lessee") are presented as if (i) the acquisitions of all hotels owned by the Company at December 31, 1996; (ii) those hotels acquired or expected to be acquired in 1997 (the "Acquisition Hotels") (collectively the "Hotels"); (iii) equity offerings consummated during 1996 and 1997 including an anticipated equity offering in June 1997; and (iv) related transactions, had occurred as of January 1, 1996 and all of the Hotels had been leased to the Lessee pursuant to Percentage Leases. The unaudited pro forma condensed consolidated balance sheet of the Company is presented as if the acquisition of the Acquisition Hotels, the anticipated equity offering in June 1997 and related transactions had occurred on March 31, 1997. 5 6 (c) EXHIBITS.
Exhibit Number Description of Exhibit - ------ ---------------------- 1 Underwriting Agreement dated January 28, 1997, between the Company and the Underwriters named therein. 23.1 Consent of Coopers & Lybrand, L.L.P. 23.2 Consent of Arthur Andersen LLP 23.3 Consent of Ernst & Young LLP 23.4 Consent of Deloitte & Touche LLP
6 7 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: June 4, 1997 FELCOR SUITE HOTELS, INC. By: /s/ Lester C. Johnson ----------------------------------------- Lester C. Johnson Chief Accounting Officer 7 8 INDEX TO FINANCIAL STATEMENTS The following represents (i) audits for the majority of the aggregate individually insignificant acquisitions by FelCor Suites Limited Partnership from January 1, 1997 through May 16, 1997 and the Proposed Acquisitions and (ii) pro forma information as it relates to the Company and DJONT Operations, L.L.C.
PAGE ---- PROMUS/GE EPT COMBINED LIMITED PARTNERSHIP HOTELS Combined audits on nine of the 10 hotels in which the Company acquired or purchased partnership interests on February 1, 1997. Report of Independent Public Accountants ...................................... 10 Combined Balance Sheets as of December 31, 1996 and 1995 (audited) ............ 11 Combined Statements of Operations for the Years Ended December 31, 1996 and 1995 (audited) ......................................................... 12 Combined Statements of Partners' Capital for the Years Ended December 31, 1996 and 1995 (audited) .................................................... 13 Combined Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 (audited) ......................................................... 14 Notes to Combined Financial Statements ........................................ 15 EPT MEADOWLANDS LIMITED PARTNERSHIP HOTEL Audit on one of the 10 hotels in which the Company acquired a partnership interest on February 1, 1997. Report of Independent Public Accountants ...................................... 21 Balance Sheets as of December 31, 1996 and 1995 (audited) ..................... 22 Statements of Income for the Years Ended December 31, 1996 and 1995 (audited) .................................................................. 23 Statements of Partners' Capital for the Years Ended December 31, 1996 and 1995 (audited) ......................................................... 24 Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 (audited) .................................................................. 25 Notes to Financial Statements ................................................. 26 AEW DOUBLETREE PORTFOLIO HOTELS Combined audits on the three Doubletree hotels in which the Company purchased 90% partnership interests on March 20, 1997. Report of Independent Auditors ................................................ 30 Combined Balance Sheet as of December 31, 1996 (audited) ...................... 31 Combined Statement of Operations for the Year Ended December 31, 1996 (audited) .................................................................. 32 Combined Statement of Partners' Equity for the Year Ended December 31, 1996 (audited) ............................................................. 33 Combined Statement of Cash Flows for the Year Ended December 31, 1996 (audited) .................................................................. 34 Notes to Financial Statements ................................................. 35 PSH MASTER L.P. I HOTELS Audits on three of the Doubletree hotels in which the Company proposes to acquire. Independent Auditors' Report .................................................. 39 Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 and 1995 (audited) ............................................................. 40 Statements of Operations for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996, 1995 and 1994 (audited) .................................................................. 41 Statements of Partners' Deficit for the Three Months Ended March 31, 1997 (unaudited) and the Years Ended December 31, 1996, 1995, 1994, and 1993 (audited) ............................................................. 42 Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996, 1995 and 1994 (audited) .................................................................. 43 Notes to the Financial Statements ............................................. 44
8 9 DS Hotels Audits on the two Embassy Suites hotels in which the Company proposes to acquire. Report of Independent Accountants ............................................. 50 Combined Balance Sheets as of December 31, 1996 (audited) and March 31, 1997 (unaudited) ................................................................... 51 Combined Statements of Revenues Over Expenses for the Year Ended December 31, 1996 (audited) and the Three Months Ended March 31, 1997 and 1996 (unaudited) ........................................................... 52 Combined Statements of Equity for the Year Ended December 31, 1996 (audited) and Three Months Ended March 31, 1997 (unaudited) .......................... 53 Combined Statements of Cash Flows for the Year Ended December 31, 1996 (audited) and the Three Months Ended March 31, 1997 and 1996 (unaudited) ... 54 Notes to Combined Financial Statements ........................................ 55 BARSHOP - HII JOINT VENTURE HOTEL Audit on the San Antonio (Airport) Embassy Suites in which the Company acquired a 50% partnership interest on May 16, 1997. Report of Independent Public Accountants ...................................... 58 Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 and 1995 (audited) ............................................................. 59 Statements of Income for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996 and 1995 (audited) ....... 60 Statements of Partners' Deficit for the Years Ended December 31, 1996 and 1995 (audited) ............................................................. 61 Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996 and 1995 (audited) .................................................................. 62 Notes to Financial Statements ................................................. 63 PRO FORMA INFORMATION (UNAUDITED) FelCor Suite Hotels, Inc. Pro Forma Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and the Year Ended December 31, 1996 .......................................................... 67 FelCor Suite Hotels, Inc. Pro Forma Consolidated Balance Sheet -- March 31, 1997 ............................................................. 77 DJONT Operations, L.L.C. Pro Forma Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and the Year Ended December 31, 1996 .................................................... 79
9 10 Report of Independent Public Accountants To the Partners of EPT Atlanta Perimeter Center Limited Partnership, EPT Austin Limited Partnership, EPT Bloomington Limited Partnership, EPT Covina Limited Partnership, EPT Kansas City Limited Partnership, EPT Omaha Limited Partnership, EPT Overland Park Limited Partnership, EPT Raleigh Limited Partnership and EPT San Antonio Limited Partnership: We have audited the accompanying combined balance sheets of the partnerships identified in Note 1 (Delaware limited partnerships, the "Partnerships"), as of December 31, 1996 and 1995, and the related combined statements of operations, partners' capital and cash flows for the years then ended. These combined financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Partnerships as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Memphis, Tennessee, February 27, 1997. 10 11 PROMUS HOTELS, INC. GE EPT COMBINED LIMITED PARTNERSHIPS COMBINED BALANCE SHEETS AS OF DECEMBER 31
ASSETS 1996 1995 ------ ------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 6,854,623 $ 2,685,452 Accounts receivable, less allowances for doubtful accounts of $27,822 and $23,323 1,192,936 1,427,619 Inventories, at cost 101,736 94,586 Prepaids and other 39,961 1,774,637 Restricted cash (Note 7) 473,052 -- ------------- ------------- Total current assets 8,662,308 5,982,294 PROPERTY AND EQUIPMENT: Land 15,013,281 15,013,281 Buildings and improvements 162,273,770 161,949,801 Furniture, fixtures and equipment 51,252,272 46,310,976 ------------- ------------- 228,539,323 223,274,058 Less accumulated depreciation (94,945,195) (82,969,215) ------------- ------------- 133,594,128 140,304,843 OTHER ASSETS, net of amortization 1,770,281 98,873 ------------- ------------- $ 144,026,717 $ 146,386,010 ============= ============= LIABILITIES AND PARTNERS' CAPITAL --------------------------------- CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 3,652,268 $ 4,579,673 Due to Promus Hotels, Inc. 108,168 408,452 Current portion of long-term debt (Note 3) 2,713,741 115,990,194 ------------- ------------- Total current liabilities 6,474,177 120,978,319 LONG-TERM DEBT (Note 3) 112,625,000 13,685 COMMITMENTS AND CONTINGENCIES (NOTES 4, 5, 6, & 8) 418,399 336,474 PARTNERS' CAPITAL 24,509,141 25,057,532 ------------- ------------- $ 144,026,717 $ 146,386,010 ============= =============
The accompanying notes are an integral part of these combined balance sheets. 11 12 PROMUS HOTELS, INC. GE EPT COMBINED LIMITED PARTNERSHIPS COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31
1996 1995 ----------- ------------ REVENUES: Suites $57,210,445 $ 53,895,121 Food and beverage 240,764 304,872 Restaurant rental 496,039 464,642 Telephone 1,868,348 1,827,164 Interest income 233,616 304,068 Other 1,458,757 1,391,381 ----------- ------------ 61,507,969 58,187,248 ----------- ------------ COSTS AND EXPENSES: Suites 14,142,830 13,117,659 Food and beverage 276,587 321,429 Administrative and general 13,945,396 13,473,999 Telephone 710,371 685,888 Management fees 3,063,641 2,895,575 Taxes and insurance 2,616,734 3,385,603 Other 1,911,408 2,336,421 ----------- ------------ Income before depreciation and amortization and interest expense 24,841,002 21,970,674 Depreciation and amortization 11,975,980 11,388,667 Interest expense 10,707,169 11,656,550 ----------- ------------ NET INCOME/(LOSS) $ 2,157,853 $ (1,074,543) =========== ============
The accompanying notes are an integral part of these combined statements. 12 13 PROMUS HOTELS, INC. GE EPT COMBINED LIMITED PARTNERSHIPS COMBINED STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31
General Limited Partners Partners Total --------- ------------ ------------ BALANCE, December 31, 1994 $ 581,134 $28,637,060 $ 29,218,194 Net loss (21,491) (1,053,052) (1,074,543) Contributions 77,181 3,781,891 3,859,072 Distributions (138,904) (6,806,287) (6,945,191) --------- ----------- ------------ BALANCE, December 31, 1995 497,920 24,559,612 25,057,532 Net income 43,157 2,114,696 2,157,853 Contributions 406,894 19,882,508 20,289,402 Distributions (459,915) (22,535,731) (22,995,646) --------- ----------- ------------ BALANCE, December 31, 1996 $ 488,056 $24,021,085 $ 24,509,141 ========= =========== ============
The accompanying notes are an integral part of these combined statements. 13 14 PROMUS HOTELS, INC. GE EPT COMBINED LIMITED PARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31
1996 1995 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,157,853 $ (1,074,543) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 11,975,980 11,388,667 Amortization of deferred financing costs 280,271 -- Loss on disposal of assets -- 41,693 Decrease (increase) in accounts receivable 234,683 (357,522) Increase in inventories (7,150) (7,736) Decrease (increase) in prepaids and other 1,734,676 (1,021,832) Financing costs (1,951,679) -- Increase in restricted cash (473,052) -- (Decrease) increase in accounts payable and accrued liabilities (927,405) 361,941 Increase (decrease) in deferred credits 81,925 (17,591) Net change in due to Promus Hotels, Inc. (300,284) (77,383) ------------- ------------ Cash flows provided by operating activities 12,805,818 9,235,694 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (5,347,141) (7,512,074) Retirement of property and equipment 81,876 95,940 ------------- ------------ Cash flows used in investing activities (5,265,265) (7,416,134) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments of long-term debt (116,665,138) (1,014,108) Proceeds of long-term debt 116,000,000 -- Cash contributions from partners 20,289,402 3,859,072 Cash distributions to partners (22,995,646) (6,945,191) ------------- ------------ Cash flows used in financing activities (3,371,382) (4,100,227) ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,169,171 (2,280,667) Cash and cash equivalents at beginning of year 2,685,452 4,966,119 ------------- ------------ Cash and cash equivalents at end of year $ 6,854,623 $ 2,685,452 ============= ============
The accompanying notes are an integral part of these combined statements. 14 15 PROMUS HOTELS, INC. GE EPT COMBINED LIMITED PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization- Promus Hotels, Inc. GE EPT Combined Limited Partnerships (the "Partnerships") consists of nine affiliated limited partnerships organized to acquire, own and operate Embassy Suites Hotels (the "Hotels"). Promus Hotels, Inc. ("PHI") owns a 49% limited partner interest and Suitelife, Inc., a subsidiary of PHI, owns a 1% general partner interest and serves as managing general partner. General Electric Employee Pension Trust ("GE EPT") Hotel Equities, Inc. owns a 49% limited partner interest and GE EPT Realty Group, an affiliate of GE EPT Hotel Equities, Inc., owns a 1% general partner interest. PHI and Suitelife, Inc. are collectively referred to as "Promus." GE EPT Hotel Equities, Inc. and GE EPT Realty Group are collectively referred to as "EPT." The Hotels are as follows: EPT Atlanta Perimeter Center Limited Partnership, organized on December 3, 1987; operating in Atlanta, Georgia ("Atlanta Perimeter") EPT Austin Limited Partnership, organized on July 11, 1986; operating in Austin, Texas ("Austin") EPT Bloomington Limited Partnership, organized on July 11, 1986; operating in Bloomington, Minnesota ("Bloomington") EPT Covina Limited Partnership, organized on July 11, 1986; operating in Covina, California ("Covina") EPT Kansas City Limited Partnership, organized on July 11, 1986; operating in Kansas City, Missouri ("Kansas City") EPT Omaha Limited Partnership, organized on July 11, 1986; operating in Omaha, Nebraska ("Omaha") EPT Overland Park Limited Partnership, organized on December 3, 1987; operating in Overland Park, Kansas ("Overland Park") EPT Raleigh Limited Partnership, organized on December 3, 1987; operating in Raleigh, North Carolina ("Raleigh") EPT San Antonio Limited Partnership, organized on July 11, 1986; operating in San Antonio, Texas ("San Antonio") Cash and Cash Equivalents- Cash and cash equivalents includes short-term interest bearing accounts with original maturities of 90 days or less. Pervasiveness of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Property and Equipment- Property and equipment are stated at cost. Costs of normal repairs and maintenance are expensed while major expenditures which extend the useful lives of the assets are capitalized. 15 16 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued): Depreciation- Provisions for depreciation are computed using the straight-line method over the following average estimated useful lives: Building and improvements 15-40 years Furniture, fixtures and equipment 2-10 years
Other Assets- Other assets consist primarily of unamortized deferred financing costs which are being amortized over the term of the related debt (Note 3). Deferred Credits- Deferred credits represent unamortized deferred income on long-term contracts with a third party provider of in-suite movie services. The credits are being amortized into other revenues over the term of the related contracts. Partners' Capital- The Partnerships' Agreements provide that items of income or loss, with certain defined exceptions, together with any contributions from or distributions to partners, are to be allocated on the basis of the partners' percentage ownership interests. Revenue Recognition- Suite revenue represents revenue derived from the rental of suites for the hotels owned by the Partnerships. Reclassifications- Certain prior year balances have been reclassified to conform with the current year presentation. 2. INCOME TAXES: No provision is made in the accounts of the Partnerships for federal and state income taxes, as such taxes are liabilities of the individual partners. The Partnerships' income tax returns and the amount of allocable partnership profits or losses are subject to examination by federal and state taxing authorities. If such examinations result in changes to the partnership profits or losses, the income tax liability of the partners may also change. The accounting records of the Partnerships are maintained on the accrual basis of accounting in accordance with generally accepted accounting principles. The combined net income (loss) reflected in the accompanying statements of operations differs from amounts reported in the Partnerships' federal income tax returns (if combined) because of differences in accounting policies adopted for financial and tax reporting purposes. 16 17 2. INCOME TAXES (Continued): The table below reconciles the combined differences for the years ended December 31:
1996 1995 ----------- ----------- Net income (loss) in the accompanying statements of operations $ 2,157,853 $(1,074,543) Financial reporting depreciation greater than amount deductible for federal income tax purposes 1,132,441 975,827 Timing of deductibility of property tax expense accrued for financial reporting purposes (417,572) -- Disallowance of loss on involuntary conversion for tax purposes 360 41,800 Other, net (65,485) 36,140 ----------- ----------- Net loss for federal income tax reporting purposes $ 2,807,597 $ (20,776) =========== ===========
3. LONG-TERM DEBT: Long-term debt consists of the following at December 31:
1996 1995 ------------- ------------- Notes payable, secured by a first mortgage on substantially all property and equipment of the respective Partnerships $ 115,325,000 $ 113,266,292 Unsecured note payable to Promus, interest at 10% payable monthly, balance due July 1, 1996 -- 2,708,011 ------------- ------------- Total notes payable 115,325,000 115,974,303 Obligations under capital lease 13,741 29,576 ------------- ------------- 115,338,741 116,003,879 Less portion due within one year (2,713,741) (115,990,194) ------------- ------------- $ 112,625,000 $ 13,685 ============= =============
The notes payable in 1995 to Aetna Life Insurance ("Aetna") matured on July 1, 1996. On July 2, 1996 the Partnerships refinanced the debt with new notes payable of $116,000,000 with Credit Lyonnais (New York Branch), Societe Generale (Southwest Agency), the Bank of New York, and Sumitomo Corporation. The new notes payable mature on July 1, 2001. Under the new loan agreements, the Partnerships make quarterly principal payments of $675,000. The notes payable bear interest at a variable rate which averaged 7.95% in 1996. 17 18 3. LONG-TERM DEBT (Continued): Based on the borrowing rates currently available to the Partnerships for bank loans with similar terms and average maturities, management believes that the related liability reflected in the accompanying balance sheet as of December 31, 1996, approximates fair market value. Interest paid in 1996 and 1995 was $9,652,453 and $11,649,762, respectively. Total future principal payments are scheduled to occur as follows:
Year Ending December 31 Amount ----------- ------------ 1997 $ 2,713,741 1998 2,700,000 1999 2,700,000 2000 2,700,000 2001 104,525,000 ------------ $115,338,741 ============
Raleigh Capital Lease- Raleigh leases equipment under a capital lease which expires on March 31, 1997 with an imputed interest rate of 11.9%. The balance of the capital lease at December 31 was $13,741. The Partnership, in accordance with the lease agreement, has guaranteed the residual value of the equipment at the end of the lease term. Included in the accompanying financial statements at December 31 are the following related to assets acquired under capital lease:
1996 -------- Furniture, fixtures and equipment $ 54,239 Less accumulated depreciation (48,212) -------- $ 6,027 ========
4. RESTAURANT RENTAL REVENUE: All of the Partnerships, except Omaha and Overland Park, lease their restaurants to third parties. Omaha's restaurant is operated by the Partnership and managed by Promus. Overland Park's restaurant is managed by a third party for which the net profits of the restaurant are paid as a management fee. The terms of the related lease agreements are as follows: Atlanta Perimeter - Variable monthly rentals equal 5% of gross restaurant revenue through $1,000,000 and 10% thereafter, plus an additional 0.5% of gross restaurant revenue each month, to be deposited to a reserve account for repairs and supplies. The lease expires in October 2005. Austin and San Antonio - Variable monthly rentals equal to 3% of manager gross revenues. The leases expire in March 1999, with two 5 year renewals at the lessee's option. Bloomington - Variable monthly rentals equal 7% of gross sales, plus an additional 1.5% for utilities. The lease expires in January 1998, with a 2 year renewal at the lessee's option. Covina - Monthly rentals equal to the greater of 8% of annualized restaurant revenue through $2,000,000, 10% through $2,500,000 and 12% thereafter, or $12,500. The lease agreement also provides that $25,000 18 19 4. RESTAURANT RENTAL REVENUE (Continued): in rentals shall be abated in each of the first and second years of the lease term. The lease expires in September 1999, with two 5 year renewals at the lessee's option. Kansas City - Rentals are 8% of restaurant revenue; however, half of this amount is recorded as revenue while the balance is applied toward utilities. The lease expires in March 1999, with two 5 year renewals at the lessee's option. Raleigh - $5,000 fixed monthly rentals, plus $2,000 monthly for utilities; the lease expires in March 1998, with a 2 year renewal at the lessee's option. 5. COMMITMENTS: Kansas City Land Lease- The property on which the Hotel is located is subject to an operating lease that expires on December 14, 2023, with a renewal option for two successive 25 year periods. The lease agreement provides for fixed monthly rentals, adjusted annually for inflation. The adjusted total fixed rentals were $122,868 and $119,856 in 1996 and 1995, respectively. The lease agreement also provides for variable rentals due at the end of each year equal to 4% of new suites revenues, as defined, less fixed rentals paid during the year. Total fixed and variable rent expense was $295,952 and $274,530 in 1996 and 1995, respectively, and is included in other expense. San Antonio Land Lease- The property on which the Hotel is located is subject to an operating lease that expires on December 31, 2030. The lease agreement provides for monthly variable rentals equal to 4% of the previous month's gross room revenues, as defined. The related rent expense was $220,846 and $217,001 in 1996 and 1995, respectively, and is included in other expense. Atlanta Perimeter- The Atlanta Perimeter Partnership is a member of the Crown Pointe Property Owners Association, Inc. (the "Association"), which provides for maintenance of the common areas shared by the Association members. Each member makes monthly payments equal to the estimated operating expenses for the year. The related expense was $138,709 and $151,311 in 1996 and 1995, respectively, and is included in other expense. 6. RELATED PARTY TRANSACTIONS: Management Fees- The Hotels are managed by Promus, pursuant to management agreements with the Partnerships. The terms of the management agreements provide for base management fees equal to 5% of adjusted gross revenues, as defined. Incentive management fees are due when operating levels of the Partnerships exceed a specified amount. No incentive management fees were incurred in 1996 or 1995. Marketing and Reservation Assessments- The Partnerships paid a combined marketing and reservation assessment to Promus equal to 3.5% of net suites revenue in 1996 and 1995. Total marketing and reservation assessments incurred were $2,002,331 in 1996 and $1,886,318 in 1995 and are included in administrative and general expense. 19 20 6. RELATED PARTY TRANSACTIONS (Continued): Operating Services- Promus provided insurance coverage and various other services to the Partnerships at a total cost of $1,378,813 and $1,504,430 in 1996 and 1995, respectively. Due to PHI- In addition to the fees and services discussed above, the Partnerships reimburse Promus for payroll and other operating costs paid by Promus on behalf of the Partnerships. 7. RESTRICTED ASSETS: The related debt agreements with Credit Lyonnais (New York Branch), Societe Generale (Southwest Agency), The Bank of New York, and Sumitomo Corporation specify that the Partnerships establish a reserve fund for those ordinary capital replacements which are necessary to maintain and operate the Hotels in accordance with operational standards of Promus. During 1996, this reserve was funded through an initial deposit of $335,000 plus monthly deposits of an amount equal to 4% of gross revenues, as defined. Withdrawals from this fund are restricted to the purchase of capital replacements, alterations, additions and improvements. At December 31, 1996, the Partnerships had a surplus in the capital replacement reserve of $473,052. 8. SUBSEQUENT EVENTS: On January 24, 1997 EPT Atlanta Perimeter Center Limited Partnership, EPT Austin Limited Partnership, EPT Covina Limited Partnership, EPT Kansas City Limited Partnership, EPT Meadowlands Limited Partnership, EPT Overland Park Limited Partnership, EPT Raleigh Limited Partnership, and EPT San Antonio Limited Partnership ( the "entities" ), and GE EPT, signed a Partnership Interest Purchase Agreement with FelCor Suites Limited Partnership ("FelCor") and FelCor/Eight Hotels, L.L.C. As of February 1, 1997, EPT transferred to FelCor its entire limited partnership interests in capital and 99.8% of its interests in profits in each of the eight partnerships and transferred its entire general partner interest to FelCor/Eight Hotels, L.L.C. Promus entered into a ten year management agreement for each of the eight hotels with DJONT Leasing, L.L.C. an affiliate of FelCor. The agreements call for a basic management fee of 5% of adjusted gross revenues less 4% of suite revenues. The agreement also calls for an incentive management fee of 50% of eight combined hotel incomes before lessee's overhead expenses, up to a maximum of 3% of the aggregate adjusted gross revenues for all eight of the hotels. In addition, on February 1, 1997, Promus and EPT sold their interests in EPT Bloomington Limited Partnership and EPT Omaha Limited Partnership to FelCor. 20 21 Report of Independent Public Accountants To the Partners of EPT Meadowlands Limited Partnership: We have audited the accompanying balance sheets of EPT MEADOWLANDS LIMITED PARTNERSHIP (a Delaware limited partnership) as of December 31, 1996 and 1995, and the related statements of income, partners' capital and cash flows for the years then ended. These financial statements are the responsibility of the Partnership'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 EPT Meadowlands Limited Partnership as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Memphis, Tennessee, February 27, 1997. 21 22 EPT MEADOWLANDS LIMITED PARTNERSHIP BALANCE SHEETS AS OF DECEMBER 31
ASSETS 1996 1995 ------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,405,541 $ 347,013 Accounts receivable, less allowance for doubtful accounts of $5,000 290,253 347,889 Inventories, at cost 11,409 5,182 Prepaids and other 167,785 5,957 ------------ ------------ Total current assets 1,874,988 706,041 PROPERTY AND EQUIPMENT: Building and improvements 24,586,818 24,597,154 Furniture, fixtures and equipment 5,641,751 5,320,591 ------------ ------------ 30,228,569 29,917,745 Less accumulated depreciation (12,845,477) (10,970,512) ------------ ------------ 17,383,092 18,947,233 OTHER ASSETS, net of amortization 48,195 51,700 ------------ ------------ $ 19,306,275 $ 19,704,974 ============ ============ LIABILITIES AND PARTNERS' CAPITAL --------------------------------- CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 533,061 $ 470,589 Due to Promus Hotels, Inc. (Note 5) 48,274 48,804 Current portion of capital lease obligation (Note 3) 410,249 369,526 ------------ ------------ Total current liabilities 991,584 888,919 CAPITAL LEASE OBLIGATION (Note 3) 13,157,305 13,567,555 COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 7) 51,113 64,162 PARTNERS' CAPITAL 5,106,273 5,184,338 ------------ ------------ $ 19,306,275 $ 19,704,974 ============ ============
The accompanying notes are an integral part of these combined balance sheets. 22 23 EPT MEADOWLANDS LIMITED PARTNERSHIP STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31
1996 1995 ----------- ----------- REVENUES: Suites $ 9,815,893 $ 8,608,968 Telephone 387,242 381,359 Other 227,680 171,533 ----------- ----------- 10,430,815 9,161,860 COSTS AND EXPENSES: Suites 2,663,312 2,356,332 Administrative and general 2,487,148 2,273,565 Telephone 119,766 139,707 Management fees 519,169 458,214 Taxes and insurance 706,975 632,941 Rent expense 207,416 167,100 Other 407,215 317,651 ----------- ----------- Income before depreciation and amortization and interest expense 3,319,814 2,816,350 Depreciation and amortization 1,874,965 1,912,397 Interest expense, net 1,429,164 1,454,179 ----------- ----------- NET INCOME (LOSS) $ 15,685 $ (550,226) =========== ===========
The accompanying notes are an integral part of these statements. 23 24 EPT MEADOWLANDS LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31
General Limited Partners Partners Total --------- ----------- ----------- BALANCE, December 31, 1994 $ 120,971 $ 5,927,477 $ 6,048,448 Contributions 9,848 482,547 492,395 Distributions (16,126) (790,153) (806,279) Net loss (11,005) (539,221) (550,226) --------- ----------- ----------- BALANCE, December 31, 1995 103,688 5,080,650 5,184,338 Distributions (1,875) (91,875) (93,750) Net income 314 15,371 15,685 --------- ----------- ----------- BALANCE, December 31, 1996 $ 102,127 $ 5,004,146 $ 5,106,273 ========= =========== ===========
The accompanying notes are an integral part of these statements. 24 25 EPT MEADOWLANDS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31
1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 15,685 $ (550,226) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,874,965 1,912,397 Amortization of deferred financing costs 3,505 3,505 Decrease (increase) in accounts receivable 57,636 (84,242) Increase in inventories (6,227) (1,872) (Increase) decrease in prepaids and other (161,828) 1,236 Increase (decrease) in accounts payable and accrued liabilities 62,472 (426,136) (Decrease) increase in deferred credits (13,049) 64,162 Decrease in due to Promus Hotels, Inc. (530) (22,772) ----------- ----------- Cash flows provided by operating activities 1,832,629 896,052 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (310,824) (670,053) Proceeds from sale of property and equipment -- 89,230 ----------- ----------- Cash flows used in investing activities (310,824) (580,823) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments of capital lease obligation (369,527) (329,958) Cash contributions by partners -- 492,395 Cash distributions to partners (93,750) (806,279) ----------- ----------- Cash flows used in financing activities (463,277) (643,842) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,058,528 (328,613) Cash and cash equivalents at beginning of year 347,013 675,626 ----------- ----------- Cash and cash equivalents at end of year $ 1,405,541 $ 347,013 =========== ===========
The accompanying notes are an integral part of these statements. 25 26 EPT MEADOWLANDS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization- EPT Meadowlands Limited Partnership (the "Partnership") was organized on December 3, 1987, to acquire, own and operate an Embassy Suites Hotel (the "Hotel") in Secaucus, New Jersey. Promus Hotels, Inc. ("PHI") owns a 49% limited partner interest and Suitelife, Inc., a subsidiary of PHI, owns a 1% general partner interest while serving as managing general partner. General Electric Employee Pension Trust ("GE EPT") Hotel Equities, Inc. owns a 49% limited partner interest and GE EPT Realty Group, an affiliate of GE EPT Hotel Equities, Inc., owns a 1% general partner interest. PHI and Suitelife, Inc. are collectively referred to as "Promus". Cash and Cash Equivalents- Cash and cash equivalents includes short-term interest bearing accounts with original maturities of 90 days or less. Pervasiveness of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Property and Equipment- Property and equipment are stated at cost. Costs of normal repairs and maintenance are expensed while major expenditures which extend the useful lives of the assets are capitalized. Depreciation- Provisions for depreciation are computed using the straight-line method over the following average estimated useful lives: Building and improvements 22 years Furniture, fixtures and equipment 3-10 years
Other Assets- Other assets consist primarily of unamortized deferred financing costs, which are being amortized over the term of the related capital lease obligation (Note 3). The amortization of deferred financing costs has been included in interest expense. Deferred Credits- Deferred credits consist of unamortized deferred income on a long-term contract with a third party for in-suite movies. This deferred income is being amortized into other revenues over the term of the related contract period. 26 27 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued): Partners' Capital- The Partnership Agreement provides that items of income or loss, with certain defined exceptions, together with any contributions from or distributions to partners, are to be allocated on the basis of the partners' percentage ownership interests. Revenue Recognition- Suites revenue represents revenue derived from the rental of suites for the hotel owned by the Partnership. Reclassifications- Certain prior year balances have been reclassified to conform with the current year presentation. 2. INCOME TAXES: No provision is made in the accounts of the Partnership for federal and state income taxes, as such taxes are liabilities of the individual partners. The Partnership's income tax returns and the amount of allocable partnership profits or losses are subject to examination by federal and state taxing authorities. If such examinations result in changes to partnership profits or losses, the income tax liability of the partners may also change. The accounting records of the Partnership are maintained on the accrual basis of accounting in accordance with generally accepted accounting principles. The net income (loss) reflected in the accompanying statements of operations differs from amounts reported in the Partnership's federal income tax return because of differences in accounting policies adopted for financial and tax reporting purposes. The table below reconciles these differences for the years ended December 31:
1996 1995 ----------- ----------- Net income (loss) in the accompanying statements of operations $ 15,685 $ (550,226) Financial reporting depreciation greater than amount deductible for federal income tax purposes 1,240,888 1,292,370 Financial reporting amortization less than amount deductible for federal income tax purposes (98,594) (98,594) Interest expense on capital lease not deductible for federal income tax purposes 1,431,032 1,467,394 Rent payments deductible for federal income tax purposes (1,797,352) (1,797,352) Other, net 134,866 (826) ----------- ----------- Net income for federal income tax reporting purposes $ 926,525 $ 312,766 =========== ===========
27 28 3. CAPITAL LEASE OBLIGATION: The Partnership purchased its land and building and substantially all of its furniture, fixtures and equipment pursuant to a capital lease expiring on October 31, 2011. The lease provides for minimum fixed monthly rent of $137,279, as well as minimum variable monthly rentals of $12,500. The variable rent is 4% of gross suites revenue and 1% of food and beverage revenue. PHI has agreed to pay any variable rent in excess of 3.5% of gross suites revenue. All variable monthly rentals in excess of $12,500 are recorded as rent expense. The Partnership recorded rent expense of $207,416 and $167,101 in 1996 and 1995, respectively, which is included in other expense in the accompanying statements of operations. The interest portion of the minimum lease payments was $1,427,826 and $1,467,394 in 1996 and 1995, respectively. Future minimum lease payments under this lease agreement as of December 31, 1996, are as follows:
Year Ending December 31 Amount ----------- ------------ 1997 $ 1,797,352 1998 1,797,352 1999 1,797,352 2000 1,797,352 2001 1,797,352 Thereafter 17,536,682 ------------ Total minimum lease payments 26,523,442 Amount representing interest (imputed at 10.5%) (12,955,888) ------------ Total obligations under capital lease 13,567,554 Obligations under capital lease due within one year (410,249) ------------ Long-term obligations under capital lease $ 13,157,305 ============
4. RESTAURANT RENTAL: On April 1, 1994, the Hotel restaurant was leased to a third party, pursuant to a ten-year lease agreement with one five-year renewal at the lessee's option. In accordance with the lease agreement, no rental payments were due during the first two years of the lease term. During 1996, the agreement was amended to extend this provision until April 1, 1997. Thereafter, monthly rentals are equal to 3% of restaurant gross revenues, as defined. 5. RELATED PARTY TRANSACTIONS: Management Fees- The Hotel is managed by PHI, pursuant to a management agreement with the Partnership. The terms of the management agreement provide for a base management fee equal to 5% of adjusted gross revenues, as defined. Incentive management fees are due when operating levels of the Partnership exceed a specified amount. No incentive management fees were earned in 1996 or 1995. Marketing and Reservation Assessment- The Partnership paid to Promus a combined marketing and reservation assessment equal to 3.5% of net suites revenue in 1996 and 1995. Total marketing and reservation assessments incurred were $343,543 in 1996 and $301,314 in 1995 and are included in administrative and general expense. 28 29 5. RELATED PARTY TRANSACTIONS (Continued): Operating Services- Promus provided insurance coverage and various other services to the Partnership at a total cost of $174,272 and $199,766 in 1996 and 1995, respectively. Due to Promus- In addition to the fees and services discussed above, the Partnership reimburses Promus for payroll and other operating costs paid by Promus on behalf of the Partnership. Cash Accounts Shared With Affiliates- Prior to July 2, 1996, the Partnership shared a credit card depository account and a short-term investment account with nine affiliated partnerships. Each was accounted for on an individual partnership basis. Cash shortfalls were funded from capital contributions, which were made through capital distributions from affiliated partnerships with cash surpluses. During 1995, the Partnership received $492,395 in contributions and made distributions of $806,279. During 1996, no such contributions or distributions were made. After July 1, 1996, the Partnership established a separate credit card depository account and short-term investment account, and therefore no longer shares the accounts with the nine affiliated partnerships. 6. RESTRICTED ASSETS: The management agreement specifies that the Partnership establish a reserve fund for ordinary capital replacements necessary to maintain and operate the Hotel in accordance with operational standards of Promus. This reserve is funded through monthly deposits of an amount equal to 3% of gross revenues, as defined. Withdrawals from this fund are restricted to the purchase of capital replacements, alterations, additions and improvements. At December 31, 1996, the Partnership had made capital expenditures above the required level by approximately $1,189,000, which was funded from operating cash. The management agreement also specifies that the Partnership maintain a minimum cash balance for working capital requirements. At December 31, 1996, the amount of this required minimum balance was $200,000. 7. SUBSEQUENT EVENT: On January 24, 1997, the Partnership, along with EPT, signed a Partnership Interest Purchase Agreement with FelCor Suites Limited Partnership ("FelCor") and FelCor/Eight Hotels, L.L.C. As of February 1, 1997, GE EPT transferred its entire limited and general partnership interest in capital and 99.8% of its interest in profits in the Partnership, to FelCor. Promus entered into a ten-year management agreement with the new partnership with DJONT Leasing, L.L.C., an affiliate of FelCor. The agreement calls for a basic management fee of 5% of adjusted gross revenue less 4% of suite revenues. The agreement also calls for an incentive management fee of 50% of the combined partnership and seven affiliated hotel partnership's hotel income before lessee's overhead expenses, up to a maximum of 3% of the aggregate adjusted gross revenues to the Partnership and the seven affiliated hotel partnerships. 29 30 Report of Independent Auditors The Partners of AEW Doubletree Portfolio We have audited the accompanying combined balance sheet as of December 31, 1996, of AEW Doubletree Portfolio, and the related combined statements of operations, partners' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of AEW Doubletree Portfolio at December 31, 1996, and the combined results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP February 7, 1997, except for Note 5 as to which the date is March 20, 1997 30 31 AEW DOUBLETREE PORTFOLIO COMBINED BALANCE SHEET DECEMBER 31, 1996 ASSETS Current assets Cash and equivalents $ 2,027,641 Accounts receivable, net of an allowance of ($55,505) 948,121 Inventories 132,807 Prepaid expenses and other assets 259,929 ------------ Total current assets 3,368,498 ------------ Property and equipment (Note 3) Land and land improvements 5,787,368 Building and improvements 41,740,011 Furniture, fixtures and equipment 8,994,138 ------------ 56,521,517 Less accumulated depreciation (4,677,104) ------------ 51,844,413 Restricted cash 955,771 Deposits and other non-current assets 5,986 Organizational and deferred financing costs, net 1,187,616 ------------ TOTAL ASSETS $ 57,362,284 ============ LIABILITIES AND PARTNERS' EQUITY Current liabilities Accounts payable $ 1,101,777 Accrued expenses and other liabilities 1,531,541 Advance deposits 24,569 Current portion of long-term debt (Note 3) 750,765 ------------ Total current liabilities 3,408,652 Long-term debt, less current portion (Note 3) 31,788,839 Commitments (Note 4) PARTNERS' EQUITY 22,164,793 ------------ TOTAL LIABILITIES AND PARTNERS' EQUITY $ 57,362,284 ============
See notes to financial statements. 31 32 AEW DOUBLETREE PORTFOLIO COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 REVENUES Rooms $18,273,664 Food and beverage 5,954,564 Other 1,438,707 ----------- 25,666,935 ----------- DIRECT DEPARTMENT EXPENSES Rooms 4,268,135 Food and beverage 4,637,244 Other 662,357 ----------- 9,567,736 ----------- GROSS OPERATING PROFIT 16,099,199 UNALLOCATED OPERATING EXPENSES Administrative and general 2,295,619 Marketing 1,864,638 Energy costs 1,282,283 Property operation and maintenance 1,323,079 ----------- 6,765,619 ----------- OPERATING INCOME 9,333,580 ----------- OTHER EXPENSES Depreciation and amortization 3,521,014 Management fees (Note 4) 807,338 Property taxes and insurance 1,214,086 Owner's expense 82,883 ----------- Interest expense (Note 3) 2,080,571 ----------- 7,705,892 ----------- NET INCOME $ 1,627,688 ===========
See notes to financial statements. 32 33 AEW DOUBLETREE PORTFOLIO COMBINED STATEMENT OF PARTNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996 Partners' equity, January 1, 1996 $ 46,032,222 Capital contributions 400,000 Distributions (25,895,117) Net income 1,627,688 ------------ Partners' equity, December 31, 1996 $ 22,164,793 ============
See notes to financial statements. 33 34 AEW DOUBLETREE PORTFOLIO COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 OPERATING ACTIVITIES Net income $ 1,627,688 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 3,521,014 Changes in operating assets and liabilities: Inventories 12,927 Accounts receivable 89,194 Prepaid expenses and other assets (59,172) Deposits and other non-current assets 507,195 Accounts payable (491,031) Accrued expenses and other liabilities 718,566 Advance deposits (37,028) ------------ Net cash provided by operating activities 5,889,353 ------------ INVESTING ACTIVITIES Decrease in restricted cash 247,317 Additions to property and equipment Additions to property and equipment (2,755,045) ------------ Net cash used in investing activities (2,507,728) ------------ FINANCING ACTIVITIES Proceeds from issuance of long-term debt 23,200,000 Additions to deferred financing costs (522,752) Payments on long-term debt (625,733) Additional capital contributions 400,000 Distributions (25,895,117) ------------ Net cash used in financing activities (3,443,602) ------------ Net decrease in cash and equivalents (61,977) Cash and equivalents at beginning of year 2,089,618 ------------ Cash and equivalents at end of year $ 2,027,641 ============ Supplemental Schedule: Interest Paid $ 2,013,475 ============
See notes to financial statements. 34 35 AEW DOUBLETREE PORTFOLIO NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 1. THE REPORTING ENTITY The AEW Doubletree Portfolio (the Partnerships) is comprised of three limited partnerships, each of which own a hotel property operating under a Doubletree Guest Suites brand. B.D. Eastrich No. 1 Limited Partnership was formed on December 21, 1994, under the laws of the Commonwealth of Massachusetts, for the purpose of acquiring and operating the Austin, Texas Doubletree Guest Suites hotel (Austin). B.D. Eastrich BWI No. 1 Limited Partnership and B.D. Eastrich Troy No. 1 Limited Partnership were both formed on May 5, 1995, under the laws of the State of Delaware, for the purpose of acquiring and operating the Baltimore/Washington International Airport (BWI) and the Troy, Michigan (Troy) Doubletree Guest Suites hotels. The limited partner interests of the Partnerships are owned by AEW Partners, L.P., a Delaware limited partnership. The general partner interests of the Partnerships are owned by separate limited partnerships or limited liability companies which are ultimately owned by AEW Partners, L.P. AEW Partners, L.P. is treating these three partnerships as a separate portfolio and therefore the reporting entity is the combined financial statements of the Partnerships. All significant intercompany transactions have been eliminated upon combination. The financial statements exclude the results of operations and balances of beverage sales at Austin. In accordance with Texas state law, the beverage sales must be performed by an organization chartered domestically. Austin consists of 189 guest rooms, a restaurant, a fitness center and 5,000 square feet of meeting space. BWI consists of 251 guest rooms, a restaurant and lounge, a fitness center and 5,800 square feet of meeting space. Troy consists of 251 guest rooms, a restaurant and lounge, a fitness center and 5,800 square feet of meeting space. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND EQUIVALENTS Cash consists of cash in interest bearing checking accounts. The Partnerships consider all liquid investments with maturities of three months or less to be cash equivalents. RESTRICTED CASH Restricted cash consists of real estate tax escrows as well as cash reserved for future capital improvements relating to the Partnerships' property and equipment. INVENTORIES Inventories, consisting primarily of food, beverage, and gift shop merchandise are carried at the lower of cost or market using the first-in, first-out method. 35 36 AEW DOUBLETREE PORTFOLIO NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1996 BUILDINGS AND IMPROVEMENTS Buildings and improvements are stated at cost, and are depreciated using the straight-line method over their estimated useful lives, generally 30 years. FURNITURE, FIXTURES, AND EQUIPMENT Furniture, fixtures, and equipment are stated at cost, and depreciated using the straight-line method over their estimated useful lives, generally five years. ORGANIZATIONAL AND DEFERRED FINANCING COST Organizational and deferred financing costs are amortized using the straight-line method over three years or the term of the related long-term debt, respectively. Accumulated amortization at December 31, 1996 was $951,673. ADVERTISING The Partnerships expense advertising cost as incurred. During 1996, the Partnerships expensed $62,142 relating to advertising. INCOME TAXES Under provisions of the Internal Revenue Code, the Partnerships are not taxable entities; accordingly, taxable income or losses are allocated to the partners of each partnership for inclusion in their respective income tax returns. No provision for income taxes has been included in the accompanying financial statements. USE OF ESTIMATES The preparation of the combined financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. LONG-TERM DEBT Long-term debt at December 31, 1996 consists of three mortgage notes payable secured by all three hotel properties with a combined carrying value of $51,844,413. 36 37 AEW DOUBLETREE PORTFOLIO NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1996 Mortgage note payable, bearing interest at 7.86%, amortized over 20 years, maturing October 10, 2000 at which time the remaining balance will be approximately $8,760,000 $ 9,747,581 Mortgage note payable, bearing interest at 7.65%, amortized over 20 years, maturing March 10, 2001 at which time the remaining balance will be approximately $9,350,000 10,524,851 Mortgage note payable, bearing interest at LIBOR rate plus 2.08%, 7.53% at December 31, 1996, amortized over 20 years, maturing April 1, 2001 at which time the remaining balance will be approximately $10,830,000 12,267,172 ----------- $32,539,604 ===========
Principal payment requirements for the next five years are as follows: 1997 $ 750,765 1998 835,175 1999 903,166 2000 9,658,958 2001 20,391,540 ----------- $32,539,604 ===========
4. COMMITMENTS The hotel operations of each of the Partnerships are managed by Doubletree Partners (Doubletree). Doubletree is currently managing the hotel properties under management agreements (the Agreements) which expire approximately ten years from the date of purchase. The Agreements provide for a base management fee and an incentive management fee to Doubletree based on a percentage of the Partnerships' gross revenues, or excess cash flow, respectively, both as defined in the Agreements. In connection with the Agreements, the Partnerships incurred management fees of $642,805 and incentive management fees of $164,533 for the year ended December 31, 1996. In addition, as defined in the Agreements, a Sale Termination Bonus is required to be paid to Doubletree in the event that the net proceeds from the sale, as defined, exceed the preferred return to the partners of the Partnerships. 37 38 5. SUBSEQUENT EVENTS: On March 20, 1997, the Partnership sold the three hotels for approximately $80,100,000. 38 39 INDEPENDENT AUDITORS' REPORT To the Partners of PSH Master L.P. I: We have audited the accompanying balance sheets of PSH Master L.P. I (the "Partnership") as of December 31, 1996 and 1995, and the related statements of operations, partners' deficit, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership'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 report dated February 14, 1997, we did not express an opinion on the financial statements of the Partnership for the three years in the period ended December 31, 1996 because the Partners' capital deficiency and uncertainty regarding the Partnership's ability to make the final payment on the mortgage loan on August 1, 1997 or refinance the debt raised substantial doubt about its ability to continue as a going concern. As discussed in Note 12, on April 22, 1997 the Partnership entered into a purchase and sale agreement to sell all its hotels. Accordingly, our present opinion on such financial statements, as expressed herein, is different from our prior report on such financial statements. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 12 to the financial statements, on April 22, 1997, the Partnership entered into a purchase and sale agreement to sell all of its hotels to FelCor Suites Limited Partnership; the sales transaction, distribution of all net proceeds and liquidation of the Partnership is contingent upon approval by the unit holders of a majority of the outstanding units of the Partnership. Additionally, the consummation of the sale is contingent upon the written approval by the land lessor of one of the properties. These matters raise substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Columbus, Ohio February 14, 1997 [except for Note 12 as to which the date is May 30, 1997] 39 40 PSH MASTER L.P. I BALANCE SHEETS
MARCH 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 -------------- ----------------- ----------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ............................ $ 2,760,593 $ 1,586,070 $ 579,253 Accounts receivable, trade ........................... 1,289,011 1,095,968 986,029 Inventories .......................................... 109,709 119,462 103,444 Prepaid expenses and other ........................... 484,882 401,083 335,179 Cash held in escrow .................................. 464,084 268,907 346,089 ------------ ------------ ------------ Total current assets .......................... 5,108,279 3,471,490 2,349,994 ------------ ------------ ------------ Property and equipment: Land ................................................. 3,780,000 3,780,000 3,780,000 Leasehold interest in land ........................... 7,440,000 7,440,000 7,440,000 Hotels ............................................... 36,499,582 36,401,424 36,191,902 Furniture, fixtures and equipment .................... 12,189,070 12,139,268 11,104,168 ------------ ------------ ------------ Total ......................................... 59,908,652 59,760,692 58,516,070 Less accumulated depreciation and amortization ....... (24,906,989) (24,367,593) (22,338,504) ------------ ------------ ------------ Total property and equipment, net ............. 35,001,663 35,393,099 36,177,566 ------------ ------------ ------------ Other assets: Replacement reserve fund ............................. 111 49,111 46,524 China, glass, linen and silver ....................... 781,590 781,590 781,590 Deferred financing fees, organization costs and other, net .................................... 90,485 129,404 319,563 ------------ ------------ ------------ Total other assets ............................ 872,186 960,105 1,147,677 ------------ ------------ ------------ Total assets ............................................ $ 40,982,128 $ 39,824,694 $ 39,675,237 ============ ============ ============ LIABILITIES AND PARTNERS' DEFICIT Current liabilities: Current portion of mortgage notes payable ............ $ 45,422,230 $ 45,502,185 $ 273,979 Accounts payable ..................................... 963,305 1,542,608 1,739,648 Due to affiliates .................................... 65,859 43,212 37,442 Accrued expense: Payroll and related taxes .......................... 725,200 524,870 342,265 Real estate and other taxes ........................ 421,378 115,370 95,671 Interest ........................................... 4,271 4,271 Other .............................................. 373,992 172,103 171,966 ------------ ------------ ------------ Total current liabilities ..................... 47,976,235 47,904,619 2,660,971 ------------ ------------ ------------ Note payable ............................................ 500,000 500,000 500,000 Mortgage notes payable, less current portion ............ 45,528,387 ------------ ------------ ------------ Partners' Deficit: General Partner - 1% interest ........................ (256,551) (263,067) (267,409) Limited Partners - 99% interest (3,110,000 units authorized and outstanding) ...... (7,237,556) (8,316,858) (8,746,712) ------------ ------------ ------------ Total partners' deficit .......................... (7,494,107) (8,579,925) (9,014,121) ------------ ------------ ------------ Total liabilities and partners' deficit ....... $ 40,982,128 $ 39,824,694 $ 39,675,237 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 40 41 PSH MASTER L.P. I STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------------------- ---------------------------------------------- 1997 1996 1996 1995 1994 ---------- ---------- ----------- ------------ ------------ (UNAUDITED) Revenues: Suites ............................. $5,949,641 $5,127,145 $19,271,365 $ 16,917,194 $ 16,141,594 Other .............................. 1,522,132 1,448,676 5,413,438 4,970,035 4,641,074 ---------- ---------- ----------- ------------ ------------ Total revenues .............. 7,471,773 6,575,821 24,684,803 21,887,229 20,782,668 ---------- ---------- ----------- ------------ ------------ Operating costs and expenses: Direct operating: Suites ........................... 1,108,388 1,005,767 4,105,760 3,686,203 3,356,235 Other ............................ 982,111 966,185 3,842,769 3,534,968 3,367,423 Other operating: Sales, general and administrative 1,421,402 1,330,259 5,131,917 4,743,202 4,536,546 Energy and maintenance ........... 532,590 493,039 2,140,891 1,995,534 1,910,640 Rents, taxes and other ........... 527,444 528,829 1,971,428 1,809,115 1,920,839 Partnership administrative ....... 68,877 55,852 164,885 160,520 144,180 Depreciation and amortization ... 578,316 552,063 2,219,247 1,977,413 1,888,789 ---------- ---------- ----------- ------------ ------------ Total operating costs and expenses ........ 5,219,128 4,931,994 19,576,897 17,906,955 17,124,652 ---------- ---------- ----------- ------------ ------------ Income from operations ................ 2,252,645 1,643,827 5,107,906 3,980,274 3,658,016 Interest income ....................... 13,276 23,813 66,346 18,465 22,376 Interest expense ...................... 1,180,103 1,187,862 4,740,056 4,769,181 4,753,485 ---------- ---------- ----------- ------------ ------------ Net income (loss) ..................... $1,085,818 $ 479,778 $ 434,196 $ (770,442) $ (1,073,093) ========== ========== =========== ============ ============ Net income (loss) per unit of limited partnership interest ..... $ 0.35 $ 0.15 $ 0.14 $ (0.25) $ (0.34) ========== ========== =========== ============ ============
The accompanying notes are an integral part of these financial statements. 41 42 PSH MASTER L.P. I STATEMENTS OF PARTNERS' DEFICIT
GENERAL LIMITED PARTNER PARTNERS TOTAL --------- ----------- ----------- Deficit balance, December 31, 1993 ............... $(248,974) $(6,921,612) $(7,170,586) Net loss ...................................... (10,731) (1,062,362) (1,073,093) --------- ----------- ----------- Deficit balance, December 31, 1994 ............... (259,705) (7,983,974) (8,243,679) Net loss ...................................... (7,704) (762,738) (770,442) --------- ----------- ----------- Deficit balance, December 31, 1995 ............... (267,409) (8,746,712) (9,014,121) Net income .................................... 4,342 429,854 434,196 --------- ----------- ----------- Deficit balance, December 31, 1996 ............... (263,067) (8,316,858) (8,579,925) Net income (unaudited) ........................... 6,516 1,079,302 1,085,818 --------- ----------- ----------- Deficit balance, March 31, 1997 (unaudited) ...... $(256,551) $(7,237,556) $(7,494,107) ========= =========== ===========
The accompanying notes are an integral part of these financial statements. 42 43 PSH MASTER L.P. I STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------------- ----------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Cash provided (used) by operations: Net income (loss) ................................... $ 1,085,819 $ 479,778 $ 434,196 $ (770,442) $(1,073,093) Changes not requiring cash: Depreciation and amortization .................... 578,316 552,063 2,219,247 1,977,413 1,888,789 Working capital changes: (Increase) decrease in accounts receivable, trade ........................................... (193,043) (520,965) (109,939) 76,856 (249,664) Increase in inventories, prepaid expenses and other ...................................... (74,046) (39,499) (81,922) (146,544) (46,272) Increase (decrease) in accounts payable and accrued expenses ........................... 128,924 (155,367) 5,401 417,034 9,980 Increase (decrease) in accrued interest payable .. 4,271 4,271 (403,639) 93,889 Increase (decrease) in due to affiliates ......... 22,647 20,296 5,770 (727) 3,492 ----------- ----------- ----------- ----------- ----------- Cash provided by operations ...................... 1,548,617 340,577 2,477,024 1,149,951 627,121 ----------- ----------- ----------- ----------- ----------- Financing and capital transactions: Guaranty payments from General Partner .............. 47,535 41,589 53,475 Proceeds from notes payable ......................... 500,000 Payments of mortgages ............................... (79,955) (72,198) (300,181) (369,512) (223,389) ----------- ----------- ----------- ----------- ----------- Cash (used) provided by financing and capital transactions .............................. (79,955) (72,198) (252,646) (327,923) 330,086 ----------- ----------- ----------- ----------- ----------- Investment and other transactions: (Increase) decrease in replacement reserve fund ..... 49,000 (164,862) (2,587) 657,766 (331,199) Increase in china, glass, linen and silver .......... (1,866) (Increase) decrease in cash escrow for real estate taxes ............................ (195,177) (197,400) 77,182 (158,950) 13,141 Additions to property and equipment ................. (147,962) (101,479) (1,292,156) (1,046,723) (991,477) ----------- ----------- ----------- ----------- ----------- Cash used by investment and other transactions ...... (294,139) (463,741) (1,217,561) (547,907) (1,311,401) ----------- ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents ....... $ 1,174,523 $ (195,362) $ 1,006,817 $ 274,121 $ (354,194) =========== =========== =========== =========== =========== Supplemental disclosure of cash flow information -- cash paid for interest .............................. $ 1,180,103 $ 1,189,746 $ 4,735,783 $ 5,172,820 $ 4,659,596 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 43 44 NOTES TO THE FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying financial statements of PSH Master L.P. I (the Partnership) have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Partnership incurred net losses from inception through 1995. However, in 1996 the Partnership realized net income of $434,196. Net losses for the years 1995 and 1994 were ($770,442) and ($1,073,093), respectively. The Partnership had a partners' deficit of ($8,597,925) at December 31, 1996. The final payment on the Partnership's real estate mortgage notes due on August 1, 1997 (see Note 7), the accumulated Partners' deficits and the uncertainty of the Partnership's ability to refinance the first mortgage debt on maturity, raise substantial doubt about the Partnership's ability to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Partnership be unable to continue as a going concern. The General Partner is presently in discussion with potential buyers of all three hotels. The General Partner believes that the hotels can be sold or refinanced prior to the maturity of the existing mortgage debt. To sell all three hotels within a twelve-month period, the General Partner must seek the approval from the holders of a majority of the Units of Limited Partnership Interest (see Note 12). (2) BANKRUPTCY OF GENERAL PARTNER On February 1, 1991, PC Development Limited Partnership, the General Partner, along with one of its general partners and two affiliated corporations, filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. On December 30, 1991, the debtors filed a Joint Plan of Reorganization and Disclosure Statement and, on April 19, 1992, the court confirmed the Plan. An unsecured claim in the amount of $5,038,658 was filed in the bankruptcy case on behalf of the Partnership due to the General Partner's default under the Performance and Break-even Guaranty (the Guaranty Agreement). Total payments received to date by the Partnership against its unsecured claim total $757,870. The Partnership expects to receive total payments of approximately $2,000,000, including amounts previously received. This amount includes operating profits and sale proceeds from a hotel owned by the General Partner. Due to the remaining variables in the Plan, however, there are no assurances as to the actual amount to be received. The Plan also provides that PC Development Limited Partnership will continue as the General Partner of the Partnership. (3) ORGANIZATION AND BUSINESS The Partnership is a Delaware limited partnership formed on April 3, 1987. The Partnership will continue in existence until the close of Partnership business on December 31, 2037, or until its earlier termination in accordance with the provisions of the Amended and Restated Agreement of Limited Partnership (the Partnership Agreement). On July 23, 1987, the Partnership received the net proceeds of an initial public offering of 3,110,000 Units of Limited Partner Interest representing gross offering proceeds of $31,100,000. On July 30, 1987, the Partnership purchased from its General Partner the Tampa hotel and the Disney hotel. On December 15, 1987, the Partnership purchased and opened the Raleigh/Durham hotel. The Partnership is a party to a Management Agreement with Doubletree to operate and manage the hotels. The Management Agreement expires on December 29, 2011 with two consecutive ten year renewal options. The Partnership pays a base management fee of 4.75% of hotel revenues. Doubletree assessed the properties three and one-half percent of total departmental revenues for national advertising during 1994 and four percent of room revenues for national 44 45 advertising and centralized reservation services in 1995. Effective January 1, 1996, Doubletree assessed the properties three and one-half percent of room revenues for national advertising and centralized reservation services. Other centralized services such as accounting are provided by Doubletree to the Partnership's properties based upon each hotel's share of such costs. (4) SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Partnership's significant accounting policies are as follows: Inventories: Inventories, consisting principally of food and beverages, are valued at the lower of cost (first-in, first-out) or market. Property and equipment: The initial purchase price allocation to land, leasehold interest in land, hotels, and furniture, fixtures and equipment was based upon independent appraisals obtained in connection with the public offering. Any cash payments made by the General Partner pursuant to its Guaranty Agreement (see Notes 2, 9, and 10) are recorded as a reduction in the purchase price originally allocated to the hotels. Depreciation and amortization are provided using the straight-line method over the estimated useful lives or lease terms, as follows: Leasehold interest in land--initial lease life of 45 years; hotels--45 years; furniture, fixtures and equipment--3, 5, and 10 years. China, glass, linen and silver: A portion of the initial purchase price was allocated to china, glass, linen and silver for the amounts on-hand on the date of acquisition. The base stock method of accounting is used whereby the cost of maintaining and replenishing the base stock is expensed as incurred. Deferred financing fees and organization costs: Deferred financing fees are amortized over the life of the related loans and credit agreements using the straight- line method. Organization costs are amortized over five years using the straight-line method. Such fees and costs are net of accumulated amortization of $1,570,798 and $1,380,640 at December 31, 1996 and December 31, 1995, respectively. Self-Insurance Program: The Partnership uses a retrospective self-insurance plan for workers' compensation. A provision has been made in the financial statements, based on information currently available, which represents the expected future payments based on the estimated ultimate cost for incidents incurred prior to the balance sheet dates. Encompassed in this provision are refundable workers' compensation deposits which result from deposit payments made in excess of the estimated ultimate cost expected to be incurred. 45 46 Cash and cash equivalents: The Partnership considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash is primarily held in one bank. (5) REPLACEMENT RESERVE FUND As required under current debt agreements the Partnership funded replacement reserves based upon revenue percentages of 2% for the Tampa and Raleigh/Durham hotels and 3% for the Disney hotel during 1995, and 1994. Beginning in 1996 replacement reserves were calculated at 4% of revenues at all three hotels. During the years ended December 31, 1996, 1995 and 1994, $990,026, $526,745, and $503,104 respectively, were reserved to fund capital improvements. (6) LEASES The land for the Disney hotel is leased by the Partnership under an operating lease, the initial term of which expires March 11, 2032, with a renewal option for an additional period of 25 years. The Partnership pays annual rent based upon specified percentages of suite, food and beverage, and other hotel revenues, subject to a $100,000 minimum annual rent. Rent is computed and paid quarterly. Rent expense under this lease was $726,177 in 1996, $596,269 in 1995, and $592,453 in 1994. (7) REAL ESTATE MORTGAGE NOTES The nonrecourse notes in the original aggregate amount of $43,300,000 are secured by the first mortgages on the hotels, including the ground lease at the Disney hotel. In February, 1991, the lender applied $2,000,000 of the General Partner's funds, previously held in escrow, against the principal balance of the notes. On May 26, 1993, the Partnership modified certain terms of the mortgage loan documents. Accordingly, during 1993 unpaid interest accruing in the aggregate amount of $4,876,267 was added to the principal balance of the mortgage computed at the contract rate of 10.25%. Additionally, the Partnership borrowed $219,000 during 1993 to pay for closing costs incurred with the modifications. Beginning in February, 1994 interest was payable at an annual rate of 10.25% of $41,300,000 (original loan balance). During 1994, 1995 and 1996, the Partnership made monthly payments of principal and interest on the outstanding principal of $46,395,267 based upon a 30-year amortization schedule. A final payment, which will include principal of $45,502,185 and interest, is due on August 1, 1997. The lender will also receive 25% of the net proceeds, as defined, at the sale of the hotels, or 25% of the net proceeds based upon market value if the hotels are not sold prior to the maturity of the loan, as appreciation interest. The Partnership is subject to prepayment penalties at all times except on the interest adjustment date and during the last three months of the loan term. Any future subordinate financing to be secured by all or any of the hotels is subject to the lender's prior consent. Due to the Partnership's current financial condition and excessive cost, assessment of the fair value was determined to be impracticable. (8) NOTE PAYABLE On October 26, 1994, the Partnership borrowed $500,000 from Doubletree for capital improvements. This nonrecourse note is secured by second mortgages on the hotels and is due at the termination of the management agreement with Doubletree (see Note 3). Interest is computed at 10.25% payable monthly in arrears and payment is equal to the lesser of the monthly computed interest due or monthly available cash flow from the Partnership. 46 47 Due to the Partnership's current financial condition and excessive cost, assessment of the fair value was determined to be impracticable. (9) RELATED PARTIES The General Partner, an affiliate, is generally empowered by the Partnership Agreement to conduct, direct and exercise full control over all activities of the Partnership. Total fees charged by Doubletree to the Partnership for management, advertising, reservation and accounting services were $2,151,820, $1,793,723 and $1,919,253 during 1996, 1995 and 1994, respectively. Nuho Company, a successor to PH Management Company (a previous management company) pursuant to the bankruptcy plan, received residual management fees of $579,078, $515,669, and $487,783 during 1996, 1995, and 1994, respectively. These fees were used by Nuho Company to fund required payments to the creditors in the bankruptcy, including the Partnership. (10) PARTNERSHIP DISTRIBUTIONS AND ALLOCATIONS Pursuant to the terms of the renegotiated debt, the Partnership is precluded from making cash distributions to the partners until such time as the interest capitalized by the lender (see Note 7) has been repaid. This is not expected to occur prior to the maturity of the first mortgage loans on August 1, 1997. Cash flow available for distribution will be distributed 99 percent to the Unitholders and 1 percent to the General Partner until the Unitholders have received cash distributions sufficient to provide a 10 percent (11 percent for the fiscal years 1987 through 1990) non-compounded, cumulative return on the weighted average balances of the net invested capital (originally $31,100,000 in the aggregate) outstanding during such year. Any remaining cash flow available for distribution in excess of the foregoing amounts will be distributed 15 percent to the General Partner and 85 percent to the Unitholders, until the General Partner has received an amount equal to 10 percent of all cash flow available for distribution which has been distributed and, thereafter, 90 percent to the Unitholders and 10 percent to the General Partner. Sale or refinancing proceeds, net of any appreciation interest due the lender (see Note 7), will be distributed 99 percent to the Unitholders and 1 percent to the General Partner until the Unitholders have received (from all prior distributions of cash, regardless of source) a 10 percent non-compounded, cumulative return on their weighted average net invested capital and a return of their net invested capital balances. Any remaining sale or refinancing proceeds will be distributed 70 percent to the Unitholders and 30 percent to the General Partner. Distributions resulting from a liquidation of the Partnership will be paid to the Partners in accordance with their positive capital account balances after such balances have been adjusted to reflect allocations of taxable income and taxable loss. For federal income tax purposes, taxable income, whether from operations or the sale of a hotel, is allocated first to restore any deficit balances of the General Partner and Unitholders on a proportionate basis. Unitholders and the General Partner are then allocated taxable income 99 percent and 1 percent, respectively, (to the extent of cash distributions in this ratio) until the Unitholders have been allocated an amount equal to their net invested capital plus a 10 percent (11 percent for fiscal years 1987 through 1990) non-compounded, cumulative return on the weighted average balances of the net invested capital outstanding plus all prior distributions to the Unitholders of sale or refinancing proceeds. Thereafter, taxable income is allocated in the same proportions as and to the extent of distributions of cash. For federal income tax purposes, taxable loss, whether from operations or the sale of a hotel, is allocated first to the extent of previously allocated taxable income in excess of distributions of cash and, thereafter, 99 percent to the Unitholders and one percent to the General Partner, except that the General Partner shall receive a special loss allocation 47 48 to the extent of its cash payments pursuant to the Guaranty Agreement. Unitholders of record on the last day of each month will be allocated the proportionate share of income or loss for that entire month. Cash payments made by the General Partner pursuant to its Guaranty Agreement have been recorded as a reduction of the purchase price of the hotels. Accordingly, net property and equipment has been reduced by $10,469,829, reflecting $12,477,870 in payments by the General Partner net of accumulated depreciation of $2,008,041, through December 31, 1996. The equity accounts of the Limited Partners and the General Partner reflect a 99 percent and 1 percent allocation, respectively, of cumulative losses through December 31, 1996. (11) INCOME TAXES Partnership taxable income or loss is allocated to the Partners according to the Partnership Agreement for inclusion in the determination of their taxable income. Accordingly, the accompanying financial statements include no provision for income taxes. The Partnership has considered statement of Financial Accounting Standard Number 109 "Accounting for Income Taxes" and, given the cumulative operating losses, has concluded that this standard has no impact on the Partnership's current financial statements. The net income for 1996, as reported on the Partnership's federal tax return was $535,339. The net losses for 1995 and 1994, as reported on the Partnership's federal tax return were ($701,970) and ($1,934,790), respectively, and differ from the net losses as reported in the accompanying financial statements primarily due to the difference between tax and book depreciation charges. This difference is due principally to cash payments made by the General Partner pursuant to its Guaranty Agreement (See Note 2) being recorded as a capital contribution for tax purposes versus a reduction in net property and equipment for financial reporting purposes and different depreciation lives for tax and book purposes. The net income/(losses) for tax purposes allocable to the Unitholders during 1996, 1995, and 1994 were $331,167 or $.11 per unit, ($653,778) or ($.21) per unit, and ($1,862,502) or ($.60) per unit, respectively. Under the Revenue Act of 1987, the Partnership's interest income is taxable to its Partners in the current year as portfolio income while the loss from operations for tax purposes is suspended. This suspended loss can only be used to offset future taxable income of the Partnership or can be recognized by a partner upon a complete disposition of his interest in the Partnership. The provision of the Revenue Act of 1987 which taxes publicly traded partnerships as corporations does not apply to PSH Master L.P. I until 1998. The Revenue Act of 1987 included a provision which will treat publicly-traded partnerships, such as the Partnership, as corporations for Federal income tax purposes beginning January 1, 1998. The effect of treating publicly-traded partnerships as corporations will be to tax the income of the partnership at the entity level and reflect distributions to partners as dividends. Additional costs to the Partnership for such taxes would reduce the amount available for distribution to the partners. (12) SUBSEQUENT EVENTS On April 22, 1997 the Partnership entered into a purchase and sale agreement to sell all its hotels to FelCor Suites Limited Partnership, an affiliate of FelCor Suite Hotels, Inc. for $64,800,000. FelCor Suite Hotels, Inc., located in Irving, Texas, is one of the largest publicly-traded hotel REITs. The sale, which is expected to occur before the end of July, will result in the liquidation of PSH Master L.P. I and a distribution to unit holders of all net proceeds. The sales transaction, distribution of all net proceeds and liquidation of the Partnership is contingent upon approval by the unit holders of a majority of the outstanding units of the Partnership. Additionally the consummation of the sale is contingent upon the written approval by the land lessor of the property at Lake Buena Vista, Florida. FelCor's board of directors has already approved the transaction. 48 49 (13) INTERIM INFORMATION (UNAUDITED) The interim condensed combined financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results of operations and financial position for such periods. All such adjustments reflected in the interim condensed financial statements are considered to be of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 1996. 49 50 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors FelCor Suite Hotels, Inc. We have audited the accompanying combined balance sheet of the DS Hotels (described in Note 1) as of December 31, 1996 and the related combined statements of revenues over expenses, equity, and cash flows for the year then ended. These combined financial statements are the responsibility of the management of the DS Hotels. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. The accompanying financial statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 1 to the financial statements and are not intended to be a complete presentation of the DS Hotels. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the DS Hotels as of December 31, 1996 and the combined results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Dallas, Texas June 2, 1997 50 51 DS HOTELS COMBINED BALANCE SHEETS December 31, 1996 and March 31, 1997 (unaudited)
ASSETS December 31, March 31, 1996 1997 ------------ ------------ (unaudited) Investments in hotel properties, at cost: Land $ 2,871,387 $ 2,871,387 Buildings and improvements 28,902,645 28,918,213 Furniture and equipment 15,010,788 15,323,609 ------------ ------------ 46,784,820 47,113,209 Less accumulated depreciation (15,308,559) (16,078,049) ------------ ------------ Net investment in hotel properties 31,476,261 31,035,160 Cash and cash equivalents 145,186 93,224 Accounts receivable, net 382,241 466,984 Inventories 54,694 50,518 Prepaid expenses 94,664 158,789 Other assets 96,990 96,052 ------------ ------------ Total assets $ 32,250,036 $ 31,900,727 ------------ ------------ LIABILITIES AND EQUITY Accounts payable, trade, accrued expenses and other liabilities 1,159,083 802,501 ------------ ------------ Commitments and contingencies (Note 3) Equity 31,090,953 31,098,226 ------------ ------------ Total liabilities and equity $ 32,250,036 $ 31,900,727 ------------ ------------
The accompanying notes are an integral part of these combined financial statements. 51 52 DS HOTELS COMBINED STATEMENTS OF REVENUES OVER EXPENSES for the year ended December 31, 1996 and the three-month periods ended March 31, 1997 and 1996 (unaudited)
Year Ended Three Months Ended December 31, March 31, 1996 1997 1996 ------------ ---------- ---------- (unaudited) (unaudited) Revenues: Suite revenue $ 13,287,778 $3,343,079 $3,270,182 Restaurant rent 42,099 10,572 15,826 Other revenue 735,410 184,368 186,039 ------------ ---------- ---------- Total revenue 14,065,287 3,538,019 3,472,047 ------------ ---------- ---------- Expenses: Property and operating costs and expenses 3,447,437 850,045 834,778 General and administrative 1,016,047 229,218 247,002 Franchise fees 222,888 53,431 48,257 Advertising and promotion 1,119,819 265,905 293,367 Repairs and maintenance 746,984 194,053 186,963 Utilities 769,858 204,503 206,109 Management fee 701,785 176,250 173,179 Net food and beverage loss (profit) (60,725) 30,956 4,215 Depreciation 3,014,474 769,490 731,255 Real estate and personal property taxes, and insurance 987,406 267,321 244,303 Other expense 114,033 27,356 25,202 ------------ ---------- ---------- Total expenses 12,080,006 3,068,528 2,994,630 ------------ ---------- ---------- Revenues over expenses $ 1,985,281 $ 469,491 $ 477,417 ------------ ---------- ----------
The accompanying notes are an integral part of these combined financial statements. 52 53 DS HOTELS COMBINED STATEMENTS OF EQUITY for the year ended December 31, 1996 Balance, December 31, 1995 $ 32,435,255 Revenues over expenses 1,985,281 Net distributions (3,329,583) ------------ Balance, December 31, 1996 31,090,953 Revenues over expenses (unaudited) 469,491 Net distributions (unaudited) (462,218) ------------ Balance, March 31, 1997 (unaudited) $ 31,098,226 ------------
The accompanying notes are an integral part of these combined financial statements. 53 54 DS HOTELS COMBINED STATEMENTS OF CASH FLOWS for the year ended December 31, 1996 and the three-month periods ended March 31, 1997 and 1996 (unaudited)
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, 1996 1997 1996 ----------- --------- --------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Revenues over expenses $ 1,985,281 $ 469,491 $ 477,417 Adjustments to reconcile revenues over expenses to net cash provided by operating activities: Depreciation and amortization 3,014,474 769,490 731,255 Changes in assets and liabilities: Accounts receivable (101,102) (84,743) (223,803) Inventories (798) 4,176 (310) Prepaid expenses (5,439) (64,125) (66,083) Other assets 382 938 (1,871) Accounts payable, trade, accrued expenses and other liabilities (200,598) (356,582) (387,553) ----------- --------- --------- Net cash provided by operating activities 4,692,200 738,645 529,052 ----------- --------- --------- Cash flows used in investing activities: Additions to property, plant and equipment (1,359,771) (328,389) (478,221) ----------- --------- --------- Cash flows used in financing activities: Net distributions paid (3,329,583) (462,218) (33,401) ----------- --------- --------- Net increase (decrease) in cash 2,846 (51,962) 17,430 Cash and cash equivalents at beginning of periods 142,340 145,186 142,340 ----------- --------- --------- Cash and cash equivalents at end of periods $ 145,186 $ 93,224 $ 159,770 ----------- --------- ---------
The accompanying notes are an integral part of these combined financial statements. 54 55 DS HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION The accompanying combined financial statements of the Embassy Suites hotel in Dallas, TX and the Embassy Suites hotel in Syracuse, NY (collectively the "DS Hotels" or the "Hotels") have been presented on a combined basis because the hotels are expected to be the subject of a business combination with FelCor Suite Hotels, Inc. (the "Company"), a Maryland corporation established to acquire equity interests in existing hotel properties. The Hotels are owned by Promus Hotel Corporation or its wholly-owned subsidiaries (collectively "Promus"). All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared to show the operations and financial position of the Hotels, substantially all of whose assets and operations will be acquired by the Company. The Hotels are included in Promus' consolidated Federal tax return. Taxes are allocated to subsidiaries by Promus based upon the separate company accrual method, however, any benefits from losses are retained by Promus and not passed down to its subsidiaries. The Company has qualified as a REIT and does not pay any federal income taxes. Accordingly, the combined financial statements have been presented on a pretax basis. The accompanying unaudited interim combined financial statements as of March 31, 1997 and 1996 have been prepared pursuant to the rules and regulations of the S.E.C. These financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim combined financial statements. All such adjustments are of a normal and recurring nature. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS IN HOTEL PROPERTIES The hotel properties are stated at cost. Depreciation is computed using the straight-line method based upon the following estimated useful lives:
Years Buildings and improvements 25-40 Furniture and equipment 3-15
The owner of the DS Hotels reviews the carrying value of each property to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel property or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the owner of the Hotels will prepare a projection of the undiscounted future cash flows, without interest charges, of the specific hotel property and determine if the investment in hotel property is recoverable based on the undiscounted future cash flows. The owner of the Hotels does not believe that there are any factors or circumstances indicating impairment of any of its investment in hotel properties. 55 56 DS HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED INVESTMENT IN HOTEL PROPERTIES, CONTINUED 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 gain or loss is included in operations. CASH EQUIVALENTS All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. INVENTORIES Inventories, consisting predominately of room linens and foods and beverages, are stated at the lower of cost (generally, first-in, first-out) 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. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, trade receivables, other assets, accounts payable and amounts included in accruals meeting the definition of a financial instrument approximate fair value. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. COMMITMENTS AND CONTINGENCIES Promus does not typically obtain franchise agreements or charge franchise fees for its owned and managed properties. However, due to a past ownership arrangment, no longer in place, the Syracuse hotel is operating under the terms of a hotel franchise agreement expiring in 1999. As the hotel is owned by the franchisor, Promus, fees are only paid for reservation and advertising services and are computed as 4% of gross room revenue. 56 57 DS HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 3. COMMITMENTS AND CONTINGENCIES, CONTINUED Certain equipment is leased under noncancelable operating lease agreements expiring at varying intervals through March 2002. Minimum future rental payments required under these leases as of December 31, 1996 are as follows: 1997 $ 39,605 1998 47,388 1999 37,757 2000 35,999 2001 35,999 Thereafter 9,000 ---------- $ 205,748 ----------
Rent expense was approximately $84,000 for the year ended December 31, 1996. 4. RELATED PARTY TRANSACTIONS As discussed in Note 3, the Hotels are owned and operated by the owner of the franchise under which they operate. All franchise fees are paid to an affiliate of the owner. Management fees are paid to Embassy Suites, Inc., an affiliated Company, and are generally computed as 5% of total revenue for the periods presented. In 1996, Promus provided insurance coverage and other services to the Hotels at a cost of $366,544, which is included in the Statement of Revenues Over Expenses. 57 58 Report of Independent Public Accountants To the Partners of Barshop - HII Joint Venture: We have audited the accompanying balance sheets of BARSHOP - HII JOINT VENTURE (a Texas joint venture) as of December 31, 1996 and 1995, and the related statements of income, partners' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Joint Venture'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 Barshop - HII Joint Venture as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Memphis, Tennessee, May 16, 1997. 58 59 BARSHOP - HII JOINT VENTURE BALANCE SHEETS AS OF
(UNAUDITED) MARCH 31, 1997 DECEMBER 31, -------------- ------------------------------ 1996 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 882,830 $ 616,550 $ 319,938 Accounts receivable, less allowance for doubtful accounts of $2,000 144,449 167,346 173,143 Inventories, at cost 12,008 12,008 11,787 Prepaids and other 2,335 1,885 1,835 Restricted cash (Note 7) 358,530 266,611 114,464 ------------ ------------ ------------ Total current assets 1,400,152 1,064,400 621,167 Property and equipment, at cost: Land 2,107,275 2,107,275 2,107,275 Building and improvements 11,059,204 11,064,078 11,117,923 Furniture, fixtures and equipment 8,158,859 8,035,252 7,393,192 ------------ ------------ ------------ 21,325,338 21,206,605 20,618,390 Less accumulated depreciation (10,008,890) (9,789,254) (8,838,718) ------------ ------------ ------------ 11,316,448 11,417,351 11,779,672 Other assets, net of amortization 252,770 257,285 162,069 ------------ ------------ ------------ $ 12,969,370 $ 12,739,036 $ 12,562,908 ============ ============ ============ LIABILITIES AND PARTNERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities $ 480,683 $ 363,742 $ 471,119 Due to Promus Hotels, Inc. (Note 6) 198,933 180,901 153,813 Current portion of long-term debt (Note 3) 478,570 478,570 585,041 ------------ ------------ ------------ Total current liabilities 1,158,186 1,023,213 1,209,973 Long-term debt (Note 3) 12,007,695 12,123,657 11,884,843 Deferred credits 102,660 109,837 51,113 Commitments and Contingencies (Notes 6 and 9) Partners' deficit (299,171) (517,671) (583,021) ------------ ------------ ------------ $ 12,969,370 $ 12,739,036 $ 12,562,908 ============ ============ ============
The accompanying notes are an integral part of these statements. 59 60 BARSHOP - HII JOINT VENTURE STATEMENTS OF INCOME
(UNAUDITED) THREE MONTHS ENDED TWELVE MONTHS ENDED MARCH 31, DECEMBER 31, ------------------------- ------------------------- 1997 1996 1996 1995 ---------- ---------- ---------- ---------- Revenues: Suite $1,881,630 $1,812,326 $7,234,741 $6,990,450 Telephone 71,080 63,064 245,261 247,951 Other 54,887 36,456 190,867 165,935 ---------- ---------- ---------- ---------- 2,007,597 1,911,846 7,670,869 7,404,336 Costs and expenses: Suites 433,615 427,852 1,797,701 1,790,352 Administrative and general 466,037 462,067 1,885,155 1,687,321 Telephone 25,150 19,552 78,627 79,786 Management fees 114,676 111,900 430,767 365,534 Taxes and insurance 132,881 140,032 483,599 508,431 Other 52,234 107,003 196,810 275,116 ---------- ---------- ---------- ---------- Income before depreciation and amortization and interest expense 783,004 643,440 2,798,210 2,697,796 Depreciation and amortization 219,636 238,445 950,536 1,094,289 Interest expense, net 256,519 275,892 1,106,788 1,050,026 ---------- ---------- ---------- ---------- Net Income $ 306,849 $ 129,103 $ 740,886 $ 553,481 ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. 60 61 BARSHOP - HII JOINT VENTURE STATEMENTS OF PARTNERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31
PMB PROMUS ASSOCIATES HOTELS, INC. TOTAL ---------- ------------ ----------- Balance, December 31, 1994 $(564,002) $(564,002) $(1,128,004) Net income 276,740 276,741 553,481 Contributions 195,751 195,751 391,502 Distributions (200,000) (200,000) (400,000) --------- --------- ----------- Balance, December 31, 1995 (291,511) (291,510) (583,021) Net income 370,443 370,443 740,886 Contributions 225,066 225,066 450,132 Distributions (562,834) (562,834) (1,125,668) --------- --------- ----------- Balance, December 31, 1996 $(258,836) $(258,835) $ (517,671) ========= ========= ===========
The accompanying notes are an integral part of these statements. 61 62 BARSHOP - HII JOINT VENTURE STATEMENTS OF CASH FLOWS
UNAUDITED THREE MONTHS ENDED TWELVE MONTHS ENDED MARCH 31, DECEMBER 31, --------------------------- ----------------------------- 1997 1996 1996 1995 --------- ------------ ------------ ----------- Cash flows from operating activities: Net income $ 306,849 $ 129,103 $ 740,886 $ 553,481 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 219,636 238,445 950,536 1,094,289 Amortization of deferred financing costs 4,515 25,752 39,291 38,628 Increase in restricted cash (91,919) (136,031) (152,147) (109,404) Decrease (increase) in accounts receivable 22,897 (148,067) 5,797 (6,771) Increase in inventories -- -- (221) (1,103) (Increase) decrease in prepaids and other (450) (29,706) (50) 999 Financing costs -- (111,156) (134,507) (136,319) Increase (decrease) in accounts payable and accrued liabilities 116,941 (19,166) (107,377) (126,567) Increase (decrease) in due to Promus Hotels, Inc. 18,032 114,991 27,088 (92,221) Increase (decrease) in deferred credits (7,177) (3,263) 58,724 (13,050) --------- ------------ ------------ ----------- Cash flows provided by operating activities 589,324 60,902 1,428,020 1,201,962 --------- ------------ ------------ ----------- Cash flows from investing activities: Purchase of property and equipment (118,733) (161,735) (588,215) (540,971) --------- ------------ ------------ ----------- Cash flows from financing activities: Principal payments on long-term debt (115,962) (12,469,884) (12,767,657) (947,357) Principal proceeds -- 12,900,000 12,900,000 -- Distributions to partners (88,349) -- (1,125,668) (400,000) Contributions from partners -- -- 450,132 391,502 --------- ------------ ------------ ----------- Cash flows provided by (used in) financing activities (204,311) 430,116 (543,193) (955,855) --------- ------------ ------------ ----------- Net increase (decrease) in cash and cash equivalents 266,280 329,283 296,612 (294,864) Cash and cash equivalents at beginning of period 616,550 319,938 319,938 614,802 --------- ------------ ------------ ----------- Cash and cash equivalents at end of period $ 882,830 $ 649,221 $ 616,550 $ 319,938 ========= ============ ============ ===========
The accompanying notes are an integral part of these statements. 62 63 BARSHOP - HII JOINT VENTURE NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization- Barshop - HII Joint Venture (the "Joint Venture") was formed on January 17, 1984, in the state of Texas, for the purpose of constructing, owning and operating an Embassy Suites Hotel (the "Hotel") in San Antonio, Texas. The venture partners are Promus Hotels, Inc. ("PHI") and PMB Associates ("PMB"), each owning a 50% interest in the Joint Venture. The Hotel is managed by PHI, in accordance with the terms of the joint venture and management agreements. Cash and Cash Equivalents- Cash and cash equivalents includes short-term interest bearing accounts with original maturities of 90 days or less. Pervasiveness of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Property and Equipment- Property and equipment are stated at cost. Costs of normal repairs and maintenance are expensed while major expenditures which extend the useful lives of the assets are capitalized. Depreciation- Provisions for depreciation are computed using the straight-line method over the following average estimated useful lives: Building and improvements 40 years Furniture, fixtures and equipment 3-10 years
Other Assets- Other assets consist of deferred financing costs and a loan commitment fee. The deferred financing costs are being amortized over the term of the related debt. The loan commitment fee is a deposit with a financial institution to secure the loan for refinancing the Joint Venture's debt (Note 3). The amortization of deferred financing costs has been included in interest expense. 63 64 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued): Deferred Credits- Deferred credits consist of unamortized deferred income on a long-term contract with a third party for in-suite movies. This deferred income is being amortized into other revenues over the term of the related contract period. Revenue Recognition- Suites revenue represents revenue derived from the rental of suites for the hotel owned by the Joint Venture. Reclassifications- Certain prior year balances have been reclassified to conform with the current year presentation. 2. INCOME TAXES: No provision has been made in the accounts of the Joint Venture for federal and state income taxes, as such taxes are liabilities of the individual partners. The Joint Venture's income tax returns and the amount of allocable profits or losses are subject to examination by federal and state taxing authorities. If such examinations result in changes to joint venture profits or losses, the income tax liability of the partners may also change. The accounting records of the Joint Venture are maintained on the accrual basis of accounting in accordance with generally accepted accounting principles. The net income reflected in the accompanying statements of income differs from amounts reported in the Joint Venture's federal income tax returns because of differences in accounting policies adopted for financial and tax reporting purposes. The table below reconciles the differences for the years ended December 31:
1996 1995 ---------- ----------- Net income in the accompanying statements of income $ 740,886 $ 553,481 Financial reporting depreciation greater than amount deductible for federal income tax reporting 195,378 671,417 Other, net 68,579 (2,489) ---------- ----------- Net income for federal income tax reporting purposes $1,004,843 $ 1,222,409 ========== ===========
3. LONG-TERM DEBT: The mortgage loan payable is secured by substantially all of the Joint Venture's property and equipment. On March 20, 1996, the mortgage loan payable, scheduled to mature on September 1, 1996, was refinanced. The new maturity date is April 11, 2011. Under the new agreement, the Joint Venture makes monthly principal and interest payments of $125,448. The interest rate on the loan is 8.29% per annum. 64 65 Total future principal payments on long-term debt are scheduled to occur as follows:
Year Ending December 31 Amount ----------- ---------- 1997 $ 478,570 1998 519,786 1999 564,551 2000 613,173 2001 665,981 Thereafter 9,760,166 ----------- $12,602,227 ===========
Interest paid in 1996 and 1995 was $1,072,485 and $1,039,142, respectively. 4. PARTNERS' DEFICIT: The Joint Venture Agreement provides that the allocation of profits or losses and cash distributions of the Joint Venture shall be made in proportion to the Joint Venture partners' respective ownership interests. 5. RESTAURANT OPERATIONS: An affiliate of PHI operates the Hotel's restaurant. No rent is required under this agreement. The restaurant operator provides services for the Hotel's complimentary breakfast and bar and is reimbursed by the Joint Venture for such costs. Complimentary breakfast and bar costs are included in suites expense. The affiliate is also paid a surcharge equal to 50% of complimentary bar costs. The surcharge totaled $50,252 and $55,846 in 1996 and 1995, respectively, and is included in other expenses. 6. RELATED PARTY TRANSACTIONS: Management Fees- The Joint Venture entered into a management agreement with PHI to manage the operations of the Hotel. The Joint Venture pays PHI a base management fee equal to 4% of adjusted gross suites revenue, as defined, and an incentive management fee equal to 25% of annual distributable cash flow, as defined. Base management fees of $294,824 and $279,613 were incurred in 1996 and 1995, respectively. Incentive management fees of $135,943 and $85,921 were incurred in 1996 and 1995, respectively. Marketing and Reservation Assessment- The Joint Venture paid a combined marketing and reservation assessment to PHI equal to 3.5% of net suites revenue in 1996 and 1995. Total marketing and reservation assessments incurred were $253,212 in 1996 and $244,662 in 1995 and are included in administrative and general expense. Operating Services- PHI provided insurance coverage and various other services to the Joint Venture at a total cost of $210,643 and $222,914 in 1996 and 1995, respectively. 65 66 6. RELATED PARTY TRANSACTIONS (Continued): Due to PHI- In addition to the fees and services discussed above, the Joint Venture reimburses PHI for payroll and other operating costs paid by PHI on behalf of the Joint Venture. 7. RESTRICTED ASSETS: The management agreement specifies that the Joint Venture establish a cash reserve for those ordinary capital replacements which are necessary to maintain and operate the Hotel in accordance with the operational standards of PHI. This reserve is funded through monthly deposits of an amount equal to 5% of adjusted gross revenues as defined in the management agreement. Withdrawals from this fund are restricted to the purchase of capital replacements, alterations, additions and improvements. At December 31, 1996, the Joint Venture had made capital expenditures above the required level by approximately $183,000, which were funded by partner contributions. The management agreement specifies that the Joint Venture maintain a minimum cash balance for working capital requirements. At December 31, 1996, the amount of this required minimum balance was approximately $250,000. Under the mortgage loan agreement, the Joint Venture is required to make monthly deposits into an escrow account of an amount sufficient to permit the payment of property taxes on the property. Disbursements can only be made from this account to pay property taxes. At December 31, 1996, the amount in the escrow account was $266,611. 8. UNAUDITED INTERIM FINANCIAL INFORMATION: The interim financial information presented in the accompanying financial statements do not include all information and notes necessary for complete financial statements in conformity with generally accepted accounting principles. The results for the periods presented are unaudited, but in management's opinion, reflect all adjustments (consisting only of normal recurring adjustments) deemed necessary for a fair presentation of operating results. Results of operations for interim periods are not necessarily indicative of a full year of operations. 9. SUBSEQUENT EVENT: On May 16, 1997 PMB sold its interest in the Joint Venture to FelCor Suites Limited Partnership. 66 67 FELCOR SUITE HOTELS, INC. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 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 or expected to be acquired in 1997 (collectively the "Hotels"), the equity offerings consummated during 1996 and 1997, including the proposed June 1997 equity offering and related transactions had occurred as of January 1, 1996 and the Hotels had all been leased to DJONT Operations, L.L.C. or 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. (the "Lessee") and the historical Statements of Operations of the Proposed 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 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 HISTORICAL AND PREFERRED AND EQUITY COMPANY STOCK OFFERING(A) OFFERINGS(B) TOTAL -------- ----------------- ----------------- -------- Statement of Operations Data: Revenues: Percentage lease revenue (C) ..................... $ 97,950 $ 12,127 $59,636 $169,713 Income from unconsolidated partnerships (D) ...... 2,010 805 308 3,123 Other income (E) ................................. 984 (984) -------- -------- ------- -------- Total revenues ................................. 100,944 11,948 59,944 172,836 -------- -------- ------- -------- Expenses: General and administrative (F) ................... 1,819 76 1,408 3,303 Depreciation (G) ................................. 26,544 4,559 13,604 44,707 Taxes, insurance and other (H) ................... 13,897 1,292 8,767 23,956 Interest expense (I) ............................. 9,803 6,100 8,287 24,190 Minority interest in Operating Partnership (J) ... 5,590 (417) 1,135 6,308 Minority interest in other partnerships (K) ...... 236 236 -------- -------- ------- -------- Total expenses ................................. 57,653 11,610 33,437 102,700 -------- -------- ------- -------- Net income ............................................ 43,291 338 26,507 70,136 Preferred dividends (L) ............................... 7,734 4,064 11,798 -------- -------- ------- -------- Net income applicable to common shareholders (M) ...... $ 35,557 $ (3,726) $26,507 $ 58,338 ======== ======== ======= ======== Net income per common share (M) ....................... $ 1.54 $ 1.66 ======== ======== Weighted average number of common shares outstanding ...................................... 23,076 35,237 ======== ========
67 68 FELCOR SUITE HOTELS, INC. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 1997 --------------------------------- PRO FORMA 1997 HISTORICAL ACQUISITIONS AND COMPANY EQUITY OFFERINGS TOTAL ------- --------------- ------- Statement of Operations Data: Revenues: Percentage lease revenue (C) ....................... $35,370 $ 14,259 $49,629 Income from unconsolidated partnerships (D) ........ 1,127 (285) 842 Other income (E) ................................... 95 (95) ------- -------- ------- Total revenues ................................... 36,592 13,879 50,471 ------- -------- ------- Expenses: General and administrative (F) ..................... 972 100 1,072 Depreciation (G) ................................... 10,417 2,755 13,172 Taxes, insurance and other (H) ..................... 5,207 2,188 7,395 Interest expense (I) ............................... 5,601 1,696 7,297 Minority interest in Operating Partnership (J) ..... 1,417 211 1,628 Minority interest in other partnerships (K) ........ 21 88 109 ------- -------- ------- Total expenses ................................... 23,635 7,038 30,673 ------- -------- ------- Net income .............................................. 12,957 6,841 19,798 Preferred dividends (L) ................................. 2,949 2,949 ------- -------- ------- Net income applicable to common shareholders (M) ........ $10,008 $ 6,841 $16,849 ======= ======== ======= Net income per common share (M) ......................... $ 0.39 $ 0.47 ======= ======= Weighted average number of common shares outstanding .... 25,459 35,526 ======= =======
68 69 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 South San Francisco, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . January 3, 1996 Lexington, Kentucky, Hilton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 10, 1996 Piscataway, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . January 10, 1996 Beaver Creek (Avon-Vail), Colorado, Embassy Suites . . . . . . . . . . . . . . . . . . February 20, 1996 Boca Raton, Florida, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . February 28, 1996 LAX (El Segundo), California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . March 27, 1996 Mandalay, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . May 8, 1996 Napa, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . . May 8, 1996 Deerfield, Illinois, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . June 20, 1996 San Rafael (Marin County), California, Embassy Suites . . . . . . . . . . . . . . . . . July 18, 1996 Parsippany, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . August 1, 1996 Charlotte, North Carolina, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . August 1, 1996 Indianapolis, Indiana, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . August 1, 1996 Atlanta-Buckhead, Georgia, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . October 17, 1996 Kingston Plantation (Myrtle Beach), South Carolina, Embassy Suites . . . . . . . . . . December 5, 1996
(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 and the historical results of operations of those hotels that the Company proposes to acquire ("Proposed Acquisitions") prior to the acquisition by the Company 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 proposed common stock offering in June 1997; and other pro forma adjustments reflecting additional overhead expenses and interest expense. Those hotels acquired during 1997 and date acquired and the Proposed Acquisitions are as follows: Omaha, Nebraska, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997 Bloomington, Minnesota, 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 (Downtown), Texas, Doubletree Guest Suites . . . . . . . . . . . . . . . . . . . . March 20, 1997 Baltimore Washington International Airport (BWI), Maryland, Doubletree Guest Suites . . . March 20, 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
69 70 Austin (Airport North), Texas, Embassy Suites . . . . . . . . . . . . . . . . . . . . February 1, 1997 Covina, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997 Secaucus, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997 San Antonio (Airport), Texas, Embassy Suites . . . . . . . . . . . . . . . . . . . . May 16, 1997
PROPOSED ACQUISITIONS Atlanta (Gateway), Georgia Atlanta (Galleria), Georgia Chicago (O'Hare), Illinois Dallas (Park Central), Texas Phoenix (Crescent), Arizona Lake Buena Vista (Disney World), Florida Raleigh/Durham, North Carolina Tampa (Rocky Point), Florida Nashville (Airport), Tennessee Dallas (Market Center), Texas Syracuse, New York The proposed common stock offering, as further detailed in the Pro Forma Consolidated Balance Sheet, is for 9 million shares of common stock the proceeds of which are to partially finance the Proposed Acquisitions. The proposed offering also includes an offering of 1.2 million shares of common stock to repurchase 1.2 million shares of common stock from Promus at the same price. (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): 70 71
SUITE REVENUE FOR THE PERIOD PRIOR TO ACQUISITION BY THE COMPANY -------------- DATE OF THREE MONTHS THE YEAR ENDED DESCRIPTION OF PROPERTY ACQUISITION 3-31-97 12-31-96 ----------------------- ----------- ------- -------- Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites February 1, 1997 $ 372 $ 6,342 Omaha, NE, Doubletree Guest Suites February 1, 1997 332 4,754 Los Angeles (LAX North), Doubletree Guest Suites February 18, 1997 830 6,263 Dana Point, CA, Doubletree Guest Suites February 21, 1997 832 3,716 Troy, MI, Doubletree Guest Suites March 20, 1997 1,489 6,342 Austin, TX, Doubletree Guests March 20, 1997 1,366 5,696 Baltimore (BWI), MD, Doubletree Guest Suites March 20, 1997 1,167 6,236 Lake Buena Vista, FL, Doubletree Guest Suites (1) 2,688 8,446 Raleigh, NC, Doubletree Guest Suites (1) 1,398 5,327 Tampa (Rocky Point), FL, Doubletree Guest Suites (1) 1,864 5,499 Nashville, TN, Doubletree Guest Suites (1) 691 3,164 Dallas Market Center, TX, Doubletree Guest Suites (1) 2,007 7,716 Syracuse, NY, Embassy Suites (1) 1,336 5,572 Dallas (Park Central), TX, Sheraton (1) 3,289 13,520 Phoenix (Crescent), AZ, Sheraton (1) 3,338 9,581 Chicago (O'Hare), IL, Sheraton Gateway Suites (1) 2,155 8,973 Atlanta (Airport), GA, Sheraton Gateway Hotel (1) 2,196 9,841 Atlanta (Galleria), GA, Sheraton Suites (1) 1,759 8,091 ------- -------- Total consolidated hotels $29,109 $125,079 ======= ======== Unconsolidated Partnership Hotels: Atlanta (Perimeter Center), GA, Embassy Suites February 1, 1997 $ 600 $ 8,085 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 (Plaza), MO, Embassy Suites February 1, 1997 547 7,604 Raleigh, NC, Embassy Suites February 1, 1997 624 7,592 San Antonio (NW I-10), 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 1,882 7,235 ------- -------- Total unconsolidated hotel partnerships $ 6,060 $ 63,165 ======= ========
PERCENTAGE LEASE REVENUE FOR THE PERIOD PRIOR TO ACQUISITION ANNUAL PERCENTAGE BY THE COMPANY LEASE TERMS ----------------------- --------------------------- THE YEAR SUITE THREE MONTHS ENDED FIRST SECOND REVENUE DESCRIPTION OF PROPERTY 3-31-97 12-31-96 TIER TIER BREAKPOINT ----------------------- ------------ -------- ---- ---- ---------- Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites $ 146 $ 3,049 17% 65% $2,468 Omaha, NE, Doubletree Guest Suites 145 2,285 17% 65% $1,703 Los Angeles (LAX North), Doubletree Guest Suites 341 2,591 17% 65% $3,176 Dana Point, CA, Doubletree Guest Suites 400 1,395 17% 65% $2,211 Troy, MI, Doubletree Guest Suites 791 3,316 17% 65% $1,935 Austin, TX, Doubletree Guests 710 2,828 17% 65% $1,961 Baltimore (BWI), MD, Doubletree Guest Suites 516 2,943 17% 65% $2,536 Lake Buena Vista, FL, Doubletree Guest Suites 1,499 4,467 17% 65% $2,272 Raleigh, NC, Doubletree Guest Suites 704 2,623 17% 65% $1,900 Tampa (Rocky Point), FL, Doubletree Guest Suites 999 2,703 17% 65% $1,939 Nashville, TN, Doubletree Guest Suites 267 1,320 17% 65% $1,585 Dallas Market Center, TX, Doubletree Guest Suites 952 3,583 17% 65% $3,069 Syracuse, NY, Embassy Suites 499 2,130 17% 65% $3,227 Dallas (Park Central), TX, Sheraton 1,631 6,748 17% 65% $4,997 Phoenix (Crescent), AZ, Sheraton 1,634 4,025 17% 65% $5,175 Chicago (O'Hare), IL, Sheraton Gateway Suites 1,263 5,265 17% 65% $1,602 Atlanta (Airport), GA, Sheraton Gateway Hotel 979 4,548 17% 65% $4,215 Atlanta (Galleria), GA, Sheraton Suites 783 3,817 17% 65% $3,185 ------- ------- Total consolidated hotels $14,259 $59,636 ======= ======= Unconsolidated Partnership Hotels: Atlanta (Perimeter Center), GA, Embassy Suites $ 271 $ 3,889 17% 65% $2,949 Austin (Airport North), TX, Embassy Suites 245 3,792 17% 65% $2,378 Covina, CA, Embassy Suites 154 1,293 17% 65% $3,066 Overland Park, KS, Embassy Suites 173 2,641 17% 65% $2,114 Kansas City (Plaza), MO, Embassy Suites 236 3,594 17% 65% $2,976 Raleigh, NC, Embassy Suites 296 3,693 17% 65% $2,711 San Antonio (NW I-10), TX, Embassy Suites 117 2,487 17% 65% $2,474 Secaucus, NJ, Embassy Suites 268 4,082 17% 65% $4,788 San Antonio (Airport), TX, Embassy Suites 831 3,113 17% 65% $3,311 ------- ------- Total unconsolidated hotel partnerships $ 2,591 $28,584 ======= =======
(1) Proposed Acquisitions 71 72 (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 deducted to arrive at income from unconsolidated partnerships. This computation is as follows:
THREE MONTHS ENDED YEAR ENDED MARCH 31, 1997 DECEMBER 31, 1996 ------------------ ----------------- Statements of operations information: Percentage lease revenue ...................................... $ 2,591 $ 28,584 Depreciation .................................................. 1,190 12,536 Taxes, insurance and other .................................... 448 3,166 Interest expense .............................................. 986 9,725 ---------- ---------- Net income (loss) ............................................. (33) 3,157 50 % of income (loss) attributable to the Company ............ (17) 1,579 Amortization of cost in excess of book value (See Note G) ..... (268) (1,271) ---------- ---------- Income (loss) from unconsolidated partnerships ................ $ (285) $ 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. 72 73 The pro forma depreciation adjustment for the hotels acquired in 1997 and the Proposed Acquisitions for the year ended December 31, 1996 is as follows:
FELCOR SUITE HOTELS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF MARCH 31, 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), Doubletree Guest 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, TX, Doubletree Guests 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 3 - Doubletree Proposed Acquisitions (1) 7,230 62,901 2,169 72,300 Nashville, TN, Doubletree Guest Suites (1) 1,080 9,396 324 10,800 2 - Embassy Suite Proposed Acquisitions (1) 4,670 40,629 1,401 46,700 5 - Sheraton Proposed Acquisitions (1) 20,000 174,000 6,000 200,000 -------- -------- ------- -------- Total consolidated hotels $ 48,918 $425,768 $14,676 $490,362 ======== ======== ======= ========
FELCOR SUITE HOTELS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF MARCH 31, 1997 (IN THOUSANDS)
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 North), Doubletree Guest Suites 480 132 612 Dana Point, CA, Doubletree Guest Suites 389 107 496 Troy, MI, Doubletree Guest Suites 645 177 822 Austin, TX, Doubletree Guests 546 150 696 Baltimore (BWI), MD, Doubletree Guest Suites 560 154 714 3 - Doubletree Proposed Acquisitions 1,573 434 2,007 Nashville, TN, Doubletree Guest Suites 235 65 300 2 - Embassy Suite Proposed Acquisitions 1,015 306 1,321 5 - Sheraton Proposed Acquisitions 4,350 1,200 5,550 ------- ------ ------- Total consolidated hotels $10,644 $2,960 $13,604 ======= ====== =======
ACQUISITION COST ANNUAL ACQUISITION ACQUISITION IN EXCESS OF NET AMORTIZATION DATE 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 6,500 7,085 177 ------- ------- ------ Total unconsolidated hotel partnerships $64,719 $50,842 $1,271 ======= ======= ======
(1) Proposed Acquisitions 73 74 (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 three months ended March 31, 1997 real estate, personal property and 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 and the Proposed Acquisitions follows:
PROPERTY TAXES PROPERTY INSURANCE ----------------------- ----------------------- 3/31/97 12/31/96 3/31/97 12/31/96 ---------- ---------- ---------- ---------- (IN THOUSANDS) DESCRIPTION OF PROPERTY ----------------------- Consolidated Hotels: Bloomington, MN, Doubletree Guest Suites $ 59 $ 707 $ 1 $ 17 Omaha, NE, Doubletree Guest Suites 14 170 1 13 Los Angeles (LAX North), Doubletree Guest Suites 44 320 20 91 Dana Point, CA, Doubletree Guest Suites 16 62 25 13 Troy, MI, Doubletree Guest Suites 91 354 5 21 Austin, TX, Doubletree Guests 97 466 3 13 Baltimore (BWI), MD, Doubletree Guest Suites 38 223 2 7 Lake Buena Vista, FL, Doubletree Guest Suites 99 399 4 16 Raleigh, NC, Doubletree Guest Suites 40 149 4 14 Tampa (Rocky Point), FL, Doubletree Guest Suites 59 237 10 39 Nashville, TN, Doubletree Guest Suites 21 75 2 8 Dallas Market Center, TX, Doubletree Guest Suites 139 505 5 19 Syracuse, NY, Embassy Suites 84 329 5 16 Dallas (Park Central), TX Sheraton 169 595 15 70 Phoenix, AZ, Sheraton Crescent 206 748 7 24 Chicago (O'Hare), IL, Sheraton Gateway Suites 323 1,366 5 20 Atlanta (Airport), GA, Sheraton Gateway Hotel 123 443 6 25 Atlanta (Galleria), GA, Sheraton Suites 96 369 4 16 ---------- ---------- ---------- ---------- Total consolidated hotels $ 1,718 $ 7,517 $ 124 $ 442 ========== ========== ========== ========== 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 116 418 5 18 ---------- ---------- ---------- ---------- Total unconsolidated hotel partnerships $ 361 $ 2,060 $ 25 $ 244 ========== ========== ========== ==========
74 75 (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 Chase Line of Credit in the amount of $120.4 million were required in order to finance the 1997 Acquisition Hotel purchases and includes additional interest expense incurred prior to the acquisition date by the Company. The increase in the pro forma debt balance from December 31, 1996 to March 31, 1997 primarily relates to borrowings associated with the renovation of the Company's hotels. 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 March 31, 1997. The period end pro forma debt balances, average interest rates and pro forma interest expense for the year end December 31, 1996 and March 31, 1997 follow:
DECEMBER 31, 1996 (IN THOUSANDS) ------------------------------------------- DEBT INTEREST INTEREST BALANCE RATE EXPENSE(1) ------------ ----------- ------------ Line of Credit .................................................. $ 235,396 7.30% $ 16,419 Term Loan ....................................................... 85,000 7.41% 1,693 Renovation loan ................................................. 25,000 7.27% 852 Other debt payable .............................................. 1,550 6.75% 3,520 Capital leases .................................................. 12,875 12.50% 1,706 ------------ ------------ $ 359,821 $ 24,190 ============ ============
MARCH 31, 1997 (IN THOUSANDS) -------------------------------- DEBT INTEREST INTEREST BALANCE RATE EXPENSE(1) ---------- -------- -------- Line of Credit . . . . . . . . . . . . . . . . . . . . . . . . . $ 253,588 7.30% $ 4,507 Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 7.97% 1,693 Renovation loan . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 6.24% 390 Other debt payable . . . . . . . . . . . . . . . . . . . . . . . 650 6.00% 320 Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . 12,577 12.50% 387 ---------- -------- $ 376,815 $ 7,297 ========== ========
(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. (J) Calculated as approximately 7.60% and 8.25% of income before minority interest for pro forma results of operations for the three months ended March 31, 1997 and the year ended December 31, 1996, respectively. (K) Represents historical and pro forma minority interest expense related to 3 hotels in which Doubletree has a 10% limited 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:
THREE MONTHS ENDED YEAR ENDED MARCH 31, 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 ======= =======
75 76 (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 and 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 "Historical Company" for the year ended December 31, 1996. 76 77 FELCOR SUITE HOTELS, INC. PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 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 subsequent to March 31, 1997 or proposed to be acquired ("Proposed Acquisitions"), and the consummation of the proposed June 1997 equity offering and related transactions had occurred on March 31, 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 March 31, 1997, nor does it purport to represent the future financial position of the Company.
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ------------ ----------- ----------- ASSETS Investment in hotels . . . . . . . . . . . . . . . . . . . . . $1,061,340 $329,800 (A) $1,391,140 Investment in unconsolidated partnerships . . . . . . . . . . . 118,320 6,500 (B) 124,820 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . 10,957 (1,625)(C) 9,332 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,616 1,616 Due from Lessee . . . . . . . . . . . . . . . . . . . . . . . . 15,630 15,630 Deferred expenses . . . . . . . . . . . . . . . . . . . . . . . 3,702 3,702 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 793 793 ---------- -------- ---------- Total assets . . . . . . . . . . . . . . . . . . . . . $1,212,358 $334,675 $1,547,033 ========== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Distributions payable . . . . . . . . . . . . . . . . . . . . . $ 17,610 $ 17,610 Accrued expenses and other liabilities . . . . . . . . . . . . 4,740 4,740 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353,650 $ 10,588 (D) 364,238 Capital lease obligations . . . . . . . . . . . . . . . . . . . 12,577 12,577 Minority interest in Operating Partnership . . . . . . . . . . 62,661 11,878 (E) 74,539 Minority interest in other partnerships . . . . . . . . . . . . 8,043 8,043 ---------- -------- ---------- Total liabilities . . . . . . . . . . . . . . . . . . 459,281 22,466 481,747 ---------- -------- ---------- Shareholders' Equity: Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . 151,250 151,250 Common stock . . . . . . . . . . . . . . . . . . . . . . . . . 266 90 (F) 356 Additional paid in capital . . . . . . . . . . . . . . . . . . 620,465 312,119 (G) 932,584 Unearned officers' and directors' compensation . . . . . . . . (2,448) (2,448) Distributions in excess of earnings . . . . . . . . . . . . . . (16,456) (16,456) ---------- -------- ---------- Total shareholders' equity . . . . . . . . . . . . . . 753,077 312,209 1,065,286 ---------- -------- ---------- Total liabilities and shareholders' equity . . . . . . $1,212,358 $334,675 $1,547,033 ========== ======== ==========
77 78 FELCOR SUITE HOTELS, INC. NOTES TO PRO FORMA BALANCE SHEET (A) Increase represents the following probable hotel purchase transactions: Five Sheraton hotels $200,000 Four Doubletree Guest Suites hotels 83,100 Two Embassy Suites hotels 46,700 -------- $329,800 ========
(B) Increase represents the unconsolidated 50% hotel partnership interest in the San Antonio (Airport) Embassy Suites hotel purchased for $6.5 million on May 16, 1997. (C) Decrease represents cash portion of purchase price of San Antonio (Airport) Embassy Suites Hotel. (D) Increase represents borrowing under the Company's line of credit for the Proposed Acquisitions. (E) Increase represents $4.9 million in Partnership Units issued for acquisition of 50% partnership interest in the San Antonio (Airport) Embassy Suites hotel and the adjustment necessary to reflect a pro forma 7.5% minority interest in the Operating Partnership at March 31, 1997. (F) Increase reflects the par value of common stock in the proposed equity offering. (G) Net increase reflects the proceeds from the proposed offering less the par value of the common stock issued and estimated offering expenses less an allocation to minority interest as follows (in thousands): Gross proceeds from proposed offering(1). . . . . . . . . . . $336,375 (9 million shares at $37.375 per share) Estimated offering expenses including underwriters' discount. (17,163) Par value of common stock . . . . . . . . . . . . . . . . . . (90) Allocation to minority interest . . . . . . . . . . . . . . . (7,003) -------- Net change in additional paid in capital . . . . . . . . . . $312,119 ========
(1) The proposed offering also includes an offering of 1.2 million shares of common stock to repurchase 1.2 million shares of common stock from Promus at the same price. 78 79 DJONT OPERATIONS, L.L.C. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) 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 or expected to be acquired in 1997 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, and the historical Statements of Operations of the Proposed 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 HISTORICAL AND PREFERRED AND EQUITY PRO FORMA COMPANY STOCK OFFERING (A) OFFERINGS (B) ADJUSTMENTS TOTAL ---------- ------------------ --------------- ----------- ---------- Revenues: Suite revenue ........................... $ 234,451 $ 46,393 $ 188,243 $ 469,087 Food and beverage revenue ............... 15,119 8,194 35,569 58,882 Food and beverage rent .................. 2,334 408 538 3,280 Other revenue ........................... 17,340 2,802 12,652 $ (316)(c) 32,478 ---------- ---------- ---------- ---------- ---------- Total revenues ..................... 269,244 57,797 237,002 (316) 563,727 ---------- ---------- ---------- ---------- ---------- Expenses: Property operating costs and expenses ... 66,236 12,417 53,616 132,269 Other operating expenses ................ 81,045 20,182 84,206 185,433 Management and franchise fees ........... 11,770 5,491 10,754 (3,604)(D) 24,411 Taxes, insurance and other .............. 5,912 (862) 17,663 (12,690)(E) 10,023 Interest expense ........................ 30,779 (30,779)(F) Depreciation and amortization ........... 32,969 (32,969)(G) Percentage lease payments ............... 107,935 20,248 88,220 (H) 216,403 Lessee overhead expenses ................ 1,776 (236) 1,540 ---------- ---------- ---------- ---------- ---------- Income before minority interest ............. (5,430) 557 7,015 (8,494) (6,352) Minority interest ....................... (92)(I) (92) ---------- ---------- ---------- ---------- ---------- Net loss .................................... $ (5,430) $ 557 $ 7,015 $ 8,402 $ (6,260) ========== ========== ========== ========== ==========
79 80 DJONT OPERATIONS, L.L.C. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 --------------------------------- 1997 HISTORICAL ACQUISITIONS AND PRO FORMA COMPANY EQUITY OFFERING(B) ADJUSTMENTS TOTAL ---------- ------------------ ----------- ---------- Revenues: Suite revenue ............................ $ 93,153 $ 35,169 $ 128,322 Food and beverage revenue ................ 4,028 8,881 12,909 Food and beverage rent ................... 965 51 1,016 Other revenue ............................ 7,069 2,631 $ (73)(C) 9,627 ---------- ---------- ---------- ---------- Total revenues ......................... 105,215 46,732 (73) 151,874 ---------- ---------- ---------- ---------- Expenses: Property operating costs and expenses .... 25,182 10,105 35,287 Other operating costs .................... 26,911 17,792 44,703 Management and franchise fees ............ 4,987 2,728 (1,196)(D) 6,519 Taxes, insurance and other ............... 1,588 3,563 (2,554)(E) 2,597 Interest expense ......................... 4,357 (4,357)(F) Depreciation and amortization ............ 5,616 (5,616)(G) Percentage lease expenses ................ 44,615 16,850 (H) 61,465 Lessee overhead expenses ................. 518 518 ---------- ---------- ---------- ---------- Income before minority interest ............... 1,414 2,571 (3,200) 785 Minority interest ........................ 300 (213)(I) 87 ---------- ---------- ---------- ---------- Net income .................................... $ 1,114 $ 2,571 $ (2,987) $ 698 ========== ========== ========== ==========
80 81 DJONT OPERATIONS, L.L.C. NOTES TO PRO FORMA CONDENSED 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 South San Francisco, California, Embassy Suites . . . . . . . . . . . . . . . . . January 3, 1996 Lexington, Kentucky, Hilton . . . . . . . . . . . . . . . . . . . . . . . . . . . January 10, 1996 Piscataway, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . January 10, 1996 Beaver Creek (Avon-Vail), Colorado, Embassy Suites . . . . . . . . . . . . . . . February 20, 1996 Boca Raton, Florida, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . February 28, 1996 LAX (El Segundo), California, Embassy Suites . . . . . . . . . . . . . . . . . . March 27, 1996 Mandalay, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . May 8, 1996 Napa, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . May 8, 1996 Deerfield, Illinois, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . June 20, 1996 San Rafael (Marin County), California, Embassy Suites . . . . . . . . . . . . . . July 18, 1996 Parsippany, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . August 1, 1996 Charlotte, North Carolina, Embassy Suites . . . . . . . . . . . . . . . . . . . . August 1, 1996 Indianapolis, Indiana, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . August 1, 1996 Atlanta-Buckhead, Georgia, Embassy Suites . . . . . . . . . . . . . . . . . . . . October 17, 1996 Kingston (Myrtle Beach), South Carolina, Embassy Suites . . . . . . . . . . . . . December 5, 1996
(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 and the Proposed Acquisitions. Those hotels acquired during 1997 and date acquired and the Proposed Acquisitions are as follows: Omaha, Nebraska, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997 Bloomington, Minnesota, 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 (Washington International Airport), Maryland, Doubletree Guest Suites . . . March 20, 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 San Antonio (Airport), Texas, Embassy Suites . . . . . . . . . . . . . . . . . . . . May 16, 1997
81 82 PROPOSED ACQUISITIONS: Atlanta (Gateway), Georgia Atlanta (Galleria), Georgia Chicago (O'Hare), Illinois Dallas (Park Central), Texas Phoenix (Crescent), Arizona Lake Buena Vista (Disney World, Florida Raleigh/Durham, North Carolina Tampa (Rocky Point), Florida Nashville (Airport), Tennessee Dallas (Market Center), Texas Syracuse, New York (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. (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. 82 83 INDEX TO EXHIBITS
Exhibit Number Description of Exhibit - ------ ---------------------- 1 Underwriting Agreement dated January 28, 1997, between the Company and the Underwriters named therein. 23.1 Consent of Coopers & Lybrand, L.L.P. 23.2 Consent of Arthur Andersen LLP 23.3 Consent of Ernst & Young LLP 23.4 Consent of Deloitte & Touche LLP
EX-1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1 3,000,000 Shares FELCOR SUITE HOTELS, INC. Common Stock UNDERWRITING AGREEMENT January 28, 1997 Smith Barney Inc. Alex. Brown & Sons Incorporated Dean Witter Reynolds Inc. Montgomery Securities The Several Underwriters c/o Smith Barney Inc. 388 Greenwich Street New York, New York 10013 Gentlemen: FelCor Suite Hotels, Inc., a Maryland corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto an aggregate of 3,000,000 shares (the "Firm Shares") of the Company's common stock, $0.01 par value per share (the "Common Stock"). The respective amounts of the Firm Shares to be so purchased by the Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to sell at the Underwriters' option an aggregate of up to 450,000 additional shares of the Company's Common Stock (the "Option Shares") as set forth below. The Firm Shares and the Option Shares are hereinafter collectively referred to as the "Shares." Upon consummation of the transactions contemplated hereby and upon the Company's contribution of the net proceeds from the sale of the Firm Shares, in exchange for units of partnership interest (the "Units") in FelCor Suites Limited Partnership, (the "Partnership"), a Delaware limited partnership, the Company will own an approximate 90.5% general partnership interest in the Partnership. The Partnership currently owns interests in 43 hotels as described in the Prospectus, as defined herein, (collectively, the "Current Hotels"). Six of the Current Hotels were acquired in connection with the Company's initial public offering of Common Stock in July 1994, seven of the Current Hotels were acquired from December 1994 through August 1995, eighteen Current Hotels, 2 the Crown Sterling Suites hotels, were acquired between November 1995 and March 1996, and the remaining twelve Current Hotels were acquired between November 1995 through December 1996. The Partnership has entered into agreements (the "Acquisition Agreements") as described in the Prospectus to acquire interests in ten additional hotels from affiliates of the General Electric Pension Trust or joint ventures between such affiliates and Promus Hotels, Inc. ("Promus") (such ten additional hotels being hereinafter referred to as the "Acquisition Hotels") (the Current Hotels and the Acquisition Hotels hereinafter referred to as the "Hotels"). The Partnership leases the Current Hotels, and upon the purchase thereof will lease the Acquisition Hotels to DJONT Operations, L.L.C. or a subsidiary thereof (collectively, the "Lessee"), pursuant to separate leases providing for the payment of certain base amounts (the "Percentage Leases"). Thirty-eight of the Company's Current Hotels are managed by Promus, two are managed by American General Hospitality, Inc., two are managed by DT Management, Inc. and one is managed by Coastal Hotel Group, Inc., pursuant to separate management agreements (collectively, the "Management Agreements"). The Partnership will lease the Acquisition Hotels to the Lessee pursuant to leases substantially similar to the Percentage Leases. The Current Hotels are operated, and the Acquisition Hotels will be operated, by the Lessee pursuant to the terms of the Percentage Leases. Other capitalized terms used herein and not otherwise defined herein shall have the meaning set forth in the Registration Statement (as hereinafter defined). The Company wishes to confirm as follows its agreement with you and the other Underwriters, in connection with the several purchases of the Shares by the Underwriters. 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-3 (Registration No. 333-3170) under the Act, with respect to an aggregate of $500,000,000 of Debt Securities, Preferred Stock, Common Stock and Common Stock Warrants, including a prospectus generally relating to the Shares; and such amendments to such registration statement as may have been required prior to the date hereof have been filed with the Commission, and such amendments have been similarly prepared. Such registration statement and any post-effective amendments thereto have become effective under the Act. The Company also has filed, or proposes to file, with the Commission pursuant to Rule 424(b) under the Act, a prospectus supplement specifically relating to the Shares. The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it became effective, as supplemented or amended prior to the execution of this Agreement, including all information (if any) deemed to be a part of such registration at the time it became effective pursuant to Rule 430A under the Act. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement -2- 3 means the registration statement as amended by said post-effective amendment. The term "Prospectus" as used in this Agreement means the base prospectus included in the registration statement at the time it was declared effective (the "Base Prospectus") together with the prospectus supplement relating to the Shares dated the date hereof in the form first filed with the Commission on or after January 22, 1997 pursuant to Rule 424(b) under the Act. The term "Prepricing Prospectus Supplement" as used in this Agreement means the Base Prospectus together with any prospectus supplement subject to completion as filed with the Commission pursuant to Rule 424(b) under the Act, and as such Prepricing Prospectus Supplement shall have been amended or supplemented from time to time prior to the date of the Prospectus. Any reference in this Agreement to the Registration Statement, the Base Prospectus, any Prepricing Prospectus Supplement or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date of the Registration Statement, such Prepricing Prospectus Supplement of the Prospectus, as the case may be, and any reference to any amendment or supplement to the Registration Statement, any Prepricing Prospectus Supplement or the Prospectus shall be deemed to refer to and include any documents filed after such date under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which, upon filing, are incorporated by reference therein, as required by paragraph (b) of Item 12 of Form S-3. As used herein, the term "Incorporated Documents" means the documents which at the time are incorporated by reference in the Registration Statement, any Prepricing Prospectus Supplement, the Prospectus, or any amendment or supplement thereto. 2. Agreements to Sell and Purchase. The Company hereby agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company and the Partnership herein contained, and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $35.50 per Share (the "Purchase Price Per Share"), the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof). The Company also agrees, subject to all the terms and conditions set forth herein, to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company and the Partnership herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Company, at the Purchase Price Per Share, pursuant to an option (the "Over-allotment Option"), which may be exercised at any time and from time to time prior to 9:00 p.m., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading), up to an aggregate of 450,000 Additional Shares. Additional Shares may be purchased only for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. Upon any exercise of the Over-allotment Option, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments as you may determine in order to avoid fractional shares) which bears the same proportion to the total number of Additional -3- 4 Shares to be purchased by all of the Underwriters as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof) bears to the aggregate number of Firm Shares. 3. Terms of Public Offering. The Company has been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after this Agreement has become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery of the Shares and Payment Therefor. Delivery to the Underwriters of and payment for the Firm Shares shall be made at the office of Smith Barney Inc., 333 West 34th Street, New York, New York 10001, at 10:00 a.m., New York City time, on February 3, 1997 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement between you and the Company. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at the aforementioned office of Smith Barney Inc. at such time and on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than three nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Company of the Underwriters' determination to purchase a number, specified in such notice, of Additional Shares. The place of closing for any Additional Shares and the Option Closing Date for such Shares may be varied by agreement between you and the Company. Certificates for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request prior to 9:30 a.m., New York City time, on the second business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 a.m., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor by wire transfer of immediately available funds to the Company. 5. Agreements of the Company. The Company agrees with the Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for a post-effective amendment to the Registration Statement to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause such post-effective amendment to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when such post-effective amendment has become effective. -4- 5 (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus Supplement or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period of time referred to in paragraph (f) below, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations, or of the occurrence of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge, (i) two copies of the Prepricing Prospectus Supplement or Prospectus, and, (ii) such number of copies of the documents incorporated by reference in the Prepricing Prospectus Supplement or Prospectus since April 30, 1996, as you may reasonably request. (d) The Company will not file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus or, prior to the end of the period of time referred to in the first sentence in subsection (f) below, file any document which upon filing, becomes an Incorporated Document, of which you shall not previously have been advised or to which, after you shall have received a copy of the document proposed to be filed, you shall reasonably object. (e) Prior to the execution and delivery of this Agreement, the Company has delivered to you, without charge, in such quantities as you have requested, copies of the Prepricing Prospectus Supplement. The Company consents to the use, in accordance with the provisions of the Act and with the securities or blue sky laws of the jurisdictions in which the Shares are offered by the Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus Supplement so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may reasonably request. The Company consents to the use of the Prospectus (and of any amendment or -5- 6 supplement thereto) in accordance with the provisions of the Act and with the securities or blue sky laws or real estate syndication laws of the jurisdictions in which the Shares are offered by the Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Company or in the reasonable opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus (or to file under the Exchange Act any document which, upon filing, becomes an Incorporated Document) in order to comply with the Act or any other law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto (or to such Incorporated Document), and will expeditiously furnish to the Underwriters and dealers a reasonable number of copies thereof. In the event that the Company and you, agree that the Prospectus should be amended or supplemented, the Company, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Company will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the Underwriters and by dealers under the securities or blue sky laws or real estate syndication laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Company generally will make available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act. (i) As long as any of the Shares are outstanding, the Company will furnish to its shareholders, as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and during the period of five years hereafter, the Company will furnish to you (i) concurrently with mailing or filing, a copy of each report of the Company mailed to shareholders or filed with the Commission, and (ii) from time to time such other information concerning the Company as you may reasonably request. -6- 7 (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 10 hereof or by notice given by you terminating this Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company to comply with the terms or fulfill any of the conditions of this Agreement to be complied with or fulfilled by the Company, the Company agrees to reimburse the Underwriters for all reasonable out-of-pocket expenses (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. (k) The Company will apply the net proceeds from the sale of the Shares substantially in accordance with the description set forth under the caption "Use of Proceeds" in the Prospectus. (l) The Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) Except as provided in this Agreement, the Company will not sell, offer to sell, solicit an offer to buy, contract to sell, grant any option to purchase, or otherwise transfer or dispose of any shares of Common Stock or any other securities convertible into, or exercisable or exchangeable for, shares of Common Stock for a period of 90 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc.; provided, however, that the foregoing shall not prohibit the Company from issuing Common Stock upon the exercise of stock options, the conversion of outstanding shares of the Company's $1.95 Series A Cumulative Convertible Preferred Stock or the redemption of Units outstanding as of the date of the Prospectus, grant additional options under the Company's stock option plans consistent with past practices, and issuing Common Stock and/or Units in connection with the acquisition of hotels. (n) The Company has furnished or will furnish to you "lock-up" letters, in form and substance satisfactory to you, signed by Messrs. Feldman and Corcoran. (o) Except as stated in this Agreement and in any Prepricing Prospectus Supplement and Prospectus, the Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (p) The Company will not, and will use its best efforts to cause its officers, directors and affiliates not to, (i) take, directly or indirectly prior to termination of the underwriting syndicate contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or which may cause or result in, or which might in the future reasonably be expected to cause or result in, the stabilization or manipulation of the price of any security of the Company, to facilitate the same or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of the Shares or (iii) pay or agree -7- 8 to pay to any person any compensation for soliciting any order to purchase any other securities of the Company. (q) The Company will use its best efforts to list the Shares on the New York Stock Exchange. 6. Representations and Warranties of the Company and the Partnership. The Company and the Partnership, jointly and severally, represent and warrant to each Underwriter that: (a) No order preventing or suspending the use of any Prepricing Prospectus Supplement has been issued and no proceeding for that purpose has been instituted or threatened by the Commission or the securities authority of any state or other jurisdiction. No stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and no proceeding for that purpose has been instituted or threatened or, to the best knowledge of the Company, contemplated by the Commission or the securities authority of any state or other jurisdiction. (b) The Company and the transactions contemplated by this Agreement meet the requirements and conditions for using a registration statement on Form S-3 under the Act, set forth in the General Instructions to Form S-3. When any Prepricing Prospectus Supplement was filed with the Commission it (i) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was declared effective, and on the Closing Date (or the Option Closing Date, as the case may be) it (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any amendment or supplement thereto is filed with the Commission pursuant to Rule 424(b) and at the Closing Date (or the Option Closing Date, as the case may be), the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representation and warranty in this paragraph (b) does not apply to statements in or omissions from the Registration Statement or the Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. -8- 9 (c) The Incorporated Documents heretofore filed, when they were filed (or, if any amendment with respect to any such document was filed, when such amendment was filed), conformed in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder, any further Incorporated Documents so filed will, when they are filed, conform in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder; no such document when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and no such further document, when it is filed, will contain an untrue statement of a material fact or will omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. (d) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of Maryland with all requisite corporate power and authority to own and lease its properties and to conduct its business. The Company has been duly qualified to do business and is in good standing as a foreign corporation in each other jurisdiction in which the ownership or leasing of its properties or the nature or conduct of its business as now conducted requires such qualification, except where the failure to do so would not have a material adverse effect on the Company, the Partnership or the Hotels taken as a whole. The Company will be duly qualified (at the time of the closing of the acquisition of the Acquisition Hotels) in each jurisdiction in which the ownership or leasing of its properties or the nature or conduct of its business requires such qualification, except where the failure to do so would not have a material adverse effect on the Company, the Partnership, any Hotels, taken as a whole. Except for the entities listed on Schedule II hereto, the Company does not own or control, directly or indirectly, any corporation, association or other entity. (e) The Partnership has been duly formed and is validly existing as a limited partnership in good standing under the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act") with all requisite partnership power and authority to own and lease its properties and to conduct its business. The Partnership has been duly qualified or registered to do business and is in good standing as a foreign partnership in each other jurisdiction in which the ownership or leasing of its properties or the nature or conduct of its business as now conducted requires such qualification, except where the failure to do so would not have a material adverse effect on the Company, the Partnership or the Hotels taken as a whole. The Partnership will be duly qualified (at the time of the closing of the acquisition of the Acquisition Hotels) in each jurisdiction in which the ownership or leasing of its properties or the nature or conduct of its business requires such qualification, except where the failure to do so would not have a material adverse effect on the Company, the Partnership, the Hotels, taken as a whole. The Company is the sole general partner of the Partnership, and at the Closing Date, will be the sole general partner of the Partnership and will own an approximate 90.5% interest in the Partnership (assuming no exercise of the option to purchase the Option Shares). -9- 10 (f) DJONT Operations, L.L.C. has been duly formed and is validly existing as a limited liability company in good standing under the Delaware Limited Liability Company Act. FCOAM, Inc. has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Texas. The Lessee has all requisite limited liability company or corporate power and authority to own, lease and operate its properties and conduct its business. The Lessee has been duly qualified to do business and is in good standing as a foreign limited liability company or corporation in each other jurisdiction in which the ownership or leasing of its properties or the nature or conduct of its business as now conducted requires such qualification, except where the failure to do so would not have a material adverse effect on the Lessee. The Lessee will be duly qualified (at the time of the closing of the acquisition of the Acquisition Hotels) in each jurisdiction in which the ownership or leasing of its properties or the nature or conduct of its business requires such qualification, except where the failure to do so would not have a material adverse effect on the Lessee or the Hotels, taken as a whole. (g) The Company has full legal right, power and authority to enter into this Agreement, to issue, sell and deliver the Shares as provided herein and to consummate the transactions contemplated herein. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company, enforceable in accordance with its terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting creditors' rights, or by general equity principles and except to the extent the indemnification provisions set forth in Section 7 of this Agreement may be limited by federal or state securities laws or the public policy underlying such laws. (h) The Partnership has full legal right, power and authority to enter into this Agreement and to consummate the transactions contemplated herein. This Agreement has been duly authorized, executed and delivered by the Partnership and constitutes a valid and binding agreement of the Partnership enforceable against the Partnership in accordance with its terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting creditors' rights, or by general equity principles and except to the extent the indemnification provisions set forth in Section 7 of this Agreement may be limited by federal or state securities laws or the public policy underlying such laws. (i) The Company, the Partnership, and to the knowledge of the Company and the Partnership, each of the other parties to the Amended and Restated Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") and the Percentage Leases and the Management Agreements has full legal right, power and authority to enter into each such agreement and to consummate the transactions contemplated therein. Each such agreement has been duly authorized, executed and delivered by the Company, the Partnership, and to the knowledge of the Company and the Partnership, each of the other parties and constitutes a valid and binding agreement, enforceable in accordance with their respective terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting -10- 11 creditors' rights or by general equity principles. (This Agreement, the Partnership Agreements, the new Percentage Leases and the Management Agreements sometimes are hereinafter referred to collectively as the "Operative Documents"). (j) The Partnership and, to the knowledge of the Company and the Partnership, each of the other parties to the Acquisition Agreements has full legal right, power and authority to enter into such agreements and to consummate the transactions contemplated thereby. To the knowledge of the Company and the Partnership, the Acquisition Agreements have been duly authorized, executed and delivered by the Partnership and, to the Company's and the Partnership's knowledge, the other parties thereto and constitute valid and binding agreements, enforceable in accordance with their terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting creditors' rights or by general equity principles. (k) Each consent, approval, authorization, order, license, certificate, permit, registration, designation or filing by or with any governmental agency or body necessary for the valid authorization, issuance, sale and delivery of the Shares, the execution, delivery and performance of this Agreement and the consummation by the Company and the Partnership of the transactions contemplated hereby and thereby has been made or obtained and is in full force and effect. (l) Neither the issuance, sale and delivery by the Company of the Shares, nor the execution, delivery and performance of this Agreement nor the consummation of the transactions contemplated hereby will conflict with or result in a breach or violation of any of the terms and provisions of, or (with or without the giving of notice or the passage of time or both) constitute a default under, any of the Operative Documents, the articles of incorporation, by-laws, certificate of limited partnership or partnership agreement, as the case may be, of the Company or the Partnership; any indenture, mortgage, deed of trust, loan agreement, note, lease or other agreement or instrument to which the Company, the Partnership is a party or to which they, any of them, any of their respective properties or other assets or any Current Hotel or the Acquisition Hotels is subject; or any applicable statute, judgment, decree, order, rule or regulation of any court or governmental agency or body applicable to any of the foregoing or any of their respective properties; or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of any of the foregoing. (m) The Shares to be issued and sold to the Underwriters hereunder have been validly authorized by the Company. When issued and delivered against payment therefor as provided in this Agreement, the Shares will be duly and validly issued, fully paid and nonassessable. No statutory or other preemptive rights of shareholders exist with respect to any of the Shares. No person or entity holds a right to require or participate in the registration under the Act of the Shares pursuant to the Registration Statement other than those persons who have expressly waived such rights; and, except for Promus, Cleveland Finance Associates Limited Partnership, Robert E. Woolley, Charles M. Sweeney, MarRay-Lex Green, Inc., and Piscataway-Centennial Associates -11- 12 Limited Partnership or as set forth in the Prospectus, no person holds a right to require registration under the Act of any shares of Common Stock of the Company at any other time. No person or entity has a right of participation or first refusal with respect to the sale of the Shares by the Company. The form of certificates evidencing the Shares complies with all applicable requirements of Maryland law. (n) The Company's authorized, issued and outstanding capital stock is as disclosed in the Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description of the Common Stock contained in the Prospectus. None of the issued and outstanding shares of capital stock of the Company has been issued or is owned or held in violation of any preemptive rights of shareholders. The Company has no other issued and outstanding capital stock. Except as disclosed in the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company. (o) All offers and sales of the Company's capital stock prior to the date hereof were at all relevant times duly registered under the Act or exempt from the registration requirements of the Act by reason of Sections 3(b), 4(2) or 4(6) thereof and were duly registered or were issued pursuant to an available exemption from the registration requirements of the applicable state securities or blue sky laws. (p) All of the issued Units have been duly and validly authorized and issued and are fully paid and nonassessable. None of the issued Units have been issued or is owned or held in violation of any preemptive right. The Units to be issued to the Company at the Closing Date have been duly and validly authorized by the Partnership. At the Closing Date, such Units will be validly issued, fully paid and nonassessable. All of the outstanding Units have been issued, offered and sold in compliance with all applicable laws (including, without limitation, federal and state securities laws). The Units to be issued to the Company at the Closing Date will be issued, offered and sold in compliance with all applicable laws (including, without limitation, federal and state securities laws). (q) The financial statements of the Company and the Lessee incorporated by reference in the Registration Statement and Prospectus, together with related schedules and notes (and any amendment or supplement thereto), present fairly the financial position of each entity, as of the dates indicated, and the results of operations and cash flows of such entity for the periods specified, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods specified. No other financial statements or schedules are required by Form S-3 or otherwise to be included or incorporated by reference in the Registration Statement, the Prospectus, or any Prepricing Prospectus Supplement. (r) Coopers & Lybrand L.L.P. and Ernst & Young, LLP, who have examined and are reporting upon the audited financial statements and schedules included in the Registration -12- 13 Statement, are and were, during the periods covered by their reports included in the Registration Statement and the Prospectus, independent public accountants within the meaning of the Act. (s) Since April 30, 1996, neither the Company, the Partnership, nor the Lessee has sustained any material loss or interference with its business from fire, explosion, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or arbitrators' or court or governmental action, order or decree; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as otherwise stated in the Registration Statement and Prospectus, there has not been (i) any material change in the capital stock or partnership interests, as applicable, long-term debt, obligations under capital leases or short-term borrowings of the Company, the Partnership, or the Lessee, (ii) any material adverse change, or any development which could reasonably be seen as involving a prospective material adverse change, in or affecting the business, prospects, properties, assets, results of operations or condition (financial or other) of the Company, the Partnership or the Lessee, (iii) any liability or obligation, direct or contingent, incurred or undertaken by the Company, the Partnership or the Lessee which is material to the business or condition (financial or other) of such entity, except for liabilities or obligations incurred in the ordinary course of business, (iv) any declaration or payment of any dividend or distribution of any kind on or with respect to the capital stock or partnership interests, as applicable, of the Company, or the Partnership, or (v) any transaction that is material to the Company, the Partnership, or the Lessee, except transactions in the ordinary course of business or as otherwise disclosed in the Registration Statement and the Prospectus. (t) The Partnership has good and marketable title in fee simple to all real property and the improvements thereon owned by it free and clear of all liens, encumbrances, claims, security interests, restrictions and defects except (i) such as are described in the Prospectus and (ii) such matters reflected in the owner's title insurance policies relating to such properties. Upon consummation of the transactions contemplated by the Acquisition Agreements, the Partnership will have good and marketable title in fee simple to the Acquisition Hotels through an approximate 50% equity interest in each of eight partnerships, each of which owns a single hotel, and the direct ownership of two hotels, and all related real property, free and clear of all liens, encumbrances, claims, security interests, restrictions and defects except such as are described in the proposed title commitments for the Acquisition Hotels or which do not materially adversely affect the value of the property or the use proposed to be made of the property by the Partnership. Neither the Company nor the Partnership owns or leases any real property as lessee other than (i) the Partnership is the owner of a leasehold interest in certain air space related to its Current Hotel in New Orleans, Louisiana, (ii) Holdings is the lessee for two hotels leased under ground leases, located in Burlingame (SF Airport), California, St. Paul, Minnesota and Phoenix, Arizona and the lessee of certain room space in the hotel located in Cleveland, Ohio; (iii) FelCor/St. Paul Holdings, L.P. is the lessee for one hotel and one restaurant leased under ground leases located in St. Paul, Minnesota; (iv) EPT Kansas City (Country Club Plaza), Missouri; (v) EPT Meadowlands Limited Partnership is the lessee for a hotel, leased under a ground lease, located in Secaucus, New Jersey; and (vi) EPT San Antonio Limited Partnership is the lessee for a hotel, leased under a ground lease, located in San Antonio, -13- 14 Texas. No person other than the Partnership has an option or right of first refusal to purchase all or part of any Current Hotel or any interest therein. Each of the Hotels complies with all applicable codes, laws and regulations (including, without limitation, building and zoning codes, laws and regulations and laws relating to access to the Hotels), except if and to the extent disclosed in the Prospectus and except for such failures to comply that would not or in the aggregate have a material adverse impact on the condition, financial or otherwise, or on the earnings, assets, business affairs or business prospects of such Hotel, the Partnership, the Company or the Hotels, taken as a whole. Neither the Company nor the Partnership has knowledge of any pending or threatened condemnation proceedings, zoning change, or other proceeding or action that will in any manner affect the size of, use of, improvements on, construction on or access to the Hotels, except such proceedings or actions that would not have a material adverse effect on the condition, financial or otherwise, or on the earnings, assets, business affairs or business prospects of or with respect to the Partnership, the Company or the Hotels, taken as a whole. (u) Neither the Company nor the Partnership is in violation of its respective articles of incorporation, bylaws, certificate of limited partnership or partnership agreement, as the case may be, and no default exists, and no event has occurred, nor state of facts exists, which, with notice or after the lapse of time to cure or both, would constitute a default in the due performance and observance of any obligation, agreement, term, covenant, consideration or condition contained in any indenture, mortgage, deed of trust, loan agreement, note, lease or other agreement or instrument to which any such entity is a party or to which any such entity or any of its properties is subject. Neither the Company nor the Partnership is in violation of, or in default with respect to, any statute, rule, regulation, order, judgment or decree, except as may be properly described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect on the financial position, results of operations or business of each such entity, respectively. (v) Except as described in the Prospectus, there is not pending or, to the knowledge of the Company or the Partnership, threatened, any action, suit, proceeding, inquiry or investigation against the Company, the Partnership, the Lessee or any of their respective officers and directors or to which the properties, assets or rights of any such entity are subject, before or brought by any court or governmental agency or body or board of arbitrators, which could result in any material adverse change in the business, prospects, properties, assets, results of operations or condition (financial or otherwise) of any such entity or which could adversely affect the consummation of the transactions contemplated by this Agreement. (w) The descriptions in the Registration Statement and the Prospectus of the contracts, leases and other legal documents therein described present fairly the information required to be shown, and there are no contracts, leases, or other documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required. To the best knowledge of the Company and the Partnership, there are no statutes or regulations applicable to the Company or the Partnership or certificates, permits or other authorizations from governmental regulatory officials or bodies required -14- 15 to be obtained or maintained by the Company or the Partnership of a character required to be disclosed in the Registration Statement or the Prospectus which have not been so disclosed and properly described therein. All agreements between the Company, the Partnership, the Lessee, respectively, and third parties expressly referenced in the Prospectus are legal, valid and binding obligations of the Company, the Partnership and the Lessee, respectively, enforceable against such parties in accordance with their respective terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting creditors' rights and by general equitable principles. (x) Except as described in the Prospectus, the Company, the Partnership or the Lessee owns, possesses or has obtained or has taken all necessary action to obtain (and will obtain) all material permits, licenses, franchises (including, with respect to the Lessee, the franchises relating to the Hotels), certificates, consents, orders, approvals and other authorizations of governmental or regulatory authorities or other entities as are necessary to own or lease, as the case may be, and to operate its respective properties and to carry on its business, and neither the Company, the Partnership nor the Lessee has received any notice of proceedings relating to revocation or modification of any such licenses, permits, franchises, certificates, consents, orders, approvals or authorizations. (y) Except as described in the Prospectus, the Company, the Partnership, and the Lessee own or possess or have the right to acquire (and will acquire) adequate license or other rights to use all patents, trademarks, service marks, trade names, copyrights, software and design licenses, trade secrets, manufacturing processes, other intangible property rights and know-how (collectively "Intangibles") necessary to entitle the Company, the Partnership, and the Lessee to conduct their respective businesses as presently conducted, and neither the Company, the Partnership, nor the Lessee has received notice of infringement or of conflict with (and knows of no such infringement of or conflict with) asserted rights of others with respect to any Intangibles which could materially and adversely affect the business, prospects, properties, assets, results of operation or condition (financial or otherwise) of the Company, the Partnership or the Lessee. (z) The Company's, the Partnership's and to the best of the Company's and the Partnership's knowledge, the Company's, the Partnership's, and the Lessee's system of internal accounting controls taken as a whole is sufficient to meet the broad objectives of internal accounting control insofar as those objectives pertain to the prevention or detection of errors or irregularities in amounts that would be material in relation to the Company's, the Partnership's, or the Lessee's financial statements; and, to the best of the Company's and the Partnership's knowledge, neither the Company, the Partnership, nor the Lessee, nor any employee or agent thereof, has made any payment of funds of the Company, the Partnership, the Lessee, as the case may be, or received or retained any funds, and no funds of the Company, the Partnership, the Lessee, as the case may be, have been set aside to be used for any payment, in each case in violation of any law, rule or regulation. -15- 16 (aa) Each of the Company, the Partnership (to the extent not consolidated with the Company), and the Lessee has filed on a timely basis all necessary federal, state, local and foreign income and franchise tax returns required to be filed through the date hereof and has paid all taxes shown as due thereon; and no tax deficiency has been asserted against any such entity, nor does any such entity know of any tax deficiency which is likely to be asserted against any such entity and which if determined adversely to any such entity, could materially adversely affect the business, prospects, properties, assets, results of operations or condition (financial or otherwise) of any such entity, respectively. All tax liabilities are adequately provided for on the respective books of such entities. (bb) The Company, the Partnership, and the Lessee maintain insurance (issued by insurers of recognized financial responsibility) of the types and in the amounts generally deemed adequate for their respective businesses and, to the best of the Company's and the Partnership's knowledge, consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company, the Partnership and the Lessee against theft, damage, destruction, acts of vandalism, and all other risks customarily insured against, all of which insurance is in full force and effect. (cc) To the best of the Company's knowledge, no general labor problem exists or is imminent with the employees of the Company or Lessee. The Partnership has no employees. (dd) The Company has obtained the agreement of Messrs. Feldman and Corcoran that, for a period of 90 days after the date of the Prospectus, such persons will not, without your prior written consent, directly or indirectly, sell, offer to sell, solicit an offer to buy, contract to sell, pledge, grant any option to purchase or otherwise transfer or dispose of, any shares of Common Stock or any other securities convertible into, or exercisable or exchangeable for, shares of Common Stock held by such persons (including, without limitation, shares of Common Stock deemed to be beneficially owned by such person in accordance with the rules and regulations promulgated under the Exchange Act). (ee) Each of the Company, the Partnership, and their officers, directors or affiliates has not taken and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in or constitute the stabilization or manipulation of any security of the Company or to facilitate the sale or resale of the Shares. (ff) The Common Stock is registered pursuant to Section 12(b) of the Exchange Act and is listed on the New York Stock Exchange. (gg) The Company has not incurred any liability for a fee, commission or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement other than as contemplated hereby or as described in the Registration Statement. -16- 17 (hh) Except as otherwise disclosed in the Prospectus, neither the Company, the Partnership, Holdings, nor, to the best knowledge of the Company and the Partnership, any entity from whom the Partnership acquired or will acquire the Hotels has authorized or conducted or has knowledge of the generation, transportation, storage, presence, use, treatment, disposal, release, or other handling of any hazardous substance, hazardous waste, hazardous material, hazardous constituent, toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated biphenyls ("PCBs"), petroleum product or waste (including crude oil or any fraction thereof), natural gas, liquefied gas, synthetic gas or other material defined, regulated, controlled, or potentially subject to any remediation requirement under any environmental law (collectively, "Hazardous Materials"), on, in, under, or affecting any real property currently leased or owned (or proposed to be leased or owned) or by any means controlled by the Company or the Partnership, including the Hotels (the "Real Property"), except as in material compliance with applicable laws; to the knowledge of the Company and the Partnership, the Real Property and the Company's and the Partnership's operations with respect to the Real Property are in compliance with all federal, state and local laws, ordinances, rules, regulations and other governmental requirements relating to pollution, control of chemicals, management of waste, discharges of materials into the environment, health, safety, natural resources, and the environment (collectively, "Environmental Laws"), and the Company and the Partnership have complied with, and are in compliance with, all licenses, permits, registrations, and government authorizations necessary to operate under all applicable Environmental Laws. Except as otherwise disclosed in the Prospectus, neither the Company nor the Partnership has received any written or oral notice from any governmental entity or any other person, and there is no pending or threatened claim, litigation, or any administrative agency proceeding that alleges a violation of any Environmental Laws by the Company or the Partnership; alleges that: the Company or the Partnership is a liable party or a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., or any state superfund law; has resulted in or could result in the attachment of an environmental lien on any of the Real Property; or alleges that the Company or the Partnership is liable for any contamination of the environment, contamination of the Real Property, damage to natural resources, property damage, or personal injury based on their activities or the activities of their predecessors or third parties (whether at the Real Property or elsewhere) involving Hazardous Materials, whether arising under the Environmental Laws, common law principles, or other legal standards. (ii) The Company is organized in conformity with the requirements for qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"), and the Company's method of operation enables it to meet the requirements for taxation as a real estate investment trust under the Code. The Partnership is treated as a partnership for federal income purposes and not as a corporation or an association taxable as a corporation. (jj) None of the Company, the Partnership, or the Lessee is, will become as a result of the transactions contemplated hereby, or will conduct its respective business in a manner in which any such entity would become, "an investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. -17- 18 (kk) No real estate appraisal firm which prepared appraisals of the Hotels, nor any environmental engineering firm which prepared Phase I environmental assessment reports with respect to the Hotels, was employed for such purpose on a contingent basis or has any substantial interest in the Company, the Partnership, the Lessee, or any selling entity. (ll) Holdings is not currently prohibited, directly or indirectly, from making distributions to the Company, from repaying to the Company any loans or advances to Holdings, or from transferring any of Holdings's property or assets to the Company, except as disclosed in the Prospectus. (mm) The Company has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus Supplement, the Prospectus or other materials, if any, permitted by the Act. (nn) To the Company's knowledge, neither the Company nor any of its subsidiaries nor any employee or agent of the Company or any Subsidiary has made any payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule, or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. Any certificate signed by any officer of the Company on behalf of the Company, or the Partnership and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by such entity to each Underwriter as to the matters covered thereby. 7. Indemnification and Contribution. (a) The Company and the Partnership, jointly and severally, agree to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities, and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus Supplement or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon 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 in light of the circumstances under which they were made, except insofar as such losses, claims, damages, liabilities, or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with (i) the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through -18- 19 you expressly for use in connection therewith or (ii) those parts of the Registration Statement that constitute the Statements of Eligibility (Form T-1) under the Trust Indenture Act of the trustee(s) referred to in the Registration Statement; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus Supplement shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability, or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus Supplement was corrected in the Prospectus, provided that the Company has delivered the Prospectus to the Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Company or the Partnership may otherwise have. (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company or the Partnership, such Underwriter or such controlling person shall promptly notify the Company or the Partnership, and the Company or the Partnership shall assume the defense thereof, including the employment of counsel and payment of all reasonable fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit, or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless the Company and the Partnership have agreed in writing to pay such fees and expenses, the Company and the Partnership have failed to assume the defense and employ counsel, or the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the Company or the Partnership and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and the Company or the Partnership by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them, in which case the Company or the Partnership shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the Company or the Partnership shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel), at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred; provided, however, to the extent that any such reimbursement payment is so held by a court of competent jurisdiction to have been improper, each Underwriter shall promptly return it to the Company together with interest, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) -19- 20 announced from time to time in the U.S. edition of the Wall Street Journal. Neither the Company, nor the Partnership shall be liable for any settlement of any such action, suit, or proceeding effected without its written consent, but if settled with such written consent or if there be a final judgment for the plaintiff in any such action, suit, or proceeding, the Company and the Partnership agree to indemnify and hold harmless any Underwriter, to the extent provided in the preceding paragraph, and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Partnership, their respective directors and officers who sign the Registration Statement, and any person who controls the Company or the Partnership within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company and the Partnership to each Underwriter, but only with respect to information furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus, or any Prepricing Prospectus Supplement, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, the Partnership or any of their respective directors, any such officer, or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus Supplement, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company and the Partnership by paragraph (b) above (except that if the Company and the Partnership shall have assumed the defense thereof, such Underwriter shall not be required to do so but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Company, the Partnership or their respective directors, any such officer, and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which the Underwriters may otherwise have. (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities, or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable to such indemnified party as a result of such losses, claims, damages, liabilities, or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Partnership on the one hand and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Partnership on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities, or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Partnership on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares (before deducting expenses) received by the -20- 21 Company and the total underwriting discounts and commissions received by the Underwriters bear to the price to public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Partnership on the one hand and the Underwriters on the other hand 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 the Partnership on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company, the Partnership, and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) 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, liabilities, and expenses 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 any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter 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 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule I hereto (or such numbers of Firm Shares increased as set forth in Section 10 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit, or proceeding in respect of which any indemnified party is 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 action, suit, or proceeding. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company and the Partnership set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, the Partnership, their -21- 22 respective directors or officers, or any person controlling the Company or the Trust or the Partnership, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to the Underwriters or any person controlling the Underwriter, or a sucessor to the Company or the Partnership and their respective directors or officers, or any person controlling the Company or the Partnership, shall be entitled to the benefits of the indemnity, contribution, and reimbursement agreements contained in this Section 7. 8. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for a post-effective amendment to the Registration Statement to be declared effective before the offering of the Shares may commence, such post-effective amendment shall have become effective not later than 5:30 p.m., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rule 424 and Rule 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to your satisfaction. (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting the condition (financial or other), business, properties, net worth, or results of operations of the Company, the Partnership and the Lessee taken as a whole not contemplated by the Prospectus, which in your reasonable opinion, as the Underwriters, would materially, adversely affect the market for the Shares, or (ii) any event or development relating to or involving the Company or the Partnership or any officer or director of the Company which makes any statement made in the Prospectus untrue or which, in the reasonable opinion of the Company and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the Act or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your reasonable opinion, as the Underwriters, materially adversely affect the market for the Shares. (c) You shall have received on the Closing Date, an opinion of Bracewell & Patterson, L.L.P., counsel for the Company and the Partnership, dated the Closing Date and addressed to you, as the Underwriters, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under Maryland law with all requisite corporate power and authority to own, lease and operate its properties and to conduct its business. The Company has been duly -22- 23 qualified to do business and is in good standing as a foreign corporation in the states of Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Massachusetts, New Jersey, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Utah. To such counsel's knowledge, there are no other jurisdictions in which the ownership or leasing the Company's properties or the nature or conduct of its business requires such qualification, except where the failure to do so would not have a material adverse effect on the financial condition, business, prospects, net worth or results of operations of the Company and the Partnership, taken as a whole. To such counsel's knowledge, except for the entities listed on Schedule II to this Agreement, the Company does not own or control, directly or indirectly, any corporation, association or control, directly or indirectly, any corporation, association or other entity. (ii) The Partnership has been duly formed and validly existing under the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act") with all requisite partnership power and authority to own, lease and operate its properties and to conduct its business. The Partnership has been duly qualified or registered to do business and is in good standing as a foreign partnership in the states of Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Massachusetts, New Jersey, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Utah. To such counsel's knowledge, there are no other jurisdictions in which the ownership or leasing of the Partnership's properties or the nature or conduct of its business requires such qualification, except where the failure to do so would not have a material adverse effect on the financial condition, business, prospects, net worth or results of operations of the Company and the Partnership, taken as a whole. The Company is the sole general partner of the Partnership and upon its delivery to the Partnership of the net proceeds from the sale of the Shares pursuant hereto, will own an approximate 90.5% interest in the Partnership. (iii) DJONT Operations, L.L.P. has been duly formed and is validly existing as a limited liability company in good standing under the Delaware Limited Liability Company Act. FCOAM, Inc. has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Texas. The Lessee has all requisite limited liability company or corporate power and authority to own, lease and operate its properties and conduct its business. The Lessee has been duly qualified to do business and is in good standing as a foreign limited liability company or corporation in the states of Alabama, Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, New Jersey, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Utah. To such counsel's knowledge, there are no other jurisdictions in which the ownership or leasing of its properties or the nature or conduct of its business requires such qualification, except where the failure to do so would not have a material adverse effect on the financial condition, business, prospects, net worth or results of the Lessee. (iv) The Company has full corporate right, power and authority to enter into, deliver and perform this Agreement, to issue, sell and deliver the Shares as provided herein and to consummate the transactions contemplated herein. This Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by -23- 24 the Underwriters, constitutes a valid and binding agreement of the Company, enforceable in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other laws affecting the rights of creditors generally and by general equity principles and except to the extent that enforcement of the indemnification and contribution provisions set forth in Section 7 of this Agreement may be limited by federal or state securities laws or the public policy underlying such laws. (v) The Partnership has full partnership right, power and authority to enter into this Agreement and to consummate the transactions contemplated herein. This Agreement has been duly authorized, executed and delivered by the Partnership and, assuming due authorization, execution and delivery by the Underwriters, constitutes a valid and binding agreement of the Partnership enforceable in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other laws affecting the rights of creditors generally and by general equity principles and except to the extent that enforcement of the indemnification and contribution provisions set forth in Section 7 of this Agreement may be limited by federal or state securities laws or the public policy underlying such laws. (vi) The Partnership has full partnership right, power and authority to enter into, either for itself or on behalf of a general partnership, each of the Percentage Leases relating to the Current Hotels acquired since April 30, 1996 and the Acquisition Hotels. Each Percentage Lease relating to the Current Hotels acquired since April 30, 1996 has been duly authorized, executed and delivered by the Partnership and, assuming due authorization, execution and delivery by each other party thereto, constitutes a valid and binding agreement of the Partnership, enforceable against the Partnership in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws of general applicability relating to or affecting creditors' rights and by general equity principles. Each Lease should be construed to create a valid leasehold interest in favor of the Lessee. (vii) The Lessee has full limited liability company right, power and authority to enter into each of the Percentage Leases and the Management Agreements relating to the Current Hotels acquired since April 30, 1996 and the Acquisition Hotels and to consummate the transactions contemplated therein. Each such agreement relating to the Current Hotels acquired since April 30, 1996 has been duly authorized, executed and delivered by the Lessee and, assuming due authorization, execution and delivery by such other party thereto, constitutes a valid and binding agreement of the Lessee, enforceable against the Lessee in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws of general applicability relating to or affecting creditors' rights and by general equity principles. (viii) Each consent, approval, authorization, order, license, certificate, permit, registration, designation or filing by or with any governmental agency or body necessary for the valid authorization, issuance, sale and delivery of the Shares, the execution, delivery and performance of this Agreement and the consummation by the Company and the Partnership of the transactions contemplated hereby, the execution, delivery and performance of the other Operative -24- 25 Documents to which either the Company or the Partnership is a party and the consummation by the Company and/or the Partnership, as applicable, of the transactions contemplated thereby, including without limitation the issuance of Units, has been made or obtained and is in full force and effect, except such (i) as may be necessary under state securities or real estate syndication laws or by the NASD in connection with the purchase and distribution of the Shares by the Underwriters, as to which such counsel need express no opinion, or (ii) solely as the same may relate to the Operative Documents, the lack of which would not have a material adverse effect on the financial condition, business, prospects, net worth or results of operations of the Company and the Partnership, taken as a whole. (ix) Each consent, approval, authorization, order, license, certificate, permit, registration, designation or filing by or with any governmental agency or body necessary for the execution, delivery and performance of the Operative Documents by the Lessee, and the consummation by the Lessee of the transactions contemplated thereby, has been made or obtained or filed and is in full force and effect, except such (i) as may be necessary under state securities or real estate syndication laws or by the NASD in connection with the purchase and distribution of the Shares by the Underwriters, as to which such counsel need express no opinion, or (ii) the lack of which would not have a material adverse effect on the financial condition, business, prospects, net worth or results of operations of the lessee. (x) Neither the issuance, sale and delivery by the Company of the Shares, nor the execution, delivery and performance of this Agreement by the Company and the Partnership, nor the consummation of the transactions contemplated hereby by the Company or the Partnership, will violate any of the terms and provisions of, or constitute a default under, any of the Operative Documents, the articles of incorporation, by-laws, certificate of limited partnership or partnership agreement, as the case may be, of any such entity, as applicable; or, to such counsel's knowledge, under any material indenture, mortgage, deed of trust, loan agreement, note, lease or other agreement or instrument to which the Company or the Partnership is a party or to which they, either of them, any of their respective properties or other assets or any Current Hotel owned by the Partnership or Holdings as of the date hereof is subject, except for violations or defaults under agreements or instruments which have since been terminated, cured or otherwise satisfied or such violations or defaults as would not have a material adverse effect on the financial condition, business, prospects, net worth or results of operations of the Company and the Partnership, taken as a whole; or, to such counsel's knowledge, violate any applicable statute, judgment, decree, order, rule or regulation of any court or governmental agency or body; or, to such counsel's knowledge, result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of any of the foregoing, except for liens, charges, claims or encumbrances which are created by the Operative Documents or which have since been terminated, cured or otherwise would not have a material adverse effect on the financial condition, business, prospects, net worth or results of operations of the Company and the Partnership, taken as a whole. -25- 26 (xi) The Shares to be issued and sold to the Underwriters hereunder have been validly authorized by the Company. When issued and delivered against payment therefor as provided in this Agreement, such Shares will be validly issued, fully paid and nonassessable. No preemptive rights of shareholders exist with respect to any of the Shares. To such counsel's knowledge, no person holds a right to require or participate in the registration under the Act of the Shares pursuant to the Registration Statement other than persons who have expressly waived such rights; and, except for Promus, Cleveland Finance Associates Limited Partnership, Robert E. Woolley, Charles M. Sweeney, MarRay-Lex Green, Inc. and Piscataway-Centennial Associates Limited Partnership or as otherwise set forth in the Prospectus, no person holds a right to require registration under the Act of any shares of Common Stock at any other time. To such counsel's knowledge, no person or entity has a right of participation or first refusal with respect to the sale of the Shares by the Company. The form of certificates evidencing the Shares comply in all material respects with all applicable requirements of Maryland law. All offers and sales of the Company's capital stock prior to the date hereof were at all relevant times duly registered under the Act or exempt from the registration requirements of the Act by reason of Sections 3(b), 4(2) or 4(6) thereof, and (with the exception of shares of Common Stock registered under the Act, as to which such counsel need not opine) were duly registered or the subject of an available exemption from the registration requirements of the applicable state securities or blue sky laws. (xii) The Company's authorized, issued and outstanding capital stock is as disclosed in the Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued, fully paid and nonassessable. To the knowledge of such counsel, except as disclosed in the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company. (xiii) All of the issued Units have been duly and validly authorized and issued and are fully paid. None of the issued Partnership Units have been issued or is owned or held in violation of any preemptive rights. The Partnership Units to be issued to the Company at the Closing Time has been duly and validly authorized by the Partnership. When issued and delivered against payment thereof as provided in the Partnership Agreement, such Units will be duly and validly issued and fully paid. The outstanding Partnership Units have been issued, offered and sold in compliance with all applicable laws (including, without limitation, federal and state securities laws). The Partnership Units to be issued to the Company at the Closing Time will be issued, offered and sold in compliance with all applicable laws (including, without limitation, federal and state securities laws). (xiv) To the knowledge of such counsel, neither the Company nor the Partnership leases any real property as lessee other than (i) the Partnership is the owner of a leasehold interest in certain air space related to its hotel in New Orleans, Louisiana; (ii) Holdings is the lessee for two hotels leased under ground leases, located in Burlingame (SF Airport), California, St. Paul, Minnesota and Phoenix, Arizona and the lessee of certain room space in the hotel located in Cleveland, Ohio; (iii) FelCor/St. Paul Holdings, L.P. is the lessee for one hotel and one restaurant -26- 27 leased under ground leases located in St. Paul, Minnesota; (iv) EPT Kansas City (Country Club Plaza), Missouri; (v) EPT Meadowlands Limited Partnership is the lessee for a hotel, leased under a ground lease, located in Secaucus, New Jersey; and (vi) EPT San Antonio Limited Partnership is the lessee for a hotel, leased under a ground lease, located in San Antonio, Texas.. (xv) Neither the Company, the Partnership nor the Lessee is in violation of its respective articles of incorporation, by-laws, certificate of limited partnership, partnership agreement, or limited liability company agreement, as the case may be, and to the knowledge of such counsel no material default exists and no event has occurred which, with notice or after the lapse of time to cure or both, would constitute a material default in the due performance and observance of any obligation, agreement, term, covenant, or condition contained in any indenture, mortgage, deed of trust, loan agreement, note, lease or other agreement or instrument known to such counsel to which any such entity is a party or by which any such entity or any of its properties is subject. To the knowledge of such counsel, neither the Company, the Partnership nor the Lessee is in violation of, or in default with respect to, any statute, rule, regulation, order, judgment or decree, except as may be properly described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect on the financial position, results of operations or business of each such entity, respectively. (xvi) To such counsel's knowledge and except as described in the Prospectus, there is not pending or threatened, any action, suit, proceeding, inquiry or investigation against the Company, the Partnership, the Lessee or Holdings or any of their respective officers and directors or to which the properties, assets or rights of any such entity are subject, which, if determined adversely to any such entity, would individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and the Partnership, taken as a whole. (xvii) There are no contracts, leases or other documents known to such counsel of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required. To such counsel's knowledge, there are no statutes or regulations applicable to the Company, the Partnership or the Lessee or certificates, permits or other authorizations from governmental regulatory officials or bodies required to be obtained or maintained by any such entity, known to such counsel, of a character required to be disclosed in the Registration Statement or the Prospectus which have not been so disclosed and properly described therein. To such counsel's knowledge, all material agreements between the Company, the Partnership or the Lessee, respectively, and third parties expressly referenced in the Prospectus, assuming due authorization, execution and delivery thereof by each other party thereto, are legal, valid and binding obligations of each such entity, respectively, enforceable against such entity in accordance with their respective terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws of general applicability relating to or affecting creditors' rights and to general equitable principles. -27- 28 (xviii) The Shares are and the Common Stock is listed for trading on the New York Stock Exchange. (xix) The Registration Statement has become effective under the Act and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or is pending or contemplated under the Act. Other than financial statements and other financial and operating information data and schedules contained therein, as to which counsel need express no opinion, the Registration Statement, all Prepricing Prospectus Supplements, the Prospectus and any amendment or supplement thereto, appear on their face to conform as to form in all material respects with the requirements of Form S-3 under the Act. (xx) Such counsel has no reason to believe that the Registration Statement including the Incorporated Documents, or any further amendment thereto made prior to the Closing Time, on its effective date and as of the Closing Time, contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, or any amendment or supplement thereto made prior to the Closing Time, as of its issue date and as of the Closing Time, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (provided that such counsel need express no belief regarding the financial statements and related schedules and other financial data contained in the Registration Statement, any amendment thereto, or the Prospectus, or any amendment or supplement thereto). (xxi) The Incorporated Documents (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), when they were filed with the Commission, complied on their face as to form in all material respects with the requirements of the Exchange Act, and the rules and regulations of the Commission thereunder; and nothing has come to such counsel's attention which causes them to believe that any of such Incorporated Documents (other than the financial statements and related schedules therein, as to which such counsel need express no belief), when such Incorporated Documents were so filed, contained an untrue statement of material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made when such documents were so filed, not misleading. (xxii) None of the Company, the Partnership or the Lessee is, or solely as a result of the consummation of the transactions contemplated hereby will become, an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. (xxiii) The descriptions in or incorporated by reference in the Prospectus or the Prepricing Prospectus Supplement of statutes, regulations, legal or governmental proceedings, the Percentage Leases, and the Management Agreements therein described present fairly a summary -28- 29 of the information required to be shown under the Act. The descriptions in the Registration Statement and the Prospectus or the Prepricing Prospectus Supplement of the contracts, leases and other legal documents therein described present fairly the information required to be shown. In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by them or the Company as to laws of any jurisdiction other than the United States and jurisdictions in which they are admitted, provided that (1) each such local counsel is acceptable to the Underwriters, (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is delivered to the Underwriters and is, in form and substance satisfactory to them and their counsel, and (3) counsel shall state in their opinion that they believe that they and the Underwriters are justified in relying thereon. In addition, in rendering the foregoing opinion, such counsel may rely on, as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company, the Partnership and the Lessee and certificates or other written statements of officers or departments of various jurisdictions, having custody of documents respecting the existence or good standing of the Company, the Partnership and the Lessee provided that copies of all such opinions, statements or certificates shall be delivered to Underwriters' counsel. The opinion of counsel for the Company shall state that the opinion of any other counsel, or certificate or written statement, on which such counsel is relying is in form satisfactory to such counsel and that you and they are justified in relying thereon. (d) You shall have received on the Closing Date, an opinion of Hunton & Williams, tax counsel for the Company and the Partnership, dated the Closing Date and addressed to you, as the Underwriters, to the effect that the Company is organized in conformity with the requirements for qualification as a real estate investment trust ("REIT"), pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and that the Company's proposed method of operation enables it to meet the requirements for qualification and taxation as a real estate investment trust under the Code. The Company has taken all necessary action to be treated, effective beginning with the year ended December 31, 1994, as a REIT under the Code. The Partnership will be treated as a partnership for federal income purposes and not as a corporation or an association taxable as a corporation. In rendering the foregoing opinion, such counsel may rely on, as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company, the Partnership and the Lessee and certificates or other written statements of officers or departments of various jurisdictions, having custody of documents respecting the existence or good standing of the Company, the Partnership and the Lessee provided that copies of all such opinions, statements or certificates shall be delivered to Underwriters' counsel. (e) You shall have received on the Closing Date an opinion of (i) King & Spalding, counsel for the Underwriters, dated the Closing Date and addressed to you, as the several Underwriters, with respect to the matters referred to in clauses (iv), (xi), (xix) and (xx) of the foregoing paragraph (c) and such other related matters as you may request. -29- 30 (f) You shall have received letters addressed to you, as the Underwriters, and dated the date hereof and the Closing Date from Coopers & Lybrand L.L.P., independent certified public accountants, substantially in the forms heretofore approved by you. (g) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission at or prior to the Closing Date; (ii) there shall not have been any change in the capital stock of the Company nor any material increase in the consolidated short-term or long-term debt of the Company (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or Supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company or the Partnership taken as a whole; (iv) the Company and the Partnership, shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company and the Partnership, taken as a whole, other than those reflected in the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the representations and warranties of the Company and the Partnership contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company and general partner or the Partnership (or such other officers as are acceptable to you), to the effect set forth in this Section 8(f) and in Section 8(g) hereof. (h) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (i) Prior to the Closing Date, the Shares shall have been listed or approved for listing upon notice of issuance on the New York Stock Exchange. (j) The NASD, upon a review of the terms of the public offering of the Shares, shall not have objected to such offering, such terms or the Underwriters' participation in the same. (k) The Company shall have furnished or caused to be furnished to you such further certificates and documents as you shall have reasonably requested. -30- 31 All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel. Any certificate or document signed by any officer of the Company or the subsidiary and delivered to you, as the Underwriters, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Company or the Partnership, as applicable, to each Underwriter as to the statements made therein. The obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 8, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (f) shall be dated the Option Closing Date in question and the opinions called for by paragraphs (c) and (d) shall be revised to reflect the sale of Additional Shares. 9. Expenses. The Company agrees to pay the following costs and expenses and all other costs and expenses incident to the performance by it of its obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the Registration Statement (including financial statements and exhibits thereto), each Prepricing Prospectus Supplement, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, each Prepricing Prospectus Supplement, the Prospectus, and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the original issuance and sale of the Shares; (iv) the reproduction and delivery of this Agreement, the blue sky memorandum and all other agreements or documents reproduced and delivered in connection with the offering of the Shares; (v) the listing of the Shares on the New York Stock Exchange; (vi) the registration or qualification of the Shares for offer and sale under the securities or blue sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, reproduction, and delivery of the blue sky memorandum and such registration and qualification); (vii) the filing fees and the fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; (viii) the transportation and other expenses incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Shares; and (ix) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company. 10. Effective Date of Agreement. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for a post-effective amendment to the Registration Statement to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of such post-effective amendment has been released by the Commission. Until such time -31- 32 as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representative of the Underwriters, by notifying the Company. 11. Default of Underwriters. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you and the Company for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Company, purchases shares which a defaulting Underwriter is obligated, but fails or refuses, to purchase. Any notice under this Section 10 may be given by telegram, telecopy or telephone but shall be subsequently confirmed within 24 hours by letter. 12. Termination of Agreement. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company, by notice to the Company, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or The Nasdaq Stock Market shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in New York or Texas shall have been declared by either federal or state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic -32- 33 calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Company by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 13. Information Furnished by the Underwriters. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside cover page, the list of Underwriters and their respective allotments appearing under the caption "Underwriting" in the Prospectus and the statements in the third paragraph under the caption "Underwriting" in any Prepricing Prospectus Supplement and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 6(b) and 7 hereof. 14. Notices. Except as otherwise provided in Sections 5, 10 and 11 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be deemed to have been duly given if delivered, mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed c/o Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division (with a copy sent in the same manner to King & Spalding, 191 Peachtree Street, Atlanta, Georgia 30303, Attention: Mr. Alan J. Prince); and notices to the Company and the Partnership shall be directed to them at FelCor Suite Hotels, Inc., 545 E. John Carpenter Freeway, Suite 1300, Irving, Texas 75062, Attention: Mr. Lawrence D. Robinson (with a copy sent in the same manner to Bracewell & Patterson, L.L.P., 4000 Lincoln Plaza, 500 N. Akard Street, Dallas, Texas 75201, Attention: Mr. Robert W. Dockery). 15. Successors. This Agreement has been and is made solely for the benefit of the Underwriters, the Company, the Subsidiary, their respective directors and officers, and the other controlling persons referred to in Section 7 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 16. Applicable Law; Counterparts. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. -33- 34 This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. -34- 35 If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the Underwriters in accordance with its terms. Very truly yours, FELCOR SUITE HOTELS, INC. By: /s/ Thomas J. Corcoran, Jr. -------------------------------- Thomas J. Corcoran, Jr. President FELCOR SUITES LIMITED PARTNERSHIP By: FELCOR SUITE HOTELS, INC. General Partner By: /s/ Thomas J. Corcoran, Jr. -------------------------------- Thomas J. Corcoran, Jr. President The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. SMITH BARNEY INC. ALEX. BROWN & SONS INCORPORATED DEAN WITTER REYNOLDS INC. MONTGOMERY SECURITIES As Representative of the Underwriters listed on Schedule I By: SMITH BARNEY INC. By: /s/ Mark R. Patterson ---------------------------- Authorized Officer -35- 36 SCHEDULE I SCHEDULE OF UNDERWRITERS
Number of Firm Shares Underwriter to be Purchased -------------- --------------------- Smith Barney Inc. 750,000 Alex. Brown & Sons Incorporated 750,000 Dean Witter Reynolds Inc. 750,000 Montgomery Securities 750,000 ---------- Total 3,000,000
EX-23.1 3 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of FelCor Suite Hotels, Inc. We consent to the incorporation by reference in the registration statements of FelCor Suite Hotels, Inc. on Form S-3 (File Nos. 333-25717, 333-04947 and 333-3170) of our report dated June 2, 1997, on our audit of the combined financial statements of the DS Hotels as of December 31, 1996 and for the year then ended, which report is included in this Form 8-K. We also consent to the reference to our firm under the caption "Experts." COOPERS & LYBRAND L.L.P. Dallas, Texas June 3, 1997 EX-23.2 4 CONSENT OF ARTHUR ANDERSEN L.L.P. 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS As independent public accountants, we hereby consent to the incorporation by reference 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 this Form 8-K, into the Company's previously filed Registration Statements (File numbers 333-25717, 333-04947 and 333-3170). We also consent to the reference to our firm under the caption "Experts." ARTHUR ANDERSEN LLP Memphis, Tennessee, June 2, 1997 EX-23.3 5 CONSENT OF ERNST & YOUNG L.L.P. 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statements on Forms S-3 (File Nos. 333-3170, 333-04947 and 333-25717) and Prospectus of FelCor Suite Hotels, Inc. and to the incorporation by reference therein 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 4, 1997 filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Columbus, Ohio June 2, 1997 EX-23.4 6 CONSENT OF DELOITTE & TOUCHE L.L.P. 1 EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Amendment No. 1 to Registration Statement No. 333-3170, Amendment No. l to Registration Statement No. 333-04947 and Amendment No. 1 to Registration Statement No. 333-25717 of FelCor Suite Hotels, Inc. on Form S-3 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 this Form 8-K of FelCor Suite Hotels, Inc. and to the reference to us under the heading "Experts" in the Prospectus Supplement, which is part of Registration Statement No. 333-25717. DELOITTE & TOUCHE LLP Columbus, Ohio June 4, 1997 -----END PRIVACY-ENHANCED MESSAGE-----