1
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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 JUNE 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-3959-01
FELCOR LODGING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
DELAWARE 75-2544994
(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__
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2
FELCOR LODGING LIMITED PARTNERSHIP
INDEX
<Table>
<Caption>
Page
----
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................ 3
Consolidated Balance Sheets - June 30, 2001 (Unaudited)
and December 31, 2000................................................................... 3
Consolidated Statements of Operations - For the Three and Six Months
Ended June 30, 2001 and 2000 (Unaudited)................................................ 4
Consolidated Statements of Cash Flows -- For the Six Months
Ended June 30, 2001 and 2000 (Unaudited)................................................ 5
Notes to Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General/Second Quarter Activities............................................................ 17
Results of Operations........................................................................ 19
Liquidity and Capital Resources.............................................................. 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 29
PART II. - OTHER INFORMATION
Item 5. Other Information............................................................................... 30
Item 6. Exhibits and Reports on Form 8-K................................................................ 30
SIGNATURE................................................................................................... 31
</Table>
2
3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $553,281
at June 30, 2001 and $473,101 at December 31, 2000 $ 3,710,694 $ 3,750,275
Investment in unconsolidated entities 154,980 128,593
Assets held for sale 52,122 129,294
Cash and cash equivalents 64,220 26,060
Restricted cash 323,555
Accounts receivable 46,449 31,241
Note receivable from unconsolidated entity 7,695
Deferred expenses, net of accumulated amortization of $9,934
at June 30, 2001 and $7,146 at December 31, 2000 32,201 23,944
Other assets 19,307 6,501
------------ ------------
Total assets $ 4,403,528 $ 4,103,603
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Debt $ 2,134,093 $ 1,838,241
Distributions declared but unpaid 34,199 33,957
Accrued expenses and other liabilities 146,077 94,232
Minority interest in other partnerships 50,474 50,774
------------ ------------
Total liabilities 2,364,843 2,017,204
------------ ------------
Commitments and contingencies
Redeemable units at redemption value 210,929 205,800
Preferred units, $.01 par value, 20,000 units authorized:
Series A Cumulative Preferred Units, 5,981 units issued and outstanding 149,515 149,515
Series B Redeemable Preferred Units, 58 units issued and outstanding 143,750 143,750
Partners' capital 1,534,491 1,587,334
------------ ------------
Total liabilities and partners' capital $ 4,403,528 $ 4,103,603
============ ============
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
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4
FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2001 AND 2000 (UNAUDITED, IN THOUSANDS
EXCEPT FOR PER UNIT DATA)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
Hotel operating revenue:
Room ............................................... $ 173,118 $ 365,343
Food and beverage .................................. 25,486 53,150
Other operating departments ........................ 11,891 24,790
Percentage lease revenue ............................. 63,606 $ 133,286 115,137 $ 256,335
Retail space rental and other revenue ................ 548 371 1,882 1,824
---------- ---------- ---------- ----------
Total revenues ................................. 274,649 133,657 560,302 258,159
---------- ---------- ---------- ----------
Expenses:
Hotel operating expenses:
Room ............................................... 39,784 83,404
Food and beverage .................................. 19,024 39,141
Other operating departments ........................ 5,195 10,922
Management fees ...................................... 5,495 12,612
Other property operating costs ....................... 57,586 121,642
Taxes, insurance and lease expense ................... 38,096 23,385 76,460 47,588
Corporate expenses ................................... 3,231 2,713 6,372 6,112
Depreciation ......................................... 39,705 41,080 79,513 81,480
Lease termination costs .............................. 36,226
---------- ---------- ---------- ----------
Total operating expenses ....................... 208,116 67,178 466,292 135,180
---------- ---------- ---------- ----------
Operating income ........................................ 66,533 66,479 94,010 122,979
Interest expense, net ................................ (40,265) (39,301) (79,621) (76,781)
Swap termination expense ............................. (4,824) (4,824)
Loss on assets held for sale ......................... (63,000) (63,000)
---------- ---------- ---------- ----------
Income (loss) before equity in income from
unconsolidated entities, minority interests, and
gain on sale of assets ............................ 21,444 (35,822) 9,565 (16,802)
Equity in income from unconsolidated entities ........ 4,178 3,769 6,328 5,648
Minority interests in other partnerships ............. (526) (1,125) (2,282) (2,093)
Gain on sale of assets ............................... 482 875 2,955 875
---------- ---------- ---------- ----------
Income (loss) before extraordinary items ................ 25,578 (32,303) 16,566 (12,372)
Extraordinary charge from write off of deferred
financing fees .................................... (225) (225)
---------- ---------- ---------- ----------
Net income (loss) ....................................... 25,353 (32,303) 16,341 (12,372)
Preferred distributions .............................. (6,150) (6,174) (12,300) (12,358)
---------- ---------- ---------- ----------
Net income (loss) applicable to unitholders ............. $ 19,203 $ (38,477) $ 4,041 $ (24,730)
========== ========== ========== ==========
Per unit data:
Basic:
Net income (loss) applicable to unitholders .......... $ 0.31 $ (0.62) $ 0.07 $ (0.39)
========== ========== ========== ==========
Weighted average units outstanding ................... 61,644 62,312 61,628 63,066
Diluted:
Net income (loss) applicable to unitholders .......... $ 0.31 $ (0.62) $ 0.07 $ (0.39)
========== ========== ========== ==========
Weighted average units outstanding ................... 62,060 62,543 62,069 63,297
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
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5
FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
------------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net income (loss) .......................................................... $ 16,341 $ (12,372)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation ..................................................... 79,513 81,480
Gain on sale of assets ........................................... (2,955) (875)
Amortization of deferred financing fees .......................... 2,563 2,383
Accretion of debt ................................................ (150) (448)
Amortization of unearned officers' and directors' compensation ... 884 474
Equity in income from unconsolidated entities .................... (6,328) (5,648)
Extraordinary write off of deferred financing fees ............... 225
Lease termination costs .......................................... 36,226
Loss on assets held for sale ..................................... 63,000
Minority interests in other partnerships ......................... 2,282 2,093
Changes in assets and liabilities:
Accounts receivable .............................................. (10,077) (10,204)
Deferred expenses ................................................ (11,045) (4,003)
Other assets ..................................................... (11,297) (1,251)
Deferred rent .................................................... 18,604
Accrued expenses and other liabilities ........................... (2,552) 5,510
------------ ------------
Net cash flow provided by operating activities ......... 93,630 138,743
------------ ------------
Cash flows provided by (used in) investing activities:
Restricted cash ............................................................ (323,555)
Improvements and additions to hotels ....................................... (29,431) (41,408)
Proceeds from sale of interest in hotels ................................... 48,049
Operating cash received in acquisition of lessee ........................... 25,583
Proceeds from sale of assets ............................................... 10,967 1,071
Cash distributions from unconsolidated entities ............................ 2,973 11,708
------------ ------------
Net cash flow used in investing activities ............. (265,414) (28,629)
------------ ------------
Cash flows provided by (used in) financing activities:
Proceeds from borrowings ................................................... 849,748 500,892
Repayment of borrowings .................................................... (553,746) (451,847)
Purchase of treasury stock ................................................. (4,046) (56,733)
Proceeds from exercise of stock option ..................................... 692
Buyback of assumed stock options ........................................... (1,860)
Distributions paid to minority interest .................................... (2,582) (3,054)
Distributions paid to preferred unitholders ................................ (12,300) (12,368)
Distributions paid to unitholders .......................................... (67,822) (70,415)
------------ ------------
Net cash flow provided by (used in) financing
activities ......................................... 209,944 (95,385)
------------ ------------
Net change in cash and cash equivalents .............................................. 38,160 14,729
Cash and cash equivalents at beginning of periods .................................... 26,060 36,123
------------ ------------
Cash and cash equivalents at end of periods .......................................... $ 64,220 $ 50,852
============ ============
Supplemental cash flow information --
Interest paid .............................................................. $ 84,115 $ 73,259
============ ============
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
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6
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
FelCor Lodging Limited Partnership and its subsidiaries (the "Company")
at June 30, 2001, owned interests in 185 hotels in the United States and Canada
with nearly 50,000 rooms and suites (collectively, the "Hotels"). The sole
general partner of the Company is FelCor Lodging Trust Incorporated ("FelCor")
the nation's second largest hotel real estate investment trust ("REIT"). At June
30, 2001, FelCor owned a greater than 85 percent equity interest in the Company.
At June 30, 2001, the Company owned a 100 percent interest in 152 of the
Hotels, a 90 percent or greater interest in entities owning seven hotels, a 60
percent interest in an entity owning two hotels and 50 percent interests in
entities that own 24 hotels. Fifteen of the Company's hotels have been
designated as held for sale.
On May 9, 2001, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with MeriStar Hospitality Corporation
("MeriStar"). Pursuant to the Merger Agreement, MeriStar will be merged with and
into FelCor subject to the approval of the shareholders of both companies. Under
the terms of the merger plan holders of MeriStar common shares will receive, for
each common share, $4.60 in cash and 0.784 shares of common stock of FelCor. The
Company also will either assume or refinance $1.6 billion in MeriStar debt. A
separate publicly traded company, MeriStar Hotels & Resorts, will continue to
manage the hotels acquired from MeriStar in the merger. The merger is expected
to close in September of 2001.
The transaction will also involve the merger of MeriStar's subsidiary
operating limited partnership with and into the Company. The holders of common
partnership units in MeriStar's partnership will receive, for each common unit,
$4.60 in cash and 0.784 common partnership units in the Company. Preferred units
in MeriStar's partnership will receive similar preferred units in the Company or
a combination of cash and units. The proposed mergers are subject to shareholder
approval and other customary conditions. The equity portion of the transaction
is structured to qualify as a tax free merger with respect to the share
consideration.
On January 1, 2001, the REIT Modernization Act ("RMA") went into
effect. Among other things, the RMA permits a REIT to form taxable subsidiaries
that lease hotels from the REIT, provided that the hotels continue to be managed
by unrelated third parties. Effective January 1, 2001, the Company completed
transactions that resulted in its newly formed taxable subsidiaries acquiring
leases for 96 hotels that were leased to either DJONT Operations, L.L.C. and its
consolidated subsidiaries (collectively "DJONT") or subsidiaries of Six
Continents Hotels, formerly Bass Hotels and Resorts, ("Six Continents Hotels").
By acquiring these leases through its taxable subsidiaries, the Company acquired
the economic benefits and risks of these hotel operations and reports hotel
revenues and expenses rather than percentage lease revenues. Additionally, in
2001, the Company entered into an agreement to acquire its remaining 88 hotel
leases held by Six Continents Hotels. This transaction was effective July 1,
2001.
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FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION -- (CONTINUED)
The following table provides a schedule of the Hotels by brand, broken
out between those hotels whose operations are consolidated for purposes of the
Company's financial statements, those hotels whose operations are reported as
unconsolidated entities for purposes of the Company's financial statements and
those hotels operated under leases with Six Continents Hotels at June 30, 2001:
<Table>
<Caption>
UNCONSOLIDATED SIX CONTINENTS
BRAND CONSOLIDATED JOINT VENTURES HOTELS LEASED TOTAL
----- ------------ -------------- -------------- -----
Hilton(R) Brands:
Embassy Suites(R) 45 14 59
Doubletree(R) and Doubletree Guest Suites(R) 14 14
Hampton Inn(R) 2 1 5 8
Hilton Suites(R) 1 1
Homewood Suites(R) 1 1
Six Continents Hotels Brands:
Holiday Inn(R) 1 43 44
Crowne Plaza(R) and Crowne Plaza Suites(R) 18 18
Holiday Inn Select(R) 10 10
Holiday Inn Express(R) 5 5
Starwood Brands:
Sheraton(R) and Sheraton Suites(R) 9 1 10
Westin(R) 1 1
Other Brands 1 7 6 14
----- ----- ----- -----
Total Hotels 73 24 88 185
===== ===== ===== =====
</Table>
The Hotels are located in the United States (35 states) and Canada,
with a concentration in Texas (41 hotels), California (19 hotels), Florida (16
hotels) and Georgia (14 hotels).
At June 30, 2001, (i) subsidiaries of Six Continents Hotels managed 90
of the Hotels, (ii) subsidiaries of Hilton managed 72 of the Hotels, (iii)
subsidiaries of Starwood Hotels & Resorts Worldwide, Inc. ("Starwood") managed
11 of the Hotels, (iv) subsidiaries of Interstate Hotels Corporation ("IHC")
managed eight of the Hotels and (v) three independent management companies
managed the four remaining Hotels
Effective January 1, 2001, with the enactment of the RMA, the Company
acquired and contributed to a newly formed taxable REIT subsidiary, all the
equity interests in DJONT. In consideration for the acquisition, the Company
issued an aggregate of 416,667 units of limited partnership interest valued at
approximately $10 million, which, together with DJONT's accumulated
shareholders' deficit of $24.5 million, was expensed as a lease termination cost
in the first quarter of 2001.
Effective January 1, 2001, the Company completed the acquisition of 12
of the leases, which were held by Six Continents Hotels. In consideration for
the acquisition and termination of these leases and the related management
agreements of such leases, FelCor issued to Six Continents Hotels 413,585 shares
of FelCor common stock valued at approximately $10 million and the Company
issued the corresponding number of units. Of this $10 million in consideration
for acquisition of these leases, approximately $8.3 million associated with 11
of the hotels had been previously accrued in connection with the hotels
designated as held for sale and $1.7 million was expensed as lease termination
costs in the first quarter of 2001. Of the 12 hotels, two have been sold, eight
have been contributed to a joint venture with IHC, one remains to be sold and
one will be retained.
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FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION -- (CONTINUED)
In March 2001, the Company contributed the eight hotels managed by IHC to a
joint venture with IHC. The Company also entered into an agreement with Six
Continents Hotels to acquire the remaining 88 leases, which became effective
July 1, 2001. In consideration for the acquisition of such leases the Company
entered into long-term management agreements with Six Continents Hotels with
regard to these hotels and, on July 1, 2001, FelCor issued to Six Continents
Hotels 100 shares of FelCor common stock. A portion of the management fees with
respect to the 88 hotels to be managed by Six Continents Hotels under long-term
management agreements is considered to be lease termination costs and the
Company will record a lease termination expense of approximately $125 million in
the third quarter of 2001. At that time, the Company will record a corresponding
liability of approximately $125 million that will be amortized over the term of
the applicable management agreements.
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 partners' capital.
The financial information for the three and six months ended June 30,
2001 and 2000, is unaudited but includes all adjustments (consisting only of
normal recurring accruals) which the Company considers necessary for a fair
presentation of the results for the periods. The financial information should be
read in conjunction with the consolidated financial statements for the year
ended December 31, 2000, included in the Company's Annual Report on Form 10-K
("Form 10-K"). Operating results for the three and six months ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2001.
2. DEFERRED RENT
The Company recognized deferred lease income under Staff Accounting
Bulletin No. 101 ("SAB 101") of $5.3 million for the quarter ended June 30, 2001
and deferred $9.7 million and $18.6 million of lease income for the three and
six months ended June 30, 2000, respectively. In accordance with SAB 101, rent
deferred in the first quarter of 2001 was fully earned and recognized as
percentage lease revenue in the second quarter of 2001, because all
contingencies related to such revenue were resolved with regard to the leases
acquired July 1, 2001. For the six months ended June 30, 2001, SAB 101 had no
financial impact to the Company.
3. ASSETS HELD FOR SALE
In the second quarter of 2000, the Company identified 25 hotels that it
considered non-strategic and announced its intention to sell such hotels. In
connection with the decision to sell these hotels, the Company recorded, at June
30, 2000, an expense of $63 million representing the difference between the net
book value of these hotels and the estimated net proceeds. No depreciation
expense has been recorded on these hotels since June 30, 2000. Revenues related
to the assets held for sale, less costs associated with those assets, were
included in the Company's results of operations for the six months ended June
30, 2001 and 2000, and represented income of $7.1 million and $6.1 million (net
of depreciation expense in 2000), respectively.
In March 2001, the Company contributed eight of the hotels held for
sale to an entity in which the Company owns a 50 percent equity interest and a
subsidiary of IHC holds the other 50 percent equity interest. The Company
contributed assets with a book value of approximately $77 million, received net
cash proceeds of $48 million and retained a $17 million preferred interest.
In June 2001, the Company sold the 140-room Hampton Inn located in
Marietta, Georgia, for a net sales price of $7.1 million. The Company is
actively marketing the remaining 15 hotels held for sale.
8
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FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company owned 50 percent interests in joint venture partnerships
that owned and operated 24 hotels at June 30, 2001, and 16 hotels at June 30,
2000. The Company also owned a 50% interest in partnerships that owned an
undeveloped parcel of land, a condominium management company and developed and
sold condominiums in Myrtle Beach, South Carolina. The Company accounts for its
investments in these unconsolidated entities under the equity method.
Summarized unaudited combined financial information for 100 percent of
these unconsolidated entities is as follows (in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Balance sheet information:
Investment in hotels................................ $342,294 $294,941
Non-recourse mortgage debt.......................... $266,660 $225,302
Equity.............................................. $ 96,975 $ 82,986
</Table>
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS INFORMATION:
Total revenues......................................... $ 24,050 $ 21,245 $ 41,300 $ 39,173
Net income............................................. $ 9,012 $ 8,715 $ 14,327 $ 13,649
Net income attributable to the Company................. $ 4,714 $ 4,305 $ 7,399 $ 6,719
Amortization of cost in excess of book value........... (536) (536) (1,071) (1,071)
---------- ---------- ---------- ----------
Equity in income from unconsolidated entities.......... $ 4,178 $ 3,769 $ 6,328 $ 5,648
========== ========== =========== ==========
</Table>
5. DEBT
Debt at June 30, 2001, and December 31, 2000, consisted of the
following (in thousands):
<Table>
<Caption>
JUNE DECEMBER 31,
COLLATERAL INTEREST RATE MATURITY DATE 2001 2000
---------- ------------- ------------- ---------- ------------
FLOATING RATE DEBT:
Line of credit None LIBOR + 200bp August 2003 $ 112,000
Mortgage debt 3 hotels LIBOR + 200bp February 2003 61,909
Promissory note None LIBOR + 200bp June 2016 $ 650 650
---------- ----------
Total floating rate debt 650 174,559
---------- ----------
FIXED RATE DEBT:
Line of credit - swapped None 7.66% August 2003 39,900 250,000
Publicly-traded term notes None 7.38% October 2004 174,569 174,505
Publicly-traded term notes None 7.63% October 2007 124,370 124,320
Publicly-traded term notes None 9.50% September 2008 101,699
Publicly-traded term notes None 9.50% September 2008 395,073 394,731
Publicly-traded term notes None 8.50% June 2011 595,073
Mortgage debt 15 hotels 7.24% November 2007 138,854 140,148
Mortgage debt 7 hotels 7.54% April 2009 96,826 97,604
Mortgage debt 6 hotels 7.55% June 2009 72,810 73,389
Mortgage debt 7 hotels 8.73% May 2010 143,163 144,032
Mortgage debt 8 hotels 8.70% May 2010 183,807 184,829
Other 13 hotels 6.96% - 7.23% 2000 - 2005 67,299 80,124
---------- ----------
Total fixed rate debt 2,133,443 1,663,682
---------- ----------
Total debt $2,134,093 $1,838,241
========== ==========
</Table>
One month LIBOR at June 30, 2001, was 3.835%.
9
10
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEBT -- (CONTINUED)
At June 30, 2001, the Company's line of credit was matched with an
interest rate swap agreement, which effectively converted the floating rate on
the line of credit to a fixed rate.
The line of credit contains various affirmative and negative covenants
including limitations on total indebtedness, total secured indebtedness, and
cash distributions, as well as the obligation to maintain certain minimum
tangible net worth and certain minimum interest and debt service coverage
ratios. At June 30, 2001, 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. Most of the mortgage debt is non-recourse to the Company and contains
provisions allowing for the substitution of collateral upon satisfaction of
certain conditions. Most of the mortgage debt is prepayable; subject to various
prepayment penalties, yield maintenance, or defeasance obligations.
Interest expense is reported net of interest income of $2.2 million and
$863,000 for the six months ended June 30, 2001 and 2000, respectively, and
capitalized interest of $229,000 and $497,000, respectively.
On June 4, 2001, the Company completed the private placement of $600
million in 8 1/2 percent senior unsecured notes that mature in June 2001.
Approximately $315 million of the proceeds were placed in escrow pending
completion of the merger with MeriStar. The remaining proceeds were used to pay
down the Line of Credit and other floating rate debt. Associated with the pay
down of the Line of Credit, the Company terminated interest rate swaps with a
notional value of $200 million, resulting in a one-time $4.8 million swap
termination cost, which was expensed in the second quarter. An extraordinary
charge of $225,000 was recorded to write-off unamortized deferred financing
costs associated with the prepayment of the floating rate debt.
On January 11, 2001, the Company completed the private placement of
$100 million in 9 1/2 percent senior unsecured notes that mature in September
2008. These notes were issued at a premium to yield an effective rate of 9 1/8
percent. The proceeds were used initially to pay down the company's line of
credit.
6. ADOPTION OF SFAS 133
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments. Specifically, SFAS No. 133 requires an entity to recognize all
derivatives as either assets or liabilities on the balance sheet and to measure
those instruments at fair value. Additionally, the fair value adjustments will
affect either partners' capital or net income depending on whether the
derivative instrument qualifies as a hedge for accounting purposes and the
nature of the hedging activity.
Upon adoption of SFAS 133, on January 1, 2001, the Company recorded the
fair value of its interest swap rate agreements with a notional value of $250
million as an asset of $248,000 with a corresponding credit to accumulated other
comprehensive income reported in partners' capital.
10
11
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ADOPTION OF SFAS 133 -- (CONTINUED)
As of June 30, 2001, the Company held an interest rate swap agreement
with a notional value of $50 million. The fixed interest rate paid on this swap
was 5.6 percent and the floating swap rate received was 4.06 percent with a
maturity of July 2003. The fair value of the Company's interest rate swap
agreement at June 30, 2001 was a liability of $899,000 which was recorded in
accrued expenses and accumulated other comprehensive income reported in
partners' capital. Assuming no changes in the index rates over the next
twelve months, the swap currently held by the Company would result in additional
interest expense of $561,000. In June 2001, interest rate swaps with a notional
amount of $200 million were terminated at a cost of $4.8 million when the
corresponding floating rate debt was prepaid.
In the normal course of business, the Company is exposed to the effect
of interest rate changes. The Company limits these risks by following
established risk management policies and procedures including the use of
derivatives. Derivatives are used primarily to fix the rate on floating rate
debt and manage the cost of borrowing obligations. The Company requires that
hedging derivative instruments are effective in reducing the interest rate risk
exposure that they are designated to hedge. Instruments that meet these hedging
criteria are formally designated as hedges at the inception of the derivative
contract. The Company does not use derivatives for trading or speculative
purposes, and the Company has a policy of only entering into contracts with
major financial institutions.
To determine the fair values of its derivative instruments, the Company
uses a variety of methods and assumptions that are based on market conditions
and risks existing at each balance sheet date. All methods of assessing fair
value result in a general approximation of value, and such value may never
actually be realized.
At June 30, 2001, the Company's financing facilities consist of a $600
million floating rate line of credit. To reduce the risk of variable interest
rates, the Company currently uses an interest rate swap agreement, to
effectively convert a portion of its floating rate debt to fixed-rate debt. 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.
7. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" establishes standards
for reporting and displaying comprehensive income and its components. Total
comprehensive income for the three and six months ended June 30, 2001 is
calculated as follows (in thousands):
<Table>
<Caption>
JUNE 30, 2001
----------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
Net income...................................................... $ 25,353 $ 16,341
Realized loss on terminated interest rate swap agreements....... 4,824 4,824
Unrealized loss on interest rate swap agreements................ (879) (5,723)
-------- --------
Total comprehensive income................................. $ 29,298 $ 15,442
======== ========
</Table>
Although the Company conducts business in Canada, the Canadian
operations were not material to our consolidated financial position, results of
operations or cash flows during the three and six months ended June 30, 2001 and
2000. Additionally, foreign currency transaction gains and losses were not
material to the Company's results of operations for the three and six months
ended June 30, 2001 and 2000.
11
12
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB")
approved SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS No. 142 will be effective for fiscal years beginning after December 15,
2001 and will require (1) intangible assets (as defined in SFAS No. 141) to be
reclassified into goodwill, (2) goodwill amortization to cease, and (3) the
testing of goodwill for impairment at transition and at interim periods (if an
event or circumstance would result in an impairment). The Company will adopt
SFAS No. 142 on June 30, 2001, with the purchase of any goodwill and intangible
assets acquired after June 30, 2001. The Company has not yet determined the
impact of SFAS No. 142 on the Company's results of operations and financial
position.
9. INCOME TAXES
Under the RMA that became effective January 1, 2001, the Company leases
certain of its hotels to wholly-owned taxable REIT subsidiaries that are subject
to federal and state income taxes. The Company accounts for income taxes in
accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes."
Under SFAS 109, the Company accounts for income taxes using the asset and
liability method under which deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The Company has a deferred tax asset of
approximately $100,000, prior to any valuation allowance, relating to losses of
the taxable REIT subsidiaries during the six months ended June 30, 2001.
Management has provided a 100 percent valuation allowance against this asset due
to uncertainty of realization and accordingly, no provision or benefit from
income taxes is reflected in the accompanying Consolidated Statements of
Operations.
10. GAIN ON SALE OF ASSETS
During the six months ended June 30, 2001, the Company received $3.9
million for the condemnation of three parcels of land and recorded a gain of
$3.0 million.
11. PURCHASE OF DJONT
Effective January 1, 2001, the Company acquired all the equity
interests in DJONT. In consideration for the acquisition, the Company issued
416,667 units of limited partnership interest valued at approximately $10
million which, together with DJONT's accumulated shareholders' deficit of $24.5
million, was expensed as lease termination cost in the first quarter of 2001.
The Company purchased certain assets and assumed certain liabilities
with this acquisition. The fair values of the acquired assets and liabilities at
January 1, 2001, are as follows (in thousands):
<Table>
Cash and cash equivalents.............................. $ 25,583
Accounts receivable................................... 30,689
Investment in real estate............................. 10,954
Other assets.......................................... 10,358
--------
Total assets acquired........................ 77,584
--------
Accounts payable...................................... 18,656
Due to FelCor Lodging Trust........................... 39,466
Accrued expenses and other liabilities................ 43,999
--------
Total liabilities assumed.................... 102,121
--------
Liabilities assumed in excess of assets acquired...... 24,537
Value of units issued................................. 9,896
--------
Lease termination costs.......................... $ 34,433
========
</Table>
12
13
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT INFORMATION
Following the acquisition of certain of the Company's leases at January
1, 2001, 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 in 2001 by those hotels that the Company leases to DJONT (whose
operations are consolidated for financial reporting purposes beginning January
1, 2001) and those hotels that the Company leases to Six Continents Hotels.
For the three and six months ended June 30, 2000, the Company segmented
its business between its two lessees, DJONT and Six Continents Hotels.
The following tables present information for the reportable segments
for the three and six months ended June 30, 2001 and 2000 (in thousands):
<Table>
<Caption>
SIX
CONTINENTS CORPORATE
DJONT HOTELS SEGMENT NOT ALLOCABLE CONSOLIDATED
THREE MONTHS ENDED JUNE 30, 2001 LEASED LEASED TOTAL TO SEGMENTS TOTAL
-------------------------------- ---------- ---------- ---------- -------------- ------------
Total revenues $ 210,404 $ 63,606 $ 274,010 $ 639 $ 274,649
Net income (loss) $ 52,863 $ 18,153 $ 71,016 $ (45,663) $ 25,353
Funds from operations $ 75,293 $ 32,725 $ 108,018 $ (43,758) $ 64,260
Weighted average units outstanding (1) 66,750
</Table>
<Table>
<Caption>
SIX
CONTINENTS CORPORATE
DJONT HOTELS SEGMENT NOT ALLOCABLE CONSOLIDATED
THREE MONTHS ENDED JUNE 30, 2000 LEASED LEASED TOTAL TO SEGMENTS TOTAL
-------------------------------- ---------- ---------- ---------- -------------- ------------
Total revenues $ 70,833 $ 62,453 $ 133,286 $ 371 $ 133,657
Net income (loss) $ 33,193 $ (23,785) $ 9,408 $ (41,771) $ (32,303)
Funds from operations $ 68,567 $ 57,197 $ 125,764 $ (44,879) $ 80,885
Weighted average units outstanding (1) 67,232
</Table>
<Table>
<Caption>
SIX
CONTINENTS CORPORATE
DJONT HOTELS SEGMENT NOT ALLOCABLE CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 2001 LEASED LEASED TOTAL TO SEGMENTS TOTAL
-------------------------------- ---------- ---------- ---------- -------------- ------------
Total revenues $ 443,283 $ 115,137 $ 558,420 $ 1,882 $ 560,302
Net income (loss) $ 80,431 $ 21,855 $ 102,286 $ (85,945) $ 16,341
Funds from operations $ 160,706 $ 62,161 $ 222,867 $ (87,184) $ 135,683
Weighted average units outstanding (1) 66,759
</Table>
<Table>
<Caption>
SIX
CONTINENTS CORPORATE
DJONT HOTELS SEGMENT NOT ALLOCABLE CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 2000 LEASED LEASED TOTAL TO SEGMENTS TOTAL
-------------------------------- ---------- ---------- ---------- -------------- ------------
Total revenues $ 137,813 $ 118,522 $ 256,335 $ 1,824 $ 258,159
Net income (loss) $ 69,892 $ (1,059) $ 68,833 $ (81,205) $ (12,372)
Funds from operations $ 132,459 $ 104,459 $ 236,918 $ (87,538) $ 149,380
Weighted average units outstanding (1) 67,987
</Table>
- ----------
(1) Weighted average units outstanding are computed including dilutive
options, unvested stock grants, and assuming conversion of Series A
preferred units to units.
13
14
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. TREASURY STOCK REPURCHASE PROGRAM
On January 4, 2000, FelCor announced that its Board of Directors had
approved a $200 million increase in its stock repurchase program, authorizing
FelCor to purchase up to an aggregate of $300 million of its outstanding common
shares. Approximately 179,000 of FelCor common shares for approximately $4.0
million have been purchased from January 1, 2001 through March 27, 2001. FelCor
has not repurchased any additional shares since March 27, 2001. These
repurchases have been recorded as a reduction to partners' capital as a result
of the redemption of units held by FelCor to fund the repurchases. Since the
inception of the stock repurchase program FelCor has repurchased approximately
10.5 million shares of FelCor common stock for approximately $189.1 million.
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per unit for the three and six months ended June 30, 2001 and 2000 (in
thousands, except per unit data):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator:
Income (loss) before extraordinary items ............. $ 25,578 $ (32,303) $ 16,566 $ (12,372)
Extraordinary charge .............................. (225) (225)
---------- ---------- ---------- ----------
Net income (loss) .................................... 25,353 (32,303) 16,341 (12,372)
Preferred distributions ............................ (6,150) (6,174) (12,300) (12,358)
---------- ---------- ---------- ----------
Net income (loss) applicable to unitholders .......... $ 19,203 $ (38,477) $ 4,041 $ (24,730)
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per unit -
weighted average units ............................. 61,644 62,312 61,628 63,066
Effect of dilutive securities:
Stock options ........................................ 65 90
Restricted units ..................................... 351 231 351 231
---------- ---------- ---------- ----------
Denominator for diluted earnings per unit -
adjusted weighted average units and assumed
conversions ........................................ 62,060 62,543 62,069 63,297
========== ========== ========== ==========
Earnings (loss) per unit data:
Basic
Net income (loss) before extraordinary item .......... $ 0.32 $ (0.62) $ 0.07 $ (0.39)
Extraordinary item ................................... (0.01)
---------- ---------- ---------- ----------
Net income (loss) .................................... $ 0.31 $ (0.62) $ 0.07 $ (0.39)
========== ========== ========== ==========
Diluted
Net income (loss) before extraordinary item .......... $ 0.31 $ (0.62) $ 0.07 $ (0.39)
Extraordinary item
---------- ---------- ---------- ----------
Net income (loss) .................................... $ 0.31 $ (0.62) $ 0.07 $ (0.39)
========== ========== ========== ==========
</Table>
The Series A preferred units and most of the options granted are
anti-dilutive and not included in the calculation of diluted earnings per unit.
14
15
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information for the six months
ended June 30, 2001 and 2000 are based in part upon the Consolidated
Statements of Operations of the Company, DJONT, Six Continents Hotels and
MeriStar for the six months ended June 30, 2001 and 2000.
The pro forma information for the six months ended June 30, 2001 and
2000 assumes that all the following occurred on January 1 of the fiscal period
presented:
o The Company's acquisition of DJONT, effective January 1, 2001, for
416,667 units of limited partnership interest valued at
approximately $10 million;
o The Company's acquisition of 12 leases held by Six Continents
Hotels, effective January 1, 2001, for 413,585 shares of FelCor
common stock valued at approximately $10 million;
o The Company's acquisition of the remaining 88 leases held by Six
Continents Hotels, effective July 1, 2001, and the recording of a
lease termination expense of approximately $125 million that will
be amortized over the term of the management agreements with
respect to these hotels;
o The assignment of the leases from MeriStar Hotels & Resorts, Inc.
to taxable REIT subsidiaries; and
o The completion of the MeriStar merger and related financings and
the application of the net proceeds.
In the opinion of FelCor's management, all material adjustments
necessary to reflect the effects of the preceding transactions have been made.
The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of what the actual results of operations would
have been had the MeriStar merger and the other transactions described above
occurred on the indicated dates, nor do they purport to represent the Company's
results of operations for future periods.
<Table>
<Caption>
PRO FORMA
SIX MONTHS ENDED
JUNE 30,
---------------------------------
2001 2000
--------------- --------------
Total revenue............................................................... $1,412,155 $1,471,031
========== ==========
Net income (loss) applicable to unitholders................................. $ 77,192 $ 92,236
========== ==========
Basic:
Net income (loss) applicable to unitholders.............................. $ .77 $ .92
========== ==========
Basic:
Weighted average units outstanding....................................... $ 100,020 $ 100,701
========== ==========
Basic:
Diluted:
Net income (loss) applicable to unitholders.............................. $ .76 $ .91
========== ==========
Weighted average units outstanding....................................... $ 101,351 $ 101,746
========== ==========
</Table>
16. SUBSEQUENT EVENTS
On July 18, 2001, the Company announced the commitment of a $500
million standby loan facility. The loan facility will be available to fund any
purchases of MeriStar's existing 9 percent Senior Notes due 2009 or 9 1/8
percent Senior Notes due 2011 pursuant to change in control provisions contained
in the indentures.
15
16
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUBSEQUENT EVENTS -- (CONTINUED)
On July 26, 2001, the Company announced the increase of its line of
credit from $600 million to $700 million contingent upon the merger with
MeriStar closing. The new unsecured facility has similar terms as the existing
facility. The facility has a term of up to five years, a floating interest rate,
and a tiered spread based on the Company's leverage ratio. The increased line
will be available to refinance a portion of MeriStar's debt and for general
corporate purposes.
The Company has filed a registration statement on Form S-4 with the SEC
in connection with the merger. The registration statement is currently being
reviewed by the SEC but has not been declared effective. The Form S-4 contains a
prospectus, a proxy statement, and other documents for FelCor's and MeriStar's
stockholder meetings at which time the proposed merger will be considered. It is
planned to mail the proxy statement and prospectus contained in the Form S-4 to
our respective stockholders after the registration statement is declared
effective by the SEC. The Form S-4, proxy statement and prospectus will contain
important information about FelCor, MeriStar, the merger and related matters.
16
17
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 Lodging Limited Partnership
appearing elsewhere herein.
As a result of the acquisition of leases for 96 of its hotels in the
first quarter of 2001 by the Company's taxable REIT subsidiaries, the Company is
reporting hotel revenues and expenses with respect to such hotels, whereas prior
to January 1, 2001, percentage lease revenue was reported.
FINANCIAL COMPARISON
THREE MONTHS ENDED JUNE 30, 2001 (COMPARED TO THREE MONTHS ENDED JUNE
30, 2000)
o Total hotel portfolio RevPAR decreased 7.4 percent (185 hotels)
o FFO decreased 20.5 percent to $64.3 million from $80.9 million
o EBITDA decreased 11.2 percent to $112.2 million from $126.3
million
o Net income was $25.4 million compared to a net loss of $32.3
million
SIX MONTHS ENDED JUNE 30, 2001 (COMPARED TO SIX MONTHS ENDED JUNE 30,
2000)
o Total hotel portfolio RevPAR decreased 2.9 percent (185 hotels)
o FFO decreased 9.2 percent to $135.7 million from $149.4 million
o EBITDA decreased 3.9 percent to $229.6 million from $238.8
million
o Net income was $16.3 million compared to a net loss of $12.4
million
PROPOSED MERGER
On May 9, 2001, the Company entered into an Agreement and Plan of
Merger with MeriStar and MeriStar LP. Pursuant to the merger agreement, MeriStar
will be merged with and into FelCor, with FelCor as the survivor. Under the
terms of the merger agreement holders of shares of MeriStar common stock will
receive, for each share of common stock, $4.60 in cash and 0.784 shares of
FelCor common stock. The Company will either assume or refinance approximately
$1.6 billion in MeriStar debt. MeriStar Hotels & Resorts, Inc., an independent
public hotel management company, will continue to manage substantially all of
the hotels acquired from MeriStar in the merger.
The transaction will also involve the merger of MeriStar's subsidiary
operating limited partnership with and into the Company. The holders of common
partnership units in MeriStar's partnership will receive, for each common unit,
$4.60 in cash and 0.784 common partnership units in the Company. Preferred units
in MeriStar's partnership will receive similar preferred units in the Company or
a combination of cash and units. The proposed mergers are subject to shareholder
approval and other customary conditions. The equity portion of the transaction
is structured to qualify as a tax free merger with respect to the share
consideration. The merger is expected to close in September of 2001.
In connection with the merger with MeriStar, the Company has completed
the following financing transactions:
o The Company issued $600 million of 10-year, 8 1/2 percent senior
unsecured notes.
o In July, the Company received a $500 million standby loan facility
which will be available to fund any required purchases of MeriStar's
senior notes pursuant to change in control provisions.
17
18
o The Company closed an expanded line of credit facility in July. The new
line of credit will permit borrowing of $700 million, a $100 million
increase from the Company's previous $600 million facility, contingent
upon the merger closing.
o The Company is also planning a CMBS transaction in the amount of $325
to $350 million and FelCor is considering a preferred equity offering,
although the preferred equity offering is not necessary to complete the
merger.
The Company has filed a registration statement on Form S-4 with the SEC
in connection with the merger. The registration statement is currently being
reviewed by the SEC but has not been declared effective. The Form S-4 contains a
prospectus, a proxy statement, and other documents for FelCor's and MeriStar's
stockholder meetings at which time the proposed merger will be considered. It is
planned to mail the proxy statement and prospectus contained in the Form S-4 to
our respective stockholders after the registration statement is declared
effective by the SEC. The Form S-4, proxy statement and prospectus will contain
important information about FelCor, MeriStar, the merger and related matters.
ACQUISITION OF TENANTS:
The Company completed the acquisition of DJONT (which leased 85 of the
Company's hotels) effective January 1, 2001. In consideration for the
acquisition, the Company issued approximately 417,000 units of limited
partnership interest, valued at approximately $10 million which, together with
DJONT's accumulated deficit of $24.5 million, was recorded as a lease
termination cost in the first quarter of 2001.
The Company acquired leases from Six Continents Hotels, formerly Bass
Hotels and Resorts ("Six Continents Hotels") on 12 of the Company's hotels for
approximately 414,000 shares of common stock, valued at approximately $10
million, of which $1.7 million was included in lease termination costs and the
remainder had been previously accrued for in the reserve related to hotels held
for sale. Of these hotels, one has been sold, eight have been contributed to a
joint venture with IHC, two remain to be sold and one will be retained.
The Company and Six Continents Hotels agreed to the terms on which the
Company acquired the remaining 88 Hotel leases held by Six Continents Hotels in
exchange for long-term management agreements. A portion of the management fees
with respect to the 88 hotels to be managed by Six Continents Hotels is
considered to be lease termination costs and the Company will record a lease
termination expense of approximately $125 million in the third quarter of 2001.
At that time, the Company will record a corresponding liability of approximately
$125 million that will be amortized over the term of the applicable management
agreements. This transaction was effective July 1, 2001. Beginning with the
third quarter of 2001, the Company's financial statements will reflect hotel
revenues and expenses of these additional 88 hotels.
HIGHLIGHTS:
FIRST QUARTER
o The Company contributed seven Marriott(R)-branded hotels and one
Hilton(R)-branded hotel to a 50/50 joint venture between the Company
and IHC. Net cash proceeds to the Company were $48 million. In addition
to its 50 percent equity interest in the joint venture, the Company
retains a $17 million preferred interest.
o Project capital expenditures for improvements totaled $9.7 million
during the quarter. An additional $6.3 million was spent on maintenance
capital expenditures.
SECOND QUARTER
o In June, the Company sold a hotel previously designated as held for
sale with net sales proceeds of $7.1 million. No gain or loss was
recorded on this sale.
o Project capital expenditures for improvements totaled $8.3 million
during the quarter.
18
19
An additional $7.8 million was spent on maintenance capital
expenditures.
CAPITALIZATION:
FIRST QUARTER
o On January 11, 2001, the Company completed the private placement of
$100 million of senior unsecured notes that mature in September, 2008
and bear interest at an effective rate of 9 1/8 percent. The proceeds
were used initially to pay down the Company's line of credit.
o During the first quarter 2001, FelCor repurchased approximately 179,000
shares of common stock for approximately $4.0 million.
o The Company declared first quarter distributions of $0.55 per unit on
its units, $0.4875 per unit on its $1.95 Series A Cumulative
Convertible Preferred Units and $0.5625 per depositary unit evidencing
its 9 percent Series B Cumulative Redeemable Preferred Units.
SECOND QUARTER
o On June 4, 2001, the Company issued $600 million of 10-year, 8 1/2
percent senior unsecured notes. Approximately $315 million of the
proceeds were placed in escrow to be released upon the merger closing.
Merger related carrying costs related to the escrowed funds, impacted
FFO by $1.4 million. Associated with the issuance of the favorably
priced fixed rate debt, and the prepayment of floating rate debt, the
Company terminated $200 million of interest rate swaps resulting in a
one-time $4.8 million swap termination cost.
o The Company declared second quarter distributions of $0.55 per unit on
its Common Units, $0.4875 per unit on its $1.95 Series A Cumulative
Convertible Preferred Units and $0.5625 per depositary unit evidencing
its 9 percent Series B Cumulative Redeemable Preferred Units.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 and 2000
Until January 1, 2001, the Company leased 184 hotels to either DJONT or
Six Continents Hotels and reported the lease revenue from the percentage lease
agreements. Effective January 1, 2001, upon acquisition of these leases by the
Company's taxable REIT subsidiaries, the Company assumed all operating risks and
rewards of these 96 hotels. The Consolidated Statement of Operations for the
quarter ending June 30, 2001, include the revenue and expenses of those hotels
and percentage lease revenues related to the 88 hotels that were leased by Six
Continents Hotels through July 1, 2001. Therefore, the operating results of the
Company for the three months ended June 30, 2001, are not directly comparable to
the same period in 2000.
Total revenue for the second quarter of 2001 increased $141.0 million
over the same period in 2000. The increase is principally associated with hotel
operating revenues for the 96 hotels that the Company had reported percentage
lease revenue in previous periods. The 96 hotels contributed approximately
$210.5 million in hotel operating revenue in the second quarter of 2001,
compared to $70.8 million in percentage rent revenue for these same hotels, in
the second quarter of 2000.
At June 30, 2001, the Company had hotel leases with Six Continents
Hotels for 88 hotels which are reflected in percentage lease revenues for both
years reported. Percentage lease revenue was $63.6 million in the quarter ended
June 30, 2001, compared to percentage lease revenue of $133.3 million for the
same period in 2000. The principal reason for the decrease in percentage lease
revenue is related to the previously discussed acquisition of 96 hotel leases
effective January 1, 2001. Percentage lease revenue for the 88 hotels leased by
Six Continents Hotels during the second quarter of 2001 increased for those same
hotels in the same period of 2000 by $1.2 million. The principal reason for the
change in percentage lease revenue for the 88 Six Continents Hotels leased
hotels was deferred rent. In the second quarter of 2001 the Company recognized
$5.3 million of rent
19
20
deferred from the first quarter of 2001, associated with the acquisition of
these leases on July 1, 2001, while in the same period in 2000 the Company
deferred $9.7 million under SAB 101. Other items affecting revenue, compared to
the second quarter 2000 are:
o RevPAR for the 95 hotels decreased 7.4 percent for quarter (reflected
in hotel revenue)
o RevPAR for the 88 Bass leased hotels decreased 7.6 percent for the
quarter (reflected in percent rent)
Total operating expenses increased by $140.9 million for the three
months ended June 30, 2001 over the same three month period in 2000. This
increase is primarily a result of including hotel operating expenses, management
fees and other property related costs of $127.1 million, which were not included
in the same period of 2000. Also included in total operating expenses are
depreciation expense and taxes, insurance and lease expense. Taxes, insurance
and lease expense increased by $14.7 million in the three months ended June 30,
2001, compared to the prior year. The majority of this increase related to
percentage lease expense for hotels whose operations were acquired with the
acquisition of DJONT, but a portion of whose percentage lease is allocated to
the third party partner. Depreciation expense decreased by $1.4 million for the
quarter, which principally relates to deprecation for the 25 hotels which the
Company designated as held for sale in June 2000. When these hotels were
designated as held for sale, the Company stopped recording depreciation on them.
Net income increased $57.7 million for the three months ended June 30,
2001 compared to the same period in 2000. Major items affecting the change in
net income are interest expense, swap termination expense and loss on assets
held for sale (recorded in second quarter 2000).
Interest expense, net increased $964,000 principally related to the
issuance of $600 million of senior debt issued in anticipation of the proposed
merger with MeriStar. Associated with the issuance of favorably priced fixed
rate debt, and the prepayment of floating rate debt, the Company terminated $200
million of interest rate swaps resulting in a one time $4.8 million swap
termination cost. In June 2000 the Company recorded a $63 million loss for
assets held for sale.
Six Months Ended June 30, 2001 and 2000
Until January 1, 2001, the Company leased 184 hotels to either DJONT or
Six Continents Hotels and reported the lease revenue from the percentage lease
agreements. Effective January 1, 2001, upon acquisition of these leases by the
Company's taxable REIT subsidiaries, the Company assumed all operating risks and
rewards of these 96 hotels. The Consolidated Statement of Operations for the six
months ending June 30, 2001, include the revenue and expenses of those hotels
and percentage lease revenues related to the 88 hotels that were leased by Six
Continents Hotels through July 1, 2001. Therefore, the operating results of the
Company for the six months ended June 30, 2001, are not directly comparable to
the same period in 2000.
Total revenue for the six months ended June 30, 2001 increased $302.1
million over the same period in 2000. The increase is principally associated
with hotel operating revenues for the 96 hotels that the Company had reported
percentage lease revenue in previous periods. The 96 hotels contributed
approximately $443.3 million in hotel operating revenue in the first six months
of 2001, compared to $136.7 million in percentage rent revenue for these same
hotels, for the same period in 2000.
At June 30, 2001, the Company had hotel leases with Six Continents
Hotels for 88 hotels which are reflected in percentage lease revenues for both
years reported. Percentage lease revenue was $115.1 million for the six months
ended June 30, 2001, compared to percentage lease revenue of $256.3 million for
the same period in 2000. The principal reason for the decrease in percentage
lease revenue is related to the previously discussed acquisition of 96 hotel
leases effective January 1, 2001. Percentage lease revenue for the 88 hotels
leased by Six Continents Hotels during the first half of 2001 decreased for
those same hotels in the same period of 2000 by $4.5 million. The principal
reasons for the change in percentage lease revenue for the 88
20
21
Six Continents Hotels leased hotels was rent deferred under SAB 101 in the six
months ended June 30, 2000 of $18.6 million. Other items affecting revenue,
compared to the six months ended June 30, 2000 are:
o RevPAR for the 95 hotels decreased 1.9 percent for six months
(reflected in hotel revenue)
o RevPAR for the 88 Six Continents Hotels leased hotels decreased 4.2
percent for the six months (reflected in percent rent)
Total operating expenses increased by $331.1 million for the six months
ended June 30, 2001 over the same six month period in 2000. This increase is
primarily a result of including hotel operating expenses, management fees and
other property related costs of $267.7 million, which were not included in the
same period of 2000. Also included in total operating expenses are depreciation
expense, lease termination costs and taxes, insurance and lease expense. Taxes,
insurance and lease expense increased by $28.9 million in the six months ended
June 30, 2001, compared to the prior year. The majority of this increase related
to percentage lease expense for hotels whose operations were acquired with the
acquisition of DJONT, but a portion of whose percentage lease is allocated to
the third party partner. Lease termination costs of $36.2 million were recorded
in the first quarter of 2001 and relate to the acquisition of DJONT and
termination of certain leases held by Six Continents Hotels. Depreciation
expense decreased by $2.0 million for the six months, which principally relates
to depreciation for the 25 hotels which the Company designated as held for sale
in June 2000. When these hotels were designated as held for sale, the Company
stopped recording depreciation on them.
Net income increased $28.7 million for the six months ended June 30,
2001 compared to the same period in 2000. Major items affecting the change in
net income are interest expense, swap termination expense, loss on assets held
for sale (recorded in second quarter 2000), and gain on sale of assets.
Interest expense, net increased $2.8 million principally from increased
interest expense in 2001 compared to the same period in 2000 related to the
Company repositioning its debt to increase its fixed rate exposure. This
increase was partially offset by interest income on approximately $315 million
of proceeds from the Company's second quarter $600 million senior debt offering,
which was escrowed pending the completion of the MeriStar merger. Associated
with the issuance of favorably priced fixed rate debt, and the prepayment of
floating rate debt, the Company terminated $200 million of interest rate swaps
resulting in a one time $4.8 million swap termination cost. In June 2000 the
Company recorded a $63 million loss for assets held for sale. Gain on sale of
assets increased $2.1 million, principally from condemnation proceeds received
in 2001.
Funds From Operations
The Company considers Funds From Operations ("FFO") and earnings before
interest, taxes, depreciation and amortization ("EBITDA") to be key measures of
a REIT's performance and should be considered along with, but not as an
alternative to, net income and cash flow as a measure of the Company's operating
performance and liquidity.
The White Paper on Funds From Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") defines FFO as net income or loss (computed in accordance with GAAP),
excluding gains or losses from extraordinary items and sales of properties, plus
real estate related depreciation and amortization, after comparable adjustments
for the Company's portion of these items related to unconsolidated entities and
joint ventures. The Company believes that FFO and EBITDA are helpful to
investors as a measure of the performance of an equity REIT because, along with
cash flow from operating activities, financing activities and investing
activities, they provide investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures, to pay
dividends and to fund other cash needs. The Company computes FFO in accordance
with standards established by NAREIT, except that the Company adds back rent
deferred under SAB 101, lease termination costs and interest rate
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swap termination expense to derive FFO. This may not be comparable to FFO
reported by other REITs that do not define the term in accordance with the
current NAREIT definition, that interpret the current NAREIT definition
differently than the Company or that do not adjust FFO for rent deferred under
SAB 101, lease termination costs and swap termination expense. FFO and EBITDA do
not represent cash generated from operating activities as determined by GAAP,
and should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company 's liquidity, nor does it necessarily reflect the funds
available to fund the Company's cash needs, including its ability to make cash
distributions. FFO and EBITDA may include funds that may not be available for
management's discretionary use due to functional requirements to conserve funds
for capital expenditures and property acquisitions, and other commitments and
uncertainties.
The following table details the computation of Funds From Operations
(in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2001 2000 2001 2000
---------- --------- ---------- ----------
FUNDS FROM OPERATIONS (FFO):
Net income (loss) ................................ $ 25,353 $ (32,303) $ 16,341 $ (12,372)
Deferred rent ............................... (5,254) 9,750 18,604
Extraordinary charge ........................ 225 225
Loss on assets held for sale ................ 63,000 63,000
Swap termination expense .................... 4,824 4,824
Lease termination costs ..................... 36,226
Series B preferred distributions ............ (3,234) (3,234) (6,468) (6,468)
Depreciation ................................ 39,705 41,080 79,513 81,480
Depreciation from unconsolidated entities ... 2,641 2,592 5,022 5,136
--------- --------- --------- ---------
FFO .............................................. $ 64,260 $ 80,885 $ 135,683 $ 149,380
========= ========= ========= =========
Weighted average units outstanding (1) ........... 66,750 67,232 66,759 67,987
========= ========= ========= =========
</Table>
(1) Weighted average units outstanding are computed including dilutive
options, unvested stock grants, and assuming conversion of Series A
preferred units to units.
The following table details the computation of EBITDA (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2001 2000 2001 2000
---------- --------- ---------- ----------
EBITDA:
Funds from Operations ..................................... $ 64,260 $ 80,885 $135,683 $149,380
Interest expense ..................................... 41,706 39,740 81,799 77,644
Interest expense of unconsolidated subsidiaries ...... 2,631 2,157 4,742 4,787
Amortization expense ................................. 408 312 884 474
Series B preferred distributions ..................... 3,234 3,234 6,468 6,468
-------- -------- -------- --------
EBITDA .................................................... $112,239 $126,328 $229,576 $238,753
======== ======== ======== ========
</Table>
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The Hotels
Changes in the Hotels' room revenues significantly affect the Company
after the acquisition of its leases, as well as historically, because room
revenue has been the major component in the computation of percentage lease
income.
The following table sets forth historical occupied rooms ("Occupancy"),
average daily rate ("ADR") and RevPAR at June 30, 2001 and 2000, and the
percentage changes therein between the quarters presented for the Hotels in
which the Company had an ownership interest at June 30, 2001:
<Table>
<Caption>
OCCUPANCY (%)
-----------------------------------------------------------
SECOND QUARTER YEAR TO DATE
--------------------------- -------------------------
% %
2001 2000 VARIANCE 2001 2000 VARIANCE
---- ---- -------- ---- ---- --------
Embassy Suites hotels 70.9 78.5 (9.7) 71.2 76.0 (6.4)
Holiday-branded hotels 72.8 75.7 (3.7) 71.0 72.2 (1.7)
Crowne Plaza hotels 65.9 75.2 (12.3) 65.3 72.6 (10.0)
Doubletree-branded hotels 72.2 76.1 (5.0) 72.2 72.1 0.1
Sheraton-branded hotels 69.2 76.0 (8.9) 68.8 73.9 (6.8)
Other hotels 61.6 67.8 (9.2) 64.4 67.2 (4.2)
Total hotels excluding hotels held for sale 70.0 75.8 (7.7) 69.6 73.1 (4.8)
Hotels held for sale 56.6 54.0 4.7 53.4 52.1 2.5
Total hotels 69.3 74.8 (7.3) 68.8 72.1 (4.5)
</Table>
<Table>
<Caption>
ADR (DOLLARS)
-----------------------------------------------------------
SECOND QUARTER YEAR TO DATE
--------------------------- -------------------------
% %
2001 2000 VARIANCE 2001 2000 VARIANCE
---- ---- -------- ---- ---- --------
Embassy Suites hotels 130.83 126.84 3.1 134.36 128.00 5.0
Holiday-branded hotels 87.54 89.22 (1.9) 87.12 87.51 (0.4)
Crowne Plaza hotels 106.98 107.37 (0.4) 106.41 104.79 1.5
Doubletree-branded hotels 108.59 108.11 0.4 112.92 109.53 3.1
Sheraton-branded hotels 111.32 112.04 (0.6) 114.74 113.33 1.2
Other hotels 79.72 82.34 (3.2) 83.78 85.05 (1.5)
Total hotels excluding hotels held for sale 106.01 105.98 0.0 107.87 105.90 1.9
Hotels held for sale 64.38 66.05 (2.5) 68.17 67.70 0.7
Total hotels 104.41 104.61 (0.2) 106.42 104.60 1.7
</Table>
<Table>
<Caption>
REVPAR (DOLLARS)
-----------------------------------------------------------
SECOND QUARTER YEAR TO DATE
--------------------------- -------------------------
% %
2001 2000 VARIANCE 2001 2000 VARIANCE
---- ---- -------- ---- ---- --------
Embassy Suites hotels 92.77 99.56 (6.8) 95.66 97.32 (1.7)
Holiday-branded hotels 63.75 67.50 (5.6) 61.87 63.21 (2.1)
Crowne Plaza hotels 70.54 80.73 (12.6) 69.50 76.03 (8.6)
Doubletree-branded hotels 78.42 82.22 (4.6) 81.48 78.97 3.2
Sheraton-branded hotels 77.02 85.10 (9.5) 78.97 83.70 (5.7)
Other hotels 49.13 55.86 (12.1) 53.95 57.18 (5.6)
Total hotels excluding hotels held for sale 74.14 80.32 (7.7) 75.09 77.43 (3.0)
Hotels held for sale 36.44 35.69 2.1 36.42 35.30 3.2
Total hotels 72.39 78.21 (7.4) 73.26 75.44 (2.9)
</Table>
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REVPAR PERFORMANCE FOR SELECTED STATES
Excluding hotels held for sale, hotels in Texas, California, Florida
and Georgia accounted for 55.3 percent of hotel room revenues for the quarter.
The RevPAR changes during the periods ended June 30, 2001 (versus comparable
periods for 2000) from our hotels in these states are as follows:
<Table>
<Caption>
REVPAR (DOLLARS)
---------------------------------------------------------------------------------------
SECOND QUARTER YEAR-TO-DATE
----------------------------------------- -------------------------------------------
2001 2000 % VARIANCE 2001 2000 % VARIANCE
---- ---- ---------- ---- ---- ----------
Texas 56.15 62.82 (10.6) 58.83 61.74 (4.7)
California 102.59 116.89 (12.2) 102.29 108.74 (5.9)
Florida 69.28 74.96 (7.6) 79.42 81.58 (2.7)
Georgia 68.78 68.66 0.2 71.42 70.67 1.1
</Table>
BRAND DISTRIBUTION
<Table>
<Caption>
NUMBER OF NUMBER PERCENTAGE OF
HOTELS OF ROOMS ROOM REVENUE
Embassy Suites 59 14,840 39.8
Holiday-branded hotels 51 15,526 26.9
Crowne Plaza 18 5,963 11.6
Doubletree-branded hotels 11 2,330 5.3
Sheraton-branded 10 3,269 7.2
Other hotels 21 4,470 6.9
Hotels held for sale 15 2,294 2.3
--- ------ -----
Total 185 48,692 100.0
=== ====== =====
</Table>
SELECTED STATE DISTRIBUTION
<Table>
<Caption>
NUMBER OF NUMBER PERCENTAGE OF
HOTELS OF ROOMS ROOM REVENUE
Texas 41 11,147 18.4
California 19 6,028 17.3
Florida 16 5,346 11.9
Georgia 14 3,868 7.7
-- ------ ----
Total for four states 90 26,389 55.3
== ====== ====
</Table>
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to unitholders and repayments of indebtedness, is its
share of cash flow from the Percentage Leases for the 88 hotels leased by Six
Continents Hotels and the results of operations from the remaining 97 hotels.
For the six months ended June 30, 2001, net cash flow provided by operating
activities consisting primarily of hotel operations from consolidated hotels and
percentage lease revenues, was $93.6 million and Funds From Operations was
$135.7 million.
As a result of the effectiveness of the REIT Modernization Act, which,
among other things, allows the Company to own its leases in taxable REIT
subsidiaries, and the acquisition of the hotel leases in January 2001, the
Company began reporting the income and expenses of operating hotels as it
acquired its lessees, rather than lease income from the Percentage Leases. Any
profits or losses from the TRS entities holding the hotel leases, after
applicable corporate taxes is reflected in the Company's results of operations.
Prior to January 1, 2001, substantially all of the Company's hotels
were leased to third parties under leases providing for the payment of rent
based, in part upon revenues from the hotels. Accordingly, the Company's risks
were essentially limited to changes in hotel revenues and to the lessees'
ability to pay the rent due under the leases. On January 1, 2001, the Company
acquired the leaseholds of 98 of our hotels. Effective July 1, 2001, the Company
acquired the remaining 88 leases from Six Continents Hotels. As a result of
these acquisitions, we became subject to the risk of fluctuating hotel operating
expenses at our hotels, including but not limited to wage and benefit costs,
repair and maintenance expenses, the cost of utilities, liability insurance, and
other operating expenses. These operating expenses are more difficult to predict
and control than revenue, resulting in increased risk of volatility in our
result of operations.
Proposed Merger
On May 9, 2001, the Company entered into an Agreement and Plan of
Merger with MeriStar and MeriStar LP. Pursuant to the merger agreement, MeriStar
will be merged with and into FelCor, with FelCor as the survivor. Under the
terms of the merger agreement, which is subject to shareholder approval, holders
of shares of MeriStar common stock will receive, for each share of common stock,
$4.60 in cash and 0.784 shares of FelCor common stock. The Company also will
either assume or refinance approximately $1.6 billion in MeriStar debt. MeriStar
Hotels & Resorts, Inc., an independent public hotel management company, will
continue to manage substantially all of the hotels acquired from MeriStar in the
merger.
The transaction will also involve the merger of MeriStar's subsidiary
operating limited partnership with and into the Company. The holders of common
partnership units in MeriStar's partnership will receive, for each common unit,
$4.60 in cash and 0.784 common partnership units in the Company. Preferred units
in MeriStar's partnership will receive similar preferred units in the Company or
a combination of cash and units. The proposed mergers are subject to shareholder
approval and other customary conditions. The equity portion of the transaction
is structured to qualify as a tax free merger with respect to the share
consideration. The merger is expected to close in September of 2001.
In connection with the merger with Meristar, the Company has completed
the following financing transactions:
o The Company issued $600 million of 10-year, 8 1/2 percent senior
unsecured notes on June 4, 2001. Approximately $315 million of the
proceeds were placed in escrow to be released upon the merger closing.
Merger related carrying costs related to the escrowed funds, impacted
FFO by $1.4 million or
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$0.02 per share. Associated with the issuance of the favorably priced
fixed rate debt and the subsequent prepayment of floating rate debt,
the Company terminated $200 million of interest rate swaps resulting in
a one-time $4.8 million swap termination cost.
o In July, the Company received a $500 million standby loan facility
which will be available to fund any required purchases of MeriStar's
most recently issued senior notes pursuant to change in control
provisions. The Company also closed an expanded line of credit facility
in July. The new line of credit will permit borrowing of $700 million,
a $100 million increase from its previous $600 million facility,
contingent upon the merger closing.
o The Company is also planning a CMBS transaction in the amount of $325
to $350 million. Although it would not be necessary to complete the
merger, FelCor is also considering a preferred equity offering.
On January 11, 2001, the Company completed the private placement of
$100 million in 9 1/2 percent senior unsecured notes that mature in September
2008. These notes were issued at a premium to yield an effective rate of 9 1/8
percent. The proceeds were used initially to pay down the Company's line of
credit.
In March 2001, the Company contributed eight of the hotels held for
sale to an entity in which the Company holds a 50 percent equity interest, and a
subsidiary of IHC holds the other 50 percent equity interest. Another subsidiary
of IHC manages each of these hotels.
The Company may incur indebtedness to make property acquisitions, to
purchase shares of its capital stock, 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 for such
purposes.
FelCor's board of directors has authorized FelCor to repurchase up to
$300 million of its outstanding common shares. Stock repurchases, may, at the
discretion of FelCor's management, be made from time to time at prevailing
prices in the open market or through privately negotiated transactions. FelCor
funds the repurchase of stock through redemption of the Company's units, which
redemptions the Company expects to fund through the use of cash, existing credit
facilities, proceeds from the sale of assets and debt refinancings. Beginning in
January 2001, through March 27, 2001, FelCor repurchased approximately 179,000
shares of its outstanding common stock on the open market for approximately $4.0
million. Subsequent to March 27, 2001, FelCor has not repurchased any additional
shares of its common stock.
At June 30, 2001, the Company had $64.2 million of cash and cash
equivalents. Certain significant credit and debt statistics at June 30, 2001,
are as follows:
o Interest coverage ratio of 2.7x
o Borrowing capacity of $560 million under the line of credit
o Consolidated debt equal to 40 percent of its investment in hotels, at
cost
o Fixed interest rate debt equal to 98 percent of total debt
o Weighted average maturity of fixed interest rate debt of approximately
8 years
o Mortgage debt to total assets of 16.0 percent
o Debt of approximately $5.8 million maturing in 2001
o Debt of approximately $13 million maturing in 2002
The Company's line of credit contains various affirmative and negative
covenants, including limitations on total indebtedness, total secured
indebtedness, restricted payments (such as stock repurchases and cash
distributions), as well as the obligation to maintain certain minimum tangible
net worth and certain minimum interest and debt service coverage ratios. At June
30, 2001, the Company was in compliance with all such covenants.
The Company's other borrowings contain affirmative and negative
covenants that are generally equal to
26
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or less restrictive than the line of credit. Most of the mortgage debt is
nonrecourse to the Company and contains provisions allowing for the substitution
of collateral upon satisfaction of certain conditions. Most of the mortgage debt
is prepayable, subject, however, to various prepayment penalties, yield
maintenance, or defeasance obligations.
The Company had an interest rate swap agreement with a notional amount
of $50 million at June 30, 2001, which was designated as a cash flow hedge. The
interest rate swap agreement modifies a portion of the interest characteristics
of the Company's outstanding debt under its line of credit without an exchange
of the underlying principal amount and effectively converts variable rate debt
to a fixed rate. The fixed rate to be paid, based on the swap agreement is 5.56
percent, and the variable rate to be received by the Company at June 30, 2001 is
5.28 percent. The swap agreement matures July 2003.
The Company spent approximately $16.1 million on upgrading and
renovating its Hotels during the six months ended June 30, 2001. In the event of
a significant economic downturn, the Company believes that its Hotels will
continue to benefit from the Company's extensive capital expenditure programs in
the previous years. Most future renovation and redevelopment expenditures are
discretionary and the Company expects to fund these from cash flow.
Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is to changes in interest
rates on its floating rate debt. The Company manages the risk of increasing
interest rates on its floating rate debt through the use of interest rate swaps,
which effectively convert variable rate debt to a fixed rate, by locking the
interest rates paid.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations. For debt obligations at June 30, 2001, the
table presents scheduled maturities and weighted average interest rates, by
maturity dates. For its interest rate swap, the table presents the notional
amount and weighted average interest rate, by contractual maturity dates.
Weighted average variable rates are based on implied forward rates in the yield
curve as of June 30, 2001. The Fair Value of the Company's fixed rate debt
indicates the estimated principal amount of debt having the same debt service
requirements which could have been borrowed at June 30, 2001 at then current
market interest rates. The Fair Value of the Company's variable to fixed
interest rate swap indicates the estimated amount that would have been paid by
the Company had the swap been terminated at June 30, 2001.
EXPECTED MATURITY DATE
(IN THOUSANDS)
<Table>
<Caption>
REMAINDER
OF
2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
LIABILITIES
Debt:
Fixed rate $5,724 $13,039 $34,906 $189,228 $43,129 $1,811,764 $ 2,097,790 $1,970,752
Average interest rate 8.22% 8.19% 8.09% 7.44% 8.67% 8.60%
Variable rate $39,900 $ 650 $ 40,550 $ 40,550
Average interest rate 6.92% 8.26%
Discount accretion $ (4,248)
Total debt $ 2,134,092
INTEREST RATE DERIVATIVES
Interest rate swap:
Variable to fixed $50,000 $ 50,000 $ (899)
Average pay rate 5.56%
Average receive rate 5.64%
</Table>
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Swap contracts, such as described above, contain a credit risk, in that
the counterparties may be unable to fulfill 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.
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates daily to reflect the effects of inflation. Competitive pressures may,
however, limit the Lessees' 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 earnings, particularly during the fourth quarter. To the extent that
cash flow from operations is insufficient during any quarter, due to temporary
or seasonal fluctuations in revenues, the Company expects to utilize cash on
hand or borrowings under its line of credit to make distributions to its equity
holders.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Quarterly Report on Form 10-Q include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. 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 are disclosed herein and in the Company's other filings under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, (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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to the
Company is incorporated herein by reference to the discussion under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" contained elsewhere in this
Quarterly Report on Form 10-Q for the three and six months ended June 30, 2001.
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PART II. -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
For information relating to certain other transactions by the Company
through June 30, 2001, see Note 1 of Notes to Consolidated Financial Statements
of FelCor Lodging Limited Partnership 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
10.16 Seventh Amended and Restated Credit Agreement dated as
of July 26, 2001, FelCor Lodging Limited Partnership,
FelCor Lodging Trust Incorporated and FelCor Canada
Co., as Borrowers, the Lenders party thereto, The
Chase Manhattan Bank and The Chase Manhattan Bank of
Canada, as Administrative Agents, Bankers Trust
Company, as Syndication Agent, J.P. Morgan Securities
Inc., as Co-Lead Arranger and Joint Bookrunner,
Deutsche Banc Alex. Brown, Inc., and Co-Lead Arranger
and Joint Bookrunner, and Bank of America, N.A. and
Salomon Smith Barney Inc., as Document Agents (filed
as Exhibit 10.17 to FelCor Lodging Trust
Incorporated's quarterly report on Form 10-Q for the
quarter ended June 30, 2001 and incorporated herein by
reference).
(b) Reports on Form 8-K:
A current report on Form 8-K was filed by the Company on May 11,
2001. This filing under Item 5. announced the proposed merger between FelCor and
MeriStar and included the Agreement and Plan of Merger among FelCor Lodging
Trust Incorporated, FelCor Lodging Limited Partnership, MeriStar Hospitality
Corporation and MeriStar Hospitality Operating Partnership, L.P. dated as of May
9, 2001.
A current report on Form 8-K was filed by the Company on June 14, 2001.
This filing under Item 5. reported the completion of the private placement of
$600 million of 8 1/2 senior notes due 2001.
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SIGNATURE
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 thereunto duly authorized.
Dated: August 14, 2001
FELCOR LODGING LIMITED PARTNERSHIP
A Delaware Limited Partnership
By: FelCor Lodging Trust Incorporated
Its General Partner
By: Richard J. O'Brien
----------------------------
Richard J. O'Brien
Executive Vice President and
Chief Financial Officer
31