-----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, Mxi0U0n9lV8Ba5HPYh8WGuBNW7ET3YvVazGPDIwgTds9ZxigZcoHA7ZiyWXB5jr5 pw1SWH+dElwlTntL1KMs1g== /in/edgar/work/0000950134-00-008400/0000950134-00-008400.txt : 20001005 0000950134-00-008400.hdr.sgml : 20001005 ACCESSION NUMBER: 0000950134-00-008400 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001004 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20001004 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR LODGING TRUST INC CENTRAL INDEX KEY: 0000923603 STANDARD INDUSTRIAL CLASSIFICATION: [6798 ] IRS NUMBER: 752541756 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-14236 FILM NUMBER: 734659 BUSINESS ADDRESS: STREET 1: 545 E JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 MAIL ADDRESS: STREET 1: 545 E JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 FORMER COMPANY: FORMER CONFORMED NAME: FELCOR SUITE HOTELS INC DATE OF NAME CHANGE: 19940523 8-K 1 d80726e8-k.txt FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): October 4, 2000 FELCOR LODGING TRUST INCORPORATED (Exact name of registrant as specified in its charter) MARYLAND 1-14236 72-2541756 (State or other jurisdiction of (Commission File Number) (IRS Employer incorporation) Identification No.) 545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 444-4900 (NOT APPLICABLE) (Former name or former address, if changed since last report) 2 ITEM 5. OTHER EVENTS On September 15, 2000, FelCor Lodging Limited Partnership issued $400 million in aggregate principal amount of its 9 1/2% Senior Notes Due 2008, which notes were fully and unconditionally guaranteed, jointly and severally, by FelCor Lodging Trust Incorporated and one of its wholly-owned subsidiaries. The financial statements of FelCor Lodging Trust Incorporated are included herein, commencing on page F-1, for the purpose of satisfying the financial statement requirements of FelCor Lodging Trust Incorporated and such subsidiary applicable to such guarantee. See "Index to Financial Statements" below. ITEM 7. EXHIBITS (c) Exhibits. The following exhibit is furnished in accordance with Item 601 of Regulation S-K. Exhibit No. Description 23 Consent of PricewaterhouseCoopers LLP 3 FELCOR LODGING TRUST INCORPORATED INDEX TO FINANCIAL STATEMENTS FELCOR LODGING TRUST INCORPORATED Report of Independent Accountants............................................................................ F-2 Consolidated Balance Sheets - December 31, 1999 and 1998..................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997......... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997................... F-6 Notes to Consolidated Financial Statements................................................................... F-7
F-1 4 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of FelCor Lodging Trust Incorporated In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of FelCor Lodging Trust Incorporated at December 31, 1999 and 1998, and the consolidated results of operations and cash flows for the years ended December 31, 1999, 1998 and 1997, respectively, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Dallas, Texas February 1, 2000, except as to the information in Note 19, for which the date is September 15, 2000. F-2 5 FELCOR LODGING TRUST INCORPORATED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (IN THOUSANDS)
ASSETS 1999 1998 ------------ ------------ Investment in hotels, net of accumulated depreciation of $330,555 in 1999 and $178,072 in 1998 ...................................... $ 4,035,344 $ 3,955,582 Investment in unconsolidated entities .......................................... 136,718 140,299 Cash and cash equivalents ...................................................... 36,123 34,692 Due from Lessees ............................................................... 18,394 18,968 Note receivable from unconsolidated entity ..................................... 7,760 7,766 Deferred expenses, net of accumulated amortization of $4,491 in 1999 and $2,096 in 1998 ........................................... 15,473 10,041 Other assets ................................................................... 5,939 8,035 ------------ ------------ Total assets ............................................................ $ 4,255,751 $ 4,175,383 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Debt, net of discount of $1,401 in 1999 and $1,628 in 1998 ..................... $ 1,833,954 $ 1,594,734 Distributions payable .......................................................... 39,657 67,262 Accrued expenses and other liabilities ......................................... 65,480 57,312 Minority interest in Operating Partnership, 2,991 and 2,939 units issued and outstanding at December 31, 1999 and 1998, respectively .................... 90,078 87,353 Minority interest in other partnerships ........................................ 51,671 51,105 ------------ ------------ Total liabilities .............................................................. 2,080,840 1,857,766 ------------ ------------ Commitments and contingencies (Notes 6 and 11) Shareholders' equity: Preferred stock, $.01 par value, 20,000 shares authorized: Series A Preferred Stock, 6,050 shares issued and outstanding ............... 151,250 151,250 Series B Preferred Stock, 58 shares issued and outstanding .................. 143,750 143,750 Common stock, $.01 par value, 200,000 shares authorized, 69,291 and 69,284 shares issued at December 31, 1999 and 1998, respectively ............ 693 693 Additional paid-in capital ..................................................... 2,138,477 2,142,250 Distributions in excess of earnings ............................................ (119,385) (78,839) ------------ ------------ 2,314,785 2,359,104 Less: Common stock in treasury, at cost, 6,976 and 1,213 shares at December 31, 1999 and 1998, respectively ................................. (139,874) (41,487) ------------ ------------ Total shareholders' equity ............................................. 2,174,911 2,317,617 ------------ ------------ Total liabilities and shareholders' equity ............................. $ 4,255,751 $ 4,175,383 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 6 FELCOR LODGING TRUST INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997 ------------ ------------ ------------ Revenues: Percentage lease revenue ......................................... $ 490,893 $ 328,035 $ 169,114 Equity in income from unconsolidated entities .................... 8,484 7,017 6,963 Other revenue .................................................... 4,624 4,565 574 ------------ ------------ ------------ Total revenues .............................. 504,001 339,617 176,651 ------------ ------------ ------------ Expenses: General and administrative ....................................... 9,122 5,254 3,743 Depreciation ..................................................... 152,948 90,835 50,798 Taxes, insurance and other ....................................... 59,572 37,158 21,483 Land leases ...................................................... 17,558 8,130 1,610 Interest expense ................................................. 125,435 73,182 28,792 Minority interest in Operating Partnership ...................... 4,696 6,500 5,817 Minority interest in other partnerships .......................... 2,713 1,121 573 ------------ ------------ ------------ Total expenses ............................. 372,044 222,180 112,816 ------------ ------------ ------------ Income before nonrecurring items ................................. 131,957 117,437 63,835 Gain on sale of hotels, net ...................................... 236 477 Extraordinary charge from write off of deferred financing fees ... 1,113 3,075 185 ------------ ------------ ------------ Net income ....................................................... 131,080 114,839 63,650 Preferred dividends .............................................. 24,735 21,423 11,797 ------------ ------------ ------------ Net income applicable to common shareholders ..................... $ 106,345 $ 93,416 $ 51,853 ============ ============ ============ Per common share data: Basic: Income applicable to common shareholders before extraordinary charge ................................ $ 1.59 $ 1.93 $ 1.67 Extraordinary charge ....................................... (0.02) (0.06) (0.01) ------------ ------------ ------------ Net income applicable to common shareholders ............... $ 1.57 $ 1.87 $ 1.66 ============ ============ ============ Weighted average common shares outstanding ................. 67,392 49,968 31,269 Diluted: Income applicable to common shareholders before extraordinary charge ............................ $ 1.59 $ 1.92 $ 1.65 Extraordinary charge ....................................... (0.02) (0.06) (0.01) ------------ ------------ ------------ Net income applicable to common shareholders ............... $ 1.57 $ 1.86 $ 1.64 ============ ============ ============ Weighted average common shares outstanding ................. 67,581 50,314 31,610
The accompanying notes are an integral part of these consolidated financial statements. F-4 7 FELCOR LODGING TRUST INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (IN THOUSANDS)
COMMON STOCK ----------------------- NUMBER ADDITIONAL DISTRIBUTIONS TOTAL PREFERRED OF PAID-IN IN EXCESS OF TREASURY SHAREHOLDERS' STOCK SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1996 $ 151,250 23,502 $ 235 $ 503,628 $ (13,187) $ 641,926 Issuance of common shares, net of offering expenses 14,300 143 505,671 505,814 Allocation to minority interest (7,552) (7,552) Repurchase of common shares held in treasury $ (41,106) (41,106) Distributions/dividends declared: $2.10 per common share (72,437) (72,437) $1.95 per preferred share (11,797) (11,797) Net income 63,650 63,650 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1997 151,250 37,802 378 1,001,747 (33,771) (41,106) 1,078,498 Issuance of common shares, net of offering expenses 31,482 315 1,151,038 1,151,353 Forfeiture of restricted common stock awards (381) (381) Allocation to minority interest (5,848) (5,848) Issuance of Series B Preferred Stock, net of offering expenses 143,750 (4,687) 139,063 Distributions/dividends declared: $2.545 per common share (138,484) (138,484) $2.157 per Series A preferred share (13,050) (13,050) $1.44 per Series B depositary preferred share (8,373) (8,373) Net income 114,839 114,839 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1998 295,000 69,284 693 2,142,250 (78,839) (41,487) 2,317,617 Issuance of common shares 7 5 5 Repurchase of common shares (98,387) (98,387) Allocation to minority interest (3,778) (3,778) Distributions/dividends declared: $2.20 per common share (146,891) (146,891) $1.95 per Series A preferred share (11,797) (11,797) $2.25 per Series B depositary preferred share (12,938) (12,938) Net income 131,080 131,080 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1999 $ 295,000 69,291 $ 693 $2,138,477 $ (119,385) $ (139,874) $2,174,911 ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-5 8 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (IN THOUSANDS)
1999 1998 1997 ----------- ----------- ----------- Cash flows from operating activities: Net income ........................................................... $ 131,080 $ 114,839 $ 63,650 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of assets ............................................ (236) (477) Depreciation ...................................................... 152,948 90,835 50,798 Amortization of deferred financing fees and organization costs .... 1,816 1,985 1,468 Amortization of unearned officers' and directors' compensation .... 652 830 1,017 Equity in income from unconsolidated entities ..................... (8,484) (7,017) (6,963) Extraordinary charge for write off of deferred financing fees ..... 1,113 3,075 185 Minority interest in Operating Partnership ........................ 4,696 6,500 5,817 Minority interest in other partnerships ........................... 2,713 1,121 573 Changes in assets and liabilities, net of effects of acquisitions: Due from Lessees .................................................. 574 (3,035) (13,382) Deferred financing fees ........................................... (9,313) (4,348) (8,825) Other assets ...................................................... (282) (602) (1,175) Accrued expenses and other liabilities ............................ 5,088 (11,123) 4,315 ----------- ----------- ----------- Net cash flow provided by operating activities .......... 282,365 192,583 97,478 ----------- ----------- ----------- Cash flows used in investing activities: Acquisition of hotels ............................................. (10,802) (326,276) (574,100) Acquisition of unconsolidated entities ............................ (7,452) (4,230) (65,271) Improvements and additions to hotels .............................. (222,320) (119,107) (52,700) Note receivable from unconsolidated entity ........................ (7,766) Bristol interim credit facility ................................... (120,000) Sale of hotels .................................................... 15,476 7,815 Cash distributions from unconsolidated entities ................... 19,581 19,066 4,211 ----------- ----------- ----------- Net cash flow used in investing activities .............. (205,517) (550,498) (687,860) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from borrowings .......................................... 1,034,667 1,013,003 679,144 Repayment of borrowings ........................................... (804,915) (658,524) (445,900) Proceeds from sale of common stock ................................ 516,700 Proceeds from sale of preferred stock ............................. 143,750 Costs associated with public offerings ............................ (4,687) (27,600) Purchase of treasury stock ........................................ (98,387) (41,106) Proceeds from exercise of stock options ........................... 8 3,884 592 Distributions paid to limited partners ............................ (7,559) (6,671) (6,026) Distributions paid to common shareholders ......................... (173,244) (98,754) (63,875) Dividends paid to preferred shareholders .......................... (25,987) (16,937) (11,797) ----------- ----------- ----------- Net cash flow provided (used) by financing activities ... (75,417) 375,064 600,132 ----------- ----------- ----------- Net change in cash and cash equivalents ................................... 1,431 17,149 9,750 Cash and cash equivalents at beginning of years ........................... 34,692 17,543 7,793 ----------- ----------- ----------- Cash and cash equivalents at end of years ................................. $ 36,123 $ 34,692 $ 17,543 =========== =========== =========== Supplemental cash flow information - interest paid ........................ $ 125,085 $ 72,215 $ 21,414 ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-6 9 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION FelCor Lodging Trust Incorporated ("FelCor") is one of the nation's largest hotel real estate investment trusts ("REIT"). At December 31, 1999, it owned interests in 188 hotels with nearly 50,000 rooms and suites (collectively the "Hotels") through its greater than 95% equity interest in FelCor Lodging Limited Partnership (the "Operating Partnership"). FelCor, the Operating Partnership, and their subsidiaries are herein referred to, collectively, as the "Company". The Company owns 100% of the interest in 163 of the Hotels, a 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels and 50% interests in separate entities that own 16 hotels. The Company is the owner of the largest number of Embassy Suites(R), Crowne Plaza(R), Holiday Inn(R), and independently owned Doubletree(R) branded hotels in the world. The following table provides a schedule of the Hotels, by brand, operated by each of the Company's Lessees at December 31, 1999:
NOT OPERATED BRAND DJONT BRISTOL UNDER A LEASE TOTAL ----- ----- ------- ------------- ----- Embassy Suites 58 58 Holiday Inn 43 1 44 Doubletree and Doubletree Guest Suites(R) 16(1) 16 Crowne Plaza and Crowne Plaza Suites(R) 18 18 Holiday Inn Select(R) 10 10 Sheraton(R) and Sheraton Suites(R) 9 1(2) 10 Hampton Inn(R) 9 9 Holiday Inn Express(R) 5 5 Fairfield Inn(R) 5 5 Harvey Hotel(R) 4 4 Independents 2 1 3 Courtyard by Marriott(R) 2 2 Four Points by Sheraton(R) 1 1 Hilton Suites(R) 1 1 Homewood Suites(R) 1 1 Westin(R) 1 1 -- --- -- --- Total Hotels 85 100 3 188 == === == ===
(1) On January 1, 2000, two of these Doubletree Guest Suites hotels were converted to the Embassy Suites brand. (2) On January 1, 2000, a lease on this hotels became effective between the Company and DJONT. The Hotels are located in the United States (35 states) and Canada, with a concentration in California (20 hotels), Florida (18 hotels), Georgia (15 hotels) and Texas (41 hotels). The following table provides information regarding the net acquisition and disposition of hotels through December 31, 1999:
NET HOTELS ACQUIRED/(DISPOSED OF) ---------------------- 1994 7 1995 13 1996 23 1997 30 1998 120 1999 (5) ---- 188 ====
F-7 10 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. ORGANIZATION -- (CONTINUED) At December 31, 1999, the Company leased 85 of the Hotels to DJONT Operations, L.L.C., a Delaware limited liability company, or a consolidated subsidiary thereof (collectively "DJONT"), and leased 100 of the Hotels to Bristol Hotels & Resorts, or a consolidated subsidiary thereof ("Bristol" and, together with DJONT, the "Lessees"). Three Hotels were operated without a lease. Thomas J. Corcoran, Jr., the President, Chief Executive Officer, and a Director of FelCor, and Hervey A. Feldman, Chairman Emeritus of FelCor, beneficially own a 50% voting common equity interest in DJONT. The remaining 50% nonvoting common equity interest is beneficially owned by the children of Charles N. Mathewson, a director of FelCor and major initial investor in the Company. At December 31, 1999, DJONT had entered into management agreements pursuant to which 72 of the Hotels leased by it were managed by subsidiaries of Hilton Hotels Corporation ("Hilton"), ten were managed by subsidiaries of Starwood Hotels & Resorts Worldwide, Inc. ("Starwood"), and three were managed by two unrelated management companies. Bristol, an independent publicly owned company, at December 31, 1999, leased and managed 100 Hotels and managed one hotel which operated without a lease. Bristol is one of the largest independent hotel operating companies in North America and operates the largest number of Bass Hotels & Resorts-branded hotels in the world. Certain reclassifications have been made to prior period financial information to conform to the current period's presentation with no effect to previously reported net income or shareholder's equity. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of FelCor, the Operating Partnership, and their consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated. Use of Estimates -- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investment in Hotels -- Hotels are stated at cost and are depreciated using the straight-line method over estimated useful lives ranging from 31 to 40 years for buildings and improvements and three to seven years for furniture, fixtures, and equipment. The Company periodically reviews the carrying value of each Hotel to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel based on discounted future cash flows. The Company does not believe that there are any factors or circumstances indicating impairment of any of its investment in the Hotels. Maintenance and repairs are charged to the Lessees' operations as incurred; major renewals and betterments by the Company are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is included in operations. F-8 11 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Investment in Unconsolidated Entities --The Company owns a 50% interest in various partnerships or limited liability companies in which the partners jointly make all material decisions concerning the business affairs and operations. The Company also owns a 97% nonvoting interest in an entity. Accordingly, the Company does not control these entities and carries its investment in unconsolidated entities at cost, plus its equity in net earnings, less distributions received since the date of acquisition. Equity in net earnings is adjusted for the straight-line amortization, over a 40-year period, of the difference between the Company's cost and its proportionate share of the underlying net assets at the date of acquisition. Cash and Cash Equivalents -- All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Deferred Expenses -- Deferred expenses are recorded at cost. Amortization is computed using the interest method over the maturity of the related debt. Revenue Recognition -- Percentage lease revenue is reported as income over the lease term as it becomes receivable from the Lessees according to the provisions of the Percentage Lease agreements. The Lessees are in compliance with their rental obligations under the Percentage Leases. Capitalized Interest -- The Company capitalizes interest and certain other costs relating to hotels undergoing major renovations and redevelopments. Such costs capitalized in 1999 and 1998 were approximately $7.4 million and $5.9 million, respectively. Net Income Per Common Share -- Basic earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share have been computed by dividing net income by the weighted average number of common shares and equivalents outstanding. Common stock equivalents represent shares issuable upon exercise of stock options and unvested officers' restricted stock grants. At December 31, 1999, 1998, and 1997, the Company's Series A Cumulative Preferred Stock, if converted to common shares, would be antidilutive; accordingly the Series A Cumulative Preferred Stock is not assumed to be converted in the computation of diluted earnings per share. Distributions and Dividends -- FelCor and the Operating Partnership pay regular quarterly distributions on their Common Stock and Units. Additionally, the Company pays regular quarterly dividends on preferred stock in accordance with its preferred stock dividend requirements. FelCor's ability to make distributions is dependent on its receipt of quarterly distributions from the Operating Partnership. For 1999 FelCor paid regular dividends of $2.20 per common share, $1.95 per share of Series A Cumulative Preferred Stock ("Series A Preferred Stock"), and $2.25 per depositary share evidencing Series B Redeemable Preferred Stock ("Series B Preferred Stock"). Minority Interest in Operating Partnership -- Minority interest in the Operating Partnership represents the proportionate share of the equity in the Operating Partnership not owned by FelCor. Income is allocated to minority interest based on the weighted average percentage ownership throughout the year. F-9 12 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Income Taxes -- The Company has elected to be treated as a REIT under Sections 856 to 860 of the Internal Revenue Code. Accordingly, no provision for federal income taxes has been reflected in the financial statements. Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from income reported for financial reporting purposes primarily due to the differences for federal income tax purposes in the estimated useful lives used to compute depreciation. Distributions made in 1999 and 1998 represent an approximately 7% and 17% return of capital, respectively, for federal income tax purposes. 3. BRISTOL MERGER On July 28, 1998, the Company completed the merger of Bristol Hotel Company's real estate holdings with and into the Company (the "Merger"). The Merger resulted in the net acquisition of 107 primarily full-service hotels in return for approximately 31.0 million shares of newly issued Common Stock. A summary of the fair values of the assets and liabilities acquired in the Merger, recorded at the date of acquisition, is as follows (in thousands): Investment in hotels ............................... $ 2,014,250 Investment in unconsolidated entity ................ 16,839 Other assets ....................................... 4,151 ------------ 2,035,240 ------------ Common stock issued ................................ 1,146,081 Debt obligations assumed ........................... 868,615 Accrued expenses and other liabilities assumed ..... 55,297 ------------ 2,069,993 ------------ Total cash received in Merger ...................... $ 34,753 ============
The Merger has been accounted for as a purchase, and, accordingly, the results of operations since the date of acquisition are included in the Company's consolidated statements of operations. 4. INVESTMENT IN HOTELS Investment in hotels at December 31, 1999 and 1998, consist of the following (in thousands):
1999 1998 ----------- ----------- Land ................................... $ 346,862 $ 328,591 Building and improvements .............. 3,616,269 3,470,854 Furniture, fixtures and equipment ...... 383,931 300,501 Construction in progress ............... 18,837 33,708 ----------- ----------- 4,365,899 4,133,654 Accumulated depreciation ............... (330,555) (178,072) ----------- ----------- $ 4,035,344 $ 3,955,582 =========== ===========
F-10 13 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INVESTMENT IN UNCONSOLIDATED ENTITIES At December 31, 1999, the Company owned 50% interests in separate entities owning 16 hotels, a parcel of undeveloped land, and a condominium management company. The Company also owned a 97% nonvoting interest in an entity that is developing condominiums for sale and that owns an annex to a hotel owned by the Company. The Company accounts for its investments in these unconsolidated entities under the equity method. Summarized unaudited combined financial information for 100% of these unconsolidated entities is as follows (in thousands):
DECEMBER 31, -------------------------- 1999 1998 ---------- ---------- Balance sheet information: Investment in hotels .......... $ 337,444 $ 269,881 Non-recourse mortgage debt .... $ 254,668 $ 176,755 Equity ........................ $ 101,120 $ 105,347
YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 -------- -------- -------- Statements of operations information: Total revenues ................................... $ 69,146 $ 57,006 $ 54,000 Net income ....................................... $ 21,726 $ 17,438 $ 17,044 Net income attributable to the Company ........... 10,626 8,719 8,522 Amortization of cost in excess of book value ..... (2,142) (1,702) (1,559) -------- -------- -------- Equity in income from unconsolidated entities .... $ 8,484 $ 7,017 $ 6,963 ======== ======== ========
6. DEBT Debt at December 31, 1999 and 1998, consists of the following (in thousands):
DECEMBER 31, ------------------------ COLLATERAL INTEREST RATE MATURITY DATE 1999 1998 ---------- ------------- ------------- ---------- ---------- FLOATING RATE DEBT: - ------------------- Line of credit (a) LIBOR + 163bp June 2001 $ 351,000 $ 411,000 Senior term loan (a) LIBOR + 250bp March 2004 250,000 Term loan Unsecured LIBOR + 150bp December 1999 250,000 Mortgage debt 3 hotels LIBOR + 200bp February 2003 62,553 Other Unsecured Up to LIBOR + 200bp Various 32,282 34,750 ---------- ---------- Total floating rate debt 695,835 695,750 ---------- ---------- FIXED RATE DEBT: - ---------------- Line of credit - swapped (a) 7.17 - 7.56% March 2000-2001 313,000 325,000 Publicly-traded term notes (a) 7.38% October 2004 174,377 174,249 Publicly-traded term notes (a) 7.63% October 2007 124,221 124,122 Mortgage debt 15 hotels 7.24% November 2022 142,542 145,062 Senior term loan - swapped (a) 8.30% March 2000-2004 125,000 Mortgage debt 3 hotels 6.97% December 2002 43,836 Mortgage debt 7 hotels 7.54% April 2009 99,075 Mortgage debt 6 hotels 7.55% June 2009 74,483 Other 13 hotels 6.96% - 7.23% 2000 - 2005 85,421 86,715 ---------- ---------- Total fixed rate debt 1,138,119 898,984 ---------- ---------- Total debt $1,833,954 $1,594,734 ========== ==========
(a) Collateralized by stock and partnership interests in certain subsidiaries of FelCor. F-11 14 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. DEBT -- (CONTINUED) On March 4, 1999 the Company completed a $63 million first mortgage term loan ("Mortgage Loan"). The Mortgage Loan is collateralized by three hotels, bears interest at 200 basis points over LIBOR, matures in February 2003 and amortizes over 25 years. The proceeds from this loan were used to pay off a $44 million mortgage loan due December 2002 and to acquire ownership of land previously held under ground leases. On April 1, 1999, the Company entered into a $375 million term loan ("the Senior Term Loan") increasing its credit facilities to $1.2 billion, consisting of the Senior Term Loan which matures in March 2004 and an $850 million revolving line of credit ("Line of Credit") which matures in June 2001. The Line of Credit, Senior Term Loan and the Company's publicly traded term notes are collateralized by stock and partnership interests in certain subsidiaries of FelCor. The financial covenants in the Senior Term Loan are consistent with those in the Company's existing Line of Credit. If the Company achieves investment grade credit ratings from the applicable rating agencies, or when the Senior Term Loan is retired, the stock and partnership interest collateral will be released. The proceeds of the Senior Term Loan were used to prepay a $250 million term loan, which was to mature on December 31, 1999, and initially to reduce borrowings under the Company's Line of Credit. Interest payable on borrowings under the credit facilities is variable, determined from a ratings and leverage-based pricing matrix, ranging from 87.5 basis points to 275 basis points above LIBOR (30-day LIBOR at December 31, 1999, was 5.83%). The interest rate spread on the Line of Credit ranged from 150 to 162.5 basis points in 1999. Additionally, the Company is required to pay an unused commitment fee on the Line of Credit which is variable, determined from a ratings-based pricing matrix, ranging from 20 to 30 basis points. In 1999 and 1998, the Company wrote off approximately $1.1 million and $2.5 million, respectively, of deferred financing fees relating to the term loan of $250 million and the previous unsecured credit facility of $550 million, respectively. For the years ended December 31, 1999, 1998, and 1997, the Company paid interest on its unsecured credit facilities at weighted average interest rates of 7.1%, 7.1%, and 7.6%, respectively. At December 31, 1999, the Company had borrowing capacity under its Line of Credit of $186 million. On April 1, 1999, the Company also closed a 10-year, $100 million mortgage loan (the "April 1999 First Mortgage Term Loan"). The April 1999 First Mortgage Term Loan is non-recourse (with certain exceptions), is collateralized by seven Embassy Suites hotels, carries a fixed rate coupon of 7.54%, matures in April 2009 and amortizes over 25 years. The proceeds from this loan were used initially to reduce outstanding borrowings under the Company's Line of Credit. On May 13, 1999, the Company closed a 10-year, $75 million mortgage loan. This loan is non-recourse (with certain exceptions), is collateralized by six Embassy Suites hotels, carries a fixed rate coupon of 7.55%, matures in June 2009 and amortizes over 25 years. The proceeds from this loan were used initially to reduce outstanding borrowings under the Company's Line of Credit. The Line of Credit and the Senior Term Loan contain various affirmative and negative covenants including limitations on total indebtedness, total secured indebtedness, and cash distributions, as well as the obligation to maintain a certain minimum tangible net worth and certain minimum interest and debt service coverage ratios. At December 31, 1999, the Company was in compliance with all such covenants. The Company's other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the Line of Credit and Senior Term Loan. Most of the mortgage debt is non-recourse to the Company (with certain exceptions) and contain provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of the mortgage debt is prepayable; subject, however, to various prepayment, yield maintenance, or defeasance obligations. F-12 15 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. DEBT -- (CONTINUED) Future scheduled principal payments on debt obligations at December 31, 1999 are as follows (in thousands):
YEAR - ---- 2000 ................................... $ 42,608 2001 ................................... 684,588 2002 ................................... 9,622 2003 ................................... 90,768 2004 ................................... 559,306 2005 and thereafter .................... 448,463 --------------- 1,835,355 Discount accretion over term ........... (1,401) --------------- $ 1,833,954 ===============
To manage the relative mix of its debt between fixed and variable rate instruments, the Company has entered into interest rate swap agreements with six financial institutions. These interest rate swap agreements modify a portion of the interest characteristics of the Company's outstanding debt under its Line of Credit and Senior Term Loan without an exchange of the underlying principal amount and effectively convert variable rate debt to a fixed rate. The fixed rates to be paid, the effective fixed rate, and the variable rate to be received by the Company at December 31, 1999, are summarized in the following table:
EFFECTIVE SWAP RATE RECEIVED SWAP RATE EFFECTIVE (VARIABLE) AT SWAP NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 12/31/99 MATURITY - --------------- ------------ ---------- ------------- -------- $113 million 5.9300% 7.5550% 7.7450% March 2000 $ 75 million 5.9375% 7.5625% 7.7450% March 2000 $ 25 million 5.5750% 7.1830% 8.1013% July 2001 $ 25 million 5.5480% 7.1730% 8.1013% July 2001 $ 75 million 5.5550% 7.1800% 8.1013% July 2001 $100 million 5.7955% 8.2960% 8.9763% July 2003 $ 25 million 5.8260% 8.3260% 8.9763% July 2003 ------------ $438 million ============
The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense by the Company, pursuant to the terms of its interest rate agreement, and will have a corresponding effect on its future cash flows. Agreements such as these contain a credit risk in that the counterparties may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, who are limited to major banks and financial institutions, and does not anticipate nonperformance by the counterparties. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 requires disclosures about the fair value for all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about fair value of financial instruments are based on pertinent information available to management as of December 31, 1999. F-13 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) Considerable judgement is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Management estimates the fair value of (i) accounts receivable, accounts payable and accrued expenses approximate carrying value due to the relatively short maturity of these instruments; (ii) the note receivable approximates carrying value based upon effective borrowing rates for issuance of debt with similar terms and remaining maturities; (iii) the borrowings under the Line of Credit, Senior Term loan and various other mortgage notes approximate carrying value because these borrowings accrue interest at floating interest rates based on market. The estimated fair value of the Company's fixed rate debt of $700 million is $568 million at December 31, 1999, based on current market interest rates estimated by the Company for similar debt with similar maturities. The Company manages its debt portfolio by using interest rate swaps to achieve an overall desired position of fixed and floating rates. The fair value of interest rate hedge contracts is estimated based on quotes from the market makers of these instruments and represents the estimated amounts the Company would expect to receive or pay to terminate the contracts. Credit and market risk exposures are limited to the net interest differentials. The estimated unrealized net gain on these instruments was approximately $6.3 million at December 31, 1999, which represents the amount the Company would receive to terminate the agreements based on current market rates. 8. CAPITAL STOCK As of December 31, 1999, the Company had approximately $946 million of common stock, preferred stock, debt securities, and/or common stock warrants available for offerings under shelf registration statements previously declared effective. Preferred Stock The Board of Directors is authorized to provide for the issuance of up to 20,000,000 shares of Preferred Stock in one or more series, to establish the number of shares in each series, to fix the designation, powers preferences and rights of each such series, and the qualifications, limitations or restrictions thereof. In 1996 the Company issued 6.1 million shares of its $1.95 Series A Preferred Stock at $25 per share. The Series A Preferred Stock bears an annual dividend equal to the greater of $1.95 per share or the cash distributions declared or paid for the corresponding period on the number of shares of Common Stock into which the Series A Preferred Stock is then convertible. Each share of the Series A Preferred Stock is convertible at the shareholder's option to 0.7752 shares of Common Stock, subject to certain adjustments, and may not be redeemed by the Company before April 30, 2001. On May 1, 1998, the Company issued 5.75 million depositary shares, representing 57,500 shares of 9% Series B Preferred Stock, at $25 per depositary share. The Series B Preferred Stock and the corresponding depositary shares may be called by FelCor at par on or after May 7, 2003, have no stated maturity, sinking fund or mandatory redemption, and are not convertible into any other securities of FelCor. The Series B Preferred Stock has a liquidation preference of $2,500 per share (equivalent to $25 per depositary share) and is entitled to annual dividends at the rate of 9% of the liquidation preference (equivalent to $2.25 annually per depositary share). F-14 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. CAPITAL STOCK -- (CONTINUED) At December 31, 1999, all dividends then payable on the Series A and Series B Preferred Stock had been paid. Operating Partnership Units FelCor is the sole general partner of the Operating Partnership and is obligated to contribute the net proceeds from any issuance of its equity securities to the Operating Partnership in exchange for units of partnership interest ("Units") corresponding in number and terms to the equity securities issued by it. Units of limited partner interest may also be issued by the Operating Partnership to third parties in exchange for cash or property, and Units so issued to third parties are redeemable at the option of the holders thereof for a like number of shares of FelCor Common Stock or, at the option of FelCor, for the cash equivalent thereof. Treasury Stock Repurchase Program On September 3, 1999, FelCor announced that its Board of Directors had authorized the Company to repurchase up to $100 million of its outstanding common shares. At December 31, 1999, the Company had completed the repurchase of approximately 5.8 million common shares at a cost of approximately $98.4 million which has been recorded as treasury stock. 9. TAXES, INSURANCE AND OTHER Taxes, insurance and other is comprised of the following for the years ended December 31, 1999, 1998, and 1997 (in thousands):
1999 1998 1997 ---------- ---------- ---------- Real estate and personal property taxes .......... $ 52,118 $ 32,892 $ 18,976 Property insurance ............................... 3,481 2,341 1,627 State franchise taxes and Canadian income tax .... 3,973 1,609 718 Other ............................................ 316 162 ---------- ---------- ---------- Total taxes, insurance, and other ..... $ 59,572 $ 37,158 $ 21,483 ========== ========== ==========
10. LAND LEASES The Company leases land occupied by certain hotels from third parties under various operating leases. Certain leases contain contingent rent features based on gross revenue at the respective hotels. Future minimum lease payments under the Company's land lease obligations at December 31, 1999, are as follows (in thousands):
YEAR ---- 2000 $ 18,358 2001 18,346 2002 17,951 2003 17,767 2004 17,703 2005 and thereafter 265,115 --------- $ 355,240 =========
F-15 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMITMENTS AND RELATED PARTY TRANSACTIONS Commitments The Company is to receive rental income from the Lessees under the Percentage Leases, which expire in 2002 (five hotels), 2003 (three hotels), 2004 (12 hotels), 2005 (19 hotels), 2006 (26 hotels), 2007 (37 hotels), 2008 (54 hotels), and thereafter (15 hotels). The rental income under the Percentage Leases between 14 of the unconsolidated entities, of which the Company owns 50%, is payable by the Lessee to the respective entities and is not included in the following schedule of future lease commitments to the Company. Minimum future rental income (i.e., base rents) payable to the Company under these noncancelable operating leases at December 31, 1999 is as follows (in thousands):
LESSEES ---------------------- DJONT BRISTOL TOTAL ----- ------- ----- YEAR ---- 2000........................................... $ 140,235 $ 180,055 $ 320,290 2001........................................... 143,609 180,076 323,685 2002........................................... 143,966 180,049 324,015 2003........................................... 130,445 177,302 307,747 2004 126,885 169,930 296,815 2005 and thereafter............................ 392,499 650,239 1,042,738 ----------- ---------- ---------- $ 1,077,639 $1,537,651 $2,615,290 =========== ========== ==========
The Percentage Lease revenue is based on a percentage of room and suite revenues, and a varying combination of food and beverage revenues, food and beverage rents, and other revenues of the Hotels. Both the base rent and the threshold suite revenue in each lease computation are subject to adjustments for changes in the Consumer Price Index ("CPI"). The adjustment is calculated at the beginning of each calendar year for the hotels acquired prior to July of the previous year. The adjustment in any lease year may not exceed 7%. The CPI adjustments made in January 2000 ranged from 1.05% to 2.20%, dependent upon the Lessee. The CPI adjustments for 1999 ranged from 0.55% to 1.5%, dependent upon the Lessee, and in 1998 was 0.50%. Under the Percentage Leases, the Operating Partnership is obligated to pay the costs of real estate and personal property taxes, property insurance, maintenance of underground utilities and structural elements of the Hotels, and to set aside a portion of the hotels' revenues (varying from 4% of room and suite revenue to 3% of total hotel revenue) per month, on a cumulative basis, to fund capital expenditures for the periodic replacement or refurbishment of furniture, fixtures and equipment required for the retention of the franchise licenses with respect to the Hotels. Included in cash and cash equivalents at December 31, 1999 and 1998, were cash balances held by the Hotel managers for these capital expenditures of $19.9 million and $14.8 million, respectively. Related Party Transactions The Company shares the executive offices and certain employees with FelCor, Inc., and DJONT, and each company bears its share of the costs thereof, including an allocated portion of the rent, compensation of certain personnel (other than Mr. Corcoran, whose compensation is borne solely by the Company), office supplies, telephones, and depreciation of office furniture, fixtures, and equipment. Any such allocation of shared expenses to the Company is required to be approved by a majority of the Independent Directors. During 1999, 1998, and 1997, the Company paid approximately $5.7 million (approximately 89.5%), $2.8 million (approximately 63%), and $1.3 million (approximately 38%), respectively, of the allocable expenses under this arrangement. F-16 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED) Included in the mortgage debt of the unconsolidated entities is a mortgage loan payable to the Company in the amount of $7.8 million for 1999 and 1998. The note bears a fixed interest rate of 8% per annum with a 30 year amortization, matures on December 31, 2004, and is collateralized by a Mortgage and Assignment of Leases and Rents with respect to the annex of the hotel owned by an entity in which the Company has a 97% nonvoting interest. 12. SUPPLEMENTAL CASH FLOW DISCLOSURE The Company purchased certain assets and assumed certain liabilities in connection with the acquisition of hotels in 1998 and 1997. During 1999 the Company purchased the land related to three hotels, which was previously leased. These purchases were recorded under the purchase method of accounting. The fair values of the acquired assets and liabilities recorded at the date of acquisition are as follows (in thousands):
1999 1998 1997 ----------- ----------- ----------- Assets acquired ................... $ 19,776 $ 2,427,027 $ 588,053 Liabilities assumed ............... (7,800) (940,906) (5,932) Common Stock and Units issued ..... (1,174) (1,152,856) Minority interest contribution .... (6,989) (8,021) ----------- ----------- ----------- Net cash paid .......... $ 10,802 $ 326,276 $ 574,100 =========== =========== ===========
Under the Merger Agreement with Bristol Hotel Company, FelCor provided Bristol a $120 million interim credit facility (the "Interim Credit Facility"). At July 28, 1998, the Interim Credit facility was assumed and canceled by FelCor upon completion of the Merger. Approximately $39.7 million, $67.3 million, and $24.7 million of aggregate preferred stock dividends and common stock distributions had been declared as of December 31, 1999, 1998, and 1997, respectively. These amounts were paid in the following January of each year. In 1998 the Company entered into a joint venture, in which the Company contributed a hotel with a net book value of $53.9 million for a 60% equity interest in the venture. The Company has consolidated this venture in the financial statements and recorded increases of $34.4 million in investment in hotels and minority interest in other partnerships. 13. STOCK BASED COMPENSATION PLANS The Company sponsors three restricted stock and stock option plans (the "FelCor Plans"). In addition, upon completion of the Merger, FelCor assumed two stock option plans previously sponsored by Bristol Hotel Company (the "Bristol Plans"). FelCor was initially obligated to issue up to 1,271,103 shares of its Common Stock pursuant to the Bristol Plans. No additional options may be awarded under the Bristol Plans. The FelCor Plans and the Bristol Plans are referred to collectively as the "Plans". The Company applies APB Opinion 25 and related interpretations in accounting for the Plans. In 1995 the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the Plans. Adoption of the cost recognition provisions of SFAS 123 is optional and the Company has decided not to adopt the provisions of SFAS 123. However, pro forma disclosures as if the Company adopted the cost recognition provisions of SFAS 123 are required by SFAS 123 and are presented below. F-17 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. STOCK BASED COMPENSATION PLANS -- (CONTINUED) Stock Options FelCor is authorized to issue 2,950,000 shares of Common Stock under the FelCor Plans pursuant to awards granted in the form of incentive stock options, non-qualified stock options, and restricted stock. All options have 10-year contractual terms and vest over five equal annual installments (20% per year), beginning in the year following the date of grant. The options outstanding under the Bristol Plans generally vest either in four equal annual installments (25% per year) beginning in the second year following the original date of award, in five equal annual installments (20% per year) beginning in the year following the original date of award, or on a single date that is three to five years following the original date of the date of award. A summary of the status of FelCor's non-qualified stock options under the Plans as of December 31, 1999, 1998, and 1997, and the changes during the years are presented below:
1999 1998 1997 ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED # SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES ---------- ------ ---------- ------ ---------- ------ Outstanding at beginning of the year ... 2,540,466 $22.53 1,670,500 $29.96 1,047,500 $25.67 Granted (A) (B) ........................ 9,750 $22.13 2,445,813 $20.54 752,000 $35.70 Exercised .............................. (760) $10.33 (332,915) $11.67 (31,000) $19.11 Forfeited (B) .......................... (52,683) $32.41 (1,242,932) $31.51 (98,000) $31.56 ---------- ---------- ---------- Outstanding at end of year ............. 2,496,773 $22.32 2,540,466 $22.53 1,670,500 $29.96 ========== ========== ========== Exercisable at end of year ............. 906,675 $24.58 796,499 $24.64 411,500 $24.42
(A) 1998 grants include options covering 1,271,103 shares of Common Stock issuable as a result of the assumption of the Bristol Plans. (B) To enable FelCor to preserve its stock options as a meaningful element of compensation in 1998, existing option holders under the FelCor Plans employed by FelCor on a full-time basis were offered the opportunity to exchange their existing options (having exercise prices ranging from $26.44 to $38.56 per share) for a lesser number of new options having an equal value under the Black-Scholes option pricing model. Twenty-two employees accepted this offer in 1998, surrendering for cancellation existing options covering an aggregate of 1,151,500 shares of Common Stock at a weighted average exercise price of $32.807 per share for new options covering an aggregate of 840,393 shares of Common Stock at an exercise price of $22.125 per share. The new options have the same expiration dates and vesting schedules as the options surrendered for cancellation; however, none of the new options were exercisable prior to January 1, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ------------------------------- NUMBER WGTD. AVG. NUMBER RANGE OF OUTSTANDING REMAINING WGTD AVG. EXERCISABLE WGTD. AVG. EXERCISE PRICES AT 12/31/99 LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE - --------------- ----------- ----- -------------- ----------- -------------- $10.33 to $29.50 2,206,819 7.21 $20.80 734,890 $22.21 $30.28 to $36.63 289,954 7.63 $33.92 171,785 $34.72 - ---------------- ---------- ---- ------ -------- ------ $10.33 to $36.63 2,496,773 7.26 $22.32 906,675 $24.58
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 9.94%; risk free interest rates are different for each grant and range from 4.65% to 6.2%; the expected lives of options are 6 years; and volatility of 18.44% for 1999 grants, 32.90% for 1998 grants, and 22.67% for grants issued in 1997. The weighted average fair value of options granted during 1999, 1998, and 1997 was $1.07, $3.35, and $4.31 per share, respectively. F-18 21 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. STOCK BASED COMPENSATION PLANS -- (CONTINUED) Restricted Stock A summary of the status of the Company's restricted stock grants as of December 31, 1999, 1998, and 1997 and the changes during the years are presented below:
1999 1998 1997 ---------------------- --------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE FAIR MARKET FAIR MARKET FAIR MARKET VALUE VALUE VALUE # SHARES AT GRANT # SHARES AT GRANT # SHARES AT GRANT -------- -------- -------- -------- -------- --------- Outstanding at beginning of the year ....... 125,375 $ 28.97 115,500 $ 29.03 84,500 $ 26.04 --------- --------- --------- Granted: With 5-year pro rata vesting ............ 5,000 $ 21.25 35,000 $ 35.00 Vest 100% at grant date ................. 4,875 $ 35.63 6,000 $ 35.00 Vest 100% within 12 months of grant ..... 2,500 $ 36.94 --------- --------- --------- Total granted .............................. 9,875 $ 28.35 43,500 $ 35.11 Forfeited .................................. (12,500) $ 30.00 --------- --------- --------- Outstanding at end of year ................. 125,375 $ 28.97 125,375 $ 28.97 115,500 $ 29.03 ========= ========= ========= Vested at end of year ...................... 83,575 $ 28.35 65,175 $ 28.26 40,400 $ 26.60
Pro Forma Net Income and Net Income Per Common Share Had the compensation cost for the Company's stock-based compensation plans been determined in accordance with SFAS 123, the Company's net income and net income per common share for 1999, 1998, and 1997 would approximate the pro forma amounts below (in thousands, except per share data):
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------ ------------------------ ------------------------ AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA SFAS 123 charge................... $ 1,606 $ 1,799 $ 1,447 APB 25 charge..................... $ 652 $ 829 $ 1,017 Net income applicable to common shareholders............ $ 106,345 $ 105,391 $ 93,416 $ 92,446 $ 51,853 $ 51,423 Diluted net income applicable to common shareholders per common share............... $ 1.57 $ 1.56 $ 1.86 $ 1.84 $ 1.64 $ 1.63
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. 14. LESSEES All of the Company's percentage lease revenue is derived from the Percentage Leases with the Lessees. Certain information, related to DJONT's financial statements, is as follows (in thousands):
DECEMBER 31, ------------------------- 1999 1998 ---------- --------- Balance Sheet Information: Cash and cash equivalents........................... $ 20,127 $ 28,538 Accounts receivable, net............................ $ 28,601 $ 27,561 Total assets........................................ $ 71,659 $ 63,972 Due to FelCor Lodging Trust Incorporated............ $ 22,064 $ 16,875 Accounts payable.................................... $ 12,742 $ 13,508 Shareholders' deficit............................... $ (13,142) $ (8,231)
F-19 22 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. LESSEES -- (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------------------------------ 1999 1998 1997 --------- --------- --------- Statement of Operations Information: Room and suite revenue .............. $ 649,323 $ 618,122 $ 456,614 Percentage lease expenses ........... $ 307,532 $ 289,891 $ 216,990 Net income (loss) ................... $ (4,911) $ 844 $ (2,672)
Certain entities owning interests in DJONT and managers for certain hotels have agreed to make loans to DJONT of up to an aggregate of approximately $17.3 million to the extent necessary to enable DJONT to pay rent and other obligations due under the respective Percentage Leases relating to a total of 38 of the Hotels. No such loans were outstanding at December 31, 1999. DJONT engages third-party managers to operate the Hotels leased by it and generally pays such managers a base management fee based on a percentage of room and suite revenue and an incentive management fee based on DJONT's income before overhead expenses for each hotel. In certain instances, the hotel managers have subordinated fees and are committed to make subordinated loans to DJONT, if needed, to meet its rental and other obligations under the Percentage Leases. Bristol is a publicly traded company whose stock is listed on the New York Stock Exchange under the symbol BH and that files financial statements in accordance with the Securities Exchange Act of 1934, as amended. Bristol serves as both the lessee and manager of the 100 Hotels leased to it by the Company at December 31, 1999, and, as such, is compensated for both roles through the profitability of the Hotels, after meeting their operating expenses and rental obligations under the Percentage Leases. Bristol has entered into an absolute and unconditional guarantee of the obligations of the Bristol Lessees under the Percentage Leases, and is required to maintain a minimum liquid net worth. A portion of this liquid net worth is being satisfied through a letter of credit for the benefit of the Company. This Letter of Credit is subject to periodic reductions upon satisfaction of certain conditions and, at December 31, 1999, totaled $9.1 million. According to Bristol's press release dated February 1, 2000, for the year ended December 31, 1999 and the period from July 28, 1998 through December 31, 1998, Bristol had net income of $8.2 million and $2.6 million, respectively, and at December 31, 1999 and 1998, had stockholders' equity of $43.1 million and $35.4 million, respectively. At December 31, 1999, the Company owned interests in 188 Hotels operating under various brand names. The Hotels generally operate pursuant to franchise license agreements which require the payment of fees based on a percentage of room and suite revenue. These fees are paid by the Lessees. 15. EMPLOYEE BENEFITS The Company offers a 401(k) plan, health insurance benefits and a deferred compensation plan to its employees. In 1999, the Company's matching contribution to the 401(k) plan was $382,000 and the cost of health insurance benefits were $217,000. The deferred compensation plan offered by the Company is available only to directors and employees making in excess of $100,000 annually. The Company makes no matching or other contributions to the deferred compensation plan other than the payment of its operating and administrative expenses. F-20 23 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. SEGMENT INFORMATION The Company has determined that its reportable segments are those that are consistent with the Company's method of internal reporting, which segments its business by Lessee. The Company's Lessees at December 31, 1999, were DJONT and Bristol. Prior to July 28, 1998 (the date of the Bristol Merger), the Company had only one lessee, DJONT. The following tables present information about the reportable segments for the year ended December 31, 1999 and 1998 (in thousands):
CORPORATE SEGMENT NOT ALLOCABLE CONSOLIDATED YEAR ENDED DECEMBER 31, 1999 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL - ----------------------------------------------- ----------- ---------- ----------- ------------- ------------- Statement of Operations Information: Percentage lease revenue....................... $ 256,128 $ 234,765 $ 490,893 $ 490,893 Equity in income from unconsolidated entities................................. $ 7,725 $ 759 $ 8,484 $ 8,484 Expenses: Depreciation.............................. $ 80,969 $ 71,748 $ 152,717 $ 231 $ 152,948 Interest expense.......................... $ 125,435 $ 125,435 Income (loss) before nonrecurring items........ $ 147,868 $ 118,949 $ 266,817 $ (134,860) $ 131,957 Gain on sale of hotels......................... 236 236 Income (loss) before extraordinary change $ 147,868 $ 118,949 $ 266,817 $ (134,624) $ 132,193 Funds from operations: Income (loss) before extraordinary charge...... $ 147,868 $ 118,949 $ 266,817 $ (134,624) $ 132,193 Series B preferred dividends................... (12,937) (12,937) Depreciation................................... 80,969 71,748 152,717 231 152,948 Depreciation for unconsolidated entities....... 9,248 747 9,995 9,995 Minority interest in Operating Partnership..... 4,696 4,696 ----------- ---------- ----------- ---------- ----------- Funds from operations.......................... $ 238,085 $ 191,444 $ 429,529 $ (142,634) $ 286,895 =========== ========== =========== ========== =========== Weighted average common shares and units outstanding (1)....................... 75,251 Other Information: Total assets....................... $ 1,940,247 $2,243,916 $ 4,184,163 $ 68,555 $ 4,252,718 Capital expenditures............... $ 51,587 $ 170,733 $ 222,320 $ 222,320
F-21 24 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. SEGMENT INFORMATION -- (CONTINUED)
CORPORATE SEGMENT NOT ALLOCABLE CONSOLIDATED YEAR ENDED DECEMBER 31, 1998 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL - ----------------------------------------------- ----------- ---------- --------- ------------- ------------ Statement of Operations Information: Percentage lease revenue...................... $ 237,555 $ 90,480 $ 328,035 $ 328,035 Equity in income from unconsolidated entities................................ $ 6,744 $ 273 $ 7,017 $ 7,017 Expenses: Depreciation............................ $ 71,055 $ 19,619 $ 90,674 $ 161 $ 90,835 Interest expense........................ $ 73,182 $ 73,182 Income before nonrecurring item............... $ 143,736 $ 54,233 $ 197,969 $ (80,532) $ 117,437 Gain on sale of hotels........................ $ 477 $ 477 Income (loss) before extraordinary charge..... $ 143,736 $ 54,233 $ 197,969 $ (80,055) $ 117,914 Funds from operations: Income (loss) before extraordinary charge..... $ 143,736 $ 54,233 $ 197,969 $ (80,055) $ 117,914 Series B preferred dividends.................. (8,373) (8,373) Depreciation.................................. 71,055 19,619 90,674 161 90,835 Depreciation for unconsolidated entities...... 10,254 233 10,487 10,487 Minority interest in Operating Partnership.... 6,500 6,500 ----------- ---------- ----------- ---------- ----------- Funds from operations......................... $ 225,045 $ 74,085 $ 299,130 $ (81,767) $ 217,363 =========== ========== =========== ========== =========== Weighted average common shares and units outstanding (1)...................... 58,013 Other Information: Total assets...................... $ 2,022,975 $2,093,328 $ 4,116,303 $ 59,080 $ 4,175,383 Capital expenditures.............. $ 65,264 $ 65,839 $ 131,103 $ 131,103
(1) Weighted average common shares and units outstanding are computed including dilutive options and unvested stock grants, and assuming conversion of Series A preferred stock to common stock. F-22 25 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. SEGMENT INFORMATION -- (CONTINUED) The following table sets forth Percentage Lease revenue and investment in hotel assets represented by the following geographical areas as of and for the years ended December 31, (in thousands):
PERCENTAGE LEASE REVENUE INVESTMENT IN HOTEL ASSETS ---------------------------- ---------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- California ......... $ 97,283 $ 63,733 $ 698,942 $ 642,965 Texas .............. 94,782 52,220 891,626 854,558 Florida ............ 61,516 45,719 542,298 519,280 Georgia ............ 39,247 23,691 355,519 349,429 Other States ....... 186,248 138,437 1,802,220 1,705,220 Canada ............. 11,817 5,123 75,294 62,202 ---------- ---------- ---------- ---------- Total ... $ 490,893 $ 328,923 $4,365,899 $4,133,654 ========== ========== ========== ==========
17. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB 133" which deferred the effective date of FAS 133 for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company believes that, upon implementation, FAS 133 will not have a material impact on the financial statements of the Company. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") which provides guidance on revenue recognition. SAB 101 is effective for fiscal years beginning after December 15, 1999. SAB 101 requires that a lessor not recognize contingent rental income until annual specified thresholds have been achieved by the lessee. During 1999, the Company's leases had quarterly, rather than annual, specified rental thresholds and the Company recognized contingent rentals earned in each quarter pursuant to the Percentage Lease terms. The Company has reviewed the terms of its Percentage Leases and has determined that the provisions of SAB 101 will not materially impact the Company's revenue recognition on an interim basis in 2000, since a significant majority of the Percentage Leases contain quarterly specified thresholds. SAB 101 will not impact the Company's revenue recognition on an annual basis given the Company maintains only calendar year leases. SAB 101 will have no impact on the Company's interim or annual cash flow from the Lessees, and therefore on its ability to pay dividends. F-23 26 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. QUARTERLY OPERATING RESULTS (UNAUDITED) The Company's unaudited consolidated quarterly operating data for the years ended December 31, 1999 and 1998, follows (in thousands, except per share data). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of quarterly results have been reflected in the data. It is also management's opinion, however, that quarterly operating data for hotel enterprises are not indicative of results to be achieved in succeeding quarters or years. In order to obtain a more accurate indication of performance, there should be a review of operating results, changes in shareholders' equity and cash flows for a period of several years.
FIRST SECOND THIRD FOURTH 1999 QUARTER QUARTER QUARTER QUARTER - ---- -------- -------- -------- -------- Total revenues ........................................ $126,917 $135,187 $124,082 $117,815 Income before nonrecurring items ...................... $ 36,747 $ 41,935 $ 30,021 $ 23,254 Net income applicable to common shareholders .......... $ 30,563 $ 34,638 $ 23,837 $ 17,307 Per diluted common share data: Net income applicable to common shareholders ..... $ 0.45 $ 0.51 $ 0.35 $ 0.26 Weighted average common shares outstanding ............ 68,344 68,351 68,221 65,543
FIRST SECOND THIRD FOURTH 1998 QUARTER QUARTER QUARTER QUARTER - ---- -------- -------- -------- -------- Total revenues ........................................ $ 57,528 $ 67,402 $108,599 $106,088 Income before nonrecurring items ...................... $ 21,500 $ 24,881 $ 39,854 $ 31,202 Net income applicable to common shareholders .......... $ 17,995 $ 20,027 $ 31,151 $ 24,243 Per diluted common share data: Net income applicable to common shareholders ..... $ 0.49 $ 0.54 $ 0.53 $ 0.36 Weighted average shares outstanding ................... 36,905 36,851 58,834 68,185
19. SUBSEQUENT EVENTS In connection with the efforts of Bass plc to acquire Bristol, as announced on February 28, 2000, a Bass subsidiary (Bass America, Inc.) contributed 4,713,185 outstanding FelCor common shares held by it to the Operating Partnership in exchange for a like number of units of limited partner interest. This exchange will not affect FelCor's FFO or earnings per share, although it results in reducing FelCor's percentage ownership in the Operating Partnership from approximately 95% to approximately 88%. On January 4, 2000, FelCor announced that its Board of Directors had approved a $200 million increase to the existing $100 million stock repurchase program, authorizing the Company to purchase up to an aggregate of $300 million of its outstanding common shares. Through September 15, 2000, the Company had purchased an aggregate of 9.5 million shares of FelCor common stock at an aggregate cost of approximately $167.8 million. On April 26, 2000, the Company closed a 10-year, $145 million First Mortgage Term Loan, which is collateralized by seven Sheraton hotels and carries an 8.73% fixed interest rate. On May 2, 2000, the Company closed $186 million of 10-year, First Mortgage Term Loans which are collateralized by eight Embassy Suites hotels and carry an 8.69% fixed interest rate. The loans are non-recourse, mature in May 2010, and amortize over 25 years. The proceeds of these loans were used to reduce borrowings under its $850 million Line of Credit. The Company has identified 25 hotels that it considers non-strategic and has announced its intention to sell such hotels within the next year. Three of the hotels are leased by DJONT and the other 22 are leased and managed by Bristol. The Company expects gross sales proceeds from these hotels to be approximately $150 million and net proceeds to be approximately $136 million. In connection with the decision to sell these hotels, the Company has recorded, at June 30, 2000, a one-time reserve of $63 million representing the difference between the net book value of these hotels and the estimated net proceeds. On July 14, the Company entered into a binding sale contract to sell its Embassy Suites hotel, Los Angeles International Airport-North, California (215 suites) for a gross price of approximately $24 million. The Company expects the sale will close in the third quarter of 2000, and result in a gain on sale of approximately $2.5 million. This hotel is not included in the 25 hotels held for sale. On July 21, 2000, FelCor's Independent Directors approved the acquisition of 100% of DJONT effective January 1, 2001. The purchase price is approximately 417,000 units of the Operating Partnership; no binding agreements have been entered into for this acquisition, and the Company cannot assure that they will successfully complete this transaction. On August 1, 2000, the Company renewed it Line of Credit. The Line of Credit was reduced from $850 million to $600 million and the maturity was extended from July 2001 to August 2003. The effective interest rate ranges from 87.5 basis points to 250 basis points above LIBOR depending on the Company's leverage and corporate rating. On September 15, 2000, the Company completed the private placement of $400 million in aggregate principal amount of its long term senior unsecured notes. The notes bear interest at 9 1/2%, mature in 2008 and are priced at 98.633% to yield 9.75%. The discount on the $400 million senior notes accrete using the straight line method over the maturity of the notes. These senior notes were issued by the Operating Partnership and are fully and unconditionally guaranteed, jointly and severally, (1) by certain wholly-owned subsidiaries of the Operating Partnership and (2) by FelCor and one of its wholly-owned subsidiaries. Condensed consolidating financial information for FelCor and its guarantor subsidiary is not presented since FelCor has no independent assets or operations, the guarantee is full and unconditional and any other subsidiaries of FelCor, other than the Operating Partnership, are minor. Condensed consolidating financial information for the Operating Partnership and its guarantor and non-guarantor subsidiaries is separately presented in the financial statements of the Operating Partnership. F-24 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FELCOR LODGING TRUST INCORPORATED Date: October 4, 2000 By: /s/ Lawrence D. Robinson ------------------------------ Lawrence D. Robinson Senior Vice President, General Counsel and Secretary 28 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23 Consent of PricewaterhouseCoopers LLP
EX-23 2 d80726ex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (File Nos. 333-04947, 333-46357, 333-50509, and 333-62599) and Form S-8 (File Nos. 333-32579 and 333-66041) of FelCor Lodging Trust Incorporated of our report dated February 1, 2000, except as to the information in Note 19, for which the date is September 15, 2000 relating to the financial statements of FelCor Lodging Trust Incorporated, which appears in the Current Report on Form 8-K of FelCor Lodging Trust Incorporated dated October 4, 2000. PricewaterhouseCoopers LLP Dallas, Texas October 4, 2000 -----END PRIVACY-ENHANCED MESSAGE-----