-----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, WwAFnd8hP1tYaqsImMRAXNhps9pdwQQAW75RablAxyBvx0U/jULRA9g4Fg92PzWc ePi3QKWp6O8KdrPzXSmdPg== 0000950134-97-008441.txt : 19971113 0000950134-97-008441.hdr.sgml : 19971113 ACCESSION NUMBER: 0000950134-97-008441 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-14236 FILM NUMBER: 97717022 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 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1997 1 - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-24250 FELCOR SUITE HOTELS, INC. (Exact name of registrant as specified in its charter) MARYLAND 72-2541756 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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) Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] The number of shares of Common Stock, par value $.01 per share, of FelCor Suite Hotels, Inc. outstanding on November 10, 1997 was 36,594,733. - ------------------------------------------------------------------------------- 2 FELCOR SUITE HOTELS, INC. INDEX
PAGE ---- PART I. -- FINANCIAL INFORMATION Item 1. Financial Statements.......................................................................... 3 FELCOR SUITE HOTELS, INC. Consolidated Balance Sheets - September 30, 1997 (Unaudited) and December 31, 1996................................................................. 3 Consolidated Statements of Operations -- For the Three and Nine Months Ended September 30, 1997 and 1996 (Unaudited)......................................... 4 Consolidated Statements of Cash Flows -- For the Nine Months Ended September 30, 1997 and 1996 (Unaudited)......................................... 5 Notes To Consolidated Financial Statements................................................. 6 DJONT OPERATIONS, L.L.C. Consolidated Balance Sheets - September 30, 1997 (Unaudited) and December 31, 1996................................................................. 13 Consolidated Statements of Operations -- For the Three and Nine Months Ended September 30, 1997 and 1996 (Unaudited)......................................... 14 Consolidated Statements of Cash Flows -- For the Nine Months Ended September 30, 1997 and 1996 (Unaudited)......................................... 15 Notes to Consolidated Financial Statements................................................. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 19 General/Third Quarter Highlights........................................................... 19 Results of Operations...................................................................... 19 Liquidity and Capital Resources............................................................ 25 PART II. -- OTHER INFORMATION Item 2. Changes in Securities......................................................................... 29 Item 5. Other Information............................................................................. 29 Item 6. Exhibits and Reports on Form 8-K.............................................................. 29 SIGNATURES................................................................................................ 31
2 3 PART I. -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FELCOR SUITE HOTELS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ------------ (UNAUDITED) ASSETS Investment in hotels, net of accumulated depreciation of $72,607 and $36,718 at September 30, 1997 and December 31, 1996 respectively .............. $ 1,447,340 $ 899,691 Investment in unconsolidated partnerships ........................................... 127,606 59,867 Cash and cash equivalents ........................................................... 18,942 7,793 Deposits ............................................................................ 1,616 1,616 Due from Lessee ..................................................................... 13,419 5,526 Deferred expenses, net of accumulated amortization of $1,375 and $364 at September 30, 1997 and December 31, 1996 .............................. 3,793 3,235 Other assets ........................................................................ 3,771 1,060 ------------ ------------ Total assets ............................................................. $ 1,616,487 $ 978,788 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Distributions payable ............................................................... $ 24,171 $ 16,090 Accrued expenses and other liabilities .............................................. 5,766 5,235 Debt ................................................................................ 406,650 226,550 Capital lease obligations ........................................................... 11,527 12,875 Minority interest in Operating Partnership, 2,904 and 2,786 units issued and outstanding at September 30, 1997 and December 31, 1996, respectively ........... 74,175 76,112 Minority interest in other partnerships ............................................. 8,358 ------------ ------------ Total liabilities ........................................................ 530,647 336,862 ------------ ------------ Commitments and contingencies (Note 2) Shareholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized, 6,050 shares issued and outstanding at September 30, 1997 and December 31, 1996 ............. 151,250 151,250 Common stock, $.01 par value, 50,000 shares authorized, 36,595 and 23,502 shares issued, including shares in treasury, at September 30, 1997 and December 31, 1996, respectively ............................................ 377 235 Additional paid in capital .......................................................... 1,003,049 505,082 Unearned officers' and directors' compensation ...................................... (1,942) (1,454) Distributions in excess of earnings ................................................. (25,788) (13,187) ------------ ------------ 1,126,946 641,926 Less common stock in treasury at cost, 1,200 shares at September 30, 1997 ........... (41,106) ------------ ------------ Total shareholders' equity ............................................... 1,085,840 641,926 ------------ ------------ Total liabilities and shareholders' equity ............................... $ 1,616,487 $ 978,788 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 4 FELCOR SUITE HOTELS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ----------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Revenues: Percentage lease revenue ........................................... $ 48,603 $ 25,263 $ 122,651 $ 72,648 Income from unconsolidated partnerships ............................ 2,338 927 5,765 1,412 Other income ....................................................... 112 163 283 937 ---------- ---------- ---------- ---------- Total revenue ............................................. 51,053 26,353 128,699 74,997 ---------- ---------- ---------- ---------- Expenses: General and administrative ......................................... 897 458 2,743 1,307 Depreciation ....................................................... 14,238 7,529 35,969 17,833 Taxes, insurance and other ......................................... 6,155 3,260 16,912 9,859 Interest expense ................................................... 7,183 1,760 20,097 6,273 Minority interest in operating partnership ......................... 1,643 1,477 4,584 4,619 Minority interest in other partnerships ............................ 195 337 ---------- ---------- ---------- ---------- Total expenses ............................................ 30,311 14,484 80,642 39,891 ---------- ---------- ---------- ---------- Net income before extraordinary charge ............................... 20,742 11,869 48,057 35,106 Extraordinary charge from write off of deferred financing fees ....... 2,354 2,354 ---------- ---------- ---------- ---------- Net income ........................................................... 20,742 9,515 48,057 32,752 Preferred dividends .................................................. 2,949 2,949 8,848 4,784 ---------- ---------- ---------- ---------- Net income applicable to common shareholders ......................... $ 17,793 $ 6,566 $ 39,209 $ 27,968 ========== ========== ========== ========== Per common share information: Net income applicable to common shareholders before extraordinary charge ............................................. $ 0.49 $ 0.38 $ 1.33 $ 1.32 Extraordinary charge ............................................... (0.10) (0.10) ---------- ---------- ---------- ---------- Net income ......................................................... $ 0.49 $ 0.28 $ 1.33 $ 1.22 ========== ========== ========== ========== Weighted average number of common shares outstanding ............... 36,442 23,276 29,570 22,933
The accompanying notes are an integral part of these consolidated financial statements. 4 5 FELCOR SUITE HOTELS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1997 1996 ------------ ------------ Cash flows from operating activities: Net income .......................................................................... $ 48,057 $ 32,752 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation .............................................................. 35,969 17,833 Amortization of deferred financing fees and organization costs ............ 1,011 269 Amortization of unearned officers' and directors' compensation ............ 737 315 Income from unconsolidated partnerships ................................... (5,765) (1,412) Cash distributions from unconsolidated partnerships ....................... 2,849 896 Extraordinary charge for write off of deferred financing fees ............. 2,354 Minority interest in Operating Partnership ................................ 4,584 4,619 Minority interest in other partnerships ................................... 337 Changes in assets and liabilities: Due from Lessee ........................................................... (7,893) (1,359) Deferred expenses and other assets ........................................ (4,362) (3,979) Accrued expenses and other liabilities .................................... (966) (3,142) ------------ ------------ Net cash flow provided by operating activities .................. 74,558 49,146 ------------ ------------ Cash flows from investing activities: Acquisition of hotels ............................................................... (537,100) (287,715) Acquisition of interests in unconsolidated partnerships ............................. (59,571) (28,204) Improvements and additions to hotels ................................................ (38,413) (44,960) ------------ ------------ Net cash flow used in investing activities ...................... (635,084) (360,879) ------------ ------------ Cash flows from financing activities: Proceeds from borrowings ............................................................ 332,000 185,350 Repayment of borrowings ............................................................. (151,900) (190,954) Proceeds from sale of common stock .................................................. 516,700 44,978 Proceeds from sale of preferred stock ............................................... 144,251 Costs associated with public offerings .............................................. (27,600) Purchase of treasury stock .......................................................... (41,106) Proceeds from exercise of stock options ............................................. 592 Distributions paid to limited partners .............................................. (4,432) (3,960) Distributions paid to preferred shareholders ........................................ (8,848) (1,835) Distributions paid to common shareholders ........................................... (43,731) (24,835) ------------ ------------ Net cash flow provided by financing activities .................. 571,675 152,995 ------------ ------------ Net change in cash and cash equivalents ....................................................... 11,149 (158,738) Cash and cash equivalents at beginning of periods ............................................. 7,793 166,821 ------------ ------------ Cash and cash equivalents at end of periods ................................................... $ 18,942 $ 8,083 ============ ============ Supplemental cash flow information -- Interest paid ....................................................................... $ 19,907 $ 6,971 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 6 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND ACQUISITIONS FelCor Suite Hotels, Inc., is a self-administered real estate investment trust ("REIT"), which commenced operations on July 28, 1994. At the commencement of operations, FelCor Suite Hotels, Inc. ("FelCor") acquired an equity interest of approximately 75% in FelCor Suites Limited Partnership (the "Operating Partnership"), which owned six Embassy Suites(R) hotels (the "Initial Hotels") with an aggregate of 1,479 suites. The Operating Partnership had acquired the Initial Hotels through a merger with entities originally formed in 1991 and controlled by Hervey A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board of Directors and Chief Executive Officer of the Company, respectively. At September 30, 1997, FelCor owned interests in 71 hotels with an aggregate of 17,486 suites/rooms (collectively the "Hotels") through its 92.7% aggregate ownership of the Operating Partnership and its subsidiaries (collectively, the "Company"). FelCor also is the sole general partner of the Operating Partnership. The Company owns 100% equity interests in 53 of the Hotels (12,983 suites), a 90% or greater interest in partnerships owning four hotels (1,041 suites), and 50% interests in separate partnerships that own 14 hotels (3,462 suites). At September 30, 1997, 51 of the Hotels were operated as Embassy Suites hotels, 12 as Doubletree Guest Suites(R) hotels, one as a Hilton Suites(R) hotel, one hotel was in the process of conversion to an Embassy Suites hotel, four hotels were operated as Sheraton(R) hotels and two were operated as Sheraton Suites(R) hotels. The Hotels are located in 26 states, with 31 hotels in California, Florida and Texas. The following table provides certain information regarding the Hotels through September 30, 1997:
NUMBER OF HOTELS ACQUIRED NUMBER OF SUITES ---------------- ---------------- 1994 7 1,730 1995 13 2,649 1996 23 5,769 1ST QUARTER 1997 15 3,446 2ND QUARTER 1997 9 2,715 3RD QUARTER 1997 4 1,000 ------ ------ 71 17,309 ====== Additional suites constructed by the Company 177 ------ 17,486 ======
The Company completed construction and placed into service on July 1, 1997, 129 net additional suites, meeting rooms and other public area upgrades at its Boston-Marlborough, Massachusetts hotel at a cost of $15.9 million. The Company is constructing 67 additional suites at its Jacksonville, Florida hotel and 67 additional suites at its Orlando (North), Florida hotel at an aggregate projected cost of $10.2 million with an expected completion in early 1998. The Company leases all of the Hotels to DJONT Operations, L.L.C. ("DJONT"), or a consolidated subsidiary thereof (collectively, the "Lessee"), under operating leases providing for the payment of percentage rent (the "Percentage Leases"). Hervey A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board and President of the Company, respectively, beneficially own a 50% voting equity interest in DJONT. The remaining 50% non-voting equity interest in DJONT is beneficially owned by the children of Charles N. Mathewson, a director of the Company and major investor in the predecessor entities. The Company's partners in partnerships owning 12 of the Hotels hold special purpose non-voting equity interests in the consolidated subsidiary of DJONT which leases such Hotels, which interests entitle them to 50% of such subsidiary's net income before overhead with respect to such Hotels. In addition, the Company's partner in a partnership owning three of the Hotels holds a 50% non-voting equity interest in the consolidated subsidiary of DJONT leasing those Hotels. See Note 2 Commitments and Related Party Transactions for additional discussion regarding Lessee consolidated subsidiaries. The Lessee has entered into management agreements 6 7 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND ACQUISITIONS -- (CONTINUED) pursuant to which 50 of the Hotels are managed by Promus Hotels, Inc. ("Promus"), 12 of the Hotels are managed by a subsidiary of Doubletree Hotel Corporation ("Doubletree"), six of the hotels are managed directly by, or by a subsidiary of, ITT Sheraton Corporation ("Sheraton"), the remaining three Hotels are managed by two other management companies. A brief discussion of the hotels acquired and other significant transactions occurring in the third quarter of 1997 follows: o On July 28, 1997 the Company acquired three Doubletree Guest Suites hotels for an aggregate purchase price of $71.2 million in cash. The hotels total 635 suites and are located in Lake Buena Vista, Florida; Raleigh/Durham, North Carolina and Tampa (Rocky Point), Florida. These hotels are managed by a subsidiary of Doubletree. o On September 30, 1997 the Company acquired the partnership which owns the 365 room Sheraton Society Hill hotel in Philadelphia, Pennsylvania for $51 million in cash. This hotel is managed by Sheraton. o On September 30, 1997 the Company declared a third quarter dividend of $0.55 per common share and $0.4875 per share on its $1.95 Series A Cumulative Preferred Stock to shareholders of record on October 15, 1997. This dividend is payable on October 31, 1997. o On August 14, 1997 the Company announced that it had increased its unsecured revolving line of credit from $400 million to $550 million, extended the maturity for an additional year to September 30, 2000 and reduced the effective interest rate. o Following the end of the third quarter, the Company announced the completion of a private placement of $300 million of long term senior unsecured notes. The notes were issued in two maturities, consisting of $175 million of 7 3/8% notes due 2004 and $125 million of 7 5/8% notes due 2007. The proceeds were used to pay off the Company's $85 million collateralized term loan and to pay down the Line of Credit. The Company has filed a registration statement with the SEC, which has not yet been declared effective, to exchange this privately placed debt for registered debt with identical terms. These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the financial statements and notes thereto of the Company and the Lessee included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "10-K"). The notes to the financial statements included herein highlight significant changes to the notes included in the 10-K and present interim disclosures required by the SEC. The statements for the three and nine months ended September 30, 1997 are unaudited; however, in the opinion of management, all adjustments (which include only normal recurring accruals) have been made which are considered necessary to present fairly the operating results and financial position of the Company for the unaudited periods. 2. SUPPLEMENTAL CASH FLOW INFORMATION In the first nine months of 1997 the Company purchased certain assets and assumed certain liabilities of hotels. These purchases were recorded under the purchase method of accounting. The fair value of the acquired assets and liabilities recorded at the date of acquisition are as follows: Assets acquired................................................. $545,122 Minority interest contribution to other partnerships............ (8,022) -------- Net cash paid by the Company............................. $537,100 ========
7 8 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUPPLEMENTAL CASH FLOW INFORMATION -- (CONTINUED) In the first nine months of 1997 the Company purchased interests in nine unconsolidated partnerships that hold hotel properties. The hotels associated with these unconsolidated subsidiaries are located in Atlanta (Perimeter), GA; Austin, TX; Covina, CA; Kansas City (Country Club Plaza), MO; Overland Park, KS; Raleigh, NC; San Antonio, TX; San Antonio (Airport), TX; and Secaucus, NJ. These purchases were recorded under the equity method of accounting. The value of the assets recorded at the date of acquisition are as follows: Assets acquired................................................. $64,672 Operating partnership units issued.............................. (5,101) ------- Net cash paid by the Company............................. $59,571 =======
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS Upon final completion of the conversion of one hotel, the Hotels will be operated as Embassy Suites (52), Doubletree Guest Suites (12), Sheraton Suites (2), Sheraton (4) and Hilton Suites (1) hotels. The Embassy Suites hotels and Hilton Suites hotel will operate pursuant to franchise license agreements which require the payment of fees based on a percentage of suite revenue. These fees are paid by the Lessee. There are no separate franchise license agreements with respect to the Doubletree Guest Suites hotels, Sheraton hotels or Sheraton Suites hotels, which rights are included in the management agreement. The Lessee generally pays the managers a base management fee based on a percentage of total revenue and an incentive management fee based on the Lessee's net income before overhead expenses. In certain instances, the hotel managers have subordinated fees and committed to make subordinated loans to the Lessee, if needed, to meet its rental and other obligations under the leases. The Company is to receive rental income from the Lessee under the Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels), 2006 (19 hotels) and 2007 (19 hotels). The rental income under the Percentage Leases between the 14 unconsolidated partnerships, of which the Company owns 50%, and the Lessee are payable to the respective partnerships and as such is not included in the following schedule of future lease commitments to the Company. Minimum future rental income (i.e., base rents) to the Company under these noncancellable operating leases at September 30, 1997 is as follows (in thousands):
YEAR Remainder of 1997....................................... $ 26,150 1998.................................................... 104,600 1999.................................................... 104,600 2000.................................................... 104,600 2001.................................................... 104,600 2002 and thereafter..................................... 493,961 --------- $ 938,511 =========
Minority equity interest in two of DJONT's consolidated subsidiaries, relating to an aggregate of 15 Hotels, are held by unrelated third parties that also own an equity interest in such Hotels. Messrs. Feldman and Corcoran, such unrelated third party owners, and the managers of certain of the Hotels have agreed, directly or through their affiliates, to make loans to the Lessee of up to an aggregate of approximately $15.4 million, to the extent necessary to enable the Lessee to pay rent and other obligations due under the respective Percentage Leases relating to a total of 32 of the Hotels. Amounts so borrowed by the Lessee, if any, will be subordinate in right of repayment to the prior payment in full of rent and other obligations due under the Percentage Leases relating to such Hotels. No loans were outstanding under such agreements at September 30, 1997. 8 9 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. DEBT AND CAPITAL LEASE OBLIGATIONS Debt and capital lease obligations at September 30, 1997 and December 31, 1996 consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ----------- Line of Credit...................... $ 296,000 $ 115,000 Term loan........................... 85,000 85,000 Renovation loan .................... 25,000 25,000 Other debt payable.................. 650 1,550 ------------ ----------- $ 406,650 $ 226,550 ============ ===========
In the third quarter of 1997, the Company increased the amount available under its unsecured Line of Credit from $400 million to $550 million, extended the term by one year to September 30, 2000 and reduced the effective interest rate. Interest payable on borrowings under the Line of Credit is variable, determined from a ratings-based pricing matrix, and is currently set at LIBOR plus 140 basis points. The Company had an $85 million collateralized term loan outstanding at September 30, 1997 which bore interest at LIBOR plus 150 basis points. The $85 million collateralized term loan was repaid in full on October 1, 1997 from the proceeds of the long term senior unsecured private placement debt. This senior unsecured private placement debt, which the Company placed on October 1, 1997, bears interest at 7 3/8% for the seven year notes and 7 5/8% for the ten year notes. The Company has filed a registration statement with the SEC, which has not yet been declared effective, to exchange privately placed debt for registered debt with identical terms. Also outstanding at September 30, 1997 was a renovation loan of $25 million that bears interest at LIBOR plus 45 basis points. At September 30, 1997, 30 day LIBOR was 5.6563%. Under its loan agreements the Company is required to satisfy various affirmative and negative covenants. The Company was in compliance with these covenants at September 30, 1997. Capital lease obligations at September 30, 1997 and December 31, 1996 consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ------------ Capital land and building lease obligations ................ $ 9,419 $ 9,675 Capital equipment lease obligations ........................ 2,108 3,200 ------------ ------------ $ 11,527 $ 12,875 ============ ============
5. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS At September 30, 1997, the Company owned 50% interests in separate partnerships owning 14 hotels, a parcel of undeveloped land and a condominium management company. The Company is accounting for its investments in these unconsolidated partnerships under the equity method. 9 10 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS -- (CONTINUED) Summarized combined financial information for unconsolidated partnerships, of which the Company owns 50%, is as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ------------ Balance sheet information: Partnership assets (primarily hotel assets) ........... $ 390,302 $ 138,972 Non-recourse mortgage debt ............................ 158,455 49,402 Equity ................................................ 255,212 119,734
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Statement of operations information: Percentage lease revenue .............................. $ 13,297 $ 3,889 $ 35,551 $ 6,011 Other income .......................................... 3,140 4,316 ---------- ---------- ---------- ---------- Total revenue .................................. 16,437 3,889 39,867 6,011 Expenses: Depreciation ..................................... 4,216 1,085 11,431 2,037 Taxes, insurance and other ....................... 3,436 195 6,314 358 Interest expense ................................. 3,215 689 8,216 689 ---------- ---------- ---------- ---------- Total expenses ................................. 10,867 1,969 25,961 3,084 ---------- ---------- ---------- ---------- Net income ............................................ $ 5,570 $ 1,920 $ 13,906 $ 2,927 ========== ========== ========== ========== 50% of net income attributable to the Company ......... $ 2,785 $ 960 $ 6,953 $ 1,464 Amortization of cost in excess of book value .......... 447 33 1,188 52 ---------- ---------- ---------- ---------- Income from unconsolidated partnerships ............... $ 2,338 $ 927 $ 5,765 $ 1,412 ========== ========== ========== ==========
6. TREASURY STOCK In conjunction with the June 30, 1997 common stock offering of 11.2 million shares, the Company purchased, at the net offering price of $36.625, 1.2 million shares of its common stock from Promus. The stock was purchased at an aggregate cost of $41.1 million (after allocation of offering expenses) and is recorded using the cost method of accounting. All of the acquired shares are held as common stock in treasury. 7. TAXES, INSURANCE AND OTHER Taxes, insurance and other is comprised of the following for the three and nine months ended September 30, 1997 and 1996 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Real estate and personal property taxes ............... $ 5,015 $ 2,631 $ 13,848 $ 7,649 Property insurance .................................... 483 353 1,347 966 Land lease expense .................................... 459 268 1,119 869 State franchise taxes ................................. 198 4 498 333 Other ................................................. 4 100 42 ------------ ------------ ------------ ------------ Total taxes, insurance and other ............... $ 6,155 $ 3,260 $ 16,912 $ 9,859 ============ ============ ============ ============
10 11 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. PRO FORMA INFORMATION (UNAUDITED) The following unaudited Pro Forma Consolidated Statements of Operations for the nine months ended September 30, 1997 and 1996 are presented as if the acquisitions of all hotels owned by the Company at September 30, 1997, the private placement of $300 million of senior unsecured notes and the equity offerings consummated during 1996 and 1997 had occurred as of January 1, 1996 and the Hotels had all been leased to the Lessee pursuant to Percentage Leases. Such pro forma information is based in part upon the Consolidated Statements of Operations of the Company and pro forma Statements of Operations of the Lessee included elsewhere in this Quarterly Report on Form 10-Q. 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. 11 12 FELCOR SUITE HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 ---------- ---------- Revenues: Percentage lease revenue ........................................... $ 152,127 $ 132,487 Income from unconsolidated partnerships ............................ 5,681 2,859 ---------- ---------- Total revenue ................................................. 157,808 135,346 Expenses: General and administrative ......................................... 2,743 2,707 Depreciation ....................................................... 43,243 30,147 Taxes, insurance and other ......................................... 21,045 18,450 Interest expense ................................................... 28,244 25,642 Minority interest in Operating Partnership ......................... 4,577 3,870 Minority interest in other partnerships ............................ 427 242 ---------- ---------- Total expenses ................................................ 100,279 81,058 ---------- ---------- Net income ........................................................... 57,529 54,288 Preferred dividends .................................................. 8,848 8,848 ---------- ---------- Net income applicable to common shareholders ......................... $ 48,681 $ 45,440 ========== ========== Per common share information: Net income ......................................................... $ 1.33 $ 1.26 ========== ========== Weighted average number of common shares outstanding ............... 36,570 36,135
12 13 DJONT OPERATIONS, L.L.C. CONSOLIDATED BALANCE SHEETS September 30, 1997 and December 31, 1996 (in thousands)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ------------ (UNAUDITED) ASSETS Cash and cash equivalents ........................................................... $ 29,171 $ 5,208 Accounts receivable, net ............................................................ 23,970 8,700 Inventories ......................................................................... 3,065 2,105 Prepaid expenses .................................................................... 2,444 255 Other assets ........................................................................ 2,144 2,203 ------------ ------------ Total assets .............................................................. $ 60,794 $ 18,471 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Accounts payable, trade ............................................................. $ 7,409 $ 1,273 Accounts payable, other ............................................................. 15,162 2,398 Due to FelCor Suite Hotels, Inc. .................................................... 13,419 5,526 Due to other partnerships ........................................................... 6,156 2,588 Accrued expenses and other liabilities .............................................. 26,639 13,089 ------------ ------------ Total liabilities ......................................................... 68,785 24,874 ------------ ------------ Shareholders' deficit: Capital ............................................................................. 1 1 Accumulated losses and distributions in excess of earnings .......................... (7,992) (6,404) ------------ ------------ Total shareholders' deficit ............................................... (7,991) (6,403) ------------ ------------ Total liabilities and shareholders' deficit ............................... $ 60,794 $ 18,471 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 13 14 DJONT OPERATIONS, L.L.C. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Revenue: Suite revenue ............................... $ 128,461 $ 63,393 $ 330,545 $ 168,950 Food and beverage revenue ................... 10,387 3,091 20,576 11,235 Food and beverage rent ...................... 1,315 743 3,338 1,742 Other revenue ............................... 9,488 4,617 26,209 12,457 ---------- ---------- ---------- ---------- Total revenues ......................... 149,651 71,844 380,668 194,384 ---------- ---------- ---------- ---------- Expenses: Property operating costs and expenses ....... 37,076 18,427 93,442 46,878 General and administrative .................. 11,377 5,292 27,694 14,033 Advertising and promotion ................... 10,720 4,957 26,243 12,807 Repair and maintenance ...................... 7,345 4,044 18,417 10,031 Utilities ................................... 6,625 3,654 15,316 8,801 Management fee .............................. 2,832 1,747 8,121 4,761 Franchise fee ............................... 3,644 1,631 9,828 3,852 Food and beverage expenses .................. 8,770 3,336 17,459 11,748 Percentage lease expenses ................... 61,362 29,152 158,436 78,307 Lessee overhead expenses .................... 574 421 1,618 1,148 Liability insurance ......................... 996 476 2,496 1,276 Conversion costs ............................ 69 787 113 2,174 Other ....................................... 798 608 2,636 1,460 ---------- ---------- ---------- ---------- Total expenses ......................... 152,188 74,532 381,819 197,276 ---------- ---------- ---------- ---------- Income before minority interest .................. (2,537) (2,688) (1,151) (2,892) Minority interest ........................... 63 437 ---------- ---------- ---------- ---------- Net income (loss) ................................ $ (2,600) $ (2,688) $ (1,588) $ (2,892) ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 14 15 DJONT OPERATIONS, L.L.C. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1997 1996 ---------- ---------- Cash flows from operating activities: Net income (loss) ......................................................... $ (1,588) $ (2,892) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Changes in assets and liabilities: Accounts receivable .................................................. (15,270) (5,722) Inventories .......................................................... (960) (208) Prepaid expenses ..................................................... (2,189) (434) Other assets ......................................................... 59 (157) Due to FelCor Suite Hotels, Inc. ..................................... 7,892 1,359 Accounts payable, accrued expenses and other liabilities ............. 36,019 11,187 ---------- ---------- Net cash flow provided by operating activities .................. 23,963 3,133 ---------- ---------- Net change in cash and cash equivalents ........................................ 23,963 3,133 Cash and cash equivalents at beginning of periods .............................. 5,208 5,345 ---------- ---------- Cash and cash equivalents at end of periods .................................... $ 29,171 $ 8,478 ========== ==========
The accompany notes are an integral part of these consolidated financial statements. 15 16 DJONT OPERATIONS, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION DJONT Operations, L.L.C. is a Delaware limited liability company ("DJONT") which began operations on July 28, 1994. All of the voting Class A membership interest in DJONT (representing a 50% equity interest) is beneficially owned by Hervey A. Feldman and Thomas J. Corcoran, Jr. who serve as directors and officers of FelCor Suite Hotels, Inc. (the "Company") and as managers and officers of DJONT. All of the non-voting Class B membership interest in DJONT (representing the remaining 50% equity interest) is owned by RGC Leasing, Inc., a Nevada corporation owned by the children of Mr. Mathewson, a director of the Company and major investor in the Company's predecessor entities. Each of the 71 hotels in which FelCor Suites Limited Partnership (the "Operating Partnership") had an ownership interest at September 30, 1997 (the "Hotels"), is leased to DJONT or a consolidated subsidiary thereof (collectively, the "Lessee") pursuant to percentage leases ("Percentage Leases"). The Company's partners in partnerships owning interests in 12 of the Hotels hold special purpose non-voting equity interests in the consolidated subsidiary of DJONT which leases such Hotels, which interests entitle them to 50% of such subsidiary's net income before overhead with respect to such Hotels. In addition, the Company's partner in a partnership owning three of the Hotels holds a 50% non-voting equity interest in the consolidated subsidiary of DJONT leasing those Hotels. Messrs. Feldman and Corcoran, such partners, and the managers of certain of the Hotels have agreed, directly or through their affiliates, to make loans to the Lessee of up to an aggregate of approximately $15.4 million, to the extent necessary to enable the Lessee to pay rent and other obligations due under the respective Percentage Leases relating to a total of 32 of the Hotels. Amounts so borrowed by the Lessee, if any, will subordinate in right of repayment to the prior payment in full of rent and other obligations due under the Percentage Leases relating to such Hotels. No loans were outstanding under such agreements at September 30, 1997. Messrs. Feldman and Corcoran, as the beneficial owners of an aggregate 50% of DJONT, have entered into an agreement with the Company pursuant to which they have agreed that, for a period of ten years from April 15, 1995, any distributions received by them from DJONT (in excess of their tax liabilities with respect to the income of DJONT) will be utilized to purchase common stock from the Company or units of limited partner interest in the Operating Partnership at then current market prices. The agreement stipulates that Messrs. Feldman and Corcoran are restricted from selling any stock or units so acquired for a period of two years from the date of purchase. RGC Leasing, Inc., which owns the other 50% of DJONT, may elect to purchase common stock or units upon similar terms, at its option. The independent directors of the Company may suspend or terminate such agreement at any time. Fifty-one of the Hotels are, and the Radisson at Kingston Plantation in Myrtle Beach, South Carolina will be converted by year end to, Embassy Suites(R) hotels, 50 of which are being managed for the Lessee by a subsidiary of Promus Hotel Corporation ("Promus"). Two Embassy Suites hotels are managed for the Lessee by two other management companies. Twelve of the Hotels are Doubletree Guest Suites(R) hotels and are managed by a subsidiary of Doubletree Hotels Corporation ("Doubletree"). Six of the Hotels are Sheraton Suites (2) or Sheraton hotels (4) and are being managed for the Lessee directly by, or by a subsidiary of, ITT Sheraton Corporation ("Sheraton"). One of the Hotels is operated under a Hilton Suites(R) hotel franchise and managed by an independent management company that also manages one of the Company's Embassy Suites. 16 17 DJONT OPERATIONS, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. COMMITMENTS AND RELATED PARTY TRANSACTIONS The Lessee has future lease commitments under the Percentage Leases which expire in 2004 (7 hotels), 2005 (13 hotels) 2006 (23 hotels) and 2007 (28 hotels). Minimum future rental payments are computed based on the base rent as defined under these noncancellable operating leases and are as follows (in thousands):
YEAR AMOUNT - ---- ---------- Remainder of 1997 ........................... $ 32,896 1998 ........................................ 131,586 1999 ........................................ 131,586 2000 ........................................ 131,586 2001 ........................................ 131,586 2002 and thereafter ......................... 627,134 ---------- $1,186,374 ==========
The Lessee pays a franchise fee ranging from 4% to 5% of suite revenue, and marketing and reservation fees ranging from 1% to 3.5% of suite revenue. In the cases where there is not a separate franchise agreement, the right to use the brand name is included in the management agreement. Base management fees typically range from 2% to 3% of total revenues. Incentive management fees are based upon the hotel's net income before overhead and typically range from 50% to 100% subject to, in certain cases, a maximum annual payment of between 2% and 3% of applicable hotel revenues in addition to the base management fee. In many cases managers and franchisors have agreed to subordinate all or a portion of their fees at a specific hotel or group of hotels either for a set period of time, or until the hotel or group of hotels provides a predetermined return to the Lessee, or both. 3. PRO FORMA INFORMATION (UNAUDITED) The following unaudited Pro Forma Consolidated Statements of Operations for the nine months ended September 30, 1997 and 1996 are presented as if Lessee had leased and operated all of the Hotels, beginning on January 1, 1996. Such information should be read in conjunction with the financial statements listed in the Index on page 2. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The Pro Forma Consolidated Statements of Operations do not purport to present what actual results of operations would have been if such hotels had been operated by Lessee pursuant to the Percentage Leases since such date or to project the results of operations for any future periods. 17 18 DJONT OPERATIONS, L.L.C. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1997 1996 ---------- ---------- Revenue: Suite revenue ............................... $ 400,079 $ 368,557 Food and beverage revenue ................... 40,289 46,355 Food and beverage rent ...................... 3,393 2,552 Other revenue ............................... 31,545 25,972 ---------- ---------- Total revenues ......................... 475,306 443,436 ---------- ---------- Expenses: Property operating costs and expenses ....... 112,007 104,744 General and administrative .................. 35,066 33,490 Advertising and promotion ................... 32,222 30,265 Repair and maintenance ...................... 22,587 22,528 Utilities ................................... 18,988 18,597 Management fee .............................. 11,172 9,823 Franchise fee ............................... 12,160 11,593 Food and beverage expenses .................. 33,227 40,214 Percentage lease payments ................... 191,008 168,011 Lessee overhead expenses .................... 1,618 1,151 Liability insurance ......................... 3,011 2,922 Other ....................................... 4,595 6,523 ---------- ---------- Total expenses ......................... 477,661 449,861 ---------- ---------- Loss before minority interest .................... (2,355) (6,425) Minority interest ........................... 413 505 ---------- ---------- Net loss ......................................... $ (1,942) $ (5,920) ========== ==========
18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For background information relating to the Company and the definitions of certain capitalized terms used herein, reference is made to Note 1 of Notes to Consolidated Financial Statements of FelCor Suite Hotels, Inc. appearing elsewhere herein. THIRD QUARTER HIGHLIGHTS: o FFO of $39.2 million or $0.89 per share and unit sets a new record for the Company and represents a 27% increase in FFO per share and unit for the quarter. Revenues increased from $26.4 million in the third quarter of 1996 to $51.1 million in the current quarter. o Net income before extraordinary charges increased from $0.38 per share to $0.49 per share, an increase of 28.9%. o RevPAR for the Company's total portfolio increased 7.3% over the third quarter of 1996. Excluding the Company's four hotels located in Atlanta, which were impacted by the Olympics in 1996, RevPAR for the third quarter increased 9.8% over the third quarter of 1996. In addition, on a comparable basis excluding the twelve hotels undergoing rebranding, renovation or room additions, RevPAR increased 12.3% for the quarter. o The 18 fully renovated Crown Sterling Suites(R) hotels ("CSS Hotels") experienced a 22.2 % increase in RevPAR as compared to the third quarter of 1996. o The Company acquired four hotels (one Sheraton(R) hotel and three Doubletree Guest Suites(R) hotels) during the quarter, representing a gross investment of approximately $122 million and 1,000 suites/rooms. o On August 18, 1997 the Company amended and restated its existing unsecured line of credit in order to increase availability from $400 million to $550 million, extend the term by one year to September 30, 2000 and reduce pricing. o On September 30, 1997 the Company announced that it would increase its Common Stock dividend by 10% to an annual rate of $2.20 per share, beginning with a third quarter 1997 dividend of $0.55 per share. o Following the end of the quarter, the Company announced the completion of a private placement of $300 million of long term senior unsecured notes. The notes were issued in two maturities, consisting of $175 million of 73/8% notes due 2004 and $125 million of 75/8% notes due 2007. Upon application of the proceeds, the Company had only $12 million of secured indebtedness and more than $1.6 billion of unencumbered assets. RESULTS OF OPERATIONS The Company -- Actual Nine Months Ended September 30, 1997 and 1996 For the nine months ended September 30, 1997 and 1996, the Company had revenues of $128.7 million and $75.0 million, respectively, consisting of Percentage Lease revenues of $122.7 million and $72.6 million, income in unconsolidated partnerships of $5.8 million and $1.4 million and other revenue (made up primarily of interest income) of $283,000 and $937,000, respectively. Percentage Lease revenue is computed as a percentage of suite revenues, food and beverage revenues and food and beverage rents of the Hotels. For the nine months ended September 30, 1997, 97.3% of Percentage Lease revenue was derived from suite revenues. A more detailed discussion of hotel suite revenue begins at "The Hotels - Actual" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations. The increase in Percentage Lease revenue is attributed primarily to the increased number of hotels owned at September 30, 1997 compared to the same period in 1996 and increased suite revenue at the comparable hotels (those hotels owned for the entire nine months in both 1996 and 1997). The increase in the number of hotels accounted for 19 20 approximately $43.0 million of the increase (86%) while Percentage Lease revenue for the nineteen comparable hotels increased by $7.1 million (14%). Suite revenues for the Original Hotels increased 9.3% and the CSS Hotels increased suite revenue by 21.4% for this nine month period. The increase in income from unconsolidated partnerships is principally attributed to the increase in unconsolidated partnership hotels from five hotels at September 30, 1996 to 14 at September 30, 1997. Total expenses increased $40.7 million in the nine months ended September 30, 1997 from $39.9 million to $80.6 million over the same period in 1996. The primary components of the dollar increase are: depreciation; taxes, insurance and other; and interest expense. The primary reason for these increases relate to the increased number of hotels owned by the Company. Those expenses that made up the majority of the increase, as a percentage of total revenue, were depreciation (27.9% of total revenue for the nine months ended September 30, 1997 compared to 23.8% in the same period 1996), and interest expense (15.6% of total revenue in 1997 compared to 8.4% in 1996). Depreciation, as a percentage of total revenue, increased primarily as a result of the major renovation projects which were placed in service and started depreciating in late 1996 or early 1997. The increased interest expense, as a percentage of total revenue, is reflective of the additional borrowings during the end of 1996 and first nine months of 1997 to finance hotel acquisitions and the renovation program. Minority interest in the Operating Partnership decreased as a percentage of total revenue due to the additional 14.2 million shares of common stock issued during 1997 which decreases the Operating Partnership's unit holders interest in the operations of the Company. Preferred dividends increased from $4.8 million for the nine months in 1996 to $8.8 million for the same period in 1997. This increase is due to the preferred stock, issued in May 1996, which accrued a full nine months of dividends in 1997. Net income applicable to common shareholders for the nine months ended September 30, 1997 and 1996 was $39.2 million and $28.0 million respectively. Three Months Ended September 30, 1997 and 1996 For the three months ended September 30, 1997 and 1996, the Company had revenues of $51.1 million and $26.4 million, respectively, consisting primarily of Percentage Lease revenues of $48.6 million and $25.3 million respectively, income from unconsolidated partnerships of $2.3 million and $927,000, and other income of $112,000 and $163,000, respectively. A more detailed discussion of hotel suite revenue begins at "The Hotels -- Actual" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations. The increases in Percentage Lease revenues of $23.3 million is attributable primarily to the hotels acquired since the third quarter of 1996 coupled with increased suite revenues at the 36 hotels that are comparable (those hotels owned for the entire quarter in both 1997 and 1996). The increase in hotels accounted for $17.2 million of the increase while the comparable hotels contributed $6.1 million of the increase. The increase in income from unconsolidated partnerships is principally attributed to the increase in unconsolidated partnership hotels from five hotels at September 30, 1996 to 14 at September 30, 1997. Total expenses increased $15.8 million in the three months ended September 30, 1997, from $14.5 million to $30.3 million. This represents an increase in expenses as a percentage of total revenue of 4.4 percentage points from 55.0% to 59.4%. The primary components of this increase in dollars were: depreciation; taxes, insurance and other; and interest expense. The primary reason for this increase is related to the increased number of hotels owned by the Company. The expense that made up the majority of the increase, as a percentage of total revenue, was interest expense (14.1% of total revenue in 1997 compared to 6.7% in 1996). 20 21 The increased interest expense, as a percentage of total revenue, is reflective of the additional borrowings during the end of 1996 and first nine months of 1997 to finance hotel acquisitions and the renovation program. Minority interest in the Operating Partnership decreased as a percentage of total revenue because the additional 14.2 million shares of common stock issued during 1997 which decreases the Operating Partnership's unit holders interest in the operations of the Company. Net income applicable to common shareholders before extraordinary charge for the quarter was $17.8 million, or 34.9% of total revenue, as compared to $8.9 million, or 33.8% of total revenue, for the third quarter of 1996. Funds From Operations The Company considers Funds From Operations to be a key measure of a REIT's performance and should be considered along with, but not as an alternative to, net income and cash flow as a measure of the Company's operating performance and liquidity. The following table computes Funds From Operations under the National Association of Real Estate Investment Trusts ("NAREIT") definition. Funds From Operations under the NAREIT definition consists of net income, computed in accordance with generally accepted accounting principles, excluding gains or losses from debt restructuring and sales of property, plus depreciation of real property (including furniture and equipment) and after adjustments for unconsolidated partnerships and joint ventures (in thousands, except per share and unit data). 21 22
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Funds From Operations (FFO): Net income ................................................................ $ 20,742 $ 9,515 $ 48,057 $ 32,752 Less preferred dividends .................................................. 2,949 2,949 8,848 4,784 ---------- ---------- ---------- ---------- Net income applicable to common shareholders .............................. 17,793 6,566 39,209 27,968 Add back: Extraordinary charge for write-off of deferred financing .............................................................. 2,354 2,354 Minority interest in Operating Partnership ............................. 1,643 1,477 4,584 4,619 Depreciation ........................................................... 14,238 7,529 35,969 17,833 Depreciation for unconsolidated partnerships ........................... 2,555 575 6,904 1,070 ---------- ---------- ---------- ---------- FFO available to common shares and units .................................. 36,229 18,501 86,666 53,844 Add preferred dividends ................................................... 2,949 2,949 8,848 4,784 ---------- ---------- ---------- ---------- FFO diluted for conversion of preferred stock ............................. $ 39,178 $ 21,450 $ 95,514 $ 58,628 ========== ========== ========== ========== Weighted average common shares outstanding ................................ 36,442 23,276 29,570 22,933 Weighted average units outstanding ........................................ 2,905 2,896 2,842 3,020 ---------- ---------- ---------- ---------- Weighted average common shares and units outstanding ...................... 39,347 26,172 32,412 25,953 Weighted average common shares and units outstanding, diluted for conversion of preferred stock ............................ 44,037 30,862 37,102 28,555 Per share and unit data: FFO per common share and unit outstanding ................................. $ 0.92 $ 0.71 $ 2.67 $ 2.07 FFO per common share and unit outstanding, diluted for conversion of preferred stock ........................................ $ 0.89 $ 0.70 $ 2.57 $ 2.05
Included in the Funds From Operations described above is the Company's share of FFO from its interest in fourteen unconsolidated partnerships. The FFO contribution from these unconsolidated partnerships is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Statement of operations information: Percentage Lease revenue .................................................. $ 13,297 $ 3,889 $ 35,551 $ 6,011 Other income .............................................................. 3,140 4,316 ---------- ---------- ---------- ---------- Total revenue .................................. 16,437 3,889 39,867 6,011 Expenses: Depreciation ...................................................... 4,216 1,085 11,431 2,037 Taxes, insurance and other ........................................ 3,436 195 6,314 358 Interest expense .................................................. 3,215 689 8,216 689 ---------- ---------- ---------- ---------- Total expenses ................................. 10,867 1,969 25,961 3,084 ---------- ---------- ---------- ---------- Net income ................................................................ $ 5,570 $ 1,920 $ 13,906 $ 2,927 ========== ========== ========== ========== 50% of net income attributable to the Company ............................. $ 2,785 $ 960 $ 6,953 $ 1,464 Amortization of cost in excess of book value .............................. (447) (33) (1,188) (52) ---------- ---------- ---------- ---------- Income from unconsolidated partnerships ................................... 2,338 927 5,765 1,412 Add back: Depreciation ................................................... 2,108 542 5,715 1,018 Amortization of cost in excess of book value ............ 447 33 1,189 52 ---------- ---------- ---------- ---------- FFO contribution of unconsolidated partnerships ........................... $ 4,893 $ 1,502 $ 12,669 $ 2,482 ========== ========== ========== ==========
22 23 The Lessee -- Actual The Nine Months Ended September 30, 1997 and 1996 Total revenues increased from $194.4 million in the first nine months of 1996 to $380.7 million for the same period 1997. The primary reasons for this increase are the number of hotels operated by the Lessee which increased from 41 hotels at September 30, 1996 to 71 hotels at September 30, 1997 and the increases in revenues at the hotels owned in both the first nine months of 1997 and 1996. Percentage Lease expense, property operating costs, and other hotel expenses increased in the first nine months of 1997 compared to the same period of 1996 and relate primarily to the increased number of hotels operated by the Lessee. The increase in percentage lease expense is also attributable in part to the increase in the suite revenues. The Lessee had net losses of $1.6 million and $2.9 million for the nine months ended September 30, 1997 and 1996, respectively. Except as otherwise noted each of such hotels is operated as an Embassy Suites hotel. The Three Months Ended September 30, 1997 and 1996 Total revenues increased from $71.8 million in the third quarter of 1996 to $149.7 million for the same period of 1997. The primary reasons for this increase are the number of hotels operated by the Lessee which increased from 41 hotels at September 30, 1996 to 71 hotels at September 30, 1997 and the increases in revenues at the hotels owned in both the third quarter of 1997 and 1996. Percentage Lease expense, property operating costs and other hotel expenses increased in the third quarter of 1997 compared to the same period of 1996 and relate primarily to the increased number of hotels operated by the Lessee. The increase in percentage lease expense is also attributable in part to the increase in suite revenues. The Lessee had net losses of $2.6 million and $2.7 million for the three months ended September 30, 1997 and 1996, respectively. 23 24 The Hotels -- Actual The following table sets forth historical suite revenue and percentage changes therein between the periods presented for the 71 hotels which the Lessee operated at September 30, 1997. The following table also presents comparative information with respect to percentage of occupied rooms ("Occupancy"), average daily rate ("ADR") and revenue per available room ("RevPAR") for the 13 Original Hotels, the 18 CSS Hotels, the 12 1996 Acquisitions and the 28 1997 Acquisitions, regardless of ownership, through September 30, 1997. Except as otherwise noted below, each of such hotels is operated as an Embassy Suites hotel.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 1997 1996 VARIANCE 1997 1996 VARIANCE --------- --------- -------- --------- -------- -------- Room Revenue (in thousands): Original Hotels (13)........... $ 21,958 $ 19,828 10.7% $ 64,876 $ 59,353 9.3% CSS Hotels (18)................. 35,816 29,317 22.2% 108,379 89,287 21.4% 1996 Acquisitions (12).......... 24,007 22,749 5.5% 69,493 64,782 7.3% 1997 Acquisitions (28).......... 51,266 50,874 0.8% 157,331 155,134 1.4% --------- --------- --------- ------- Total (71)...................... $ 133,047 $ 122,768 8.4% $ 400,079 $368,557 8.6% ========= ========= ========= ======== Occupancy: Original Hotels................ 76.9% 77.8% (0.9) pts 77.4% 77.7% (0.3) pts CSS Hotels...................... 74.5% 68.3% 6.2 pts 74.5% 68.4% 6.1 pts 1996 Acquisitions............... 77.0% 76.6% 0.4 pts 76.2% 74.6% 1.6 pts 1997 Acquisitions............... 71.8% 73.9% (2.1) pts 72.9% 75.2% (2.3) pts Total........................... 74.2% 73.5% 0.7 pts 74.6% 73.7% 0.9 pts ADR: Original Hotels................ $ 107.50 $ 101.13 6.3% $ 109.29 $ 102.11 7.0% CSS Hotels...................... 113.40 101.30 11.9% 115.67 103.21 12.1% 1996 Acquisitions............... 120.34 115.66 4.0% 118.69 112.74 5.3% 1997 Acquisitions............... 108.51 104.55 3.8% 110.25 105.18 4.8% Total........................... 111.61 105.04 6.3% 112.92 105.42 7.1% RevPAR: Original Hotels................ $ 82.70 $ 78.69 5.1% $ 84.61 $ 79.39 6.6% CSS Hotels...................... 84.49 69.14 22.2% 86.16 70.60 22.0% 1996 Acquisitions............... 92.70 88.62 4.6% 90.44 84.07 7.6% 1997 Acquisitions............... 77.89 77.29 0.8% 80.42 79.13 1.6% Total........................... 82.81 77.17 7.3% 84.24 77.70 8.4%
ORIGINAL HOTELS: Boston - Marlborough, MA; Brunswick, GA; Chicago - Lombard, IL; Corpus Christi, TX; Dallas (Love Field), TX; Dallas (Park Central), TX; Flagstaff, AZ; Jacksonville, FL; Nashville, TN; New Orleans, LA; Orlando (North), FL; Orlando (South), FL; Tulsa, OK. CSS HOTELS: Anaheim, CA; Baton Rouge, LA; Birmingham, AL; Boca Raton, FL (1); Deerfield Beach, FL; Ft. Lauderdale, FL; Los Angeles (LAX South), CA; Miami, FL; Milpitas, CA; Minneapolis (Airport), MN; Minneapolis (Downtown), MN; Napa, CA; Oxnard (Mandalay Beach), CA; Phoenix, AZ; San Francisco (Airport North), CA; San Francisco (Airport South), CA; St. Paul, MN; Tampa (Busch Gardens), FL(1). 1996 ACQUISITIONS: Atlanta-Buckhead, GA; Beaver Creek Resort (Avon-Vail), CO; Boca Raton, FL; Charlotte, NC; Cleveland, OH; Deerfield, IL; Indianapolis, IN; Kingston Plantation (Myrtle Beach), SC(3); Lexington, KY(2); Parsippany, NJ; Piscataway, NJ; San Rafael (Marin County) CA. 1997 ACQUISITIONS: Atlanta, GA; Atlanta Galleria, GA(4); Atlanta Gateway, GA(4); Austin, TX; Austin (Downtown), TX(1); Bloomington, MN(1); BWI Airport, MD(1); Chicago O'Hare, IL(4); Covina, CA; Dallas Market Center, TX; Dallas Park Central(4); Dana Point, CA(1); Kansas City, MO; Lake Buena Vista, FL(1); LAX North, CA; Nashville, TN; Nashville, TN(1); Omaha, NE(1); Overland Park, KS; Phoenix Crescent, AZ(4); Raleigh, NC; San Antonio, TX; San Antonio (Airport), TX; Secaucus, NJ; Society Hill, PA (4) ;Syracuse, NY; Tampa Rocky Point, FL(1); Troy, MI(1). (1) Operating as a Doubletree Guest Suites hotel (2) Operating as a Hilton Suites hotel (3) In the process of conversion to Embassy Suites hotels (4) Operating as a Sheraton hotel 24 25 Comparison of The Hotels' Suite Revenues for the Nine Months Ended September 30, 1997 and 1996 Suite revenues from the 71 Hotels, included without regard to ownership, increased 8.6% for the nine months ended September 30, 1997 from the same period of 1996. The Original Hotels increased 9.3%, the CSS Hotels increased 21.4%, the 1996 Acquisition Hotels increased 7.3% and the 1997 Acquisition Hotels increased 1.4% for the nine months ended September 30, 1997 as compared to the same period of 1996. The Original Hotels were owned by the Company throughout all of the first nine months of both 1997 and 1996. Suite revenue for these hotels increased $5.5 million over the same period in 1996. This improvement in suite revenue resulted from increased average daily rates ("ADR") of 7.0%. The hotels in this group recorded increases in ADR ranging from 2.5% to 12.5%. The increases in ADR at these hotels are attributed to the strength of the markets in which these hotels operate as well as aggressive rate management. For the nine months of 1997 over 1996 the CSS Hotels experienced an increase in ADR of 12.1% to $115.67 and a 6.1 percentage point increase in Occupancy to 74.5%. The strength of the improvement in the CSS Hotels is partially reflective of the $54 million suite renovation program that was completed in the first quarter of 1997. This program made substantial upgrades and improvements to these former Crown Sterling Suites hotels. This group of hotels were also converted to the Embassy Suites (16) or Doubletree Guest Suites (2) brand during 1996. The increase in both occupancy and ADR is also attributable in part, to the stronger marketing presence of the Embassy Suites and Doubletree Guest Suites brands. The 1996 Acquisition Hotels increased ADR by 5.3% to $118.69 and occupancy increased 1.6 percentage points which resulted in suite revenue increases for these hotels of $4.7 million in the first nine months of 1997 compared to the same period in 1996. Some of the 1996 Acquisition Hotels benefitted from suite renovations completed in 1996 or during the first quarter of 1997. The Company has committed to reserving 4% of suite revenue for ongoing capital replacements and improvements for all of its Hotels, in addition to making normal repair and maintenance expenditures and any necessary renovations for hotels acquired. The 1997 Acquisition hotels, collectively, increased ADR by 3.8% and 4.8%, respectively for the three and nine months ended September 30, 1997 compared to the same period of 1996. Certain of the individual 1997 Acquisition hotels, however, had decreases in ADR and/or Occupancy for such comparable periods. These decreases are primarily the result of temporary declines attributed to disruptions from rebranding, repositioning and/or renovation of certain hotels and in the case of those hotels located in Atlanta, Georgia, decreased demand in 1997 compared to 1996 due to the 1996 Summer Olympics which were held in Atlanta. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash to meet its cash requirements, including distributions to stockholders, is its share of the Operating Partnership's cash flow from the Percentage Leases. For the nine months ended September 30, 1997, cash flow provided by operating activities, consisting primarily of Percentage Lease revenue, was $74.6 million and funds from operations diluted for the conversion preferred stock, which is the sum of net income, minority interest, and depreciation of real property (including furniture and equipment), was $95.5 million. The Lessee's obligations under the Percentage Leases are unsecured. The Lessee's ability to make lease payments under the Percentage Leases and the Company's liquidity, including its ability to make distributions to stockholders, are substantially dependent on the ability of the Lessee to generate sufficient cash flow from the operation of the Hotels. At September 30, 1997, the Lessee had paid all amounts then due the Company under the Percentage Leases. During the nine months ended 1997, the Lessee realized a net loss of $1.6 million. The Lessee's accumulated shareholders' deficit of $8.0 million at September 30, 1997 resulted primarily from losses during 1996 as a consequence of the one-time costs of converting the CSS Hotels to the Embassy Suites and Doubletree Guest Suites brands and the substantial number of suite nights lost during the year due to renovation. It is anticipated that a substantial portion of any future profits of the Lessee will be retained until a positive shareholders' equity is restored. Although it is currently anticipated that the Lessee could sustain a loss during 1997, it is anticipated that its future earnings will be sufficient to enable it to continue to make its lease payments under the Percentage Leases when due. 25 26 Minority equity interest in two of DJONT's consolidated subsidiaries, relating to an aggregate of 15 Hotels, are held by unrelated third parties that also own an equity interest in such Hotels. Messrs. Feldman and Corcoran, such unrelated third party owners, and the managers of certain of the Hotels have agreed, directly or through their affiliates, to make loans to the Lessee of up to an aggregate of approximately $15.4 million, to the extent necessary to enable the Lessee to pay rent and other obligations due under the respective Percentage Leases relating to a total of 32 of the Hotels. Amounts so borrowed by the Lessee, if any, will be subordinate in right of repayment to the prior payment in full of rent and other obligations due under the Percentage Leases relating to such Hotels. No loans were outstanding under such agreements at September 30, 1997. The Company intends to acquire additional hotels and may incur indebtedness to make such acquisitions, or to meet distribution requirements imposed on a REIT under the Internal Revenue Code, to the extent that working capital and cash flow from the Company's investments are insufficient to make such distributions. At September 30, 1997, the Company had $18.9 million of cash and cash equivalents and had utilized $296 million of the amount available under the Company's $550 million unsecured revolving Line of Credit. On October 1, 1997, the Company placed $300 million in long term senior unsecured private placement debt. This senior unsecured private placement debt, bears interest at 73/8% for the notes due 2004, and 75/8% for the notes due 2007. The Company has filed a registration statement with the SEC, which has not yet been declared effective, to exchange privately placed debt for registered debt with identical terms. To manage the relative mix of its debt between fixed and variable rate instruments, the Company has entered into two separate interest rate swap agreements. These interest rate swap agreements modify a portion of the interest characteristics of the Company's outstanding debt without an exchange of the underlying principal amount and effectively convert variable rate debt to a fixed rate. The fixed rates to be paid, the effective fixed rate, and the initial variable rate to be received by the Company at September 30, 1997 are summarized in the following table:
SWAP RATE RECEIVED SWAP RATE EFFECTIVE (VARIABLE) AT SWAP NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 9/30/97 MATURITY --------------- ------------ ---------- ------- -------- $50 million 6.11125% 7.61125% 6.47625% October 1999 $25 million 5.95500% 7.45500% 6.19100% November 1999
After application of the $300 million senior unsecured privately placed debt, and taking into consideration the $75 million in interest rate swaps, the Company has reduced its variable rate debt to about 10% of total debt outstanding. The fixed rate debt held by the Company bears interest at a weighted average rate of 7.6%. The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense by the Company pursuant to the terms of its interest rate agreement and will have a corresponding effect on its future cash flows. Agreements such as these contain a credit risk that the counterparties may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, which are limited to major banks and financial institutions, and does not anticipate nonperformance by the counterparties. To provide for additional flexibility, the Company has registered up to an aggregate of $1.0 billion in common stock, preferred stock, debt securities and/or common stock warrants pursuant to two shelf registration statements. One shelf registration statement for $500 million, was declared effective by the Securities Exchange Commission during 1996 and the second shelf registration statement for $500 million was declared effective during the second quarter of 1997. The terms and conditions of the stock or debt securities issued thereunder are determined by the Company based upon market conditions at the time of issuance. A total of 6,050,000 shares of preferred stock at $25.00 per share were issued in the second quarter of 1996 and 3,000,000 shares of common stock at $35.50 were issued during the first quarter of 1997 pursuant to the shelf registration declared effective in 1996 leaving approximately $242.3 million available under that shelf registration. With regard to the shelf registration declared effective in 1997, the Company issued 11,200,000 shares of common stock at $36.625 leaving approximately $89.8 million available under that shelf registration. On October 22, 1997 a Special Meeting of Shareholders approved an amendment to the Company's Charter increasing the number of authorized shares of Common Stock from 50 million shares to 100 million shares. The 26 27 amendment was adopted by the affirmative vote of shareholders owning more than 77% of the shares of common stock outstanding at the close of business on September 8, 1997. The Company completed construction and placed into service on July 1, 1997, 129 net additional suites, meeting rooms and other public area upgrades at its Boston-Marlborough, Massachusetts hotel at a cost of $15.9 million. The Company is constructing an additional 67 suites at its Jacksonville, Florida hotel and 67 additional suites at its Orlando (North), Florida hotel at an aggregate projected cost of $10.2 million with an expected completion in early 1998. The Company's cash flow from financing activities of approximately $571.7 million for the nine months ended September 30, 1997 resulted from the following: The sale of an aggregate of 14.2 million shares of common stock with net proceeds of $448.0 million; (3.0 million shares in the first quarter of 1997 at $35.50 per share and 11.2 million shares at September 30, 1997 at $36.625) net of 1.2 million shares of common stock repurchased from Promus net borrowings under the Company's line of credit of $180.1 million; distributions paid to common shareholders, preferred shareholders and limited partners of $57.0 million; and proceeds from the exercise of stock options by former employees of $592,000. INFLATION Operators of hotels, in general, possess the ability to adjust room rates periodically to reflect the effects of inflation. Competitive pressures may, however, limit the Lessee's ability to raise room rates. SEASONALITY The Hotels' operations historically have been seasonal in nature, reflecting higher occupancy rates primarily during the first three quarters of each year. This seasonality can be expected to cause fluctuations in the Company's quarterly lease revenue, particularly during the fourth quarter, to the extent that it receives Percentage Rent. To the extent the cash flow from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in lease revenue, the Company expects to utilize other cash on hand or borrowings under the Line of Credit to make distributions to its shareholders. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS During 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), No. 129 "Disclosure of Information About Capital Structure" ("SFAS 129"), No. 130 "Reporting Comprehensive Income" ("SFAS 130"), and No. 131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), all of which are effective for fiscal years beginning after December 15, 1997. SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 129 establishes standards for disclosing information about an entity's capital structure such as information about securities, liquidation preference of preferred stock and redeemable stock. SFAS 130 specifies the presentation and disclosure requirements for reporting comprehensive income which includes those items which have been formerly reported as a component of shareholders' equity. SFAS 131 establishes the disclosure requirements for reporting segment information. Management believes that, when adopted, SFAS 128, 129, 130 and 131 will not have a significant impact on the Company's financial statements. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Portions of this Quarterly Report on Form 10-Q include forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("1933 Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("1934 ACT"). Although the Company believes that the expectations reflected in such forward looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Important factors that could cause actual results to differ materially from the Company's current expectations 27 28 are disclosed herein and in the Company's other filings under the 1933 Act and 1934 Act (collectively, "Cautionary Disclosures"). The forward looking statements included herein, and all subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf, are expressly qualified in their entirety by the Cautionary Statements. 28 29 PART II. -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES. The Indenture filed as Exhibit 4.1 hereto, covering the issuance of $175 million in 73/8% Senior Notes Due 2004 and $125 million in 75/8% Senior Notes Due 2007, contains various affirmative and negative covenants binding upon the Company, to which Indenture reference is hereby made for a complete statement of such provisions. Among the negative covenants contained in such Indenture is a limitation upon restricted payments, including dividends, with respect to the capital stock of the Company. In general terms, this limitation would limit the Company's payment of cash dividends, purchases of outstanding capital stock and certain other payments or investments (collectively, "Restricted Payments"), following October 1, 1997, if at the time of or after giving effect to any such Restricted Payment, (A) a default or event of default shall have occurred and be continuing under the Indenture, (B) the Company could not incur at least $1.00 of additional indebtedness under the limitation on indebtedness set forth in the Indenture or (C) the aggregate amount of all such Restricted Payments made after October 1, 1997 would exceed, in the case of the payment of dividends, the sum of (1) $80 million, (2) 95% of the Company's Funds From Operations, on a cumulative basis, during the period beginning on October 1, 1997 and ending on the last day of the fiscal quarter ending immediately preceding such payment for which reports have been filed with the Securities & Exchange Commission or provided to the trustee, (3) the aggregate net proceeds from the Company's sale to unrelated third parties of its capital stock (other than certain disqualified stock), (4) the net reduction in certain investments included within Restricted Payments; provided, however, that in any event the Company may declare or pay any dividend that is necessary to enable it to maintain its REIT status, so long as (i) the aggregate amount of its outstanding indebtedness is less than 60% of its adjusted total assets and (ii) no default or event of default shall have occurred and be continuing under the Indenture. Accordingly, at October 1, 1997 the Company had $80 million available for the payment of dividends under the Indenture. ITEM 5. OTHER INFORMATION. For information relating to hotel acquisitions and certain other transactions by the Company through September 30, 1997, see Note 1 of Notes to Consolidated Financial Statements of FelCor Suite Hotels, Inc. contained in Item 1 of Part I of this Quarterly Report on Form 10-Q. Such information is incorporated herein by reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: Exhibit Number Description 4.2 - Indenture dated as of October 1, 1997 by and among FelCor Suites Limited Partnership, FelCor Suite Hotels, Inc., the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.1 to the registration statement filed by FelCor Suites Limited Partnership, FelCor Suite Hotels, Inc., FelCor/CSS Hotels, L.L.C., FelCor/LAX Hotels, L.L.C., FelCor Eight Hotels, L.L.C., FelCor/CSS Holdings, L.P., FelCor/St. Paul Holdings, L.P. and FelCor/LAX Holdings, L.P. on Form S-4 (File No. 333-39595) (the "1997 S-4 Registration Statement") and incorporated herein by reference). 10.2.2 - Schedule of executed Lease Agreements identifying material variations from the form of Lease Agreement with respect to hotels acquired by the Company through September 30, 1997 (filed as Exhibit 10.2.2 to the 1997 S-4 Registration Statement and incorporated herein by reference). 29 30 10.23 - Third Amended and Restated Revolving Credit Agreement dated as of August 14, 1997 among FelCor Suite Hotels, Inc. and FelCor Suites Limited Partnership, as Borrower, the Lenders party thereto, The Chase Manhattan Bank, as Administrative Agent, and Wells Fargo Bank, National Association, as Documentation Agent (filed as Exhibit 10.23 to the 1997 S-4 Registration Statement and incorporated herein by reference). 10.25 - Registration Rights Agreement dated as of September 26, 1997 among FelCor Suite Hotels, Inc., FelCor Suites Limited Partnership, Morgan Stanley & Co. Incorporated, NationsBank Capital Markets, Inc. and Salomon Brothers Inc (filed as Exhibit 10.25 to the 1997 S-4 Registration Statement and incorporated herein by reference). 27 - Financial Data Schedule (b) Reports on Form 8-K: -- Current Report on Form 8-K, filed by the Company on July 11, 1997. This filing reported, under Item 2, the purchase of five Sheraton hotels on June 30, 1997 for an aggregate purchase price of approximately $200 million. -- Current Report on Form 8-K/A, filed by the Company on August 13, 1997. This filing reported: (1) under Item 7(a), the audited financial statements for the Sheraton Acquisition Hotels, including a combined balance sheet for the Sheraton Acquisition Hotels as of December 31, 1996 and March 31, 1997 (unaudited), the related combined statements of revenues over expenses, combined statements of cash flows for the year ended December 31, 1996 and three months ended March 31, 1997 and 1996 (unaudited), and combined statements of equity for the year ended December 31, 1996 and the three months ended March 31, 1997 (unaudited); and (2) under Item 7(b), unaudited pro forma statements of operations of the Company and the Lessee, presented as if (i) the acquisitions of all hotels owned by the Company at December 31, 1996; (ii) those hotels acquired in 1997 through July 31, 1997; (iii) the equity offerings consummated during 1996 and 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 the Percentage Leases. The unaudited consolidated balance sheet of the Company is presented as if the acquisition of the hotels acquired subsequent to March 31, 1997 and the consummation of the June 1997 equity offering and related transactions had occurred on March 31, 1997. -- Current Report on Form 8-K, filed by the Company on September 19, 1997. Under Item 5, the Company filed a press release dated September 19, 1997. In this press release, the Company announced a proposed private placement of $150 million in senior unsecured notes by the Operating Partnership. -- Current Report on Form 8-K, filed by the Company on October 8, 1997. Under Item 5, the Company filed a press release dated October 1, 1997. In this press release, the Company announced the completion of a $300 million private placement of senior unsecured notes by the Operating Partnership. 30 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 13, 1997 FELCOR SUITE HOTELS, INC. By: /s/ Lester C. Johnson --------------------------------- Lester C. Johnson Vice President and Controller (Chief Accounting Officer) 31 32 INDEX TO EXHIBITS
Exhibit Number Exhibit - ------- ------- 27 FINANCIAL DATA SCHEDULE
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 18,942 0 13,419 0 0 32,361 1,519,947 72,607 1,616,487 29,937 418,177 0 151,250 377 934,213 1,616,487 0 51,053 0 0 0 0 7,183 20,742 0 20,742 0 0 0 20,742 0.49 0.49
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