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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 1-14236
FelCor Lodging Trust Incorporated
(Exact name of registrant as specified in its charter)
MARYLAND 75-2541756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 E. JOHN CARPENTER FRWY., SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<Table>
<Caption>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK NEW YORK STOCK EXCHANGE, INC.
$1.95 SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
DEPOSITARY SHARES REPRESENTING 9% SERIES B CUMULATIVE
REDEEMABLE PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
</Table>
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark whether the registrant (i) has filed all 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common equity securities of the
registrant held by non-affiliates of the registrant, as of March 18, 2002, was
approximately $980 million.
As of March 18, 2002, the registrant had issued and outstanding
53,042,778 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement pertaining to the 2001 Annual
Meeting of Stockholders (the "Proxy Statement") and filed or to be filed not
later than 120 days after the end of the fiscal year pursuant to Regulation 14A
is incorporated herein by reference into Part III.
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FELCOR LODGING TRUST INCORPORATED
INDEX
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<Caption>
FORM 10-K
REPORT
ITEM NO. PAGE
- -------- ---------
PART I
1. Business............................................................................................1
2. Properties.........................................................................................16
3. Legal Proceedings..................................................................................25
4. Submission of Matters to a Vote of Security Holders................................................25
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters..............................26
6. Selected Financial Data............................................................................28
7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............29
7A. Quantitative and Qualitative Disclosures About Market Risk.........................................48
8. Financial Statements and Supplementary Data........................................................48
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...............48
PART III
10. Directors and Executive Officers of the Company....................................................49
11. Executive Compensation.............................................................................49
12. Security Ownership of Certain Beneficial Owners and Management.....................................49
13. Certain Relationships and Related Transactions.....................................................49
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................50
</Table>
This Annual Report on Form 10-K contains registered trademarks owned or
licensed by companies other than us, including but not limited to Bristol
House(R), Conrad(R), Courtyard by Marriott(R), Crown Sterling Suites(R) Crowne
Plaza(R), Disney(R), Doubletree(R), Doubletree Guest Suites(R), Embassy Suites
Hotels(R), Fairfield Inn(R), Hampton Inn(R), Harvey Hotel(R), Hilton(R), Hilton
Suites(R), Holiday Inn(R), Holiday Inn Express(R), Holiday Inn Select(R),
Homewood Suites(R) by Hilton, Inter-Continental(R), Marriott(R), Sheraton(R),
Sheraton Suites(R), Walt Disney World(R) and Westin(R).
PART I
ITEM 1. BUSINESS
FelCor Lodging Trust Incorporated ("FelCor"), a Maryland corporation,
is one of the nation's largest hotel real estate investment trusts, or REITs. As
the sole general partner of, and the owner of greater than 85% partnership
interest in, FelCor Lodging Limited Partnership ("FelCor LP"), we had ownership
interests in 183 hotels at December 31, 2001, with nearly 50,000 rooms and
suites. All of our operations are conducted solely through FelCor LP or its
subsidiaries. At December 31, 2001, we owned a 100% interest in 150 hotels, a
90% or greater interest in entities owning seven hotels, a 60% interest in an
entity owning two hotels and a 50% interest in separate unconsolidated entities
that own 24 hotels. Our hotels are located in the United States (35 states) and
Canada, with concentrations in Texas (41 hotels), California (19 hotels),
Florida (17 hotels) and Georgia (14 hotels). We own the largest number of
Embassy Suites Hotels, Crowne Plaza, Holiday Inn and independently owned
Doubletree-branded hotels in the world. Thirteen of our hotels were designated
as held for sale at December 31, 2001.
We seek to increase operating cash flow through both internal growth
and selective acquisitions, while maintaining a flexible and conservative
capital structure. In addition to renovating, redeveloping and repositioning our
acquired hotels, we may seek to acquire new hotel properties that will benefit
from affiliation with one of the premium brands available to us through our
strategic brand owner and manager relationships with Hilton Hotels Corporation
("Hilton"), Six Continents Hotels and Starwood Hotels & Resorts Worldwide Inc.
("Starwood").
In support of this strategy, on July 28, 1998, we merged Bristol Hotel
Company into FelCor, acquiring its 107 primarily full-service hotels. These
hotels added more than 28,000 rooms and suites to our portfolio, more than
doubling our size. The merger also provided diversification, both geographically
and by asset class, by adding hotels in many key markets and broadening our
portfolio in the full-service, upscale and midscale hotel markets.
On May 9, 2001, we entered into a merger agreement with MeriStar
Hospitality Corporation ("MeriStar"), which owned 113 primarily upscale,
full-service hotels. Under the terms of the merger agreement, MeriStar was to
have been merged with and into us. Before the merger could be completed,
MeriStar and we jointly terminated the merger on September 21, 2001. The
decision to terminate the merger resulted from the September 11, 2001 terrorist
attacks and their subsequent adverse impact on the financial markets in general
and on the lodging industry. As a result of the merger termination in 2001, we
recorded expenses of $19.9 million associated with the merger and $5.5 million
of merger financing costs.
REIT Modernization Act
On January 1, 2001, the provisions of the REIT Modernization Act became
effective. These provisions, among other things, reduced the distribution
requirement for REITs from 95% of taxable income to 90% of taxable income for
taxable years after 2000.
In addition, these provisions allow REITs, subject to certain
limitations, to own, directly or indirectly, up to 100% of the stock of a
taxable REIT subsidiary ("TRS") that can engage in businesses previously
prohibited to a REIT. In particular, these provisions permit hotel REITs to own
a TRS that leases hotels from the REIT, rather than requiring the lessee to be a
separate, unaffiliated party. However, hotels leased to a TRS still must be
managed by an unaffiliated third party. The TRS provisions are complex and
impose several conditions on the use of TRSs, generally to assure that TRSs are
subject to an appropriate level of corporate taxation. Further, no more than 20%
of a REIT's assets may consist of securities of TRSs, and no more than 25% of a
REIT's assets may consist of non-qualifying assets, including securities of TRSs
and other taxable subsidiaries. In addition, the TRS legislation provides that a
REIT may not own more than 10% of the voting power or value of a taxable
subsidiary that is not treated as a TRS. Although the TRS provisions became
effective on January 1, 2001, a taxable subsidiary in existence on July 12, 1999
is grandfathered under the new provisions unless and until (1) it engages in a
new line of business or acquires a substantial new asset or (2) the owning REIT
acquires additional stock in the taxable subsidiary. Such existing taxable
subsidiaries can be
1
converted into TRSs on a tax-free basis at any time before January 1, 2004. As a
result of the TRS provisions, we were able to form or acquire one or more TRSs
to own all of our existing hotel leases and to serve as the lessee for any
additional hotels that we acquire. Any "profit" from leases held by one of our
TRSs, after payment of the applicable corporate tax, will be available for
distribution to us in the form of dividends.
As a result of the passage of the REIT Modernization Act, effective
January 1, 2001 we acquired 100% of DJONT Operations, L.L.C. ("DJONT"), which
owned leases on 85 of our hotels, and contributed it to a TRS. In consideration,
we issued 416,667 FelCor LP units, valued at approximately $10 million, and
assumed DJONT's accumulated stockholders' deficit of $24.5 million. On January
1, 2001, we acquired from Six Continents Hotels the leases covering 11 hotels,
terminated one additional lease in connection with the sale of the related hotel
and terminated the 12 related management agreements in exchange for 413,585
shares of FelCor common stock valued at approximately $10 million. We acquired
the remaining 88 hotel leases held by Six Continents Hotels on July 1, 2001. In
consideration for the acquisition of these leases, we entered into long term
management agreements with Six Continents Hotels with regard to these hotels,
and FelCor issued to Six Continents Hotels 100 shares of common stock.
Our business is conducted in one reportable segment, which is
hospitality. Additional information on our business can be found in the Notes to
Consolidated Financial Statements located elsewhere in this Annual Report on
Form 10-K.
THE INDUSTRY
The United States hotel industry profitability improved each year from
1992 to 2000, its longest sustained growth in history. According to
PricewaterhouseCoopers LLP's 1999 Lodging Industry Briefing and April 10, 2001
U.S. Lodging Industry Update, after a period of extended unprofitability in the
late 1980's and early 1990's, during which time the increase in the supply of
new hotel rooms significantly outpaced growth in room demand, lodging industry
profit increased every year from 1992 through 2000. The percentage growth in
room demand exceeded percentage growth in new room supply from 1992 through
1996. While 1997 and 1998 experienced the highest number of new room starts in
the prior 10 years, 1999 and 2000 showed declines in new room starts of 9.2% and
17.2%, respectively, from the prior year level. According to
PricewaterhouseCoopers L.L.P.'s Lodging Industry Briefing, from March 1, 2002,
in 2001, supply growth slowed to 2.0% as room demand declined by 350 basis
points. The nation's hotel occupancy rates declined significantly from 63.7% in
2000 to 60.3% in 2001. In 2001, the lodging industry experienced the first
profit decline since 1991. However, despite the significant decline in demand in
2001, the industry still remained profitable. According to
PricewaterhouseCoopers, the industry earned $16.7 billion, and that figure is
expected to increase in 2002.
The nation's economy slowed during the first eight months of 2001 and
the lodging industry started to see a significant reduction in corporate travel.
This economic decline that began in the spring of 2001 was exacerbated by the
events of September 11, 2001, where aircraft hijacked by terrorists destroyed
the World Trade Center Towers in New York City and damaged the Pentagon in
northern Virginia. In 2001, the lodging industry experienced an unprecedented
decline in business caused by a reduction in both business and leisure travel.
The events of 2001 produced the hotel industry's first decline in year over year
revenue per available room ("RevPAR"), since 1991. We currently expect that this
decline in year over year operating levels will continue through mid-2002. We
expect positive RevPAR, compared to 2001, in the second half of 2002.
Smith Travel Research, a leading provider of industry data, classifies
hotel chains into five distinct categories: Upper Upscale, Upscale, Midscale
With Food & Beverage, Midscale Without Food & Beverage, and Economy. We remain
focused on properties in the Upper Upscale (including Doubletree Guest Suites,
Embassy Suites Hotels, Sheraton and Westin hotels), Upscale (including Crowne
Plaza, Doubletree hotels and Homewood Suites), and Midscale With Food & Beverage
(including Harvey, Holiday Inn and Holiday Inn Select hotels) categories, from
which we derived approximately 97% of our revenues in 2001.
2
Smith Travel Research also categorizes hotels based upon their relative
market positions, as measured by average daily rate ("ADR"), as Luxury, Upscale,
Midprice, Economy and Budget. The following table contains information with
respect to average occupancy, (determined by dividing occupied rooms by
available rooms), ADR and RevPAR for our hotels, as well as all Upscale U.S.
hotels, all Midprice U.S. hotels and all U.S. hotels as reported by Smith Travel
Research for the periods indicated.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
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2001 2000 1999 1998 1997
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NUMBER OF FELCOR HOTELS .......... 183 186 188 193 73
OCCUPANCY:
FelCor hotels(1) ............... 63.9% 70.4% 68.2% 68.3% 73.2%
All Upscale U.S. hotels(2) ..... 61.8 65.1 64.9 65.9 67.9
All Midprice U.S. hotels(3) .... 58.4 61.7 61.1 62.0 64.9
All U.S. hotels ................ 60.1 63.7 63.1 63.8 64.5
ADR:
FelCor hotels(1) ............... $ 102.18 $ 104.42 $ 100.72 $ 96.62 $ 112.47
All Upscale U.S. hotels(2) ..... 92.84 94.07 87.45 85.33 88.25
All Midprice U.S. hotels(3) .... 69.60 69.22 64.89 62.15 67.67
All U.S. hotels ................ 84.85 86.04 81.29 78.15 75.31
REVPAR:
FelCor hotels(1) ............... $ 65.34 $ 73.73 $ 68.93 $ 66.02 $ 82.37
All Upscale U.S. hotels(2) ..... 57.38 69.24 56.76 56.23 59.92
All Midprice U.S. hotels(3) .... 40.65 42.71 39.65 38.53 43.91
All U.S. hotels ................ 50.99 54.81 51.29 49.86 48.44
</Table>
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(1) Information is historical, including periods prior to ownership by
FelCor.
(2) This category includes hotels in the "upscale price level," defined as
hotels with ADRs in the 70th to 85th percentiles in their respective
markets.
(3) This category includes hotels in the "midprice level," defined as
hotels with ADRs in the 40th to 70th percentiles in their respective
markets.
BUSINESS STRATEGY
In the current operating environment, where the lodging industry is
experiencing a sharp decline in RevPAR compared to the prior year, we intend to
focus on conserving capital, maximizing operating cash flow by actively
overseeing the operation of our hotels by our managers, maintaining a strong
balance sheet and placing ourselves in the best position possible to take
advantage of opportunities that may arise in the future. We have established,
and intend to maintain, strong strategic relationships with our brand owners and
managers and have successfully demonstrated our ability to apply our asset
management expertise to the renovation, redevelopment and rebranding of our
hotels.
Maintenance of Financial Flexibility
During the challenging economic environment following September 11,
2001, we committed ourselves to conserving capital, maximizing operating cash
flow from our hotels, maintaining a strong balance sheet and maintaining the
financial flexibility to take advantage of opportunities that may arise in the
future. In 2002 we have seen improving revenue trends, however, in the near
term, we intend to limit our dividends and distributions to equity holders
generally to not more than available cash flow after debt service and
maintenance capital expenditures, to suspend the previously authorized
repurchase of FelCor common stock and to restrict discretionary capital
expenditures. We are in a position to repay our line of credit entirely should
the need arise and have scheduled debt maturities of $13 million in 2002 and $35
million in 2003. We intend to continue to actively pursue the sale of the hotels
previously designated as held for sale.
Maintenance of Strong Strategic Relationships
We benefit from strategic brand owner and manager relationships with
Hilton (Embassy Suites Hotels, Hilton and Doubletree), Six Continents Hotels
(Crowne Plaza and Holiday Inn) and Starwood (Sheraton and Westin). These
relationships enable us to work effectively with our managers to maintain
operating margins and maximize operating cash flow from our hotels.
3
o Hilton, which acquired Promus Hotel Corporation in 1999, has a
hotel system of approximately 1,900 hotels with more than
315,000 guest rooms worldwide, and is now the largest operator
of full-service, all-suite hotels in the United States. In
addition to its Hilton and Conrad-branded hotels, Hilton also
owns the Embassy Suites Hotels, Doubletree and Doubletree
Guest Suites brands. Subsidiaries of Hilton managed 71 of our
hotels at December 31, 2001. As a result of its acquisition of
Promus, Hilton acquired an equity interest in us having an
aggregate value of approximately $17 million at December 31,
2001, and it became a 50% partner in joint ventures with us in
the ownership of 12 hotels and the holder of a 10% equity
interest in certain of our consolidated subsidiaries owning
six hotels. The relationship with Promus and its Embassy
Suites Hotels brand provided the foundation for our initial
growth.
o Six Continents Hotels is the world's largest hotel company.
Six Continents Hotels owns, operates or franchises more than
3,200 hotels with more than 500,000 guest rooms in nearly 100
countries around the world. Among the brands owned by Six
Continents Hotels are Crowne Plaza, Holiday Inn, Holiday Inn
Select, Holiday Inn Express and Inter-Continental.
Subsidiaries of Six Continents Hotels, which acquired Bristol
Hotels & Resorts in March 2000, managed 89 of our hotels at
December 31, 2001. Six Continents Hotels also owns FelCor
common stock and FelCor LP units aggregating approximately 16%
of our outstanding common stock and units.
o Starwood is one of the world's largest hotel operating
companies. Directly and through subsidiaries, Starwood owns,
leases, manages or franchises 750 properties in more than 80
countries. Our strategic alliance with Starwood, coupled with
the purchase of seven Sheraton hotels in 1997, provided us
with our initial entry into the upscale, full-service,
non-suite hotel market. Subsidiaries of Starwood managed 11 of
our hotels at December 31, 2001, is a 40% joint venture
partner with us in the ownership of two hotels and a 50% joint
venture partner with us in the ownership of one hotel.
Hotel Renovation, Redevelopment and Rebranding
We expect to continue to differentiate ourselves from many of our
competitors by:
o our success in upgrading, renovating and/or redeveloping our
hotels to enhance their competitive position, and, in certain
instances, rebranding them to improve their revenue generating
capacity; and
o our ongoing program for the maintenance of our upgraded hotel
assets, which generally includes:
-- contribution of approximately 4% of total annual room
and suite revenue to a capital reserve for routine
capital replacements and improvements; and
-- adherence to a rigorous maintenance and repair
program, resulting in the expenditure of
approximately 4% of annual hotel revenues on
maintenance of the hotels.
We have demonstrated our ability to successfully execute renovations.
Our renovation and rebranding of the 18 Crown Sterling Suites hotels, which were
acquired during 1996 and 1997, achieved an overall RevPAR increase of 47.7%
between 1996 and 2000. The largest single renovation project that we have
completed was the Allerton Crowne Plaza hotel in Chicago, which reopened in July
1999, after having been closed for more than a year. This project received
numerous awards, including Lodging Hospitality magazine's Year's Best Design
competition in two categories, Bass Hotels & Resorts 1999 Newcomer of the Year
award, and Chicago's Greater North Michigan Avenue Association 1999 Avenue
Enhancement award. During 1998, 1999 and 2000, an aggregate of approximately
$550 million in capital improvements and other capital expenditures were made to
our hotels, with approximately 3% of total hotel room nights being lost in 1998,
2% in 1999 and 1% in 2000, due to renovations. We believe that our historical
capital expenditures should limit the need for future major renovation
expenditures. During 2001, we made capital expenditures aggregating
approximately $65 million and we currently anticipate 2002 maintenance capital
expenditures of between $40 and $50 million, depending upon the pace of the
anticipated economic recovery.
4
HOTELS HELD FOR SALE
In the second quarter of 2000, we identified 25 hotels that were
considered non-strategic and announced our intention to hold these assets for
sale. These hotels included most of our limited service hotels, a number of our
small market Holiday Inn hotels and all of our Marriott-branded hotels. These
hotels represented 8.3% of our total rooms, but only 4.2% of our total revenues
at the time they were identified. Our management believes the sale of these
non-strategic hotels will allow us and our brand managers to focus our efforts
on our upscale and full service hotels in more strategic markets. In 2000, our
board of directors approved recognition of a $63.0 million loss on assets held
for sale, to reflect the difference between our book value and the estimated
fair market value for these hotels. We recognized an additional $7 million loss
in the fourth quarter of 2001 to reflect the deterioration of the market value
for these hotels.
Through December 31, 2001, we had completed the sale of four of the
hotels held for sale. There was a gain of approximately $135,000 recognized on
the sale of one hotel and realized no gain or loss on the sale of the other
three hotels. In addition, in March 2001, we contributed eight of the hotels
held for sale to a joint venture in which we retain a 50% equity interest, and
an affiliate of Interstate Hotels Corporation, holds the other 50% equity
interest. We contributed hotels with a book value of approximately $77 million,
and received net cash proceeds of approximately $52 million. We retained a
common equity interest of approximately $8 million and a $17 million preferred
equity interest in the acquiring venture. As a result of these transactions, at
December 31, 2001, we had 13 hotels that we continued to hold for sale.
COMPETITION
The hotel industry is highly competitive. Each of our hotels is located
in a developed area that includes other hotel properties and competes for guests
primarily with other full and limited service hotels in its immediate vicinity
and secondarily with other hotel properties in its geographic market. We believe
that brand recognition, location, the quality of the hotel and services
provided, and price are the principal competitive factors affecting our hotels.
ENVIRONMENTAL MATTERS
We customarily obtain a Phase I environmental survey from an
independent environmental consultant before acquiring a hotel. The principal
purpose of a Phase I survey is to identify indications of potential
environmental contamination for which a property owner may have liability and,
secondarily, to assess, to a limited extent, the potential for environmental
regulatory compliance liabilities. The Phase I surveys of our hotels were
designed to meet the requirements of the then current industry standards
governing Phase I surveys, and consistent with those requirements, none of the
surveys involved testing of groundwater, soil or air. Accordingly, they do not
represent evaluations of conditions at the studied sites that would be revealed
only through such testing. In addition, their assessment of environmental
regulatory compliance issues was general in scope and was not a detailed
determination of the hotel's complete environmental compliance status.
Similarly, the surveys did not involve comprehensive analysis of potential
offsite liability. The Phase I survey reports did not reveal any environmental
liability that we believe would have a material adverse effect on our business,
assets or results of operations, nor are we aware of any such liability.
Nevertheless, it is possible that these reports do not reveal or accurately
assess all environmental liabilities and that there are material environmental
liabilities of which we are unaware.
We believe that our hotels are in compliance, in all material respects,
with all federal, state, local and foreign laws and regulations regarding
hazardous substances and other environmental matters, the violation of which
would have a material adverse effect on us. We have not been notified by any
governmental authority or private party of any material noncompliance, liability
or claim relating to hazardous or toxic substances or other environmental
matters in connection with any of our current or former properties. However,
obligations for compliance with environmental laws that arise or are discovered
in the future may adversely affect our financial condition.
5
TAX STATUS
We elected to be taxed as a REIT under the federal income tax laws,
commencing with our initial taxable year ended December 31, 1994. As a REIT, we
generally are not subject to federal income taxation at the corporate level on
our taxable income that is distributed to our stockholders. We may, however, be
subject to certain state and local taxes on our income and property. A REIT is
subject to a number of organizational and operational requirements, including a
requirement that it currently distribute annually at least 90% of its taxable
income. In connection with our election to be taxed as a REIT, our charter
imposes restrictions on the ownership and transfer of shares of our common
stock. FelCor LP expects to make distributions on its units sufficient to enable
us to meet our distribution obligations as a REIT. We have adopted the calendar
year as our taxable year.
EMPLOYEES
Mr. Thomas J. Corcoran, Jr. is our President and Chief Executive
Officer, and entered into an employment agreement with us in 1994 that continues
in effect until December 31, 2002, and automatically renews for successive
one-year terms unless terminated by either party. None of our other executive
officers has an employment agreement with us. In addition to Mr. Corcoran, we
had 60 other full-time employees at December 31, 2001.
All persons employed in the day-to-day operation of our hotels are
employees of the management companies engaged by us, and are not our employees.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements and analyses contained in this Annual Report on Form
10-K, in our 2001 Annual Report to Stockholders, or that may in the future be
made by, or be attributable to, us, may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, and
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "estimate" or "continue" or the negative thereof
or other variations thereon or comparable terminology. All of such
forward-looking statements are based upon present expectations and assumptions
that may or may not actually occur. The following factors constitute cautionary
statements identifying important factors, including material risks and
uncertainties, with respect to such forward-looking statements that could cause
actual results to differ materially from those reflected in such forward-looking
statements or in our historical results. Each of the following factors, among
others, could adversely affect our ability to meet the current expectations of
management.
TERRORIST ACTIVITIES HAVE ADVERSELY AFFECTED AND CREATED UNCERTAINTY IN OUR
BUSINESS
The terrorist attacks of September 11, 2001, caused a significant
disruption in travel-related businesses in the United States. Consistent with
the rest of the lodging industry, we have experienced substantial declines in
occupancy and ADR due to the decline in travel. In 2002, we have seen improving
revenue trends, however we are unable to predict with certainty when or if
travel and lodging demand will be fully restored to normal levels. Military
actions against terrorists, new terrorist attacks, actual or threatened, and
other political events may cause a lengthy period of uncertainty that could
continue to adversely affect the lodging industry, including us, as a result of
customer reluctance to travel.
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT THAT COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION
We have a substantial amount of debt. At December 31, 2001, our
consolidated debt of $1.9 billion equaled 60.7% of our total market
capitalization and 42.8% of our investment in hotel assets, at cost. Our decline
in revenues and earnings during 2001 has adversely affected our public debt
ratings and may limit our access to additional debt capital. We have incurred
debt for acquisitions and to fund our renovation, redevelopment and rebranding
program and our share repurchase program.
6
The share repurchase program authorizes repurchases of up to an
aggregate maximum of $300 million, but was suspended in March 2001. Through
December 31, 2001, we repurchased approximately 10.5 million shares of common
stock under this program at an aggregate cost of approximately $189.1 million.
We have not repurchased any shares of common stock in the open market since
March 27, 2001.
At December 31, 2001:
o we had approximately $1.9 billion in consolidated debt, of
which approximately $696 million was secured by mortgages or
capital leases;
o we had a ratio of consolidated debt (net of cash) to market
capitalization of 60.7%;
o we had a ratio of consolidated debt (net of cash) to
investment in hotels, as defined by us, of 42.8%; and
o our ratio of EBITDA to interest expense, including interest
expense from unconsolidated entities, for the year then ended
was 2.3-to-1.
The recent economic slowdown, which began in early 2001 and which was
exacerbated by the terrorist attacks of September 11, 2001, has resulted in a
decline in RevPAR, compared to the prior year period. If the economic slowdown
and the reduced RevPAR experienced in 2001 worsen or continue for a protracted
period of time, they could have a material adverse effect on our operations and
earnings, including our ability to pay dividends and service our debt.
Changes in economic conditions could result in higher interest rates,
thereby increasing our interest expense on our floating rate debt, which totaled
$225 million at December 31, 2001 and reducing funds available for debt
reduction, capital expenditures and distributions. In addition, as a consequence
of the economic slowdown and the impact of the terrorist attacks on our business
and the travel and lodging industries generally, the rating agencies lowered
their ratings on our $1.2 billion in senior unsecured debt one level to BB-
(Standard & Poor's) and Ba3 (Moody's). If the rating agencies were to lower our
senior unsecured debt ratings below the current level, the interest rate on $900
million of our outstanding senior unsecured debt would increase by 50 basis
points, resulting in an increase in our interest expense.
Our leverage could have important consequences. For example, it could:
o limit our ability to obtain additional financing, if we need
it, for working capital, our renovation, redevelopment and
rebranding plans, acquisitions, debt service requirements or
other purposes;
o require us to agree to additional restrictions and limitations
on our business operations and capital structure to obtain
additional or continued financing;
o increase our vulnerability to adverse economic and industry
conditions as well as fluctuations in interest rates;
o require us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, thereby reducing
funds available for operations, future business opportunities,
payment of dividends or other purposes;
o limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we compete; and
o place us at a competitive disadvantage compared to our
competitors that have less debt.
7
WE MAY BE UNABLE TO REALIZE THE ANTICIPATED BENEFITS OF OUR RENOVATIONS
The majority of our hotels recently have been substantially renovated,
redeveloped and, in some cases, rebranded. The recently completed improvements
may not achieve the results anticipated when we made the decision to invest in
the improvements.
CONFLICTS OF INTEREST COULD ADVERSELY AFFECT OUR BUSINESS
Certain FelCor directors. Six Continents Hotels currently manages 89 of
our hotels. Richard C. North, who joined FelCor's board during 1998, is the
Group Finance Director of Six Continents plc, formerly Bass plc, which is the
parent of Six Continents Hotels and, together with its affiliates, owns FelCor
common stock and FelCor LP units aggregating approximately 16% of our
outstanding common stock and units.
Issues may arise under the franchise agreements and management
contracts, and in the allocation of acquisition and management opportunities,
that present conflicts of interest due to the relationship of Mr. North to the
companies with which he is associated. As an example, in the event we enter into
new or additional hotel management contracts or other transactions with Six
Continents Hotels, the interests of Mr. North, by virtue of his relationship
with Six Continents plc, may conflict with our interests. Any increase in
management fees payable to Six Continents Hotels may decrease our profits to the
benefit of Six Continents Hotels. Also, in the selection of franchises under
which our hotels will be operated, Mr. North, by virtue of his relationship with
Six Continents plc, may have interests that conflict with our interests.
We anticipate that any director who has a conflict of interest with
respect to an issue presented to the FelCor board will abstain from voting upon
that issue, although he or she will have no legal obligation to do so. We have
no provisions in our bylaws or charter that require an interested director to
abstain from voting upon an issue. We do not expect to add provisions in our
charter and bylaws to this effect. Although each director has a fiduciary duty
of loyalty to us, there is a risk that, should an interested director vote upon
an issue in which he or one of his affiliates has an interest, his vote may
reflect a bias that could be contrary to our best interests. In addition, even
if an interested director abstains from voting, the director's participation in
the meeting and discussion of an issue in which he or companies with which he is
associated have an interest could influence the votes of other directors
regarding the issue.
Acquisition of lessees. As a result of the passage of the REIT
Modernization Act, beginning January 1, 2001,we were able to form or acquire
TRSs to acquire or hold the lessee's interest in our existing hotel leases and
to serve as lessees for any hotels acquired in the future. A TRS is a fully
taxable corporation that may be owned 100% by a REIT. A TRS generally is
permitted to engage in businesses, own assets and earn income that, if engaged
in, owned or earned by the REIT, might jeopardize the REIT's tax status or
result in the imposition of penalty taxes on the REIT. A TRS is permitted to
lease hotels from the related REIT as long as it does not directly or indirectly
operate or manage hotels, except through an independent hotel management company
that satisfies applicable requirements under the federal income tax laws. A TRS
generally is not allowed to act as a licensor or a franchisor of any brand name
under which any hotel is operated.
The acquisition of DJONT, one of our primary lessees, was completed
effective January 1, 2001. In consideration for the acquisition of DJONT, FelCor
LP issued 416,667 units of limited partnership interest valued at approximately
$10 million. The acquisition of DJONT required negotiations between us and the
owners of DJONT, including Mr. Corcoran and the children of Charles N.
Mathewson, a director of FelCor. The interests of Mr. Corcoran and Mr. Mathewson
were in direct conflict with our interests in these negotiations and,
accordingly, they abstained from participation in our board's discussion and
vote on this matter
In December 2000, we sold one hotel and, effective January 1, 2001,
completed the acquisition of leases with respect to 12 hotels that had been
leased to and operated by Six Continents Hotels. In consideration for the
acquisition of such leases and termination of the related management agreements,
we issued 413,585 shares of our common stock valued at approximately $10
million, to Six Continents Hotels. We acquired the remaining 88 leases held by
Six Continents Hotels, effective July 1, 2001. We have contributed these
8
leases to our TRSs. In consideration for these 88 leases, we issued 100 shares
of our common stock and caused our subsidiaries to agree to new long-term
management agreements with subsidiaries of Six Continents Hotels to manage these
hotels. The acquisition of the leases held by Six Continents Hotels involved
negotiations between us and Six Continents Hotels. Richard C. North, a director
of FelCor, is the Group Finance Director of Six Continents plc, the parent of
Six Continents Hotels and, together with its affiliates, the owner of
approximately 16% of our outstanding shares and units. The interest of Six
Continents plc in those negotiations was in direct conflict with our interests.
Mr. North abstained from participating in any discussion or vote by our board
relating to these transactions.
For information regarding the management agreements entered into by us
with Six Continents Hotels and others, reference is made to the description of
these agreements under the caption "Management Agreements" in Item 2 to this
Annual Report on Form 10-K.
Adverse tax consequences to some affiliates on a sale of some hotels.
Messrs. Corcoran and Mathewson may incur additional tax liability if we sell our
investments in six hotels that we acquired in July 1994 from partnerships
controlled by these individuals. Consequently, our interests could differ from
Messrs. Corcoran's and Mathewson's interests in the event that we consider a
sale of any of these hotels. Decisions regarding a sale of any of these six
hotels must be made by a majority of the independent directors.
WE HAVE RESTRICTIVE DEBT COVENANTS THAT COULD ADVERSELY AFFECT OUR ABILITY TO
RUN OUR BUSINESS
The indentures governing our existing notes and the agreements governing
our line of credit contain various restrictive covenants including, among
others, provisions restricting us from:
o incurring indebtedness;
o making distributions;
o making investments;
o engaging in transactions with affiliates;
o incurring liens;
o merging or consolidating with another person;
o disposing of all or substantially all of our assets; or
o permitting limitations on the ability of our subsidiaries to
make payments to us.
These restrictions may adversely affect our ability to finance our
operations or engage in other business activities that may be in our best
interest. For example, under the most restrictive of these covenants we would be
limited to not more than $50 million of additional hotel acquisitions unless we
meet certain other requirements.
In addition, some of these agreements require us to maintain certain
specified financial ratios. Our ability to comply with such ratios may be
affected by events beyond our control.
On November 8, 2001, we amended our unsecured line of credit. Although
we were in compliance with our existing covenants prior to the amendment, it was
necessary to amend the line of credit in anticipation of a continued negative
RevPAR environment. The amendment allows for the relaxation of certain financial
covenants through September 30, 2002, including the unsecured interest coverage,
fixed charge coverage, and total leverage tests. The interest rate remains on
the same floating rate basis with a tiered spread based on our debt leverage
ratio, but with added tiers to reflect the higher permitted leverage. The
lenders' commitments under the line of credit remain at $615 million, and we had
approximately $50 million outstanding under the facility at December 31, 2001.
9
Unless our business has recovered sufficiently from the sharp declines
in RevPAR experienced following the September 11 terrorist attacks, upon
expiration of the relaxation in financial covenants provided by the November
amendment to our line of credit, we may be unable to satisfy the original
covenant requirements. In such an event, we may need to obtain further
amendments from our lenders on the line of credit. We are not certain whether,
to what extent, or upon what terms the lenders may be willing to continue a
relaxation of the covenants. Further amendments to our line of credit may result
in additional restrictions on us and may adversely affect our ability to run our
business and financial affairs.
These covenants and limitations under our line of credit restrict our
ability to make distributions to our stockholders and to engage in certain
transactions. The breach of any of these covenants and limitations could result
in the acceleration of amounts outstanding under our line of credit. Our failure
to satisfy any accelerated indebtedness, if in the amount of $10 million or
more, could result in the acceleration of most of our other indebtedness. We may
not be able to refinance or repay our debt in full under those circumstances.
WE WILL ENCOUNTER INDUSTRY RELATED RISKS THAT MAY ADVERSELY AFFECT OUR BUSINESS
The recent economic slowdown has had a significant adverse effect on
our RevPAR performance and earnings. If it worsens or continues, the effects on
our financial condition could be material. We experienced declines in RevPAR
beginning in March 2001. A sharper than anticipated decline in business travel
was the primary cause of the decline, which was principally reflected in
decreased occupancies. This decline was exacerbated by the terrorist attacks. On
a national basis, the hotel industry experienced a RevPAR decline of 7.0% for
the year ended December 31, 2001. The decline in occupancy has also resulted in
declines in room rates as hotels compete more aggressively for guests, both of
which have had a significant adverse effect on our RevPAR and operating
performance. If the economic slowdown worsens or continues for a protracted
period of time, it could have a material adverse effect on our operations,
earnings and financial condition.
Investing in hotel assets involves special risks. We have invested in
hotel-related assets, and our hotels are subject to all of the risks common to
the hotel industry. These risks could adversely affect hotel occupancy and the
rates that can be charged for hotel rooms, and generally include:
o competition from other hotels;
o construction of more hotel rooms in a particular area than
needed to meet demand;
o increases in energy costs and other travel expenses that
reduce business and leisure travel;
o adverse effects of declines in general and local economic
activity;
o fluctuations in our revenue caused by the seasonal nature of
the hotel industry;
o adverse effects of a downturn in the hotel industry; and
o risks generally associated with the ownership of hotels and
real estate, as discussed below.
We face reduced coverages and increased costs of insurance. Following
the events of September 11, 2001, certain types of coverage, such as for acts of
terrorism, are unavailable or are only available at a cost that is prohibitive.
In an effort to keep our cost of insurance within reasonable limits, we have not
purchased terrorism insurance at the current prohibitive prices. We have also
increased our deductible amounts under policies of flood, wind and general
liability insurance, which increases our risk of incurring losses that are
uninsured or not fully insured. Should such uninsured or not fully insured
losses be substantial, they could have a material adverse impact on our
operating results and cash flows.
It is possible that lenders under certain of our secured loans could
assert that the absence of terrorism insurance constitutes a default on our part
under the loan agreements. Although we do not believe any such assertion to be
justified, if a lender was successful in proving such a default, we may be
required to either provide the terrorism insurance or repay the loan.
10
We have geographic concentrations that may create risks from regional
economic and weather conditions. Approximately 54.4% of our hotel room revenues
for the year ended December 31, 2001 were generated from hotels located in four
states: California, Florida, Texas and Georgia. Additionally, we have
concentrations in four major metropolitan areas, San Francisco/San Jose, Dallas,
Orlando and Houston, which represent approximately 26.6% of our hotel room
revenues for the year ended December 31, 2001. Therefore, adverse economic or
weather conditions in these states will have a greater effect on us than similar
conditions in other states.
We could face increased competition. Each of our hotels competes with
other hotels in its geographic area. A number of additional hotel rooms have
been or may be built in a number of the geographic areas in which our hotels are
located, which could adversely affect the results of operations of these hotels.
An oversupply of hotel rooms could adversely affect both occupancy and rates in
the markets in which our hotels are located. A significant increase in the
supply of midprice, upscale and upper upscale hotel rooms and suites, if demand
fails to increase proportionately, could have a severe adverse effect on our
business, financial condition and results of operations.
Acquisition growth opportunities have decreased. There has been
substantial consolidation in, and capital allocated to, the U.S. lodging
industry since the early 1990's. This generally has resulted in higher prices
for hotels. The uncertainties resulting from the September 11, 2001 attacks and
the resulting sharp decline in hotel occupancies, have significantly reduced the
prices that buyers, generally, are currently willing to pay for hotels to less
than sellers, generally, are willing to accept. In addition, the market price of
our common stock during the latter part of 2001 made cost of equity capital
relatively high. These conditions have resulted in fewer attractive acquisition
opportunities. An important part of our historical growth strategy has been the
acquisition and, in many instances, the renovation and repositioning, of hotels
at less than replacement cost. Continued industry consolidation and competition
for acquisitions could adversely affect our growth prospects. Currently, our
line of credit covenants limit the amount we can spend on hotel purchases unless
we meet certain requirements. We compete for hotel investment opportunities with
other companies, some of which have greater financial or other resources than we
have. Certain competitors may have a lower cost of capital and may be able to
pay higher prices or assume greater risks than would be prudent for us to pay or
assume.
We are subject to possible adverse effects of franchise and licensing
agreement requirements. Substantially all of our hotels are operated under
existing franchise or license agreements with nationally recognized hotel
brands. Each license agreement requires that the licensed hotel be maintained
and operated in accordance with specific standards and restrictions in order to
maintain uniformity within the franchisor system. Compliance with these
standards could require a franchisee to incur significant expenses or capital
expenditures, which could adversely affect our results of operations and ability
to make payments on indebtedness. Also, changes to these standards could
conflict with a hotel's specific business plan or limit our ability to make
improvements or modifications to a hotel without the consent of the franchisor.
If a franchise license terminates due to our failure to make required
improvements, we may be liable to the franchisor for a termination payment.
These termination payments vary by franchise agreement and hotel. The loss of a
substantial number of franchise licenses and the related termination payments
could have a material adverse effect on our business because of the loss of
associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. The franchise agreements could also expire
or terminate, with specified renewal rights, at various times. As a condition to
renew, the franchise agreements could involve a renewal application process that
would require substantial capital improvements, for which we would be
responsible, to be made to the hotels.
We are subject to the risks of brand concentration. We are subject to
the potential risks associated with concentration of our hotels under a limited
number of brands. A negative public image or other adverse event that becomes
associated with the brand could adversely affect hotels operated under that
brand. The following percentages of our hotels' room revenues are expected to be
generated by hotels operated under each of the indicated brands, based on room
revenues for the year ended December 31, 2001:
o Embassy Suites Hotels 40.1%
o Holiday Inn-branded hotels 28.6%
o Crowne Plaza 11.5%
11
Should any of these brands suffer a significant decline in popularity
with the traveling public, it could affect our revenues and profitability.
We are subject to the risks of hotel operations. Prior to January 1,
2001, substantially all of our hotels were leased to Six Continents Hotels or
DJONT under leases providing for the payment of rent based, in part, upon
revenues from the hotels. Accordingly, our operating risks were essentially
limited to changes in hotel revenues and to the lessees' ability to pay the rent
due under the leases. As a result of the acquisition of DJONT and the leases
from Six Continents Hotels, we became subject to the risk of fluctuating hotel
operating expenses at our hotels, including but not limited to:
o wage and benefit costs;
o repair and maintenance expenses;
o the costs of gas and electricity;
o the costs of liability insurance; and
o other operating expenses.
These operating expenses are more difficult to predict and control than
revenue, resulting in an increased risk of volatility in our results of
operations.
The lodging business is seasonal in nature. Generally, hotel revenues
are greater in the second and third calendar quarters than in the first and
fourth calendar quarters, although this may not be true for hotels in major
tourist destinations. Revenues for hotels in tourist areas generally are
substantially greater during tourist season than other times of the year.
Seasonal variations in revenue at our hotels can be expected to cause quarterly
fluctuations in our revenues. Quarterly earnings also may be adversely affected
by events beyond our control, such as extreme weather conditions, economic
factors and other considerations affecting travel.
We lack control over the management and operations of our hotels. We
are dependent on the ability of unaffiliated third party managers to operate and
manage our hotels. In order to maintain REIT status, we cannot operate our
hotels or any subsequently acquired hotels. As a result, we are unable to
directly implement strategic business decisions for the operation and marketing
of our hotels, such as decisions with respect to the setting of room rates, food
and beverage operations and similar matters.
OUR ABILITY TO GROW MAY BE LIMITED BY OUR ABILITY TO ATTRACT DEBT OR EQUITY
FINANCING AND WE MAY HAVE DIFFICULTY ACCESSING CAPITAL ON ATTRACTIVE TERMS
Recently, we have focused on our internal growth strategy, which
includes the renovation, redevelopment and rebranding of our hotels to achieve
improved revenue performance. We may not be able to fund growth solely from cash
provided from operating activities because we must distribute at least 90% of
our taxable income each year to maintain our status as a REIT. Consequently, we
rely upon the availability of debt or equity capital to fund hotel acquisitions
and discretionary capital improvements and we may be dependent upon our ability
to attract debt financing from public or institutional lenders. The capital
markets have been adversely affected by the occurrence of recent events,
including the September 11, 2001, terrorist attacks, the ongoing war against
terrorism by the United States and the bankruptcy of Enron Corp. These events,
or an escalation in the anti-terrorism war or new terrorist attacks or
bankruptcies in the future, could adversely affect the availability and cost of
capital for our business. We cannot assure you that we will be successful in
attracting sufficient debt or equity financing to fund future growth at an
acceptable cost, or at all. In addition, we currently have a policy of limiting
our consolidated debt to not more than 55% of our investment in hotel assets, as
defined by us. This policy is a board policy only and not a requirement
contained in our organizational documents. Accordingly, the policy may be
modified or waived by the board at any time. Unless further waived or modified
by our board of directors, this limitation could also limit our ability to incur
12
additional debt to fund our continued growth. At December 31, 2001, our
consolidated debt represented approximately 42.8% of our investment in hotels,
as defined by us.
WE OWN AND MAY ACQUIRE INTERESTS IN HOTEL VENTURES WITH THIRD PARTIES THAT
EXPOSE US TO SOME RISK OF ADDITIONAL LIABILITIES.
We own, through our subsidiaries, interests in several real estate
ventures with third parties. Those ventures that are not consolidated into our
financial statements own a total of 24 hotels, in which we have an aggregate
investment of approximately $151 million. None of our directors or officers hold
any interest in any of these ventures. The ventures and hotels are subject to
non-recourse mortgage loans aggregating approximately $266 million and one
venture also had a full recourse loan outstanding of $440,000 at December 31,
2001, which we have guaranteed. These loans to our unconsolidated ventures are
not reflected as liabilities on our consolidated balance sheet, but are
summarized in Note 5 of the notes to our consolidated financial statements. The
personal liability of our subsidiaries under the non-recourse loans is generally
limited to the guaranty of the borrowing ventures' personal obligations to pay
for the lender's losses caused by misconduct, fraud or misappropriation of funds
by the ventures and other typical exceptions from the non-recourse covenants in
the mortgages, such as those relating to environmental liability. We may invest
in other ventures in the future that own hotels and have recourse or
non-recourse debt financing. If a venture defaults under its mortgage loan, the
lender may accelerate the loan and demand payment in full before taking action
to foreclose on the hotel. As a partner or member in any of these ventures, our
subsidiary may be exposed to liability for claims asserted against the venture,
and the venture may not have sufficient assets or insurance to discharge the
liability. Our subsidiaries may not legally be able to control decisions being
made regarding these ventures and their hotels. In addition, the hotels in a
venture may perform at levels below expectations, resulting in the potential for
insolvency of the venture unless the partners or members provide additional
funds. In some ventures, the partners or members may be required to make
additional capital contributions. In many of the foregoing events, we may be
faced with the choice of losing our investment in the venture or investing more
capital in it with no guaranty of receiving a return on that investment.
WE ARE SUBJECT TO POTENTIAL TAX RISKS
The federal income tax laws governing REITs are complex. We have
operated and intend to continue to operate in a manner that is intended to
enable us to qualify as a REIT under the federal income tax laws. The REIT
qualification requirements are extremely complicated, and interpretations of the
federal income tax laws governing qualification as a REIT are limited.
Accordingly, we cannot be certain that we have been or will continue to be
successful in operating so as to qualify as a REIT. At any time, new laws,
interpretations or court decisions may change the federal tax laws relating to,
or the federal income tax consequences of, qualification as a REIT.
Failure to make required distributions would subject us to tax. Each
year, a REIT must pay out to its stockholders at least 90% of its taxable
income, other than any net capital gain. To the extent that we satisfy the
applicable distribution requirement, but distribute less than 100% of our
taxable income, we will be subject to federal corporate income tax on our
undistributed taxable income. In addition, we will be subject to a 4%
nondeductible tax if the actual amount we pay out to our stockholders in a
calendar year is less than a minimum amount specified under federal tax laws.
Our only source of funds to make such distributions comes from distributions to
us from FelCor LP. Accordingly, we may be required to borrow money or sell
assets to make distributions sufficient to pay out enough of our taxable income
to satisfy the applicable distribution requirement and to avoid corporate income
tax and the 4% tax in a particular year.
Failure to qualify as a REIT would subject us to federal income tax. If
we fail to qualify as a REIT in any taxable year, we would be subject to federal
income tax on our taxable income. We might need to borrow money or sell hotels
in order to pay any such tax. If we cease to be a REIT, we no longer would be
required to distribute most of our taxable income to our stockholders. Unless
our failure to qualify as a REIT were excused under federal income tax laws, we
could not re-elect REIT status until the fifth calendar year following the year
in which we failed to qualify.
13
Failure to have distributed earnings and profits of Bristol Hotel
Company in 1998 could cause us to fail to qualify as a REIT. At the end of any
taxable year, a REIT may not have any accumulated earnings and profits,
described generally for federal income tax purposes as cumulative undistributed
net income, from a non-REIT corporation. In connection with the merger of
Bristol Hotel Company, or Bristol, with and into us in 1998, Arthur Andersen LLP
prepared and provided to us its computation of Bristol's accumulated earnings
and profits through the date of the merger, and we made a corresponding special
distribution to our stockholders. However, the determination of accumulated
earnings and profits for federal income tax purposes is extremely complex and
the computations by Arthur Andersen LLP are not binding upon the Internal
Revenue Service. Should the Internal Revenue Service successfully assert that
Bristol's accumulated earnings and profits were greater than the amount so
distributed by us, we may fail to qualify as a REIT. Alternatively, the Internal
Revenue Service may permit FelCor to avoid losing its REIT status by paying a
deficiency dividend to eliminate any remaining accumulated earnings and profits
of Bristol. There can be no assurance, however, that we would be able to make
any such required distribution or that the Internal Revenue Service would not
assert loss of REIT status as the penalty for failing to distribute any
accumulated earnings and profits of Bristol in 1998.
A sale of assets acquired from Bristol within ten years after the merger
may result in corporate income tax. If we sell any asset acquired from Bristol
within ten years after our merger with Bristol, and we recognize a taxable gain
on the sale, we will be taxed at the highest corporate rate on an amount equal
to the lesser of:
o the amount of gain that we recognize at the time of the sale;
or
o the amount of gain that we would have recognized if we had
sold the asset at the time of the Bristol merger for its then
fair market value.
The sales of Bristol hotels that have been made to date have not
resulted in any material amount of tax liability. If we are successful in
selling the remaining hotels shown as hotels held for sale, we could incur
corporate income tax with respect to the related built in gain, the amount of
which cannot yet be determined.
DEPARTURE OF KEY PERSONNEL, INCLUDING MR. CORCORAN, COULD ADVERSELY AFFECT OUR
FUTURE OPERATING RESULTS
WE WILL ENCOUNTER RISKS THAT MAY ADVERSELY AFFECT REAL ESTATE OWNERSHIP
General Risks. Our investments in hotels are subject to the numerous
risks generally associated with owning real estate, including among others:
o adverse changes in general or local economic or real estate
market conditions;
o changes in zoning laws;
o changes in traffic patterns and neighborhood characteristics;
o increases in assessed valuation and real estate tax rates;
o increases in the cost of property insurance;
o governmental regulations and fiscal policies;
o the potential for uninsured or underinsured property losses;
o the impact of environmental laws and regulations; and
o other circumstances beyond our control.
Moreover, real estate investments are relatively illiquid, and we may
not be able to vary our portfolio in response to changes in economic and other
conditions.
14
Compliance with environmental laws may adversely affect our financial
condition. Owners of real estate are subject to numerous federal, state, local
and foreign environmental laws and regulations. Under these laws and
regulations, a current or former owner of real estate may be liable for the
costs of remediating hazardous substances found on its property, whether or not
it was responsible for their presence. In addition, if an owner of real property
arranges for the disposal of hazardous substances at another site, it may also
be liable for the costs of remediating the disposal site, even if it did not own
or operate the disposal site. Such liability may be imposed without regard to
fault or the legality of a party's conduct and may, in certain circumstances, be
joint and several. A property owner may also be liable to third parties for
personal injuries or property damage sustained as a result of its release of
hazardous or toxic substances, including asbestos-containing materials, into the
environment. Environmental laws and regulations may require us to incur
substantial expenses and limit the use of our properties. We could have
substantial liability for a failure to comply with applicable environmental laws
and regulations, which may be enforced by the government or, in certain
instances, by private parties. The existence of hazardous substances on a
property can also adversely affect the value of, and the owner's ability to use,
sell or borrow against, the property.
We cannot provide assurances that future or amended laws or
regulations, or more stringent interpretations or enforcement of existing
environmental requirements, will not impose any material environmental
liability, or that the environmental condition or liability relating to the
hotels will not be affected by new information or changed circumstances, by the
condition of properties in the vicinity of such hotels, such as the presence of
leaking underground storage tanks, or by the actions of unrelated third parties.
Compliance with the Americans with Disabilities Act may adversely
affect our financial condition. Under the Americans with Disabilities Act of
1990, all public accommodations, including hotels, are required to meet certain
federal requirements for access and use by disabled persons. We believe that our
hotels substantially comply with the requirements of the Americans with
Disabilities Act. However, a determination that the hotels are not in compliance
with that Act could result in liability for both governmental fines and payments
to private parties. If we were required to make unanticipated major
modifications to the hotels to comply with the requirements of the Americans
with Disabilities Act, it could adversely affect our ability to pay our
obligations.
OUR CHARTER CONTAINS LIMITATIONS ON OWNERSHIP AND TRANSFER OF SHARES OF OUR
STOCK THAT COULD ADVERSELY AFFECT ATTEMPTED TRANSFERS OF OUR COMMON STOCK.
To maintain our status as a REIT, no more than 50% in value of our
outstanding stock may be owned, actually or constructively, under the applicable
tax rules, by five or fewer persons during the last half of any taxable year.
Our charter prohibits, subject to some exceptions, any person from owning more
than 9.9%, as determined in accordance with the Internal Revenue Code and the
Exchange Act, of the number of outstanding shares of any class of our stock. Our
charter also prohibits any transfer of our stock that would result in a
violation of the 9.9% ownership limit, reduce the number of stockholders below
100 or otherwise result in us failing to qualify as a REIT. Any attempted
transfer of shares in violation of the charter prohibitions will be void, and
the intended transferee will not acquire any right in those shares. We have the
right to take any lawful action that we believe necessary or advisable to ensure
compliance with these ownership and transfer restrictions and to preserve our
status as a REIT, including refusing to recognize any transfer of stock in
violation of our charter.
SOME PROVISIONS IN OUR CHARTER AND BYLAWS AND MARYLAND LAW MAKE A TAKEOVER OF US
MORE DIFFICULT.
Ownership Limit. The ownership and transfer restrictions of our charter
may have the effect of discouraging or preventing a third party from attempting
to gain control of us without the approval of our board of directors.
Accordingly, it is less likely that a change in control, even if beneficial to
stockholders, could be effected without the approval of our board.
Staggered Board. Our board of directors is divided into three classes.
Directors in each class are elected for terms of three years. As a result, the
ability of stockholders to effect a change in control of us through the election
of new directors is limited by the inability of stockholders to elect a majority
of our board at any particular meeting.
15
Authority to Issue Additional Shares. Under our charter, our board of
directors may issue preferred stock without stockholder action. The preferred
stock may be issued, in one or more series, with the preferences and other terms
designated by our board that may delay or prevent a change in control of us,
even if the change is in the best interests of stockholders. We currently have
outstanding 5,980,475 shares of our $1.95 Series A Cumulative Convertible
Preferred Stock and 57,500 shares, representing 5,750,000 depository receipts,
of our 9% Series B Cumulative Redeemable Preferred Stock. The preferred stock
reduces the amount of dividends available, and has dividend, liquidation and
other rights superior, to the holders of our common stock.
Maryland Takeover Statutes. As a Maryland corporation, we are subject
to various provisions under the Maryland General Corporation Law, including the
Maryland business combination statute, that may have the effect of delaying or
preventing a transaction or a change in control that might involve a premium
price for the stock or otherwise be in the best interests of stockholders. Under
the Maryland business combination statute, some "business combinations,"
including some issuances of equity securities, between a Maryland corporation
and an "interested stockholder," which is any person who beneficially owns 10%
or more of the voting power of the corporation's shares, or an affiliate of that
stockholder, are prohibited for five years after the most recent date on which
the interested stockholder becomes an interested stockholder. Any of these
business combinations must be approved by a stockholder vote meeting two
separate super majority requirements unless, among other conditions, the
corporation's common stockholders receive a minimum price, as defined in the
statute, for their shares and the consideration is received in cash or in the
same form as previously paid by the interested stockholder for its common
shares. Our charter currently provides that the Maryland control share statute
will not apply to any of our existing or future stock. That statute may deny
voting rights to shares involved in an acquisition of one-tenth or more of the
voting stock of a Maryland corporation. To the extent these or other laws are
applicable to us, they may have the effect of delaying or preventing a change in
control of us even though beneficial to our stockholders.
ITEM 2. PROPERTIES
We are the only lodging REIT that owns a diversified portfolio of
nationally branded, upscale and full-service hotels managed by its strategic
brand managers, which are Hilton, Six Continents Hotels, and Starwood. We are
competitively positioned to deliver superior stockholder returns through a
strong management team, strategic brand manager alliances, diversified upscale
and full-service hotels, and value creation expertise.
We consider our hotels to be premier lodging properties with respect to
desirability of location, size, facilities, physical condition, quality and
variety of services offered in the markets in which they are located. Our hotels
are designed to appeal to a broad range of hotel customers, including frequent
business travelers, groups and conventions, as well as leisure travelers. The
hotels generally feature comfortable, modern guest rooms, extensive meeting and
convention facilities and full-service restaurant and catering facilities. Our
183 hotels are located in 35 states and Canada, and are situated primarily in
major markets near airport, suburban or downtown areas. The hotels are located
in geographically diverse major markets with more than 50% of our room revenues
being derived from hotels located in Texas, California, Florida and Georgia. The
following table illustrates the distribution of hotels in these states.
SELECTED STATE DISTRIBUTION
<Table>
<Caption>
NUMBER OF NUMBER PERCENTAGE OF
HOTELS OF ROOMS ROOM REVENUE
--------- -------- -------------
Texas 41 11,139 18.2%
California 19 6,033 17.3
Florida 17 5,513 11.2
Georgia 14 3,867 7.7
-- ------ ----
Total for four states 91 26,552 54.4%
== ====== ====
</Table>
16
Our hotels have an average of approximately 265 rooms, with eight of
them having more than 500 rooms. Although obsolescence arising from age and
condition of facilities can adversely effect our hotels, we have invested in
excess of $600 million, in the aggregate, during the past four years to upgrade,
renovate and/or redevelop our hotels to enhance their competitive position. We
are committed to maintaining the high standards of our hotels and spend at least
4% of hotel revenues for maintenance and repair programs in addition to
necessary capital.
HOTEL BRANDS
A key part of our business strategy is to have our hotels managed by
one of our strategic brand-managers. Our hotels are operated under some of the
nation's most recognized and respected hotel brands. We maintain strategic
relationships with brand owners who also manage substantially all of our hotels.
We are the owner of the largest number of Embassy Suites Hotels, Crowne Plaza,
and Holiday Inn and independently owned Doubletree-branded hotels. The following
tables illustrate the distribution and operating statistics of our hotels among
these premier brands.
BRAND DISTRIBUTION
<Table>
<Caption>
NUMBER OF NUMBER PERCENTAGE OF
HOTELS OF ROOMS ROOM REVENUE
--------- -------- -------------
Embassy Suites Hotels 59 14,853 40.1
Holiday Inn-branded hotels 59 16,888 28.6
Crowne Plaza 18 5,943 11.5
Doubletree-branded hotels 13 2,657 5.7
Sheraton-branded 10 3,269 7.0
Other hotels 24 4,845 7.1
--- ------ -----
Total 183 48,465 100.0
=== ====== =====
</Table>
17
HOTEL OPERATING STATISTICS
The following table sets forth historical occupancy, ADR and RevPAR at
December 31, 2001 and 2000, and the percentage changes therein between the
periods presented for the hotels in which we had an ownership interest at
December 31, 2001:
<Table>
<Caption>
OCCUPANCY (%)
----------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------
%
2001 2000 VARIANCE
---- ---- --------
Embassy Suites Hotels 67.0 74.1 (9.6)
Holiday Inn-branded hotels 64.3 69.0 (6.9)
Crowne Plaza hotels 60.1 70.9 (15.1)
Doubletree-branded hotels 65.0 70.3 (7.4)
Sheraton-branded hotels 62.2 71.4 (12.9)
Other hotels 58.7 63.3 (7.4)
Total hotels 63.9 70.5 (9.2)
</Table>
<Table>
<Caption>
ADR (DOLLARS)
-----------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------
%
2001 2000 VARIANCE
---- ---- --------
Embassy Suites Hotels 127.90 127.96 0.0
Holiday Inn-branded hotels 83.41 86.44 (3.5)
Crowne Plaza hotels 101.62 106.00 (4.1)
Doubletree-branded hotels 104.38 105.69 (1.2)
Sheraton-branded hotels 109.14 112.47 (3.0)
Other hotels 78.36 81.66 (4.0)
Total hotels 102.18 104.64 (2.4)
</Table>
<Table>
<Caption>
REVPAR (DOLLARS)
-----------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------
%
2001 2000 VARIANCE
---- ---- --------
Embassy Suites Hotels 85.66 94.78 (9.6)
Holiday Inn-branded hotels 53.64 59.68 (10.1)
Crowne Plaza hotels 61.12 75.13 (18.6)
Doubletree-branded hotels 67.88 74.26 (8.6)
Sheraton-branded hotels 67.92 80.35 (15.5)
Other hotels 45.97 51.72 (11.1)
Total hotels 65.34 73.73 (11.4)
</Table>
Embassy Suites Hotels
Embassy Suites Hotels are upscale, full-service, all suite hotels
designed to attract frequent business travelers, leisure travelers and weekend
guests. Embassy Suites Hotels typically offer numerous services and amenities,
such as:
o two-room suites, containing two telephones, a
mini-refrigerator, coffee maker, microwave oven, wet bar, and
two color televisions;
o complimentary, cooked-to-order breakfast;
o complimentary cocktails during two hours every evening,
subject to local laws and regulations, in an atrium
environment; and
o business centers equipped with fax and copy machines.
18
Holiday Inn and Holiday Inn Select Hotels
The Holiday Inn brand is positioned to attract the business and leisure
traveler seeking up-to-date products and features, value and friendly service.
Holiday Inn hotels typically offer a full-service restaurant and lounge,
swimming pool, meeting and banquet facilities, optional fitness center and
electronic locks. In-room amenities generally include a hair dryer, coffee maker
and iron. The Holiday Inn name is recognized around the world, with more than
1,500 hotels currently being operated under this brand.
The Holiday Inn Select hotels are focused on the business traveler.
Each room offers a residential decor with a well-lit work area, including a
dataport and voicemail, and in-room coffee makers. Amenities offered at the
Holiday Inn Select hotels generally include full business services such as
photocopying and telecopying, meeting capabilities for small to mid-size groups,
exercise facilities and full-service restaurant and lounge.
The Holiday Inn, Holiday Inn Select and Crowne Plaza brands are part of
the family of brands owned, operated and franchised by Six Continents Hotels.
Six Continents Hotels owns, operates or franchises more than 3,200 hotels with
more than 500,000 guest rooms in nearly 100 countries around the world.
Crowne Plaza Hotels
Crowne Plaza hotels offer upscale accommodations for business and
leisure travelers looking for a full range of services. Guests receive
personalized attention through a wide variety of premium guest service offerings
which typically include: fully appointed guest rooms with ample work areas, a
full complement of business services, excellent dining choices, quality fitness
facilities and comprehensive meeting capabilities. There are currently more than
150 Crowne Plaza hotels in 40 countries around the world.
Doubletree and Doubletree Guest Suites Hotels
Doubletree hotels and Doubletree Guest Suites are part of an upscale,
full-service hotel chain which primarily serves major metropolitan areas and
leisure destinations. Each property attempts to reflect the local or regional
environment in its design. Typical properties offer a full-service restaurant
and lounge, room service, swimming pool, health club, complete meeting and
banquet facilities, oversized guest rooms and luxury amenities.
Sheraton and Sheraton Suites
Sheraton hotels, including Sheraton Suites, are part of Starwood, which
owns the Sheraton, Westin and other brand names. There are currently more than
400 Sheraton hotels and resorts in over 70 countries. Sheraton hotels typically
offer a wide variety of on-site business services, a full range of amenities and
rooms that feature generous work spaces. In more than 150 locations, Sheraton
Smart Rooms feature ergonomically designed chairs, ample task lighting, modem
hookups and personalized voice mail, as well as printing, copying and faxing
capabilities. Starwood owns, leases, manages or franchises 750 properties in
over 80 countries.
Other Hotels
As of December 31, 2001, 29 of our hotels are operated under other
brands, as follows:
o Hampton Inn (7 hotels);
o Holiday Inn Express (5 hotels);
o Fairfield Inn (5 hotels);
o Harvey Hotel (4 hotels);
o Hilton Suites (1 hotel);
o Courtyard by Marriott (2 hotels);
o Homewood Suites (1 hotel);
o Westin (1 hotel); and
o Independents (3 hotels).
19
HOTEL PORTFOLIO
The following table sets forth certain descriptive information regarding our
hotels at December 31, 2001:
Held for Investment
<Table>
<Caption>
LOCATION FRANCHISE BRAND ROOMS/SUITES
- -------- --------------- ------------
Birmingham, AL(1)........................................... Embassy Suites Hotels 242
Montgomery (East I-85), AL.................................. Holiday Inn 213
Texarkana (I-30), AR(2)..................................... Holiday Inn 210
Flagstaff, AZ............................................... Embassy Suites Hotels 119
Phoenix (Airport-44th St.), AZ.............................. Embassy Suites Hotels 229
Phoenix (Camelback), AZ..................................... Embassy Suites Hotels 233
Phoenix (Crescent), AZ(1)................................... Sheraton 342
Scottsdale (Downtown), AZ(1)(2)(3).......................... Fairfield Inn 218
Tempe (ASU), AZ(1).......................................... Embassy Suites Hotels 224
Anaheim (Disney Area), CA(1)................................ Embassy Suites Hotels 222
Burlingame (SF Airport So), CA(2)........................... Embassy Suites Hotels 339
Covina (I-10), CA(1)(3)..................................... Embassy Suites Hotels 264
Dana Point, CA.............................................. Doubletree Guest Suites 198
El Segundo (LAX Airport South), CA.......................... Embassy Suites Hotels 350
Irvine (Orange County Airport), CA.......................... Crowne Plaza 335
Milpitas, CA(1)............................................. Embassy Suites Hotels 267
Milpitas (San Jose North), CA............................... Crowne Plaza 305
Napa, CA(1)................................................. Embassy Suites Hotels 205
Oxnard (Mandalay Beach), CA................................. Embassy Suites Hotels 249
Palm Desert, CA(1).......................................... Embassy Suites Hotels 198
Pleasanton, CA.............................................. Crowne Plaza 244
Santa Barbara, CA(1)........................................ Holiday Inn 160
San Diego (On the Bay), CA(2)............................... Holiday Inn 600
San Francisco (Financial District), CA(2)................... Holiday Inn 566
San Francisco (Fisherman's Wharf), CA(2).................... Holiday Inn 584
San Francisco (Union Square), CA............................ Crowne Plaza 400
San Rafael (Marin Co.), CA(1)(3)............................ Embassy Suites Hotels 235
South San Francisco (SF Airport North), CA(1)............... Embassy Suites Hotels 312
Aurora (Denver Southeast), CO(6)............................ Doubletree 248
Avon (Beaver Creek Resort), CO.............................. Independent 72
Hartford (Downtown), CT..................................... Crowne Plaza 342
Stamford, CT(2)............................................. Holiday Inn Select 383
Wilmington, DE(6)........................................... Doubletree 244
Boca Raton, FL.............................................. Embassy Suites Hotels 263
Cocoa Beach (Oceanfront Resort), FL......................... Holiday Inn 500
Deerfield Beach, FL(1)...................................... Embassy Suites Hotels 244
Ft. Lauderdale, FL(1)....................................... Embassy Suites Hotels 359
Ft. Lauderdale (Cypress Creek), FL(1)....................... Sheraton Suites 253
Jacksonville, FL............................................ Embassy Suites Hotels 277
Kissimmee (Nikki Bird Resort), FL(2)........................ Holiday Inn 529
Lake Buena Vista (Walt Disney World), FL(2)................. Doubletree Guest Suites 229
Miami (Airport), FL(2)...................................... Crowne Plaza 304
Miami (Airport), FL(1)...................................... Embassy Suites Hotels 314
Orlando (North), FL......................................... Embassy Suites Hotels 277
Orlando (South), FL(1)...................................... Embassy Suites Hotels 244
Orlando (International Drive Resort), FL.................... Holiday Inn 652
Orlando (Airport), FL....................................... Holiday Inn Select 288
Tampa (Rocky Point), FL..................................... Doubletree Guest Suites 203
Tampa (Near Busch Gardens), FL(2)........................... Holiday Inn 395
Atlanta (Downtown), GA(1)(3)................................ Courtyard by Marriott 211
Atlanta (Airport), GA....................................... Crowne Plaza 378
Atlanta (Powers Ferry), GA(1)............................... Crowne Plaza 296
Atlanta (Buckhead), GA(1)................................... Embassy Suites Hotels 317
</Table>
20
<Table>
<Caption>
LOCATION FRANCHISE BRAND ROOMS/SUITES
- -------- --------------- ------------
Atlanta (Airport), GA....................................... Embassy Suites Hotels 233
Atlanta (Perimeter Center), GA(1)(3)........................ Embassy Suites Hotels 241
Atlanta (Downtown), GA(1)(3)................................ Fairfield Inn 242
Atlanta (Airport North), GA(1).............................. Holiday Inn 493
Atlanta (Jonesboro South), GA(1)............................ Holiday Inn 180
Atlanta (Perimeter Dunwoody), GA(1)......................... Holiday Inn Select 250
Atlanta (Airport Gateway), GA............................... Sheraton 395
Atlanta (Galleria), GA(1)................................... Sheraton Suites 278
Brunswick, GA............................................... Embassy Suites Hotels 130
Columbus (Airport North), GA(2)............................. Holiday Inn 223
Chicago (Allerton), IL...................................... Crowne Plaza 443
Chicago (Lombard), IL(1)(3)................................. Embassy Suites Hotels 262
Chicago (O'Hare), IL(1)..................................... Sheraton Suites 297
Deerfield, IL(1)............................................ Embassy Suites Hotels 237
Indianapolis (North), IN(1)(3).............................. Embassy Suites Hotels 222
Overland Park, KS(1)(3)..................................... Embassy Suites Hotels 199
Lexington, KY............................................... Hilton Suites 174
Lexington, KY(1)............................................ Sheraton Suites 155
Baton Rouge, LA(1).......................................... Embassy Suites Hotels 224
New Orleans, LA(1).......................................... Embassy Suites Hotels 372
New Orleans (Chateau LeMoyne), LA(1)(2)(3).................. Holiday Inn 171
New Orleans (French Quarter), LA(1)(2)...................... Holiday Inn 374
Boston (Marlborough), MA(1)................................. Embassy Suites Hotels 229
Boston (Government Center), MA(2)........................... Holiday Inn Select 303
Baltimore (BWI), MD(6)...................................... Embassy Suites Hotels 251
Troy, MI(6)................................................. Embassy Suites Hotels 251
Bloomington, MN............................................. Embassy Suites Hotels 219
Minneapolis (Airport), MN(1)................................ Embassy Suites Hotels 311
Minneapolis (Downtown), MN.................................. Embassy Suites Hotels 218
St. Paul, MN(4)............................................. Embassy Suites Hotels 210
Kansas City (Country Club Plaza), MO(1)(2)(3)............... Embassy Suites Hotels 266
Kansas City (Northeast), MO................................. Holiday Inn 167
St. Louis (Downtown), MO.................................... Embassy Suites Hotels 297
St. Louis (Westport), MO(1)................................. Holiday Inn 318
Jackson (Downtown), MS(1)................................... Crowne Plaza 354
Jackson (North), MS(1)...................................... Holiday Inn Hotel & Suites 224
Olive Branch (Whispering Woods Hotel and Conference
Center), MS............................................... Independent 179
Charlotte, NC(1)(3)......................................... Embassy Suites Hotels 274
Raleigh/Durham, NC.......................................... Doubletree Guest Suites 203
Raleigh, NC(1)(3)........................................... Embassy Suites Hotels 225
Omaha, NE................................................... Doubletree Guest Suites 189
Omaha (Central), NE......................................... Hampton Inn 132
Omaha (Southwest), NE....................................... Hampton Inn 131
Omaha (I-80), NE............................................ Holiday Inn 383
Omaha (Old Mill Northwest), NE.............................. Crowne Plaza 213
Omaha (Southwest), NE....................................... Holiday Inn Express Hotel & Suites 78
Omaha (Southwest), NE....................................... Homewood Suites 108
Parsippany, NJ(1)(3)........................................ Embassy Suites Hotels 274
Piscataway, NJ(1)........................................... Embassy Suites Hotels 225
Secaucus (Meadowlands), NJ(2)(3)............................ Embassy Suites Hotels 261
Secaucus (Meadowlands), NJ.................................. Crowne Plaza 301
Albuquerque (Mountain View), NM............................. Holiday Inn 360
Syracuse, NY................................................ Embassy Suites Hotels 215
Cleveland, OH............................................... Embassy Suites Hotels 268
Columbus, OH................................................ Doubletree Guest Suites 194
Dayton, OH(1)............................................... Doubletree Guest Suites 138
Tulsa, OK................................................... Embassy Suites Hotels 240
</Table>
21
<Table>
<Caption>
LOCATION FRANCHISE BRAND ROOMS/SUITES
- -------- --------------- ------------
Philadelphia (Center City), PA(1)........................... Crowne Plaza 445
Philadelphia (Independence Mall), PA(1)..................... Holiday Inn 364
Philadelphia (Society Hill), PA(1).......................... Sheraton 365
Pittsburgh, PA(1)(2)........................................ Holiday Inn Select 251
Charleston (Mills House), SC................................ Holiday Inn 214
Greenville (Roper), SC...................................... Crowne Plaza 208
Myrtle Beach (Kingston Plantation), SC...................... Embassy Suites Hotels 255
Knoxville (Central), TN(2).................................. Holiday Inn 242
Nashville, TN............................................... Embassy Suites Hotels 296
Nashville (Opryland/Airport), TN(2)......................... Holiday Inn Select 385
Addison (North Dallas), TX(1)............................... Crowne Plaza 429
Amarillo (I-40), TX(2)...................................... Holiday Inn 247
Austin (Downtown), TX(6).................................... Doubletree Guest Suites 189
Austin (Airport North), TX(1)(3)............................ Embassy Suites Hotels 261
Austin (Town Lake), TX...................................... Holiday Inn 320
Beaumont (Midtown I-10), TX................................. Holiday Inn 190
Corpus Christi, TX(1)....................................... Embassy Suites Hotels 150
Dallas (Alpha Road), TX..................................... Bristol House 114
Dallas (Market Center), TX(1)............................... Crowne Plaza 354
Dallas (Park Central), TX(1)................................ Crowne Plaza Suites 295
Dallas (Campbell Centre), TX(6)............................. Doubletree 302
Dallas (DFW Airport South), TX.............................. Embassy Suites Hotels 305
Dallas (Love Field), TX(1).................................. Embassy Suites Hotels 248
Dallas (Market Center), TX(1)............................... Embassy Suites Hotels 244
Dallas (Park Central), TX................................... Embassy Suites Hotels 279
Dallas (Regal Row), TX(1)(3)................................ Fairfield Inn 204
Dallas (Downtown West End), TX.............................. Hampton Inn 311
Dallas, TX(1)............................................... Harvey Hotel 313
Dallas (Park Central), TX(5)................................ Sheraton 438
Dallas (Park Central), TX(5)................................ Westin 545
Houston (Near the Galleria), TX(1)(3)....................... Courtyard by Marriott 209
Houston (Medical Center), TX(1)............................. Crowne Plaza 297
Houston (Near the Galleria), TX(1)(3)....................... Fairfield Inn 107
Houston (I-10 East), TX(1)(3)............................... Fairfield Inn 160
Houston (I-10 East), TX(1)(3)............................... Hampton Inn 90
Houston (Medical Center), TX(1)(2).......................... Holiday Inn Hotel & Suites 285
Houston (International Airport), TX(1)...................... Holiday Inn 401
Houston (I-10 West), TX..................................... Holiday Inn Select 345
Houston (Near Greenway Plaza), TX(1)........................ Holiday Inn Select 355
Irving (DFW Airport North), TX(1)........................... Harvey Hotel 506
Irving (DFW Airport North), TX(1)........................... Harvey Suites 164
Midland (Country Villa), TX................................. Holiday Inn 250
Odessa (Parkway Blvd), TX................................... Holiday Inn Express Hotel & Suites 186
Odessa (Centre), TX......................................... Holiday Inn Hotel & Suites 245
Plano, TX(1)................................................ Harvey Hotel 279
Plano, TX................................................... Holiday Inn 161
San Antonio (Airport), TX(1)(2)(3).......................... Embassy Suites Hotels 261
San Antonio (Northwest), TX(1)(3)........................... Embassy Suites Hotels 217
San Antonio (Downtown), TX(2)............................... Holiday Inn 315
San Antonio (International Airport), TX..................... Holiday Inn Select 397
Waco (I-35), TX............................................. Holiday Inn 171
Salt Lake City (Airport), UT(2)............................. Holiday Inn 191
Tyson's Corner, VA (1)(3)................................... Sheraton 437
Burlington, VT(1)........................................... Sheraton 309
Cambridge, Canada........................................... Holiday Inn 139
Kitchener (Waterloo), Canada................................ Holiday Inn 182
Peterborough (Waterfront), Canada........................... Holiday Inn 155
Sarnia, Canada.............................................. Holiday Inn 151
</Table>
22
<Table>
<Caption>
LOCATION FRANCHISE BRAND ROOMS/SUITES
- -------- --------------- ------------
Toronto (Yorkdale), Canada.................................. Holiday Inn 370
Toronto (Airport), Canada................................... Holiday Inn Select 444
</Table>
Held for Sale
<Table>
<Caption>
LOCATION FRANCHISE BRAND ROOMS/SUITES
- -------- --------------- ------------
Boca Raton, FL.............................................. Doubletree Guest Suites 182
Davenport, IA............................................... Hampton Inn 132
Davenport, IA............................................... Holiday Inn 279
Moline, IL.................................................. Hampton Inn 138
Moline (Airport), IL........................................ Holiday Inn 216
Moline (Airport), IL........................................ Holiday Inn Express 111
Colby, KS................................................... Holiday Inn Express 72
Great Bend, KS.............................................. Holiday Inn 175
Hays, KS.................................................... Hampton Inn 116
Hays, KS.................................................... Holiday Inn 190
Salina, KS.................................................. Holiday Inn 192
Salina (I-70), KS(2)........................................ Holiday Inn Express Hotel & Suites 93
Nashville (Airport), TN..................................... Doubletree Guest Suites 138
</Table>
- ----------
(1) Encumbered by mortgage debt.
(2) Situated on land leased under a long-term ground lease.
(3) This hotel is one of 24 hotels owned by unconsolidated entities in
which we own a 50% equity interest.
(4) Owned subject to a capitalized industrial revenue bond lease that
expires in 2011 and permits us to purchase the fee interest at
expiration for a nominal amount.
(5) This hotel is one of 2 hotels owned by a joint venture in which we own
a 60% equity interest.
(6) This hotel is one of 6 hotels in which we own a 90% equity interest.
MANAGEMENT AGREEMENTS
In July 2001, we acquired the leasehold interests in 88 hotels from Six
Continents Hotels. In connection with this acquisition, Six Continents Hotels
assigned the leases to those hotels to our TRSs, and the TRSs executed new
management agreements with Six Continents Hotels for each of the 88 hotels that
was previously leased.
Additionally, as a result of our acquisition of DJONT, our TRSs became
parties to management agreements with subsidiaries of Hilton, including Promus
Hotels, Inc. and its affiliates, DT Management, Inc. and its affiliates, and
subsidiaries of Starwood, including Sheraton Operating Corporation and its
affiliates.
The management agreements governing the operation of 100 of our hotels
that are (i) managed by Six Continents Hotels or Starwood under brands owned by
them, or (ii) managed by Hilton under the Doubletree brand, contain the right
and license to operate the hotels under the specified brands. No separate
franchise agreements are required for the operation of these hotels.
Management Fees and Performance Standards. Under the management
agreements with Six Continents Hotels, the TRS lessees generally pay Six
Continents Hotels a basic management fee for each hotel equal to 2% of adjusted
gross revenues of the hotel plus 5% of the room revenue of the hotel for each
fiscal month during the initial term and any renewal term. The basic management
fees owed under the other management agreements are generally as follows:
o Doubletree -- between 2% and 3% of the hotel's total sales per
month;
o Sheraton -- 2% of the hotel's total revenue per accounting
period; and
o Embassy Suites Hotels -- 2% of adjusted gross income payable
monthly.
23
Under the management agreements with Six Continents Hotels, the TRS
lessees are required to pay an incentive management fee based on the performance
of all the managed hotels, considered in the aggregate. The incentive management
fee is computed as a percentage of hotel profits in excess of specified returns
to us based on our investment in the managed hotels. The management agreements
with the other managers generally provide for an incentive management fee based
on a percentage of the TRS lessee's net income before overhead on a hotel by
hotel basis.
Term and Termination. The management agreements with Six Continents
Hotels generally have initial terms of 12 to 17 years. Six Continents Hotels may
renew the management agreements for one additional 5-year term on mutually
acceptable terms and conditions, provided the hotel meets certain performance
standards. The TRSs may elect not to continue to operate the hotels under the
brand beyond the expiration of the initial term, however such election will give
Six Continents Hotels the right to force us to sell such hotel to it at an
appraised value. The management agreements with the other managers generally
have initial terms of between 10 and 20 years, and the agreements are generally
renewable beyond the initial term for a period or periods of between 5 and 10
years only upon the mutual written agreement of the parties.
The management agreements are generally terminable upon the occurrence
of standard events of default or if the hotel subject to the agreement fails to
meet certain financial expectations. Upon termination by either party for any
reason the TRSs generally will pay all amounts due and owing under the
management agreement through the effective date of such termination. Under the
Six Continents Hotels management agreements, if we sell any individual hotel,
including 11 of the 13 hotels held for sale by us, we may be required to pay Six
Continents Hotels a monthly replacement management fee equal to the existing fee
structure for up to one year. In addition, if a TRS breaches the agreement,
resulting in a default and termination thereof, or otherwise causes or suffers a
termination for any reason other than an event of default by Six Continents
Hotels, the TRS may be liable for liquidated damages under the terms of the
management agreement. However, if the termination results from the sale of a
hotel, no such liquidated damages will be owed if the net proceeds of the sold
hotel are reinvested in one or more hotels licensed by Six Continents Hotels
within one year from the sale of the hotel.
Assignment. Generally, neither party to the management agreements has
the right to sell, assign or transfer the agreements to a third party without
the prior written consent of the other party to the agreement, which consent
shall not be unreasonably withheld. A change in control of either party will
generally require the other's consent, which shall not be unreasonably withheld.
FRANCHISE AGREEMENTS
With the exception of our 100 hotels whose rights to use a brand name
are contained in the management agreement governing their operations and our
seven hotels that do not operate under a nationally recognized brand name, each
of our hotels operates under a franchise or license agreement. Of our 76 hotels
that are operated under a franchise or license agreements, 59 are operated under
the Embassy Suites Hotels brand.
The Embassy Suites Hotels franchise license agreements to which we are
a party grant us the right to the use of the Embassy Suites Hotels name, system
and marks with respect to specified hotels and established various management,
operational, record-keeping, accounting, reporting and marketing standards and
procedures with which the licensed hotel must comply. In addition, the
franchisor establishes requirements for the quality and condition of the hotel
and its furnishings, furniture and equipment and we are obligated to expend such
funds as may be required to maintain the hotel in compliance with those
requirements.
Typically, our Embassy Suites Hotels franchise license agreements
provide for payment to the franchisor of a license fee or royalty of 4% of suite
revenues. In addition, we pay approximately 3.5% of suite revenues as marketing
and reservation system contributions for the systemwide benefit of Embassy
Suites Hotels.
24
Our typical Embassy Suites Hotels franchise license agreement provides
for a term of 20 years, but we have right to terminate the license for any
particular hotel on the 10th or 15th anniversary of the agreement upon payment
by us of an amount equal to the fees paid to the franchisor with respect to that
hotel during the two preceding years. The agreements provide us with no renewal
or extension rights. The agreements are not assignable by us and a change in
control of the franchisee will constitute a default on our part. In the event we
breach one of these agreements, in addition to losing the right to use the
Embassy Suites Hotels name for the operation of the applicable hotel, we may be
liable, under, under certain circumstances, for liquidated damages equal to the
fees paid to the franchisor with respect to that hotel during the three
preceding years.
ITEM 3. LEGAL PROCEEDINGS
There is no litigation pending or known to be threatened against us or
affecting any of our hotels, other than claims arising in the ordinary course of
business or which are not considered to be material. Furthermore, most of these
claims are substantially covered by insurance. We do not believe that any claims
known to us, individually or in the aggregate, will have a material adverse
effect on us, without regard to any potential recoveries from insurers or other
third parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is traded on the New York Stock Exchange under the
symbol "FCH." The following table sets forth for the indicated periods the high
and low sale prices for our common stock, as traded on that exchange.
<Table>
<Caption>
HIGH LOW
---- ---
2000
First quarter............................................... $18.75 $16.50
Second quarter.............................................. 22.06 17.69
Third quarter............................................... 23.75 19.69
Fourth quarter.............................................. 24.50 21.50
2001
First quarter............................................... 24.94 22.14
Second quarter.............................................. 24.75 20.90
Third quarter............................................... 24.23 11.90
Fourth quarter.............................................. 17.20 12.80
</Table>
STOCKHOLDER INFORMATION
At March 18, 2002, we had approximately 530 holders of record of our
common stock and approximately 50 holders of record of our $1.95 Series A
Cumulative Convertible Preferred Stock (which is convertible into common stock).
It is estimated that there were approximately 23,500 beneficial owners, in the
aggregate, of our common stock and Series A Preferred Stock at that date.
IN ORDER TO COMPLY WITH CERTAIN REQUIREMENTS RELATED TO OUR
QUALIFICATION AS A REIT, OUR CHARTER LIMITS THE NUMBER OF SHARES OF COMMON STOCK
THAT MAY BE OWNED BY ANY SINGLE PERSON OR AFFILIATED GROUP TO 9.9% OF THE
OUTSTANDING COMMON STOCK.
DISTRIBUTION INFORMATION
We have adopted a policy of paying regular quarterly distributions on
our common stock, and cash distributions have been paid on our common stock with
respect to each quarter since our inception. For the fourth quarter of 2001 we
reduced our dividend to $0.05 from $0.55, paid in the previous quarter. This
reduction resulted from the weakness in the economy, the events of September 11
and the decline in lodging demand. The following table sets forth information
regarding the declaration and payment of distributions by FelCor on its common
stock during 2000 and 2001.
<Table>
<Caption>
QUARTER TO DISTRIBUTION DISTRIBUTION PER SHARE
WHICH DISTRIBUTION RECORD PAYMENT DISTRIBUTION
RELATES DATE DATE AMOUNT
------------------ ------------ ------------ ------------
2000
First quarter.................................................. 4/14/00 4/28/00 $0.55
Second quarter................................................. 7/14/00 7/31/00 $0.55
Third quarter.................................................. 10/16/00 10/31/00 $0.55
Fourth quarter................................................. 12/29/00 1/31/01 $0.55
2001
First quarter.................................................. 4/13/01 4/30/01 $0.55
Second quarter................................................. 7/13/01 7/31/01 $0.55
Third quarter.................................................. 10/15/01 10/31/01 $0.55
Fourth quarter................................................. 12/31/01 1/31/02 $0.05
</Table>
26
The foregoing distributions represent approximately a 45% return of
capital in 2001 and no return of capital in 2000. In order to maintain our
qualification as a REIT, we must make annual distributions to our stockholders
of at least 90% (95% prior to January 1, 2001) of our taxable income (which does
not include net capital gains). For the years ended December 31, 2001 and
December 31, 2000, we had annual distributions totaling $1.70 and $2.20 per
common share, respectively, of which only $0.94 and $2.09 per share,
respectively, were required to satisfy the 90% and 95% REIT distribution tests
in the respective years. Under certain circumstances we may be required to make
distributions in excess of cash available for distribution in order to meet
these REIT distribution requirements. In that event, we presently would expect
to borrow funds, or to sell assets for cash, to the extent necessary to obtain
cash sufficient to make the distributions required to retain our qualification
as a REIT for federal income tax purposes.
We currently expect to determine the amount of each quarterly dividend
based upon the operating results of that quarter, economic conditions and other
operating trends. Our management currently believes that we should be able to
pay an aggregate of $1.00 in dividends per common share for 2002, based upon the
low end of our previously announced FFO estimates for 2002 of $147 to $174
million. However, our decision to pay common dividends will be determined each
quarter, based upon the operating results of that quarter, economic conditions
and other operating trends. Future distributions, if any, paid by us will be at
the discretion of our board of directors and will depend on our actual cash
flow, financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code and such
other factors as our board of directors deems relevant.
ISSUANCES OF UNREGISTERED SECURITIES
Effective January 1, 2001, FelCor LP issued 416,667 units of limited
partnership interest valued at approximately $10 million to the equity owners of
DJONT in consideration for the acquisition of DJONT. These limited partnership
units are redeemable, subject to certain conditions, for shares of our common
stock on a one-for-one basis.
Also effective January 1, 2001, we issued 413,585 shares of our common
stock valued at approximately $10 million to Six Continents Hotels in
consideration for the acquisition of leases with respect to 12 hotels that had
been leased to and operated by Six Continents Hotels and the termination of the
related management agreements. Effective July 1, 2001, we issued 100 shares of
our common stock to Six Continents Hotels in partial consideration for the
acquisition of leases with respect to 88 hotels that had been leased to and
operated by Six Continents Hotels.
During the year ended December 31, 2001, we issued an aggregate of
6,227 shares of our common stock to holders of FelCor LP units upon redemption
of a like number of units.
For each of the foregoing issuances of partnership units by FelCor LP
and shares of common stock by us, we relied upon the exemption from registration
provided by Section 4(2) of the Securities Act as each was a transaction not
involving a public offering.
27
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial data for us for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997 that has been derived
from our financial statements and the notes thereto, audited by
PricewaterhouseCoopers LLP, independent accountants. This data should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Item 14(a), the Consolidated Financial
Statements and Notes thereto, appearing elsewhere in this Annual Report on Form
10-K.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2001(1) 2000(2) 1999 1998(3) 1997
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Total revenues ............................ $ 1,200,971 $ 539,964 $ 493,087 $ 332,600 $ 169,688
Net income (loss) ......................... $ (39,276) $ 61,699 $ 131,080 $ 114,839 $ 63,650
Net income (loss) applicable to
common stockholders .................... $ (63,876) $ 37,017 $ 106,345 $ 93,416 $ 51,853
DILUTED EARNINGS PER SHARE:
Net income (loss) applicable to
common stockholders before
extraordinary charge ................... $ (1.19) $ 0.74 $ 1.59 $ 1.92 $ 1.65
Net income (loss) applicable to
common stockholders .................... $ (1.21) $ 0.67 $ 1.57 $ 1.86 $ 1.64
OTHER DATA:
Cash distributions per common
share(4) ................................ $ 1.70 $ 2.20 $ 2.20 $ 2.545 $ 2.10
Funds From Operations (5) ................. $ 183,657 $ 288,636 $ 286,895 $ 217,363 $ 129,815
EBITDA(5) ................................. $ 369,591 $ 470,861 $ 432,689 $ 306,361 $ 165,613
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets .............................. $ 4,088,929 $ 4,103,603 $ 4,255,751 $ 4,175,383 $ 1,673,364
Total debt, net of discount ............... $ 1,938,408 $ 1,838,241 $ 1,833,954 $ 1,594,734 $ 476,819
</Table>
- ----------
(1) Includes hotel revenues and expenses with respect to 96 hotels that were
leased to either DJONT or subsidiaries of Six Continents Hotels prior to January
1, 2001 and 88 hotels that were leased to Six Continents Hotels prior to July 1,
2001. Prior to the acquisition of the leases, our revenues were comprised mainly
of percentage lease revenues. Accordingly, revenues, expenses and operating
results for the year ended December 31, 2001, are not directly comparable to the
same period in 2000. Additionally, for the year ended December 31, 2001, we
recorded approximately $78 million of expenses, including lease termination
costs of $36.6 million, merger termination costs of $19.9 million, merger
related financing costs of $5.5 million, swap termination costs of $7.0 million,
loss on hotels held for sale of $7.0 million, extraordinary loss from the
write-off of deferred loan costs of $1.3 million, and abandoned project
write-offs of $837,000.
(2) In the second quarter of 2000, we recorded a $63.0 million loss to reflect
the difference between our book value and the expected realizable value of 25
hotels in connection with our decision to sell these non-strategic hotel assets,
and an extraordinary charge of $3.9 million for the write-off of deferred loan
costs associated with debt retired in 2000, prior to its maturity.
(3) On July 28, 1998, we completed the merger of Bristol Hotel Company's real
estate holdings with and into FelCor. The merger resulted in the net acquisition
of 107 primarily full-service hotels in return for approximately 31 million
shares of newly issued common stock. We subsequently contributed all assets and
liabilities acquired in the merger to FelCor LP, in exchange for approximately
31 million of its common units.
(4) In the fourth quarter of 2001, we paid a common dividend of $0.05 per share.
This reduction from the $0.55 per share quarterly dividend that we had paid
since the third quarter of 1997 was prompted by the decrease in revenues
resulting from the events of September 11, 2001, and the general economic
downturn. In 1998, we declared a special distribution of accumulated but
undistributed earnings and profits as a result of Bristol Hotel Company merging
with and into FelCor, in addition to the aggregate quarterly dividends of $2.20
per common share. The amount of the distribution was $0.345 per common share.
(5) A more detailed description and computation of FFO and EBITDA is contained
in the "Funds From Operations and EBITDA" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 below.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
For background information relating to us and the definitions of
certain capitalized terms used herein, reference is made to the Notes to
Consolidated Financial Statements of FelCor Lodging Trust Incorporated appearing
elsewhere in this Annual Report on Form 10-K.
The economic downturn, which started in early 2001, and the aftermath
of the terrorist attacks on September 11, resulted in a sharp decline in lodging
demand for 2001 and had an adverse effect on our operating results for the year.
In 2001 the lodging industry experienced the worst decline in demand in the past
30 years. For the year ended December 31, 2001, our hotels' revenue per
available room ("RevPAR") decreased by 11.4% compared to 2000. This decline
resulted in lower revenues from our hotels and a reduction in our operating
income. Other items that affected our results of operations in 2001 were the
termination of the planned merger with MeriStar and the acquisition of our hotel
leases. The MeriStar merger was terminated as a result of the adverse impact on
the financial markets of the September 11 terrorist attacks. The acquisition of
our hotel leases was made possible by the REIT Modernization Act, which became
effective on January 1, 2001.
We raised a net total of $500 million in new capital during 2001,
through the issuance of unsecured senior notes, and reduced our borrowings under
our line of credit to approximately $50 million at December 31, 2001. On
November 8, 2001, we amended our unsecured line of credit. Although we were in
compliance with our existing covenants prior to the amendment, it was necessary
to amend the line of credit in anticipation of a continued negative RevPAR
environment. The amendment allows for the relaxation of certain financial
covenants through December 31, 2002, with a step-up in existing covenants on
September 30, 2002, but imposes additional limitations on our ability to invest
in hotels and make distributions to stockholders.
FINANCIAL COMPARISON
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
% CHANGE % CHANGE
2001 2000 2001-2000 1999 2000-1999
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT REVPAR)
Revenue Per Available Room
("RevPAR").......................... $ 65.34 $ 73.73 (11.4)% $ 68.93 6.9%
Funds From Operations ("FFO") .......... $ 183.7 $ 288.6 (36.3) $ 286.9 0.6
Earnings Before Interest, Taxes,
Depreciation and Amortization
("EBITDA") .......................... $ 369.6 $ 470.9 (21.5) $ 432.7 8.9
Net income (loss) ...................... $ (39.3)(1) $ 61.7(2) (163.7) $ 131.1 (52.9)
</Table>
(1) The net loss for the year ended December 31, 2001, includes $78 million
of expenses consisting of merger termination costs of $20 million,
merger related financing costs of $6 million, lease termination costs
of $37 million, swap termination costs of $7 million, a loss on assets
held for sale of $7 million, abandoned project write-offs of $837,000,
and an extraordinary loss of $1 million from the write-off of deferred
loan costs.
(2) The net income for the year ended December 31, 2000, was reduced by a
$63 million loss recognized to reflect the difference between our book
value and the estimated realizable value of 25 non-strategic hotel
assets that we decided to sell, and a $4 million extraordinary loss
from the write-off of deferred loan costs.
29
REVPAR DECLINE
Room revenues at our hotels decreased during 2001 as a result of the
economic recession and the sharp decline in travel following the terrorist
attacks on September 11, 2001. For the year to date period prior to September
11, 2001, our RevPAR decreased 5.1% due to a decrease in the number of occupied
rooms as a percentage of available rooms ("occupancy") of 4.1 percentage points
to 68.0% partially offset by the slight increase of 0.6% in average daily rate
("ADR") to $104.88. During the four week period following the tragic events of
September 11, 2001, our hotels recorded average occupancy rates as low as 33.9%.
During that period, we experienced a substantial number of group cancellations,
resulting in a significant loss of revenue, primarily affecting our larger
hotels. For the 16 weeks from September 11, 2001 to December 31, 2001, our
RevPAR decreased 26.3% compared to the same period of 2000. As a result of this
decline in revenue, our results from operations for the fourth quarter were
significantly reduced. In response, we are actively working with the managers of
our hotels to reduce operating costs as well as to provide economic incentives
to individuals and business travelers in selected markets to increase demand. In
addition, based on our assessment of the current operating environment and in
order to conserve capital, future non-essential capital expenditure projects
will be approved only as adequate funds become available.
As a result of a gradual recovery in the level of travel, we have begun
to see modest improvements in occupancy and ADR, though they remain below prior
year levels. However, our fourth quarter results were significantly lower than
the prior year period. Accordingly, we reduced the fourth quarter dividend on
our common stock to $0.05 per share, resulting in aggregate dividends of $1.70
per share for the year ended December 31, 2001.
For the first quarter of 2002, we currently anticipate our portfolio
RevPAR will be 16% to 18% below the comparable period of the prior year. FFO is
expected to be within the range of $27 to $30 million for the first quarter of
2002, and EBITDA is expected to be within the range of $74 million to $78
million for the same period. We currently anticipate that our hotel portfolio
RevPAR for 2002, compared to 2001, will be flat to negative 3%.
The terrorist attacks of September 11, 2001, were unprecedented. We are
unable to predict with certainty if or when lodging demand and rates will return
to pre-September 11 levels. We believe that the uncertainty associated with the
war on terrorism and possible future terrorist attacks will continue to hamper
the travel and lodging industries during much of 2002. Any additional terrorist
attack may have a similar or worse effect on the lodging industry than that
experienced as a result of the September 11 attacks.
MERGER TERMINATION
On May 9, 2001, we entered into a merger agreement with MeriStar. On
September 21, 2001, MeriStar and we jointly announced the termination of the
merger. The decision to terminate the merger resulted from the September 11
terrorist attacks and their subsequent adverse impact on the financial markets.
As a result of the merger termination, we expensed $19.9 million associated with
the merger and $5.5 million in merger financing costs for the year ended
December 31, 2001.
ACQUISITION OF HOTEL LEASES
Under the REIT Modernization Act that became effective January 1, 2001,
we are permitted to lease our hotels to our wholly-owned TRS lessees, provided
that the TRS lessees engage third-party management companies to manage the
hotels.
We completed the acquisition of DJONT (which leased 85 of our hotels)
effective January 1, 2001. In consideration for the acquisition, FelCor LP
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.
30
On January 1, 2001, we also acquired the leases of 12 of our hotels,
together with the associated management contracts, from Six Continents Hotels,
for 413,585 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 loss related to hotels held for sale. Of these
hotels, three have been sold, eight have been contributed to a joint venture
with Interstate Hotels Corporation, or IHC, and one will be retained.
Effective July 1, 2001, we acquired the remaining 88 of our hotel
leases held by Six Continents Hotels in exchange for long-term management
agreements. In exchange for the assignment of the leases to our wholly-owned
TRS, FelCor issued 100 shares of its common stock and we entered into long-term
management agreements with Six Continents Hotels covering the 88 hotels. The
management fees payable to Six Continents Hotels under the new management
agreements on the 88 hotels were structured so that the historical cash flows
for the year ended December 31, 2000, for both FelCor and Six Continents Hotels,
would have been approximately the same had the management agreements replaced
the leases on January 1, 2000. These management fees, which are higher than
those paid by us to other managers for comparable services, include compensation
to Six Continents Hotels for both management services and the acquisition of the
88 leases.
Unlike the leases, where the rent payable to us would vary only as a
result of changes in hotel revenues, under the management agreements our cash
flow and net income also will vary as a result of changes in the operating
margins of the hotels. We entered into the transactions to acquire the leases
and DJONT based upon our management's belief that, in the long term, lodging
demand will exceed new supply and that operational efficiencies will increase
industry-wide for a variety of reasons, including the impact of new technologies
allowing lower-cost delivery of services and providing new revenue sources that
are not labor-intensive, such as in-room entertainment and direct and in-room
marketing to guests. In addition, we believe that our ownership of the lessees
on our hotels eliminates a potential divergence of interest between the lessor,
who benefits from having management maximize revenues, even at the expense of
profits, and the lessee, who benefits from having management maximize profits,
even at the expense of revenues.
We acquired DJONT from entities controlled by Mr. Corcoran and the
children of Mr. Mathewson. Because of the conflict between our interests and
those of Messrs. Corcoran and Mathewson in connection with our acquisition of
DJONT, our board of directors appointed a special committee of three independent
directors who, with the assistance of an investment advisor, determined the
price to be paid for DJONT and concluded that the transaction was fair to us
from a financial point of view. Neither Mr. Corcoran nor Mr. Mathewson
participated in any discussion or vote of the board of directors regarding this
transaction. The acquisition of leases from Six Continents Hotels was
negotiated, on an arms-length basis, by our senior management with the officers
of Six Continents Hotels. Each party was represented by separate counsel.
Because of his position with Six Continents plc, Mr. North abstained from
participating in any discussion or vote by our board of directors relating to
the acquisition of leases from Six Continents Hotels.
The recent economic slowdown combined with the sharp reduction in
travel following the terrorist attacks of September 11, have resulted in
declines in RevPAR and in an erosion in operating margins during the year ended
December 31, 2001, as compared to the same periods of 2000. So long as the
operating margins for our hotels remain below the levels experienced during
2000, we expect the hotel operating results to be generally less favorable to us
than the leases would have been.
INSURANCE
Following the events of September 11, 2001, certain types of insurance
coverage, such as for acts of terrorism, are unavailable or are only available
at a cost that is prohibitive. In an effort to keep our cost of insurance within
reasonable limits, we have not purchased terrorism insurance at the current
prohibitive prices. We have also increased our deductible amounts under policies
of flood, wind and general liability insurance, which increases our risk of
incurring losses that are uninsured or not fully insured. Should losses that are
uninsured or not fully insured be substantial, they could have a material
adverse impact on our operating results and cash flows.
31
RESULTS OF OPERATIONS
THE COMPANY -- ACTUAL
Comparison of the Years Ended December 31, 2001 and 2000
Prior to December 31, 2000, we leased 184 hotels to either DJONT or Six
Continents Hotels and reported the lease revenue from the percentage lease
agreements. Our historical revenues for 2000 represented principally rental
income on leases. Expenses during this period represented specific ownership
costs including real estate and property taxes, property insurance and ground
leases. Effective January 1, 2001, through our TRSs, we acquired 96 of these
hotel leases and, effective July 1, 2001, acquired the leases on our remaining
88 hotels, assuming all operating risks and rewards of these 184 hotels. As a
result of acquiring these leases, we reported hotel operating revenues and
expenses. Our expenses included all hotel operating costs including management
fees, salary expenses, hotel marketing, utilities, and food and beverage costs,
in addition to ownership costs. Accordingly, operating results for the year
ended December 31, 2001, are not directly comparable to the same period in 2000.
For the year ended December 31, 2001, we recorded total revenues of
$1.2 billion compared to $540 million for the year ended December 31, 2000. The
increase in total revenues of $661 million is principally associated with
reporting hotel operating revenues in 2001 rather than percentage lease revenue
reported in the previous year. The 96 hotels acquired from DJONT contributed
approximately $788 million in hotel operating revenue in 2001, compared to $277
million in percentage lease revenue for 2000. The 88 hotels acquired July 1,
2001 from Six Continents Hotels contributed approximately $115 million in
percentage lease revenue and $295 million in hotel operating revenue, following
the acquisition of these leases, compared to $260 million in percentage lease
revenue for these same hotels in 2000.
Total operating expense increased $814 million for the year ended
December 31, 2001, over the same period in 2000, primarily as a result of the
inclusion of hotel operating expenses, management fees and other property
related costs of $711 million, which were not included in the same period of
2000 prior to our acquisition of the hotel leases. Also included in total
operating expenses for 2001 are lease termination costs; merger termination
costs; depreciation; taxes, insurance and lease expense; and corporate expenses.
Taxes, insurance and lease expense increased by $49 million for year
ended December 31, 2001, over 2000. The majority of this increase is related to
percentage lease expense paid to unconsolidated ventures owning hotels whose
operations were acquired with the acquisition of DJONT. We included in operating
expenses $37 million of costs associated with the acquisition of DJONT and the
Six Continents Hotels leases, and $20 million of expenses associated with the
termination of the MeriStar merger. We also incurred $6 million in merger
related financing costs related to the $300 million in senior debt that was
repaid in October as a result of the termination of the MeriStar merger.
In connection with the issuance of favorably priced fixed rate debt,
and the prepayment of floating rate debt, we terminated $250 million of interest
rate swaps, resulting in a $7 million swap termination cost. In June 2000, we
announced our intention to sell 25 non-strategic hotels and, in 2000, recorded
an expense of $63 million representing the difference between the net book value
of these hotels and their estimated net proceeds from sale. In 2001, an
additional $7 million loss provision was recorded related to the remaining 13
hotels held for sale. We continue to actively market the remaining hotels held
for sale.
Equity in income from unconsolidated entities decreased $8 million in
2001, compared to 2000. The principal reasons for the decrease in 2001 were a
gain of $4 million recorded in 2000 from the development and sale of
condominiums by an entity in which we own a 50% equity interest and a decline in
percentage lease revenue in 2001 from these unconsolidated entities related to a
11.2% decline in RevPAR for the hotels owned by them.
32
Minority interests decreased $16 million in 2001, compared to 2000.
This decrease in minority interest principally reflects FelCor LP's partners'
share of our net loss of $64 million in 2001.
We recorded a net loss applicable to common stockholders of $64
million in 2001, compared to a net income of $37 million in 2000. The principal
components of the loss in 2001 were the decrease in hotel RevPAR of 11.4%,
contraction of hotel operating margins principally associated with the decline
in RevPAR, costs of terminating the MeriStar merger of $20 million, merger
financing costs of $6 million, lease termination costs of $37 million associated
with acquiring hotel leases, swap termination costs of $7 million associated
with repayment of variable rate debt, and a loss on assets held for sale of $7
million.
Comparison of the pro forma years ended December 31, 2001 and 2000
Between January 1 and July 1, 2001, we acquired the operating leases
covering all of our hotels and contributed them to our TRSs. As the leases were
acquired, we began receiving and recording direct hotel revenues and expenses,
rather than percentage lease revenue. Consequently, a comparison of historical
results for the year ended December 31, 2001 to the year ended December 31, 2000
may not be as meaningful as a discussion of pro forma results. Accordingly, we
have included a discussion of the comparison of the pro forma results of
operations. The pro forma results of operations for the years ended December 31,
2001 and 2000 assumes that the following occurred on January 1, 2000:
o Our acquisition of DJONT for 416,667 units of limited
partnership interest in FelCor LP valued at approximately $10
million;
o Our acquisition of 12 hotel leases, together with their
associated management contracts, from Six Continents Hotels
for 413,585 shares of our common stock valued at approximately
$10 million; and
o Our acquisition of the remaining 88 hotel leases held by Six
Continents Hotels.
FELCOR LODGING TRUST INCORPORATED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
PRO FORMA PRO FORMA
2001 2000
------------ ------------
Total revenues ......................................................... $ 1,442,974 $ 1,667,270
Total operating expenses ............................................... 1,261,163 1,402,018
Merger termination costs ............................................... 19,919
------------ ------------
Operating income ....................................................... 161,892 265,252
Interest expense, net:
Recurring financing ................................................. 158,343 156,712
Merger related financing ............................................ 5,486
Swap termination expense ............................................... 7,049
Loss on assets held for sale ........................................... 7,000 63,000
------------ ------------
Income (loss) before equity in income from unconsolidated entities,
minority interests, gain on sale of assets and extraordinary items .. (15,986) 45,540
Equity in income from unconsolidated entities .......................... 7,346 11,484
Minority interests .................................................. 1,457 (7,469)
Gain on sale of assets .............................................. 3,417 4,388
------------ ------------
Net income (loss) before extraordinary items ........................... (3,766) 53,943
Preferred dividends .................................................... (24,600) (24,682)
------------ ------------
Net income (loss) applicable to common shareholders before
extraordinary items ............................................... $ (28,366) $ 29,261
============ ============
</Table>
33
FELCOR LODGING TRUST INCORPORATED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
FELCOR
HISTORICAL PRO FORMA
2001 ADJUSTMENTS 2001
------------ ------------ ------------
Total revenues ......................................................... $ 1,200,971 $ 242,003(a) $ 1,442,974
Total operating expenses ............................................... 1,059,226 201,937(b) 1,261,163
Merger termination costs ............................................... 19,919 19,919
------------ ------------ ------------
Operating income ....................................................... 121,826 40,066 161,892
Interest expense, net:
Recurring financing ................................................. 158,343 158,343
Merger related financing ............................................ 5,486 5,486
Swap termination expense ............................................... 7,049 7,049
Loss on assets held for sale ........................................... 7,000 7,000
------------ ------------ ------------
Income (loss) before equity in income from unconsolidated entities,
minority interests, gain on sale of assets and extraordinary items .. (56,052) 40,066 (15,986)
Equity in income from unconsolidated entities .......................... 7,346 7,346
Minority interests .................................................. 7,283 (5,826)(c) 1,457
Gain on sale of assets .............................................. 3,417 3,417
------------ ------------ ------------
Net income (loss) before extraordinary items ........................... (38,006) 34,240 (3,766)
Preferred dividends .................................................... (24,600) (24,600)
------------ ------------ ------------
Net income (loss) applicable to common shareholders before
extraordinary items ............................................... $ (62,606) $ 34,240 $ (28,366)
============ ============ ============
</Table>
34
FELCOR LODGING TRUST INCORPORATED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
FELCOR
HISTORICAL PRO FORMA
2000 ADJUSTMENTS 2000
------------ ------------- -------------
Total revenues ......................................................... $ 539,964 $ 1,127,306(a) $ 1,667,270
Total operating expenses ............................................... 265,634 1,136,384(b) 1,402,018
------------ ------------- -------------
Merger termination costs
Operating income ....................................................... 274,330 (9,078) 265,252
Interest expense, net:
Recurring financing ................................................. 156,712 156,712
Merger related financing
Swap termination expense
Loss on assets held for sale ........................................... 63,000 63,000
------------ ------------- -------------
Income (loss) before equity in income from unconsolidated entities,
minority interests, gain on sale of assets and extraordinary items .. 54,618 (9,078) 45,540
Equity in income from unconsolidated entities .......................... 14,820 (3,336)(d) 11,484
Minority interests .................................................. (8,262) 793(c) (7,469)
Gain on sale of assets .............................................. 4,388 4,388
------------ ------------- -------------
Net income (loss) before extraordinary items ........................... 65,564 (11,621) 53,943
Preferred dividends .................................................... (24,682) (24,682)
------------ ------------- -------------
Net income (loss) applicable to common shareholders before
extraordinary items ............................................... $ 40,882 $ (11,621) $ 29,261
============ ============= =============
</Table>
35
Pro forma numbers presented represent our historical revenues and
expenses, except as described by pro forma changes below.
Pro forma adjustments:
(a) Total revenue adjustments consist of the changes in our historical
revenue from the elimination of historical percentage lease revenue and
the addition of historical hotel operating revenues.
(b) Total operating expense adjustments consist of the changes in our
historical operating expense from the elimination of historical lease
termination costs in 2001, the addition of historical hotel operating
expenses and the elimination of percentage lease expense. Additionally,
for the 88 hotels managed by Six Continents Hotels, the adjustments
record management fees at their new contractual rates and the
elimination of historical franchise fees, which are included in
management fees.
(c) Represents FelCor LP's minority interest holders' share of revenue and
expense adjustments.
(d) Equity in income from unconsolidated entities represents historical
equity in income from unconsolidated entities after the elimination in
2000 of $3 million related to minority interest expense on DJONT.
Pro forma revenues decreased $224 million in 2001, primarily as a
result of the continuing economic recession and disruptions in business and
leisure travel patterns following the terrorist attacks on September 11, 2001.
As a result of these events, both business and leisure travel declined
significantly during the year ending December 31, 2001, compared to the same pro
forma period in 2000. During 2001 our hotels' RevPAR decreased 11.4%, comprised
of a decrease in occupancy of 6.6 percentage points to 63.9% and a decline in
ADR of 2.4% to $102.18. During the four-week period following the terrorist
attacks on September 11, 2001, our hotels recorded average occupancy rates as
low as 33.9%. However, our Hotel RevPAR performance improved throughout the
fourth quarter, with RevPAR decreases compared to the prior year periods, of
25.2% in October, 23.6% in November, and 18.8% in December. We continue to see
improvements in both occupancy and ADR, although they remain below prior year
levels.
Pro forma operating expenses decreased $141 million in 2001 compared
to 2000 but pro forma operating expense as a percentage of total revenue
increased from 84% to 89%. The principal reason for the increased operating
expense as a percentage of total revenue was a 260 basis point drop in hotel
operating margins (gross operating profit less franchise and management fees).
This margin compression primarily relates to increased labor costs, the cost of
frequent guest programs and utility costs as a percentage of total revenue. The
pro forma increase in costs as a percentage of pro forma revenue is principally
related to the decrease in hotel revenue previously discussed. We have been
actively working with our managers to implement cost cutting programs at the
hotels to stabilize the hotel operating profits. These measures include reducing
labor costs, streamlining staffing, and consolidating operations by closing
unused floors in hotels when possible.
Pro forma interest expense net of interest income increased $7
million. The principal reason for the increase is $6 million of merger related
financing costs.
Pro forma equity in income from unconsolidated entities decreased $4
million, principally as the result of the decreased hotel revenues previously
discussed.
Pro forma minority interest expense was reduced by $8 million. This
principally represents the allocation of the pro forma 2001 losses to our
minority interest holders in FelCor LP.
Comparison of the Years Ended December 31, 2000 and 1999
For the year ended December 31, 2000, we recorded net income of $62
million compared to $131 million for the year ended December 31, 1999. Included
in expense for the year ended December 31, 2000, is an expense of $63 million
related to 25 non-strategic hotels that we identified as held for sale. The
expense represents the difference between the net book value of the hotels and
their estimated net realizable value. Net income excluding the reserve would
have been $125 million.
36
Our total revenues increased $47 million to $540 million for the year
ended December 31, 2000, compared to $493 million for the year ended December
31, 1999. This increase is principally from increased percentage lease revenues
of $46 million, which increased to $537 million from $491 million in the prior
year.
Changes in our hotels' room and suite revenues significantly affect us
because our principal source of revenue historically has been rent payments from
the lessees under the percentage leases. The percentage leases provide for rent
based on a percentage of room and suite revenue, food and beverage revenue, food
and beverage rents, and in some instances, other hotel revenues. During 2000 and
1999, percentage lease revenue derived from room and suite revenue represented
90% and 91% of total percentage lease revenue, respectively. RevPAR, which is a
measure of room and suite revenue, increased by 7.0% in 2000 for all of our
hotels. This increase in RevPAR resulted from increases in both occupancy and
ADR. For the year ended December 31, 2000, ADR increased by 3.7% over the prior
year and Occupancy increased by 2.2 percentage points. Our ability to achieve
increases in room and suite revenue and RevPAR at our hotels is affected, among
other things, by overall demand in the marketplace, room supply and the success
of our renovation, redevelopment and rebranding program. We had 59 hotels that
had undergone renovation, redevelopment or rebranding in either 1999 or 2000,
that are identified by us as non-comparable hotels. The non-comparable hotels
reflected increases in RevPAR of 10.1%, which was greater than the results for
hotels that had not recently undergone renovation.
The Company generally seeks to improve those hotels that management
believes can achieve increases in room and suite revenue and RevPAR as a result
of renovation, redevelopment and rebranding. Since the beginning of 1998 through
2000, we had spent nearly $550 million in capital improvements to our hotels.
Management attributes much of the improvement in RevPAR to these capital
improvements.
Operating expenses increased $26 million in the year ended December 31,
2000, to $266 million from $239 million in 1999. The principal components of the
increase in operating expense were taxes, insurance and lease expense and
depreciation expense.
Taxes, insurance and lease expense increased by $16 million in 2000,
compared to the prior year, and increased as a percentage of total revenue from
15.6% to 17.2%. This increase in expenses was principally from increases in real
estate and personal property taxes. Our real estate and personal property taxes
increased from higher assessed values generally resulting from the major
renovations completed over the past three years.
Depreciation expense increased by $8 million in 2000, compared to the
prior year, and decreased as a percentage of total revenue from 31.0% to 29.8%.
Depreciation expense increased principally as a result of additional
depreciation related to fixed asset additions of $95 million in 2000 and $222
million in 1999.
Interest expense, net increased by $34 million for the year ended
December 31, 2000, compared to 1999, and increased as a percentage of total
revenue from 24.9% to 29.0%. This increase is principally the result of the
following items:
o Our average debt outstanding increased in 2000 by approximately $197
million over the prior year. The increase in average debt resulted
principally from stock repurchases in 2000 of approximately $87 million
and capital expenditures in 2000 totaling approximately $101 million.
o The average interest rate on our indebtedness increased from about 7%
in 1999 to nearly 8% in 2000.
o We capitalized interest related to major renovations of approximately
$5 million in 1999 but, because of reduced renovation activity in 2000,
we had only $1 million of interest capitalized in 2000.
In 2000 we recorded a loss on assets held for sale of $63 million. We
identified for sale 25 non-strategic hotels and recorded a loss representing the
difference between the net book value of these hotels compared to the
anticipated net sales proceeds.
37
Equity in income from unconsolidated entities increased by $6.3 million
in 2000 compared to 1999. The principal reasons for this increase in 2000 were a
$3.7 million gain recorded in 2000 from the development and sale of the Brighton
Beach condominiums at Kingston Plantation in Myrtle Beach, South Carolina, by an
entity in which we own a 50% equity interest and the operations of a hotel in
which we acquired a 50% equity interest in the fourth quarter of 1999.
We also recorded gains on the sale of two hotels of $2.6 million and
$1.8 million for the sale of excess land during the year ended December 31, 2000
and an extraordinary charge of $3.9 million for the write-off of deferred loan
costs associated with debt that was retired in 2000, prior to its maturity.
Funds From Operations and EBITDA
We consider FFO and 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 our 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 applicable portion of these items related to unconsolidated entities and
joint ventures. We believe 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 REIT to incur and
service debt, to make capital expenditures, to pay dividends and to fund other
cash needs. We compute FFO in accordance with standards established by NAREIT,
except that we add back lease termination costs, merger termination costs,
merger financing costs, abandoned projects, provision for losses on hotels held
for sale and interest rate 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 we do or that do not adjust FFO for lease
termination costs, merger termination costs, merger financing costs, abandoned
projects, provision for losses on hotels held for sale and interest rate 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 our financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of our liquidity, nor does it
necessarily reflect the funds available to fund our cash needs, including our
ability to make cash distributions. FFO and EBITDA may include funds that may
not be available for our discretionary use due to functional requirements to
conserve funds for capital expenditures and property acquisitions, and other
commitments and uncertainties.
38
The following table details the computation of FFO (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
FUNDS FROM OPERATIONS (FFO):
Net income (loss) ............................................................ $ (39,276) $ 61,699 $ 131,080
Gain on sale of hotel ................................................... (2,595)
Extraordinary charge from write-off of deferred
financing fees ...................................................... 1,270 3,865 1,113
Provision for losses on hotels held for sale ............................ 7,000 63,000
Abandoned projects ...................................................... 837
Swap termination expense ................................................ 7,049
Lease termination costs ................................................. 36,604
Merger costs:
Termination costs .................................................. 19,919
Financing costs .................................................... 5,486
Series B preferred dividends ............................................ (12,937) (12,937) (12,937)
Depreciation ............................................................ 157,692 160,745 152,948
Depreciation from unconsolidated entities ............................... 10,881 10,167 9,995
Minority interest in FelCor LP. ......................................... (10,868) 4,692 4,696
---------- ---------- ----------
FFO .......................................................................... $ 183,657 $ 288,636 $ 286,895
========== ========== ==========
Weighted average common shares and units
outstanding (1) ....................................................... 66,675 67,239 75,251
========== ========== ==========
</Table>
The following table details the computation of EBITDA (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
EBITDA:
Funds from Operations ........................................................... $ 183,657 $ 288,636 $ 286,895
Interest expense ........................................................... 161,226 158,620 125,435
Interest expense of unconsolidated entities ................................ 9,678 9,188 6,729
Amortization expense ....................................................... 2,093 1,480 693
Series B preferred dividends ............................................... 12,937 12,937 12,937
---------- ---------- ----------
EBITDA .......................................................................... $ 369,591 $ 470,861 $ 432,689
========== ========== ==========
</Table>
(1) Weighted average common shares and units outstanding are computed
including dilutive options, unvested stock grants, and assuming
conversion of Series A preferred stock to common stock.
39
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to stockholders and repayments of indebtedness, is from the
results of operations of our hotels. For the year ended December 31, 2001, net
cash flow provided by operating activities, consisting primarily of hotel
operations, was $131 million and FFO was $184 million. We currently expect that
our operating cash flow will be sufficient to fund our continuing operations,
including our required capital expenditures, debt service obligations and
distributions to shareholders required to maintain our REIT status. However, due
to the sharp reduction in travel following the terrorist attacks of September 11
and the resultant drop in RevPAR and profits from our hotel operations, we plan
to limit distributions to holders of our common stock to our available cash
flow. Accordingly, distributions to holders of common stock may be significantly
reduced or possibly eliminated in future periods.
Recent events, including the terrorist attacks of September 11, 2001,
the ongoing war against terrorism by the United States and the bankruptcy of
Enron Corp., have had an adverse impact on certain capital markets. These
events, an escalation in the anti-terrorism war, new terrorist attacks or
additional bankruptcies could further adversely affect the availability and cost
of capital for our business. In addition, should the anticipated recovery of the
overall economy, and of the lodging industry, fail to occur or be delayed
significantly, that too could adversely affect our operating cash flow and the
availability and cost of capital for our business. For example, should any such
events result in a reduction in our current debt ratings by Moody's and Standard
& Poor's, the interest rates payable under $900 million of our outstanding
unsecured senior notes would be increased by 50 basis points.
Prior to January 1, 2001, substantially all of our hotels were leased
to third parties under leases providing for the payment of rent based, in part,
upon revenues from the hotels. Accordingly, our 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, we acquired the leaseholds of 96 of our
hotels and on July 1, 2001, we acquired our remaining 88 hotel leases. As a
result of these acquisitions, we also became subject to the risks of fluctuating
hotel operating margins at our hotels, including but not limited to wage and
benefit costs, repair and maintenance expenses, utilities, liability insurance,
and other operating expenses which can fluctuate disproportionately to revenues.
These operating expenses are more difficult to predict and control than
percentage lease revenue, resulting in an increased risk of volatility in our
results of operations. The recent economic slowdown and the sharp drop in
occupancy following the terrorist attacks of September 11 resulted both in
declines in RevPAR and an erosion in operating margins during the year ended
December 31, 2001, compared to 2000. If the declines in hotel RevPAR and/or
operating margins worsen or continue for a protracted time, they could have a
material adverse effect on our operations and earnings.
On May 9, 2001, we entered into a merger agreement with MeriStar. On
September 21, 2001, MeriStar and we jointly announced the termination of the
merger. The decision to terminate the merger resulted from the September 11
terrorist attacks and the subsequent disruption in the financial markets. As the
result of the merger termination, we recorded expenses aggregating $19.9 million
associated with the merger and recognized $5.5 million of merger financing
costs.
On January 11, 2001, we completed the private placement of $100 million
in 9 1/2% senior unsecured notes that mature in September 2008. These notes were
issued at a premium to yield an effective rate of 9 1/8%. The proceeds were used
initially to pay down our line of credit. In October 2001, we exchanged the $100
million of privately placed senior notes for notes with identical terms that
were registered under the Securities Act of 1933.
In March 2001, we contributed eight of our hotels held for sale to a
joint venture in which one of our subsidiaries holds a 50% equity interest, and
a subsidiary of IHC holds the other 50% equity interest. Another subsidiary of
IHC manages these hotels. Pursuant to the joint venture agreement, IHC
contributed $8.1 million to the new venture. The venture closed on a
non-recourse mortgage loan of approximately $52 million with cash proceeds going
to us. In addition to our 50% equity interest, we retained a preferred interest
of approximately $17 million in the venture and also made a loan of
approximately $4.2 million to IHC, secured by its interest in the venture.
40
On June 4, 2001, we completed the private placement of $600 million in
8 1/2% senior unsecured notes that mature in 2011. Approximately $315 million of
the proceeds were placed in escrow, pending the closing or termination of the
merger with MeriStar. In October 2001, as the result of the merger termination,
in accordance with the requirements of the indenture governing the notes, we
redeemed $300 million in principal amount of these notes. The redemption price
was 101% of the principal amount redeemed plus accrued interest and was paid out
of the $315 million in escrowed funds. In October 2001, we exchanged the
remaining privately placed notes for notes with identical terms that were
registered under the Securities Act of 1933.
In June 2001, in connection with the issuance of fixed rate senior
notes and the subsequent prepayment of floating rate debt, we terminated $200
million of interest rate swaps, resulting in a $4.8 million swap termination
cost recorded in the second quarter.
On December 3, 2001, we completed the private placement of $100 million
in 9 1/2% senior unsecured notes that mature in September 2008. These notes were
issued at a discount to yield 9.6%. The proceeds were used initially to pay down
our line of credit. In connection with the issuance of these notes and the
prepayment of floating rate debt, we terminated $50 million of interest rate
swaps resulting in a $2.2 million swap termination cost recorded in the fourth
quarter.
On July 26, 2001, we entered into an amended and restated credit
agreement, pursuant to which we obtained an increase in our line of credit from
$600 million to $615 million. The maturity of the line of credit was also
extended from August 1, 2003, to October 31, 2004, but we have the right to
extend the maturity date for two consecutive one-year periods, subject to
certain conditions.
On November 8, 2001, we further amended our unsecured line of credit.
Although we were in compliance with our existing covenants prior to the
amendment, it was necessary to amend the line of credit in anticipation of a
continued negative RevPAR environment. The amendment allows for the relaxation
of certain financial covenants through December 31, 2002, with a step-up in
covenants in September 30, 2002, including the unsecured interest coverage,
fixed charge coverage, and total leverage tests. The interest rate remains on
the same floating rate basis with a tiered spread based on our debt leverage
ratio, but with added tiers to reflect the higher permitted leverage. The
lenders' commitments under the line of credit remain at $615 million, and we had
approximately $50 million outstanding under the facility at December 31, 2001.
In addition to the financial covenants, our line of credit includes
certain other affirmative and negative covenants, including: restrictions on our
ability to create or acquire wholly-owned subsidiaries, restrictions on the
operation/ownership of our hotels, limitations on our ability to lease property
or guarantee leases of other persons, limitations on our ability to make
restricted payments, limitations on our ability to merge or consolidate with
other persons, issue stock of our subsidiaries and sell all or substantially all
of our assets, restrictions on our ability to construct new hotels or acquire
hotels under construction, limitations on our ability to change the nature of
our business, limitations on our ability to modify certain instruments,
limitations on our ability to create liens, limitations on our ability to enter
into transactions with affiliates and limitations on our ability to enter into
joint ventures. Under the most recent amendment to our line of credit, we agreed
to certain more stringent limitations through September 30, 2002. After January
1, 2002, we may acquire hotel properties and make joint venture investments,
subject to compliance with debt limitations, but with flexibility to make at
least $50 million of acquisitions and $20 million of joint venture investments,
subject to increases under certain circumstances. Also, we may be limited in
making discretionary capital expenditures through September 30, 2002, except for
the expansion or renovation of our existing hotels in an aggregate amount of $20
million, subject to an increase under certain circumstances. At December 31
2001, we were in compliance with all of these covenants.
Unless our business has recovered sufficiently from the sharp declines
in RevPAR experienced following the September 11 terrorist attacks, upon
expiration of the relaxation in financial covenants provided by the November
amendment to our line of credit, we may be unable to satisfy the original
covenant requirements. In such an event, we may need to obtain further
amendments from our lenders on the line of credit. We are not certain whether,
to what extent, or upon what terms the lenders may be willing to continue a
relaxation of the covenants. Further amendments to our line of credit may result
in additional restrictions on
41
us and may adversely affect our ability to run our business and financial
affairs. At December 31, 2001, we had, and currently have, sufficient cash on
hand to repay our line of credit borrowings in full.
Failure to satisfy any of the financial or other covenants under our
line of credit would constitute an event of default, notwithstanding our ability
to meet our debt service obligations. Other events of default under our line of
credit include, without limitation, a default in the payment of other
indebtedness of $10 million or more, bankruptcy and a change of control.
Our management currently anticipates that we will meet our financial
covenants under the RevPAR guidance provided by us at our fourth quarter
earnings conference call on February 1, 2002. For the first quarter of 2002, we
currently anticipate that our portfolio RevPAR will be 16% to 18% below the
comparable period of the prior year. FFO is expected to be within the range of
$27 to $30 million for the first quarter of 2002, and EBITDA is expected to be
within the range of $74 million to $78 million for the same period. The RevPAR
decline for 2002 compared to the same period in 2001, was approximately 21.5%
for January 2002, 15.5% for February 2002, and was 13.5% for the first 21 days
of March 2002.
Our other borrowings contain affirmative and negative covenants that
are generally equal to or less restrictive than those in the line of credit.
Most of our mortgage debt is nonrecourse to us 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.
We currently anticipate that full year 2002 hotel portfolio RevPAR,
compared to 2001, will be flat to negative 3%. RevPAR changes by quarter for
2002, compared to 2001, are currently expected to fall within the following
ranges:
<Table>
<Caption>
First quarter (16)% to (18)%
Second quarter (4)% to (7)%
Third quarter 6% to 9%
Fourth quarter 13% to 16%
</Table>
FFO for 2002 is anticipated to be within the range of $147 to $174
million and EBITDA to be within the range of $340 to $360 million. We are
currently anticipating 2002 maintenance capital expenditures of between $40 and
$50 million depending upon the pace of the anticipated economic recovery.
Our decision to pay a quarterly common dividend will be determined each
quarter based upon the operating results of that quarter, economic conditions,
and other operating trends. We currently anticipate that we should be able to
pay an aggregate of $1.00 in dividends per common share during 2002, based on
the low end of our current FFO estimates.
On December 31, 2001, our line of credit represented approximately 2.6%
of our total debt, with $50 million outstanding. We also maintain flexibility in
working with our lenders, as a result of our $129 million of cash and
equivalents on hand, $2.8 billion of unencumbered assets, and a breakeven
portfolio hotel occupancy, after debt service and preferred equity
distributions, of approximately 50%. The $565 million of capacity under our line
of credit is expected to remain available to take advantage of opportunities
that may present themselves as the industry begins to recover in late 2002 and
2003.
We may incur indebtedness to make property acquisitions, to purchase
shares of our 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 our investments are insufficient for such purposes.
The board of directors has authorized us to repurchase up to $300
million of our outstanding common shares. Stock repurchases may, at the
discretion of our management, be made from time to time at prevailing prices in
the open market or through privately negotiated transactions. Beginning in
January 2001, through March 27, 2001, we repurchased approximately 179,000
shares of our outstanding common stock on the open
42
market for approximately $4 million. The stock repurchase program has been
suspended, and since March 27, 2001, we have not repurchased any additional
shares of our common stock in the open market.
At December 31, 2001, we had $129 million of cash and cash equivalents.
Certain significant credit and debt statistics at December 31, 2001, are as
follows:
o Interest coverage ratio of 2.3x for the twelve month period ended
December 31, 2001
o Borrowing capacity of $565.2 million under our line of credit
o Consolidated debt equal to 42.8% of our investment in hotels, at cost
o Fixed interest rate debt equal to 88% of our total debt
o Weighted average maturity of fixed interest rate debt of approximately
6.8 years
o Mortgage debt to total assets of 16.8%
o Debt of approximately $13 million maturing in 2002
o Debt of approximately $35 million maturing in 2003
o Debt of approximately $239 million maturing in 2004
The following details our debt outstanding at December 31, 2001 and
2000 (in thousands):
<Table>
<Caption>
DECEMBER 31,
2001 DECEMBER DECEMBER 31,
COLLATERAL INTEREST RATE MATURITY DATE 2001 2000
---------- ------------- ------------- -------- ------------
FLOATING RATE DEBT:
Line of credit None 4.48% October 2004 $ 49,674 $ 112,000
Mortgage debt 3 hotels February 2003 61,909
Publicly-traded term notes-swapped None 5.40 October 2004 174,633
Promissory note None 3.88 June 2016 650 650
---- ----------- -----------
Total floating rate debt 5.19 224,957 174,559
----------- -----------
FIXED RATE DEBT:
Line of credit - swapped None October 2004 250,000
Publicly-traded term notes None October 2004 174,505
Publicly-traded term notes None 7.63 October 2007 124,419 124,320
Publicly-traded term notes None 9.50 September 2008 595,525 394,731
Publicly-traded term notes None 8.50 June 2011 297,655
Mortgage debt 15 hotels 7.24 November 2007 137,541 140,148
Mortgage debt 7 hotels 7.54 April 2009 95,997 97,604
Mortgage debt 6 hotels 7.55 June 2009 72,209 73,389
Mortgage debt 7 hotels 8.73 May 2010 142,254 144,032
Mortgage debt 8 hotels 8.70 May 2010 182,802 184,829
Other 13 hotels 6.96 2000 - 2005 65,049 80,124
---- ----------- -----------
Total fixed rate debt 8.59 1,713,451 1,663,682
---- ----------- -----------
Total debt 8.19% $ 1,938,408 $ 1,838,241
==== =========== ===========
</Table>
All of our floating rate debt at December 31, 2001, was based upon
LIBOR. One month LIBOR at December 31, 2001 was 1.876%.
We had approximately $2.8 billion of unencumbered assets at December
31, 2001.
At December 31, 2001, we had $175 million of publicly traded term notes
due October 2004 that were matched with interest rate swap agreements which
effectively convert the fixed interest rate on the notes to a variable interest
rate. These interest rate swap agreements were entered into during the fourth
quarter of 2001 and have a maturity date of October 2004, coinciding with the
maturity date of the publicly traded term notes. We entered into six separate
interest rate swap agreements with three different financial institutions. Under
these agreements, we receive a fixed rate of 7.375% and pay the six-month LIBOR
rate plus a spread ranging from 2.57% to 3.54%. The weighted average spread over
LIBOR is 3.20%. The credit ratings for the financial institutions that are the
counter-parties on the interest rate swap agreements range from A- to AA.
We spent approximately $65 million on upgrading and renovating our
hotels during the year ended December 31, 2001. Notwithstanding the current
significant economic downturn, we believe that our hotels will continue to
benefit from our extensive capital expenditure programs in previous years. We
currently
43
anticipate 2002 maintenance capital expenditures of between $40 and $50 million,
depending upon the pace of the anticipated economic recovery.
Contractual Obligations
We have obligations and commitments to make future payments under debt
and operating land lease contracts. The following schedule details these
obligations at December 31, 2001 (in thousands).
<Table>
<Caption>
LESS THAN 1 - 3 4 - 5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
------------ ------------ ------------ ------------ ------------
Debt $ 1,946,176 $ 12,922 $ 273,807 $ 56,851 $ 1,602,596
Discount accretion over term of debt (7,768)
Operating leases 168,038 4,736 9,491 9,164 144,647
------------ ------------ ------------ ------------ ------------
Total contractual obligations $ 2,106,446 $ 17,658 $ 283,298 $ 66,015 $ 1,747,243
============ ============ ============ ============ ============
</Table>
We have guaranteed the payment of a full recourse loan for one of our
50% owned unconsolidated ventures. The following schedule details this
obligation at December 31, 2001 (in thousands):
<Table>
<Caption>
TOTAL AMOUNTS LESS THAN 1 - 3 4 - 5 OVER
COMMITTED 1 YEAR YEARS YEARS 5 YEARS
------------- ------------ ------------ ------------ ------------
Guarantee $ 440 $ 143 $ 285 $ 12
</Table>
Investments in Unconsolidated Entities
At December 31, 2001, we had unconsolidated 50% investments in ventures
that own an aggregate of 24 hotels. None of our directors, officers or employees
owns any interest in any of these joint ventures. These ventures had
approximately $266 million of non-recourse mortgage debt relating to 15 of the
hotels. This debt is not reflected as a liability on our consolidated balance
sheet. The liability of our subsidiaries that are members or partners in these
ventures is generally limited to the guarantee of the borrowing venture's
personal obligations to pay for the lender's losses caused by misconduct, fraud
or misappropriation of funds by the venture and other typical exceptions from
the nonrecourse provisions in the mortgages, such as for environmental
liabilities. One real estate joint venture had a full recourse loan outstanding
of $440,000 at December 31, 2001. We have guaranteed the payments of the full
recourse loan.
Capital expenditures on the hotels owned by these ventures are
generally paid from the capital reserve account, which is funded from income
from operations of these ventures. However if the venture has insufficient cash
to make necessary capital improvements, the venture may make a capital call upon
the venture members or partners to fund such necessary improvements. It is
possible that in the event of a capital call the other joint venture member or
partner may be unwilling or unable to make necessary capital contributions.
Under such circumstances, we may elect to make the other party's contribution as
a loan to the venture or as an additional capital contribution by us. Under
certain circumstances, a capital contribution by us may increase our investment
equity to greater than 50% and may require that we consolidate the ventures
financial statements, including all of the assets and liabilities of the
venture, into our consolidated financial statements.
With respect to those ventures that are partnerships, any of our
subsidiaries that serve as a general partner will be liable for all of the
recourse obligations of the venture, to the extent that the venture does not
have sufficient assets or insurance to satisfy the obligations. In addition, the
hotels owned by these ventures could perform below expectations and result in
the insolvency of the ventures and the acceleration of their debts unless the
members or partners provide additional capital. In some ventures the members or
partners may be required to make additional capital contributions or have their
interest in the venture be reduced or offset for the benefit of any party making
the required investment on their behalf. In the foregoing and other
circumstances, we may be faced with the choice of losing our investment in a
venture or investing additional capital under circumstances that do not assure a
return on that investment.
44
Quantitative and Qualitative Disclosures About Market Risk
At December 31, 2001 approximately 88% of our consolidated debt had
fixed interest rates. Currently, market rates of interest are below the rates we
are obligated to pay on our fixed-rate debt.
The following table provides information about our financial
instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations. For debt obligations at December 31, 2001, the
table presents scheduled maturities and weighted average interest rates, by
maturity dates. For each 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 December 31, 2001. The fair value of our fixed rate debt indicates
the estimated principal amount of debt having the same debt service requirements
that could have been borrowed at December 31, 2001, at then current market
interest rates. The fair value of our variable to fixed interest rate swaps
indicates the estimated amount that would have been paid by us had the swaps
been terminated at December 31, 2001.
EXPECTED MATURITY DATE
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE
LIABILITIES
Debt:
Fixed rate $12,922 $34,904 $189,229 $42,635 $14,216 $ 1,601,946 $ 1,895,852 $ 1,664,696
Average interest rate 7.88% 7.43% 7.41% 7.46% 8.04% 8.66% 8.48%
Floating rate $ 49,674 $ 650 $ 50,324 $ 50,324
Average interest rate (a) 7.10% 8.26% 7.11%
Discount accretion $ (7,768)
Total debt $ 1,938,408
INTEREST RATE SWAPS:
Fixed to floating $175,000 $ 175,000 $ (1,466)
Average pay rate 5.08%
Average receive rate 7.38%
</Table>
(a) The average floating rate of interest represents the projected forward
rate at December 31, 2001.
Swap contracts, such as described above, contain a credit risk, in that
the counterparties may be unable to fulfill the terms of the agreement. We
minimize that risk by evaluating the creditworthiness of our counterparties, who
are limited to major banks and financial institutions, and we do not anticipate
nonperformance by the counterparties. The credit ratings for the financial
institutions that are counterparties to the interest rate swap agreements range
from A- to AA.
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates daily to reflect the effects of inflation. Competitive pressures may,
however, require us to reduce room rates in the near term and may limit our
ability to raise room rates in the future.
SEASONALITY
The lodging business is seasonal in nature. Generally, hotel revenues
are greater in the second and third calendar quarters than in the first and
fourth calendar quarters, although this may not be true for hotels in major
tourist destinations. Revenues for hotels in tourist areas generally are
substantially greater during tourist season than other times of the year.
Seasonal variations in revenue at our hotels can be expected to cause quarterly
fluctuations in our revenues. Quarterly earnings also may be adversely affected
by events beyond our
45
control, such as extreme weather conditions, economic factors and other
considerations affecting travel. Historically, to the extent that cash flow from
operations has been insufficient during any quarter, due to temporary or
seasonal fluctuations in revenues, we have utilized cash on hand or borrowings
under our line of credit to make distributions to our equity holders.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.
On an on-going basis, we evaluate our estimates, including those
related to bad debts, carrying value of investments in hotels, litigation, and
other contingencies. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect the most
significant judgments and estimates used in the preparation of our consolidated
financial statements.
o At December 31, 2001, we had 13 non-strategic hotels held for
sale. We regularly review the carrying value of these assets
to determine that they are carried at the lower of cost or
market. The carrying value of these hotels held for sale was
reduced in the fourth quarter of 2001 by establishing a
provision for loss of $7 million. Future adverse changes in
market conditions or poor operating results of the underlying
investments could require an additional impairment charge to
further reduce the carrying value of these hotels held for
sale.
o We are required by generally accepted accounting principles to
record an impairment charge when we believe that an investment
in one or more of our hotels has been impaired such that
future undiscounted cash flows would not recover the book
basis, or net book value, of the investment. We test for
impairment when one or more of the following events occur;
projected cash flows are significantly less than recent
historical cash flows; significant changes in legal factors or
actions by a regulator that could affect the value of our
hotels; and events that could cause changes or uncertainty in
travel patterns. Future adverse changes in market conditions
or poor operating results of underlying investments could
result in losses or an inability to recover the carrying value
of the investments that may not be reflected in the
investment's current carrying value, thereby requiring an
impairment charge in the future. We do not currently believe
that the value of any of our hotels held for investment is
permanently impaired and, accordingly, no impairment charge
was recorded at December 31, 2001.
o We adopted SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities" effective January 1, 2001, which
establishes accounting and reporting standards for derivative
instruments. In accordance with this pronouncement, our
interest rate swap agreements outstanding at December 31,
2001, were designated as fair value hedges. These instruments
are marked to market through the income statement but are
offset by the change in fair value of our swapped fixed rate
debt. At December 31, 2001, the estimated unrealized net loss
on these instruments was approximately $1.5 million and
represents the amount that we would pay to terminate these
instruments based on current market rates.
o We have recorded a valuation allowance equal to 100% of our
$13 million deferred tax asset related to our TRSs because of
the uncertainty of realizing the benefit of the deferred tax
asset. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event
we were to
46
determine that we would be able to realize all or a portion of
our deferred tax assets in the future, an adjustment to the
deferred tax asset would increase income in the period such
determination was made.
RECENT ACCOUNTING ANNOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB")
approved SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other
Intangible Assets." SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS 142 will
be effective for fiscal years beginning after December 15, 2001 and will require
(1) intangible assets (as defined in SFAS 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). As the result of implementation of SFAS 142, we
will stop the amortization of the difference between the our cost in
unconsolidated entities and our proportionate share of the book value of the
underlying net assets at the date of acquisition. At December 31, 2001, we
included in investment in unconsolidated entities an asset of $73.4 million
representing the unamortized cost in excess of our proportionate share of the
underlying assets at the date of acquisition. The Company amortized excess cost
of $2.5, $2.1 and $2.1 million in 2001, 2000 and 1999, respectively. The Company
does not believe that SFAS 142 will have a material impact on the Company's
results of operations and financial position.
On August 15, 2001 the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires that the fair value of the liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS 143 will be effective for financial statements issued for
fiscal years beginning after June 15, 2002 and interim periods within those
fiscal years. We are not currently affected by the Statement's requirement.
On October 3, 2001 the FASB issued SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 by
removing goodwill from its scope, by defining a probability-weighted cash flow
estimation approach and establishing a "primary-asset" approach to determine the
cash flow estimation period for a group of assets. It also replaces the
provisions of APB Opinion 30, "Reporting the Effects of Disposal of a Segment of
a Business" for the disposal of segments of a business. SFAS 144 will be
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. We are not currently affected by the Statement's
requirement.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although we believe that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, we can give no
assurance that our expectations will be achieved. A number of important factors
which, among others, could adversely affect our ability to meet our current
expectations are disclosed in conjunction with the forward-looking statements
and under "Cautionary Factors That May Affect Future Results" in Item 1 of our
Annual Report on Form 10-K ("Cautionary Statements"). Subsequent written and
oral forward-looking statements made by or attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the Cautionary
Statements.
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to us are
incorporated herein by reference to the discussion under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" contained elsewhere in our Annual
Report on Form 10-K for the year ended December 31, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included herein beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
PART III. -- OTHER INFORMATION
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information called for by this Item is contained in our definitive
Proxy Statement for our 2002 Annual Meeting of Stockholders, and incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item is contained in our definitive
Proxy Statement for our 2002 Annual Meeting of Stockholders, and incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is contained in our definitive
Proxy Statement for our 2002 Annual Meeting of Stockholders, and incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is contained in our definitive
Proxy Statement for our 2002 Annual Meeting of Stockholders, and incorporated
herein by reference.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included herein at pages F-1 through F-28.
2. Financial Statement Schedules
The following financial statement schedule is included herein at page
F-29.
Schedule III - Real Estate and Accumulated Depreciation for FelCor
Lodging Trust Incorporated
All other schedules for which provision is made in Regulation S-X are
either not required to be included herein under the related instructions or are
inapplicable or the related information is included in the footnotes to the
applicable financial statement and, therefore, have been omitted.
3. Exhibits
The following exhibits are filed as part of this Annual Report on Form
10-K:
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 - Articles of Amendment and Restatement dated June 22, 1995,
amending and restating the Charter of FelCor Lodging Trust
Incorporated ("FelCor"), as amended or supplemented by
Articles of Merger dated June 23, 1995, Articles Supplementary
dated April 30, 1996, Articles of Amendment dated August 8,
1996, Articles of Amendment dated June 16, 1997, Articles of
Amendment dated October 30, 1997, Articles Supplementary dated
May 6, 1998, Articles of Merger and Articles of Amendment
dated July 27, 1998, and Certificate of Correction dated March
11, 1999 (filed as Exhibit 3.1 to FelCor's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 (the
"1998 10-K") and incorporated herein by reference).
3.1.1 - Certificate of Correction to the Articles of Merger between
FelCor and Bristol Hotel Company, dated August 31, 1999 (filed
as Exhibit 3.1.1 to FelCor's Form 10-Q for the quarter ended
September 30, 1999 (the "September 1999 10-Q") and
incorporated herein by reference).
3.2 - Bylaws of FelCor, as amended (filed as Exhibit 3.2 to FelCor's
Registration Statement on Form S-11 (file no. 333-98332) and
incorporated herein by reference).
4.1 - Form of Share Certificate for Common Stock (filed as Exhibit
4.1 to FelCor's Form 10-Q for the quarter ended June 30, 1996,
and incorporated herein by reference).
4.2 - Form of Share Certificate for $1.95 Series A Cumulative
Convertible Preferred Stock (filed as Exhibit 4.4 to FelCor's
Form 8-K dated May 1, 1996, and incorporated herein by
reference).
</Table>
50
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.3 - Form of Share Certificate for 9% Series B Cumulative
Redeemable Preferred Stock (filed as Exhibit 4.5 to FelCor's
Form 8-K dated May 29, 1998, and incorporated herein by
reference).
4.4 - Deposit Agreement dated April 30, 1998, between FelCor and
SunTrust Bank, Atlanta, as preferred share depositary (filed
as Exhibit 4.6 to FelCor's Form 8-K dated May 29, 1998, and
incorporated herein by reference).
4.5 - Form of Depositary Receipt evidencing the Depositary Shares
(filed as Exhibit 4.7 to FelCor's Form 8-K dated May 29, 1998,
and incorporated herein by reference).
4.6 - Indenture dated as of April 22, 1996 by and between FelCor and
SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit
4.2 to FelCor's Form 8-K dated May 1, 1996 and incorporated
herein by reference).
4.7 - Indenture dated as of October 1, 1997 by and among FelCor
Lodging Limited Partnership, formerly FelCor Suites Limited
Partnership ("FelCor LP"), FelCor, the Subsidiary Guarantors
named therein and SunTrust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4.1 to the Registration Statement on Form
S-4 (file no. 333-39595) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.7.1 - First Amendment to Indenture dated as of February 5, 1998 by
and among FelCor, FelCor LP, the Subsidiary Guarantors named
therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed
as Exhibit 4.2 to the Registration Statement on Form S-4 (file
no. 333-39595) of FelCor LP and the other co-registrants named
therein and incorporated herein by reference).
4.7.2 - Second Amendment to Indenture and First Supplemental Indenture
dated as of December 30, 1998, by and among FelCor, FelCor LP,
the Subsidiary Guarantors named therein and SunTrust Bank, as
Trustee (filed as Exhibit 4.7.2 to the 1998 10-K and
incorporated herein by reference).
4.7.3 - Third Amendment to Indenture dated as of March 30, 1999 by and
among FelCor, FelCor LP, the Subsidiary Guarantors named
therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.3
to FelCor's Form 10-Q for the quarter ended March 31, 1999
(the "March 1999 10-Q") and incorporated herein by reference).
4.7.4 - Second Supplemental Indenture dated as of August 1, 2000, by
and among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.2.4 to the Registration Statement
on Form S-4 (file no. 333-47506) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.7.5 - Third Supplemental Indenture dated as of July 26, 2001, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.2.5 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.8 - Indenture dated as of September 15, 2000, by and among FelCor
LP, FelCor, the Subsidiary Guarantors named therein, and
SunTrust Bank, as Trustee (filed as Exhibit 4.3 to the
Registration Statement on Form S-4 (file no. 333-47506) of
FelCor LP and the other co-registrants named therein and
incorporated herein by reference).
</Table>
51
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.8.1 - First Supplemental Indenture dated as of July 26, 2001, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.3.1 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.9 - Indenture dated as of June 4, 2001, by and among FelCor LP,
FelCor, the Subsidiary Guarantors named therein, and SunTrust
Bank, as Trustee (filed as Exhibit 4.9 to FelCor's Form 8-K
dated as of June 4, 2001 and filed June 14, 2001, and
incorporated herein by reference).
4.9.1 - First Supplemental Indenture dated as of July 26, 2001, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.4.1 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
10.1* - Second Amended and Restated Agreement of Limited Partnership
of FelCor LP dated as of December 31, 2001.
10.2 - Contribution Agreement dated as of January 1, 2001, by and
among FelCor, FelCor LP, FelCor, Inc., RGC and DJONT
Operations, L.L.C. (filed as Exhibit 10.27 to FelCor's Form
10-Q for the quarter ended March 31, 2001 (the "March 2001
10-Q"), and incorporated herein by reference).
10.3 - Leasehold Acquisition Agreement dated as of March 30, 2001, by
and among Bass (U.S.A.) Incorporated, in its individual
capacity and on behalf of its subsidiaries and affiliates, and
FelCor, in its individual capacity and on behalf of its
subsidiaries and affiliates, including as an exhibit thereto
the form of Management Agreement for Six Continents-branded
hotels (filed as Exhibit 10.28 to the March 2001 10-Q and
incorporated herein by reference).
10.4 - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Six Continents Hotels, as
manager, with respect to FelCor's Six Continents-branded
hotels (included as an exhibit to the Leasehold Acquisition
Agreement filed as Exhibit 10.3 above).
10.5* - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Hilton Hotels Corporation, as
manager, with respect to FelCor's Embassy Suites Hotels,
including the form of Embassy Suites Hotels License Agreement
attached as an exhibit thereto.
10.6* - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Hilton Hotels Corporation, as
manager, with respect to FelCor's Doubletree and Doubletree
Guest Suites hotels.
10.7* - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Starwood Hotels & Resorts, Inc.,
as manager, with respect to FelCor's Sheraton and Westin
hotels.
10.8 - Employment Agreement dated as of July 28, 1994 between FelCor
and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to FelCor's
Annual Report on Form 10-K/A Amendment No. 1 for the fiscal
year ended December 31, 1994 (the "1994 10-K/A") and
incorporated herein by reference).
</Table>
52
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.9 - Restricted Stock and Stock Option Plan of FelCor (filed as
Exhibit 10.9 to the 1994 10- K/A and incorporated herein by
reference).
10.10* - Savings and Investment Plan of FelCor.
10.11 - 1995 Restricted Stock and Stock Option Plan of FelCor (filed
as Exhibit 10.9.2 to FelCor's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (the "1995 10-K") and
incorporated herein by reference).
10.12 - Non-Qualified Deferred Compensation Plan, as amended and
restated July 1999 (filed as Exhibit 10.9 to the September
1999 10-Q and incorporated herein by reference).
10.13 - 1998 Restricted Stock and Stock Option Plan (filed as Exhibit
4.2 to FelCor's Registration Statement on Form S-8 (file no.
333-66041) and incorporated herein by reference).
10.14 - Second Amended and Restated 1995 Equity Incentive Plan (filed
as Exhibit 99.1 to FelCor's Post-Effective Amendment on Form
S-3 to Form S-4 Registration Statement (file no. 333-50509)
and incorporated herein by reference).
10.15 - Amended and Restated Stock Option Plan for Non-Employee
Directors (filed as Exhibit 99.2 to FelCor's Post-Effective
Amendment on Form S-3 to Form S-4 Registration Statement (file
no. 333-50509) and incorporated herein by reference).
10.16 - Form of Severance Agreement for executive officers and certain
key employees of FelCor (filed as Exhibit 10.13 to the 1998
10-K and incorporated herein by reference).
10.17 - Stockholders' and Registration Rights Agreement dated as of
July 27, 1998 by and among FelCor, Bass America, Inc., Holiday
Corporation, Bass plc, United/Harvey Investors I, L.P.,
United/Harvey Investors II, L.P., United/Harvey Investors III,
L.P., United/Harvey Investors IV, L.P., and United/Harvey
Investors V, L.P. (filed as Exhibit 10.18 to FelCor's Form 8-K
dated August 10, 1998, and incorporated herein by reference).
10.18 - Seventh Amended and Restated Credit Agreement dated as of July
26, 2001, among the FelCor, FelCor LP 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. and Deutsche Banc Alex. Brown, Inc., as
Co-Lead Arrangers and Joint Bookrunners, and Bank of America,
N.A. and Salomon Smith Barney, Inc., as Document Agents (filed
as Exhibit 10.17 to FelCor's Form 10-Q for the quarter ended
June 30, 2001, and incorporated herein by reference).
10.18.1 - First Amendment dated as of November 6, 2001, among FelCor,
FelCor LP and FelCor Canada Co., as borrowers, the lenders
party thereto, The Chase Manhattan Bank and The Chase
Manhattan Bank of Canada, as Administrative Agents, and
Bankers Trust Company, as Syndication Agent (filed as Exhibit
10.17.1 to FelCor's Form 10-Q for the quarter ended September
30, 2001 (the "September 2001 10-Q") and incorporated herein
by reference).
10.19 - Loan Agreement dated as of October 10, 1997 among Bristol
Lodging Company, Bristol Lodging Holding Company, Nomura Asset
Capital Corporation, as administrative agent and collateral
agent for Lenders, and Bankers Trust Company, as co-agent for
Lenders (filed as
</Table>
53
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
Exhibit 10.10 to the Bristol Hotel Company Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and
incorporated herein by reference).
10.19.1 - First Amendment to Loan Agreement and Ancillary Loan Documents
made as of May 28, 1999, among FelCor Lodging Company, L.L.C.,
FelCor Lodging Holding Company, L.L.C. and LaSalle National
Bank, as Trustee for Nomura Asset Securities Corporation
Commercial Pass-Through Certificates Series 1998-D6, as
administrative agent and collateral agent (filed as Exhibit
10.19.1 to FelCor's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (the "1999 10-K") and
incorporated herein by reference).
10.20 - Form of Mortgage, Security Agreement and Fixture Filing by and
between FelCor/CSS Holdings, L.P. as Mortgagor and The
Prudential Insurance Company of America, as Mortgagee (filed
as Exhibit 10.23 to the March 1999 10-Q and incorporated
herein by reference).
10.20.1 - Promissory Note dated April 1, 1999, in the original principal
amount of $100,000,000 made by FelCor/CSS Holdings, Ltd.,
payable to the order of The Prudential Insurance Company of
America (filed as Exhibit 10.23.1 to FelCor's Form 10-Q for
the quarter ended June 30, 1999 (the "June 1999 10-Q") and
incorporated herein by reference).
10.21 - Form of Deed of Trust, Security Agreement and Fixture Filing,
each dated as of May 12, 1999, from FelCor/MM Holdings, L.P.,
as Borrower, in favor of Fidelity National Title Insurance
Company, as Trustee, and Massachusetts Mutual Life Insurance
Company, as Beneficiary, each covering a separate hotel and
securing one of the separate Promissory Notes described in
Exhibit 10.21.1, also executed by FelCor/CSS Holdings, L.P.
with respect to the Embassy Suites Hotels-Anaheim and Embassy
Suites Hotels-Deerfield Beach, and by FelCor LP with respect
to the Embassy Suites Hotels-Palm Desert (filed as Exhibit
10.24.2 to the June 1999 10-Q and incorporated herein by
reference).
10.21.1 - Form of six separate Promissory Notes each dated May 12, 1999,
made by FelCor/MM Holdings, L.P. payable to the order of
Massachusetts Mutual Life Insurance Company in the respective
original principal amounts of $12,500,000 (Embassy Suites
Hotels-Dallas Market Center), $14,000,000 (Embassy Suites
Hotels-Dallas Love Field), $12,450,000 (Embassy Suites
Hotels-Tempe), $11,550,000 (Embassy Suites Hotels-Anaheim),
$8,900,000 (Embassy Suites Hotels-Palm Desert), $15,600,000
(Embassy Suites Hotels-Deerfield Beach) (filed as Exhibit
10.24.1 to the June 1999 10-Q and incorporated herein by
reference).
10.22 - Form Deed of Trust and Security Agreement and Fixture Filing
with Assignment of Leases and Rents, each dated as of April
20, 2000, from FelCor/MM S-7 Holdings, L.P., as Mortgagor, in
favor of Massachusetts Mutual Life Insurance Company and
Teachers Insurance and Annuity Association of America, as
Mortgagee, each covering a separate hotel and securing one of
the separate Promissory Notes described in Exhibit 10.22.2
(filed as Exhibit 10.24 to FelCor's Form 10-Q for the quarter
ended June 30, 2000 (the "June 2000 10-Q") and incorporated
herein by reference).
10.22.1 - Form of Accommodation Cross-Collateralization Mortgage and
Security Agreement, each dated as of April 20, 2000, executed
by FelCor/MM S-7 Holdings, L.P., in favor of Massachusetts
Mutual Life Insurance Company and Teachers Insurance and
Annuity Association of America (filed as Exhibit 10.24.1 to
the June 2000 10-Q and incorporated herein by reference).
</Table>
54
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.22.2 - Form of fourteen separate Promissory Notes each dated April
20, 2000, each made by FelCor/MM S-7 Holdings, L.P., each
separately payable to the order of Massachusetts Mutual Life
Insurance Company and Teachers Insurance and Annuity
Association of America, respectively, in the respective
original principal amounts of $13,500,000 (Phoenix (Crescent),
Arizona), $13,500,000 (Phoenix (Crescent), Arizona),
$6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $6,500,000
(Cypress Creek/Ft. Lauderdale, Florida), $9,000,000 (Atlanta
Galleria, Georgia), $9,000,000 (Atlanta Galleria, Georgia),
$12,500,000 (Chicago O'Hare Airport, Illinois), $12,500,000
(Chicago O'Hare Airport, Illinois), $3,500,000 (Lexington,
Kentucky), $3,500,000 (Lexington, Kentucky), $17,000,000
(Philadelphia Society Hill, Philadelphia), $17,000,000
(Philadelphia Society Hill, Philadelphia), $10,500,000 (South
Burlington, Vermont), and, $10,500,000 (South Burlington,
Vermont) (filed as Exhibit 10.24.2 to the June 2000 10-Q and
incorporated herein by reference).
10.23 - Form Deed of Trust and Security Agreement, each dated as of
May 2, 2000, from each of FelCor/CMB Buckhead Hotel, L.L.C.,
FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield
Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB
Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C.,
FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF
Holdings, L.P., each as Borrower, in favor of The Chase
Manhattan Bank, as Beneficiary, each covering a separate hotel
and securing one of the separate Promissory Notes described in
Exhibit 10.23.1 (filed as Exhibit 10.25 to the June 2000 10-Q
and incorporated herein by reference).
10.23.1 - Form of eight separate Promissory Notes, each dated May 2,
2000, made by FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB
Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C.,
FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings,
L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB
Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P.,
each separately payable to the order of The Chase Manhattan
Bank in the respective original principal amounts of
$38,250,000 (Atlanta Buckhead, Georgia), $20,500,000 (Boston
Marlborough, Massachusetts), $16,575,000 (Chicago Deerfield,
Illinois), $5,338,000 (Corpus Christi, Texas), $25,583,000
(Orlando South, Florida), $32,650,000 (New Orleans,
Louisiana), $20,728,000 (Piscataway, New Jersey), and
$26,268,000 (South San Francisco, California) (filed as
Exhibit 10.25.1 to the June 2000 10-Q and incorporated herein
by reference).
10.24 - Registration Rights Agreement dated as of September 8, 2000
among FelCor, FelCor LP, Deutsche Banc Securities Inc., Chase
Securities Inc., Morgan Stanley & Co. Incorporated, Banc of
America Securities LLC, Banc One Capital Markets, Inc., Credit
Lyonnais Securities (USA) Inc., and Scotia Capital (USA) Inc.
(filed as Exhibit 10.26 to the Registration Statement on Form
S-4 (file no. 333-47506) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
10.25 - Registration Rights Agreement dated as of January 11, 2001,
among FelCor, FelCor LP and Deutsche Bank Securities Inc
(filed as Exhibit 10.26 to FelCor's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000, and incorporated
herein by reference).
10.26 - Registration Rights Agreement dated as of June 4, 2001, by and
among FelCor LP, FelCor, and Deutsche Banc Alex. Brown Inc.,
in its individual capacity and on behalf of J.P. Morgan
Securities Inc., Banc of America Securities LLC, Salomon Smith
Barney Inc., Morgan Stanley & Co. Incorporated, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, SG Cowen Securities
Corporation, Credit Lyonnais Securities (USA) Inc., Scotia
Capital (USA) Inc., BMO Nesbitt Burns Corp., Fleet Securities,
Inc., PNC Capital Markets, Inc. and Wells Fargo Brokerage
Services, LLC (filed as Exhibit 10.29 to FelCor's Form 8-K
dated June 4, 2001 and filed June 14, 2001, and incorporated
herein by reference).
</Table>
55
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.27* - Registration Rights Agreement dated as of December 3, 2001, by
and among FelCor, FelCor LP, Deutsche Banc Alex. Brown, J.P.
Morgan Securities Inc., Banc of America Securities LLC, Morgan
Stanley & Co. Incorporated and Salomon Smith Barney Inc.
21* - List of Subsidiaries of FelCor.
23.1* - Consent of PricewaterhouseCoopers LLP.
</Table>
- ----------
* Indicates that the document is filed herewith.
b) Reports on Form 8-K
No current reports on Form 8-K were filed by FelCor during the three months
ended December 31, 2001, other than a current report on Form 8-K that was filed
on October 5, 2001, which is described in the FelCor's Form 10-Q for the quarter
ended September 30, 2001.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
FELCOR LODGING TRUST INCORPORATED
By: /s/ Lawrence D. Robinson
--------------------------------
Lawrence D. Robinson
Executive Vice President
Date: March 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
DATE SIGNATURE
---- ---------
March 25, 2002 /s/ Donald J. McNamara
-----------------------------------------------------
Donald J. McNamara
Chairman of the Board and Director
March 29, 2002 /s/ Thomas J. Corcoran, Jr.
-----------------------------------------------------
Thomas J. Corcoran, Jr.
President and Director (Chief Executive Officer)
March 29, 2002 /s/ Richard J. O'Brien
-----------------------------------------------------
Richard J. O'Brien
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
March 29, 2002 /s/ Lester C. Johnson
-----------------------------------------------------
Lester C. Johnson
Senior Vice President and Controller
(Principal Accounting Officer)
March 25, 2002 /s/ Melinda J. Bush
-----------------------------------------------------
Melinda J. Bush, Director
March 25, 2002 /s/ Richard S. Ellwood
-----------------------------------------------------
Richard S. Ellwood, Director
March 25, 2002 /s/ Richard O. Jacobson
-----------------------------------------------------
Richard O. Jacobson, Director
March 28, 2002 /s/ Charles A. Ledsinger, Jr.
-----------------------------------------------------
Charles A. Ledsinger, Jr., Director
March 26, 2002 /s/ Robert H. Lutz, Jr.
-----------------------------------------------------
Robert H. Lutz, Jr., Director
March 26, 2002 /s/ Charles N. Mathewson
-----------------------------------------------------
Charles N. Mathewson, Director
March , 2002
-----------------------------------------------------
Thomas A. McChristy, Director
March 26, 2002 /s/ Richard C. North
-----------------------------------------------------
Richard C. North, Director
March 25, 2002 /s/ Michael D. Rose
-----------------------------------------------------
Michael D. Rose, Director
</Table>
57
FELCOR LODGING TRUST INCORPORATED
INDEX TO FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
<Table>
Report of Independent Accountants...........................................F-2
Consolidated Balance Sheets - December 31, 2001 and 2000....................F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999..........................................F-4
Consolidated Statements of Comprehensive Income.............................F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999..........................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999..........................................F-7
Notes to Consolidated Financial Statements..................................F-8
Report of Independent Accounts on Financial Statement Schedule.............F-29
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 2001........................................................F-30
</Table>
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of FelCor Lodging Trust Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of FelCor Lodging Trust Incorporated at December 31, 2001 and 2000, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, effective January 1, 2001,
the Company adopted the provisions of Statement of Financial Accounting Standard
133, "Accounting for Derivative Instruments and Hedging Activities".
PricewaterhouseCoopers LLP
Dallas, Texas
February 6, 2002
F-2
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(IN THOUSANDS)
<Table>
<Caption>
ASSETS
2001 2000
----------- -----------
Investment in hotels, net of accumulated depreciation of
$630,962 in 2001 and $473,101 in 2000 ........................................... $ 3,664,712 $ 3,750,275
Investment in unconsolidated entities ................................................ 151,047 128,593
Hotels held for sale ................................................................. 38,937 129,294
Cash and cash equivalents ............................................................ 128,742 26,060
Accounts receivable, net of allowance for doubtful accounts of $1,404 in 2001 ........ 53,836 31,241
Note receivable from unconsolidated entity ........................................... 7,695
Deferred expenses, net of accumulated amortization of
$10,672 in 2001 and $7,146 in 2000 .............................................. 31,249 23,944
Other assets ......................................................................... 20,406 6,501
----------- -----------
Total assets ............................................................... $ 4,088,929 $ 4,103,603
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt, net of discount of $7,768 in 2001 and $6,443 in 2000 ........................... $ 1,938,408 $ 1,838,241
Distributions declared but unpaid .................................................... 8,172 33,957
Accrued expenses and other liabilities ............................................... 173,496 94,232
Minority interest in FelCor LP, 9,005 and 8,597 units issued and
outstanding at December 31, 2001 and 2000, respectively ......................... 236,100 252,294
Minority interest in other partnerships .............................................. 49,559 50,774
----------- -----------
Total liabilities .......................................................... 2,405,735 2,269,498
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Cumulative Preferred Stock, 5,981 shares issued and outstanding ........ 149,515 149,515
Series B Redeemable Preferred Stock, 58 shares issued and outstanding ........... 143,750 143,750
Common stock, $.01 par value, 200,000 shares authorized 69,418 and 69,415 shares
issued, including shares in treasury, at December 31, 2001 and 2000,
respectively .................................................................... 694 694
Additional paid-in capital ........................................................... 2,059,448 2,064,909
Accumulated other comprehensive income ............................................... (376)
Distributions in excess of earnings .................................................. (355,391) (201,598)
Less: Common stock in treasury, at cost, 16,421 and 16,906 shares
at December 31, 2001 and 2000, respectively ..................................... (314,446) (323,165)
----------- -----------
Total stockholders' equity ................................................. 1,683,194 1,834,105
----------- -----------
Total liabilities and stockholders' equity ................................. $ 4,088,929 $ 4,103,603
=========== ===========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
Revenues:
Hotel operating revenue:
Room ........................................................ $ 866,101
Food and beverage ........................................... 157,812
Other operating departments ................................. 58,931
Percentage lease revenue ...................................... 115,137 $ 536,907 $ 490,893
----------- ----------- -----------
Retail space rental and other revenue ......................... 2,990 3,057 2,194
----------- ----------- -----------
Total revenues ................................................... 1,200,971 539,964 493,087
----------- ----------- -----------
Expenses:
Hotel operating expenses:
Room ........................................................ 212,857
Food and beverage ........................................... 122,999
Other operating departments ................................. 26,789
Other property operating costs ................................ 290,247
Management and franchise fees ................................. 57,739
Taxes, insurance and lease expense ............................ 141,621 92,633 77,130
Corporate expenses ............................................ 12,678 12,256 9,122
Depreciation .................................................. 157,692 160,745 152,948
Lease termination costs ....................................... 36,604
Merger termination costs ...................................... 19,919
----------- ----------- -----------
Total operating expenses ......................................... 1,079,145 265,634 239,200
----------- ----------- -----------
Operating income ................................................. 121,826 274,330 253,887
Interest expense, net:
Recurring financing ........................................... 158,343 156,712 123,005
Merger related financing ...................................... 5,486
Swap termination expense ......................................... 7,049
Loss on assets held for sale ..................................... 7,000 63,000
----------- ----------- -----------
Income (loss) before equity in income from
unconsolidated entities, minority interests,
gain on sale of assets, and extraordinary items ............ (56,052) 54,618 130,882
Equity in income from unconsolidated entities ................. 7,346 14,820 8,484
Minority interests ............................................ 7,283 (8,262) (7,409)
Gain on sale of assets ........................................ 3,417 4,388 236
----------- ----------- -----------
Income (loss) before extraordinary items ......................... (38,006) 65,564 132,193
Extraordinary charge from write off of deferred
financing fees ............................................. (1,270) (3,865) (1,113)
----------- ----------- -----------
Net income (loss) ................................................ (39,276) 61,699 131,080
Preferred dividends ........................................... (24,600) (24,682) (24,735)
----------- ----------- -----------
Net income (loss) applicable to common stockholders .............. $ (63,876) $ 37,017 $ 106,345
=========== =========== ===========
Per share data:
Basic
Net income (loss) applicable to common stockholders ......... $ (1.21) $ 0.67 $ 1.57
=========== =========== ===========
Weighted average common shares outstanding .................. 52,622 55,264 67,392
Diluted
Net income (loss) applicable to common stockholders ......... (1.21) 0.67 $ 1.57
=========== =========== ===========
Weighted average common shares outstanding .................. 52,622 55,519 67,581
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Net income (loss) ................................................. $(39,276) $ 61,699 $131,080
Cumulative transition adjustment from interest rate swaps ......... 248
Unrealized holding losses from interest rate swaps ................ (7,297)
Losses realized on interest rate swap terminations ................ 7,049
Foreign currency translation adjustment ........................... (376)
-------- -------- --------
Comprehensive income (loss) .................................. $(39,652) $ 61,699 $131,080
======== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)
<Table>
<Caption>
COMMON STOCK
------------------------ ACCUMULATED
NUMBER ADDITIONAL OTHER DISTRIBUTIONS
PREFERRED OF PAID-IN COMPREHENSIVE IN EXCESS OF
STOCK SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS
------------ ------------ ------------ ------------ -------------- ------------
BALANCE AT DECEMBER 31, 1998 $ 295,000 69,284 $ 693 $ 2,142,250 $ (78,839)
Issuance of common shares 7 5
Repurchase of common shares
Allocation to minority interest (3,778)
Distributions/dividends declared:
$2.20 per common share (146,891)
$1.95 per Series A preferred share (11,797)
$2.25 per Series B depositary
preferred share (12,938)
Net income 131,080
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 295,000 69,291 693 2,138,477 (119,385)
Issuance of common shares 124 1 (890)
Conversion of Series A
preferred stock (1,735) 811
Repurchase of common shares
Purchase of options (1,861)
Contribution of shares in exchange for
operating partnership units
Allocation to minority interest (71,628)
Distributions/dividends declared:
$2.20 per common share (119,230)
$1.95 per Series A preferred share (11,744)
$2.25 per Series B depositary
preferred share (12,938)
Net income 61,699
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2000 293,265 69,415 694 2,064,909 (201,598)
Foreign exchange translation $ (376)
Issuance of common shares 3 (370)
Repurchase of common shares
Allocation to minority interest (5,091)
Distributions/dividends declared:
$1.70 per common share (89,917)
$1.95 per Series A preferred share (11,662)
$2.25 per Series B depositary
preferred share (12,938)
Net loss (39,276)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2001 $ 293,265 69,418 $ 694 $ 2,059,448 $ (376) $ (355,391)
============ ============ ============ ============ ============ ============
<Caption>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
------------ ------------
BALANCE AT DECEMBER 31, 1998 $ (41,487) $ 2,317,617
Issuance of common shares 5
Repurchase of common shares (98,387) (98,387)
Allocation to minority interest (3,778)
Distributions/dividends declared:
$2.20 per common share (146,891)
$1.95 per Series A preferred share (11,797)
$2.25 per Series B depositary
preferred share (12,938)
Net income 131,080
------------ ------------
BALANCE AT DECEMBER 31, 1999 (139,874) 2,174,911
Issuance of common shares 4,340 3,451
Conversion of Series A
preferred stock 924
Repurchase of common shares (86,681) (86,681)
Purchase of options (1,861)
Contribution of shares in exchange for
operating partnership units (101,874) (101,874)
Allocation to minority interest (71,628)
Distributions/dividends declared:
$2.20 per common share (119,230)
$1.95 per Series A preferred share (11,744)
$2.25 per Series B depositary
preferred share (12,938)
Net income 61,699
------------ ------------
BALANCE AT DECEMBER 31, 2000 (323,165) 1,834,105
Foreign exchange translation (376)
Issuance of common shares 12,846 12,476
Repurchase of common shares (4,127) (4,127)
Allocation to minority interest (5,091)
Distributions/dividends declared:
$1.70 per common share (89,917)
$1.95 per Series A preferred share (11,662)
$2.25 per Series B depositary
preferred share (12,938)
Net loss (39,276)
------------ ------------
BALANCE AT DECEMBER 31, 2001 $ (314,446) $ 1,683,194
============ ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) ........................................................... $ (39,276) $ 61,699 $ 131,080
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation ...................................................... 157,692 160,745 152,948
Gain on sale of assets ............................................ (3,417) (4,388) (236)
Amortization of deferred financing fees ........................... 5,292 4,628 2,768
Accretion of debt ................................................. 17 (692) (952)
Amortization of unearned officers' and directors' compensation..... 2,093 1,478 652
Equity in income from unconsolidated entities ..................... (7,346) (14,820) (8,484)
Extraordinary write off of deferred financing fees ................ 1,270 3,865 1,113
Lease termination costs ........................................... 36,604
Loss on assets held for sale ...................................... 7,000 63,000
Minority interests ................................................ (7,283) 8,262 7,409
Changes in assets and liabilities:
Accounts receivable ............................................... 6,645 (9,664) 574
Deferred expenses ................................................. (13,801) (16,964) (9,313)
Other assets ...................................................... 2,018 (5,339) (282)
Accrued expenses and other liabilities ............................ (16,543) 25,494 5,088
----------- ----------- -----------
Net cash flow provided by operating activities .......... 130,965 277,304 282,365
----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Acquisition of hotels ....................................................... (10,802)
Acquisition of unconsolidated entities ...................................... (7,452)
Improvements and additions to hotels ........................................ (65,446) (95,235) (222,320)
Operating cash received in acquisition of lessees ........................... 29,731
Proceeds from sale of assets ................................................ 66,330 35,111 15,476
Cash distributions from unconsolidated entities ............................. 8,132 25,358 19,581
----------- ----------- -----------
Net cash flow provided by (used in) investing
activities ............................................ 38,747 (34,766) (205,517)
----------- ----------- -----------
Cash flows used in financing activities:
Proceeds from borrowings .................................................... 1,122,172 997,424 1,034,667
Repayment of borrowings ..................................................... (1,020,290) (992,635) (804,915)
Purchase of treasury stock .................................................. (4,127) (86,681) (98,387)
Proceeds from exercise of stock options ..................................... 678 8
Buyback of assumed stock options ............................................ (1,861)
Distributions paid to other partnerships' minority interests ................ (4,799) (5,229)
Distributions paid to FelCor LP limited partners ............................ (20,211) (14,190) (7,559)
Distributions paid to preferred stockholders ................................ (24,600) (24,691) (25,987)
Distributions paid to common stockholders ................................... (115,883) (124,738) (173,244)
----------- ----------- -----------
Net cash flow used in financing activities .............. (67,060) (252,601) (75,417)
----------- ----------- -----------
Effect of exchange rate changes on cash ............................................... 30
Net change in cash and cash equivalents ............................................... 102,682 (10,063) 1,431
Cash and cash equivalents at beginning of periods ..................................... 26,060 36,123 34,692
----------- ----------- -----------
Cash and cash equivalents at end of periods ........................................... $ 128,742 $ 26,060 $ 36,123
=========== =========== ===========
Supplemental cash flow information --
Interest paid ............................................................... $ 164,261 $ 143,594 $ 125,085
=========== =========== ===========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
FelCor Lodging Trust Incorporated ("FelCor"), a Maryland corporation,
is one of the nation's largest hotel real estate investment trusts, or REITs,
and is the sole general partner of, and the owner of a greater than 85%
partnership interest in, FelCor Lodging Limited Partnership ("FelCor LP").
FelCor, FelCor LP and their subsidiaries are referred to, collectively, as the
"Company". The Company had ownership interests in 183 hotels at December 31,
2001, with nearly 50,000 rooms and suites. All of the Company's operations are
conducted solely through FelCor LP or its subsidiaries. At December 31, 2001,
the Company owned a 100% interest in 150 hotels, a 90% or greater interest in
entities owning seven hotels, a 60% interest in an entity owning two hotels and
a 50% interest in separate unconsolidated entities that own 24 hotels. Thirteen
of the Company's hotels were designated as held for sale at December 31, 2001.
On May 9, 2001, the Company entered into a merger agreement with
MeriStar Hospitality Corporation ("MeriStar"). On September 21, 2001, the
Company and MeriStar jointly announced the termination of the merger. The
decision to terminate the merger resulted from the September 11 terrorist
attacks and their subsequent adverse impact on the financial markets. As a
result of the merger termination, the Company expensed $19.9 million associated
with the merger and $5.5 million in merger financing costs for the year ended
December 31, 2001.
On January 1, 2001, the REIT Modernization Act ("RMA") went into
effect. Among other things, the RMA permits a REIT to form taxable subsidiaries
("TRS") 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 TRSs 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. Effective July 1, 2001, the Company acquired the remaining 88
hotel leases held by Six Continents Hotels. By acquiring these leases through
its TRSs, the Company acquired the economic benefits and risks of the operations
of these hotels and began reporting hotel revenues and expenses rather than
percentage lease revenues.
The following table provides a schedule of the Company's hotels by
brand at December 31, 2001:
<Table>
<Caption>
BRAND
-----
Hilton Hotels Corporation ("Hilton") brands:
Embassy Suites Hotels(R).................................................. 59
Doubletree(R) and Doubletree Guest Suites(R).............................. 13
Hampton Inn(R)............................................................ 7
Hilton Suites(R).......................................................... 1
Homewood Suites(R)........................................................ 1
Six Continents Hotels brands:
Holiday Inn(R)............................................................ 44
Crowne Plaza(R) and Crowne Plaza Suites(R)................................ 18
Holiday Inn Select(R)..................................................... 10
Holiday Inn Express(R).................................................... 5
Starwood Hotels & Resorts Worldwide Inc. ("Starwood") brands:
Sheraton(R) and Sheraton Suites(R)........................................ 10
Westin(R)................................................................. 1
Other brands................................................................... 14
---
Total hotels................................................................... 183
===
</Table>
F-8
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION -- (CONTINUED)
The Company's hotels are located in the United States (35 states) and
Canada, with a concentration in Texas (41 hotels), California (19 hotels),
Florida (17 hotels) and Georgia (14 hotels). Approximately 54% of the Company's
hotel room revenues were generated from hotels in these four states.
At December 31, 2001 of the Company's 183 hotels, (i) subsidiaries of
Six Continents Hotels managed 89, (ii) subsidiaries of Hilton managed 71, (iii)
subsidiaries of Starwood managed 11, (iv) subsidiaries of Interstate Hotels
Corporation ("IHC") managed eight and (v) three independent management companies
managed four.
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 stockholder's equity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The accompanying consolidated financial
statements of the Company include the assets, liabilities, revenues and expenses
of all majority-owned subsidiaries over which the Company exercises control, and
for which control is other than temporary. Intercompany transactions and
balances are eliminated in consolidation. Investments in unconsolidated entities
(50 percent owned ventures) are accounted for by the equity method.
Use of Estimates -- The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Investment in Hotels -- The Company's hotels are stated at cost and are
depreciated using the straight-line method over estimated useful lives ranging
from 31 to 40 years for buildings and improvements and three to seven years for
furniture, fixtures, and equipment.
The Company periodically reviews the carrying value of each of its
hotels to determine if circumstances exist indicating an impairment in the
carrying value of the investment in the hotel or that depreciation periods
should be modified. If facts or circumstances support the possibility of
impairment, the Company will prepare a projection of the undiscounted future
cash flows, without interest charges, of the specific hotel and determine if the
investment in such hotel is recoverable based on the undiscounted future cash
flows. If impairment is indicated, an adjustment will be made to the carrying
value of the hotel based on discounted future cash flows. The Company has not
recorded any loss for impairment of any investments in its hotels except as
established for the hotels held for sale.
Maintenance and repairs are expensed and major renewals and betterments
are capitalized. Upon the sale or disposition of a fixed asset, the asset and
related accumulated depreciation are removed from the accounts and the related
gain or loss is included in operations.
Investment in Unconsolidated Entities --The Company owns a 50% interest
in various real estate ventures in which the partners or members jointly make
all material decisions concerning the business affairs and operations,
additionally, the Company owns a preferred equity interest in one of these real
estate ventures. Accordingly, the Company does not control these entities and
carries its investment in unconsolidated entities at cost, plus its equity in
net earnings, less distributions received since the date of acquisition. Equity
in net earnings is adjusted for the straight-line amortization, over the lower
of 40 years or the remaining life of the venture, of the difference between the
Company's cost and its proportionate share of the underlying net assets at the
date of acquisition.
F-9
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Hotels Held for Sale -- The Company classifies hotels it expects to
sell within the next 12 months as held for sale. Operations for these hotels are
included in operating income; however, no depreciation expense is recorded on
these hotels. The carrying values of these hotels are reviewed periodically and
marked to the lower of cost or estimated net sales proceeds, with the
corresponding adjustment taken to expense.
Cash and Cash Equivalents -- All highly liquid investments with a
maturity of three months or less when purchased are considered to be cash
equivalents. Included in cash and cash equivalents is $13.2 million and $15.6
million in 2001 and 2000, respectively which is held in escrow under certain of
our debt agreements.
The Company places cash deposits at major banks. The Company's bank
account balances may exceed the Federal Depository Insurance Limits of $100,000;
however, management believes the credit risk related to these deposits is
minimal.
Deferred Expenses -- Deferred expenses, consisting primarily of loan
costs, are recorded at cost. Amortization is computed using a method that
approximates the interest method over the maturity of the related debt.
Other Assets -- Other assets consist primarily of hotel operating
inventories, prepaid expenses and deposits.
Revenue Recognition -- Prior to January 2001, the Company's principal
source of revenue was from percentage lease revenue. Percentage lease revenue
was comprised of fixed base rent and percentage rent which was based on room
revenues above certain annual thresholds. All annual thresholds were based on
periods ending December 31. Base rent was recognized as income on the
straight-line basis and percentage rent was recognized as income when annual
thresholds were met. At December 31, 2001, the Company had no hotels leased to
third parties.
Beginning in January 2001, in conjunction with the effectiveness of the
RMA, the Company started acquiring its lessees and leases and began to earn room
revenue, food and beverage revenue and other revenue through the operations of
its hotels. The Company recognizes these revenues as the hotel services are
performed.
Foreign Currency Translation -- Results of operations for the Company's
Canadian hotels are maintained in Canadian dollars and translated using the
average exchange rates during the period. Assets and liabilities are translated
to U.S. dollars using the exchange rate in effect at the balance sheet date.
Resulting translation adjustments are reflected in accumulated other
comprehensive income.
Capitalized Interest -- The Company capitalizes interest and certain
other costs relating to hotels undergoing major renovations and redevelopments.
Such costs capitalized in 2001, 2000, and 1999 were approximately $1.2 million,
$2.0 million and $7.4 million, respectively.
Net Income Per Common Share -- Basic earnings per share have been
computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding. Diluted earnings per share have
been computed by dividing net income available to common stockholders by the
weighted average number of common shares and equivalents outstanding. Common
stock equivalents represent shares issuable upon exercise of stock options and
unvested officers' restricted stock grants.
At December 31, 2001, 2000, and 1999, the Company's Series A Cumulative
Preferred Stock ("Series A preferred stock"), if converted to common shares,
would be antidilutive; accordingly the Series A preferred stock is not assumed
to be converted in the computation of diluted earnings per share. At December
31, 2001, the majority of stock options granted are antidilutive and are not
included in the computation of diluted earnings per share.
F-10
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Derivatives -- On January 1, 2001, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." SFAS 133, as
amended, establishes accounting and reporting standards for derivative
instruments. Specifically, SFAS 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 stockholders' equity 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 rate swap agreements, having a notional value of $250
million, as an asset of $248,000 with a corresponding credit to accumulated
other comprehensive income reported in stockholders' equity.
Segment Information -- SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," requires the disclosure of selected
information about operating segments. Based on the guidance provided in the
standard, the Company has determined its business is conducted in one operating
segment.
Distributions and Dividends -- FelCor and FelCor LP pay regular
quarterly distributions on their common stock and partnership units.
Additionally, the Company pays regular quarterly dividends on preferred stock in
accordance with its preferred stock dividend requirements. FelCor's ability to
make distributions is dependent on its receipt of quarterly distributions from
FelCor LP.
For 2001, FelCor paid common dividends of $1.70 per common share, $1.95
per share of its Series A preferred stock, and $2.25 per depositary share
evidencing its 9% Series B Redeemable Preferred Stock ("Series B preferred
stock").
Minority Interests -- Minority interests in FelCor LP and other
consolidated subsidiaries represents the proportionate share of the equity in
FelCor LP and other consolidated subsidiaries not owned by FelCor. Income and
loss is allocated to minority interest based on the weighted average percentage
ownership throughout the year.
Income Taxes -- The Company has elected to be treated as a REIT under
Sections 856 to 860 of the Internal Revenue Code. Prior to January 1, 2001, the
Company, as a REIT, was not subject to federal income taxes. Under the RMA that
became effective January 1, 2001, the Company leases its hotels to wholly-owned
TRSs that are subject to federal and state income taxes. The Company accounts
for income taxes in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") 109. 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.
3. ACQUISITION OF HOTEL LEASES
As a result of the passage of the RMA, effective January 1, 2001 the
Company acquired 100% of DJONT, which owned leases on 85 of our hotels, and
contributed it to a TRS. In consideration, FelCor LP issued 416,667 of its
units, valued at approximately $10 million, and the Company assumed DJONT's
accumulated stockholders' deficit of $25 million, which was expensed as lease
termination cost in 2001. On January 1, 2001, the Company acquired from Six
Continents Hotels the leases covering 11 hotels, terminated one additional lease
in connection with the sale of the related hotel and terminated the 12 related
management agreements in exchange for 413,585 shares of FelCor common stock
valued at approximately $10 million. Of this $10 million in consideration,
approximately $2 million was expensed as lease termination costs in 2001 and $8
million was expensed in 2000, in connection with the designation of certain of
these hotels as held for sale. Of the 11 hotels, two have been sold, eight have
been contributed to a joint venture with IHC, and one will be retained.
F-11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITION OF HOTEL LEASES -- (CONTINUED)
The Company purchased certain assets and assumed certain liabilities in
connection with the acquisition of the leases on these 96 hotels. The fair
values of the acquired assets and liabilities at January 1, 2001, are as follows
(in thousands):
<Table>
Cash and cash equivalents..................................... $ 25,300
Accounts receivable........................................... 30,214
Other assets.................................................. 17,318
---------
Total assets acquired......................................... 72,832
---------
Accounts payable.............................................. 18,656
Due to FelCor Lodging Trust................................... 30,687
Accrued expenses and other liabilities........................ 40,372
---------
Total liabilities assumed..................................... 89,715
---------
Liabilities assumed in excess of assets acquired.............. 16,883
Value of common stock and FelCor LP units issued.............. 19,721
---------
Lease termination costs.................................. $ 36,604
=========
</Table>
The Company acquired the remaining 88 hotel leases held by Six
Continents Hotels on July 1, 2001. In consideration for the acquisition of these
leases, the Company entered into long term management agreements with Six
Continents Hotels with regard to these hotels, and FelCor issued to Six
Continents Hotels 100 shares of common stock. The management fees payable to Six
Continents Hotels include compensation to Six Continents Hotels for both
management services and the acquisition of the 88 leases and, as such, are
higher than those paid by the Company to other managers for comparable services.
Management fees under these management contracts will be expensed as incurred.
The Company purchased certain assets and acquired certain liabilities
with the acquisition of the 88 hotel leases. The fair value of the assets and
liabilities assumed at July 1, 2001 are as follows (in thousands):
<Table>
Cash and cash equivalents.............................. $ 4,431
Accounts receivable.................................... 30,964
Other assets........................................... 6,941
-------
Total assets acquired........................ $42,336
=======
Accounts payable....................................... $ 7,660
Accrued expenses and liabilities....................... 34,676
-------
Total liabilities assumed.................... $42,336
=======
</Table>
4. INVESTMENT IN HOTELS
Investment in hotels at December 31, 2001 and 2000, consists of the
following (in thousands):
<Table>
<Caption>
2001 2000
---------- ----------
Land.................................................... $ 322,010 $ 321,994
Building and improvements............................... 3,512,442 3,477,006
Furniture, fixtures and equipment....................... 447,429 409,011
Construction in progress................................ 13,793 15,365
---------- ----------
4,295,674 4,223,376
Accumulated depreciation................................ (630,962) (473,101)
---------- ----------
$3,664,712 $3,750,275
========== ==========
</Table>
F-12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company owned 50% interests in joint venture entities that owned 24
hotels at December 31, 2001, and 16 hotels at December 31, 2000. The Company
also owned a 50% interest in entities that owned an undeveloped parcel of land,
provided condominium management services, leased eight hotels 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% of these
unconsolidated entities is as follows (in thousands):
<Table>
<Caption>
DECEMBER 31,
---------------------
2001 2000
-------- --------
Balance sheet information:
Investment in hotels.............................. $365,802 $294,941
Debt(a)........................................... $266,238 $225,302
Equity............................................ $116,032 $ 82,986
</Table>
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
------- ------- -------
Statements of operations information:
Total revenues.................................... $87,795 $80,761 $69,146
Net income........................................ $17,498 $30,729 $21,726
Net income attributable to the Company............ $ 8,749 $16,962 $10,626
Preferred equity distribution..................... 1,103
Amortization of cost in excess of book value...... (2,506) (2,142) (2,142)
------- ------- -------
Equity in income from unconsolidated entities..... $ 7,346 $14,820 $ 8,484
======= ======= =======
</Table>
(a) Debt consists of $266 million of non-recourse
mortgage debt and $440 thousand of full-recourse debt
guaranteed by the Company.
6. HOTELS HELD FOR SALE
In 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, in 2000 the Company recorded an expense
of $63 million representing the difference between the net book value and
estimated fair market value of these hotels. In 2001 the Company recognized an
additional $7 million expense to reflect the deterioration of the market value
of the remaining 13 hotels held for sale. No depreciation expense has been
recorded on these hotels since June 30, 2000.
During 2000, one of these hotels was sold and the Company recognized a
gain of approximately $135,000.
In March 2001, the Company contributed eight of the hotels held for
sale to a joint venture in which the Company retains a 50% equity interest and
an affiliate of IHC holds the other 50% equity interest. The Company contributed
hotels with a book value of approximately $77 million, and received net cash
proceeds of approximately $52 million. The Company retained an $8 million common
equity interest and a $17 million preferred equity interest paying 9%. No gain
or loss was recorded in connection with this transaction. The Company also made
a loan of approximately $4 million to IHC, secured by its interest in the
venture.
F-13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. HOTELS HELD FOR SALE -- (CONTINUED)
In June 2001, the Company sold the 140-room Hampton Inn located in
Marietta, Georgia, for a net sales price of $7 million. In September 2001, the
Company sold the 119-room Hampton Inn located in Jackson, Mississippi for a net
sales price of $4 million. In November 2001, the Company sold the 129-room
Doubletree Hotel located in Tampa, Florida for a net sales price of $3 million.
No gain or loss from these sales were recorded.
The Company is actively marketing the remaining 13 hotels held for
sale. Revenues related to the hotels held for sale, less costs associated with
those assets, were included in the Company's results of operations for the year
ended December 31, 2001 and 2000, and represented income of approximately $11
million and $16 million (net of $3 million in depreciation expense for 2000),
respectively.
7. DEBT
Debt at December 31, 2001 and 2000, consists of the following (in
thousands):
<Table>
<Caption>
DECEMBER 31,
2001 DECEMBER DECEMBER 31,
COLLATERAL(b) INTEREST RATE MATURITY DATE 2001 2000
-------------- ------------- ------------- ---------- -----------
FLOATING RATE DEBT:
Line of credit None 4.48% October 2004 $ 49,674 $ 112,000
Mortgage debt 3 hotels -- February 2003 61,909
Publicly-traded term notes-swapped None 5.40 October 2004 174,633
Promissory note None 3.88 June 2016 650 650
----- ---------- ----------
Total floating rate debt 5.19 224,957 174,559
---------- ----------
FIXED RATE DEBT:
Line of credit - swapped None -- October 2004 250,000
Publicly-traded term notes None -- October 2004 174,505
Publicly-traded term notes None 7.63 October 2007 124,419 124,320
Publicly-traded term notes None 9.50 September 2008 595,525 394,731
Publicly-traded term notes None 8.50 June 2011 297,655
Mortgage debt 15 hotels 7.24 November 2007 137,541 140,148
Mortgage debt 7 hotels 7.54 April 2009 95,997 97,604
Mortgage debt 6 hotels 7.55 June 2009 72,209 73,389
Mortgage debt 7 hotels 8.73 May 2010 142,254 144,032
Mortgage debt 8 hotels 8.70 May 2010 182,802 184,829
Other 6 hotels 6.96 2000 - 2005 65,049 80,124
----- ---------- ----------
Total fixed rate debt 8.59 1,713,451 1,663,682
----- ---------- ----------
Total debt 8.19% $1,938,408 $1,838,241
===== ========== ==========
</Table>
(a) At December 31, 2001, the Company's $175 million publicly-traded notes
due October 2004 were matched with interest rate swap agreements,
which effectively convert the fixed interest rate on the notes to a
variable interest rate tied to LIBOR. The interest rate swap
agreements also have a maturity of October 2004. 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.
(b) At December 31, 2001, the Company had unencumbered investments in
hotels with a net book value totaling $2.8 billion.
All of the Company's floating rate debt at December 31, 2001, was based
upon LIBOR. One month LIBOR at December 31, 2001 was 1.876%.
If the rating agencies were to lower our senior unsecured debt ratings
below the current level, the interest rate on $900 million of our outstanding
senior unsecured debt would increase by 50 basis points, resulting in an
increase in our interest expense.
F-14
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT -- (CONTINUED)
The Company's interest rate swap agreements at December 31, 2001, were
entered into during the fourth quarter of 2001 and have a maturity date of
October 2004, coinciding with the maturity date of $175 million of our publicly
traded term notes. We entered into six separate interest rate swap agreements
with three different financial institutions with a total notional value of $175
million. Under these agreements, we receive a fixed rate of 7.375% and pay the
six-month LIBOR rate plus a spread ranging from 2.57% to 3.54%. The weighted
average spread over LIBOR is 3.20%. The credit ratings for the financial
institutions that are the counter-parties on the interest rate swap agreements
range from A- to AA.
Interest expense is reported net of interest income of $2.9 million,
$1.9 million and $2.4 million for the year ended December 31, 2001, 2000, and
1999, respectively, and capitalized interest of $811,000, $1.1 million and $5.2
million, respectively.
Interest expense associated with the terminated merger was $5.5 million
and is presented net of $2.9 million of interest income from the proceeds of the
senior notes held in escrow during the year ended December 31, 2001.
On January 11, 2001, the Company completed the private placement of
$100 million in 9 1/2% senior unsecured notes that mature in September 2008.
These notes were issued at a premium to yield an effective rate of 91/8%. The
proceeds were used initially to pay down the Company's line of credit. In
October 2001, the Company exchanged the $100 million in privately placed senior
notes for notes with identical terms that are registered under the Securities
Act of 1933.
On June 4, 2001, the Company completed the private placement of $600
million in 8 1/2% senior unsecured notes that mature in 2011. Approximately $315
million of the proceeds were placed in escrow, pending the closing or
termination of the merger with MeriStar. In October 2001, as the result of the
merger termination, in accordance with the requirements of the indenture
governing these notes, the Company redeemed $300 million in principal amount of
these notes. The redemption price was 101% of the principal amount redeemed plus
accrued interest and was paid out of the $315 million in escrowed funds. In
October 2001, the Company exchanged the remaining privately placed notes for
notes with identical terms that were registered under the Securities Act of
1933.
In June 2001, in connection with the issuance of fixed rate senior
notes and the subsequent prepayment of floating rate debt, the Company
terminated $200 million of interest rate swaps, resulting in a $4.8 million swap
termination cost recorded 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 December 3, 2001, the Company completed the private placement of
$100 million in 9 1/2% senior unsecured notes that mature in September 2008.
These notes were issued at a discount to yield 9.6%. The proceeds were used
initially to pay down the Company's line of credit. In connection with the
issuance of these notes and the prepayment of floating rate debt, the Company
terminated $50 million of interest rate swaps resulting in a $2.2 million swap
termination cost during the fourth quarter of 2001.
On July 26, 2001, the Company entered into an amended and restated
credit agreement, pursuant to which it obtained an increase in its line of
credit from $600 million to $615 million. The maturity of the line of credit was
also extended from August 1, 2003, to October 31, 2004, but the Company has the
right to extend the maturity date for two consecutive one-year periods, subject
to certain conditions. An extraordinary charge of $1 million was recorded to
write-off unamortized deferred financing costs associated with the renewal of
the Company's line of credit.
F-15
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT -- (CONTINUED)
On November 8, 2001, the Company further amended its unsecured line of
credit. Although the Company was in compliance with its existing covenants prior
to the amendment, it was necessary to amend the line of credit in anticipation
of a continued negative RevPAR environment. The amendment allows for the
relaxation of certain financial covenants through September 30, 2002, including
the unsecured interest coverage, fixed charge coverage, and total leverage
tests. The interest rate remains on the same floating rate basis with a tiered
spread based on the Company's debt leverage ratio, but with added tiers to
reflect the higher permitted leverage. The lenders' commitments under the line
of credit remain at $615 million.
In addition to the financial covenants, the Company's line of credit
includes certain other 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. Under the amendment to the line of credit in November 2001, we
agreed to certain more stringent limitations through September 30, 2002. After
January 1, 2002, we may acquire hotel properties and make joint venture
investments, subject to compliance with debt limitations, but with flexibility
to make at least $50 million of acquisitions and $20 million of joint venture
investments without specific lender approval, under certain circumstances. Also,
we may be limited in making discretionary capital expenditures through September
30, 2002, other than discretionary capital expenditures for the expansion or
renovation of existing hotels in an aggregate amount of $20 million, subject to
an increase under certain circumstances. At December 31, 2001 the Company was in
compliance with all of these covenants.
The Company's other borrowings contain affirmative and negative
covenants that are generally equal to or less restrictive than the line of
credit. Our failure to satisfy any accelerated indebtedness, if in the amount of
$10 million or more, could result in the acceleration of most of our other
indebtedness. 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.
Future scheduled principal payments on debt obligations at December 31,
2001, are as follows (in thousands):
<Table>
<Caption>
YEAR
----
2002....................................................... $ 12,922
2003....................................................... 34,904
2004....................................................... 238,903
2005....................................................... 42,635
2006....................................................... 14,216
2007 and thereafter........................................ 1,602,596
----------
1,946,176
Discount accretion over term............................... (7,768)
----------
$1,938,408
==========
</Table>
8. DERIVATIVES
On the date the Company enters into a derivative contract, it
designates the derivative as a hedge to the exposure to changes in the fair
value of a recognized asset or liability or a firm commitment (referred to as a
fair value hedge), or the exposure to variable cash flows of a forecasted
transaction (referred to as a cash flow hedge). The Company has entered into
both types of derivative contracts. For a fair value hedge the gain or loss is
recognized in earnings in the period of change together with the offsetting loss
or gain on the hedged item attributable to the risk being hedged. The effect of
that accounting is to reflect in earnings the extent to which the hedge is not
effective in achieving offsetting changes in fair value. For a cash flow hedge
the effective portion of the derivative's gain or loss is initially reported as
a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. The
ineffective portion of the gain or loss is reported in earnings immediately.
The Company formally documents all relationships between
hedging instruments and hedged items, as well as its risk-management objective
and strategy for undertaking various hedge transactions. This process includes
linking all derivatives to specific assets and liabilities on the balance sheet
or specific firm commitments. The Company also formally assesses (both at the
hedge's inception and on an ongoing basis) whether the derivatives that are used
in hedging transactions have been highly effective in offsetting changes in the
cash flows or fair values of hedged items and whether those derivatives may be
expected to remain highly effective in future periods. When it is determined
that a derivative is not (or has ceased to be) highly effective as a hedge, the
Company discontinues hedge accounting prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when
it determines that the derivative is no longer effective in offsetting changes
in the cash flows of a hedged item (including hedged items such as firm
commitments or forecasted transactions); the derivative expires or is sold,
terminated, or exercised; it is no longer probable that the forecasted
transaction will occur; a hedged firm commitment no longer meets the definition
of a firm commitment; or management determines that designating the derivative
as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is
no longer probable that the forecasted transaction will occur in the originally
expected period, the gain or loss on the derivative remains in accumulated other
comprehensive income and is reclassified into earnings when the forecasted
transaction affects earnings. However, if it is probable that a forecasted
transaction will not occur by the end of the originally specified time period or
within an additional two-month period of time thereafter, the gains and losses
that were accumulated in other comprehensive income will be recognized
immediately in earnings. In all situations in which hedge accounting is
discontinued and the derivative remains outstanding, the Company will carry the
derivative at its fair value on the balance sheet, recognizing changes in the
fair value in current-period earnings.
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. It is the objective of the Company to use interest rate hedges to
manage its fixed and floating interest rate position and not to be engaged in
the speculation of interest rates. FelCor manages interest rate risk based on
the varying circumstances of anticipated borrowings, and existing floating and
fixed rate debt, including the Company's revolving line of credit. FelCor will
generally seek to pursue
F-16
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DERIVATIVES -- (CONTINUED)
interest rate risk mitigation strategies that will result in the least amount of
reported earnings volatility under generally accepted accounting principles,
while still meeting strategic economic objectives and maintaining adequate
liquidity and flexibility. Instruments that meet these hedging criteria are
formally designated as hedges at the inception of the derivative contract.
To manage the relative mix of its debt between fixed and variable rate
instruments, at December 31, 2001, the Company had entered into interest rate
swap agreements with three financial institutions with a notional value of $175
million. These interest rate swap agreements modify a portion of the interest
characteristics of the Company's outstanding fixed rate debt without an exchange
of the underlying principal amount and effectively convert fixed rate debt to a
variable rate.
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
are recognized as an adjustment to interest expense by the Company, pursuant to
the terms of its interest rate swap agreement, and will have a corresponding
effect on its future cash flows. Under interest rate swaps then in force the
Company paid $522,000 during 2001, received $1.8 million in 2000 and paid $1.7
million during 1999.
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.
The interest rate swap agreements held at December 31, 2001, are
designated as fair value hedges, are marked to market through the income
statement, but are offset by the change in fair value of the Company's swapped
outstanding fixed rate debt. The estimated unrealized net loss on these interest
rate swaps agreements was approximately $1.5 million at December 31, 2001 and
represents the amount the Company would either pay or receive to terminate the
agreements based on current market rates.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 107 requires disclosures
about the fair value for all financial instruments, whether or not recognized
for financial statement purposes. Disclosures about fair value of financial
instruments are based on pertinent information available to management as of
December 31, 2001. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Management's estimates of the fair value of (i) accounts receivable,
accounts payable and accrued expenses approximate carrying value due to the
relatively short maturity of these instruments; (ii) notes receivable
approximate carrying value based upon effective borrowing rates for issuance of
debt with similar terms and remaining maturities; (iii) the borrowings under the
Line of Credit and interest rate swap agreements approximate carrying value
because these borrowings accrue interest at floating interest rates based on
market. The estimated fair value of the Company's fixed rate debt of $1.9
billion is $1.7 billion at December 31, 2001, based on current market interest
rates estimated by the Company for similar debt with similar maturities.
F-17
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal
Revenue Code. To qualify as a REIT, the Company must meet a number of
organizational and operational requirements, including a requirement that it
distribute at least 90% of its taxable income to its stockholders. It is
management's current intention to adhere to these requirements and maintain the
Company's REIT status. As a REIT, the Company generally will not be subject to
corporate level federal income taxes on net income it distributes to its
stockholders. If the Company fails to qualify as a REIT in any taxable year, it
will be subject to federal income taxes at regular corporate rates (including
any applicable alternative minimum tax) and may not qualify as a REIT for
subsequent taxable years. Even if the Company qualifies for taxation as a REIT,
the Company may be subject to certain state and local taxes on its income and
property and to federal income and excise taxes on its undistributed taxable
income. In addition, taxable income from non-REIT activities managed through
TRSs is subject to federal, state and local taxes.
Under the RMA, which became effective January 1, 2001, the Company
generally leases its hotels to wholly-owned TRSs that are subject to federal and
state income taxes. The Company accounts for income taxes in accordance with the
provisions of SFAS 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. At December 31, 2001, the Company's TRS had a deferred tax asset of
approximately $12.8 million, prior to any valuation allowance, relating to
losses of the TRS during the year ended December 31, 2001. Management has
provided a 100% valuation allowance against this asset due to the uncertainty of
realization and, accordingly, no provision or benefit for income taxes is
reflected in the accompanying Consolidated Statements of Operations.
Reconciliation between GAAP net income or loss and taxable income:
The following table reconciles GAAP net income or loss to taxable
income for the years ended December 31, 2001, 2000 and 1999 (in thousands):
<Table>
<Caption>
2001 2000 1999
--------- --------- ---------
GAAP net income (loss) ................................................. $ (39,276) $ 61,699 $ 131,080
Add GAAP net loss/(income) of taxable subsidiaries included
above(a) ..................................................... 33,212 (3,243) 535
--------- --------- ---------
GAAP net income (loss) from REIT operations(b) ......................... (6,064) 58,456 131,615
Book/tax differences in depreciation and amortization(c) ............. 34,746 (4,091) 251
Book/tax differences in minority interests ........................... (18,680) (8,894) (1,197)
Other book/tax differences, net:
Gains (losses) from capital transactions ............................ (4,849) 842 (4,242)
Lease termination costs not deductible for tax ...................... 36,604
Loss for assets held for sale not deductible for tax ................ 7,000 63,000
Other ............................................................... 2,751 9,626 4,996
--------- --------- ---------
Taxable income before adjustments ...................................... 51,508 118,939 131,423
Capital gains ........................................................ (1,672)
--------- --------- ---------
Adjusted taxable income subject to distribution requirement(d) ......... $ 51,508 $ 117,267 $ 131,423
========= ========= =========
</Table>
(a) 1999 and 2000 reflect the net income or loss of the Company's qualified
REIT subsidiary, while 2001 reflects a net loss from the Company's
TRSs.
(b) All adjustments to "GAAP net income (loss) from REIT operations" are
net of amounts attributable to minority interest, TRSs and qualified
REIT subsidiaries.
(c) The changes in book/tax differences in depreciation and amortization
for 2001 are principally resulting from book and tax basis differences,
differences in depreciable lives, and accelerated depreciation methods
used for tax.
(d) The dividend distribution requirement was 90% in 2001 and 95% for 1999
and 2000.
F-18
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES -- (CONTINUED)
Characterization of distributions:
For income tax purposes, distributions paid consist of ordinary income,
capital gains, return of capital or a combination thereof. For the years ended
December 31, 2001, 2000 and 1999 distributions paid per share were characterized
as follows:
<Table>
<Caption>
2001 2000 1999
-------------------- ----------------- -----------------
Amount Mix Amount Mix Amount Mix
------- ------ ------ ----- ------ ----
COMMON STOCK
Ordinary income......................... $0.935 55.01% $2.20 100% $2.20 100%
Return of capital....................... 0.765 44.99
------ ------ ----- --- ----- ---
$1.700 100.00% $2.20 100% $2.20 100%
====== ====== ===== === ===== ===
PREFERRED STOCK - SERIES A
Ordinary income......................... $1.95 100.00% $1.95 100% $1.95 100%
===== ====== ===== === ===== ===
PREFERRED STOCK - SERIES B
Ordinary income......................... $2.25 100.00% $2.25 100% $2.25 100%
===== ====== ===== === ===== ===
</Table>
At December 31, 2001 the Company had six Canadian hotels and was
subject to Canadian federal and provincial taxes. For the years ended December
31, 2001, 2000, and 1999, the Company incurred liabilities of approximately $1.2
million, $490,000 and $422,000 for Canadian taxes.
11. CAPITAL STOCK
As of December 31, 2001, the Company had approximately $946 million of
common stock, preferred stock, debt securities, and/or common stock warrants
available for offerings under shelf registration statements previously declared
effective.
Preferred Stock
FelCor's board of directors is authorized to provide for the issuance
of up to 20,000,000 shares of preferred stock in one or more series, to
establish the number of shares in each series, to fix the designation, powers
preferences and rights of each such series, and the qualifications, limitations
or restrictions thereof.
In 1996, the Company issued 6.1 million shares of its Series A
preferred stock at $25 per share. The Series A preferred stock bears an annual
dividend equal to the greater of $1.95 per share or the cash distributions
declared or paid for the corresponding period on the number of shares of common
stock into which the Series A preferred stock is then convertible. Each share of
the Series A preferred stock is convertible at the stockholder's option to
0.7752 shares of common stock, subject to certain adjustments, and could not be
redeemed by the Company before April 30, 2001. During 2000, holders of 69,400
shares of Series A preferred stock converted their shares to 53,798 common
shares, which were issued from treasury shares.
On May 1, 1998, the Company issued 5.75 million depositary shares,
representing 57,500 shares of its Series B preferred stock, at $25 per
depositary share. The Series B preferred stock and the corresponding depositary
shares may be called by FelCor at par on or after May 7, 2003, have no stated
maturity, sinking fund or mandatory redemption, and are not convertible into any
other securities of FelCor. The Series B preferred stock has a liquidation
preference of $2,500 per share (equivalent to $25 per depositary share) and is
entitled to annual dividends at the rate of 9% of the liquidation preference
(equivalent to $2.25 annually per depositary share).
F-19
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CAPITAL STOCK -- (CONTINUED)
At December 31, 2001, all dividends then payable on the Series A and
Series B preferred stock had been paid.
FelCor LP Units
FelCor is the sole general partner of FelCor LP and is obligated to
contribute the net proceeds from any issuance of its equity securities to FelCor
LP in exchange for units of partnership interest ("Units") corresponding in
number and terms to the equity securities issued by it. Units of limited partner
interest may also be issued by FelCor LP to third parties in exchange for cash
or property, and Units so issued to third parties are redeemable at the option
of the holders thereof for a like number of shares of FelCor common stock or, at
the option of FelCor, for the cash equivalent thereof. During 2001, 6,227 Units
were exchanged for a like number of shares of FelCor common stock, which were
issued from treasury stock, and 2,491 Units were redeemed during 2001 for
$34,000 in cash.
In consideration for the acquisition of all the equity interests in
DJONT, FelCor LP issued 416,667 Units on January 1, 2001. This transaction
reduced FelCor's ownership of limited partnership interests in FelCor LP from
approximately 86% to approximately 85%, which increased the minority interest
liability related to FelCor LP by approximately $10 million at December 31,
2001.
Treasury Stock Repurchase Program
FelCor's board of directors has authorized the repurchase of up to $300
million of its outstanding common shares. Stock repurchases may, at the
discretion of management, be made from time to time at prevailing prices in the
open market or through privately negotiated transactions. 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 million.
Through December 31, 2001, FelCor repurchased approximately 10.5 million shares
of common stock at an aggregate of approximately $189 million. The stock
repurchase program has been suspended and, since March 27, 2001, the Company has
not repurchased any additional shares of our common stock in the open market.
In consideration for the acquisition of 12 leases that were held by Six
Continents Hotels, the Company issued to Six Continents Hotels in January of
2001, 413,585 shares of FelCor common stock previously held in treasury. In July
2001, the Company issued 100 shares of FelCor common stock from treasury to Six
Continents Hotels to acquire the remaining 88 leases still held by Six
Continents Hotels.
Other activity during 2001 included the issuance of 226,000 shares
under restricted stock grants to employees and directors, offset by the
forfeiture of 25,300 shares under restricted stock grants and the exercise of
48,806 stock options.
12. OTHER PROPERTY OPERATING COSTS
Other property operating costs is comprised of the following for the
year ended December 31, 2001 (in thousands):
<Table>
Hotel general administrative expense....................................... $93,652
Marketing.................................................................. 87,042
Repair and maintenance..................................................... 54,603
Utilities.................................................................. 49,561
Other...................................................................... 5,389
--------
Total other property operating costs............................ $290,247
========
</Table>
F-20
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. TAXES, INSURANCE AND LEASE EXPENSE
Taxes, insurance and lease expense is comprised of the following for
the years ended December 31, 2001, 2000, and 1999 (in thousands):
<Table>
<Caption>
2001 2000 1999
-------- ------- -------
Real estate and personal property taxes ................................... $56,587 $63,207 $52,118
Percentage lease expense(a)................................................ 55,722
Property and general liability insurance................................... 11,525 4,065 3,481
State franchise and Canadian income taxes.................................. 1,193 3,376 3,973
Land lease expense......................................................... 15,757 21,985 17,558
Other...................................................................... 837
-------- ------- -------
Total taxes, insurance, and lease expense....................... $141,621 $92,633 $77,130
======== ======= =======
</Table>
(a) Represents percentage lease expense associated with the hotels owned by
unconsolidated entities.
14. LAND LEASES
The Company leases land occupied by certain hotels from third parties
under various operating leases. Certain leases contain contingent rent features
based on gross revenue at the respective hotels. Future minimum lease payments
under the Company's land lease obligations at December 31, 2001, are as follows
(in thousands):
<Table>
<Caption>
YEAR
----
2002 $ 4,736
2003 4,712
2004 4,779
2005 4,578
2006 4,586
2007 and thereafter 144,647
--------
$168,038
========
</Table>
15. GAIN ON SALE OF ASSETS
In 2001, the Company received $3.9 million from the condemnation of
three parcels of land and recorded a gain of $2.9 million. In 2001, the Company
sold an undeveloped parcel of land adjacent to one of its hotels in Atlanta and
recorded a gain of $462,000.
In 2000, the Company sold two hotels for $33.8 million, recognizing a
gain of $2.6 million, and vacant excess land and a billboard for $2.3 million
recognizing a gain of $1.8 million.
F-21
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 2001, 2000 and 1999 (in
thousands, except per share data):
<Table>
<Caption>
2001 2000 1999
--------- --------- ---------
Numerator:
Income (loss) before extraordinary items ....................... $ (38,006) $ 65,564 $ 132,193
Less: Preferred dividends ................................... (24,600) (24,682) (24,735)
--------- --------- ---------
Income (loss) applicable to common stockholders before
extraordinary items ......................................... (62,606) 40,882 107,458
Extraordinary items ......................................... (1,270) (3,865) (1,113)
--------- --------- ---------
Net income (loss) applicable to common
stockholders ................................................ $ (63,876) $ 37,017 $ 106,345
========= ========= =========
Denominator:
Denominator for basic earnings per share -
weighted average shares ...................................... 52,622 55,264 67,392
Effect of dilutive securities:
Stock options .................................................. 27 166
Restricted shares .............................................. 228 23
--------- --------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions .................................................. 52,622 55,519 67,581
========= ========= =========
Earnings (loss) per share data:
Basic
Net income (loss) before extraordinary items ................... $ (1.19) $ 0.74 $ 1.59
Extraordinary items ............................................ (0.02) (0.07) (0.02)
--------- --------- ---------
Net income (loss) .............................................. $ (1.21) $ 0.67 $ 1.57
========= ========= =========
Diluted
Net income (loss) before extraordinary items ................... $ (1.19) $ 0.74 $ 1.59
Extraordinary items ............................................ (0.02) (0.07) (0.02)
--------- --------- ---------
Net income (loss) .............................................. $ (1.21) $ 0.67 $ 1.57
========= ========= =========
</Table>
The Series A preferred shares and the majority of stock options granted
are anti-dilutive and are not included in the calculation of diluted earnings
per share.
F-22
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The acquisition of DJONT, one of the Company's primary lessees, was
completed effective January 1, 2001. In consideration for the acquisition of
DJONT, FelCor LP issued 416,667 units of limited partnership interest valued at
approximately $10 million. The acquisition of DJONT required negotiations
between the Company and the owners of DJONT, including Thomas J. Corcoran, Jr.,
the President, Chief Executive Officer, and director of FelCor and the children
of Charles N. Mathewson, a director of FelCor. The interests of Mr. Corcoran and
Mr. Mathewson were in direct conflict with the Company's interests in these
negotiations and, accordingly, they abstained from participation in the FelCor
board of directors' discussion and vote on this matter.
Prior to the acquisition of DJONT, which was effective January 1, 2001,
the Company shared the executive offices and certain employees with FelCor,
Inc., and DJONT, (both companies were controlled by Thomas J. Corcoran, Jr.,
President and CEO) and each company paid its share of the costs thereof,
including an allocated portion of the rent, compensation of certain personnel,
office supplies, telephones, and depreciation of office furniture, fixtures, and
equipment. Any such allocation of shared expenses to the Company is required to
be approved by a majority of FelCor's independent directors. At December 31,
2001, FelCor Inc. had a 10% ownership interest in one hotel and limited other
investments. During 2000 and 1999, the Company paid approximately $7.5 million
(approximately 89.4%) and $5.7 million (approximately 89.5%), respectively, of
the allocable expenses under this arrangement. Following the acquisition of
DJONT, FelCor, Inc. continued to share certain overhead costs. FelCor, Inc. paid
$45,000 for shared office costs in 2001.
In December 2002, the Company sold one hotel and, effective January 1,
2001, completed the acquisition of leases with respect to 12 hotels that had
been leased to and operated by Six Continents Hotels. In consideration for the
acquisition of such leases and termination of the related management agreements,
FelCor issued 413,585 shares of its common stock valued at approximately $10
million, to Six Continents Hotels. The Company acquired the remaining leases
held by Six Continents Hotels, effective July 1, 2001. The Company contributed
these leases to its TRSs. In consideration for these 88 leases, FelCor issued
100 shares of its common stock and caused their subsidiaries to agree to new
long-term management agreements with subsidiaries of Six Continents Hotels to
manage these hotels. The acquisition of the leases held by Six Continents Hotels
involved negotiations between the Company and Six Continents Hotels. Richard C.
North, a director of FelCor, is the Group Finance Director of Six Continents
plc, the parent of Six Continents Hotels and, together with its affiliates, the
owner of approximately 16% of our outstanding shares and units. The interest of
Six Continents plc in those negotiations was in direct conflict with the
Company's interests. Mr. North abstained from participating in any discussion or
vote by FelCor's board relating to these transactions.
Following the events of September 11, 2001, certain types of coverage,
such as for acts of terrorism, are unavailable or are only available at a cost
that is prohibitive. In an effort to keep our cost of insurance within
reasonable limits, we have not purchased terrorism insurance at the current
prohibitive prices. We have also increased our deductible amounts under policies
of flood, wind and general liability insurance, which increases our risk of
incurring losses that are uninsured or not fully insured. Should such uninsured
or not fully insured losses be substantial, they could have a material adverse
impact on our operating results and cash flows.
There is no litigation pending or known to be threatened against us or
affecting any of our hotels, other than claims arising in the ordinary course of
business or which are not considered to be material. Furthermore, most of these
claims are substantially covered by insurance. We do not believe that any claims
known to us, individually or in the aggregate, will have a material adverse
effect on us, without regard to any potential recoveries from insurers or other
third parties.
F-23
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Company's hotels are operated under various management agreements
that call for base management fees, which range from 2% to 7% of hotel room
revenue and generally have an incentive provision related to the hotel's
profitability. The management agreements have terms from 10 to 20 years and
generally have renewal options.
With the exception of 100 hotels whose rights to use a brand name are
contained in the management agreement governing their operations and seven of
the Company's hotels that do not operate under a nationally recognized brand
name, each of the Company's hotels operates under a franchise or license
agreement. Typically, our franchise or license agreements provide for a royalty
fee of 4% of room revenues to be paid to the franchisor.
18. SUPPLEMENTAL CASH FLOW DISCLOSURE
During 1999, the Company purchased the land related to three hotels,
which previously had been leased. These purchases were recorded under the
purchase method of accounting. The fair values of the acquired assets and
liabilities recorded at the date of acquisition are as follows (in thousands):
<Table>
<Caption>
1999
-------
Assets acquired................................................... $19,776
Liabilities assumed............................................... (7,800)
Common Stock and Units issued..................................... (1,174)
-------
Net cash paid.......................................... $10,802
=======
</Table>
Approximately $8.0 million, $34.0 million, and $39.7 million of
aggregate preferred stock dividends, common stock and FelCor LP unit
distributions had been declared as of December 31, 2001, 2000, and 1999,
respectively. These amounts were paid in the following January of each year.
In 2001, 2000 and 1999, the Company allocated $5 million, $71.6 million
and $3.8 million, respectively, to minority interest from additional paid in
capital.
19. STOCK BASED COMPENSATION PLANS
FelCor sponsors three restricted stock and stock option plans (the
"FelCor Plans"). In addition, upon completion of the merger with Bristol Hotel
Company (the "Merger") in 1998, FelCor assumed two stock option plans previously
sponsored by Bristol Hotel Company (the "Bristol Plans"). FelCor was initially
obligated to issue up to 1,271,103 shares of its common stock pursuant to the
Bristol Plans. No additional options may be awarded under the Bristol Plans. The
FelCor Plans and the Bristol Plans are referred to collectively as the "Plans".
The Company applies APB Opinion 25 and related interpretations in
accounting for the Plans. In 1995 the Financial Accounting Standards Board SFAS
Statement 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which, if
fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plans. Adoption of the cost recognition provisions
of SFAS 123 is optional and the Company has decided not to adopt the provisions
of SFAS 123. However, pro forma disclosures, as if the Company had adopted the
cost recognition provisions of SFAS 123, are required by SFAS 123 and are
presented below.
F-24
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
Stock Options
FelCor is authorized to issue 2,950,000 shares of common stock under
the FelCor Plans pursuant to awards granted in the form of incentive stock
options, non-qualified stock options, and restricted stock. All options have
10-year contractual terms and vest either over five equal annual installments
(20% per year), beginning in the year following the date of grant or 100% at the
end of a four year vesting term. Under the FelCor plans there were 460,260
shares available for grant at December 31, 2001.
The options outstanding under the Bristol Plans generally vest either
in four equal annual installments (25% per year) beginning in the second year
following the original date of award, in five equal annual installments (20% per
year) beginning in the year following the original date of award, or on a single
date that is three to five years following the original date of the award.
Options covering 111,247 shares were outstanding under the Bristol Plans at
December 31, 2001.
A summary of the status of FelCor's non-qualified stock options under
the Plans as of December 31, 2001, 2000, and 1999, and the changes during the
years are presented below:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
NO. SHARES OF AVERAGE NO. SHARES OF AVERAGE NO. SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
------------- -------- ------------- -------- ------------- --------
Outstanding at beginning of the year ......... 1,900,780 $23.33 2,496,773 $22.32 2,540,466 $22.53
Granted ...................................... 300,000 $17.94 69,000 $19.50 9,750 $22.13
Exercised .................................... (48,806) $10.33 (760) $10.33
Retired (a) .................................. (349,443) $12.28
Forfeited .................................... (110,762) $23.33 (315,550) $26.75 (52,683) $32.41
--------- --------- ---------
Outstanding at end of year ................... 2,041,212 $22.85 1,900,780 $23.33 2,496,773 $22.32
========= ========= =========
Exercisable at end of year ................... 1,546,913 $23.84 804,066 $24.64 906,675 $24.58
</Table>
(a) In the second quarter of 2000, the Company purchased options
covering an aggregate of 349,443 shares of FelCor's common stock for
approximately $1.9 million. These options were held by employees of
Bristol and were issued in substitution for stock options previously
granted by Bristol Hotel Company that were outstanding at the time of
its merger with FelCor in 1998. These options so purchased and retired
had exercise prices ranging from $10.33 to $16.95 per share and the
majority of these options were scheduled to vest in the third quarter
of 2000. The purchase price was recorded as a reduction in additional
paid in capital.
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD AVG. EXERCISABLE WGTD. AVG.
EXERCISE PRICES AT 12/31/01 LIFE EXERCISE PRICE AT 12/31/01 EXERCISE PRICE
--------------- ------------ --------- -------------- ----------- --------------
$10.33 to $29.92 1,884,836 6.14 $21.83 1,400,386 $22.64
$30.28 to $36.63 156,376 5.46 $35.24 146,527 $35.35
--------- ---------
$10.33 to $36.63 2,041,212 6.08 $22.85 1,546,913 $23.84
========= =========
</Table>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions: dividend yield of 12.44%; risk free interest rates are
different for each grant and range from 4.33% to 6.58%; the expected lives of
options are six years; and volatility of 21.04% for 2001 grants, 18.22% for 2000
grants and 18.44% for grants issued in 1999. The weighted average fair value of
options granted during 2001, 2000, and 1999 was $0.85, $0.90, and $1.07 per
share, respectively.
F-25
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
Restricted Stock
A summary of the status of the Company's restricted stock grants as of
December 31, 2001, 2000, and 1999 and the changes during the years are presented
below:
<Table>
<Caption>
2001 2000 1999
------------------------ ------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
FAIR MARKET FAIR MARKET FAIR MARKET
VALUE VALUE VALUE
NO. SHARES AT GRANT NO. SHARES AT GRANT NO. SHARES AT GRANT
---------- ----------- ---------- ------------ ---------- -----------
Outstanding at beginning of the year ......... 335,375 $25.55 125,375 $28.97 125,375 $28.97
Granted:
With 5-year pro rata vesting .............. 214,000 $22.89 210,000 $23.50
Forfeited .................................... (25,300) $20.23
------- ------- -------
Outstanding at end of year ................... 524,075 $24.72 335,375 $25.55 125,375 $28.97
======= ======= =======
Vested at end of year ........................ 161,895 $25.03 107,975 $28.77 83,575 $28.35
</Table>
Pro Forma Net Income and Net Income Per Common Share
Had the compensation cost for the Company's stock-based compensation
plans been determined in accordance with SFAS 123, the Company's net income or
loss and net income or loss per common share for 2001, 2000, and 1999 would
approximate the pro forma amounts below (in thousands, except per share data):
<Table>
<Caption>
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
---------------------- ---------------------- ----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
SFAS 123 charge ......................... $ 2,365 $ 1,636 $ 1,606
APB 25 charge ........................... $ 2,093 $ 1,478 $ 652
Net income (loss) applicable to
common stockholders .................. $(63,876) $(64,148) $ 37,017 $ 36,859 $106,345 $105,391
Diluted net income (loss)
applicable to common
stockholder per common
share ................................ $ (1.21) $ (1.22) $ 0.67 $ 0.66 $ 1.57 $ 1.56
</Table>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.
20. EMPLOYEE BENEFITS
The Company offers a 401(k) plan, health insurance benefits and a
deferred compensation plan to its employees. In 2001 the Company's matching
contribution to its 401(k) plan was $489,000 and the cost of health insurance
benefits were $485,000. The deferred compensation plan offered by the Company is
available only to directors and employees making in excess of $100,000 annually.
The Company makes no matching or other contributions to the deferred
compensation plan other than the payment of its operating and administrative
expenses.
21. SEGMENT INFORMATION
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," requires the disclosure of selected information about operating
segments. Based on the guidance provided in the standard, the Company has
determined that its business is conducted in one operating segment.
F-26
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. SEGMENT INFORMATION -- (CONTINUED)
The following table sets forth revenues for and investment in hotel
assets represented by the following geographical areas as of and for the years
ended December 31, 2001, 2000 and 1999 (in thousands):
<Table>
<Caption>
REVENUE(a) INVESTMENT IN HOTEL ASSETS
-------------------------------------- --------------------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
California............ $ 195,376 $118,857 $97,283 $691,724 $ 681,714 $ 698,942
Texas................. 206,766 97,274 94,898 869,369 862,199 891,626
Florida............... 130,402 66,014 61,516 541,231 530,933 542,298
Georgia............... 89,487 40,183 39,247 319,038 316,267 355,519
Other states.......... 552,964 203,776 188,326 1,797,119 1,752,303 1,802,220
Canada................ 25,976 13,860 11,817 77,193 79,960 75,294
---------- -------- -------- ---------- ---------- ----------
Total...... $1,200,971 $539,964 $493,087 $4,295,674 $4,223,376 $4,365,899
========== ======== ======== ========== ========== ==========
</Table>
a) Prior to January 1, 2001, all of the revenues that the Company derived
from hotel assets consisted of percentage lease revenue. Effective
January 1, 2001, the Company acquired 96 hotel leases and effective
July 1, 2001 acquired the remaining 88 hotel leases. Upon acquisition
of these leases, the Company's revenue derived from hotel assets became
hotel operating revenues, including room revenues, food and beverage
revenue and other hotel operating revenue.
22. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB")
approved SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other
Intangible Assets." SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS 142 will
be effective for fiscal years beginning after December 15, 2001 and will require
(1) intangible assets (as defined in SFAS 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). As the result of implementation of SFAS 142, the
Company will stop the amortization of the difference between the Company's cost
in unconsolidated entities and its proportionate share of the underlying net
assets at the date of acquisition. At December 31, 2001, the Company included in
investment in unconsolidated entities an asset of $73.4 million representing the
unamortized cost in excess of its proportionate share of the underlying assets
at the date of acquisition. The Company amortized excess cost of $2.5, $2.1 and
$2.1 million in 2001, 2000 and 1999, respectively. The Company does not believe
that SFAS 142 will have a material impact on the Company's results of operations
and financial position.
On August 15, 2001 the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires that the fair value of the liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS 143 will be effective for financial statements issued for
fiscal years beginning after June 15, 2002 and interim periods within those
fiscal years. The Company is not currently affected by the Statement's
requirement.
On October 3, 2001 the FASB issued SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 by
removing goodwill from its scope, by defining a probability-weighted cash flow
estimation approach and establishing a "primary-asset" approach to determine the
cash flow estimation period for a group of assets. It also replaces the
provisions of APB Opinion 30, "Reporting the Effects of Disposal of a Segment of
a Business" for the disposal of segments of a business. SFAS 144 will be
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company is not currently affected by the
Statement's requirement.
F-27
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. QUARTERLY OPERATING RESULTS (UNAUDITED)
The Company's unaudited consolidated quarterly operating data for the
years ended December 31, 2001 and 2000, follows (in thousands, except per share
data). In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of quarterly results have
been reflected in the data. It is also management's opinion, however, that
quarterly operating data for hotel enterprises are not indicative of results to
be achieved in succeeding quarters or years. In order to obtain a more accurate
indication of performance, there should be a review of operating results,
changes in stockholders' equity and cash flows for a period of several years.
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
2001 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
Total revenues ................................................... $ 285,653 $ 274,649 $ 337,759 $ 302,910
Income (loss) before extraordinary items ......................... $ (6,806) $ 22,784 $ (24,717) $ (29,267)
Net income (loss) applicable to common stockholders .............. $ (12,956) $ 16,409 $ (31,912) $ (35,417)
Diluted per common share data:
Net income (loss) applicable to common stockholders ......... $ (0.25) $ 0.31 $ (0.60) $ (0.67)
Weighted average common shares outstanding .................. 52,595 53,046 52,634 52,639
</Table>
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
2000 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
Total revenues ................................................... $ 124,502 $ 133,657 $ 132,842 $ 148,963
Income (loss) before extraordinary items ......................... $ 18,927 $ (28,900) $ 34,231 $ 41,306
Net income (loss) applicable to common stockholders .............. $ 12,743 $ (35,074) $ 24,211 $ 35,137
Diluted per common share data:
Net income (loss) applicable to common stockholders ......... $ 0.21 $ (0.64) $ 0.44 $ 0.66
Weighted average common shares outstanding .................. 59,377 54,945 54,579 53,202
</Table>
F-28
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of FelCor Lodging Trust Incorporated:
Our audits of the consolidated financial statements referred to in our report
dated February 6, 2002, appearing on page F-2 of the Annual Report on Form 10-K
of FelCor Lodging Trust Incorporated (which report and consolidated financial
statements are included in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 6, 2002
F-29
FELCOR LODGING TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO ACQUISITION
-------------------- ----------------------------
BUILDINGS FURNITURE BUILDINGS FURNITURE
AND AND AND AND
DESCRIPTION OF PROPERTY ENCUMBRANCES LAND IMPROVEMENTS FIXTURE LAND IMPROVEMENT FIXTURES
- ----------------------- ------------ ------ ------------ -------- ---- ----------- ---------
Birmingham, AL(1) 12,096 $2,843 $29,286 $ 160 $ -- $ 672 $4,256
Montgomery E. (I-85), AL(2) 615 836 7,272 251 9 2,717 1,057
Texarkana, (I-30), AR(2) 5,245 162 -- 1,496 562
Flagstaff, AZ(1) 900 6,825 268 -- 1,605 1,329
Phoenix (Airport - 44th St), AZ(1) 2,969 25,828 891 -- 1,397 2,841
Phoenix (Camelback), AZ(1) 38,998 612 4,695 976 5,903
Phoenix (Crescent), AZ(3) 26,489 3,608 29,583 2,886 -- 183 1,454
Tempe (ASU), AZ(1) 11,987 3,951 34,371 1,185 -- 935 3,040
Anaheim (Disney(R) Area), CA(1) 11,120 2,548 14,832 607 -- 755 4,075
Burlingame (San Francisco A/P S), CA(1) 39,929 818 -- 242 4,514
Dana Point, CA(5) 1,787 15,545 536 -- 811 2,928
El Segundo (LAX Airport S), CA(1) 2,660 17,997 798 -- 571 6,663
Irvine (Orange County Airport), CA(6) 4,981 43,338 1,494 -- 1,789 771
Milpitas, CA(1) 20,831 4,021 23,677 562 -- 1,057 4,773
Milpitas (San Jose N), CA(6) 4,153 36,130 1,246 -- 5,886 1,976
Napa, CA(1) 10,944 3,287 14,205 494 -- 1,057 3,726
Oxnard (Mandalay Beach), CA(1) 2,930 22,124 879 -- 1,695 6,115
Palm Desert, CA(1) 8,569 2,368 20,598 710 -- 1,621 2,902
Pleasanton, CA(6) 3,169 27,569 951 -- 174 316
San Diego (On the Bay), CA(2) 68,633 2,123 -- 1,288 3,725
San Francisco (Financial District), CA(2) 21,679 670 -- 1,543 2,162
San Francisco (Fisherman's Wharf), CA(2) 62,203 1,924 -- 961 952
San Francisco (Union Square), CA(6) 8,514 74,075 2,554 -- 3,609 1,481
Santa Barbara, CA(2) 5,432 1,692 14,723 508 -- 199 345
So. San Francisco (SF Airport N), CA(1) 25,831 3,418 31,737 527 -- 896 5,165
Aurora (Denver Southeast), CO(7) 2,432 21,158 730 -- 504 2,392
Avon (Beaver Creek Resort), (16) CO(8) 1,134 9,864 340 (16) 342 1,138
Hartford (Downtown), CT(6) 2,327 20,243 698 -- 6,015 3,316
Stamford, CT(9) 37,356 1,155 -- 1,586 965
Wilmington, DE(7) 1,379 12,487 431 -- 9,480 3,788
Boca Raton, FL(1) 1,868 16,253 560 -- 90 4,010
Cocoa Beach (Oceanfront Resort), FL(2) 2,304 20,046 691 -- 9,711 4,081
Deerfield Beach, FL(1) 15,020 4,522 29,443 917 69 1,045 5,470
Ft. Lauderdale, FL(1) 16,032 5,329 47,850 903 (163) 1,497 6,222
Ft. Lauderdale (Cypress Creek), FL(11) 12,754 3,009 26,177 903 -- 1,042 2,828
Jacksonville, FL(1) 1,130 9,608 456 -- 4,877 2,453
Kissimmee (Nikki Bird Resort), FL(2) 31,652 979 -- 6,409 2,320
Lake Buena Vista (Disney World(C), FL(5) 2,896 25,196 869 -- 323 3,197
Miami (Airport), FL(6) 26,146 809 -- 1,090 1,448
Miami (Airport), FL(1) 12,960 4,135 24,950 1,171 -- 374 6,705
Orlando (Airport), FL(9) 2,564 22,310 769 -- 1,761 464
Orlando (Int'l Drive Resort), FL(2) 5,142 44,735 1,543 -- 8,569 3,469
Orlando (North), FL(1) 1,673 14,218 684 -- 5,523 3,148
Orlando (South), FL(1) 25,158 1,632 13,870 799 -- 632 3,037
Tampa (Near Busch Gardens), FL(2) 9,534 295 -- 11,209 2,203
<Caption>
GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK
CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE
----------------------------------- BUILDINGS AND BUILDINGS AND
BUILDINGS FURNITURE IMPROVEMENTS IMPROVEMENTS,
AND AND FURNITURE & FURNITURE & DATE OF DATE
DESCRIPTION OF PROPERTY LAND IMPROVEMENT FIXTURES TOTAL FIXTURES FIXTURES CONSTRUCTION ACQUIRED
- ----------------------- ---- ----------- --------- ----- ------------- ------------ ------------ --------
Birmingham, AL(1) $2,843 $29,958 $4,416 $37,217 $ 8,118 $29,099 1987 01/03/96
Montgomery E. (I-85), AL(2) 845 9,989 1,308 12,142 1,565 10,577 1964 07/28/98
Texarkana, (I-30), AR(2) -- 6,741 724 7,465 945 6,520 1970 07/28/98
Flagstaff, AZ(1) 900 8,430 1,597 10,927 2,848 8,079 1988 02/16/95
Phoenix (Airport - 44th St), AZ(1) 2,969 27,225 3,732 33,926 3,604 30,322 1981 05/04/98
Phoenix (Camelback), AZ(1) 4,695 39,974 6,515 51,184 11,670 39,514 1985 01/03/96
Phoenix (Crescent), AZ(3) 3,608 29,766 4,340 37,714 6,509 31,205 1986 06/30/97
Tempe (ASU), AZ(1) 3,951 35,306 4,225 43,482 5,059 38,423 1986 05/04/98
Anaheim (Disney(R) Area), CA(1) 2,548 15,587 4,682 22,817 6,473 16,344 1987 01/03/96
Burlingame (San Francisco A/P S), CA(1) - 40,171 5,332 45,503 10,461 35,042 1986 11/06/95
Dana Point, CA(5) 1,787 16,356 3,464 21,607 4,576 17,031 1992 02/21/97
El Segundo (LAX Airport S), CA(1) 2,660 18,568 7,461 28,689 9,344 19,345 1985 03/27/96
Irvine (Orange County Airport), CA(6) 4,981 45,127 2,265 52,373 5,119 47,254 1986 07/28/98
Milpitas, CA(1) 4,021 24,734 5,335 34,090 8,180 25,910 1987 01/03/96
Milpitas (San Jose N), CA(6) 4,153 42,016 3,222 49,391 4,968 44,423 1987 07/28/98
Napa, CA(1) 3,287 15,262 4,220 22,769 5,626 17,143 1985 05/08/96
Oxnard (Mandalay Beach), CA(1) 2,930 23,819 6,994 33,743 9,051 24,692 1986 05/08/96
Palm Desert, CA(1) 2,368 22,219 3,612 28,199 3,851 24,348 1984 05/04/98
Pleasanton, CA(6) 3,169 27,743 1,267 32,179 3,083 29,096 1986 07/28/98
San Diego (On the Bay), CA(2) -- 69,921 5,848 75,769 7,684 68,085 1965 07/28/98
San Francisco (Financial District), CA(2) -- 23,222 2,832 26,054 3,095 22,959 1970 07/28/98
San Francisco (Fisherman's Wharf), CA(2) -- 63,164 2,876 66,040 6,852 59,188 1970 07/28/98
San Francisco (Union Square), CA(6) 8,514 77,684 4,035 90,233 8,802 81,431 1970 07/28/98
Santa Barbara, CA(2) 1,692 14,922 853 17,467 1,720 15,747 1969 07/28/98
So. San Francisco (SF Airport N), CA(1) 3,418 32,633 5,692 41,743 9,643 32,100 1988 01/03/96
Aurora (Denver Southeast), CO(7) 2,432 21,662 3,122 27,216 3,827 23,389 1989 03/15/98
Avon (Beaver Creek Resort), (16) CO(8) 1,118 10,206 1,478 12,802 2,926 9,876 1989 02/20/96
Hartford (Downtown), CT(6) 2,327 26,258 4,014 32,599 4,328 28,271 1973 07/28/98
Stamford, CT(9) - 38,942 2,120 41,062 4,444 36,618 1984 07/28/98
Wilmington, DE(7) 1,379 21,967 4,219 27,565 2,928 24,637 1972 03/20/98
Boca Raton, FL(1) 1,868 16,343 4,570 22,781 6,294 16,487 1989 02/28/96
Cocoa Beach (Oceanfront Resort), FL(2) 2,304 29,757 4,772 36,833 4,662 32,171 1960 07/28/98
Deerfield Beach, FL(1) 4,591 30,488 6,387 41,466 9,619 31,847 1987 01/03/96
Ft. Lauderdale, FL(1) 5,166 49,347 7,125 61,638 13,251 48,387 1986 01/03/96
Ft. Lauderdale (Cypress Creek), FL(11) 3,009 27,219 3,731 33,959 3,796 30,163 1986 05/04/98
Jacksonville, FL(1) 1,130 14,485 2,909 18,524 4,475 14,049 1986 07/28/94
Kissimmee (Nikki Bird Resort), FL(2) -- 38,061 3,299 41,360 5,071 36,289 1974 07/28/98
Lake Buena Vista (Disney World(C), FL(5) 2,896 25,519 4,066 32,481 5,090 27,391 1987 07/28/97
Miami (Airport), FL(6) -- 27,236 2,257 29,493 3,619 25,874 1987 01/03/96
Miami (Airport), FL(1) 4,135 25,324 7,876 37,335 10,188 27,147 1983 07/28/98
Orlando (Airport), FL(9) 2,564 24,071 1,233 27,868 2,651 25,217 1984 07/28/98
Orlando (Int'l Drive Resort), FL(2) 5,142 53,304 5,012 63,458 5,826 57,632 1972 07/28/98
Orlando (North), FL(1) 1,673 19,741 3,832 25,246 5,924 19,322 1985 07/28/94
Orlando (South), FL(1) 1,632 14,502 3,836 19,970 5,336 14,634 1985 07/28/94
Tampa (Near Busch Gardens), FL(2) -- 20,743 2,498 23,241 3,087 20,154 1966 07/28/98
<Caption>
LIFE UPON
WHICH
DEPRECIATION
IN STATEMENT
DESCRIPTION OF PROPERTY IS COMPUTED
- ----------------------- ------------
Birmingham, AL(1) 5-40 Yrs
Montgomery E. (I-85), AL(2) 5-40 Yrs
Texarkana, (I-30), AR(2) 5-40 Yrs
Flagstaff, AZ(1) 5-40 Yrs
Phoenix (Airport - 44th St), AZ(1) 5-40 Yrs
Phoenix (Camelback), AZ(1) 5-40 Yrs
Phoenix (Crescent), AZ(3) 5-40 Yrs
Tempe (ASU), AZ(1) 5-40 Yrs
Anaheim (Disney(R) Area), CA(1) 5-40 Yrs
Burlingame (San Francisco A/P S), CA(1) 5-40 Yrs
Dana Point, CA(5) 5-40 Yrs
El Segundo (LAX Airport S), CA(1) 5-40 Yrs
Irvine (Orange County Airport), CA(6) 5-40 Yrs
Milpitas, CA(1) 5-40 Yrs
Milpitas (San Jose N), CA(6) 5-40 Yrs
Napa, CA(1) 5-40 Yrs
Oxnard (Mandalay Beach), CA(1) 5-40 Yrs
Palm Desert, CA(1) 5-40 Yrs
Pleasanton, CA(6) 5-40 Yrs
San Diego (On the Bay), CA(2) 5-40 Yrs
San Francisco (Financial District), CA(2) 5-40 Yrs
San Francisco (Fisherman's Wharf), CA(2) 5-40 Yrs
San Francisco (Union Square), CA(6) 5-40 Yrs
Santa Barbara, CA(2) 5-40 Yrs
So. San Francisco (SF Airport N), CA(1) 5-40 Yrs
Aurora (Denver Southeast), CO(7) 5-40 Yrs
Avon (Beaver Creek Resort), (16) CO(8) 5-40 Yrs
Hartford (Downtown), CT(6) 5-40 Yrs
Stamford, CT(9) 5-40 Yrs
Wilmington, DE(7) 5-40 Yrs
Boca Raton, FL(1) 5-40 Yrs
Cocoa Beach (Oceanfront Resort), FL(2) 5-40 Yrs
Deerfield Beach, FL(1) 5-40 Yrs
Ft. Lauderdale, FL(1) 5-40 Yrs
Ft. Lauderdale (Cypress Creek), FL(11) 5-40 Yrs
Jacksonville, FL(1) 5-40 Yrs
Kissimmee (Nikki Bird Resort), FL(2) 5-40 Yrs
Lake Buena Vista (Disney World(C), FL(5) 5-40 Yrs
Miami (Airport), FL(6) 5-40 Yrs
Miami (Airport), FL(1) 5-40 Yrs
Orlando (Airport), FL(9) 5-40 Yrs
Orlando (Int'l Drive Resort), FL(2) 5-40 Yrs
Orlando (North), FL(1) 5-40 Yrs
Orlando (South), FL(1) 5-40 Yrs
Tampa (Near Busch Gardens), FL(2) 5-40 Yrs
</Table>
F-30
FELCOR LODGING TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
<Table>
<Caption>
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO ACQUISITION
-------------------- ----------------------------
BUILDINGS FURNITURE BUILDINGS FURNITURE
AND AND AND AND
DESCRIPTION OF PROPERTY ENCUMBRANCES LAND IMPROVEMENTS FIXTURE LAND IMPROVEMENT FIXTURES
- ----------------------- ------------ ------ ------------ --------- ---- ----------- ---------
Tampa Rocky Point, FL(5) 2,142 18,639 643 -- 1,240 2,603
Atlanta (Airport), GA(6) 40,943 1,266 -- 245 667
Atlanta (Airport), GA(1) 22,342 770 2,568 1,154 1,855
Atlanta (Airport Gateway), GA(3) 5,113 22,857 2,105 -- 235 4,334
Atlanta (Airport North), GA(2) 16,935 34,531 1,068 -- 293 920
Atlanta Buckhead, GA(1) 37,614 7,303 38,996 2,437 -- 744 3,074
Atlanta (Galleria) GA(11) 17,659 5,052 28,507 2,526 -- 863 925
Atlanta (Jonesboro South), GA(2) 2,815 864 7,515 259 -- 138 575
Atlanta Perimeter, GA(9) 10,509 20,556 636 -- 279 612
Atlanta Powers Ferry, GA(6) 10,250 3,410 29,672 1,023 1 557 821
Brunswick, GA(1) 705 6,067 247 -- 29 1,160
Columbus (Airport North), GA(2) 7,026 217 -- 1,996 917
Chicago (Allerton), IL(6) 3,343 29,086 1,003 -- 54,928 7,770
Chicago (O'Hare), IL(3) 24,527 8,178 37,043 2,887 -- 345 1,387
Deerfield, IL(1) 16,300 2,305 20,054 692 -- 532 2,088
Lexington, KY(14) 1,955 13,604 587 -- 165 2,290
Lexington, KY(11) 6,867 21,644 746 2,488 422 767
Baton Rouge, LA(1) 7,776 2,350 19,092 525 1 899 4,286
New Orleans (French Quarter), LA(2) 23,698 5,263 45,793 1,579 1 7,089 5,736
New Orleans, LA(1) 32,106 3,647 31,992 2,092 -- 5,205 3,425
Boston (Government Center), MA(9) 45,452 1,406 -- 5,279 1,601
Boston (Marlborough), MA(1) 20,159 948 8,143 325 761 13,083 5,381
Baltimore (BWI), MD(1) 2,568 22,433 770 (2) 1,309 2,785
Troy, MI(1) 2,968 25,905 909 -- 1,319 2,450
Bloomington, MN(1) 2,038 17,731 611 -- 561 3,439
Minneapolis (Airport), MN(1) 15,360 5,417 36,508 602 -- (14) 3,727
Minneapolis (Downtown), MN(1) 818 16,820 505 -- 87 3,971
St. Paul, MN(1) 1,156 17,315 849 -- (110) 3,783
Kansas City (Northeast), MO(2) 973 8,461 292 -- 31 2,613
St. Louis (Downtown), MO(1) 3,179 27,659 954 -- 1,317 3,992
St. Louis (Westport), MO(2) 7,990 2,767 24,072 830 -- 2,290 1,878
Jackson (Downtown), MS(6) 4,942 2,226 19,370 668 -- 122 462
Jackson (North), MS(15) 5,337 1,643 14,296 493 -- 227 505
Olive Branch (Whispering Woods
Conference Center), MS(8) 1,247 12,155 419 (158) 1,603 1,557
Raleigh/Durham, NC(5) 2,124 18,476 637 -- 113 1,952
Omaha (Central), NE(5) 1,877 16,328 563 -- 1,114 2,476
Omaha (Central), NE(12) 518 4,504 155 -- 862 516
Omaha (I-80), NE(2) 1,795 15,614 538 -- 2,932 2,096
Omaha (Old Mill Northwest), NE(6) 979 8,519 294 -- 4,821 2,561
Omaha (Southwest), NE(12) 464 4,036 139 -- 719 288
Omaha (Southwest), NE(16) 923 8,029 277 -- 870 407
Omaha (Southwest), NE(15) 373 3,245 112 -- 23 126
Piscataway, NJ(1) 20,383 1,755 17,563 527 -- 888 3,144
Secaucus (Meadowlands), NJ(6) 2,356 20,497 707 -- 4,397 6,330
Albuquerque (Mountain View), NM(2) 1,322 11,505 397 -- 656 1,051
Syracuse, NY(1) 1,483 13,756 1,330 -- 320 514
Cleveland, OH(1) 1,755 15,329 527 -- 3,177 3,556
Columbus, OH(5) 1,918 16,691 576 -- 1,035 1,284
<Caption>
GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK
CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE
----------------------------------- BUILDINGS AND BUILDINGS AND
BUILDINGS FURNITURE IMPROVEMENTS IMPROVEMENTS,
AND AND FURNITURE & FURNITURE & DATE OF DATE
DESCRIPTION OF PROPERTY LAND IMPROVEMENT FIXTURES TOTAL FIXTURES FIXTURES CONSTRUCTION ACQUIRED
- ----------------------- ---- ----------- --------- ----- ------------- ------------ ------------ --------
Tampa Rocky Point, FL(5) 2,142 19,879 3,246 25,267 3,914 21,353 1986 07/28/97
Atlanta (Airport), GA(6) -- 41,188 1,933 43,121 4,555 38,566 1975 07/28/98
Atlanta (Airport), GA(1) 2,568 23,496 2,625 28,689 2,941 25,748 1989 05/04/98
Atlanta (Airport Gateway), GA(3) 5,113 23,092 6,439 34,644 6,773 27,871 1986 06/30/97
Atlanta (Airport North), GA(2) -- 34,824 1,988 36,812 3,851 32,961 1967 07/28/98
Atlanta Buckhead, GA(1) 7,303 39,740 5,511 52,554 8,868 43,686 1988 10/17/96
Atlanta (Galleria) GA(11) 5,052 29,370 3,451 37,873 5,777 32,096 1990 06/30/97
Atlanta (Jonesboro South), GA(2) 864 7,653 834 9,351 992 8,359 1973 07/28/98
Atlanta Perimeter, GA(9) -- 20,835 1,248 22,083 2,391 19,692 1985 07/28/98
Atlanta Powers Ferry, GA(6) 3,411 30,229 1,844 35,484 3,446 32,038 1981 07/28/98
Brunswick, GA(1) 705 6,096 1,407 8,208 2,001 6,207 1988 07/19/95
Columbus (Airport North), GA(2) -- 9,022 1,134 10,156 1,360 8,796 1969 07/28/98
Chicago (Allerton), IL(6) 3,343 84,014 8,773 96,130 8,850 87,280 1923 07/28/98
Chicago (O'Hare), IL(3) 8,178 37,388 4,274 49,840 7,401 42,439 1994 06/30/97
Deerfield, IL(1) 2,305 20,586 2,780 25,671 4,542 21,129 1987 06/20/96
Lexington, KY(14) 1,955 13,769 2,877 18,601 4,090 14,511 1987 01/10/96
Lexington, KY(11) 2,488 22,066 1,513 26,067 2,667 23,400 1989 05/04/98
Baton Rouge, LA(1) 2,351 19,991 4,811 27,153 7,097 20,056 1985 01/03/96
New Orleans (French Quarter), LA(2) 5,264 52,882 7,315 65,461 5,733 59,728 1969 07/28/98
New Orleans, LA(1) 3,647 37,197 5,517 46,361 9,552 38,302 1984 12/01/94
Boston (Government Center), MA(9) -- 50,731 3,007 53,738 5,333 48,405 1968 07/28/98
Boston (Marlborough), MA(1) 1,709 21,226 5,706 28,641 7,234 21,407 1988 06/30/95
Baltimore (BWI), MD(1) 2,566 23,742 3,555 29,863 4,449 25,414 1987 03/20/97
Troy, MI(1) 2,968 27,224 3,359 33,551 4,711 28,840 1987 03/20/97
Bloomington, MN(1) 2,038 18,292 4,050 24,380 4,283 20,097 1980 02/01/97
Minneapolis (Airport), MN(1) 5,417 36,494 4,329 46,240 9,396 36,844 1986 11/06/95
Minneapolis (Downtown), MN(1) 818 16,907 4,476 22,201 6,466 15,735 1984 11/15/95
St. Paul, MN(1) 1,156 17,205 4,632 22,993 6,846 16,147 1983 11/15/95
Kansas City (Northeast), MO(2) 973 8,492 2,905 12,370 2,497 9,873 1975 07/28/98
St. Louis (Downtown), MO(1) 3,179 28,976 4,946 37,101 4,032 33,069 1985 05/04/98
St. Louis (Westport), MO(2) 2,767 26,362 2,708 31,837 2,995 28,842 1979 07/28/98
Jackson (Downtown), MS(6) 2,226 19,492 1,130 22,848 2,333 20,515 1975 07/28/98
Jackson (North), MS(15) 1,643 14,523 998 17,164 1,794 15,370 1957 07/28/98
Olive Branch (Whispering Woods
Conference Center), MS(8) 1,089 13,758 1,976 16,823 2,200 14,623 1972 07/28/98
Raleigh/Durham, NC(5) 2,124 18,589 2,589 23,302 3,696 19,606 1987 07/28/97
Omaha (Central), NE(5) 1,877 17,442 3,039 22,358 3,829 18,529 1973 02/01/97
Omaha (Central), NE(12) 518 5,366 671 6,555 743 5,812 1965 07/28/98
Omaha (I-80), NE(2) 1,795 18,546 2,634 22,975 2,252 20,723 1991 07/28/98
Omaha (Old Mill Northwest), NE(6) 979 13,340 2,855 17,174 2,260 14,914 1974 07/28/98
Omaha (Southwest), NE(12) 464 4,755 427 5,646 593 5,053 1986 07/28/98
Omaha (Southwest), NE(16) 923 8,899 684 10,506 1,057 9,449 1989 07/28/98
Omaha (Southwest), NE(15) 373 3,268 238 3,879 462 3,417 1996 07/28/98
Piscataway, NJ(1) 1,755 18,451 3,671 23,877 5,505 18,372 1988 01/10/96
Secaucus (Meadowlands), NJ(6) 2,356 24,894 7,037 34,287 4,823 29,464 N/A 07/28/98
Albuquerque (Mountain View), NM(2) 1,322 12,161 1,448 14,931 1,558 13,373 1968 07/28/98
Syracuse, NY(1) 1,483 14,076 1,844 17,403 2,929 14,474 1989 06/30/97
Cleveland, OH(1) 1,755 18,506 4,083 24,344 4,961 19,383 1990 11/17/95
Columbus, OH(5) 1,918 17,726 1,860 21,504 2,742 18,762 1985 02/04/98
<Caption>
LIFE UPON
WHICH
DEPRECIATION
IN STATEMENT
DESCRIPTION OF PROPERTY IS COMPUTED
- ----------------------- ------------
Tampa Rocky Point, FL(5) 5-40 Yrs
Atlanta (Airport), GA(6) 5-40 Yrs
Atlanta (Airport), GA(1) 5-40 Yrs
Atlanta (Airport Gateway), GA(3) 5-40 Yrs
Atlanta (Airport North), GA(2) 5-40 Yrs
Atlanta Buckhead, GA(1) 5-40 Yrs
Atlanta (Galleria) GA(11) 5-40 Yrs
Atlanta (Jonesboro South), GA(2) 5-40 Yrs
Atlanta Perimeter, GA(9) 5-40 Yrs
Atlanta Powers Ferry, GA(6) 5-40 Yrs
Brunswick, GA(1) 5-40 Yrs
Columbus (Airport North), GA(2) 5-40 Yrs
Chicago (Allerton), IL(6) 5-40 Yrs
Chicago (O'Hare), IL(3) 5-40 Yrs
Deerfield, IL(1) 5-40 Yrs
Lexington, KY(14) 5-40 Yrs
Lexington, KY(11) 5-40 Yrs
Baton Rouge, LA(1) 5-40 Yrs
New Orleans (French Quarter), LA(2) 5-40 Yrs
New Orleans, LA(1) 5-40 Yrs
Boston (Government Center), MA(9) 5-40 Yrs
Boston (Marlborough), MA(1) 5-40 Yrs
Baltimore (BWI), MD(1) 5-40 Yrs
Troy, MI(1) 5-40 Yrs
Bloomington, MN(1) 5-40 Yrs
Minneapolis (Airport), MN(1) 5-40 Yrs
Minneapolis (Downtown), MN(1) 5-40 Yrs
St. Paul, MN(1) 5-40 Yrs
Kansas City (Northeast), MO(2) 5-40 Yrs
St. Louis (Downtown), MO(1) 5-40 Yrs
St. Louis (Westport), MO(2) 5-40 Yrs
Jackson (Downtown), MS(6) 5-40 Yrs
Jackson (North), MS(15) 5-40 Yrs
Olive Branch (Whispering Woods
Conference Center), MS(8) 5-40 Yrs
Raleigh/Durham, NC(5) 5-40 Yrs
Omaha (Central), NE(5) 5-40 Yrs
Omaha (Central), NE(12) 5-40 Yrs
Omaha (I-80), NE(2) 5-40 Yrs
Omaha (Old Mill Northwest), NE(6) 5-40 Yrs
Omaha (Southwest), NE(12) 5-40 Yrs
Omaha (Southwest), NE(16) 5-40 Yrs
Omaha (Southwest), NE(15) 5-40 Yrs
Piscataway, NJ(1) 5-40 Yrs
Secaucus (Meadowlands), NJ(6) 5-40 Yrs
Albuquerque (Mountain View), NM(2) 5-40 Yrs
Syracuse, NY(1) 5-40 Yrs
Cleveland, OH(1) 5-40 Yrs
Columbus, OH(5) 5-40 Yrs
</Table>
F-31
FELCOR LODGING TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
<Table>
<Caption>
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO ACQUISITION
-------------------- ----------------------------
BUILDINGS FURNITURE BUILDINGS FURNITURE
AND AND AND AND
DESCRIPTION OF PROPERTY ENCUMBRANCES LAND IMPROVEMENTS FIXTURE LAND IMPROVEMENT FIXTURES
- ----------------------- ------------ ------ ------------ --------- ---- ----------- ---------
Dayton, OH(5) 6,453 1,140 11,223 342 149 1,163 500
Tulsa, OK(1) 525 7,344 3,117 -- 640 2,657
Philadelphia (Center City), PA(6) 5,793 50,395 1,738 -- 2,556 1,460
Philadelphia (Independence Mall), PA(2) 12,577 3,184 27,704 955 -- 5,829 2,153
Philadelphia (Society Hill), PA(3) 33,355 4,542 45,121 1,536 -- 1,178 3,589
Pittsburgh, PA(9) 15,500 25,170 773 -- 1,738 1,952
Charleston (Mills House), SC(2) 3,270 28,446 981 -- 386 2,739
Greenville (Roper), SC(6) 1,551 13,492 465 -- 735 792
Myrtle Beach (Kingston
Plantation), SC(1) 2,940 24,988 1,470 -- 1,710 5,661
Knoxville (Central), TN(2) 11,586 358 -- 1,537 1,068
Nashville, TN(1) 1,118 9,506 961 -- 278 2,307
Nashville, (Opryland/Airport), TN(9) 27,889 863 -- 1,897 1,779
Addison (North Dallas), TX(6) 4,938 42,965 1,482 -- 324 986
Amarillo (I-40), TX(2) 5,754 178 -- 2,734 870
Austin (Downtown), TX(5) 2,508 21,908 752 -- 898 646
Austin (Town Lake), TX(2) 21,551 667 -- 810 1,796
Beaumont (Midtown I-10), TX(2) 685 5,964 206 -- 2,278 763
Corpus Christi, TX(1) 5,249 1,113 9,618 390 51 584 1,757
Dallas, TX(19) 6,395 13,564 420 2,391 416 660
Dallas (Alpha Road), TX(17) 9,795 53 1,623 (1,632) 1,725
Dallas (Campbell Center), TX(7) 3,208 27,907 962 -- 1,054 2,235
Dallas (DFW Airport South), TX(1) 35,156 1,212 4,041 490 4,375
Dallas (Downtown West End), TX(12) 1,953 16,989 586 -- 155 66
Dallas (Love Field), TX(1) 13,479 1,934 16,674 757 -- 396 1,867
Dallas (Market Center), TX(6) 12,591 4,079 35,486 1,224 -- 618 960
Dallas (Market Center), TX(1) 12,035 2,560 23,751 2,182 -- 473 843
Dallas (Park Central), TX(6) 30,513 944 5,624 384 686
Dallas (Park Central), TX(1) 1,497 12,722 647 (19) 798 2,616
Dallas (Park Central), TX(3) 1,720 28,550 4,130 (898) 232 1,106
Dallas (Park Central), TX(20) 4,513 43,125 2,507 -- 4,441 2,874
Houston (I-10 West), TX(9) 3,055 26,575 916 -- 204 332
Houston (Int'l Airport), TX(2) 12,844 3,890 33,842 1,167 -- 584 987
Houston (Medical Center), TX(6) 6,098 2,493 21,687 748 -- 626 716
Houston (Medical Center), TX(15) 8,095 2,284 19,869 685 -- 2,166 1,763
Houston (Near Greenway), TX(9) 6,814 3,418 29,736 1,025 -- 582 1,182
Irving (DFW Airport North), TX(19) 56,714 1,754 10,040 814 1,774
Irving (DFW Airport North), TX(21) 10,566 1,546 13,453 464 -- 175 2,183
Midland (Country Villa), TX(2) 404 3,517 121 -- 128 326
Odessa (Centre), TX(15) 487 4,238 146 -- 88 428
Odessa (Parkway Blvd), TX(13) 370 3,218 111 -- 76 356
Plano, TX(19) 8,092 1,813 15,775 544 -- 587 1,193
Plano, TX(2) 885 7,696 265 -- 190 298
San Antonio (Downtown), TX(2) 22,246 688 -- 748 612
San Antonio (Int'l Airport), TX(9) 3,371 29,326 1,011 -- 1,857 926
Waco (I-35), TX(2) 574 4,994 172 -- 146 323
Salt Lake City (Airport), UT(2) 5,346 165 -- 2,734 1,065
Burlington, VT(3) 20,602 3,136 27,283 941 -- 502 2,150
Cambridge, Canada(2) 481 4,188 144 (35) 533 870
Kitchener (Waterloo), Canada(2) 9,441 292 -- 1,005 676
<Caption>
GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK
CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE
----------------------------------- BUILDINGS AND BUILDINGS AND
BUILDINGS FURNITURE IMPROVEMENTS IMPROVEMENTS,
AND AND FURNITURE & FURNITURE & DATE OF DATE
DESCRIPTION OF PROPERTY LAND IMPROVEMENT FIXTURES TOTAL FIXTURES FIXTURES CONSTRUCTION ACQUIRED
- ----------------------- ---- ----------- --------- ----- ------------- ------------ ------------ --------
Dayton, OH(5) 1,289 12,386 842 14,517 1,633 12,884 1987 12/30/97
Tulsa, OK(1) 525 7,984 5,774 14,283 7,194 7,089 1985 07/28/94
Philadelphia (Center City), PA(6) 5,793 52,951 3,198 61,942 6,201 55,741 1970 07/28/98
Philadelphia (Independence Mall), PA(2) 3,184 33,533 3,108 39,825 4,520 35,305 1972 07/28/98
Philadelphia (Society Hill), PA(3) 4,542 46,299 5,125 55,966 7,166 48,800 1986 10/01/97
Pittsburgh, PA(9) - 26,908 2,725 29,633 3,423 26,210 1988 07/28/98
Charleston (Mills House), SC(2) 3,270 28,832 3,720 35,822 4,043 31,779 1982 07/28/98
Greenville (Roper), SC(6) 1,551 14,227 1,257 17,035 1,922 15,113 1984 07/28/98
Myrtle Beach (Kingston
Plantation), SC(1) 2,940 26,698 7,131 36,769 8,104 28,665 1987 12/05/96
Knoxville (Central), TN(2) - 13,123 1,426 14,549 1,916 12,633 1966 07/28/98
Nashville, TN(1) 1,118 9,784 3,268 14,170 4,944 9,226 1985 07/28/94
Nashville, (Opryland/Airport), TN(9) - 29,786 2,642 32,428 3,626 28,802 1981 07/28/98
Addison (North Dallas), TX(6) 4,938 43,289 2,468 50,695 5,218 45,477 1985 07/28/98
Amarillo (I-40), TX(2) - 8,488 1,048 9,536 1,226 8,310 1970 07/28/98
Austin (Downtown), TX(5) 2,508 22,806 1,398 26,712 3,677 23,035 1987 03/20/97
Austin (Town Lake), TX(2) - 22,361 2,463 24,824 3,132 21,692 1967 07/28/98
Beaumont (Midtown I-10), TX(2) 685 8,242 969 9,896 1,123 8,773 1967 07/28/98
Corpus Christi, TX(1) 1,164 10,202 2,147 13,513 3,498 10,015 1984 07/19/95
Dallas, TX(19) 2,391 13,980 1,080 17,451 1,769 15,682 1988 07/28/98
Dallas (Alpha Road), TX(17) 1,623 8,163 1,778 11,564 3,344 8,220 1997 07/28/98
Dallas (Campbell Center), TX(7) 3,208 28,961 3,197 35,366 3,631 31,735 1982 05/29/98
Dallas (DFW Airport South), TX(1) 4,041 35,646 5,587 45,274 4,978 40,296 1985 07/28/98
Dallas (Downtown West End), TX(12) 1,953 17,144 652 19,749 1,855 17,894 1969 07/28/98
Dallas (Love Field), TX(1) 1,934 17,070 2,624 21,628 4,934 16,694 1986 03/29/95
Dallas (Market Center), TX(6) 4,079 36,104 2,184 42,367 4,187 38,180 1983 07/28/98
Dallas (Market Center), TX(1) 2,560 24,224 3,025 29,809 4,908 24,901 1980 06/30/97
Dallas (Park Central), TX(6) 5,624 30,897 1,630 38,151 3,540 34,611 1981 07/28/98
Dallas (Park Central), TX(1) 1,478 13,520 3,263 18,261 5,060 13,201 1985 07/28/94
Dallas (Park Central), TX(3) 822 28,782 5,236 34,840 4,845 29,995 1972 11/01/98
Dallas (Park Central), TX(20) 4,513 47,566 5,381 57,460 8,531 48,929 1983 06/30/97
Houston (I-10 West), TX(9) 3,055 26,779 1,248 31,082 3,030 28,052 1969 07/28/98
Houston (Int'l Airport), TX(2) 3,890 34,426 2,154 40,470 3,914 36,556 1971 07/28/98
Houston (Medical Center), TX(6) 2,493 22,313 1,464 26,270 2,666 23,604 1973 07/28/98
Houston (Medical Center), TX(15) 2,284 22,035 2,448 26,767 3,250 23,517 1984 07/28/98
Houston (Near Greenway), TX(9) 3,418 30,318 2,207 35,943 3,683 32,260 1984 07/28/98
Irving (DFW Airport North), TX(19) 10,040 57,528 3,528 71,096 6,946 64,150 1987 07/28/98
Irving (DFW Airport North), TX(21) 1,546 13,628 2,647 17,821 2,067 15,754 1989 07/28/98
Midland (Country Villa), TX(2) 404 3,645 447 4,496 554 3,942 1979 07/28/98
Odessa (Centre), TX(15) 487 4,326 574 5,387 603 4,784 1982 07/28/98
Odessa (Parkway Blvd), TX(13) 370 3,294 467 4,131 460 3,671 1977 07/28/98
Plano, TX(19) 1,813 16,362 1,737 19,912 2,264 17,648 1983 07/28/98
Plano, TX(2) 885 7,886 563 9,334 1,004 8,330 1983 07/28/98
San Antonio (Downtown), TX(2) - 22,994 1,300 24,294 2,692 21,602 1968 07/28/98
San Antonio (Int'l Airport), TX(9) 3,371 31,183 1,937 36,491 3,706 32,785 1981 07/28/98
Waco (I-35), TX(2) 574 5,140 495 6,209 716 5,493 1970 07/28/98
Salt Lake City (Airport), UT(2) - 8,080 1,230 9,310 1,192 8,118 1963 07/28/98
Burlington, VT(3) 3,136 27,785 3,091 34,012 4,155 29,857 1967 12/04/97
Cambridge, Canada(2) 446 4,721 1,014 6,181 817 5,364 1969 07/28/98
Kitchener (Waterloo), Canada(2) - 10,446 968 11,414 1,304 10,110 1965 07/28/98
<Caption>
LIFE UPON
WHICH
DEPRECIATION
IN STATEMENT
DESCRIPTION OF PROPERTY IS COMPUTED
- ----------------------- ------------
Dayton, OH(5) 5-40 Yrs
Tulsa, OK(1) 5-40 Yrs
Philadelphia (Center City), PA(6) 5-40 Yrs
Philadelphia (Independence Mall), PA(2) 5-40 Yrs
Philadelphia (Society Hill), PA(3) 5-40 Yrs
Pittsburgh, PA(9) 5-40 Yrs
Charleston (Mills House), SC(2) 5-40 Yrs
Greenville (Roper), SC(6) 5-40 Yrs
Myrtle Beach (Kingston
Plantation), SC(1) 5-40 Yrs
Knoxville (Central), TN(2) 5-40 Yrs
Nashville, TN(1) 5-40 Yrs
Nashville, (Opryland/Airport), TN(9) 5-40 Yrs
Addison (North Dallas), TX(6) 5-40 Yrs
Amarillo (I-40), TX(2) 5-40 Yrs
Austin (Downtown), TX(5) 5-40 Yrs
Austin (Town Lake), TX(2) 5-40 Yrs
Beaumont (Midtown I-10), TX(2) 5-40 Yrs
Corpus Christi, TX(1) 5-40 Yrs
Dallas, TX(19) 5-40 Yrs
Dallas (Alpha Road), TX(17) 5-40 Yrs
Dallas (Campbell Center), TX(7) 5-40 Yrs
Dallas (DFW Airport South), TX(1) 5-40 Yrs
Dallas (Downtown West End), TX(12) 5-40 Yrs
Dallas (Love Field), TX(1) 5-40 Yrs
Dallas (Market Center), TX(6) 5-40 Yrs
Dallas (Market Center), TX(1) 5-40 Yrs
Dallas (Park Central), TX(6) 5-40 Yrs
Dallas (Park Central), TX(1) 5-40 Yrs
Dallas (Park Central), TX(3) 5-40 Yrs
Dallas (Park Central), TX(20) 5-40 Yrs
Houston (I-10 West), TX(9) 5-40 Yrs
Houston (Int'l Airport), TX(2) 5-40 Yrs
Houston (Medical Center), TX(6) 5-40 Yrs
Houston (Medical Center), TX(15) 5-40 Yrs
Houston (Near Greenway), TX(9) 5-40 Yrs
Irving (DFW Airport North), TX(19) 5-40 Yrs
Irving (DFW Airport North), TX(21) 5-40 Yrs
Midland (Country Villa), TX(2) 5-40 Yrs
Odessa (Centre), TX(15) 5-40 Yrs
Odessa (Parkway Blvd), TX(13) 5-40 Yrs
Plano, TX(19) 5-40 Yrs
Plano, TX(2) 5-40 Yrs
San Antonio (Downtown), TX(2) 5-40 Yrs
San Antonio (Int'l Airport), TX(9) 5-40 Yrs
Waco (I-35), TX(2) 5-40 Yrs
Salt Lake City (Airport), UT(2) 5-40 Yrs
Burlington, VT(3) 5-40 Yrs
Cambridge, Canada(2) 5-40 Yrs
Kitchener (Waterloo), Canada(2) 5-40 Yrs
</Table>
F-32
FELCOR LODGING TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
<Table>
<Caption>
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO ACQUISITION
-------------------- -----------------------------
BUILDINGS FURNITURE BUILDINGS FURNITURE
AND AND AND AND
DESCRIPTION OF PROPERTY ENCUMBRANCES LAND IMPROVEMENTS FIXTURE LAND IMPROVEMENT FIXTURES
- ----------------------- ------------ ------ ------------ --------- ---- ----------- ---------
Peterborough (Waterfront),
Canada(2) 735 6,391 220 (35) 121 588
Sarnia, Canada(2) 271 2,359 81 (34) 758 876
Toronto (Airport), Canada(9) 21,168 655 -- 2,695 1,821
Toronto (Yorkdale), Canada(2) 1,578 13,725 473 (35) 3,908 1,270
-------- -------- ---------- -------- ------- -------- --------
Total $687,810 $288,893 $3,223,512 $124,884 $33,117 $288,930 $322,545
======== ======== ========== ======== ======= ======== ========
<Caption>
GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK
CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE
----------------------------------- BUILDINGS AND BUILDINGS AND
BUILDINGS FURNITURE IMPROVEMENTS IMPROVEMENTS,
AND AND FURNITURE & FURNITURE & DATE OF DATE
DESCRIPTION OF PROPERTY LAND IMPROVEMENT FIXTURES TOTAL FIXTURES FIXTURES CONSTRUCTION ACQUIRED
- ----------------------- ---- ----------- --------- ----- ------------- ------------ ------------ --------
Peterborough (Waterfront),
Canada(2) 700 6,512 808 8,020 943 7,077 1965 07/28/98
Sarnia, Canada(2) 237 3,117 957 4,311 421 3,890 1970 07/28/98
Toronto (Airport), Canada(9) -- 23,863 2,476 26,339 3,229 23,110 1970 07/28/98
Toronto (Yorkdale), Canada(2) 1,543 17,633 1,743 20,919 2,230 18,689 1970 07/28/98
-------- ---------- -------- ---------- -------- ----------
Total $322,010 $3,512,442 $447,429 $4,281,881 $630,962 $3,650,919
======== ========== ======== ========== ======== ==========
<Caption>
LIFE UPON
WHICH
DEPRECIATION
IN STATEMENT
DESCRIPTION OF PROPERTY IS COMPUTED
- ----------------------- ------------
Peterborough (Waterfront),
Canada(2) 5-40 Yrs
Sarnia, Canada(2) 5-40 Yrs
Toronto (Airport), Canada(9) 5-40 Yrs
Toronto (Yorkdale), Canada(2) 5-40 Yrs
Total
</Table>
<Table>
Balance at December 31, 1998 $4,099,946
Additions during the period 247,116
----------
Balance at December 31, 1999 $4,347,062
Sold hotels in 2000 (31,921)
Hotels Held for Sale (206,000)
Additions during the period 98,870
----------
Balance at December 31, 2000 $4,208,011
Additions during the period 73,870
----------
Balance at December 31, 2001 $4,281,881
==========
</Table>
<Table>
Balance at December 31, 1998 $ 178,072
Depreciation expense during
the period 152,483
----------
Balance at December 31, 1999 330,555
Sold hotels in 2000 (4,200)
Hotels Held for Sale (13,706)
Depreciation expense during
the period 160,452
----------
Balance at December 31, 2000 473,101
Foreign Exchange (394)
Purchase of DJONT Leases 1,011
Depreciation expense during
the period 157,244
----------
Balance at December 31, 2001 $ 630,962
==========
</Table>
<Table>
<Caption>
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO ACQUISITION
-------------------- ----------------------------
BUILDINGS FURNITURE BUILDINGS FURNITURE
AND AND AND AND
DESCRIPTION OF PROPERTY ENCUMBRANCES LAND IMPROVEMENTS FIXTURE LAND IMPROVEMENT FIXTURES
- ----------------------- ------------ ------ ------------ --------- ---- ----------- ---------
Boca Raton, FL(5) $ 5,433 $2,796 $ 468 -- $ 336 $1,283
Davenport, IA(12) 434 3,776 130 -- 571 537
Davenport, IA(2) 547 4,763 164 -- 1,333 1,168
Moline, IL(12) 505 4,398 152 -- 535 622
Moline (Airport), IL(2) 822 7,149 247 -- 1,487 1,285
Moline (Airport), IL(13) 232 2,021 70 -- 166 213
Colby, KS(13) 339 2,950 102 -- 228 92
Great Bend, KS(2) 549 4,780 165 -- 216 355
Hays, KS(12) 243 2,112 73 -- 319 367
Hays, KS(2) 597 5,190 179 -- 44 241
Salina, KS(2) 502 4,370 151 -- 67 367
Salina (I-70), KS(13) 341 2,964 102 -- 2 95
Nashville (Airport), TN(5) 1,073 9,331 322 -- 624 1,310
------- ------- ------ ------ ------
Total $11,617 $56,600 $2,325 $5,928 $7,935
======= ======= ====== ====== ======
Loss on hotels held for sale
<Caption>
GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK
CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE
----------------------------------- BUILDINGS AND BUILDINGS AND
BUILDINGS FURNITURE IMPROVEMENTS IMPROVEMENTS,
AND AND FURNITURE & FURNITURE & DATE OF DATE
DESCRIPTION OF PROPERTY LAND IMPROVEMENT FIXTURES TOTAL FIXTURES FIXTURES CONSTRUCTION ACQUIRED
- ----------------------- ---- ----------- --------- ----- ------------- ------------ ------------ --------
Boca Raton, FL(5) $ 5,433 $ 3,132 $1,751 $10,316 $ 1,538 $ 8,778 1989 11/15/95
Davenport, IA(12) 434 4,347 667 5,448 308 5,140 1985 07/28/98
Davenport, IA(2) 547 6,096 1,332 7,975 418 7,557 1966 07/28/98
Moline, IL(12) 505 4,933 774 6,212 347 5,865 1985 07/28/98
Moline (Airport), IL(2) 822 8,636 1,532 10,990 561 10,429 1961 07/28/98
Moline (Airport), IL(13) 232 2,187 283 2,702 148 2,554 1996 07/28/98
Colby, KS(13) 339 3,178 194 3,711 195 3,516 1998 07/28/98
Great Bend, KS(2) 549 4,996 520 6,065 401 5,664 1964 07/28/98
Hays, KS(12) 243 2,431 440 3,114 173 2,941 1985 07/28/98
Hays, KS(2) 597 5,234 420 6,251 396 5,855 1966 07/28/98
Salina, KS(2) 502 4,437 518 5,457 415 5,042 1986 07/28/98
Salina (I-70), KS(13) 341 2,966 197 3,504 275 3,229 1997 07/28/98
Nashville (Airport), TN(5) 1,073 9,955 1,632 12,660 1,240 11,420 1988 06/05/97
------- ------- ------- ------- ------ -------
Total $11,617 $62,528 $10,260 $84,405 $6,415 $77,990
======= ======= ======= ======= ======
Loss on hotels held for sale (39,053)
-------
$38,937
=======
<Caption>
LIFE UPON
WHICH
DEPRECIATION
IN STATEMENT
DESCRIPTION OF PROPERTY IS COMPUTED
- ----------------------- ------------
Boca Raton, FL(5) 5-40 Yrs
Davenport, IA(12) 5-40 Yrs
Davenport, IA(2) 5-40 Yrs
Moline, IL(12) 5-40 Yrs
Moline (Airport), IL(2) 5-40 Yrs
Moline (Airport), IL(13) 5-40 Yrs
Colby, KS(13) 5-40 Yrs
Great Bend, KS(2) 5-40 Yrs
Hays, KS(12) 5-40 Yrs
Hays, KS(2) 5-40 Yrs
Salina, KS(2) 5-40 Yrs
Salina (I-70), KS(13) 5-40 Yrs
Nashville (Airport), TN(5) 5-40 Yrs
Total
Loss on hotels held for sale
</Table>
<Table>
1. Embassy Suites 9. Holiday Inn Select 17. Bristol House
2. Holiday Inn 10. Courtyard by Marriott 18. Crowne Plaza Suites
3. Sheraton 11. Sheraton Suites 19. Harvey Hotel
4. Fairfield Inn 12. Hampton Inn 20. Westin
5. Doubletree Guest Suites 13. Holiday Inn Express 21. Harvey Suites
6. Crowne Plaza 14. Hilton Suites
7. Doubletree 15. Holiday Inn Hotel & Suites
8. Independents 16. Homewood Suites
</Table>
F-33
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 - Articles of Amendment and Restatement dated June 22, 1995,
amending and restating the Charter of FelCor Lodging Trust
Incorporated ("FelCor"), as amended or supplemented by
Articles of Merger dated June 23, 1995, Articles Supplementary
dated April 30, 1996, Articles of Amendment dated August 8,
1996, Articles of Amendment dated June 16, 1997, Articles of
Amendment dated October 30, 1997, Articles Supplementary dated
May 6, 1998, Articles of Merger and Articles of Amendment
dated July 27, 1998, and Certificate of Correction dated March
11, 1999 (filed as Exhibit 3.1 to FelCor's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 (the
"1998 10-K") and incorporated herein by reference).
3.1.1 - Certificate of Correction to the Articles of Merger between
FelCor and Bristol Hotel Company, dated August 31, 1999 (filed
as Exhibit 3.1.1 to FelCor's Form 10-Q for the quarter ended
September 30, 1999 (the "September 1999 10-Q") and
incorporated herein by reference).
3.2 - Bylaws of FelCor, as amended (filed as Exhibit 3.2 to FelCor's
Registration Statement on Form S-11 (file no. 333-98332) and
incorporated herein by reference).
4.1 - Form of Share Certificate for Common Stock (filed as Exhibit
4.1 to FelCor's Form 10-Q for the quarter ended June 30, 1996,
and incorporated herein by reference).
4.2 - Form of Share Certificate for $1.95 Series A Cumulative
Convertible Preferred Stock (filed as Exhibit 4.4 to FelCor's
Form 8-K dated May 1, 1996, and incorporated herein by
reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.3 - Form of Share Certificate for 9% Series B Cumulative
Redeemable Preferred Stock (filed as Exhibit 4.5 to FelCor's
Form 8-K dated May 29, 1998, and incorporated herein by
reference).
4.4 - Deposit Agreement dated April 30, 1998, between FelCor and
SunTrust Bank, Atlanta, as preferred share depositary (filed
as Exhibit 4.6 to FelCor's Form 8-K dated May 29, 1998, and
incorporated herein by reference).
4.5 - Form of Depositary Receipt evidencing the Depositary Shares
(filed as Exhibit 4.7 to FelCor's Form 8-K dated May 29, 1998,
and incorporated herein by reference).
4.6 - Indenture dated as of April 22, 1996 by and between FelCor and
SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit
4.2 to FelCor's Form 8-K dated May 1, 1996 and incorporated
herein by reference).
4.7 - Indenture dated as of October 1, 1997 by and among FelCor
Lodging Limited Partnership, formerly FelCor Suites Limited
Partnership ("FelCor LP"), FelCor, the Subsidiary Guarantors
named therein and SunTrust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4.1 to the Registration Statement on Form
S-4 (file no. 333-39595) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.7.1 - First Amendment to Indenture dated as of February 5, 1998 by
and among FelCor, FelCor LP, the Subsidiary Guarantors named
therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed
as Exhibit 4.2 to the Registration Statement on Form S-4 (file
no. 333-39595) of FelCor LP and the other co-registrants named
therein and incorporated herein by reference).
4.7.2 - Second Amendment to Indenture and First Supplemental Indenture
dated as of December 30, 1998, by and among FelCor, FelCor LP,
the Subsidiary Guarantors named therein and SunTrust Bank, as
Trustee (filed as Exhibit 4.7.2 to the 1998 10-K and
incorporated herein by reference).
4.7.3 - Third Amendment to Indenture dated as of March 30, 1999 by and
among FelCor, FelCor LP, the Subsidiary Guarantors named
therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.3
to FelCor's Form 10-Q for the quarter ended March 31, 1999
(the "March 1999 10-Q") and incorporated herein by reference).
4.7.4 - Second Supplemental Indenture dated as of August 1, 2000, by
and among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.2.4 to the Registration Statement
on Form S-4 (file no. 333-47506) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.7.5 - Third Supplemental Indenture dated as of July 26, 2001, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.2.5 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.8 - Indenture dated as of September 15, 2000, by and among FelCor
LP, FelCor, the Subsidiary Guarantors named therein, and
SunTrust Bank, as Trustee (filed as Exhibit 4.3 to the
Registration Statement on Form S-4 (file no. 333-47506) of
FelCor LP and the other co-registrants named therein and
incorporated herein by reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.8.1 - First Supplemental Indenture dated as of July 26, 2001, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.3.1 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.9 - Indenture dated as of June 4, 2001, by and among FelCor LP,
FelCor, the Subsidiary Guarantors named therein, and SunTrust
Bank, as Trustee (filed as Exhibit 4.9 to FelCor's Form 8-K
dated as of June 4, 2001 and filed June 14, 2001, and
incorporated herein by reference).
4.9.1 - First Supplemental Indenture dated as of July 26, 2001, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.4.1 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
10.1* - Second Amended and Restated Agreement of Limited Partnership
of FelCor LP dated as of December 31, 2001.
10.2 - Contribution Agreement dated as of January 1, 2001, by and
among FelCor, FelCor LP, FelCor, Inc., RGC and DJONT
Operations, L.L.C. (filed as Exhibit 10.27 to FelCor's Form
10-Q for the quarter ended March 31, 2001 (the "March 2001
10-Q"), and incorporated herein by reference).
10.3 - Leasehold Acquisition Agreement dated as of March 30, 2001, by
and among Bass (U.S.A.) Incorporated, in its individual
capacity and on behalf of its subsidiaries and affiliates, and
FelCor, in its individual capacity and on behalf of its
subsidiaries and affiliates, including as an exhibit thereto
the form of Management Agreement for Six Continents-branded
hotels (filed as Exhibit 10.28 to the March 2001 10-Q and
incorporated herein by reference).
10.4 - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Six Continents Hotels, as
manager, with respect to FelCor's Six Continents-branded
hotels (included as an exhibit to the Leasehold Acquisition
Agreement filed as Exhibit 10.3 above).
10.5* - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Hilton Hotels Corporation, as
manager, with respect to FelCor's Embassy Suites Hotels,
including the form of Embassy Suites Hotels License Agreement
attached as an exhibit thereto.
10.6* - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Hilton Hotels Corporation, as
manager, with respect to FelCor's Doubletree and Doubletree
Guest Suites hotels.
10.7* - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Starwood Hotels & Resorts, Inc.,
as manager, with respect to FelCor's Sheraton and Westin
hotels.
10.8 - Employment Agreement dated as of July 28, 1994 between FelCor
and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to FelCor's
Annual Report on Form 10-K/A Amendment No. 1 for the fiscal
year ended December 31, 1994 (the "1994 10-K/A") and
incorporated herein by reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.9 - Restricted Stock and Stock Option Plan of FelCor (filed as
Exhibit 10.9 to the 1994 10- K/A and incorporated herein by
reference).
10.10* - Savings and Investment Plan of FelCor.
10.11 - 1995 Restricted Stock and Stock Option Plan of FelCor (filed
as Exhibit 10.9.2 to FelCor's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (the "1995 10-K") and
incorporated herein by reference).
10.12 - Non-Qualified Deferred Compensation Plan, as amended and
restated July 1999 (filed as Exhibit 10.9 to the September
1999 10-Q and incorporated herein by reference).
10.13 - 1998 Restricted Stock and Stock Option Plan (filed as Exhibit
4.2 to FelCor's Registration Statement on Form S-8 (file no.
333-66041) and incorporated herein by reference).
10.14 - Second Amended and Restated 1995 Equity Incentive Plan (filed
as Exhibit 99.1 to FelCor's Post-Effective Amendment on Form
S-3 to Form S-4 Registration Statement (file no. 333-50509)
and incorporated herein by reference).
10.15 - Amended and Restated Stock Option Plan for Non-Employee
Directors (filed as Exhibit 99.2 to FelCor's Post-Effective
Amendment on Form S-3 to Form S-4 Registration Statement (file
no. 333-50509) and incorporated herein by reference).
10.16 - Form of Severance Agreement for executive officers and certain
key employees of FelCor (filed as Exhibit 10.13 to the 1998
10-K and incorporated herein by reference).
10.17 - Stockholders' and Registration Rights Agreement dated as of
July 27, 1998 by and among FelCor, Bass America, Inc., Holiday
Corporation, Bass plc, United/Harvey Investors I, L.P.,
United/Harvey Investors II, L.P., United/Harvey Investors III,
L.P., United/Harvey Investors IV, L.P., and United/Harvey
Investors V, L.P. (filed as Exhibit 10.18 to FelCor's Form 8-K
dated August 10, 1998, and incorporated herein by reference).
10.18 - Seventh Amended and Restated Credit Agreement dated as of July
26, 2001, among the FelCor, FelCor LP 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. and Deutsche Banc Alex. Brown, Inc., as
Co-Lead Arrangers and Joint Bookrunners, and Bank of America,
N.A. and Salomon Smith Barney, Inc., as Document Agents (filed
as Exhibit 10.17 to FelCor's Form 10-Q for the quarter ended
June 30, 2001, and incorporated herein by reference).
10.18.1 - First Amendment dated as of November 6, 2001, among FelCor,
FelCor LP and FelCor Canada Co., as borrowers, the lenders
party thereto, The Chase Manhattan Bank and The Chase
Manhattan Bank of Canada, as Administrative Agents, and
Bankers Trust Company, as Syndication Agent (filed as Exhibit
10.17.1 to FelCor's Form 10-Q for the quarter ended September
30, 2001 (the "September 2001 10-Q") and incorporated herein
by reference).
10.19 - Loan Agreement dated as of October 10, 1997 among Bristol
Lodging Company, Bristol Lodging Holding Company, Nomura Asset
Capital Corporation, as administrative agent and collateral
agent for Lenders, and Bankers Trust Company, as co-agent for
Lenders (filed as
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
Exhibit 10.10 to the Bristol Hotel Company Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and
incorporated herein by reference).
10.19.1 - First Amendment to Loan Agreement and Ancillary Loan Documents
made as of May 28, 1999, among FelCor Lodging Company, L.L.C.,
FelCor Lodging Holding Company, L.L.C. and LaSalle National
Bank, as Trustee for Nomura Asset Securities Corporation
Commercial Pass-Through Certificates Series 1998-D6, as
administrative agent and collateral agent (filed as Exhibit
10.19.1 to FelCor's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (the "1999 10-K") and
incorporated herein by reference).
10.20 - Form of Mortgage, Security Agreement and Fixture Filing by and
between FelCor/CSS Holdings, L.P. as Mortgagor and The
Prudential Insurance Company of America, as Mortgagee (filed
as Exhibit 10.23 to the March 1999 10-Q and incorporated
herein by reference).
10.20.1 - Promissory Note dated April 1, 1999, in the original principal
amount of $100,000,000 made by FelCor/CSS Holdings, Ltd.,
payable to the order of The Prudential Insurance Company of
America (filed as Exhibit 10.23.1 to FelCor's Form 10-Q for
the quarter ended June 30, 1999 (the "June 1999 10-Q") and
incorporated herein by reference).
10.21 - Form of Deed of Trust, Security Agreement and Fixture Filing,
each dated as of May 12, 1999, from FelCor/MM Holdings, L.P.,
as Borrower, in favor of Fidelity National Title Insurance
Company, as Trustee, and Massachusetts Mutual Life Insurance
Company, as Beneficiary, each covering a separate hotel and
securing one of the separate Promissory Notes described in
Exhibit 10.21.1, also executed by FelCor/CSS Holdings, L.P.
with respect to the Embassy Suites Hotels-Anaheim and Embassy
Suites Hotels-Deerfield Beach, and by FelCor LP with respect
to the Embassy Suites Hotels-Palm Desert (filed as Exhibit
10.24.2 to the June 1999 10-Q and incorporated herein by
reference).
10.21.1 - Form of six separate Promissory Notes each dated May 12, 1999,
made by FelCor/MM Holdings, L.P. payable to the order of
Massachusetts Mutual Life Insurance Company in the respective
original principal amounts of $12,500,000 (Embassy Suites
Hotels-Dallas Market Center), $14,000,000 (Embassy Suites
Hotels-Dallas Love Field), $12,450,000 (Embassy Suites
Hotels-Tempe), $11,550,000 (Embassy Suites Hotels-Anaheim),
$8,900,000 (Embassy Suites Hotels-Palm Desert), $15,600,000
(Embassy Suites Hotels-Deerfield Beach) (filed as Exhibit
10.24.1 to the June 1999 10-Q and incorporated herein by
reference).
10.22 - Form Deed of Trust and Security Agreement and Fixture Filing
with Assignment of Leases and Rents, each dated as of April
20, 2000, from FelCor/MM S-7 Holdings, L.P., as Mortgagor, in
favor of Massachusetts Mutual Life Insurance Company and
Teachers Insurance and Annuity Association of America, as
Mortgagee, each covering a separate hotel and securing one of
the separate Promissory Notes described in Exhibit 10.22.2
(filed as Exhibit 10.24 to FelCor's Form 10-Q for the quarter
ended June 30, 2000 (the "June 2000 10-Q") and incorporated
herein by reference).
10.22.1 - Form of Accommodation Cross-Collateralization Mortgage and
Security Agreement, each dated as of April 20, 2000, executed
by FelCor/MM S-7 Holdings, L.P., in favor of Massachusetts
Mutual Life Insurance Company and Teachers Insurance and
Annuity Association of America (filed as Exhibit 10.24.1 to
the June 2000 10-Q and incorporated herein by reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.22.2 - Form of fourteen separate Promissory Notes each dated April
20, 2000, each made by FelCor/MM S-7 Holdings, L.P., each
separately payable to the order of Massachusetts Mutual Life
Insurance Company and Teachers Insurance and Annuity
Association of America, respectively, in the respective
original principal amounts of $13,500,000 (Phoenix (Crescent),
Arizona), $13,500,000 (Phoenix (Crescent), Arizona),
$6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $6,500,000
(Cypress Creek/Ft. Lauderdale, Florida), $9,000,000 (Atlanta
Galleria, Georgia), $9,000,000 (Atlanta Galleria, Georgia),
$12,500,000 (Chicago O'Hare Airport, Illinois), $12,500,000
(Chicago O'Hare Airport, Illinois), $3,500,000 (Lexington,
Kentucky), $3,500,000 (Lexington, Kentucky), $17,000,000
(Philadelphia Society Hill, Philadelphia), $17,000,000
(Philadelphia Society Hill, Philadelphia), $10,500,000 (South
Burlington, Vermont), and, $10,500,000 (South Burlington,
Vermont) (filed as Exhibit 10.24.2 to the June 2000 10-Q and
incorporated herein by reference).
10.23 - Form Deed of Trust and Security Agreement, each dated as of
May 2, 2000, from each of FelCor/CMB Buckhead Hotel, L.L.C.,
FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield
Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB
Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C.,
FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF
Holdings, L.P., each as Borrower, in favor of The Chase
Manhattan Bank, as Beneficiary, each covering a separate hotel
and securing one of the separate Promissory Notes described in
Exhibit 10.23.1 (filed as Exhibit 10.25 to the June 2000 10-Q
and incorporated herein by reference).
10.23.1 - Form of eight separate Promissory Notes, each dated May 2,
2000, made by FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB
Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C.,
FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings,
L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB
Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P.,
each separately payable to the order of The Chase Manhattan
Bank in the respective original principal amounts of
$38,250,000 (Atlanta Buckhead, Georgia), $20,500,000 (Boston
Marlborough, Massachusetts), $16,575,000 (Chicago Deerfield,
Illinois), $5,338,000 (Corpus Christi, Texas), $25,583,000
(Orlando South, Florida), $32,650,000 (New Orleans,
Louisiana), $20,728,000 (Piscataway, New Jersey), and
$26,268,000 (South San Francisco, California) (filed as
Exhibit 10.25.1 to the June 2000 10-Q and incorporated herein
by reference).
10.24 - Registration Rights Agreement dated as of September 8, 2000
among FelCor, FelCor LP, Deutsche Banc Securities Inc., Chase
Securities Inc., Morgan Stanley & Co. Incorporated, Banc of
America Securities LLC, Banc One Capital Markets, Inc., Credit
Lyonnais Securities (USA) Inc., and Scotia Capital (USA) Inc.
(filed as Exhibit 10.26 to the Registration Statement on Form
S-4 (file no. 333-47506) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
10.25 - Registration Rights Agreement dated as of January 11, 2001,
among FelCor, FelCor LP and Deutsche Bank Securities Inc
(filed as Exhibit 10.26 to FelCor's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000, and incorporated
herein by reference).
10.26 - Registration Rights Agreement dated as of June 4, 2001, by and
among FelCor LP, FelCor, and Deutsche Banc Alex. Brown Inc.,
in its individual capacity and on behalf of J.P. Morgan
Securities Inc., Banc of America Securities LLC, Salomon Smith
Barney Inc., Morgan Stanley & Co. Incorporated, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, SG Cowen Securities
Corporation, Credit Lyonnais Securities (USA) Inc., Scotia
Capital (USA) Inc., BMO Nesbitt Burns Corp., Fleet Securities,
Inc., PNC Capital Markets, Inc. and Wells Fargo Brokerage
Services, LLC (filed as Exhibit 10.29 to FelCor's Form 8-K
dated June 4, 2001 and filed June 14, 2001, and incorporated
herein by reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.27* - Registration Rights Agreement dated as of December 3, 2001, by
and among FelCor, FelCor LP, Deutsche Banc Alex. Brown, J.P.
Morgan Securities Inc., Banc of America Securities LLC, Morgan
Stanley & Co. Incorporated and Salomon Smith Barney Inc.
21* - List of Subsidiaries of FelCor.
23.1* - Consent of PricewaterhouseCoopers LLP.
</Table>
- ----------
* Indicates that the document is filed herewith.